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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 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 August 11, 2003
Common Stock 22,172,272 Shares
ALLIED HEALTHCARE INTERNATIONAL INC.
THIRD QUARTER REPORT ON FORM 10-Q
TABLE OF CONTENTS
-----------------
PART I
Item 1. Financial Statements (Unaudited)......................................3
Consolidated Balance Sheets - June 30, 2003 (Unaudited)
and September 30, 2002...........................................4
Consolidated Statements of Operations (Unaudited) -
For the Three and Nine Months Ended June 30, 2003
and June 30, 2002 ...............................................5
Consolidated Statements of Cash Flows (Unaudited) -
For the Nine Months Ended June 30, 2003 and
June 30, 2002 ...................................................6
Notes to Condensed Consolidated Financial Statements (Unaudited) ..7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................20
Item 3. Quantitative and Qualitative Disclosures about Market Risk ..........36
Item 4. Controls and Procedures..............................................38
PART II
Item 4. Submission of Matters to a Vote of Security Holders..................39
Item 6. Exhibits and Reports on Form 8-K.....................................40
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.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, SEPTEMBER 30,
2003 2002
(UNAUDITED)
--------------------- ---------------------
ASSETS
Current assets:
Cash and cash equivalents $ 19,255 $ 18,278
Restricted cash 37,313 19,840
Accounts receivable, less allowance for doubtful
accounts of $3,022 and $22,849, respectively 37,598 32,113
Unbilled accounts receivable 9,997 7,046
Assets of discontinued operations -- 8,733
Inventories 313 359
Prepaid expenses and other assets 1,761 1,642
--------------------- ---------------------
Total current assets 106,237 88,011
Property and equipment, net 10,362 8,098
Restricted cash 3,309 43,678
Goodwill 179,791 123,514
Deferred financing costs and other assets 4,006 4,812
--------------------- ---------------------
Total assets $ 303,705 $ 268,113
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 37,313 $ 19,840
Short-term debt -- 3,480
Current portion of long-term debt 8,915 6,249
Liabilities of discontinued operations 935 1,270
Accounts payable 2,414 1,505
Accrued expenses 27,890 24,936
Taxes payable 3,920 4,813
--------------------- ---------------------
Total current liabilities 81,387 62,093
Long-term debt 117,238 118,961
Derivative liability 1,419 --
Deferred income taxes and other long-term liabilities 901 862
--------------------- ---------------------
Total liabilities 200,945 181,916
--------------------- ---------------------
Commitments and contingencies
Redeemable convertible preferred stock, 7,774 shares
issued and outstanding (liquidation value of $35,213) 33,033 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 22,575 and
20,945 shares, respectively 226 209
Additional paid-in capital 142,630 139,231
Accumulated other comprehensive income (loss) 1,905 (3,112)
Accumulated deficit (72,836) (80,785)
--------------------- ---------------------
72,003 55,621
Less notes receivable from officers (991) (958)
Less cost of treasury stock (408 and 266 shares, respectively) (1,285) (720)
--------------------- ---------------------
Total stockholders' equity 69,727 53,943
--------------------- ---------------------
Total liabilities and stockholders' equity $ 303,705 $ 268,113
===================== =====================
See notes to condensed consolidated financial statements.
Page 4
ALLIED HEALTHCARE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenues:
Net patient services $ 73,652 $ 59,371 $ 210,291 $ 171,144
Net respiratory, medical equipment and supplies sales 1,622 1,216 4,667 3,536
----------- ----------- ----------- -----------
Total revenues 75,274 60,587 214,958 174,680
----------- ----------- ----------- -----------
Cost of revenues:
Patient services 53,750 43,465 153,084 126,090
Respiratory, medical equipment and supplies sales 929 710 2,756 2,126
----------- ----------- ----------- -----------
Total cost of revenues 54,679 44,175 155,840 128,216
----------- ----------- ----------- -----------
Gross profit 20,595 16,412 59,118 46,464
Selling, general and administrative expenses 13,663 17,648 38,050 36,243
----------- ----------- ----------- -----------
Operating income (loss) 6,932 (1,236) 21,068 10,221
Interest income (491) (720) (1,575) (2,253)
Interest expense 3,853 4,168 11,479 12,278
Foreign exchange loss (gain) 3 (2) 14 18
----------- ----------- ----------- -----------
Income (loss) before income taxes, minority interest
and discontinued operations 3,567 (4,682) 11,150 178
Provision for income taxes 1,828 983 3,704 3,142
----------- ----------- ----------- -----------
Income (loss) before minority interest and
discontinued operations 1,739 (5,665) 7,446 (2,964)
Minority interest -- 34 -- 120
----------- ----------- ----------- -----------
Income (loss) from continuing operations 1,739 (5,699) 7,446 (3,084)
----------- ----------- ----------- -----------
Discontinued operations:
(Loss) income from discontinued operations (138) 234 (16) 702
Gain on disposal of subsidiaries, net of taxes of $775 519 -- 519 --
----------- ----------- ----------- -----------
381 234 503 702
----------- ----------- ----------- -----------
Net income (loss) 2,120 (5,465) 7,949 (2,382)
Redeemable preferred dividend and accretion 1,003 114 2,971 114
----------- ----------- ----------- -----------
Net income (loss) available to common shareholders $ 1,117 $ (5,579) $ 4,978 $ (2,496)
=========== =========== =========== ===========
Basic income (loss) per share of common stock from:
Income (loss) from continuing operations $ 0.03 $ (0.31) $ 0.21 $ (0.18)
Income from discontinued operations 0.02 0.01 0.02 0.04
----------- ----------- ----------- -----------
Net income (loss) available to common shareholders $ 0.05 $ (0.30) $ 0.23 $ (0.14)
=========== =========== =========== ===========
Diluted income (loss) per share of common stock from:
Income (loss) from continuing operations $ 0.03 $ (0.31) $ 0.20 $ (0.18)
Income from discontinued operations 0.02 0.01 0.02 0.04
----------- ----------- ----------- -----------
Net income (loss) available to common shareholders $ 0.05 $ (0.30) $ 0.22 $ (0.14)
=========== =========== =========== ===========
Weighted average number of common shares outstanding:
Basic 22,239 18,701 21,885 17,760
=========== =========== =========== ===========
Diluted 22,557 18,701 22,245 17,760
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
Page 5
ALLIED HEALTHCARE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
--------------------------------------
JUNE 30, JUNE 30,
2003 2002
-------------- --------------
Cash flows from operating activities:
Net income (loss) $ 7,949 $ (2,382)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Income from discontinued operations (503) (702)
Depreciation and amortization 1,290 1,034
Amortization of debt issuance costs 1,443 1,731
Write-off of debt discount 611 --
Provision for doubtful accounts 713 1,186
Stock based compensation 4,217
Interest accrued on officers' loans (33) (7)
Interest in kind 485 2,986
Minority interest -- 120
Gain on sale of fixed assets (54) (3)
