Back to GetFilings.com
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
MARCH 31, 2003
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 by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
--- ---
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 May 8, 2003
Common Stock 22,261,945 Shares
ALLIED HEALTHCARE INTERNATIONAL INC.
SECOND QUARTER REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I
Item 1. Financial Statements (Unaudited)............................................................3
Condensed Consolidated Balance Sheets - March 31, 2003 (Unaudited) and
September 30, 2002........................................................................4
Condensed Consolidated Statements of Operations (Unaudited) - For the Three
and Six Months Ended March 31, 2003 and March 31, 2002....................................5
Condensed Consolidated Statements of Cash Flows (Unaudited) - For the
Six Months Ended March 31, 2003 and March 31, 2002........................................6
Notes to Condensed Consolidated Financial Statements (Unaudited)............................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................19
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................34
Item 4. Controls and Procedures.....................................................................36
PART II
Item 6. Exhibits and Reports on Form 8-K............................................................37
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.
Page 3
ALLIED HEALTHCARE INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, SEPTEMBER 30,
2003 2002
(UNAUDITED)
------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 18,283 $ 18,278
Restricted cash 39,388 19,840
Accounts receivable, less allowance for doubtful
accounts of $23,131 and $22,849, respectively 30,221 32,113
Unbilled accounts receivable 8,890 7,046
Assets of discontinued operations 8,569 8,733
Inventories 305 359
Prepaid expenses and other assets 1,964 1,642
------------ ---------
Total current assets 107,620 88,011
Property and equipment, net 9,620 8,098
Restricted cash 3,111 43,678
Goodwill 170,585 123,514
Deferred financing costs and other assets 4,227 4,812
------------ ---------
Total assets $ 295,163 $ 268,113
============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 39,388 $ 19,840
Short-term debt -- 3,480
Current portion of long-term debt 6,303 6,249
Liabilities of discontinued operations 1,448 1,270
Accounts payable 3,294 1,505
Accrued expenses 24,626 24,936
Taxes payable 3,873 4,813
------------ ---------
Total current liabilities 78,932 62,093
Long-term debt 117,144 118,961
Derivative liability 701 --
Deferred income taxes and other long-term liabilities 866 862
------------ ---------
Total liabilities 197,643 181,916
------------ ---------
Commitments and contingencies
Redeemable convertible preferred stock, 7,774 shares
issued and outstanding (liquidation value of $35,213) 32,915 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 22,528 and
20,945 shares, respectively 225 209
Additional paid-in capital 143,593 139,231
Accumulated other comprehensive loss (2,635) (3,112)
Accumulated deficit (74,956) (80,785)
------------ ---------
66,305 55,621
Less notes receivable from officers (980) (958)
Less cost of treasury stock (266 shares) (720) (720)
------------ ---------
Total stockholders' equity 64,605 53,943
------------ ---------
Total liabilities and stockholders' equity $ 295,163 $ 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 SIX MONTHS ENDED
--------------------------- ------------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2003 2002 2003 2002
---------- ----------- ----------- -------------
Revenues:
Net patient services $ 70,110 $ 56,358 $ 136,639 $ 111,773
Net respiratory, medical equipment and supplies sales 1,576 1,153 3,045 2,320
---------- ---------- ---------- ----------
Total revenues 71,686 57,511 139,684 114,093
---------- ---------- ---------- ----------
Cost of revenues:
Patient services 51,101 41,664 99,334 82,625
Respiratory, medical equipment and supplies sales 960 698 1,827 1,416
---------- ---------- ---------- ----------
Total cost of revenues 52,061 42,362 101,161 84,041
---------- ---------- ---------- ----------
Gross profit 19,625 15,149 38,523 30,052
Selling, general and administrative expenses 12,581 9,397 24,387 18,595
---------- ---------- ---------- ----------
Operating Income 7,044 5,752 14,136 11,457
Interest income (494) (695) (1,084) (1,533)
Interest expense 3,838 3,949 7,626 8,110
Foreign exchange loss 3 7 11 20
---------- ---------- ---------- ----------
Income before income taxes, minority interest and
discontinued operations 3,697 2,491 7,583 4,860
Provision for income taxes 109 1,088 1,876 2,159
---------- ---------- ---------- ----------
Income before minority interest and discontinued operations 3,588 1,403 5,707 2,701
Minority interest -- 42 -- 86
---------- ---------- ---------- ----------
Income from continuing operations 3,588 1,361 5,707 2,615
(Loss) income from discontinued operations (62) 265 122 468
---------- ---------- ---------- ----------
Net income 3,526 1,626 5,829 3,083
Redeemable preferred dividend and accretion 974 -- 1,968 --
---------- ---------- ---------- ----------
Net income available to common shareholders $ 2,552 $ 1,626 $ 3,861 $ 3,083
========== ========== ========== ==========
Basic income per share of common stock from:
Income from continuing operations $ 0.11 $ 0.08 $ 0.17 $ 0.15
Income from discontinued operations -- 0.01 0.01 0.03
---------- --------- ----------- ----------
Net income $ 0.11 $ 0.09 $ 0.18 $ 0.18
========== ========== ========== ==========
Diluted income per share of common stock from:
Income from continuing operations $ 0.11 $ 0.06 $ 0.17 $ 0.12
Income from discontinued operations -- 0.01 -- 0.03
---------- --------- ----------- ----------
Net income $ 0.11 $ 0.07 $ 0.17 $ 0.15
========== ========== ========== ==========
Weighted average number of common shares outstanding:
Basic 22,256 17,289 21,707 17,289
========== ========== ========== ==========
Diluted 22,630 17,643 22,088 17,464
========== ========== ========== ==========
See notes to condensed consolidated financial statements.
