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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2003
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No.: 1-11570
ALLIED HEALTHCARE INTERNATIONAL INC.
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(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 13-3098275
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(State or Other Jurisdiction of Incorporation) (I.R.S. Employer Identification Number)
555 MADISON AVENUE
NEW YORK, NEW YORK (212) 750-0064 10022
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(Address of principal executive offices) (Registrant's telephone number, including area code) (Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, $.01 par value American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of Class)
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such reporting
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best or registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [___]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
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The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of December 26, 2003 was approximately
$47,029,095 based on the closing sales price of $6.02 per share of common stock
of the registrant on such date, as reported by the American Stock Exchange.
The number of shares of common stock of the registrant outstanding on December
26, 2003 was 22,104,628.
DOCUMENTS INCORPORATED BY REFERENCE
None
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ALLIED HEALTHCARE INTERNATIONAL INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended September 30, 2003
TABLE OF CONTENTS
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PART I
Item 1. Business..............................................................................................1
Item 2. Properties...........................................................................................17
Item 3. Legal Proceedings....................................................................................17
Item 4. Submission of Matters to a Vote of Security Holders..................................................17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................17
Item 6. Selected Financial Data..............................................................................19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...........................................42
Item 8. Financial Statements and Supplementary Data..........................................................43
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................43
Item 9A. Controls and Procedures..............................................................................44
PART III
Item 10. Directors and Executive Officers of the Registrant...................................................45
Item 11. Executive Compensation...............................................................................50
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters..........................................................................57
Item 13. Certain Relationships and Related Transactions.......................................................61
Item 14. Principal Accountant Fees and Services...............................................................62
PART IV
Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K.......................................62
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements.
Forward-looking statements are identified by words such as "believe,"
"anticipate," "expect," "intend," "plan," "will," "may," "should," "could,"
"think," "estimate" and "predict," and other similar expressions. In addition,
any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements.
We based these forward-looking statements on our current expectations
and projections about future events. Our actual results could differ materially
from those discussed in, or implied by, these forward-looking statements.
Factors that could cause actual results to differ from those implied by the
forward-looking statements include:
o our ability to continue to recruit and retain qualified flexible
and other healthcare staffing professionals and our ability to
attract and retain operational personnel;
o our ability to enter into contracts with hospitals and other
healthcare facility clients on terms attractive to us;
o the general level of patient occupancy at our hospital and
healthcare facility clients' facilities;
o our ability to successfully implement our acquisition and
integration strategies;
o our dependence on the proper functioning of our information
systems;
o the effect of existing or future government regulation of the
healthcare industry, and our ability to comply with these
regulations;
o the impact of medical malpractice and other claims asserted
against us;
o the effect of regulatory change that may apply to us and that may
increase our costs and reduce our revenue and profitability;
o our ability to use our net operating loss carryforward to offset
net income; and
o the impairment of our goodwill, of which we have a substantial
amount on our balance sheet, may have the effect of decreasing our
earnings or increasing our losses.
Other factors that could cause actual results to differ from those
implied by the forward-looking statements in this Annual Report on Form 10-K are
more fully described elsewhere in this document, as well as changes in any of
the following: the demand for our products and services, general economic
conditions, governmental regulation, the level of competition we face, customer
strategies and pricing and reimbursement policies.
PART I
ITEM 1. BUSINESS
GENERAL
Allied Healthcare International Inc. ("our company," "we" or "us") is
one of the leading providers of flexible healthcare staffing services, including
nursing and ancillary services, to the United Kingdom healthcare industry. We
operate a community-based network of over 115 branches, with the capacity to
provide nurses, carers (known as home health aides in the U.S.) and specialized
medical personnel to locations covering approximately 90% of the population of
Great Britain. We provide healthcare staffing services to hospitals, local
governmental authorities, nursing homes and private patients in the U.K. 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 disposed of the last of our U.S. operations when
we sold all of the issued and outstanding capital stock of The PromptCare
Companies, Inc. and Steri-Pharm, Inc. for approximately $8,500,000 in cash.
These two subsidiaries constituted our U.S. home healthcare operations segment.
Our home healthcare operations were concentrated in New York and New Jersey and
supplied infusion therapy, respiratory therapy and home medical equipment. The
sale of this non-core segment allows us to focus our business on providing
staffing services to the healthcare industry. In accordance with the provisions
of Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FAS No. 144"), we have accounted
for our home healthcare operations as a discontinued operation. Our consolidated
financial statements reflect the assets and liabilities of the discontinued
operations as separate line items and the operations of our home healthcare
operations for the current and prior periods are reported in discontinued
operations on our income statement.
Our principal executive offices are located at 555 Madison Avenue, New
York, New York 10022, and our telephone number at that location is (212)
750-0064. Our Internet address is www.alliedhealthcare.com.
STRATEGY
We are one of the leading providers of flexible staffing services to
the U.K. healthcare industry. Our U.K. growth strategy has been to take
advantage of policy moves by the U.K. government-funded National Health Service
(the "NHS") and by private payors seeking to treat a larger number of patients
than in the past and to shorten waiting lists for access to care, as well as the
general trend of local government toward outsourcing its home care requirements
to private industry.
It has been, and will continue to be, our intention in the U.K. to
focus on internal growth, as well as to acquire additional nursing and other
care giving operations to expand and complement our existing operations. We
believe that the healthcare flexible staffing services industry in the U.K. is
highly fragmented and that additional acquisition opportunities will continue to
arise in a general trend toward industry consolidation. Consistent with this
strategy,
we acquired seven nursing and care giving operations in the U.K. during fiscal
2003, six during fiscal 2002 and twelve during fiscal 2001.
On April 24, 2002, we entered into a Master Reorganization Agreement
(the "Reorganization Agreement") with two of our U.K. subsidiaries -- Allied
Healthcare Group Limited ("Allied Healthcare (UK)") and Transworld Healthcare
(UK) Limited ("TWUK") -- and certain investors in such subsidiaries. Both the
Reorganization Agreement and the reorganization contemplated thereby (the
"Reorganization") were voted upon and approved by our shareholders at our annual
meeting of shareholders held on June 7, 2002. The Reorganization was consummated
on July 25, 2002. In the Reorganization, equity investments in TWUK and
subordinated debt investments in Allied Healthcare (UK) were exchanged for
shares of our common stock and shares of our Series A preferred stock. The net
effect of the Reorganization was that TWUK became an indirect wholly-owned
subsidiary of our company and the senior subordinated debt of Allied Healthcare
(UK) was replaced by shares of our Series A preferred stock. We believe that the
Reorganization resulted in our company having a more straight-forward and
integrated management and corporate structure.
We believe that the key competitive advantages of our U.K. flexible
staffing business are our:
o EXTENSIVE BRANCH NETWORK. We operate a community-based network of
over 115 branches, with the capacity to provide nurses, carers and
specialized medical personnel to locations covering 90% of the
population of Great Britain. We also actively assess opportunities
to extend our geographic coverage and increase our market
penetration by evaluating customer needs, the skill base of
flexible staff and growth potential in identified areas.
o DIVERSIFIED CUSTOMER BASE. We provide flexible staff to four
principal types of customers: hospitals, local governmental
authorities, nursing homes and private patients. We also believe
this diversity of customers provides us with a competitive
advantage in our recruiting and retention efforts, as staff are
attracted by the broad range of placement opportunities.
o ENTREPRENEURIAL BUSINESS CULTURE. Our branches are managed either
by general managers, in the case of larger acquisitions, or by
employed branch managers or self-employed superintendents. In each
case, the individual's remuneration is dependent upon branch
performance. Self-employed superintendents are remunerated on an
entirely performance-related basis linked to the gross profit of
the branches they manage, while employed branch managers and
general managers are remunerated with salary and performance
bonuses.
o QUALITY REPUTATION. We believe that our customers choose flexible
staffing agencies on the basis of local branch awareness and
reputation. We focus on providing a consistently high quality of
service to the local communities where our branches are located.
We believe that the principal brand names within our
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U.K. operations each have strong individual reputations, and it is
our current intention to retain all such brands.
o TRACK RECORD OF ACQUISITIONS. We have achieved significant growth
through acquisitions, growing from 71 branches in 1999 to 117
branches as of September 30, 2003. We believe this growth is
attributable to our structured acquisition and integration
process. We first identify suitable branches for acquisition and
develop a relationship with the vendor and key management team.
o MANAGEMENT EXPERTISE. Timothy M. Aitken, our chairman and chief
executive officer, and Sarah L. Eames, our president and chief
operating officer have, respectively, 13 and 23 years experience
in the healthcare industry. In addition, many of our U.K. branch
managers and superintendents were former nurses or have otherwise
been involved in the healthcare industry.
Utilizing our successes in the U.K., we believe favorable industry
trends create significant opportunities for us to grow our flexible staffing
services healthcare business in the U.S.
While we have not in recent years had a significant presence in the
U.S. flexible staffing sector of the U.S. healthcare industry, we believe that
the following industry characteristics and competitive strengths provide us an
attractive opportunity to grow our business here:
o Favorable industry trends have increased demand in the flexible
healthcare staffing industry. According to the Staffing Industry
Report, demand for flexible healthcare staffing is expected to
grow by 10% from $11.6 billion in revenue in 2003 to $12.8 billion
in revenue in 2004. We believe these trends will continue to
increase demand for our services.
o The Center for Medicare and Medicaid Services projects healthcare
expenditures will increase from 2002 to 2010 by approximately $1.1
trillion to $2.6 trillion. This growth is expected to be fueled by
an increasingly aging U.S. population and by advances in medical
technology.
o Most regions of the U.S. are experiencing a shortage of nurses.
The American Hospital Association estimates that up to 126,000
position vacancies currently exist for registered nurses,
representing approximately 10% of the current hospital-based
nursing workforce. A study published in the Journal of the
American Medical Association in June 2000 projects that the
registered nurse workforce will be nearly 20% below projected
requirements by 2020.
o In the current cost-containment environment, hospitals and
healthcare facilities are increasingly using flexible staffing
models to more effectively manage labor costs and fluctuations in
demand for their services.
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o We believe our substantial presence in the U.K. flexible staffing
market gives us a competitive advantage in recruitment of
English-speaking nurses.
o Our management team averages approximately 15 years of experience
in the healthcare industry. Our management team has consistently
demonstrated the ability to successfully identify and integrate
strategic acquisitions.
o The home healthcare market is highly fragmented and we intend to
continue to evaluate opportunities to acquire businesses.
U.K. OPERATIONS
Our U.K. operations provide patient services, principally nursing and
para-professional services, and respiratory therapy products to patients
throughout the U.K.
During fiscal 2003, we derived 100% of our consolidated revenues from
our U.K. operations, with the following contributions by product line:
o 97.8% of our U.K. revenues from patient services; and
o 2.2% from respiratory therapy.
Patient Services
We are a leading provider of flexible staffing services to the U.K.
healthcare industry, including carers (known as home health aides in the U.S.)
and other specialized medical personnel. We provide these services through
Allied Healthcare (UK) Limited ("Allied Operating Company (UK)"), Nightingale
Nursing Bureau Limited ("Nightingale"), Crystalglen Limited (operating under the
trade name "Nurses Direct"), Balfor Medical Limited ("Balfor"), Staffing
Enterprise Limited and Staffing (PSV) Limited (collectively "Staffing
Enterprise"), and Medic-One Group Limited ("Medic-One") to four main types of
customers:
o hospitals (comprising NHS Trusts, NHS hospitals and independent
hospitals);
o local governmental authorities;
o nursing homes; and
o private patients.
Allied Operating Company (UK) was founded in 1972 as a home nursing
service and has expanded through the establishment and acquisition of branch
offices throughout the U.K. In the last three fiscal years, we have expanded
Allied Operating Company (UK)'s operations by acquiring an additional 41
branches to extend its geographical coverage in the U.K. Allied Operating
Company (UK) primarily provides carers to local governmental authorities,
nursing homes and private patients, as well as nurses and carers to hospitals.
As of September 30, 2003, Allied Operating Company (UK) operated 93 of our
branches.
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We believe that although our branch network provides nationwide
coverage, each branch is a community-based business that should be managed
locally to suit the needs of our customers and flexible staff. The branch
managers and superintendents are therefore recruited locally and often have
prior experience in the healthcare industry.
In our past three fiscal years, we have completed the following
significant acquisitions:
o Nurses Direct, which was acquired in June 2001, operates a nursing
and care agency with 17 branches in South East England.
o Balfor, which was acquired in August 2001, provides qualified
nurses, specialized theatre staff and nursing auxiliaries to
hospitals in the Midlands and Northern England.
o Staffing Enterprise, which was acquired in September 2001, is a
London-based provider of temporary staffing of specialist nurses
and other healthcare professionals to London NHS Trust and
independent hospitals.
o Medic-One, which was acquired in November 2002, is a supplier of
temporary staffing to National Health Service hospitals and
private hospitals in the U.K.
We believe that the demand for most forms of nursing and other
healthcare services is expected to increase in the medium term as the U.K.
population grows older in line with demographic trends. Consequently, we
anticipate that requirements for temporary nursing services will increase in the
future, benefiting our flexible staffing operations.
Acquisition and Integration Process
We have designated employees who identify suitable acquisition targets
and typically seek to develop a pre-acquisition relationship with the vendors
and key management in order to assess business "fit." We structure our
acquisitions so as to encourage continuity of management on acquisitions and
seek to align our business interests and the vendors/management through
performance based earn-out provisions. We also have a separate team responsible
for the integration of acquired businesses. The process of integrating newly
acquired businesses begins prior to the closing of the acquisition and for the
smaller acquisitions is usually completed within three months. These
acquisitions are generally acquired by and integrated within Allied Operating
Company (UK), including the adoption of our policies and procedures and the
implementation of Allied Operating Company (UK)'s IT system.
We believe it is important to allow larger acquired businesses to
retain certain functions essential to their continuing efficiency, such as their
own IT systems, including payroll and invoicing functions. Integration plans and
timelines for such larger acquisitions are determined on a case-by-case basis.
However, we seek to provide an appropriate degree of control and monitoring.
Thus, upon the completion of these acquisitions, branch management contributes
to our weekly management meetings and must adhere to weekly and monthly
financial reporting
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requirements. Over time, we intend that the larger acquisitions will be fully
integrated into our IT system.
Respiratory Therapy
The respiratory therapy business, comprised of Allied Oxycare Limited
("Allied Oxycare") and Medigas Limited ("Medigas"), serves two segments of the
oxygen therapy market: (a) oxygen cylinders and (b) oxygen concentrators. The
business services patients with chronic respiratory diseases either in their own
homes or via community pharmacies and is centrally managed from a national
distribution center in Wolverhampton, with a further seven leased depots in
mainland Britain and three in Northern Ireland.
Medigas
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Home oxygen therapy delivered from a cylinder via face-mask is
prescribed for a wide array of respiratory diseases ranging from asthma and
emphysema to severe bronchitis. Medigas supplies filled oxygen cylinders and
related equipment solely to pharmacies, both small independent stores and large
retail pharmacy chains, for patients at home who require lower volumes of oxygen
per day than that provided by oxygen concentrators or who may have temporary
respiratory conditions. Medigas provides approximately 1,200 cylinders per day
to pharmacies from eight depots around the U.K. The NHS reimburses the
pharmacist for the product and the pharmacist subsequently pays Medigas. The
total U.K. oxygen cylinder market is estimated by the Prescription Pricing
Authority at (pound)12,000,000 per year and has three main participants:
o BOC (British Oxygen Company);
o Medigas; and
o Air Products plc.
Medigas revenue calculations indicate that it provides approximately
20% of the oxygen cylinder market in the U.K., having grown from less than a 5%
share of this market in the early 1990s. It is second in the market to BOC, the
largest provider in this market with a market share of approximately 70%. Air
Products has a market share of approximately 5%. The provision of cylindered
oxygen at home is price regulated under the U.K. drug tariffs. We believe that
the key to maintaining and growing market share is to ensure the service is
delivered quickly and efficiently and that Medigas is able to respond promptly
to client demand.