Changes in assets and liabilities, excluding the effect of businesses
acquired and sold:
Increase in accounts receivable (1,684) (2,557)
Decrease (increase) in inventories 64 (36)
Increase in prepaid expenses and other assets (2,452) (4,099)
Increase in accounts payable and other liabilities 202 1,233
-------------- --------------
Net cash provided by continuing operations 8,031 2,721
Net cash provided by discontinued operations 546 2,512
-------------- --------------
Net cash provided by operating activities 8,577 5,233
-------------- --------------
Cash flows from investing activities:
Capital expenditures (2,983) (2,565)
Proceeds from sale of property and equipment 141 27
Proceeds from sale of discontinued operations 8,355 --
Loans issued to officers -- (940)
Payments on acquisition payable (4,734) (1,774)
Payments for acquisitions - net of cash acquired (8,274) (626)
Proceeds limited to future acquisitions 25,677 6,131
-------------- --------------
Net cash provided by investing activities 18,182 253
-------------- --------------
Cash flows from financing activities:
Principal payments on long-term debt (6,713) (5,056)
Payments on notes payable (19,322) (3,379)
Payments for treasury shares acquired (572) --
Proceeds from issuance of common stock -- 3,188
Proceeds from exercise of stock options 53 --
Payments for stock issuance costs (20) (23)
-------------- --------------
Net cash used in financing activities (26,574) (5,270)
-------------- --------------
Effect of exchange rate on cash 792 554
-------------- --------------
Increase in cash 977 770
Cash and cash equivalents, beginning of period 18,278 13,334
-------------- --------------
Cash and cash equivalents, end of period $ 19,255 $ 14,104
============== ==============
Supplemental cash flow information:
Cash paid for interest $ 8,051 $ 7,500
============== ==============
Cash paid for income taxes, net $ 4,914 $ 4,207
============== ==============
Supplemental disclosure of non-cash investing and financing activities: Details
of business acquired in purchase transactions:
Fair value of assets acquired $ 10,991
==============
Liabilities assumed or incurred $ 2,403
==============
Cash paid for acquisitions (including related expenses) $ 8,588
Cash acquired 314
--------------
Net cash paid for acquisitions $ 8,274
==============
Issuance of common stock $ 6,360 $ 4,217
============== ==============
Notes issued for earned contingent consideration $ 35,663
==============
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. The condensed consolidated
financial statements reflect the assets and liabilities of the discontinued
operations and the operations for the current and prior periods are
reported in discontinued operations.
The following table presents the financial results of the discontinued
operations:
THREE MONTHS ENDED JUNE 30, NINE MONTHS JUNE 30,
2003 2002 2003 2002
------------ --------- ------------- -----------
Revenues:
Net infusion services $ 396 $ 2,990 $ 6,685 $ 9,584
Net respiratory, medical
equipment
and supplies sales 121 1,197 2,479 3,430
------------ --------- ------------- -----------
Total revenues 517 4,187 9,164 13,014
------------ --------- ------------- -----------
Cost of revenues:
Infusion services 355 2,128 5,159 6,960
Respiratory, medical equipment
and supplies sales 111 600 1,438 1,703
------------ --------- ------------- -----------
Total cost of revenues 466 2,728 6,597 8,663
------------ --------- ------------- -----------
Selling, general and
administrative
expenses 189 1,225 2,583 3,649
Gain on disposal of
subsidiaries, net
of tax 519 - 519 -
------------ --------- ------------- -----------
Income from discontinued
operations $ 381 $ 234 $ 503 $ 702
============ ========= ============= ===========
Diluted income per share from
discontinued operations $ 0.02 $ 0.01 $ 0.02 $ 0.04
============ ========= ============= ===========
Page 7
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1. BASIS OF PRESENTATION (CONTINUED):
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 nine month periods ended June 30, 2003 and 2002 are not
necessarily indicative of operating results for the full year.
Certain prior period balances have been reclassified to conform with
current period classifications.
2. STOCK-BASED COMPENSATION:
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 148, "Accounting
for Stock-Based Compensation - Transition Disclosure, An Amendment of FAS
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 FAS 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 financial position or results of
operations.
Page 8
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
2. STOCK-BASED COMPENSATION (CONTINUED):
Had compensation costs for the Company's stock options been determined
consistent with the fair value method prescribed by FAS No. 123, the
Company's net income (loss) and related per share amounts would have been
adjusted to the pro forma amounts indicated below:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income (loss) available to common $ 1,117 $ (5,579) $ 4,978 $ (2,496)
shareholders
Total stock-based compensation expense determined
under fair value based method for all awards,
net of related tax effects 65 39 443 80
--------- --------- --------- ---------
Pro forma net income (loss) available to common $ 1,052 $ (5,618) $ 4,535 $ (2,576)
========= ========= ========= =========
Net income (loss) per share:
Basic - as reported $ 0.05 $ (0.30) $ 0.23 $ (0.14)
Basic - pro forma $ 0.05 $ (0.30) $ 0.21 $ (0.15)
Net income (loss) per share:
Diluted - as reported $ 0.05 $ (0.30) $ 0.22 $ (0.14)
Diluted - pro forma $ 0.05 $ (0.30) $ 0.20 $ (0.15)
3. 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 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. At June 30, 2003 and 2002, the Company had outstanding
stock options to purchase 1,350 and 774 shares, respectively, of common
stock ranging in price from $4.00 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 income
per share computations for the three and nine months ended June 30, 2003
and 2002 are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Weighted average number of common shares outstanding
as used in computation of basic EPS of common stock 22,239 18,701 21,885 17,760
Effect of dilutive securities - stock options 318 - 360 -
--------- --------- --------- ---------
Shares used in computation of diluted EPS of common stock 22,557 18,701 22,245 17,760
========= ========= ========= =========
Page 9
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
4. COMPREHENSIVE INCOME (LOSS):
Components of comprehensive income (loss) include net income (loss) and all
other non-owner changes in equity, such as the change in the cumulative
translation adjustment, which is the only item of other comprehensive
income (loss) impacting the Company. The following table displays
comprehensive income (loss) for the three and nine months ended June 30,
2003 and 2002:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income (loss) $ 2,120 $ (5,465) $ 7,949 $ (2,382)
Change in cumulative translation adjustment, net
of income taxes 4,540 2,795 5,017 1,680
--------- --------- --------- ---------
Comprehensive income (loss), net of income taxes $ 6,660 $ (2,670) $ 12,966 $ (702)
========= ========= ========= =========
5. 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.