Page 5
ALLIED HEALTHCARE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
------------------------------
MARCH 31, MARCH 31,
2003 2002
---------- ----------
Cash flows from operating activities:
Net income $ 5,829 $ 3,083
Adjustments to reconcile net income to net
cash provided by operating activities:
Income from discontinued operations (122) (468)
Depreciation and amortization 823 670
Amortization of debt issuance costs 952 1,007
Write-off of debt discount 607 --
Provision for doubtful accounts 433 524
Interest accrued on officers loans (22) --
Interest in kind 308 2,049
Minority interest -- 86
Gain on sale of fixed assets (63) --
Changes in assets and liabilities, excluding the effect of businesses
acquired and sold:
Decrease in accounts receivable 4,141 2,199
Decrease (Increase) in inventories 57 (47)
Increase in prepaid expenses and other assets (2,059) (4,986)
(Decrease) increase in accounts payable and other liabilities (423) 1,619
---------- -----------
Net cash provided by continuing operations 10,461 5,736
Net cash provided by discontinued operations 464 1,824
---------- -----------
Net cash provided by operating activities 10,925 7,560
---------- -----------
Cash flows from investing activities:
Capital expenditures (2,202) (1,575)
Proceeds from sale of property and equipment 107 17
Payments on acquisition payable (4,704) (1,612)
Payments for acquisitions - net of cash acquired (7,268) (104)
Proceeds limited to future acquisitions 21,750 (1,271)
---------- -----------
Net cash provided by (used in) investing activities 7,683 (4,545)
---------- -----------
Cash flows from financing activities:
Principal payments on long-term debt (3,335) (2,010)
Payments on notes payable (15,389) --
Proceeds from exercise of stock options 5 --
Payments for stock issuance costs (20) --
---------- -----------
Net cash used in financing activities (18,739) (2,010)
---------- -----------
Effect of exchange rate on cash 136 (391)
---------- ----------
Increase in cash 5 614
Cash and cash equivalents, beginning of period 18,278 13,334
---------- -----------
Cash and cash equivalents, end of period $ 18,283 $ 13,948
========== ===========
Supplemental cash flow information:
Cash paid for interest $ 5,360 $ 4,643
========== ===========
Cash paid for income taxes, net $ 2,907 $ 2,857
========== ===========
Supplemental disclosure of non-cash investing and financing activities: Details
of business acquired in purchase transactions:
Fair value of assets acquired $ 9,483
==========
Liabilities assumed or incurred $ 2,055
==========
Cash paid for acquisitions (including related expenses) $ 7,428
Cash acquired 160
----------
Net cash paid for acquisitions $ 7,268
==========
Issuance of common stock $ 2,880
==========
Notes issued for earned contingent consideration $ 34,033
==========
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 flexible 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 115 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.
On April 16, 2003, the Company sold all of the issued and outstanding
capital stock of two of its subsidiaries, The PromptCare Companies, Inc.
and Steri-Pharm, Inc., collectively referred to as "Home Healthcare" for
approximately $8,500 in cash. Home Healthcare, which comprised the
Company's United States ("U.S.") operations, was concentrated in New
York and New Jersey, and supplied infusion therapy, respiratory
therapy and home medical equipment. In accordance with the provisions
of Statement of Financial Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," ("FAS 144") the
Company has accounted for Home Healthcare as a discontinued operation
as of March 31, 2003. The condensed consolidated financial statements
reflect the assets and liabilities of the discontinued operation and
the operations for the current and prior periods are reported in
discontinued operations.
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 and six months ended March 31, 2003 are not necessarily
indicative of operating results for the full year.
Page 7
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
2. EARNINGS PER SHARE:
Basic earnings per share ("EPS") is computed using the weighted average
number of common shares outstanding. Diluted EPS adjusts basic EPS for the
effects of stock options, warrants and redeemable convertible stock only
when such effect is dilutive. In future periods, the impact of the assumed
conversion of the 7,774 of redeemable convertible preferred stock could
potentially dilute basic EPS. For the three and six months ended March 31,
2002 diluted EPS of $0.07 and $0.15, respectively, reflects the diluted
effect of common stock equivalents issued by the Company's U.K. subsidiary
of approximately $0.02 and $0.03 per share, respectively. At March 31,
2003 and 2002, the Company had outstanding stock options to purchase 1,262
and 579 shares, respectively, of common stock ranging in price from $4.31
to $7.25 per share, that were not included in the computation of diluted
EPS because the exercise price was greater than the average market price
of the common shares.
The weighted average number of shares used in the basic and diluted
earnings income per share computations for the three and six months ended
March 31, 2003 and 2002 are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------------------------
2003 2002 2003 2002
--------- ---------- ----------- -----------
Weighted average number of common shares
outstanding as used in computation of basic
EPS of common stock 22,256 17,289 21,707 17,289
Effect of dilutive securities - stock options 374 354 381 175
--------- ---------- ----------- -----------
Shares used in computation of diluted EPS of
common stock 22,630 17,643 22,088 17,464
========= ========== =========== ===========
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, which is the only item of other comprehensive
income impacting the Company. The following table displays comprehensive
income for the three and six months ended March 31, 2003 and 2002:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- --------------------------
2003 2002 2003 2002
------------- ------------- ------------- -----------
Net income $ 3,526 $ 1,626 $ 5,829 $ 3,083
Change in cumulative translation adjustment,
net of income taxes (1,775) (598) 477 (1,115)
-------- --------- ---------- ---------
Comprehensive income $ 1,751 $ 1,028 $ 6,306 $ 1,968
======== ========= ========== =========
Page 8
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
4. RESTRICTED CASH:
Restricted cash represents proceeds limited to future acquisitions. The
proceeds refer to amounts available for payment of consideration for
certain permitted acquisitions under the Company's senior credit facility,
including the payment of contingent consideration, which have been
advanced under the refinancing of the Company's U.K. operations.
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. ACQUISITIONS:
On March 17, 2003, the Company completed its acquisitions of Ablecare
Oxfordshire and Ablecare Northamptonshire, collectively referred to as
"Ablecare", both suppliers of flexible healthcare staffing services
primarily to local authority social services departments in the U.K. The
consideration included a payment of $809 in cash and additional cash of
$1,094 in contingent consideration dependent upon future earnings of the
acquired entity.
On January 13, 2003, the Company completed its acquisition of Yorkshire
Careline, a supplier of nurses and carers to local authority social
service departments in the U.K. The consideration included a payment of
$965 in cash and additional cash of $643 in contingent consideration
dependent upon future earnings of the acquired entity.
On November 28, 2002, the Company completed its acquisition of Medic-One
Group Limited, a supplier of temporary staffing to the National Health
Service (the "NHS") hospitals and private hospitals in the U.K. The
consideration included $4,642 in cash, and the issuance of 670 shares of
the Company's common stock. The Company is also obligated to issue
additional contingent consideration of up to approximately $13,481
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.