In our fiscal year ended September 30, 2003, approximately 90% of the
revenues of Medigas related to the sales of oxygen cylinders and the remainder
related to ancillary consumables and equipment required for the utilization of
the gases sold.
Allied Oxycare
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Patients that require more than eight hours of oxygen per day cross a
usage "threshold" where the U.K. Department of Health considers their needs are
more economically supplied by an on-site concentrator. Allied Oxycare provides
oxygen concentrators, which separate room air
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into its constituent gases to provide 95% oxygen gas, on an as-needed basis to a
total of approximately 1,500 patients at home in Northern Ireland. The NHS is
charged by Allied Oxycare on a monthly basis for the period during which the
patients have the equipment at home. The provision of concentrator oxygen at
home is tendered by government services agencies in the U.K. on behalf of the
relevant country's health authority or health board.
A U.K. Department of Health commissioned report in 2000 estimates the
total concentrator market at approximately (pound)10,000,000 per year. Business
to supply oxygen concentrators is mainly sought through open tender for regional
contracts. The revenue for Allied Oxycare is derived wholly from contracts with
the relevant government services agency, which contracts on behalf of the four
Northern Ireland health boards for the provision of home oxygen therapy services
in Northern Ireland. Allied Oxycare's contract in Northern Ireland has been
renewed until 2008. Eight further oxygen concentrator contracts for the Greater
London area (2 regions), Central England (3), Northern England (2) and South
West England (1), with an estimated market value of (pound)10,000,000 to
(pound)12,000,000, will be put out to tender during 2005. Allied Oxycare intends
to participate in this tender process. The main barrier to entry into the oxygen
therapy market is the cost of investment in the equipment and putting in place a
distribution network.
Respiratory Therapy Market
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Medigas has increased both its revenues and its profits over the last
three years. The growth in revenues has been due to an increased willingness by
doctors to prescribe oxygen-related treatments in the home, as well as an
increase in the number of cases of asthma and allergies verifications received.
In addition, the increase in the use of portable oxygen equipment has
contributed significantly to Medigas's growth over the past year. Part of the
NHS plan is that more individuals should be treated in their own homes, and with
a growing elderly population, there may remain some limited growth potential in
this market.
Quality Assurance
Patient Services
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We are investing heavily in quality assurance systems to ensure that
our flexible healthcare staff meet our own internal quality assurance standards,
as well as those legislated under the Care Standards Act 2000. Our investment
includes a quality assurance center where flexible healthcare staff can update
their training requirements, internal audit staff to monitor compliance,
comprehensive toolkits and procedures for our branches and a national training
manager.
Respiratory Therapy
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Our U.K. operations maintain quality assurance policies and procedures
and monitor operations to provide quality care and services to patients and
healthcare professionals in the U.K. Where appropriate, our U.K. operations
operate under license of the U.K. Department of
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Health and Medicines Control Agency, subject to the terms and conditions of
service demanded by such licensing authority.
The European Quality Standards' highest rating has been awarded to
Allied Oxycare. The awarding authority checks the continued adherence to its
standards on a six-month basis.
Sales, Marketing Activities and Types of Customers
Our flexible healthcare staffing business is marketed to key decision
makers in the NHS, the social services and independent hospitals, as well as to
healthcare professionals who act as decision makers for the use of flexible
healthcare staff both in the home and in the institutional setting. This enables
our company to obtain contracts for our flexible healthcare staff. These
purchasing decision makers can be procurement officers, contract officers or
social workers. Fundamental to our ability to obtain and retain referral sources
is establishing and maintaining a reputation for quality service and
responsiveness to the needs of referral sources and their patients and clients.
Medigas and Allied Oxycare are marketed directly to the pharmacist for
oxygen cylinders and the NHS supplier for oxygen concentrator services, by a
senior manager. In addition to primary sales activity, delivery drivers play a
key role as secondary sales staff.
In general, the sales representatives and managers of our U.K.
operations market our U.K. products and services through direct contact with
referral sources in the form of meetings, telephone calls and solicitations.
Contact is maintained with these sources to strengthen their relationships.
While representatives strive to develop the strongest provider relationship
possible, referral sources often choose to use several service and product
providers.
As in many European and U.S. markets, the escalating pressures to
reduce the cost of healthcare has, for some lines of business (prescribed
products and services, including cylinder oxygen, concentrators and medical
supplies) in our U.K. operations, resulted in reductions in reimbursement rates.
However, our intended focus towards offering integrated home healthcare could
result in an overall cost savings leading to, we believe, substantial sales
opportunities for our U.K. operations.
The development of the services we offer has closely followed market
developments and has led to the diversified customer base from which we now
benefit. We provide flexible healthcare staffing services to the following
customers:
o Hospitals. We provide services to publicly-funded NHS Trusts, NHS
hospitals and independent hospitals situated throughout the U.K.
o NHS Trust hospitals. We supply flexible staff including all
grades of nurses, as well as nursing auxiliaries and carers
to NHS Trust hospitals.
o Independent hospitals. We provide flexible staff comprising
both nurses and carers to independent hospitals in the
private sector. The services
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provided to this customer type are paid for by a patient's
private medical insurance or his/her own financial resources.
o Local governmental authorities. Local governmental authority
social services departments provide subsidized care in the home to
members of the community and use carers more frequently than
nurses.
o Nursing homes. We provide both carers and nurses to nursing homes.
o Private patients. We provide both nurses and carers to private
patient customers. These patients may include incapacitated
individuals who require daily attention or patients with long-term
illnesses living at home.
Types of Customer Contracts
The flexible staffing business operates 24 hours a day, 7 days a week,
52 weeks a year on a branch-by-branch basis. We provide staff to our customers
under a variety of arrangements, including the following broad categories of
contracts common to the healthcare staffing industry:
o NHS Framework Agreements ("Framework Agreements") and Service
Level Agreements ("SLA"). The NHS Purchasing and Supplies Agency
has put in place Framework Agreements, which are contracts that
seek to aggregate NHS hospital trust expenditures on third-party
staffing companies. The Framework Agreements confer approved
supplier status on specific staffing companies and set the level
of charge rates for each region and the quality standards to be
met by the staffing companies. There are currently nine such
agreements, covering all regions of England, and we are qualified
as suppliers of flexible healthcare staff under all of these
Framework Agreements.
Individual NHS Trusts may select from the list of staffing
companies qualified under the Framework Agreements and enter into
SLAs. Although the rates are determined in the Framework
Agreements, the NHS Trusts may obtain lower rates by committing to
higher volumes of business.
o Per diem purchases. Business provided on a per diem basis arises
when a customer requires flexible staff, and there is no formal or
ongoing contractual commitment with the customer. The work
services provided on a per diem basis may be limited to one shift,
lasting a short period of time or may be an engagement for a
period until further notice. We provide most of our nurses and
carers to customers on a per diem basis.
o Preferred supplier arrangements. These arrangements involve the
designation of an agency by a customer as a "preferred supplier"
of staff. A preferred supply contract may contain agreed rates but
is not an exclusive arrangement and does not guarantee that an
agency will be used by the customer. A small proportion of
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our services are provided under preferred supplier agreements,
which tend to be with local governmental authorities or hospitals.
o "Cost-volume" contracts. Under a "cost-volume" contract, an agency
specifies a price to the customer for an indicative number of
hours. Such an agreement may enable customers to negotiate lower
prices for minimum volumes of business. Local governmental
authorities are the principal users of these contracts. A very
small percentage of our business is conducted on a "cost-volume"
basis.
o Long-term contracts. Under a long-term contract a purchaser of
services enters into a long-term arrangement (typically three
years) with a supplier of staff under which contract rates,
usually discounted, are agreed. These arrangements may be
exclusive, with penalties if the agency is not able to satisfy the
purchaser's minimum demand criteria. Some of our services are
provided under long-term contracts. We are committed to such
contracts where that approach is beneficial to us and we believe
that long-term contracts may become more prevalent among our
customers in the medium term.
Recruiting and Training of Personnel
The U.K. healthcare industry faces a shortage of nurses and carers
(known as home health aides in the U.S.) and the market to attract staff is
highly competitive. Many healthcare professionals are attracted to flexible
staffing positions because of their desire to tailor work schedules to personal
and family needs, obtain varied and challenging work experiences and acquire new
skills. We believe that our ability to offer quality flexible staffing
assignments well-matched to individuals' preferences assists in our attracting a
large number of appropriately qualified personnel.
We provide a diverse range of flexible staff to our customers, namely
carers, nurses and specialized medical personnel. Our mix of flexible staff is
54% nurses and 46% carers.
Carers include personnel who provide personal or basic care in the
community as well as healthcare assistants or nursing auxiliaries, who also work
in hospitals. A large number of our nurses are comprised of newly and recently
qualified nurses, which are generally provided to hospitals and nursing homes.
The balance of our flexible staff is higher-grade nurses, specialist nurses and
Professionals Allied to Medicine who are primarily provided by Staffing
Enterprise and Balfor.
Recruitment of Flexible Staff
We recruit flexible staff in a variety of ways. The primary source of
recruitment is through word-of-mouth referrals from nurses and carers. On an
informal basis, our businesses and branches may run internal financial
promotions to encourage referrals from current flexible staff on their
registers. Our businesses also recruit through local and national print
advertising and organize recruitment events, including national recruitment days
at the branch level that we promote. Our website also contains national branch
vacancies.
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Nightingale primarily recruits qualified nursing professionals from
Australia, New Zealand and other Commonwealth countries visiting the U.K. under
working visa programs typically via referral from other nurses. It also
advertises in journals and magazines with a high overseas traveler readership.
In addition, Nightingale's branch office in Australia provides a recruitment
channel into the U.K.
Retention of Flexible Staff
Our retention philosophy is based upon each branch maintaining personal
contact with the flexible staff on its register, including a structured campaign
whereby current and former staff are contacted periodically by each branch to
assess their needs and to attempt to meet their individual working preferences.
Our flexible staffing business also conducts a formal annual review of all
charge and pay rates within the business and compares its pay rates for flexible
staff to prevailing market rates.
We have designed a tuition reimbursement program, called "Caremiles,"
that enables our flexible staff to earn credits based on the number of hours
they work for us. These credits can be used by members of our flexible staff to
fund training programs to assist them in maintaining their professional standing
or to obtain new qualifications to enhance their skills. The Caremiles program
is in addition to standard training programs, such as a program to earn a Moving
and Handling Certificate, offered to staff to ensure compliance with legislative
requirements.
Suppliers
Our U.K. respiratory therapy operations purchase their equipment and
supplies required in connection with the provision of our services from various
approved suppliers. We believe that there are a number of alternative sources
for these items at prices comparable to our current sources.
Competition
The U.K. flexible healthcare staffing agency industry is highly
fragmented with over 2,100 small operators providing staff locally. The market
at the local level is characterized by relatively low barriers to entry. The
barriers to entry at a U.K.-wide level are more significant, as the
establishment and growth of a flexible health-care staffing business is largely
dependent on access to capital.
The private agency competitors of our flexible staffing business are
mainly small, locally-based agencies serving a limited area or group of
customers. These agencies compete with our relevant branch covering the same
local area, but do not otherwise compete for U.K.-wide market share. In
addition, a limited number of larger U.K.-based companies compete with us in
areas of high population such as London. Such companies include Nestor
Healthcare Group and Reed Health Group.
The nature of the U.K. marketplace is such that nurses and carers often
accept placements with more than one agency.
11
Since 2000, the NHS has had its own internal agency, called NHS
Professionals, which has attempted to provide high volume/low margin contracts
for flexible healthcare workers in hospitals. This has impacted some of our
major competitors with greater exposure than us to such contracts. We will
continue to work with NHS Professionals to fulfill the per diem demand that it
is unable to cover.
Patents and Trademarks
Our U.K. operations own no patents. Our U.K. operations operate under
the following trade names:
o Allied Healthcare Group Limited;
o Allied Healthcare (UK) Limited;
o Allied Oxycare Limited;
o Balfor Medical Limited;
o Crystalglen Limited;
o Medicare;
o Medigas Limited;
o Nightingale Nursing Bureau Limited;
o Nurses Direct;
o Nursing UK;
o Omnicare Limited;
o Staffing Enterprise Limited;
o Staffing Enterprise (PSV) Limited;
o Transworld Healthcare (UK) Limited; and
o Medic-One Group Limited.
Trademarks have been registered in the U.K. for the following names:
o ALLIED HEALTHCARE;
o CAREERS GO FURTHER WITH CAREMILES;
o CAREMILES;
o EARN AS YOU LEARN WITH CAREMILES;
o 50-30-20;
o FLEXMED;
o HOSPITAL AT HOME;
o HOSPITAL HOME;
o MEDIC ONE;
o THE MEDIC ONE GROUP LIMITED;
o NIGHTINGALE NURSING BUREAU;
o OMNICARE; and
o OUR PEOPLE OUR STRENGTH.
12
We do not believe that our business in the U.K. is dependent upon the
use of any patent, trademark or similar property.
Third-Party Reimbursement
For the year ended September 30, 2003, our U.K. operations received
approximately 64.8% of revenues from U.K. governmental payors (primarily the
NHS) compared to approximately 67.8% for the year ended September 30, 2002. The
remaining 35.2% and 32.2% of revenues received for 2003 and 2002, respectively,
were derived from products and services provided to the private healthcare
sector and other commercial organizations, such as privately-owned nursing
homes.
In general, reimbursement is received regularly and reliably from all
governmental department payors and this is also the case for most of the
remaining customer base. Our U.K. operations generally collect payments from
third-party payors within less than two months after products are supplied or
services are rendered but we pay accounts payable and employees currently. The
billing and reimbursement process includes the rendering of invoices for
products and services rendered, as well as prescriptions and other support
documentation for reimbursement of drugs and medical supplies.
U.S. OPERATIONS
In April 2003, we exited the U.S. home healthcare business. In
accordance with the provisions of FAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," we have accounted for our home healthcare
operations as a discontinued operation. Our consolidated financial statements
reflect the assets and liabilities of the discontinued operations as separate
line items and the operations of our home healthcare operations for the current
and prior periods are reported in discontinued operations on our income
statement. For a discussion of the revenues and costs of operations of our
discontinued operations, see "Item 7--Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations" and
footnote 4 of Notes to Consolidated Financial Statements for our fiscal year
ended September 30, 2003.
Substantially all of our U.S. revenues were attributable to third-party
payors, including Medicare and Medicaid, private insurers, managed care plans
and HMOs. The amounts received from government programs and private third-party
payors were dependent upon the specific benefits included under the program or
the patient's insurance policies.
EMPLOYEES
As of November 30, 2003, we employed approximately 688 full-time
employees and 275 part-time employees.
In addition, our U.K. operations maintain registers of approximately
33,600 registered nurses, carers and aides available to staff home and health
service nursing arrangements on a
13
temporary basis. We consider our relationship with our U.K. employees and
independent contractors to be good. None of our U.K. employees are represented
by a labor union.
GOVERNMENT REGULATION
U.K. Government Regulation
General
- -------
Our U.K. operations are subject to regulation by the government of the
U.K. via Acts of Parliament related to healthcare provision.
Approximately 81% of healthcare in the U.K. is provided under the NHS
with the remaining 19% being provided by private healthcare organizations.
However, all care provision is regulated by statute and under the general health
regulations of the Department of Health.
Healthcare Laws and Regulations
- -------------------------------
Our U.K. operations are subject to licensing and approval regulations
from both governmental and non-governmental bodies according to terms of service
and operating procedures decided by the U.K. government.
Our U.K. operations are currently authorized in England and Wales under
the Care Standards Act 2000 and the Nurses Agencies Regulations 2002 (which came
into force in April 2003) to carry on an agency for the supply of nurses. This
legislation requires that a person who carries on an agency for the supply of
nurses on any premises in the area of the licensing authority must be the holder
of a license from that authority authorizing that person to supply on those
premises. Our U.K. operations are authorized in Scotland by the Regulation of
Care (Scotland) Act 2001. Our domiciliary care agencies in England, which
provide carers working in the community, are currently authorized under the
Domiciliary Care Agencies Regulations 2002.