6. ACQUISITIONS:
In July 2001, the FASB issued FAS No. 142, "Goodwill and Other Intangible
Assets". Under FAS No. 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 No. 142 and suspended the amortization of
goodwill. In accordance with the transitional provisions of FAS No. 142,
previously recognized goodwill was tested for impairment. The Company
completed its annual impairment test required under FAS No. 142 during the
fourth quarter of fiscal 2002 and determined there is no impairment to its
recorded goodwill balance.
Page 10
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
6. ACQUISITIONS (CONTINUED):
The following tables present the changes in the carrying amount of goodwill
for the nine months ended June 30, 2003:
NINE MONTHS ENDED JUNE 30, 2003
--------------------------------------------------
U.K. U.S.
OPERATIONS CORPORATE TOTAL
------------ ------------ ------------
Balance at September 30, 2002 $ 121,214 $ 2,300 $ 123,514
Goodwill acquired during period 49,375 - 49,375
Foreign exchange effect 6,902 - 6,902
------------ ------------ ------------
Balance at June 30, 2003 $ 177,491 $ 2,300 $ 179,791
============ ============ ============
Of the $49,375 of goodwill acquired during the nine-months ended June 30,
2003, $38,145 related to the Company's fiscal 2001 through 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 $35,663 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.
On June 27, 2003, the Company completed its acquisition of Carewise Nursing
Agency, which specializes in supplying qualified critical care nurses to
intensive care units across National Health Service (the "NHS") hospitals
in the U.K. The consideration included a payment of $91 in cash and
additional contingent cash consideration of $1,560 dependent upon future
earnings of the acquired entity.
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 contingent
cash consideration of $2,063 dependent upon future earnings of the acquired
entity.
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 contingent
cash consideration of $1,138 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 contingent cash consideration of $660 dependent upon
future earnings of the acquired entity.
Page 11
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
6. ACQUISITIONS (CONTINUED):
On November 28, 2002, the Company completed its acquisition of Medic-One
Group Limited, a supplier of temporary staffing to the NHShospitals 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 $14,127 dependent upon future earnings of the acquired
entity. 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 consolidated balance sheet at June 30, 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.
Furthermore, the transactions related to the acquisition of Carewise
Nursing Agency, First Force Medical Recruitments Limited, Ablecare,
Yorkshire Careline, 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 $20,806 at June 30, 2003 in contingent consideration dependent
upon future earnings of the acquired entities.
7. NOTES PAYABLE:
In fiscal 2003, the Company repaid, through its U.K. subsidiary, Transworld
Healthcare (UK) Limited ("TWUK"), notes payable of $19,322 issued in
connection with the acquisition of certain U.K. flexible staffing agencies
and wrote-off $611 of related debt discount. In fiscal 2003, the Company
also issued notes payable of $35,663 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 2.65% 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 $37,313 at
June 30, 2003 and related cash restricted to the payment of such notes
classified as current in the accompanying consolidated balance sheet.
Page 12
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
8. 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
$82,515 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 $1,419 at June 30, 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.
9. INCOME TAXES:
The provision for income taxes from continuing operations for the three and
nine months ended June 30, 2003 was $1,828 and $3,704, 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. The
provision for income taxes from continuing operations for the three and
nine months ended June 30, 2002 was $983 and $3,142, respectively.
10. COMMITMENTS AND CONTINGENCIES:
Acquisition Agreements
----------------------
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 6.
Litigation
----------
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.
Page 13
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Contingencies
-------------
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 together with all applicable
laws and regulations of other countries in which the Company operates.
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 and those of other countries 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, at June 30, 2003, an
accrual of approximately $920 to cover its estimate for exposure related to
these matters. Management believes these matters should not have a material
adverse impact on the Company's consolidated financial position, cash flows
or results of operations.
Page 14
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
11. 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 nine
months ended June 30, 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 nine
months ended June 30, 2003 and 2002.
THREE MONTHS ENDED JUNE 30, 2003
------------------------------------
U.K.
OPERATIONS TOTAL
---------- ----------
Net patient services $ 73,652
Net respiratory, medical equipment and supplies 1,622
-----------
Total revenues to unaffiliated customers $ 75,274 $ 75,274
========== ==========
Segment operating profit $ 7,747 $ 7,747
==========
Corporate expenses (815)
Interest expense, net (3,362)
Foreign exchange loss (3)
----------
Income before income taxes and discontinued
Operations $ 3,567
==========
THREE MONTHS ENDED JUNE 30, 2002
------------------------------------
U.K.
OPERATIONS TOTAL
---------- ----------
Net patient services $ 59,371
Net respiratory, medical equipment and supplies 1,216
----------
Total revenues to unaffiliated customers $ 60,587 $ 60,587
---------- ----------
Segment operating profit $ 6,011 $ 6,011
==========
Corporate expenses (7,247)
Interest expense, net (3,448)
Foreign exchange gain 2
----------
Loss before income taxes, minority interest
and discontinued operations $ (4,682)
==========
Page 15
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
11. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS (CONTINUED):
NINE MONTHS ENDED JUNE 30, 2003
------------------------------------------
U.K.