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 acquisitions have been accounted for as purchase business combinations
and the pro forma results of operations and related per share information
have not been presented as the amounts are considered immaterial. The
preliminary purchase cost allocations for the above acquisitions are
subject to adjustments and will be finalized once additional information
concerning asset and liability valuations are obtained. Then, final asset
and liability fair values may differ from those set forth on the
accompanying condensed consolidated balance sheet at March 31, 2003;
however, the changes are not expected to have a material effect on the
consolidated financial position, results of operations or cash flows of
the Company.
Page 9
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
5. ACQUISITIONS (CONTINUED):
Furthermore, the transactions related to the acquisition of Yorkshire
Careline, Ablecare, Medic-One Group Limited and other acquisitions of
flexible staffing agencies include provisions to pay additional amounts,
payable by a combination of cash and shares of the Company's stock,
aggregating $16,399 as of March 31, 2003 in contingent consideration
dependent upon future earnings of the acquired entities.
6. NOTES PAYABLE:
In the first quarter of fiscal 2003, the Company repaid, through its U.K.
subsidiary, Transworld Healthcare (UK) Limited ("TWUK"), notes payable of
$15,389 issued in connection with the acquisition of certain U.K. flexible
staffing agencies and wrote-off $607 of related debt discount. The Company
also issued notes payable of $34,033 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
3.00% to 5.25%. The Company may not repay 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 $39,388 at March 31, 2003 and related cash
restricted to the payment of such notes classified as current in the
accompanying consolidated balance sheet.
7. DERIVATIVE INSTRUMENT:
On March 20, 2003, the Company entered into a new Rate Cap and Floor
Collar Agreement that caps its interest rate at LIBOR of 5.50% and its
interest floor at LIBOR of 4.47%, subject to special provisions, on
approximately $78,245 of the Company's floating rate debt in a
contract which expires March 20, 2008. In accordance with Statement of
Financial Accounting Standards No. 133, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," as amended by
Statement of Financial Accounting Standards No. 138 and related
implementation guidance, the Company has calculated the fair value of
the interest cap and floor derivative to be a liability of $701 as of
March 31, 2003. In addition, changes in the value from period to
period of the interest cap and floor derivative will be recorded as
interest expense or income, as appropriate.
8. INCOME TAXES:
The provision for income taxes from continuing operations for the three
and six months ended March 31, 2003 was $109 and $1,876, respectively. In
the second quarter of fiscal 2003, the Company recorded a $1,873 benefit
related to the reversal of an estimated income tax liability for a
business that was previously discontinued and no longer has any tax
liabilities.
Page 10
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
9. 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 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 were Medicare Part B suppliers who
submitted 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.
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 legal proceedings and claims incidental
to its normal business activities. The Company is vigorously defending its
position in all such proceedings and has recorded, as of March 31, 2003,
an accrual of approximately $945 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.
Page 11
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
10. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS:
As previously disclosed, the Company sold all of the issued and
outstanding capital stock of its Home Healthcare operations on April 16,
2003 and the Home Healthcare results of operations have been classified as
discontinued operations. As a result of this transaction, the Company no
longer operates in the U.S. Home Healthcare segment. Accordingly, during
the three and six months ended March 31, 2003 and 2002, the Company's
continuing operations were in the U.K. The U.K. operations derive its
revenues from flexible healthcare services, principally nursing and
ancillary services, and provision of respiratory therapy products to
patients throughout most of the U.K. The Company evaluates performance and
allocates resources based on profit and loss from operations before
corporate expenses, interest and income taxes.
The following tables present certain financial information by reportable
business segment and geographic area of operations for the three and six
months ended March 31, 2003 and 2002.
THREE MONTHS ENDED MARCH 31, 2003
---------------------------------
U.K.
OPERATIONS TOTAL
-------------- -------------
Net patient services $ 70,110
Net respiratory, medical equipment and supplies 1,576
--------
Total revenues to unaffiliated customers $ 71,686 $ 71,686
======== ========
Segment operating profit $ 7,912 $ 7,912
========
Corporate expenses (868)
Interest expense, net (3,344)
Foreign exchange loss (3)
--------
Income before income taxes and discontinued operations $ 3,697
========
THREE MONTHS ENDED MARCH 31, 2002
---------------------------------
U.K.
OPERATIONS TOTAL
------------ ----------
Net patient services $ 56,358
Net respiratory, medical equipment and supplies 1,153
--------
Total revenues to unaffiliated customers $ 57,511 $ 57,511
======== ========
Segment operating profit $ 6,416 $ 6,416
========
Corporate expenses (664)
Interest expense, net (3,254)
Foreign exchange loss (7)
--------
Income before income taxes, minority
interest and discontinued operations $ 2,491
========
Page 12
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
10. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS (CONTINUED):
SIX MONTHS ENDED MARCH 31, 2003
-------------------------------
U.K.
OPERATIONS TOTAL
------------- ------------
Net patient services $ 136,639
Net respiratory, medical equipment and supplies 3,045
-----------
Total revenues to unaffiliated customers $ 139,684 $ 139,684
=========== ============
Segment operating profit $ 15,933 $ 15,933
===========
Corporate expenses (1,797)
Interest expense, net (6,542)
Foreign exchange loss (11)
------------
Income before income taxes and discontinued operations $ 7,583
============
Depreciation $ 819 $ 819
===========
Corporate depreciation 4
------------
Total depreciation $ 823
============
Identifiable assets, March 31, 2003 $ 283,707 $ 283,707
===========
Assets of discontinued operations 8,569
Corporate assets 2,887
------------
Total assets, March 31, 2003 $ 295,163
============
Capital expenditures $ 2,197 $ 2,197
===========
Corporate capital expenditures 5
------------
Total capital expenditures $ 2,202
============
SIX MONTHS ENDED MARCH 31, 2002
--------------------------------------
U.K.