The Care Standards Act 2000 introduced a regulatory structure for all
non-NHS health and care services in England and Wales. It established a new
independent registration and regulatory body for independent healthcare services
and social care in England, including nurses' agencies, called the National Care
Standards Commission, and enforces registration of all care agencies and
establishments. The Care Standards Act 2000 also appointed a similar
registration authority for Wales, the National Assembly for Wales. The Care
Standards Act 2000 also made provision for a new General Social Care Council in
England and a new Care Council for Wales to be established as non-departmental
statutory bodies responsible to the Department of Health and National Assembly
of Wales, respectively, with the aim of increasing the protection of service
users, their carers and the general public. The Regulation of Care (Scotland)
Act 2001 also introduced legislation relating to this area in Scotland.
The Care Standards Act 2000 is essentially an enabling act that
provides for regulations to be made by secondary legislation. Regulations
relating to registration are already in force (the National Care Standards
Commission (Registration) Regulations 2001). The Care Standards Act 2000 also
provided that regulations can be made imposing any requirements which the
14
appropriate Minister thinks fit for the purposes of Part II of the Care
Standards Act 2000 relating to establishments and agencies. Specific regulations
set out in the Care Standards Act 2000 that may be introduced include provisions
relating to the services to be provided by agencies, the keeping of accounts,
the keeping of records and documents and arrangements to be made for dealing
with complaints made by those seeking or receiving any of the services provided
by the agency. The recent regulations (including the Nurses Agency Regulations
2002 and the Domiciliary Care Agencies Regulations 2002) include provisions in
these areas.
Contracts between nursing agencies and NHS Trusts for the provision of
services will be reviewed by a new commission, to be called the Commission for
Healthcare Audit and Inspection. Allied Operating Company (UK) is accredited by
various U.K. social services agencies for the supply of carers to community
services within that specific area. The U.K. Department of Health and Medicines
Control Agency has granted licenses to Medigas for the production and
distribution of medical-grade oxygen to pharmacies throughout the U.K.
We believe that we are in substantial compliance in all material
respects with U.K. healthcare laws and regulations applicable to our U.K.
operations.
Healthcare Reform
- -----------------
The U.K. government has carried out an in-depth review of healthcare
provision in the U.K. and its regulation to ensure consistent quality in
provision of staff and other aspects of care outside the NHS. This began in 1998
when the government released a green paper "Towards a Healthier Future" and two
white papers, one concerned with community care and the second with primary care
reforms.
The current Labor government has continued to develop the previous
Conservative government's plans of devolving decisions on patient care down to
the family doctor. Primary Care Trusts based in local communities are now in
operation, which will increasingly mean that decisions related to patient care
and the funding required will be decided by a group representing general
practitioners, nurses, pharmacists and community care workers operating in
conjunction with the district health authorities and local governmental
authorities. However, local decisions relating to drug and treatment regimes are
subject to national policies and the decisions of the government-appointed
National Institute for Clinical Excellence (N.I.C.E.).
In addition to this top-level development change, the NHS continues to
seek ways in which it can reduce costs. We believe that contractors to the NHS
will continue to come under pressure over the next three years, until the next
election, notwithstanding the current government's stated determination
substantially to increase funding in the NHS.
U.S. Government Regulation
Our U.S. operations were subject to extensive federal and state
regulation. Federal regulation covers, among other things:
o Medicare and Medicaid billing and reimbursement;
15
o reporting requirements;
o supplier standards;
o limitations on ownership and other financial relationships between
a provider and its referral sources;
o approval by the Food and Drug Administration of the safety and
efficacy of pharmaceuticals and medical devices; and
o laws aimed at the prevention of fraud and abuse in the provision
of medical services, including the submission of false claims to
governmental and private payors and the payment of kickbacks to
physicians or others who refer an individual to another person for
the furnishing of services or items that may be reimbursed by a
federal healthcare program, such as Medicare or Medicaid.
In addition, the requirements that we needed to satisfy to conduct our
businesses varied from state to state.
We carefully monitored our submissions of Medicare and Medicaid claims
and all other claims for reimbursement and we used our best efforts to ensure
that these claims were not false or fraudulent. However, to the extent we are
investigated and/or found to have violated these laws, it could have a material
adverse effect on us.
Also, from time to time, government payers conduct post-payment audits
of previously paid Medicare or Medicaid claims. At this time, there are several
post-payment overpayment determinations arising from the previous business
activities of two our former operating subsidiaries, RespiFlow, Inc. or M.K.
Diabetic Support Services, Inc. Although appeals are being pursued, if we are
unsuccessful in these appeals, such a result could have a material adverse
effect on us.
We believe that our U.S. operations complied in all material respects
with all applicable laws.
INSURANCE
Participants in both the U.K. and U.S. healthcare markets are subject
to lawsuits alleging negligence, product liability or other similar legal
theories, many of which involve large claims and significant defense costs. From
time to time, we are subject to such suits as a result of the nature of our
business. We maintain general liability insurance, professional liability
insurance and excess liability coverage, as appropriate. Each of these policies
provides coverage on an "occurrence" basis and has certain exclusions from
coverage. Our insurance policies must be renewed annually. While we have been
able to obtain liability insurance in the past, this insurance varies in cost,
is difficult to obtain and may not be available in the future on terms
acceptable to us, if it is available at all. The failure to maintain insurance
coverage or a successful claim not covered by or in excess of our insurance
coverage could have a material
16
adverse effect on our business, financial position, cash flows or results of
operations. In addition, claims, regardless of their merit or eventual outcome,
may have a material adverse effect on our reputation. There can be no assurance
that our insurance will be sufficient to cover liabilities that we may incur in
the future.
ITEM 2. PROPERTIES
We lease 87 facilities in the U.K., of which 48 are for a period of
three months or less. We lease our corporate headquarters in the U.S. We believe
that our existing leases will be renegotiated as they expire or that alternative
properties can be leased on acceptable terms. We also believe that our present
facilities are well maintained and are suitable for continuing our existing
operations. (See Operating Leases in Note 12 of Notes to Consolidated Financial
Statements for our fiscal year ended September 30, 2003.)
ITEM 3. LEGAL PROCEEDINGS
On April 13, 1998, one of our shareholders, purporting to sue
derivatively on our behalf, commenced a derivative suit in the Supreme Court of
the State of New York, County of New York, entitled Kevin Mak, derivatively and
on behalf of Transworld Healthcare, Inc., Plaintiff, vs. Timothy Aitken, Scott
A. Shay, Lewis S. Ranieri, Wayne Palladino and Hyperion Partners II L.P.,
Defendants, and Transworld Healthcare, Inc., Nominal Defendant, Index No.
98-106401. The suit alleges that certain of our officers and directors, and
Hyperion Partners II L.P. ("HPII"), breached fiduciary duties owed to us and our
shareholders, in connection with a transaction, approved by a vote of our
shareholders on March 17, 1998, in which we were to issue certain shares of
stock to Hyperion Partners II L.P. in exchange for certain receivables due from
Health Management, Inc. ("HMI"). The action seeks injunctive relief against this
transaction, and damages, costs and attorneys' fees in unspecified amounts. The
transaction subsequently closed and the plaintiff has, on numerous occasions,
stipulated to extend the defendants' time to respond to this suit.
We are involved in various other legal proceedings and claims
incidental to our normal business activities. We are vigorously defending our
position in all such proceedings. We believe that these matters should not have
a material adverse impact on our consolidated financial position, cash flows, or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of our shareholders during the
fourth quarter of our fiscal year ended September 30, 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our common stock is quoted on the American Stock Exchange and is traded
under the symbol "ADH." The following table sets forth, for the periods
indicated, the high and low sales price of our common stock on the American
Stock Exchange.
17
PERIOD HIGH LOW
Year Ended September 30, 2002:
First Quarter .................................... $3.10 $2.40
Second Quarter ................................... 4.15 2.85
Third Quarter .................................... 6.80 3.55
Fourth Quarter ................................... 5.97 3.65
Year Ended September 30, 2003:
First Quarter .................................... $5.35 $4.00
Second Quarter ................................... 4.54 3.47
Third Quarter .................................... 4.15 3.15
Fourth Quarter ................................... 4.45 3.40
Year Ended September 30, 2004:
First Quarter (through
December 26, 2003) ...................... $6.46 $3.88
We have neither declared nor paid any dividends on our common stock and
do not anticipate paying dividends in respect of our common stock in the
foreseeable future. Any payment of future dividends will be at the discretion of
our board of directors and will depend upon, among other things, our earnings,
financial position, cash flows, capital requirements and other relevant
considerations, including the extent of our indebtedness and any contractual
restrictions with respect to the payment of dividends, as well as restrictions
upon dividends on our common stock imposed by our Series A preferred stock
(which is described below). Under the terms of our Senior Credit Facility, our
U.K. subsidiaries are prohibited from paying dividends, including to us. See
"Item 7--Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources--Borrowings--Senior Credit
Facility."
As of December 26, 2003, there were approximately 207 shareholders of
record of our common stock.
SERIES A PREFERRED STOCK
In the Reorganization, we issued 7,773,660 shares of our Series A
preferred stock with an aggregate liquidation preference of (pound)22,286,869
($35,213,253 at the fixed exchange rate of $1.58 set forth in an amendment to
our certificate of incorporation defining the rights of the Series A preferred
stock). There is no public trading market for our Series A preferred stock. For
a description of our Series A preferred stock, see "Item 7--Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
EQUITY COMPENSATION PLAN INFORMATION
For certain information concerning securities authorized for issuance
under our equity compensation plans, see "Item 12--Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters--Equity
Compensation Plan Information."
18
RECENT ISSUANCES OF SECURITIES
During the quarter ended September 30, 2003, in connection with the
execution of an agreement with an unaffiliated third party pursuant to which
such third party agreed to provide us with consulting services related to
corporate finance and investment banking matters, we issued to such third party
warrants to purchase up to an aggregate of 350,000 shares of our common stock.
One hundred thousand (100,000) of the warrants are exercisable at $4.75 per
share, 175,000 of the warrants are exercisable at $5.50 per share and 75,000 of
the warrants are exercisable at a price of $6.00 per share. The warrants expire
on August 13, 2007. The warrants were issued in a transaction exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2) of such
Act because, among other things, the warrants were issued to one institution,
there was no general solicitation, restrictive legends were placed on the
warrants and the warrants provide that restrictive legends will be placed on the
shares issuable upon the exercise thereof.
ITEM 6. SELECTED FINANCIAL DATA
The financial data for the year ended September 30, 2003 and the
balance sheet data as of September 30, 2003, as set forth below, have been
derived from the consolidated financial statements of our company, audited by
Deloitte & Touche LLP for such period, and the financial data for the years
ended September 30, 2002 and 2001 and the balance sheet data as of September 30,
2002 and 2001, as set forth below, have been derived from the consolidated
financial statements of our company, audited by Ernst & Young LLP for such
periods, and should be read in conjunction with those consolidated financial
statements and the notes thereto included elsewhere in this Annual Report on
Form 10-K. The financial data for the year ended September 30, 2000 and the
balance sheet data as of September 30, 2000, as set forth below, have been
derived from the consolidated financial statements of our company, audited by
Ernst & Young LLP for such period, which do not appear in this Annual Report on
Form 10-K, and the financial data for the year ended September 30, 1999 and the
balance sheet data as of September 30, 1999, as set forth below, have been
derived from the consolidated financial statements of our company, audited by
PricerwaterhouseCoopers LLP for such period, which also do not appear in this
Annual Report on Form 10-K. The selected financial data should be read in
conjunction with "Item 1--Business--General" and "Item 7--Management's
Discussion and Analysis of Financial Condition and Results of Operations."
All data in the following table is in thousands, except for per share
data.
19
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------
2003 2002 2001 2000(6) 1999
------------ ---------- ---------- --------- -----------
FINANCIAL DATA:
Total revenues ...................................... $294,379 $242,828 $138,041 $119,925 $141,580
Gross profit ........................................ 81,323 66,079 42,491 40,654 51,722
Selling, general and administrative
expenses ....................................... 53,648 48,847 (2) 32,514 44,563 53,118
General and administrative expense related
to mail-order operations ....................... -- -- 3,883 -- --
Losses due to sale of subsidiary .................... -- -- 354 -- --
Legal settlements, net .............................. -- -- -- 5,082 (7) --
Restructuring charge ................................ -- -- -- 1,288 (8) --
Impairment of long-lived assets ..................... -- -- -- 15,073 (9) --
--------- --------- --------- --------- ---------
Operating income (loss) ............................. 27,675 17,232 5,740 (25,352) (1,396)
Interest expense, net ............................... 11,279 13,472 8,433 9,014 (3) 5,218
Gain on settlement of PIK interest .................. -- (5,143)(4) -- -- --
Foreign exchange loss ............................... 18 19 400 -- --
Provision (benefit) for income taxes(1) ............. 4,910 4,971 24,117 (7,756) (500)
Equity in income of and interest
income earned from U.K. subsidiaries ............. -- -- -- 1,101 (6) --
Minority interest ................................... -- 120 22 (70) --
--------- --------- --------- --------- ---------
Income (loss) from continuing operations ............ 11,468 3,793 (27,232) (25,439) (6,114)
Income (loss) from discontinued operations .......... 503 1,001 620 495 (1,232)
Redeemable preferred dividend and
accretion(5) ..................................... 4,005 1,016 -- -- --
--------- --------- --------- --------- ---------
Net income (loss) available to common
stockholders ..................................... $7,966 $3,778 $(26,612) $(24,944) $(7,346)
========= ========= ========= ========= =========
Basic and diluted income (loss) per share of common
stock from:
Income (loss) from continuing operations ............ $0.34 $0.15 $(1.57) $(1.45) $(0.35)
Income (loss) from discontinued operations .......... 0.02 0.05 0.04 0.03 (0.07)
--------- --------- --------- --------- ---------
$0.36 $0.20 $(1.53) $(1.42) $(0.42)
========= ========= ========= ========= =========
Weighted average number of common shares outstanding:
Basic ............................................... 21,962 18,565 17,408 17,551 17,547
========= ========= ========= ========= =========
Diluted ............................................. 22,304 18,932 17,408 17,551 17,547
========= ========= ========= ========= =========
SEPTEMBER 30,
----------------------------------------------------- ------------
2003 2002 2001 2000 1999
---------- ---------- ---------- --------- ------------
BALANCE SHEET DATA:
Working capital...................... $24,781 $25,918 $25,178 $31,141 $31,938
Accounts receivable, net............. 35,745 32,113 27,888 19,821 27,100
Total assets......................... 311,668 268,113 248,073 183,746 172,121
Long-term debt....................... 118,680 118,961 175,913 89,677 54,407
Total stockholders' equity........... 75,163 53,943 36,354 63,031 91,274
(1) During the year ended September 30, 2001, we established a full valuation
allowance against our U.S. deferred tax assets.
(2) For the year ended September 30, 2002, we recorded a non-cash charge of
$4,216,000 for the issuance of shares of common stock to senior management
and $1,619,000 related to the exchange of employees' redeemable shares in
TWUK for shares of our common stock, using the net exercise method, in the
Reorganization. We also recorded a net charge of $686,000 for the year
ended September 30, 2002 mainly
20
related to the write-off of non-capitalized costs incurred in connection
with evaluating options to maximize the value of our ownership interest in
our U.K. operations.
(3) Effective October 1, 2001 we adopted FAS No. 145, "Rescission of FASB
Statements No. 4 (Reporting Gains and Losses From Extinguishment of Debt),
44 (Accounting for Intangible Assets of Motor Carriers) and, and 64
(Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements),
Amendment of FASB Statement No. 13 (Accounting for Leases), and Technical
Correction" ("FAS No. 145"), which addressed gain or loss on the
extinguishment of debt and sale-leaseback accounting for certain lease
modifications and accordingly recorded a charge of $925,000 in interest
expense for the year ended September 30, 2002. We also reclassified
$1,167,000 to interest expense which was previously recorded as an
extraordinary item in fiscal 2000. Both charges relate to the write-off of
deferred financing costs associated with the early extinguishment of debt.
(4) We recorded a gain of $5,143,000 for the year ended September 30, 2002
related to the settlement of PIK interest.