OPERATIONS TOTAL
------------- -------------
Net patient services $ 210,291
Net respiratory, medical equipment and supplies 4,667
-------------
Total revenues to unaffiliated customers $ 214,958 $ 214,958
============= =============
Segment operating profit $ 23,680 $ 23,680
=============
Corporate expenses (2,612)
Interest expense, net (9,904)
Foreign exchange loss (14)
-------------
Income before income taxes and discontinued operations $ 11,150
=============
Depreciation $ 1,284 $ 1,284
=============
Corporate depreciation 6
-------------
Total depreciation $ 1,290
=============
Identifiable assets, June 30, 2003 $ 294,387 $ 294,387
=============
Corporate assets 9,318
-------------
Total assets, June 30, 2003 $ 303,705
=============
Capital expenditures $ 2,977 $ 2,977
=============
Corporate capital expenditures 6
-------------
Total capital expenditures $ 2,983
=============
NINE MONTHS ENDED JUNE 30, 2002
------------------------------------------
U.K.
OPERATIONS TOTAL
------------- -------------
Net patient services $ 171,144
Net respiratory, medical equipment and supplies 3,536
-------------
Total revenues to unaffiliated customers $ 174,680 $ 174,680
------------- =============
Segment operating profit $ 18,794 $ 18,794
=============
Corporate expenses (8,573)
Interest expense, net (10,025)
Foreign exchange loss (18)
-------------
Income before income taxes, minority interest and $ 178
=============
Depreciation $ 1,022 $ 1,022
=============
Corporate depreciation 12
-------------
Total depreciation $ 1,034
=============
Identifiable assets, June 30, 2002 $ 248,682 $ 248,682
=============
Assets of discontinued operations 9,332
Corporate assets 513
-------------
Total assets, June 30, 2002 $ 258,527
=============
Capital expenditures $ 2,556 $ 2,556
=============
Corporate capital expenditures 9
-------------
Total capital expenditures $ 2,565
=============
Page 16
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
12. IMPACT OF RECENT ACCOUNTING STANDARDS:
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 No. 145, effective October 1, 2001, and recorded a
charge of $925 in interest expense in the fourth quarter of fiscal 2002.
In June 2002, the FASB issued FAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." FAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This statement is effective for exit and disposal
activities initiated after December 15, 2002. The Company believes that the
adoption of FAS No. 146 will not have a material impact on its 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
the interim and annual periods ending after December 15, 2002. The Company
believes that the adoption of FIN 45 did not have a material impact on its
consolidated financial position or results of operations. The Company's
U.K. subsidiaries guarantee the debt and other obligations of certain
wholly-owned U.K. subsidiaries under agreements with the senior
collateralized term and revolving credit facility, mezzanine indebtedness
and various notes issued in connection with the acquisition of certain U.K.
flexible staffing agencies. At June 30, 2003 and September 30, 2002, the
amounts guaranteed, which approximates the amounts outstanding, totaled
approximately 165,000 and 151,000, respectively.
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 position or results of operations.
Page 17
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
12. IMPACT OF RECENT ACCOUNTING STANDARDS (CONTINUED):
In April 2003, the FASB issued FAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". FAS No. 149 amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under FAS No. 133 and is effective for contracts entered into or
modified after June 30, 2003. The Company is currently reviewing the impact
of adopting FAS No. 149 on its consolidated financial position and results
of operations.
In May 2003, the FASB issued FAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". FAS No.
150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
This statement requires that an issuer classify a financial instrument that
is within its scope as a liability (or an asset in some circumstances).
Many of those instruments were previously classified as equity. FAS No. 150
is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The Company is currently reviewing
the impact of adopting FAS No. 150 on its consolidated financial position
and results of operations.
13. 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.
Page 18
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
13. CORPORATE REORGANIZATION (CONTINUED):
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
Note holders were required to exchange the loan notes for shares of the
Company's common stock. The satisfaction of accrued and unpaid interest for
shares of the Company's common stock was exchanged at the rate of 0.3488
shares for every (pound)2.00 of Loan Notes. In fiscal 2002, the Company
issued 117 shares of common stock in settlement of accrued and unpaid
interest and the remaining 890 shares of common stock were issued in the
first quarter of fiscal 2003.
In the Reorganization, the Company issued an aggregate of 2,359 shares of
its common stock and 7,774 shares of its Series A preferred stock with a
liquidation preference of 22,287 pounds sterling in exchange for all of the
equity investments in TWUK not already held by the Company and all of the
senior subordinated debt investments in Allied Healthcare (UK). The
exchange rate between the U.S. 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 at 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.
14. SUBSEQUENT EVENT:
On July 8, 2003, the Company completed its acquisition of Cynon Health
Agency, a supplier of flexible healthcare staffing services primarily to
hospitals, nursing homes and prisons in the U.K. The consideration included
a payment of $1,237 in cash and additional contingent cash consideration of
$1,732 dependent upon future earnings of the acquired entity.
Page 19
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. The condensed consolidated financial statements
reflect the assets and liabilities of the discontinued operations 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 to receive a funding
note (the "Loan Notes"); the Loan Note holders were required to exchange the
Page 20
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 at 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 21
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 6 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 June 30, 2003 vs. Three Months Ended June 30, 2002
Revenues
- --------
Total revenues for the three months ended June 30, 2003 and 2002 were
$75,274,000 and $60,587,000, respectively, an increase of $14,687,000 or 24.2%.
This increase relates to the growth of our U.K. flexible staffing operations as
a result of internal growth ($2,624,000) and acquisitions ($4,524,000) as well
as internal growth in our U.K. respiratory, medical equipment and supplies
operations ($249,000). An increase of $7,290,000 was due to the favorable
effects of changes in foreign exchange.
Gross Profit
- ------------
Total gross profit increased by $4,183,000 to $20,595,000 for the three months
ended June 30, 2003 from $16,412,000 for the three months ended June 30, 2002.