OPERATIONS TOTAL
------------------ -------------
Net patient services $ 111,773
Net respiratory, medical equipment and supplies 2.320
-----------
Total revenues to unaffiliated customers $ 114,093 $ 114,093
=========== ============
Segment operating profit $ 12,784 $ 12,784
===========
Corporate expenses (1,327)
Interest expense, net (6,577)
Foreign exchange loss (20)
------------
Income before income taxes, minority interest and
discontinued operations $ 4,860
============
Depreciation $ 663 $ 663
===========
Corporate depreciation 7
------------
Total depreciation $ 670
============
Identifiable assets, March 31, 2002 $ 235,573 $ 235,573
===========
Assets of discontinued operations 9,845
Corporate assets 355
------------
Total assets, March 31, 2002 $ 245,773
============
Capital expenditures $ 1,565 $ 1,565
===========
Corporate capital expenditures 10
------------
Total capital expenditures $ 1,575
============
Page 13
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
11. IMPACT OF RECENT ACCOUNTING STANDARDS:
In July 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 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 six months ended March 31, 2003:
SIX MONTHS ENDED MARCH 31, 2003
-----------------------------------------
U.K. U.S.
OPERATIONS CORPORATE TOTAL
----------- --------- ----------
Balance at September 30, 2002 $ 121,214 $ 2,300 $ 123,514
Goodwill acquired during year 46,023 46,023
Foreign exchange difference 1,048 1,048
----------- --------- ----------
Balance at March 31, 2003 $ 168,285 $ 2,300 $ 170,585
=========== ========= ==========
Of the $46,653 goodwill acquired during the year, $36,402 related to the
Company's fiscal 2001 thru fiscal 2003 acquisitions of various flexible
staffing agencies that had earned contingent consideration based upon the
earnings of the acquired entities. The Company satisfied its obligation to
pay under these contingent consideration agreements by cash payments as
well as the issuance of notes payable. Accordingly, in the first quarter
of fiscal 2003 the Company issued notes payable of $34,033 to satisfy
amounts owed under these agreements. The notes predominately relate to the
Company's September 27, 2001 acquisition 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.
Page 14
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
11. IMPACT OF RECENT ACCOUNTING STANDARDS (CONTINUED):
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. Effective
October 1, 2002, the Company has adopted FAS No. 144. On April 16, 2003,
the Company sold all of the issued and outstanding capital stock of two of
its subsidiaries, Home Healthcare. In accordance with the provisions of
FAS No. 144, the Company has accounted for Home Healthcare as a
discontinued operation as of March 31, 2003 and the condensed consolidated
financial statements reflect the assets and liabilities of the
discontinued operation. The following table presents the financial results
of the discontinued operation:
THREE MONTHS ENDED MARCH 31, SIX MONTHS MARCH 31,
2003 2002 2003 2002
---------------------------- --------------------------
Revenues:
Net infusion services $ 3,087 $ 3,284 $ 6,289 $ 6,594
Net respiratory, medical equipment
and supplies sales 1,119 1,089 2,358 2,233
------- ------- ------- -------
Total revenues 4,206 4,373 8,647 8,827
------- ------- ------- -------
Cost of revenues:
Net infusion services 2,390 2,384 4,804 4,832
Net respiratory, medical equipment
and supplies sales 672 530 1,327 1,103
------- ------- ------- -------
3,062 2,914 6,131 5,935
------- ------- ------- -------
Selling, general and
administrative expenses 1,206 1,194 2,394 2,424
------- ------- ------- -------
(Loss) income from discontinued
operations $ (62) $ 265 $ 122 $ 468
======= ======= ======= =======
Diluted (loss) income per share
from discontinued operations $ -- $ 0.01 $ -- $ 0.03
======= ======= ======= =======
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.
Page 15
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
11. IMPACT OF RECENT ACCOUNTING STANDARDS (CONTINUED):
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.
In November 2002, the FASB approved FASB Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees,
including Indirect Guarantees of Indebtedness of Others, an
Interpretation of FASB Statement No. 5, 57 and 107 and Rescission of
FASB Interpretation No. 34 ("FIN 45"). FIN 45 clarifies the
requirements of SFAS No. 5, Accounting for Contingencies, relating to
a guarantor's accounting for, and disclosure of, the issuance of
certain types of guarantees. Specifically, FIN 45 requires a guarantor
to recognize a liability for the non-contingent component of certain
guarantees, representing the obligation to stand ready to perform in
the event that specified triggering events or conditions occur. The
provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after
December 31, 2002, irrespective of a guarantor's fiscal year end.
However, the disclosure provisions of FIN 45 are effective for
financial statements for annual periods ending after December 15,
2002. The Company believes that the adoption of FIN 45 will not have a
material impact on its consolidated financial statements.
In December 2002, the FASB issued FAS No. 148, "Accounting for Stock-Based
Compensation - Transition Disclosure, An Amendment of FASB Statement No.
123." This statement provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, FAS No. 148 amends the
disclosure requirements of FASB No. 123 to require more prominent and more
frequent disclosures in financial statements about the effects of
stock-based compensation. The provisions of FAS No. 148 are effective for
fiscal years ending after December 15, 2002 and the interim disclosure
provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. In
accordance with FAS No. 123, the Company continues to apply APB No. 25
"Accounting for Stock Issued to Employees," and related interpretations,
in accounting for its stock-based compensation plans. Accordingly, no
compensation cost has been recognized for its stock option plans. The fair
value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing model. The Adoption of FAS No. 148 did not
have an impact on the Company's results of operations or financial
position. Additional pro forma disclosures as to the amount of
compensation costs and pro forma effect on net income and earning per
share have not been made as the amounts are deemed immaterial.
Page 16
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
11. IMPACT OF RECENT ACCOUNTING STANDARDS (CONTINUED):
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities, ("FIN 46"). FIN 46 clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The Company
is required to adopt the provisions of FIN 46 for variable interest
entities created after January 31, 2003. The Company believes that the
adoption of FIN 46 will not have a material impact on its consolidated
financial statements.
In April 2003, the FASB issued FAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("FAS 149"). FAS 149 amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under FAS 133 and is effective for contracts entered into or
modified after June 30, 2003. The Company is currently reviewing the
impact of adopting FAS 149 on its consolidated financial position and
results of operations.