(5) For the year ended September 30, 2003, we accrued dividends on our Series A
preferred Stock of $3,523,000 and accreted costs of $482,000 related to the
issuance of our Series A preferred stock. For the year ended September 30,
2002, we accrued $941,000 of dividends on the Series A preferred stock and
accreted $75,000 of costs related to the issuance of our Series A preferred
stock.
(6) Effective with the financing by our U.K. subsidiaries in December 1999, we
began accounting for the investment in Allied Healthcare (UK) and its
subsidiaries under the equity method, retroactive to October 1, 1999.
During the second quarter of fiscal 2000, Allied Healthcare (UK) and TWUK
amended their Articles of Association. The amendments enabled us to
consolidate Allied Healthcare (UK) and its subsidiaries as of January 1,
2000.
(7) We recorded a net charge of $5,082,000 related to legal settlements in the
year ended September 30, 2000.
(8) We recorded a $1,288,000 restructuring charge related to exiting our U.S.
mail-order operations in the year ended September 30, 2000.
(9) We recorded a charge for impairment of long-lived assets of $15,073,000 in
the year ended September 30, 2000. The charge related to the write-down of
assets, mainly goodwill, to their fair value of $12,346,000 for the U.S.
mail-order operations and $2,727,000 for Amcare Limited.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with the consolidated financial statements included in this Annual Report on
Form 10-K and in conjunction with the description of our business included in
this Annual Report on Form 10-K. It is intended to assist the reader in
understanding and evaluating our financial position.
This discussion contains, in addition to historical information,
forward-looking statements that involve risks and uncertainty. Our actual
results could differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed in this Annual Report on Form 10-K under
"Forward-Looking Statements."
21
GENERAL
We are one of the leading providers of flexible healthcare staffing
services, including nursing and ancillary services, to the U.K. healthcare
industry. We operate a community-based network of over 115 branches, with the
capacity to provide nurses, carers (known as home health aides in the U.S.) and
specialized medical personnel to locations covering approximately 90% of the
population of Great Britain. We provide healthcare staffing services to
hospitals, local governmental authorities, nursing homes and private patients in
the U.K. 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 disposed of the last of our U.S. operations when
we sold all of the issued and outstanding capital stock of The PromptCare
Companies, Inc. and Steri-Pharm, Inc. for approximately $8,500,000 in cash.
These two subsidiaries constituted our U.S. home healthcare operations segment.
Our home healthcare operations were concentrated in New York and New Jersey and
supplied infusion therapy, respiratory therapy and home medical equipment. The
sale of this non-core segment allows us to focus our business on providing
staffing services to the healthcare industry. In accordance with the provisions
of FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," we have accounted for our home healthcare operations as a discontinued
operation. Our consolidated financial statements reflect the assets and
liabilities of the discontinued operations as separate line items and the
operations of our home healthcare operations for the current and prior periods
are reported in discontinued operations on our income statement.
On July 25, 2002, we consummated the Reorganization. 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
principal amount of the senior subordinated notes (the "Notes") issued by Allied
Healthcare (UK) were exchanged for 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 Notes issued by Allied Healthcare (UK) was satisfied by the exchange for
shares of our common stock at the rate of 0.3488 shares for every (pound)2.00 of
accrued and unpaid interest on such Notes. We issued 116,759 shares of common
stock in settlement of accrued and unpaid interest on the Notes in fiscal 2002
and an additional 890,098 shares of common stock in settlement of accrued and
unpaid interest on the Notes were issued in the first quarter of fiscal 2003.
22
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. The
Series A preferred stock has an aggregate liquidation preference of $35,213,000.
On our balance sheet, the shares of common stock have been valued at $3.91 per
share, the closing price on AMEX of our common stock at April 24, 2002, the date
of the execution of the agreement relating to the Reorganization, and the shares
of Series A preferred stock issued in connection with the Reorganization have
been valued at $35,213,000, excluding issuance costs. At issuance, as the value
of a share of common stock into which a share of Series A preferred stock was
convertible was less than the conversion price, there was no economic incentive
for a holder of Series A preferred stock to convert and, accordingly, there was
no beneficial conversion feature in the Series A preferred stock under
accounting principles generally accepted in the U.S.
Our revenue mix and payor mix is influenced to a significant degree by
the relative contribution of acquired businesses and their respective payor
profiles. The following table shows the percentage of historical net revenues
represented by each of our product lines:
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
2003 2002 2001
------ ------ ------
Product Line:
Net patient services.......................... 97.8% 98.0% 94.7%
Net respiratory, medical equipment and
supplies .................................. 2.2 2.0 5.3
------ ------ ------
Total revenues.................. 100.0% 100.0% 100.0%
====== ====== ======
The following table shows the historical payor mix for our total
revenues for the periods presented:
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
2003 2002 2001
---- ---- ----
Payor:
U.K. NHS and other
U.K. governmental payors.................... 64.8% 67.8% 61.3%
Private payors................................ 35.2 32.2 38.7
------ ------ ------
Total revenues.................. 100.0% 100.0% 100.0%
------ ------ ------
The decrease in NHS and other U.K. governmental payors as a percentage
of total revenues for the year ended September 30, 2003 as compared to 2002 was
primarily due to a decrease in billable rates per hour achieved in the NHS due
to the introduction of the Framework Agreements, together with a migration of
nursing placements into private nursing homes where
23
higher margins were achieved. The increase in NHS and other U.K. governmental
payors as a percentage of total revenues for the year ended September 30, 2002
as compared to 2001 was primarily due to our U.K. acquisitions, which derive the
majority of their revenues from the NHS, and to organic growth in the core
flexible staffing business. We believe that our payor mix in the future will be
determined primarily by the payor profile of completed acquisitions and to a
lesser extent, from shifts in existing business among payors.
Our gross margins will be influenced by the revenue mix of our product
lines and by changes in reimbursement rates. Subsequent acquisitions, when
completed, will continue to impact the relative mix of revenues and overall
gross margin.
At September 30, 2003, we had $185,722,000 of intangible assets
(primarily goodwill) on our balance sheet compared to $123,514,000 at September
30, 2002. This represented 59.6% of total assets and 247.1% of total
stockholders' equity at September 30, 2003 and 46.1% of total assets and 229.0%
of total stockholders' equity at September 30, 2002. In accordance with the
provisions of FAS No. 142, which we adopted effective October 1, 2001, all
existing and newly acquired goodwill and intangible assets deemed to have
indefinite lives are not subject to amortization. Amortization of other
intangibles still subject to amortization was $207,000 for the year ended
September 30, 2003. Subsequent acquisitions, when completed, will continue to
increase the amount of intangible assets on the balance sheet.
CRITICAL ACCOUNTING POLICIES
Accounts Receivable
We are required to estimate the collectibility of our accounts
receivables, which requires a considerable amount of judgment in assessing the
ultimate realization of these receivables, including the current
credit-worthiness of each customer. Significant changes in required reserves may
occur in the future as we continue to expand our business and as conditions in
the marketplace change.
Intangible Assets
We have significant amounts of goodwill. The determination of whether
or not goodwill has become impaired involves a significant amount of judgment.
Changes in strategy and/or market conditions could significantly impact these
judgments and may 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
24
significant estimates regarding the future profitability of our company, as well
as potential tax strategies for the utilization of net loss and operating loss
carry forwards.
Contingencies
Related to our acquisitions of certain flexible staffing agencies, we
have entered into agreements to pay additional amounts, in cash, as contingent
consideration dependent upon future earnings of such acquired entities. See
Notes 4 and 12 of the Notes to Consolidated Financial Statements for the year
ended September 30, 2003.
Also, we are involved in various 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 are billed at fixed rates and 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. Revenues from the
rental of home medical equipment (including respiratory equipment) are
recognized over the rental period (typically on a month-to-month basis).
Revenues from the sale of oxygen and supplies for use in respiratory therapy 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 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
Year Ended September 30, 2003 vs. Year Ended September 30, 2002
Revenues
- --------
Total revenues for the year ended September 30, 2003 were $294,379,000
compared to $242,828,000 for the year ended September 30, 2002, an increase of
$51,551,000 or 21.2%. This increase relates primarily to the growth of our
company's U.K. flexible staffing operations as a result of internal growth
($11,053,000) and acquisitions ($15,577,000) as well as internal growth in our
U.K. respiratory, medical equipment and supplies operations ($955,000). An
increase of $23,966,000 was due to the favorable effects of changes in foreign
exchange.
25
Gross Profit
- ------------
Total gross profit increased by $15,244,000 to $81,323,000 for the year ended
September 30, 2003 from $66,079,000 for the year ended September 30, 2002, an
increase of 23.1%. The favorable effects of changes in foreign exchange
accounted for $6,621,000 of the increase. As a percentage of total revenue,
gross profit for the year ended September 30, 2003 increased to 27.6% from 27.2%
for the comparable prior period. Gross margins for patient services increased
(27.3% for the year ended September 30, 2003 versus 26.9% for the comparable
prior period). Gross margins in the respiratory, medical equipment and supplies
sales increased (43.4% for the year ended September 30, 2003 versus 41.7% for
the comparable prior period) mainly due to an increased focus on sales of
portable oxygen therapy equipment and a steady increase in the number of
patients in Northern Ireland, while keeping costs static.
Selling, General and Administrative Expenses
- --------------------------------------------
Total selling, general and administrative expenses increased by
$4,801,000 to $53,648,000 for the year ended September 30, 2003 from $48,847,000
for the year ended September 30, 2002, an increase of 9.8%. The increase was
mainly a result of higher level of overhead costs in our U.K. operations due
principally to acquisitions and internal growth ($8,310,000), higher level of
overhead costs in the U.S. corporate office as well as charges associated with
the exercise of employee stock options ($1,297,000), and changes in foreign
exchange ($4,056,000). This increase was partially offset by the effects of
recording, for the year ended September 30, 2002, a non-cash charge of
$5,835,000 representing $4,216,000 for the issuance of shares of our common
stock to senior management and $1,619,000 related to the exchange of employees'
redeemable shares (options) in TWUK for shares of our common stock, using the
net exercise method in the Reorganization, 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 net charge of
$686,000 principally reflecting the write-off of non-capitalized costs incurred
in connection with evaluating options to maximize the value of our ownership
interest in our U.K. operations.
Interest Income
- ---------------
Total interest income for the year ended September 30, 2003 was
$2,032,000 compared to $3,024,000 for the year ended September 30, 2002, which
represents a decrease of $992,000. The decrease was attributable to a lower
level of funds invested as well as decreases in interest rates and was partially
offset by favorable effects of changes in foreign exchange ($159,000).
Interest Expense
- ----------------
Total interest expense for the year ended September 30, 2003 was
$13,311,000 compared to $16,496,000 for the year ended September 30, 2002, which
represents a decrease of $3,185,000. Excluding the $1,070,000 increase due to
the effect of foreign exchange, the actual decrease in interest expense was
$4,255,000. The 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
26
($2,627,000). The decrease was also attributable to reduced bank debt as well as
a reduction in interest rates. The decrease was partially offset by the
recording of a $203,000 charge related to a change in the fair value of our
company's interest rate cap and floor collar agreement.
Gain on Settlement of Paid in Kind Interest
- -------------------------------------------
We recognized a gain of $5,143,000 for the year ended September 30,
2002 on the settlement of accrued and unpaid interest owed to the holders of the
Notes of Allied Healthcare (UK) in exchange for new shares of our common stock.
Provision for Income Taxes
- --------------------------
We recorded a provision for income taxes amounting to $4,910,000 or
30.0% of income before income taxes and discontinued operations for the year
ended September 30, 2003 versus a provision of $4,971,000 or 56.0% of income
before income taxes, minority interest and discontinued operations for the year
ended September 30, 2002. Included in the tax provision for the year ended
September 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 $6,783,000 or 41.4% of income before income taxes
and discontinued operations for the year ended September 30, 2003. The
difference between the 41.4% effective tax rate for the year ended September 30,
2003 and the statutory tax rate is primarily due 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 reported a charge for minority interest of $120,000 in the year
ended September 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 Reorganization, we acquired these shares and the U.K.
operations became wholly owned by our company.
Discontinued Operations and Gain on sale of Subsidiaries
- --------------------------------------------------------
Discontinued operations resulted in income of $503,000 for the year
ended September 30, 2003 compared to income of $1,001,000 for the year ended
September 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 FAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," our company has accounted
for Home Healthcare as a discontinued operation. The following table presents
the financial results of the discontinued operations:
27
YEAR ENDED SEPTEMBER 30,
2003 2002
--------------------------------------------
Revenues:
Net infusion services $ 6,685,000 $ 12,373,000
Net respiratory, medical equipment and supplies 2,479,000 4,697,000
--------------- ------------
Total revenues 9,164,000 17,070,000
--------------- ------------
Cost of revenues:
Infusion services 5,159,000 9,068,000
Respiratory, medical equipment and supplies 1,438,000 2,292,000
--------------- ------------
Total cost of revenues 6,597,000 11,360,000
--------------- ------------
Selling, general and administrative expenses 2,583,000 4,709,000
Gain on sale of subsidiaries, net of tax 519,000 --
--------------- ------------
Income from discontinued operations $ 503,000 $ 1,001,000
=============== ============
Diluted income per share from discontinued
operations $ 0.02 $ 0.05
=============== ============
Net Income
- ----------
As a result of the foregoing, we recorded net income of $11,971,000 for
the year ended September 30, 2003 compared to net income of $4,794,000 for the
year ended September 30, 2002.
Series A Preferred Stock
- ------------------------
For the year ended September 30, 2003, we accrued $3,523,000 of
dividends for the Series A preferred stock issued in connection with the
Reorganization and accreted $ 482,000 of costs related to the issuance of our
Series A preferred stock. For the year ended September 30, 2002, we accrued
$941,000 of dividends for the Series A preferred stock issued in connection with
the Reorganization and accreted $75,000 of costs related to the issuance of our
Series A preferred stock.
Year Ended September 30, 2002 vs. Year Ended September 30, 2001
Revenues
- --------
Total revenues for the year ended September 30, 2002 were $242,828,000
compared to $138,041,000 for the year ended September 30, 2001, an increase of
$104,787,000 or 75.9% (72.4% excluding the favorable effects of changes in
foreign exchange). This increase relates primarily to the growth of our
company's U.K. flexible staffing operations as a result of acquisitions,
principally Staffing Enterprise Limited and Staffing (PSV) Limited (collectively
"Staffing Enterprise") ($62,902,000), Crystalglen Limited (operating under the
trade name "Nurses Direct") ($13,136,000), and Balfor Medical ($5,642,000) with
the remaining increase ($23,107,000) principally reflecting organic growth in
the staffing operations.
Gross Profit
- ------------
Total gross profit increased by $23,588,000 to $66,079,000 for the year
ended September 30, 2002 from $42,491,000 for the year ended September 30, 2001,
an increase of 55.5% (52.4% excluding the favorable effects of changes in
foreign exchange). As a percentage of total revenue, gross profit for the year
ended September 30, 2002 decreased to 27.2% from 30.8% for the comparable prior
period. Gross margins for patient services decreased (26.9% for the year
28
ended September 30, 2002 versus 30.7% for the comparable prior period)
principally due to an increase in the percentage of revenues derived from the
staffing of nurses and other more highly paid professionals, which have lower
margins than the historical carer business. In addition, U.K. regulatory
changes, which extend the entitlement of holiday pay to temporary workers,
served to reduce gross margins in the year ended September 30, 2002. Gross
margins in the respiratory, medical equipment and supplies sales increased
(41.7% for the year ended September 30, 2002 versus 32.6% for the comparable
prior period) mainly due to the sales mix.