The favorable effects of changes in foreign exchange accounted for $1,996,000 of
the increase. As a percentage of total revenues, gross profit for the three
months ended June 30, 2003 increased to 27.4% from 27.1% for the comparable
prior period. Gross margins for patient services increased (27.0% for the three
months ended June 30,
Page 22
2003 versus 26.8% 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 (42.7% for the three months ended June 30, 2003 versus
41.6% for the comparable prior period).
Selling, General and Administrative Expenses
- --------------------------------------------
Total selling, general and administrative expenses for the three months ended
June 30, 2003 and 2002 was $13,663,000 and $17,648,000, respectively, a decrease
of $3,985,000 or 22.6%. The decrease is mainly attributable to the effect of
recording, for the three months ended June 30, 2002, a non-cash charge of
$4,217,000 for the issuance of shares of our common stock to senior management,
a $2,341,000 charge representing certain tax equalization bonuses paid to senior
management for the reimbursement of income taxes incurred as a result of share
issuances and a charge of $819,000 for the write-off of non-capitalized costs
incurred in connection with the evaluation of options to maximize the value of
our ownership interest in our U.K. operations. The above decrease was offset by
the higher levels of overhead costs in the U.K. operations due principally to
acquisitions and internal growth ($2,148,000), higher level of overhead costs in
the U.S. corporate office ($126,000) and changes in foreign exchange
($1,244,000).
Interest Income
- ---------------
Total interest income for the three months ended June 30, 2003 was $491,000
compared to $720,000 for the three months ended June 30, 2002, which represents
a decrease of $229,000. 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 ($44,000).
Interest Expense
- ----------------
Total interest expense for the three months ended June 30, 2003 was $3,853,000
compared to $4,168,000 for the three months ended June 30, 2002, which
represents a decrease of $315,000. Excluding the $374,000 increase due to the
effect of foreign exchange, the actual decrease in interest expense was
$689,000. This decrease was principally attributable to the exchange of accrued
and unpaid interest on the senior subordinated promissory notes of Allied
Healthcare (UK) for shares of our company's common stock as part of the
Reorganization ($800,000). 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 $667,000 charge related to a change in the fair value of
our company's interest rate cap and floor collar agreement.
Provision for Income Taxes
- --------------------------
We recorded a provision for income taxes amounting to $1,828,000 or 51.2% of
income before income taxes and discontinued operations for the three months
ended June 30, 2003 compared to a provision of $983,000 or 21.0% of loss before
income taxes, minority interest and discontinued operations for the three months
ended June 30, 2002. The difference between the 51.2% effective tax rate for the
three months ended June 30, 2003 and the statutory tax rate is mainly due to
non-deductible interest expense in the U.K. and to our recording of an
additional valuation allowance for the tax benefit associated with the current
year's U.S. operating loss.
Page 23
Minority Interest
- -----------------
We recorded a charge for minority interest of $34,000 for the three months ended
June 30, 2002. The minority interest represented 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.
Discontinued Operations and Gain on Disposal of Subsidiaries
- ------------------------------------------------------------
Discontinued operations resulted in net income of $381,000 for the three months
ended June 30, 2003 compared to net income of $234,000 for the three months
ended June 30, 2002. On April 16, 2003, we sold all of the issued and
outstanding capital stock of two of our subsidiaries for approximately
$8,500,000 in cash. 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. The following
table presents the financial results of the discontinued operations:
THREE MONTHS ENDED JUNE 30,
2003 2002
---------------------------------
Revenues:
Net infusion services $ 396 $ 2,990
Net respiratory, medical equipment and supplies sales 121 1,197
-------------- --------------
Total revenues 517 4,187
-------------- --------------
Cost of revenues:
Infusion services 355 2,128
Respiratory, medical equipment and supplies sales 111 600
-------------- --------------
Total cost of revenues 466 2,728
-------------- --------------
Selling, general and administrative expenses 189 1,225
Gain on disposal of subsidiaries, net of tax 519 -
-------------- --------------
Income from discontinued operations $ 381 $ 234
============== ==============
Diluted income per share from discontinued operations $ 0.02 $ 0.01
============== ==============
Net Income (Loss)
- -----------------
As a result of the foregoing, we recorded net income of $2,120,000 for the three
months ended June 30, 2003 versus a net loss of $5,465,000 for the three months
ended June 30, 2002.
Series A Preferred Stock Dividend
- ---------------------------------
For the three months ended June 30, 2003, we accrued $885,000 of dividends 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. For the three months ended June 30, 2002, we accrued $114,000 of
dividends for the Series A preferred stock issued in connection with the
Reorganization.
Page 24
Nine Months Ended June 30, 2003 vs. Nine Months Ended June 30, 2002
Revenues
- --------
Total revenues for the nine months ended June 30, 2003 and 2002 were
$214,958,000 and $174,680,000, respectively, an increase of $40,278,000 or
23.1%. This increase relates to the growth of our U.K. flexible staffing
operations as a result of internal growth ($9,251,000) and acquisitions
($9,660,000) as well as internal growth in our U.K. respiratory, medical
equipment and supplies operations ($682,000). An increase of $20,685,000 was due
to the favorable effects of changes in foreign exchange.
Gross Profit
- ------------
Total gross profit increased by $12,654,000 to $59,118,000 for the nine months
ended June 30, 2003 from $46,464,000 for the nine months ended June 30, 2002.
The favorable effects of changes in foreign exchange accounted for $5,690,000 of
the increase. As a percentage of total revenues, gross profit for the nine
months ended June 30, 2003 increased to 27.5% from 26.6% for the comparable
prior period. Gross margins for patient services increased (27.2% for the nine
months ended June 30, 2003 versus 26.3% 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 (40.9% for the nine months ended
June 30, 2003 versus 39.9% for the comparable prior period).
Selling, General and Administrative Expenses
- --------------------------------------------
Total selling, general and administrative expenses for the nine months ended
June 30, 2003 and 2002 was $38,050,000 and $36,243,000, respectively, an
increase of $1,807,000 or 5.0%. The increase was mainly a result of higher
levels of overhead costs in the U.K. operations due principally to acquisitions
and internal growth ($5,177,000), higher level of overhead costs in the U.S.
corporate office ($597,000) and changes in foreign exchange ($3,410,000). The
increase was partially offset by the effect of recording, for the three months
ended June 30, 2002, a non-cash charge of $4,217,000 for the issuance of shares
of our common stock to senior management, a $2,341,000 charge representing
certain tax equalization bonuses paid to senior management for the reimbursement
of income taxes incurred as a result of share issuances and a charge of $819,000
for the write-off of non-capitalized costs incurred in connection with the
evaluation of options to maximize the value of our ownership interest in our
U.K. operations.