12. 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 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 primary
purpose of the Reorganization was the Company's desire to increase
shareholder value by having the Company and its subsidiaries be viewed as
"one company" by the marketplace. Other objectives of the Reorganization
were to streamline the Company's corporate structure, improve the
potential for equity financings in order to take advantage of attractive
opportunities in the U.S. healthcare staffing services market and,
effectively convert the equity and subordinated debt investments in the
Company's U.K. subsidiaries into direct investments in the Company. 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
Page 17
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
12. CORPORATE REORGANIZATION (CONTINUED):
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. and pounds sterling for purposes of the
Series A preferred stock has been permanently fixed at $1.58. The common
shares were valued at $3.91 per share which represented the closing price
on AMEX of the Company's stock as of April 24, 2002, the date of the
Reorganization Agreement. The redeemable convertible preferred stock
issued in connection with the Reorganization was valued at $35,213,
excluding issuance costs, based on the exchange ratio determined pursuant
to the Reorganization Agreement. At issuance, as the value of the common
stock into which the preferred shares would convert was less than the fair
value of the redeemable preferred stock, there was no beneficial
conversion feature.
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.
13. SUBSEQUENT EVENT:
On April 11, 2003 the Company completed its acquisition of First Force
Medical Recruitments Limited, a supplier of flexible healthcare staffing
services primarily to military and NHS hospitals in the U.K. The
consideration included a payment of $787 in cash and additional cash of
$1,966 in contingent consideration dependent upon future earnings of the
acquired entity.
Page 18
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 flexible healthcare staffing services,
including nursing and ancillary services, to the United Kingdom ("U.K.")
healthcare industry. We operate a community-based network of over 115 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.
On April 16, 2003, we sold all of the issued and outstanding capital stock of
two of our subsidiaries, The PromptCare Companies, Inc. and Steri-Pharm, Inc.,
collectively referred to as "Home Healthcare". Home Healthcare, which comprised
our United States ("U.S.") operations, was concentrated in New York and New
Jersey, and supplied infusion therapy, respiratory therapy and home medical
equipment. In accordance with the provisions of Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," ("FAS 144") our company has accounted for Home Healthcare as
a discontinued operation as of March 31, 2003. The condensed consolidated
financial statements reflect the assets and liabilities of the discontinued
operation and the operations for the current and prior periods are reported in
discontinued 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. The
primary purpose of the Reorganization was our desire to increase shareholder
value by having us and our subsidiaries be viewed as "one company" by the
marketplace. Other objectives of the Reorganization were to streamline our
corporate structure, improve the potential for equity financings in order to
take advantage of attractive opportunities in the U.S. healthcare staffing
services market and, effectively convert the equity and subordinated debt
investments in our U.K. subsidiaries into direct investments in us. 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
Page 19
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 senior subordinated
debt investments in Allied Healthcare (UK). The exchange rate between the U.S.
and pounds sterling for purposes of the Series A preferred stock has been
permanently fixed at $1.58. The common shares were valued at $3.91 per share
which represented the closing price on AMEX of our stock as of April 24, 2002,
the date of the Reorganization Agreement. The redeemable convertible preferred
stock issued in connection with the Reorganization was valued at $35,213,000,
excluding issuance costs, based on the exchange ratio determined pursuant to the
Reorganization Agreement. At issuance, as the value of the common stock into
which the preferred shares would convert was less than the fair value of the
redeemable preferred stock, there was no beneficial conversion feature.
CRITICAL ACCOUNTING POLICIES
Accounts Receivable
We are required to estimate the collectibility of our accounts receivable, 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.
Goodwill
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
is evaluated for impairment annually in the fourth quarter. However, a more
frequent evaluation would be performed if indicators of impairment were present.
Deferred Income 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.
Page 20
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 respiratory therapy revenues are recognized when services
are performed and substantiated by proper documentation. For patient services,
which account for over 95% of our company's business, revenue is recognized upon
completion of timesheets that also require the signature of the recipient of
services and are billed at fixed rates. Revenues from the rental of home medical
equipment (including respiratory equipment) are recognized over the rental
period (typically on a month-to-month basis). Revenue from the sale of
pharmaceuticals and supplies are recognized when products are shipped, a
contractual arrangement exists, the sales price is either fixed or determinable
and collection is reasonably assured.
We receive a majority of our revenue from the National Health Service (the
"NHS") and other U.K. governmental 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 March 31, 2003 vs. Three Months Ended March 31, 2002
Revenues
Total revenues for the three months ended March 31, 2003 and 2002 were
$71,686,000 and $57,511,000, respectively, an increase of $14,175,000 or 24.6%.
This increase relates to the growth of our U.K. flexible staffing operations as
a result of internal growth ($3,236,000) and acquisitions ($2,866,000) as well
as internal growth in our U.K. respiratory, medical equipment and supplies
operations ($250,000). An increase of $7,823,000 was due to the favorable
effects of changes in foreign exchange.
Gross Profit
Total gross profit increased by $4,476,000 to $19,625,000 for the three months
ended March 31, 2003 from $15,149,000 for the three months ended March 31, 2002.
The favorable effects of changes in foreign exchange accounted for $2,146,000 of
the increase. As a percentage of total revenue, gross profit for the three
months ended March 31, 2003 increased to 27.4% from 26.3% for the comparable
prior period. Gross margins for patient services increased (27.1% for the three
months ended March 31,
Page 21
2003 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
relatively consistent (39.1% for the three months ended March 31, 2003 versus
39.5% for the comparable prior period).
Selling, General and Administrative Expenses
Total selling, general and administrative expenses for the three months ended
March 31, 2003 and 2002 was $12,581,000 and $9,397,000, respectively, an
increase of $3,184,000 or 33.9%. Changes in foreign exchange accounted for
$1,276,000 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 ($1,691,000).
Interest Income
Total interest income for the three months ended March 31, 2003 was $494,000
compared to $695,000 for the three months ended March 31, 2002, which represents
a decrease of $201,000. This decrease was principally attributable to lower
levels of funds invested as well as decreases in interest rates and was
partially offset by favorable effects of changes in foreign exchange ($55,000).
Interest Expense
Total interest expense for the three months ended March 31, 2003 was $3,838,000
compared to $3,949,000 for the three months ended March 31, 2002, which
represents a decrease of $111,000. Excluding the $404,000 increase due to the
effect of foreign exchange, the actual decrease in interest expense was
$515,000. This decrease was principally attributable to the exchange of accrued
and unpaid interest on the senior subordinated promissory notes for shares of
our company's common stock as part of the Reorganization ($889,000). The
decrease is also attributable to reduced bank debt as well as a reduction in
interest rates. The decrease was partially offset by the recording of a $707,000
charge, in accordance with Statement of Financial Accounting Standards No. 133,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
as amended by Statement of Financial Accounting Standards No. 138 and related
implementation guidance, related to a change in the fair value of our company's
interest rate cap and collar agreement.