Selling, General and Administrative Expenses
- --------------------------------------------
Total selling, general and administrative expenses increased by
$12,450,000 to $48,847,000 for the year ended September 30, 2002 from
$36,397,000 for the year ended September 30, 2001, an increase of 34.2% (32.1%
excluding the favorable effects of changes in foreign exchange). The increase
reflects (i) $2,341,000 representing certain tax equalization bonuses paid to
senior management for the reimbursement of income taxes incurred as a result of
share issuances, (ii) a non-cash charge of $5,835,000, representing $4,216,000
for the issuance of shares of our common stock to senior management and
$1,619,000 related to the exchange of employees' redeemable shares (options) in
TWUK for shares of our common stock, using the net exercise method in the
Reorganization, (iii) a net charge of $686,000, principally reflecting the
write-off of non-capitalized costs incurred in connection with evaluating
options to maximize the value of our ownership interest in our U.K. operations,
and (iv) the higher level of overhead costs in our U.K. operations due
principally to acquisitions and internal growth. This increase was partially
offset by the application of FAS No. 142, "Goodwill and Other Intangible
Assets," whereby goodwill is no longer being amortized ($3,725,000), effective
October 1, 2001. In addition, we incurred $3,883,000 of expenses in fiscal 2001
related to exiting our U.S. mail-order operations.
Losses due to Sale of Subsidiary
- --------------------------------
For the year ended September 30, 2001, we recorded losses of $354,000
due to the sale of Amcare Limited, a U.K. subsidiary, as a result of the
completion of the transaction.
Interest Income
- ---------------
Total interest income for the year ended September 30, 2002 was
$3,024,000 compared to $1,587,000 for the year ended September 30, 2001. The
increase was attributable to a higher level of funds invested.
Interest Expense
- ----------------
Total interest expense for the year ended September 30, 2002 was
$16,496,000 compared to $10,020,000 for the year ended September 30, 2001. The
increase was primarily attributable to a higher level of average borrowings
outstanding, as well as the write-off of $925,000 of deferred financing fees,
per FAS No. 145, related to certain costs associated with our 1999 financing of
our U.K. operations.
29
Gain on Settlement of Paid in Kind Interest
- -------------------------------------------
We recognized a gain of $5,143,000 for the year ended September 30,
2002 on the settlement of accrued and unpaid interest owed to the holders of the
Notes of Allied Healthcare (UK) in exchange for new shares of our common stock.
Provision for Income Taxes
- --------------------------
We recorded a provision for income taxes amounting to $4,971,000 or
56.0% of income before income taxes and minority interest for the year ended
September 30, 2002 versus a provision of $24,117,000 for the year ended
September 30, 2001. The difference between the 55.6% effective tax rate for the
year ended September 30, 2002 and the statutory tax rate is due to our recording
of an additional valuation allowance for the tax benefit associated with the
fiscal 2002 U.S. operating loss.
We had been previously committed to implementing tax strategies that
provided for the sale of appreciated assets, including a portion of our
ownership interest in our U.K. subsidiary, to generate sufficient taxable income
to realize the tax net operating losses prior to their expiration. While we
believe we will eventually realize the value of our tax losses, current
developments, including the continued expansion of our U.K. operations has
increased the uncertainty as to both the execution of the original strategy and
the appropriateness of a tax strategy which may not align with our current
business strategy. These uncertainties have impaired our ability to determine
whether it is more likely than not that our deferred tax assets will be
realized. Accordingly, in the fourth quarter of fiscal 2001, a full valuation
allowance for all remaining deferred tax assets was provided.
Minority Interest
- -----------------
We reported a charge for minority interest of $120,000 in the year
ended September 30, 2002 compared to a charge of $22,000 in the year ended
September 30, 2001. The minority interest represented the 1,050,000 shares of
class A1 common stock of TWUK issued as part of the Nightingale consideration.
In the Reorganization we acquired these shares and the U.K. operations became
wholly owned by our company.
Discontinued Operations
- -----------------------
Discontinued operations resulted in income of $1,001,000 for the year
ended September 30, 2002 compared to income of $620,000 for the year ended
September 30, 2001. The following table presents the financial results of the
discontinued operations:
YEAR ENDED SEPTEMBER 30,
2002 2001
--------------------------------------------
Revenues:
Net infusion services $ 12,373,000 $ 12,505,000
Net respiratory, medical equipment and supplies 4,697,000 4,087,000
--------------- ------------
Total revenues 17,070,000 16,592,000
--------------- ------------
30
YEAR ENDED SEPTEMBER 30,
2002 2001
--------------------------------------------
Cost of revenues:
Infusion services 9,068,000 8,959,000
Respiratory, medical equipment and supplies 2,292,000 2,146,000
----------- -----------
Total cost of revenues 11,360,000 11,105,000
----------- -----------
Selling, general and administrative expenses 4,709,000 4,867,000
----------- -----------
Income from discontinued operations $ 1,001,000 $ 620,000
=========== ===========
Diluted income per share from discontinued
operations $ 0.05 $ 0.04
========== ===========
Net Income
- ----------
As a result of the foregoing, we recorded net income of $4,794,000 for
the year ended September 30, 2002 compared to a loss of $26,612,000 for the year
ended September 30, 2001.
Series A Preferred Stock
- ------------------------
We accrued $941,000 of dividends in the year ended September 30, 2002
for the Series A preferred stock issued in connection with the Reorganization
and accreted $75,000 of costs related to the issuance of our Series A preferred
stock.
LIQUIDITY AND CAPITAL RESOURCES
General
For our fiscal year ended September 30, 2003, we generated $15,110,000
from operating activities. Cash requirements for our fiscal year ended September
30, 2003 for capital expenditures ($4,026,000), payments on acquisitions payable
($7,031,000), payments for acquisitions ($9,531,000), payment on notes payable
($19,363,000) and payments on long-term debt ($6,727,000) were met through
operating cash flows, proceeds from the sale of discontinued operations
($8,195,000), restricted cash and cash on hand.
In January 2001, we initiated a stock repurchase program, whereby we
may purchase up to approximately $1,000,000 of our outstanding shares of common
stock in open-market transactions or in privately-negotiated transactions. In
May 2003, we initiated a second stock repurchase program, pursuant to which we
may purchase up to an additional $3,000,000 of our outstanding shares of common
stock in open-market transactions or in privately-negotiated transactions. As of
September 30, 2003, we had acquired 407,700 shares of our common stock for an
aggregate purchase price of $1,285,000 pursuant to our stock repurchase
programs, which are reflected as treasury stock in the consolidated balance
sheet at September 30, 2003. We intend to continue with our stock repurchases
during fiscal 2004.
We believe our existing capital resources and those generated from
operating activities and available under existing borrowing arrangements will be
adequate to conduct our operations for the next twelve months.
31
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 additional
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 September 30, 2003 and September 30, 2002, $35,745,000
(11.5%) and $32,113,000 (12.0%), respectively, of our total assets consisted of
accounts receivable. The increase in the accounts receivable from 2002 to 2003
is mainly due to the acquisition of Medic-One, a supplier of temporary staffing
to NHS hospitals and private hospitals in the U.K., which was slightly offset by
the 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 we take to collect our
accounts receivable, calculated from the date services are rendered. At
September 30, 2003 and September 30, 2002, our average DSOs were 41 and 42,
respectively. The decrease in the DSOs was mainly due to the timing of cash
collections.
Borrowings
General
- -------
On December 17, 1999, as amended on September 21, 2001, our company's
U.K. subsidiaries, TWUK and its subsidiary, obtained financing denominated in
pounds sterling. At September 30, 2003, this financing had an aggregate
availability of approximately $178,092,000, consisting of a $159,208,000 Senior
Credit Facility and $18,884,000 in mezzanine indebtedness (the "Mezzanine
Loan").
Senior Credit Facility
- ----------------------
The Senior Credit Facility consists of the following:
o $46,679,000 term loan A, maturing December 17, 2005;
o $20,839,000 acquisition term loan B, maturing December 17, 2006;
32
o $83,355,000 term loan C, maturing June 30, 2007; and
o $8,335,000 revolving facility, maturing December 17, 2005.
Repayment of the loans under the Senior Credit Facility 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 September 30, 2003, we
had outstanding borrowings of $110,195,000 under the Senior Credit Facility that
bore interest at rates ranging from 5.63% to 7.13%.
Subject to certain exceptions, the Senior Credit Facility prohibits or
restricts the following:
o the incurrence of liens;
o the incurrence of additional 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 September 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
September 30, 2003, we had outstanding borrowings under the Mezzanine Loan of
$17,490,000, which bore interest at a rate of 10.63%.
Notes with Warrants
- -------------------
In connection with the Reorganization, the notes with warrants were
settled by the issuance of 890,000 shares of our common stock in the first
quarter of fiscal 2003.
33
Notes Due in Connection with Acquisitions
- -----------------------------------------
In fiscal 2003 we repaid, through TWUK, notes payable in the principal
amount of $19,363,000 issued in connection with the acquisition of certain U.K.
flexible staffing agencies and wrote-off $613,000 of related discount. In fiscal
2003, we also issued notes, in the aggregate principal amount of $36,026,000, to
satisfy our obligations to pay additional consideration to the sellers of
businesses that we had acquired; the amount of each note depended on the
earnings of the acquired business after our acquisition of it. The notes payable
are secured by the lender under our Senior Credit Facility. Our Senior Credit
Facility 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 holders
within one year from the first interest payment due date upon giving not less
than sixty days written notice. We had outstanding notes payable in connection
with acquisitions of $37,693,000 and related cash restricted to the payment of
such notes classified as current in the balance sheet included in our
Consolidated Financial Statements for the year ended September 30, 2003.
Guarantees
- ----------
Our U.K. subsidiaries guarantee the debt and other obligations of
certain wholly-owned U.K. subsidiaries under the Senior Credit Facility, the
Mezzanine Loan and various notes issued in connection with the acquisition of
certain U.K. flexible staffing agencies. At September 30, 2003 and September 30,
2002, the amounts guaranteed, which approximates the amounts outstanding,
totaled approximately $167,000,000 and $151,000,000, respectively.
Series A Preferred Stock
- ------------------------
In the Reorganization, we issued 7,773,660 shares of our Series A
preferred stock with an aggregate liquidation preference of (pound)22,286,869
($35,213,253 at the fixed exchange rate of $1.58 set forth in an amendment to
our certificate of incorporation defining the rights of the Series A preferred
stock). The shares of Series A preferred stock were issued to certain equity
investors in TWUK in exchange for 22,286,869 ordinary shares of TWUK. Such
ordinary shares were issued to such investors upon exercise of the warrants that
had been issued to them in connection with the sale to them in 1999 of 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 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 ($4.58 at the fixed exchange rate of $1.58 set forth in an
amendment to our certificate of incorporation defining the rights of the Series
A preferred stock) 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 Certificate of Incorporation), which principally relates
to the protection of the rights of the holders of our
34
Series A preferred stock. Any accrued but unpaid dividends will be paid upon the
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 with
respect to 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 vote
as a single class on all matters submitted to a vote of our shareholders. Until
Triumph Partners III, L.P. (or any of its affiliates) beneficially owns less
than 50% of the shares of Series A preferred stock issued to it in the
Reorganization, the holders of Series A preferred stock will be entitled, voting
as a separate class, to elect one director to our board of directors. In
addition, the Series A preferred stock and our common stock will vote as a
single class in the election of all other directors of our board of directors.
In the event of a covenant breach (as that term is defined in the Certificate of
Amendment (relating to the Series A preferred stock) to our Certificate of
Incorporation), the holders of the Series A preferred stock will be entitled to
elect one additional director to our board of directors.
Liquidation Preference. In the event of any liquidation, dissolution or
winding up of our company, the holders of Series A preferred stock will be
entitled to receive, before the holders of common stock or any other class or
series of stock ranking junior to the Series A preferred stock will be entitled
to receive anything in respect of their shares, a liquidation preference equal
to $4.53 per share (subject to adjustment for stock splits, stock dividends,
recapitalizations and similar transactions), plus any accrued or declared but
unpaid dividends on such shares of Series A preferred stock, which we refer to
as the "Series A Preference Amount"; provided, however, that in the event that
the holders of Series A preferred stock would have received an amount greater
than the Series A Preference Amount had they converted their Series A preferred
stock into shares of common stock immediately prior to the liquidation,
dissolution or winding up of our company, such holders will be entitled to
receive an amount per share equal to the amount they would have received had
they effectuated such a conversion.
Conversion into Common Stock. Each share of Series A preferred stock is
currently convertible, at the option of the holder thereof, into one share of
common stock without the payment of additional consideration. Subject to the
satisfaction of certain conditions, we have the right to require the holders of
the Series A preferred stock to convert all, but not less than all, of their
shares into common stock. At issuance, as the value of a share of common stock
into which a share of Series A preferred stock was convertible was less than the
conversion price, there was no economic incentive for a holder of Series A
preferred stock to convert and, accordingly, there was no beneficial conversion
feature in the Series A preferred stock under generally accepted accounting
principles.
Redemption. Subject to certain limitations, a majority in interest of
the holders of the Series A preferred stock have the right to require our
company to redeem their shares of Series A
35
preferred stock upon the occurrence of a liquidity event (as described in the
Certificate of Amendment (relating to the Series A preferred stock) to our
Certificate of Incorporation) or at any time after December 17, 2007 if we have
paid our Senior Credit Facility and the Mezzanine Loan (as defined in "Item
7--Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Borrowings") in full on or before
such date. The redemption right can be exercised up to three times, but for not
less than (pound)5 million on any one occasion (or such lower amount as is
necessary to redeem all of the shares of Series A preferred stock then
outstanding). Upon such a redemption, the holders of the Series A preferred
stock will be entitled to receive an amount equal to the Series A Preference
Amount.
Commitments
Acquisition Agreements
- ----------------------
Related to our acquisitions of certain flexible staffing agencies, we
have entered into agreements to pay additional amounts, payable in cash and
shares of our common stock, of up to $13,579,000, at September 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 and our chief operating officer) that provided for
minimum aggregate annual compensation of $825,000 in fiscal 2003. Each
employment agreement contains, among other things, customary confidentiality and
termination provisions and provides 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 his or her responsibilities, such person
will be entitled to receive a cash payment of up to 2.9 times his or her average
annual base salary during the preceding 12 months. Each employment agreement
expires on September 24, 2004; however, each employment agreement shall be
automatically renewed on such date, and on each anniversary of such date, for an
additional period of one-year, unless the Company or the executive gives notice
to the other of its intent to terminate the employment agreement within 90 days
of the then applicable termination date.
Operating Leases
- ----------------
We have entered into various operating lease agreements for office
space and equipment. Certain of these leases provide for renewal options.
Contractual Cash Obligations
As described under "Borrowings," "Commitments--Acquisition Agreements,"
and "Commitments--Operating Leases" above, the following table summarizes our
contractual cash obligations as of September 30, 2003:
36
Total Debt Total Lease Total Other Total
Fiscal Obligations Obligations Obligations Obligations
- ------------------- ------------------- ------------------ ---------------- -----------------
2004 $ 46,698,000 $ 1,643,000 $ 5,410,000 $ 53,751,000
2005 11,670,000 1,372,000 8,169,000 21,211,000
2006 30,841,000 1,191,000 32,032,000
2007 58,348,000 1,116,000 59,464,000
2008 17,821,000 789,000 18,610,00
Thereafter -- 2,438,000 2,438,000
------------------- ------------------ ---------------- -----------------
$ 165,378,000 $ 8,549,000 $ 13,579,000 $ 187,506,000
=================== ================== ================ =================
Lease obligations reflect future minimum rental commitments required
under operating leases that have non-cancelable lease terms at September 30,
2003. Other obligations reflect contingent consideration related to our
acquisitions of certain flexible staffing agencies.
Miscellaneous
Acquisitions
- ------------
On July 8, 2003, we completed our 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
$1,237,000 in cash and additional contingent cash consideration of $1,751,000
dependent upon future earnings of the acquired entity.
On June 27, 2003, we completed our acquisition of Carewise Nursing
Agency, which specializes in supplying qualified critical care nurses to
intensive care units across NHS hospitals in the U.K. The consideration included
a payment of $91,000 in cash and additional contingent cash consideration of
$1,575,000 dependent upon future earnings of the acquired entity.
On April 11, 2003, we completed our 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 $787,000 in cash and additional contingent cash consideration of
$2,084,000 dependent upon future earnings of the acquired entity.