Interest Income
- ---------------
Total interest income for the nine months ended June 30, 2003 was $1,575,000
compared to $2,253,000 for the nine months ended June 30, 2002, which represents
a decrease of $678,000. 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 ($146,000).
Page 25
Interest Expense
- ----------------
Total interest expense for the nine months ended June 30, 2003 was $11,479,000
compared to $12,278,000 for the nine months ended June 30, 2002, which
represents a decrease of $799,000. Excluding the $1,089,000 increase due to the
effect of foreign exchange, the actual decrease in interest expense was
$1,888,000. This decrease was principally attributable to the exchange of
accrued and unpaid interest on the senior subordinated promissory notes of
Allied Healthcare (UK) for shares of our company's common stock as part of the
Reorganization ($2,580,000). 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 ($611,000) associated with the repayment of
loan notes and by the recording of a $1,375,000 charge related to a change in
the fair value of our company's interest rate cap and floor collar agreement.
Provision for Income Taxes
- --------------------------
We recorded a provision for income taxes amounting to $3,704,000 or 33.2% of
income before income taxes and discontinued operations for the nine months ended
June 30, 2003 compared to a provision of $3,142,000 for the nine months ended
June 30, 2002. Included in the tax provision for the nine-months ended June 30,
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 $5,577,000 or 50.0% of income before income taxes and
discontinued operations for the nine months ended June 30, 2003. The difference
between the 50.0% effective tax rate for the nine months ended June 30, 2003 and
the statutory tax rate is mainly due to non-deductible interest expense in the
U.K. 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 $120,000 for the nine months ended
June 30, 2002. The minority interest represented the 1,050,000 shares of class
A1 common stock of TWUK issued as part of the Nightingale consideration. In the
fiscal year 2002 Reorganization, we acquired these shares and the U.K.
operations became wholly-owned subsidiaries of our company.
Discontinued Operations and Gain on sale of Subsidiaries
- --------------------------------------------------------
Discontinued operations resulted in net income of $503,000 for the nine months
ended June 30, 2003 compared to net income of $702,000 for the nine months ended
June 30, 2002. On April 16, 2003, we sold all of the issued and outstanding
capital stock of two of our subsidiaries for approximately $8,500,000 in cash.
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
Page 26
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. The following table presents the financial results of
the discontinued operations:
NINE MONTHS ENDED JUNE 30,
2003 2002
----------------------------------
Revenues:
Net infusion services $ 6,685 $ 9,584
Net respiratory, medical equipment and supplies sales 2,479 3,430
-------------- --------------
Total revenues 9,164 13,014
-------------- --------------
Cost of revenues:
Infusion services 5,159 6,960
Respiratory, medical equipment and supplies sales 1,438 1,703
-------------- --------------
Total cost of revenues 6,597 8,663
-------------- --------------
Selling, general and administrative expenses 2,583 3,649
Gain on sale of subsidiaries, net of tax 519 -
-------------- --------------
Income from discontinued operations $ 503 $ 702
============== ==============
Diluted income per share from discontinued operations $ 0.02 $ 0.04
============== ==============
Net Income (Loss)
- -----------------
As a result of the foregoing, we recorded net income of $7,949,000 for the nine
months ended June 30, 2003 versus a net loss of $2,382,000 for the nine months
ended June 30, 2002.
Series A Preferred Stock Dividend
- ---------------------------------
For the nine months ended June 30, 2003, we accrued $2,607,000 of dividends for
the nine months ended June 30, 2003 for the Series A preferred stock issued in
connection with the Reorganization and accreted $364,000 of costs related to the
issuance of our Series A preferred stock. For the nine months ended June 30,
2002, we accrued $114,000 of dividends for the Series A preferred stock issued
in connection with the Reorganization.
LIQUIDITY AND CAPITAL RESOURCES
General
For the nine months ended June 30, 2003, we generated cash of $8,577,000 from
operating activities. Cash requirements for the nine months ended June 30, 2003
for capital expenditures ($2,983,000), payments on acquisition payable
($4,734,000), payments for acquisitions ($8,274,000), payments on notes payable
($19,322,000) and payments on long-term debt ($6,713,000), were met through
operating cash flows, proceeds from the sale of discontinued operations
($8,355,000), restricted cash and cash on hand.
In January 2001, we initiated a stock repurchase program, whereby we may
purchase up to $1,000,000 of our outstanding common stock in open market
transactions or in privately negotiated transactions. In May 2003, we initiated
another stock repurchase program, whereby we may purchase up to an additional
$3,000,000 of our outstanding common stock in open market transactions or in
privately negotiated transactions. As of June 30, 2003, we had acquired 407,700
shares for an aggregate
Page 27
purchase price of $1,285,000 which are reflected as treasury stock in the
consolidated balance sheet at June 30, 2003.
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 collateralized term and revolving credit facility
(the "Senior Credit Facility"), including the payment of contingent
consideration, which have been advanced under the Senior Credit Facility.
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 June 30, 2003 and September 30, 2002, $37,598,000 (12.4%)
and $32,113,000 (12.0%), respectively, of our total assets consisted of accounts
receivable. The increase in the accounts receivable from fiscal year end is
mainly due to the acquisition of Medic-One Group Limited, a supplier of
temporary staffing to NHS hospitals and private hospitals in the U.K., and
timing of cash collections.
Our goal is to maintain accounts receivable levels equal to or less than
industry average, which would tend to mitigate the risk of 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 June 30,
2003 and September 30, 2002, our average DSOs were 45 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 $176,133,000 at
June 30, 2003. The financing consists of a $157,604,000 Senior Credit Facility
and $18,529,000 in mezzanine indebtedness (the "Mezzanine Loan").