Provision for Income Taxes
We recorded a provision for income taxes amounting to $109,000 or 2.9% of income
before income taxes and discontinued operations for the three months ended March
31, 2003 compared to a provision of $1,088,000 or 43.7% of income before income
taxes, minority interest and discontinued operations for the three months ended
March 31, 2002. Included in the tax provision for the three months ended March
31, 2003 is a $1,873,000 benefit related to the reversal of an estimated income
tax liability for a business that was previously discontinued and no longer has
any tax liabilities. Excluding this benefit, the provision for income taxes
would have been $1,982,000 or 53.6% of income before income taxes and
discontinued operations for the three months ended March 31, 2003. The
difference between the 53.6% effective tax rate for the three months ended March
31, 2003 and the statutory tax rate is mainly due to non-deductible interest
expense and to our recording of an additional valuation allowance for the tax
benefit associated with the current year's U.S. operating loss.
Page 22
Minority Interest
We recorded a charge for minority interest of $42,000 for the three months ended
March 31, 2002. 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, we
acquired these shares and the U.K. operations became wholly-owned subsidiaries
of our company.
(Loss) Income From Discontinued Operations
Discontinued operations resulted in a loss of $62,000 for the three months ended
March 31, 2003 versus net income of $265,000 for the three months ended March
31, 2002. On April 16, 2003, we sold all of the issued and outstanding capital
stock of two of our subsidiaries. Home Healthcare which comprised our U.S.
operations, was concentrated in New York and New Jersey, and supplied infusion
therapy, respiratory therapy and home medical equipment. In accordance with the
provisions of Statement of Financial Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," ("FAS 144") our company
has accounted for Home Healthcare as a discontinued operation as of March 31,
2003. The following table presents the financial results of the discontinued
operation:
THREE MONTHS ENDED MARCH 31,
2003 2002
----------------------------------
Revenues:
Net infusion services $ 3,087 $ 3,284
Net respiratory, medical equipment and supplies sales 1,119 1,089
--------- --------
Total revenues 4,206 4,373
--------- --------
Cost of revenues:
Net infusion services 2,390 2,384
Net respiratory, medical equipment and supplies sales 672 530
--------- --------
3,062 2,914
--------- --------
Selling, general and administrative expenses 1,206 1,194
--------- --------
(Loss) income from discontinued operations $ (62) $ 265
========= ========
Diluted (loss) income per share from
discontinued operations $ -- $ 0.01
========= ========
Net Income
As a result of the foregoing, we recorded net income of $3,526,000 for the
three months ended March 31, 2003 compared to net income of $1,626,000 for
the three months ended March 31, 2002.
Series A Preferred Stock Dividend
We accrued $856,000 of dividends for the three months ended March 31, 2003
for the Series A preferred stock issued in connection with the
Reorganization and accreted $118,000 of costs related to the issuance of
our Series A preferred stock.
Page 23
Six Months Ended March 31, 2003 vs. Six Months Ended March 31, 2002
Revenues
Total revenues for the six months ended March 31, 2003 and 2002 were
$139,684,000 and $114,093,000, respectively, an increase of $25,591,000 or
22.4%. This increase relates to the growth of our U.K. flexible staffing
operations as a result of internal growth ($7,678,000) and acquisitions
($4,085,000) as well as internal growth in our U.K. respiratory, medical
equipment and supplies operations ($433,000). An increase of $13,395,000 was due
to the favorable effects of changes in foreign exchange.
Gross Profit
Total gross profit increased by $8,471,000 to $38,523,000 for the six months
ended March 31, 2003 from $30,052,000 for the six months ended March 31, 2002.
The favorable effects of changes in foreign exchange accounted for $3,694,000 of
the increase. As a percentage of total revenue, gross profit for the six months
ended March 31, 2003 increased to 27.6% from 26.3% for the comparable prior
period. Gross margins for patient services increased (27.3% for the six months
ended March 31, 2003 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 relatively consistent (40.0% for the six months ended March 31, 2003 versus
39.0% for the comparable prior period).
Selling, General and Administrative Expenses
Total selling, general and administrative expenses for the six months ended
March 31, 2003 and 2002 was $24,387,000 and $18,595,000, respectively, an
increase of $5,792,000 or 31.1%. Changes in foreign exchange accounted for
$2,166,000 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 ($3,482,000).
Interest Income
Total interest income for the six months ended March 31, 2003 was $1,084,000
compared to $1,533,000 for the six months ended March 31, 2002, which represents
a decrease of $449,000. This decrease was principally attributable to lower
levels of funds invested as well as decreases in interest rates and was
partially offset by favorable effects of changes in foreign exchange ($102,000).
Page 24
Interest Expense
Total interest expense for the six months ended March 31, 2003 was $7,626,000
compared to $8,110,000 for the six months ended March 31, 2002, which represents
a decrease of $484,000. Excluding the $715,000 increase due to the effect of
foreign exchange, the actual decrease in interest expense was $1,199,000. This
decrease was principally attributable to the exchange of accrued and unpaid
interest on the senior subordinated promissory notes for shares of our company's
common stock as part of the Reorganization ($1,780,000). This 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 ($607,000)
associated with the repayment of loan notes and by the recording of a $707,000
charge, in accordance with Statement of Financial Accounting Standards No. 133,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
as amended by Statement of Financial Accounting Standards No. 138 and related
implementation guidance, related to a change in the fair value of our company's
interest rate cap and collar agreement.
Provision for Income Taxes
We recorded a provision for income taxes amounting to $1,876,000 or 24.7% of
income before income taxes and discontinued operations for the six months ended
March 31, 2003 compared to a provision of $2,159,000 or 44.4% of income before
income taxes, minority interest and discontinued operations for the six months
ended March 31, 2002. Included in the tax provision for the six-months ended
March 31, 2003 is a benefit related to the reversal of an estimated income tax
liability ($1,873,000) for a business that was previously discontinued and no
longer has any tax liabilities. Excluding this benefit, the provision for income
taxes would have been $3,749,000 or 49.4% of income before income taxes and
discontinued operations for the six months ended March 31, 2003. The difference
between the 49.4% effective tax rate for the six months ended March 31, 2003 and
the statutory tax rate is mainly due to non-deductible interest expense and to
our recording of an additional valuation allowance for the tax benefit
associated with the current year's U.S. operating loss.