On March 17, 2003, we completed our acquisitions of Ablecare
Oxfordshire and Ablecare Northamptonshire, both suppliers of flexible healthcare
staffing services primarily to local authority social services departments in
the U.K. The consideration included a payment of $809,000 in cash and additional
contingent cash consideration dependent upon future earnings of the acquired
entities. In August 2003, contingent cash consideration of $630,000 was earned
and paid. No additional consideration is required in connection with this
acquisition.
On January 13, 2003, we completed our acquisition of Yorkshire
Careline, a supplier of nurses and carers to local authority social service
departments in the U.K. The consideration
37
included a payment of $965,000 in cash and additional contingent cash
consideration of $642,000 dependent upon future earnings of the acquired entity.
Such contingent consideration was earned and paid in August 2003. No additional
consideration is required in connection with this acquisition.
On November 28, 2002, we completed our acquisition of Medic-One, a
supplier of temporary staffing to the NHS hospitals and private hospitals in the
U.K. The consideration included $4,642,000 in cash, and the issuance of 670,000
shares of our company's common stock and up to approximately $14,270,000 of
additional contingent consideration based on future earnings. At September 30,
2003, our company is only obligated to issue additional contingent consideration
of up to approximately $8,169,000 dependent upon future earnings of the acquired
entity as $6,101,000 of the previous contingent consideration was unearned and
will not be required to be paid. The additional contingent consideration, if
any, will be satisfied by a combination of cash and shares of our company's
stock.
On November 18, 2002, we completed our 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 $306,000
in cash.
During fiscal 2002 we acquired, through TWUK, a total of six flexible
staffing agencies for approximately $2,184,000 in cash. The transactions
included provisions to pay additional amounts, payable in cash, of up to
$5,606,000 in contingent consideration dependent upon future earnings of the
acquired entities. Of the $5,606,000 in contingent consideration, $4,450,000 was
earned and paid in fiscal 2003. The remaining amount of contingent consideration
of $1,156,000 was unearned and will not be required to be paid.
On September 27, 2001, we acquired, through TWUK, all of the issued and
outstanding shares of Staffing Enterprise, a London-based provider of flexible
staffing of specialist nurses and other healthcare professionals to London NHS
Trust and independent hospitals. The consideration included $7,100,000 in cash,
$14,800,000 in demand notes plus an additional sum of up to approximately
$30,800,000 in contingent consideration dependent upon pre-tax profits for our
fiscal year ended September 30, 2002. We satisfied our obligation to pay this
contingent consideration by the issuance of notes payable in the first quarter
of 2003.
In addition to the acquisition of Staffing Enterprise, during fiscal
2001 we acquired, through TWUK, a total of eleven other flexible staffing
agencies for approximately $9,144,000 in cash and the issuance of $5,720,000 in
demand notes. The transactions include provisions to pay additional amounts,
payable in cash, of up to $12,993,000 in contingent consideration dependent upon
future earnings of the acquired entities. Of the $12,993,000 in contingent
consideration, $6,588,000 was earned and paid in fiscal 2002 and 2003. The
remaining amount of contingent consideration of $6,405,000 was unearned and will
not be required to be paid.
38
Dispositions
- ------------
Disposition of Home Healthcare Operations
On April 16, 2003, we disposed of the last of our U.S. operations when
we sold all of the issued and outstanding capital stock of The PromptCare
Companies, Inc. and Steri-Pharm, Inc., for approximately $8,500,000 in cash.
These two subsidiaries constituted our U.S. home healthcare operations segment.
Our home healthcare operations were concentrated in New York and New Jersey and
supplied infusion therapy, respiratory therapy and home medical equipment. In
accordance with the provisions of FAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," we have accounted for our home healthcare
operations as a discontinued operation. Our consolidated financial statements
reflect the assets and liabilities of the discontinued operations as separate
line items and the operations of our home healthcare operations for the current
and prior periods are reported in discontinued operations on our income
statement.
Disposition of Amcare
On November 22, 2000, we sold, through TWUK, Amcare Limited for
approximately $13,826,000 in cash. In the fourth quarter of fiscal 2000, we
recorded a charge for impairment of long-lived assets of approximately
$2,727,000 to reflect the write-down of the carrying value of goodwill,
originally acquired with the purchase of Amcare Limited to its fair value as
well as a tax charge of approximately $1,654,000 to reflect the tax effect of
the transaction. As a result of the completion of the transaction, we recorded
additional losses of $354,000 and realized a foreign exchange loss of $391,000
for the three months ended December 31, 2000.
Disposition of U.S. mail-order operations
In September 2000, we approved a plan to exit our U.S. mail-order
operations and effective October 3, 2000 sold certain assets of the U.S.
mail-order operations located in Jacksonville, Florida. In addition, we recorded
a $1,288,000 restructuring charge in the fourth quarter of fiscal 2000
representing the estimated costs related to exiting and closing our U.S.
mail-order operations. Based upon additional information and revised cost
benefit estimates, we recorded an additional charge of $1,900,000 in the first
quarter of fiscal 2001 to reflect the write-down of the remaining accounts
receivable to their estimated net realizable value. In addition to the
write-down, we incurred operating expenses of $1,983,000 during the year ended
September 30, 2002 in connection with closing our U.S. mail-order operations. In
fiscal 2002, we recognized income of $280,000, representing the difference
between estimated and actual costs to close and exit the business.
Litigation
- ----------
See "Item 3--Legal Proceedings."
39
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. 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 these
subsidiaries are currently responding to these audits and pursuing appeal rights
in certain circumstances.
We believe that we are in compliance, in all material respects, with
all applicable Federal, state and foreign laws and regulations. Because of the
broad and sometimes vague nature of these laws and regulations, there can be no
assurance that an enforcement action will not be brought against us, or that we
will not be found to be in violation of one or more of these laws or
regulations. At present, we cannot anticipate what impact, if any, subsequent
administrative or judicial interpretations of applicable Federal, state and
foreign laws and regulations may have on our financial position, cash flows and
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, at September 30, 2003, have recorded an accrual of
$1,117,000 to cover our estimated exposure related to these matters. We believe
that these matters should not have a material adverse impact on our financial
position, cash flows or results of operations.
Impact of Recent Accounting Standards
- -------------------------------------
In October 2001, the Financial Accounting Standards Board ("FASB")
issued FAS No. 144, "Accounting for Impairment or Disposal of Long-lived Assets"
("FAS No. 144"). 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, we adopted FAS No. 144. On
April 16, 2003, we sold all of the issued and outstanding capital stock of two
of our subsidiaries, which constituted our home healthcare operations segment.
In accordance with the provisions of FAS No. 144, we have accounted for our home
healthcare operations 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 for the year ended
September 30, 2002.
40
In June 2002, the FASB issued FAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("FAS No. 146"). 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 adoption of FAS No. 146 did not have a material impact on our
consolidated financial position or results of operations.
In November 2002, the FASB approved FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB
Statement Nos. 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 interim and annual periods ending after
December 15, 2002. The adoption of FIN 45 did not have a material impact on our
consolidated financial position or results of operations.
In December 2002, the FASB issued FAS No. 148, "Accounting for
Stock-Based Compensation--Transition Disclosure, An Amendment of FASB Statement
No. 123" ("FAS No. 148"). 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
in our financial statements. For purposes of disclosure in the footnotes to our
financial statements, 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 consolidated financial position or results
of operations for the fiscal year ended September 30, 2003.
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
41
variable interest entities created after January 31, 2003. We do not have any
variable interest entities and therefore 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"). 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 adoption of FAS No. 149 did not have a material impact on our
consolidated financial position or 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"). 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 adoption of FAS No. 150 did
not have a material impact on our consolidated financial position or results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
FOREIGN CURRENCY EXCHANGE
We face exposure to adverse movements in foreign currency exchange
rates. These exposures may change over time as business practices evolve and
could have a material adverse impact on our consolidated financial results. Our
primary exposure relates to non-U.S. dollar denominated sales in the U.K. where
the principal currency is pounds sterling and to the pounds sterling debt
denominated obligations. See "Interest Rate Risk" below for debt obligations
principal cash flows and related weighted average interest rates by expected
maturity dates. Currently, we do not hedge foreign currency exchange rate
exposures.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relate
primarily to our cash equivalents and our U.K. subsidiaries' December 17, 1999
financing, which includes the Senior Credit Facility and Mezzanine Loan. Our
cash equivalents include highly liquid short-term investments purchased with
initial maturities of 90 days or less. We are subject to fluctuating interest
rates that may impact our consolidated results of operations or cash flows for
our variable rate Senior Credit Facility, Mezzanine Loan and cash equivalents.
In accordance with provisions of the documents governing the financing, on
January 25, 2000, we hedged the interest rate (LIBOR cap of 9%) on approximately
$41,935,000 of our floating rate debt in a contract, which expired on June 30,
2003.
42
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 $83,355,000
of our floating rate debt in a contract, which expires March 20, 2008. In
accordance with FAS No. 133, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," as amended by FAS No. 138 and related
implementation guidance, we have calculated the fair value of the interest cap
and floor derivative to be a liability of $211,000 at September 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.
As of September 30, 2003, our Series A preferred stock (with an
aggregate liquidation preference of $35,213,000) bears dividends at the per
share rate of 9.375% of $4.53 per annum. In addition, we had notes payable of
$37,693,000, which were issued in connection with the acquisition of several
U.K. flexible staffing agencies. The notes payable are redeemable, at the
holder's option, in fiscal 2004 and bear interest ranging from 2.65% to 5.25% at
September 30, 2003. The table below represents the expected maturity of our
variable rate debt and their weighted average interest rates at September 30,
2003.
Expected Weighted Average
Fiscal Maturity Rate
------------------------------------------------------
2004 $ 9,005,000 LIBOR +1.82%
2005 11,670,000 LIBOR +2.00%
2006 30,841,000 LIBOR +3.22%
2007 58,348,000 LIBOR +3.50%
2008 17,821,000 LIBOR +7.00%
Thereafter --
-------------
$127,685,000 LIBOR +3.66%
= = = = = = =
The aggregate fair value of our debt was estimated based on quoted
market prices for the same or similar issues and was approximately $166,772,000
at September 30, 2003.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and required financial statement
schedule of our company are located beginning on page F-1 of this Annual Report
on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On April 10, 2003, we dismissed Ernst & Young LLP, independent
accountants, as our auditor. On April 10, 2003, we engaged the firm of Deloitte
& Touche LLP, independent accountants, as our auditor.
43
The reports of Ernst & Young LLP on our financial statements for our
fiscal years ended September 30, 2001 and September 30, 2002 did not contain an
adverse opinion or a disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principles.
The decision to change auditors was approved by both our board of
directors and the Audit Committee thereof.
In connection with Ernst & Young LLP's audits of our financial
statements for our fiscal years ended September 20, 2001 and September 30, 2002,
and during the subsequent interim period preceding April 10, 2003, there were no
disagreements with Ernst & Young LLP on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which,
if not resolved to the satisfaction of Ernst & Young LLP, would have caused
Ernst & Young LLP to make reference thereto in its reports on our financial
statements for such periods.
During our fiscal years ended September 30, 2001 and September 30,
2002, and during the subsequent interim period preceding April 10, 2003, there
were no "reportable events" (as such term defined in Item 304 (a)(1)(v) of
Regulation S-K promulgated by the Securities and Exchange Commission) involving
Ernst & Young LLP.
During our fiscal years ended September 30, 2001 and September 30,
2002, and during the subsequent interim period preceding April 10, 2003, neither
we nor anyone on our behalf consulted Deloitte & Touche LLP regarding any of the
matters set forth in Item 304(a)(2) of Regulation S-K promulgated by the
Securities and Exchange Commission.
Ernst & Young LLP provided us with a copy of a letter, dated April 14,
2003, addressed to the Securities and Exchange Commission stating that it is in
agreement with the statements contained in the first sentence of the first
paragraph above and the statements contained in the second, fourth and fifth
paragraphs above and that it has no basis to agree or disagree with the other
statements contained in the first through sixth paragraphs above. A copy of such
letter is filed as an exhibit to this Annual Report on Form 10-K.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures. Our company's
management, with the participation of our chief executive officer and our acting
chief financial officer, has evaluated the effectiveness of our disclosure
controls and procedures as of September 30, 2003.
Under the rules of the Securities and Exchange Commission, "disclosure
controls and procedures" are controls and other procedures that are designed to
ensure that information required to be disclosed in the reports that we file or
submit under the Securities Exchange Act of 1934, such as this Annual Report on
Form 10-K, 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
44
we file or submit under the Securities Exchange Act of 1934 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 September 30, 2003, our disclosure
controls and procedures were effective to ensure that the information we are
required to disclose in reports that we file or submit to the Securities and
Exchange Commission is recorded, processed, summarized and reported within the
time periods specified under the rules and forms of the Securities and Exchange
Commission.
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 Securities Exchange Act of 1934)
during the quarter ended September 30, 2003 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
OUR DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the
directors and officers of our company:
NAME AGE POSITIONS WITH OUR COMPANY
Timothy M. Aitken 59 Chairman of the Board and Chief
Executive Officer
Sarah L. Eames 45 Director, President and Chief
Operating Officer
Charles F. Murphy 50 Acting Chief Financial Officer
Leslie J. Levinson 48 Secretary
G. Richard Green 64 Director
David J. Macfarlane 57 Director
John W. Matthews 59 Director
Wayne Palladino 45 Director
Jeffrey S. Peris 57 Director
Scott A. Shay 46 Director
Certain biographical information regarding each director and officer is
set forth below:
Timothy M. Aitken has served as chairman of the board and chief
executive officer of our company since January 15, 1997. Prior to joining our
company, Mr. Aitken served as an independent consultant to the healthcare
industry from November 1995 until January 1997.
45
From June 1995 until November 1995, Mr. Aitken served as the vice chairman and
president of Apria Healthcare Group, Inc., a California-based home healthcare
company. He also served as chairman of the board of Omnicare plc from September
1995 until its acquisition by our company. From 1990 until June 1995, Mr. Aitken
served as chairman of the board, president and chief executive officer of Abbey
Healthcare Group Inc., a California-based home healthcare company.
Sarah L. Eames has served as a director of our company since June 2002,
as chief operating officer of our company since June 2001, as president of our
company since May 1998, and as executive vice president of business development
and marketing of our company from June 1997 to May 1998. Prior to joining our
company, Ms. Eames was employed by Johnson & Johnson Professional, Inc. as a
business development consultant from 1996 to 1997. From June 1995 until November
1995, Ms. Eames served as vice president of marketing for Apria Healthcare
Group, Inc., a California-based home healthcare company. From 1980 until June
1995, Ms. Eames held various marketing and business development positions at
Abbey Healthcare Group Inc., a predecessor company of Apria Healthcare Group,
Inc.
Charles F. Murphy has served as acting chief financial officer of our
company since May 2003. From October 1999 to May 2003, Mr. Murphy served as
chief financial officer of our company's U.K. operations. From 1997 to 1999, Mr.
Murphy was a principal of Visual Networks Limited, a technology company. From
1994 to 1997, he was finance director of Exceler Healthcare Group, a nursing
home company. From 1987 to 1994, Mr. Murphy was a partner at PriceWaterhouse, an
accounting firm.
Leslie J. Levinson has served as secretary of our company since
September 1999 and had previously served in such capacity from October 1990 to
July 1997. Since January 2002, he has been a partner in the law firm of Brown
Raysman Millstein Felder & Steiner LLP, which firm serves as counsel to our
company. From June 1991 until January 2002, he was a partner in the law firm of
Baer Marks & Upham LLP, which firm served as counsel to our company.
G. Richard Green has been a director of our company since August 1998
and is currently a director of Allied Healthcare (UK) and TWUK. Mr. Green has
been the chairman since 1987 and a director since 1960 of J.H. & F.W. Green
Ltd., a conglomerate based in the U.K. Since 1960, Mr. Green has held various
positions at J.H. & F.W. Green Ltd. and several of its subsidiaries. Mr. Green
was also a director of Abbey Healthcare Group, Inc. from 1991 to 1995. He also
held directorships of Omnicare Limited and Medigas Limited, subsidiaries of our
company, from 1993 to 1996.