Senior Credit Facility
- ----------------------
The Senior Credit Facility consists of the following:
o $46,208,000 term loan A, maturing December 17, 2005;
o $20,629,000 acquisition term loan B, maturing December 17, 2006;
Page 28
o $82,515,000 term loan C, maturing June 30, 2007, per the September 27,
2001 amendment,; and
o $8,252,000 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. At June 30, 2003, we had outstanding borrowings of $109,085,000 under
the Senior Credit Facility that bore interest at a rates ranging from 5.68% to
7.18%.
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. At June 30, 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. At June 30, 2003, we
had outstanding borrowings under the Mezzanine Loan of $17,068,000, which bore
interest at a rate of 10.68%.
Notes Due in Connection with Acquisitions
- -----------------------------------------
In fiscal 2003 we repaid, through TWUK, notes payable of $19,322,000 issued in
connection with the acquisition of certain U.K. flexible staffing agencies and
wrote-off $611,000 of related debt discount. In fiscal 2003, we also issued
notes payable of $35,663,000 to satisfy amounts owed under agreements to pay
additional consideration dependent upon future earnings of certain acquired
entities. The notes payable are secured by our senior credit lender which
requires us to keep an amount on deposit for the sole purpose of repaying the
notes payable. These notes bear interest at rates ranging from 2.65% 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. At June 30, 2003, we had outstanding notes payable of
$37,313,000 and related cash restricted to the payment of such notes classified
as current in the accompanying Consolidated Balance Sheet.
Page 29
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.. The shares of Series A preferred stock are entitled to
receive dividends at a higher rate 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), 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. Except for the directors
to be elected by the holders of the Series A preferred stock, voting as a class,
the Series A preferred stock and the common stock will vote as a single class on
all matters submitted to a vote of our company's shareholders. Until Triumph
Partners III, L.P. (or any of its affiliates) beneficially owns less than 50% of
the shares of Series A preferred stock issued to it in the Reorganization, the
holders of Series A preferred stock will be entitled, voting as a separate
class, to elect one director to the our company's board of directors. In
addition, the Series A preferred stock and our company's common stock will vote
as a single class in the election of all other directors of our board of
directors. In the event of a Covenant Breach (as that term is defined in the
Certificate of Amendment (relating to the Series A preferred stock) to our
company's Certificate of Incorporation), the holders of the Series A preferred
stock will be entitled to elect one additional director to our company's board
of directors.
Liquidation Preference. In the event of any liquidation, dissolution or winding
up of our company, the holders of Series A preferred stock will be entitled to
receive, before the holders of common stock or any other class or series of
stock ranking junior to the Series A preferred stock in respect of their shares,
a liquidation preference equal to (pound)2.867 per share (subject to adjustment
for stock splits, stock dividends, recapitalizations and similar transactions),
plus any accrued or declared but unpaid dividends on such shares of Series A
preferred stock, which we refer to as the "Series A Preference Amount";
provided, however, that in the event that the holders of Series A preferred
stock would have received an amount greater than the Series A Preference Amount
had they converted their Series A preferred stock into shares of common stock
immediately prior to the liquidation, dissolution or winding up of our company ,
such holders will be entitled to receive an amount per share equal to the amount
they would have received had they effectuated such a conversion.
Page 30
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 $20,806,000, at June 30, 2003, in contingent
consideration dependent upon future earnings of such acquired entities.
Employment Agreements
- ---------------------
We have two employment agreements with certain executive officers (our chief
executive officer, our chief operating officer) that provide for minimum
aggregate annual compensation of $825,000 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 .
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 31
Contractual Cash Obligations
- ----------------------------
As described under "Borrowings," "Acquisition Agreements," and "Operating
Leases" above, the following table summarizes our contractual cash obligations
at June 30, 2003:
Total Debt Total Lease Total Other Total
Fiscal Obligations Obligations Obligations Obligations
------------------------------------------------------------------------
2003 $ 36,986,000 $ 545,000 $ 3,057,000 $ 40,588,000
2004 9,242,000 1,536,000 9,663,000 20,441,000
2005 11,552,000 1,335,000 8,086,000 20,973,000
2006 30,531,000 1,211,000 31,742,000
2007 57,761,000 1,093,000 58,854,000
Thereafter 17,394,000 3,018,000 20,412,000
------------------------------------------------------------------------
$ 163,466,000 $ 8,738,000 $ 20,806,000 $ 193,010,000
========================================================================
Lease obligations reflect future minimum rental commitments required under
operating leases that have non-cancelable lease terms at June 30, 2003.
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.
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.
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 together with all applicable laws and regulations of other
countries in which we operate. Because of the broad and
Page 32
sometimes vague nature of these laws, there can be no assurance that an
enforcement action will not be brought against our company, or that our company
will not be found to be in violation of one or more of these provisions. At
present, we cannot anticipate what impact, if any, subsequent administrative or
judicial interpretation of the applicable Federal and state laws and those of
other countries 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 $920,000 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 ("FASB") issued Statement
of Financial Accounting Standards ("FAS") No. 142, "Goodwill and Other
Intangible Assets." The provisions of FAS No. 142 are effective for fiscal years
beginning after December 15, 2001. Under FAS No. 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 No. 142 and suspended the amortization of
goodwill. In accordance with the transitional provisions of FAS No. 142,
previously recognized goodwill was tested for impairment. We completed the
annual impairment test required by FAS No. 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 No. 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. We believe that
the adoption of FAS No. 146 will not have a material impact on our consolidated
financial position or results of operations.
Page 33
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 the interim and annual periods ending after December 15, 2002. We
believe that the adoption of FIN 45 did not have a material impact on our
consolidated financial position or results of operations. The company's U.K.
subsidiaries guarantee the debt and other obligations of certain wholly-owned
U.K. subsidiaries under agreements with the senior collateralized term and
revolving credit facility, mezzanine indebtedness and various notes issued in
connection with the acquisition of certain U.K. flexible staffing agencies. At
June 30, 2003 and September 30, 2002, the amounts guaranteed, which approximates
the amounts outstanding totaled approximately $165,000,000 and $151,000,000,
respectively.
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 FAS
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 consolidated
financial position or results of operations.
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 position or results of operations.