Minority Interest
We recorded a charge for minority interest of $86,000 for the six
months ended March 31, 2002. The minority interest represents the 1,050,000
shares of class A1 common stock of TWUK issued as part of the Nightingale
consideration. In the fiscal year 2002 Reorganization, we acquired these shares
and the U.K. operations became wholly-owned subsidiaries of our company.
Income From Discontinued Operations
Discontinued operations resulted in income of $122,000 for the six months ended
March 31, 2003 compared to income of $468,000 for the six months ended March 31,
2002. On April 16, 2003, we sold all of the issued and outstanding capital stock
of two of our subsidiaries. Home Healthcare which comprised our U.S. operations,
was concentrated in New York and New Jersey, and supplied infusion therapy,
respiratory therapy and home medical equipment. In accordance with the
provisions of Statement of Financial Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," ("FAS 144") our company
has accounted for Home
Page 25
Healthcare as a discontinued operation as of March 31, 2003. The following table
presents the financial results of the discontinued operation:
SIX MONTHS ENDED MARCH 31,
2003 2002
---------------------------------
Revenues:
Net infusion services $ 6,289 $ 6,594
Net respiratory, medical equipment and supplies sales 2,358 2,233
------- -------
Total revenues 8,647 8,827
------- -------
Cost of revenues:
Net infusion services 4,804 4,832
Net respiratory, medical equipment and supplies sales 1,327 1,103
------- -------
6,131 5,935
------- -------
Selling, general and administrative expenses 2,394 2,424
------- -------
Income from discontinued operations $ 122 $ 468
======= =======
Diluted income per share from discontinued
operations $ -- $ 0.03
======= =======
Net Income
As a result of the foregoing, we recorded net income of $5,829,000 for the six
months ended March 31, 2003 compared to net income of $3,083,000 for the six
months ended March 31, 2002.
Series A Preferred Stock Dividend
We accrued $1,722,000 of dividends for the six months ended March 31, 2003 for
the Series A preferred stock issued in connection with the Reorganization and
accreted $246,000 of costs related to the issuance of our Series A preferred
stock.
LIQUIDITY AND CAPITAL RESOURCES
General
For the six months ended March 31, 2003, we generated cash of $10,925,000 from
operating activities. Cash requirements for the six months ended March 31, 2003
for capital expenditures ($2,202,000), payments on acquisition payable
($4,704,000), payments for acquisitions ($7,268,000), payments on notes payable
($15,389,000) and payments on long-term debt ($3,335,000), were met through
operating cash flows, restricted cash and cash on hand.
In May 2003, we initiated another stock repurchase program, whereby we may
purchase up to approximately $3,000,000 of our outstanding common stock in open
market transactions or in privately negotiated transactions.
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 March 31,
2003, we had acquired 266,200 shares for an aggregate purchase price of $720,000
which are reflected as treasury stock in the condensed consolidated balance
sheet at March 31, 2003.
Page 26
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 proceeds limited to future acquisitions. The proceeds
refer to amounts available for payment of consideration for certain permitted
acquisitions under our senior credit facility, including the payment of
contingent consideration, which have been advanced under the refinancing of our
company's U.K. operations.
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.
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 March 31, 2003 and September 30, 2002, $30,221,000 (10.2%)
and $32,113,000 (12.0%), respectively, of our total assets consisted of accounts
receivable. The decrease in the accounts receivable from fiscal year end is
mainly due to improvements in credit controls to ensure cash collections on a
timelier basis.
Our goal is to maintain accounts receivable levels equal to or less than
industry average, which would tend to mitigate the risk of negative cash flows
from operations by reducing the required investment in accounts receivable and
thereby increasing cash flows from operations. Days sales outstanding ("DSOs")
is a measure of the average number of days taken by our company to collect its
accounts receivable, calculated from the date services are rendered. At March
31, 2003 and September 30, 2002, our average DSOs were 38 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 availability of approximately $167,914,000 at
March 31, 2003. The financing consists of a $150,403,000 senior collateralized
term and revolving credit facility (the "Senior Credit Facility") and
$17,511,000 in mezzanine indebtedness (the "Mezzanine Loan").
Page 27
Senior Credit Facility
The Senior Credit Facility consists of the following:
o $44,097,000 term loan A, maturing December 17, 2005;
o $19,686,000 acquisition term loan B, maturing December 17, 2006;
o $78,745,000 term loan C, maturing June 30, 2007, per the September 27,
2001 amendment,; and
o $7,875,000 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 2.00% to 3.50%
per annum. As of March 31, 2003, we had outstanding borrowings of $107,408,000
under the Senior Credit Facility that bore interest at a rates ranging from
5.65% to 7.15%.
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. As of March 31, 2003, we are in compliance with
such covenants.
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 March 31, 2003,
we had outstanding borrowings under the Mezzanine Loan of $16,039,000, which
bore interest at a rate of 10.65%.
Notes Due in Connection with Acquisitions
In the first quarter of fiscal 2003, we repaid, through TWUK, notes payable of
$15,389,000 issued in connection with the acquisition of certain U.K. flexible
staffing agencies and wrote-off $607,000 of related debt discount. We also
issued notes payable of $34,033,000 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
Page 28
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 3.00% to 5.25%. In general, we may not repay 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. As of March 31, 2003, we had
outstanding notes payable of $39,388,000 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
Page 29
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. At issuance, as the value of the common stock into
which the preferred share would convert was less than the fair value of the
redeemable preferred stock, there was no beneficial conversion feature.
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 $16,399,000, as of March 31, 2003, 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.