David John Macfarlane has been a director of our company since June
2002. Mr. Macfarlane is of counsel to Ashurst, a law firm in London, where he
has worked since 1986. Ashurst has provided legal services to our company,
including in the fiscal year ended September 30, 2003.
John Waylett Matthews has been a director of our company since June
2002. Mr. Matthews has been a director of Crest Nicholson plc, a U.K.
residential and commercial development company, since 1992 and the chairman
thereof since 1996. Mr. Matthews is a
46
director of Regus plc, which leases office space and related services, such as
videoconferencing. Mr. Matthews has indicated that he intends to resign from the
board of directors effective January 1, 2004.
Wayne Palladino has been a director of our company since September
2003. Mr. Palladino has been a director of client portfolio services at Pzena
Investment Management LLC, an asset management firm, since June 2002. From
August 2000 until June 2002, he was a senior vice president and chief financial
officer of Lillian Vernon Corporation, a catalog retailer. Mr. Palladino was a
vice president of our company from February 1991 to September 1996, senior vice
president of our company from September 1996 to August 2000 and chief financial
officer of our company from February 1991 to August 2000.
Jeffrey S. Peris has been a director of our company since May 1998. Dr.
Peris has been the vice president of human resources and chief learning officer
of Wyeth (formerly American Home Products Corporation), a pharmaceutical
company, since May 2001. Dr. Peris was the vice president of business operation
of Knoll Pharmaceutical (Abbott Laboratories), a pharmaceutical company, where
he was responsible for human resources and corporate communications from April
1998 until May 2001. Dr. Peris was a management consultant to various Fortune
100 companies from May 1997 until April 1998. From 1972 until May 1997, Dr.
Peris was employed by Merck & Co., Inc. a pharmaceutical company, where he
served as the executive director of human resources from 1985 until May 1997,
the executive director of marketing from 1976 until 1985, and the director of
clinical biostatistics and research data systems from 1972 until 1976.
Scott A. Shay has been a director of our company since January 1996 and
served as acting chairman of the board of our company from September 1996 until
January 1997. Mr. Shay has
47
been a managing director of Ranieri & Co., Inc., a private investment advisor
and management corporation, since its formation in 1988. Mr. Shay currently
serves as the chairman of the board of Signature Bank, a subsidiary of Bank
Hapoalim, and is currently a director of Allied Healthcare (UK) and TWUK, both
of which are subsidiaries of our company, Bank Hapoalim B.M., in Tel Aviv,
Israel, and Super Derivatives, Inc., as well as an officer or director of other
direct and indirect subsidiaries of Hyperion Partners II, L.P. Prior to joining
Ranieri & Co., Inc., Mr. Shay was a director of Salomon Brothers Inc., where he
was employed from 1980 to 1988.
The holders of the Series A preferred stock, voting together as a
separate class, are currently entitled to elect one director to our board of
directors. See "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--
Borrowings--Series A Preferred Stock." Frederick S. Moseley IV, who served as
a director of our company from July 2002 until his resignation on December 24,
2003, was elected by the holders of the Series A preferred stock. Pursuant to
the provisions of our certificate of incorporation relating to the Series A
preferred stock, the vacancy on the board created by Mr. Moseley's resignation
may only be filled by the holders of the Series A preferred stock, voting
together as a separate class. At the request of Triumph Partners III, L.P. and
Triumph III Investors, L.P., Mr. Moseley may attend board meetings as a
non-voting observer.
All directors of our company (other than the director elected by of the
holders of the Series A preferred stock) are elected by the shareholders for a
one-year term and hold office until their successors are elected and qualified
or until their earlier death, resignation or removal. Officers are chosen by and
serve at the discretion of the board of directors. There are no family
relationships among our directors and officers.
All directors who are not employees of our company are entitled to
receive a fee of $10,000 per annum, plus reimbursement of expenses incurred as a
result of acting as a director or as a member of any committee of our board of
directors. In addition, effective as of November 25, 2003, Mr. Palladino is
entitled to receive, for serving as chairman of the Audit Committee, an
additional $6,000 per annum and $1,000 per Audit Committee meeting attended in
person or by telephone conference call and Mr. Macfarlane is entitled to an
additional director's fee of $10,000 per year for advising on U.K. governance
and related matters.
Other than Timothy M. Aitken and Sarah L. Eames none of our company's
executive officers have employment agreements. For more information, see "Item
11--Executive Compensation--Employment Agreements; Termination of Employment and
Change-in-Control Arrangements."
MEETINGS OF THE BOARD OF DIRECTORS
The business affairs of our company are managed under the direction of
our board of directors. Members of the board of directors are informed about our
company's affairs through various reports and documents distributed to them,
through operating and financial reports routinely presented at meetings of the
board of directors and committee meetings by the chairman and other officers,
and through other means. In addition, directors of our company discharge their
duties throughout the year not only by attending board of directors' meetings,
but also through personal meetings and other communications, including telephone
contact with the chairman of the board and others regarding matters of interest
and concern to our company.
During our fiscal year ended September 30, 2003, our company's board of
directors held eight formal meetings and acted by unanimous written consent in
lieu of a meeting on nine separate occasions during that period. During our
fiscal year ended September 30, 2003, no director attended fewer than 75% of the
board meetings and any applicable committee meetings.
48
BOARD COMMITTEES
The board of directors has an Audit Committee and a Compensation
Committee but does not currently have a nominating committee. The members of
each committee are appointed by the board of directors.
Audit Committee. The Audit Committee assists our board of directors in
monitoring (1) the integrity of our financial statements, (2) our compliance
with legal and regulatory requirements, and (3) the independence and performance
of our independent auditors. The current written charter for the Audit Committee
was adopted by our board of directors on May 10, 2000 and is attached as an
exhibit to the proxy statement relating to our 2000 annual meeting of
shareholders. On December 1, 2003, the Securities and Exchange Commission
approved changes to the corporate governance rules of the American Stock
Exchange, including the rules relating to the composition and functions of the
Audit Committee. Our board of directors intends to revise, as appropriate, the
Audit Committee's charter to comply with these new rules, as well as other
recent legal developments impacting audit committees.
The Audit Committee consists of Messrs. Green, Matthews, Palladino and
Peris. Mr. Palladino serves as chairman of the Audit Committee. The members of
the Audit Committee are independent, as defined in Section 121(A) of the
American Stock Exchange's listing standards. The board of directors has
determined that Wayne Palladino is an "audit committee financial expert," as
such term is defined in Item 401(h) of Regulation S-K promulgated by the
Securities and Exchange Commission.
The Audit Committee was in session during each of the eight formal
meetings of our company's board of directors during our fiscal year ended
September 30, 2003 and also met on four separate occasions during that period.
Compensation Committee. The Compensation Committee reviews and approves
overall policy with respect to compensation matters, including such matters as
compensation plans for employees and employment agreements and compensation for
executive officers. The Compensation Committee currently consists of Messrs.
Green and Shay. The Compensation Committee was in session during each of the
eight formal meetings of our company's board of directors during our fiscal year
ended September 30, 2003 and also met on two separate occasions during that
period.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 and the rules
thereunder promulgated by the Securities and Exchange Commission require the
reporting of transactions in our equity securities by our directors and certain
of our officers and by shareholders who beneficially own more than 10% of our
common stock (collectively, the "Reporting Persons"). Section 16(a) and the
rules thereunder require the Reporting Persons to report initial statements of
ownership of our equity securities on Form 3 and changes in ownership of our
equity
49
securities on Form 4 or Form 5. Based solely on a review of these reports
received by us from the Reporting Persons and written representations from our
directors and officers that no Forms 5 were required to be filed by them in
respect of our fiscal year ended September 30, 2003, we believe that no
Reporting Person failed to file a Section 16 report on a timely basis during our
fiscal year ended September 30, 2003, other than Timothy M. Aitken, Sarah L.
Eames and Charles F. Murphy, each of whom filed one Form 4 one day late. Each
such Form 4 reported one transaction in our equity securities.
Hyperion TWH Fund LLC, which together with its affiliates owns more
than 10% of our common stock, failed to file a Form 4 disclosing one transaction
in our equity securities in our fiscal year ended September 30, 2002. Scott A.
Shay, a director of our company and an affiliate of Hyperion TWH Fund LLC, also
failed to file a Form 4 with respect to the same transaction. Both Hyperion TWH
Fund LLC and Mr. Shay subsequently filed a late Form 5 disclosing the
transaction.
CODE OF CONDUCT
In September 2003, our board of directors adopted a Code of Conduct
that applies to all of our directors, officers and employees, including our
chief executive officer and our acting chief financial officer. As required by
the regulations of the Securities and Exchange Commission, the Code of Conduct
is designed to deter wrongdoing and to promote:
(1) honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between personal and professional
relationships;
(2) full, fair, accurate, timely, and understandable disclosure in
reports and documents that we file with, or submit to, the Securities and
Exchange Commission and in other public communications made by us;
(3) compliance with applicable governmental laws, rules and
regulations;
(4) the prompt internal reporting of violations of the Code of
Conduct to the Audit Committee; and
(5) accountability for adherence to the Code of Conduct.
A copy of our Code of Conduct is filed as an exhibit to this Annual
Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes all compensation earned by or paid to
our chief executive officer and each of the other most highly compensated
executive officers of our company whose total annual salary and bonus
compensation exceeded $100,000, who we refer to as the Named Officers, for
services rendered in all capacities to our company in respect of our fiscal
years ended September 30, 2003, 2002 and 2001.
50
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION AWARDS
ANNUAL ---------------------------------
COMPENSATION RESTRICTED SECURITIES
NAME AND FISCAL -------------------------------- STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS AWARDS($) OPTIONS (#) COMPENSATION
Timothy M. Aitken 2003 $420,000 $230,000(5) -- 384,000 $9,750(10)
Chairman of the 2002 380,000 4,214,592(6) -- -- 9,000(10)
Board and Chief 2001 360,089 150,000(7) -- 195,000 18,378(11)
Executive Officer
Sarah L. Eames(1) 2003 $405,000 $270,000(5) -- 334,000 $8,450(10)
President and Chief 2002 365,000 3,049,793(8) -- -- 7,800(10)
Operating Officer 2001 333,654 150,000(7) -- 150,000 9,099(11)
Charles F. Murphy, 2003 $ 90,096 $ 80,085 -- 99,000 $2,177(11)
Acting Chief
Financial Officer(2)
Daniel A. Bergeron(3) 2003 $135,754(4) $0 -- 100,000(9) $0
Former Vice
President and Chief
Financial Officer
- -----------------
(1) Ms. Eames became a director of our company in June 2002, chief
operating officer of our company in June 2001 and president of our
company in May 1998.
(2) Mr. Murphy became acting chief financial officer of our company on May
16, 2003.
(3) Mr. Bergeron served as vice president and chief financial officer of
our company from November 4, 2002 until May 16, 2003.
(4) Includes $11,908 paid in respect of accrued vacation.
(5) Paid in fiscal 2004 as a bonus for fiscal 2003.
(6) Consists of (a) $150,000 cash paid in fiscal 2002 as a bonus for fiscal
2001, (b) $200,000 cash paid in fiscal 2003 as a bonus for fiscal 2002,
and (c) the value of shares of our common stock issued in the bonus
share issuance described below and the related cash payment made to Mr.
Aitken to enable him to pay the income taxes arising from such
issuance.
(7) Paid in fiscal 2001 as a bonus for fiscal 2000.
(8) Consists of (a) $200,000 cash paid in fiscal 2002 as a bonus for fiscal
2001, (b) $250,000 cash paid in fiscal 2003 as a bonus for fiscal 2002,
and (c) the value of shares of our common stock issued in the bonus
share issuance described below and the related cash payment made to Ms.
Eames to enable her to pay the income taxes arising from such issuance.
(9) Mr. Bergeron resigned as vice president and chief financial officer of
our company in May 2003,
51
without such options ever having vested.
(10) Reflects payments for car allowances.
(11) Reflects payment for car allowances and reimbursement of certain travel
expenses.
The Bonus Share Issuance and Related Transactions
Prior to the Reorganization in July 2002, Mr. Aitken, Ms. Eames and
others held redeemable shares of TWUK. The holders of the redeemable shares
other than Mr. Aitken and Ms. Eames exchanged their redeemable shares for shares
of our common stock in the Reorganization on a tax-free basis. Had Mr. Aitken
and Ms. Eames exchanged their redeemable shares for shares of our common stock
in the Reorganization, they would have received 684,258 and 487,099 shares of
our common stock, respectively, based on the number of redeemable shares held by
them. However, just prior to the execution of the reorganization agreement, we
learned that these officers would in fact, unlike the other holders of the
redeemable shares, be liable for U.S. taxes if they exchanged their redeemable
shares for shares of common stock in the reorganization.
In order to address this matter, Mr. Aitken and Ms. Eames surrendered
their redeemable shares for nominal value and we issued to Mr. Aitken and Ms.
Eames 684,258 shares of common stock (valued at $2,463,329) and 487,099 shares
of common stock (value at $1,753,556), respectively, as bonus shares, together
with cash bonuses and loans in an amount roughly equal to the income taxes
payable by them in respect of such share issuances (grossed-up to reflect the
related cash bonuses). Accordingly, in fiscal 2002 we made cash bonus payments
to Mr. Aitken and Ms. Eames in the amount of $1,401,263 and $846,237,
respectively, and loaned Mr. Aitken and Ms. Eames the amount of $550,000 and
$390,000, respectively. The cash bonus payments and loans from us to Mr. Aitken
and Ms. Eames were used by them to pay their income taxes arising from the bonus
share issuance.
The following table sets forth certain information regarding individual
options granted during fiscal 2003 to each of the Named Officers pursuant to our
2002 Stock Option Plan. During fiscal 2003 we did not grant stock appreciation
rights to any of our Named Executive Officers or any other employee. In
accordance with the rules of the Securities and Exchange Commission, the table
sets forth the hypothetical gains or "option spreads" that would exist for the
options at the end of their respective terms. These gains are based on assumed
rates of annual compound stock price appreciation of 5% and 10% from the date
the option was granted to the end of the option's term.
52
OPTION GRANTS IN FISCAL 2003
POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENTAGE OF AT ASSUMED ANNUAL RATES
SECURITIES TOTAL OPTIONS OF STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION FOR OPTION
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION TERM(2)
NAME GRANTED FISCAL YEAR PER SHARE(1) DATE 5% 10%
---- ------- ----------- --------- ---- -------------------------------
Timothy M. Aitken 60,000(3) 4.2% $4.70 11/13/12 $177,348 $449,435
24,000(4) 1.7% 4.00 6/3/13 60,374 152,999
300,000(5) 21.2% 4.00 9/25/13 754,674 1,912,491
------- ---- ------- ---------
Totals: 384,000 27.1% 992,396 2,514,925
Sarah L. Eames 60,000(3) 4.2% 4.70 11/13/12 177,348 449,435
24,000(4) 1.7% 4.00 6/3/13 60,374 152,999
250,000(5) 17.7% 4.00 9/25/13 628,895 1,593,742
------- ---- ------- ---------
Totals: 334,000 23.6% 866,617 2,196,176
Charles F. Murphy 75,000(3) 5.3% 4.70 11/13/12 221,685 561,794
24,000(4) 1.7% 4.00 6/3/13 60,374 152,999
------- --- ------ -------
Totals: 99,000 7.0% 282,059 714,793
Daniel A. Bergeron 100,000(3)(6) 7.1% 4.70 11/13/12 295,580 749,059
- ------------------
(1) Options were granted at an exercise price equal to the closing price of a
share of our common stock on the American Stock Exchange on the date of
grant.
(2) The 5% and 10% assumed annual compound rates of stock price appreciation
are mandated by the Securities and Exchange Commission and do not
represent our company's estimate or projection of future common stock
prices.
(3) The options, which were granted on November 13, 2002, vest in three equal
annual installments beginning on the first anniversary of the date of
grant.
(4) The options, which were granted on June 3, 2003, vest in three equal
annual installments beginning on the first anniversary of the date of
grant.
(5) The options, which were granted on September 25, 2003, vest in three equal
annual installments beginning on the date of grant.