In April 2003, the FASB issued FAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". FAS No. 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under FAS No. 133 and is
effective for contracts entered into or modified after June 30, 2003. We are
currently reviewing the impact of adopting FAS No. 149 on our consolidated
financial position and results of operations.
Page 34
In May 2003, the FASB issued FAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". FAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. FAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. We are currently reviewing the impact of adopting FAS No. 150 on our
consolidated financial position and results of operations.
Page 35
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 expired on June 30, 2003. On March
20, 2003, we entered into a new Rate Cap and 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 $82,515,000 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 $1,419,000 at June 30, 2003. In addition, changes in the value from
period to period of the interest cap and floor derivative are recorded as
interest expense or income, as appropriate.
At June 30, 2003, our Series A preferred stock ($33,033,000), net of unamortized
issuance cost ($2,180,000) matures on December 31, 2008 and bears a fixed
preferred cumulative, compounding dividend rate of 9.375% per year. 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 36
In connection with the acquisition of several U.K. flexible staffing agencies,
we have notes payable of $37,313,000 at June 30, 2003. The notes payable are
redeemable, at the holder's option, and bear interest ranging from 2.65% to
5.25% at June 30, 2003. The table below represents the expected maturity of our
variable rate debt and their weighted average interest rates at June 30, 2003.
EXPECTED WEIGHTED AVERAGE
FISCAL MATURITY RATE
-----------------------------------------------
2004 $ 8,915,000 LIBOR +2.08%
2005 11,552,000 LIBOR +2.25%
2006 30,531,000 LIBOR +3.26%
2007 57,761,000 LIBOR +3.50%
Thereafter 17,394,000 LIBOR +7.00%
-----------------
$ 126,153,000 LIBOR +3.71%
=================
The aggregate fair value of our debt was estimated based on quoted market prices
for the same or similar issues and approximated $164,927,000 at June 30, 2003.
Page 37
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Our company's management, with
the participation of our Chief Executive Officer and Acting Chief Financial
Officer, has evaluated the effectiveness of our "disclosure controls and
procedures" (as such term is defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act")) as of the end of the period covered
by this Quarterly Report.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed under the Exchange Act, 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 and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in our reports that we
file or submit under the Exchange Act is accumulated and communicated to our
management, including our Chief Executive Officer and Acting Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
Based on such evaluation, our Chief Executive Officer and Acting Chief Financial
Officer have concluded that, as of the end of the period covered by this
Quarterly Report, our disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely basis, information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act.
Changes in Internal Control Over Financial Reporting. There have not been any
changes in our "internal control over financial reporting" (as such term is
defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to
which this Quarterly Report relates that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Page 38
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We held our annual meeting of shareholders on June 3, 2003 (the "Annual
Meeting"). The proposals voted upon at the Annual Meeting were as follows:
(1) To elect eight directors to serve for a term of one year and until
their respective successors are duly elected and qualified.
(2) To ratify the appointment by the Company's board of directors of
Deloitte & Touche LLP, as independent auditors for the fiscal year
ending September 30, 2003.
The voting results with respect to each proposal are set forth below:
AUTHORITY ABSTENTIONS AND
PROPOSAL FOR AGAINST WITHHELD BROKER NON-VOTES
-------- --- ------- -------- ----------------
No. 1 (election of Directors)
Timothy M. Aitken 26,208,756 - 3,150 -
Sarah L. Eames 26,208,756 - 3,150 -
Scott A. Shay 26,208,756 - 3,150 -
Jeffery S. Peris 26,208,756 - 3,150 -
G. Richard Green 26,208,756 - 3,150 -
David J. Macfarlane 26,208,756 - 3,150 -
John W. Matthews 26,208,756 - 3,150 -
Frederick S. Moseley IV 6,801,600 - - -
No. 2 26,193,356 17,400 - -
Page 39
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).
16.1 Letter, dated April 14, 2003, from Ernst & Young LLP to the
Securities and Exchange Commission (incorporated herein by reference
to Exhibit 16.1 of our Current Report on Form 8-K filed with the
Securities and Exchange Commission on April 15, 2003).
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chairman and Chief
Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Acting Chief Financial
Officer.
32.1 Section 1350 Certification of Chairman and Chief Executive
Officer
32.2 Section 1350 Certification of Acting Chief Financial Officer
(b) Reports on Form 8-K.
The Company filed on April 15, 2003 a Report on Form 8-K dated April
14, 2003, which included information required by Items 4 and 7 of Form
8-K. The Form 8-K disclosed the Company's dismissal of Ernst & Young
LLP, independent accountants, as its auditor and the engagement of
Deloitte & Touche LLP, independent accountants, as its new auditor. No
financial statements were filed.
The Company filed on April 17, 2003 a Report on Form 8-K dated April
16, 2003, which included information required by Items 5 and 7 of Form
8-K. The Form 8-K disclosed the Company's sale of all the issued and
outstanding capital stock of two of its U.S. subsidiaries, The
PromptCare Companies, Inc. and Steri-Pham, Inc. to PromptCare
Acquisition Corporation for approximately $8,500,000 million in cash.
No financial statements were filed.
The Company filed on May 8, 2003 a Report on Form 8-K dated May 8,
2003, which included information required by Items 5, 7 and 9 of Form
8-K. The Form 8-K disclosed the Company's announcement that it had
initiated a stock repurchase program pursuant to which it may purchase
up to $3,000,000 of its outstanding shares of common stock. The Form
8-K also disclosed the issuance of the Company's press release
announcing its earnings for the quarter ended March 31, 2003. No
financial statements were filed. However, the press release attached
to the Form 8-K included a table containing statement of operations
data.
Page 40
The Company filed on May 13, 2003 a Report on Form 8-K dated May 13,
2003, which included information required by Item 5 of Form 8-K. The
Form 8-K disclosed the appointment of Charles F. Murphy as the acting
Chief Financial Officer of the Company. No financial statements were
filed.
Page 41
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: August 13, 2003
ALLIED HEALTHCARE INTERNATIONAL INC.
By: /s/ Charles F. Murphy
-------------------------------
Charles F. Murphy
Acting Chief Financial Officer
(Principal Financial Officer and
Duly Authorized to Sign on Behalf
of Registrant)
Page 42