Page 30
Contractual Cash Obligations
As described under "Borrowings," "Acquisition Agreements," and "Operating
Leases" above, the following table summarizes our contractual cash obligations
as of March 31, 2003:
Total Debt Total Lease Total Other Total
Fiscal Obligations Obligations Obligations Obligations
------ ----------------------------------------------------------------
2003 $ 42,383,000 $ 922,000 $ 2,918,000 $ 46,223,000
2004 8,819,000 1,356,000 5,764,000 15,939,000
2005 11,024,000 1,165,000 7,717,000 19,906,000
2006 29,136,000 1,057,000 30,193,000
2007 55,122,000 945,000 56,067,000
Thereafter 16,351,000 2,324,000 18,675,000
----------------------------------------------------------------
$ 162,835,000 $ 7,769,000 $ 16,399,000 $ 187,003,000
================================================================
Lease obligations reflect future minimum rental commitments required under
operating leases that have non-cancelable lease terms as of March 31, 2003.
Contingencies
Some of our subsidiaries were Medicare Part B suppliers who submitted 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. 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.
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.
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
Page 31
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 of operations.
We are involved in various legal proceedings and claims incidental to our normal
business activities. We are vigorously defending our position in all such
proceedings and have recorded an accrual of approximately $945,000 to cover our
estimated exposure related to these matters. 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 (the "FASB") 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. Effective October 1, 2002, the Company has
adopted FAS No. 144. On April 16, 2003, we sold all of the issued and
outstanding capital stock of two of our subsidiaries, Home Healthcare. In
accordance with the provisions of FAS No. 144, we have accounted for Home
Healthcare as a discontinued operation .
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 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 our consolidated
financial position or results of operations.
In November 2002, the FASB approved FASB Interpretation No. 45 Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statement No. 5,
57 and 107 and Rescission of FASB Interpretation No.
Page 32
34 ("FIN 45"). FIN 45 clarifies the requirements of SFAS No. 5, Accounting for
Contingencies, relating to a guarantor's accounting for, and disclosure of, the
issuance of certain types of guarantees. Specifically, FIN 45 requires a
guarantor to recognize a liability for the non-contingent component of certain
guarantees, representing the obligation to stand ready to perform in the event
that specified triggering events or conditions occur. The provisions for initial
recognition and measurement are effective on a prospective basis for guarantees
that are issued or modified after December 31, 2002, irrespective of a
guarantor's fiscal year-end. However, the disclosure provisions of FIN 45 are
effective for financial statements for annual periods ending after December 15,
2002. We believe that the adoption of FIN 45 will not have a material impact on
our consolidated financial statements.
In December 2002, the FASB issued FAS No. 148, "Accounting for Stock-Based
Compensation - Transition Disclosure, An Amendment of FASB Statement No. 123."
This statement provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. In addition, FAS No. 148 amends the disclosure requirements of
FASB No. 123 to require more prominent and more frequent disclosures in
financial statements about the effects of stock-based compensation. The
provisions of FAS No. 148 are effective for fiscal years ending after December
15, 2002 and the interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning after
December 15, 2002. In accordance with FAS No. 123, we continue to apply APB No.
25 "Accounting for Stock Issued to Employees," and related interpretations, in
accounting for our stock-based compensation plans. Accordingly, no compensation
cost has been recognized for our stock option plans. The fair value of each
option granted is estimated on the date of grant using the Black-Scholes
option-pricing model. The Adoption of FAS No. 148 did not have an impact on our
company's results of operations or financial position. Additional pro forma
disclosures as to the amount of compensation costs and pro forma effect on net
income and earning per share have not been made as the amounts are deemed
immaterial.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities, ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements, to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. We are required to adopt the provisions of FIN 46
for variable interest entities created after January 31, 2003. We believe that
the adoption of FIN 46 will not have a material impact on our consolidated
financial statements.
In April 2003, the FASB issued FAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("FAS 149"). FAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under FAS
133 and is effective for contracts entered into or modified after June 30, 2003.
We are currently reviewing the impact of adopting FAS 149 on our consolidated
financial position and results of operations.
Page 33
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, January 25,
2000, we capped our interest rate (LIBOR cap of 9%) on approximately $41,935,000
of our floating rate debt in a contract which expires June 30, 2003.
Subsequently, on March 20, 2003, we entered into a new Rate Cap Floor Collar
Agreement that caps our interest rate at LIBOR of 5.50% and our interest floor
at LIBOR of 4.47%, subject to special provisions, on approximately $78,245,000
of our floating rate debt in a contract which expires March 20, 2008. In
accordance with Statement of Financial Accounting Standards No. 133, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities," as amended
by Statement of Financial Accounting Standards No. 138 and related
implementation guidance, we have calculated the fair value of the interest cap
and floor derivative to be a liability of $701,000 as of March 31, 2003. In
addition, changes in the value from period to period of the interest cap and
floor derivative will be recorded as interest expense or income, as appropriate.
As of March 31, 2003, our Series A preferred stock ($32,915,000), net of
unamortized issuance cost ($2,298,000) 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.
Page 34
In connection with the acquisition of several U.K. flexible staffing agencies,
we have notes payable of $39,388,000 at March 31, 2003. The notes payable are
redeemable, at the holder's option, and bear interest ranging from 2.00% to
5.25% as of March 31, 2003. The table below represents the expected maturity of
our variable rate debt and their weighted average interest rates as of March 31,
2003.
EXPECTED WEIGHTED AVERAGE
FISCAL MATURITY RATE
------------------------------------------
2003 $ 2,995,000 LIBOR +1.59%
2004 8,819,000 LIBOR +2.25%
2005 11,024,000 LIBOR +2.25%
2006 29,136,000 LIBOR +3.26%
2007 55,122,000 LIBOR +3.50%
Thereafter 16,351,000 LIBOR +7.00%
-----------------
$ 123,447,000 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 $164,307,000 as of March
31, 2003.
Page 35
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 36
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Stock Purchase Agreement by and between PromptCare Acquisition
Corporation and Allied Healthcare International Inc. dated as of April
16. 2003 (incorporated herein by reference to Exhibit 10.1 of our
Current Report on Form 8-K filed with the Securities and Exchange
Commission on April 17, 2003).
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
Sarbanes-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 Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K.
The Company filed on February 11, 2003 a Report on Form 8-K dated
February 11, 2003, 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 ended December
31, 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 37
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: May 14, 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 38
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: May 14, 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: May 14, 2003
/s/ Daniel A. Bergeron
--------------------------------------
Daniel A. Bergeron
Vice President and Chief Financial
Officer (principal financial officer)
Page 2