(6) Mr. Bergeron resigned as vice president and chief financial officer of our
company in May 2003, without such options ever having vested.
We have granted options to certain of our directors and executive
officers after September 30, 2003. See "Item 13--Certain Relationships and
Related Transactions--Other Transactions with Directors and Executive
Officers."
The following table sets forth certain information with respect to
our Named Officers concerning the exercise of options by them during our
fiscal year ended September 30, 2003 and unexercised options held by them
as of September 30, 2003. We have never granted stock appreciation rights
to any of our Named Executive Officers or any other employee.
53
AGGREGATE OPTION EXERCISES IN FISCAL 2003
AND 2003 FISCAL YEAR-END OPTION VALUES
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END(3)
ACQUIRED ON VALUE
NAME EXERCISE REALIZED(2) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- -------- ----------- ------------------------- -------------------------
Timothy M. Aitken 150,000(1) $213,750 795,000/284,000 $423,150/0
Sarah L. Eames 100,000(1) 142,500 233,333/250,667 325,500/0
Charles F. Murphy -- -- 0/99,000 0/0
Daniel A. Bergeron -- -- 0/0 0/0
- ---------------
(1) Represents the aggregate amount of shares acquired upon exercise of the
options. A portion of the shares acquired upon exercise were withheld to
pay the exercise price of the options. As a result, the net amount of
shares of our common stock acquired by Mr. Aitken and Ms. Eames upon
exercise of their options was 52,778 shares and 35,185 shares,
respectively.
(2) Calculated by multiplying the number of shares acquired on exercise, as
set forth in the previous column, by the difference between (a) the
closing sales price of our common stock, as reported on the American Stock
Exchange, immediately preceding the exercise, and (b) the exercise price
of the options that were exercised.
(3) Calculated on the basis of $3.92 per share, the closing sale price of our
common stock, as reported on the American Stock Exchange on September 30,
2003, minus the exercise price.
COMPENSATION OF DIRECTORS
See "Item 10--Directors and Executive Officers of the Registrant--Our
Directors and Executive Officers" with respect to compensation of non-employee
directors.
EMPLOYMENT AGREEMENTS; TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
In September 2001, we entered into employment agreements with Mr.
Aitken and Ms. Eames. The agreements have a three-year term (subject to
automatic renewal for successive additional one-year periods unless either party
provides the other with notice of intent to terminate the agreement at least 90
days before the then applicable termination date). The agreements provide for a
base salary of $380,000 and $365,000 for Mr. Aitken and Ms. Eames, respectively,
during the first year of the term of the agreements. Each of the agreements
provides that our company will negotiate in good faith, commencing not less than
90 days prior to each anniversary date of the employment agreements, the amount,
if any, of future salary increases. The salary of Mr. Aitken for fiscal 2003 was
$420,000 and the salary for Ms. Eames
54
for fiscal 2003 was $405,000. Each agreement provides that if the officer's
employment is terminated during the term of the agreement other than for cause,
death or disability, or if, within six months of a "change in control" (as
defined in the agreements) of our company, the officer or our company terminates
the officer's employment, then (1) all stock options in our company held by the
officer shall immediately vest and (2) the officer will be entitled to receive a
cash payment of 2.9 times his or her average annual base salary during the
twelve months preceding the change of control or the termination of employment.
In addition, certain of Mr. Aitken's and Ms. Eames' stock option agreements
provide that the options covered thereby shall vest immediately upon a "change
of control" (as such term is defined in their respective employment agreement).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors currently consists
of Messrs. Shay and Green. Until December 24, 2003, when he resigned from the
board of directors, Mr. Moseley was a member of the Compensation Committee. Mr.
Shay, among others, is a control person of Hyperion Partners II, L.P., Hyperion
TW Fund L.P., Hyperion TWH Fund LLC and Hyperion TWH Fund II LLC, each of which
are principal shareholders of our company. Mr. Moseley, among others, controls
Triumph Partners III, L.P. and Triumph III Investors, L.P., each of which are
principal shareholders of our company. See "Item 13--Certain Relationships and
Related Transactions" for a description of certain transactions between our
company and Triumph Partners III, L.P. and Triumph III Investors, L.P.
STOCK OPTION PLANS
1992 and 2002 Stock Option Plans
In July 1992, the board of directors and shareholders approved the
Transworld Healthcare 1992 Stock Option Plan, which we refer to as the 1992
Stock Option Plan. The 1992 Stock Option Plan, which is substantially similar to
our 2002 Stock Option Plan discussed below, provided for the grant of options to
key employees, officers, directors and non-employee independent contractors of
our company. Effective with the adoption by our shareholders of our 2002 Stock
Option Plan in June 2002, no further options may be granted under the 1992 Stock
Option Plan. Outstanding options granted under the 1992 Stock Option Plan may be
exercised in accordance with the terms of the 1992 Stock Option Plan.
On March 14, 2002, the board of directors adopted, and in June 2002 the
shareholders of our company approved, our 2002 Stock Option Plan. Options
granted under the 2002 Stock Option Plan may be either incentive stock options,
which we refer to as Incentive Options, which are intended to meet the
requirements of section 422 of the Internal Revenue Code of 1986 or options that
do not qualify as Incentive Options, which we refer to as Non-Qualified Options.
Under the 2002 Stock Option Plan, the Compensation Committee may grant (1)
Incentive Options at an exercise price per share which is not less than the fair
market value of a share of common stock on the date on which such Incentive
Options are granted (and not less than 110% of the fair market value in the case
of any optionee who beneficially owns more than 10% of the total combined voting
power of our company) and (2) Non-Qualified Options at an exercise price per
share which is determined by the Compensation Committee (and which may be less
than the fair market value of a share of common stock on the date on which such
Non-Qualified Options
55
are granted). The 2002 Stock Option Plan further provides that the maximum
period in which options may be exercised will be determined by the Compensation
Committee, except that Incentive Options may not be exercised after the
expiration of ten years from the date the Incentive Option was initially granted
(and five years in the case of any optionee who beneficially owns more than 10%
of the total combined voting power of our company). Under the 2002 Stock Option
Plan, if an optionee's employment is terminated, generally the unexercised
Incentive Options must be exercised within three months after termination.
However, if the termination is due to the optionee's death or permanent
disability, the option must be exercised within one year of the termination of
employment. If we terminate the optionee's employment for cause by, or if the
optionee voluntarily terminates his employment, generally his options will
expire as of the termination date. Any option granted under the 2002 Option
Stock Plan will be nontransferable, except by will or by the laws of descent and
distribution, and generally may be exercised upon payment of the option price in
cash or by delivery of shares of common stock with a fair market value equal to
the option price.
Shares delivered under the 2002 Stock Option Plan will be available
from authorized but unissued shares of common stock or from shares of common
stock reacquired by our company. Shares of common stock that are subject to
options under the 2002 Stock Option Plan which have terminated or expired
unexercised will return to the pool of shares available for issuance under the
2002 Stock Option Plan.
At October 1, 2002, there were 3,002,000 options available for grant
under the 2002 Stock Option Plan and at September 30, 2003 there were 1,814,000
options available for grant under such plan.
1997 Non-Employee Director Plan
In May 1997, our board of directors adopted the 1997 Option Plan for
Non-Employee Directors, which we refer to as the Director Plan, pursuant to
which 100,000 shares of common stock of our company were reserved for issuance
upon the exercise of options granted to non-employee directors of our company.
The purpose of the Director Plan is to encourage ownership of common stock by
non-employee directors of our company whose continued services are considered
essential to our company's future progress and to provide them with a further
incentive to remain as directors of our company. The Director Plan is
administered by the board of directors. Directors of our company who are not
employees of our company or any subsidiary or affiliate of our company are
eligible to participate in the Director Plan. The Director Plan will terminate
in May 2007; however, options outstanding on the expiration of the term shall
continue to have full force and effect in accordance with the provisions of the
instruments evidencing such options. The board of directors may suspend,
terminate, revise or amend the Director Plan, subject to certain limitations.
Under the Director Plan, the board of directors may from time to time
at its discretion determine which of the eligible directors should receive
options, the number of shares subject to such options and the dates on which
such options are to be granted. Each such option is immediately exercisable for
a period of ten years from the date of grant generally, but may not be exercised
more than 90 days after the date an optionee ceases to serve as a director of
our
56
company. Options granted under the Director Plan are not transferable by the
optionee other than by will, laws of descent and distribution, or as required by
law.
Shares of common stock may be purchased from our company upon the
exercise of an option by payment in cash or cash equivalent, through the
delivery of shares of common stock having a fair market value equal to the cash
exercise price of the option or any combination of the above, subject to the
discretion of the board of directors.
INDEMNIFICATION
As permitted under the Business Corporation Law of the State of New
York, our Certificate of Incorporation provides that a director of our company
will not be personally liable to our company or our shareholders for monetary
damages for breach of a fiduciary duty owed to our company or our shareholders.
By its terms and in accordance with the law of the State of New York, however,
this provision does not eliminate or otherwise limit the liability of a director
of our company for any breach of duty based upon (1) an act or omission (a)
resulting from acts committed in bad faith or involving intentional misconduct
or involving a knowing violation of law or (b) from which the director
personally derived a financial benefit to which he was not legally entitled, or
(2) an improper declaration of dividends or purchases of our securities or such
other violation of section 719 of the Business Corporation Law of the State of
New York.
Our Certificate of Incorporation and Bylaws provide that our company
shall indemnify its directors and officers to the fullest extent permitted by
New York law. In addition, w have entered into indemnification agreements with
each of our directors and officers and we maintain directors' and officers'
liability insurance.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth the number of shares of common stock and
Series A preferred stock, and the percentage of voting stock, beneficially owned
as of December 26, 2003, by (1) each of our "named executive officers," as
defined under the rules of the Securities and Exchange Commission; (2) each
director of our company; (3) all persons known by us to be the beneficial owner
of more than 5% of our outstanding voting stock; and (4) all directors and named
executive officers of our company as a group (10 persons).
NUMBER OF NUMBER
COMMON OF SERIES A PERCENTAGE OF
SHARES PREFERRED VOTING SHARES
BENEFICIALLY SHARES BENEFICIALLY BENEFICIALLY
NAME OWNED(1) OWNED OWNED(2)
Timothy M. Aitken................................. 1,841,173(3) 174,400(4) 6.5%
Sarah L. Eames.................................... 1,008,971(5) 21,580 3.4%
Daniel A. Bergeron................................ -- -- --
Charles F. Murphy................................. 93,099(6) 17,440 *
57
NUMBER OF NUMBER
COMMON OF SERIES A PERCENTAGE OF
SHARES PREFERRED VOTING SHARES
BENEFICIALLY SHARES BENEFICIALLY BENEFICIALLY
NAME OWNED(1) OWNED OWNED(2)
G. Richard Green.................................. 70,414(7) 17,440(8) *
David J. Macfarlane............................... 6,000(9) -- *
John W. Matthews.................................. 4,000(10) -- *
Wayne Palladino................................... 682(11) 5,232 *
Jeffrey S. Peris.................................. 9,333(12) -- *
Scott A. Shay..................................... 11,860,610(13) -- 39.7%
Hyperion Partners II L.P. ........................ 11,860,610(14) -- 39.7%
Hyperion TW Fund L.P. ............................ 11,860,610(15) -- 39.7%
Hyperion TWH Fund LLC ............................ 11,860,610(16) -- 39.7%
Hyperion TWH Fund II LLC.................... 11,860,610(17) -- 39.7%
Triumph Partners III, L.P. ....................... 1,163,870(18) 6,627,200(19) 26.1%
Triumph III Investors, L.P. ...................... 1,163,870(18) 6,627,200(19) 26.1%
All current executive officers and
directors as a group (9 persons)................. 14,894,282(20) 236,092 47.8%
- ---------------------------------------------
* Less than 1%.
(1) Does not include the shares of common stock issuable upon conversion of
the Series A preferred stock.
(2) As of December 26, 2003, the voting shares of our company consist of
22,104,628 outstanding shares of common stock and 7,773,660 outstanding
shares of Series A preferred stock. The percentage given for each
shareholder assumes that such shareholder has exercised the options held
by him that are exercisable within 60 days of December 26, 2003, but that
no other shareholders have exercised the options held by them.
(3) Consists of 644,807 shares of common stock held by Mr. Aitken, 11,366
shares of common stock held by Aitken (English) Company Limited, an
affiliate of Mr. Aitken, 20,000 shares held by the Aitken Living Trust, a
trust of which Mr. Aitken is the sole beneficiary and the sole trustee,
and 1,165,000 shares subject to options held by Mr. Aitken that are
exercisable within 60 days of December 26, 2003. Does not include an
additional 264,000 shares subject to options held by Mr. Aitken that are
not exercisable within 60 days of December 26, 2003.
(4) Consists of 87,200 shares of Series A preferred stock held by Mr. Aitken
and 87,200 shares of Series A preferred stock held by Aitken (English)
Company Limited, an affiliate of Mr. Aitken.
(5) Consists of 451,638 shares of common stock held by Ms. Eames, 4,000 shares
of common stock held jointly by Ms. Eames and her husband and 553,333
shares subject to options held by Ms. Eames that are exercisable within 60
days of December 26, 2003. Does not include an additional 230,667 shares
subject to options held by Ms. Eames that are not exercisable within 60
days of December 26, 2003.
58
(6) Consists of 68,099 shares of common stock held by Mr. Murphy and 25,000
shares subject to options held by Mr. Murphy that are exercisable within
60 days of December 26, 2003. Does not include an additional 74,000 shares
subject to options held by Mr. Murphy that are not exercisable within 60
days of December 26, 2003.
(7) Consists of 60,995 shares of common stock held by Mr. Green, 1,819 shares
of common stock held by Orion Nominees Limited, an affiliate of Mr. Green,
5,000 shares subject to options held by Mr. Green that are exercisable
within 60 days of December 26, 2003 and 2,600 shares owned of record by
Mr. Green's wife, as to which Mr. Green disclaims beneficial ownership.
Mr. Green shares voting and dispositive power over the shares of common
stock held by Orion Nominees Limited.
(8) Consists of 17,440 shares of Series A preferred stock held by Orion
Nominees Limited, an affiliate of Mr. Green. Mr. Green shares voting and
dispositive power over the shares of Series A preferred stock held by
Orion Nominees Limited.
(9) Consists of 6,000 shares subject to options held by Mr. Macfarlane that
are exercisable within 60 days of December 26, 2003. Does not include an
additional 12,000 shares subject to options held by Mr. Macfarlane that
are not exercisable within 60 days of December 26, 2003.
(10) Consists of 4,000 shares subject to options held by Mr. Matthews that are
exercisable within 60 days of December 26, 2003. Does not include an
additional 8,000 shares subject to options held by Mr. Matthews that are
not exercisable within 60 days of December 26, 2003.
(11) Does not include an additional 9,000 shares subject to options held by Mr.
Palladino that are not exercisable within 60 days of December 26, 2003.
(12) Consists of 2,000 shares of common stock held by Mr. Peris and 7,333
shares subject to options held by Mr. Peris that are exercisable within 60
days of December 26, 2003. Does not include an additional 4,667 shares
subject to options held by Mr. Peris that are not exercisable within 60
days of December 26, 2003.
(13) Consists of 6,854,454 shares of common stock owned by Hyperion Partners II
L.P., 4,148,456 shares of common stock owned by Hyperion TW Fund L.P.,
482,700 shares of common stock owned by Hyperion TWH Fund LLC and 375,000
shares of common stock owned by Hyperion TWH Fund II LLC, each of which
are affiliates of Mr. Shay and as to which Mr. Shay disclaims beneficial
ownership except to the extent of his pecuniary interest therein. Mr. Shay
shares voting and dispositive power over all of such shares of common
stock.
59
(14) Consists of (a) 6,854,454 shares of common stock held by Hyperion Partners
II L.P. and (b) 4,148,456 shares of common stock beneficially owned by
Hyperion TW Fund L.P., 482,700 shares of common stock beneficially owned
by Hyperion TWH Fund LLC and 375,000 shares of common stock beneficially
owned by Hyperion TWH Fund II LLC, each of which are affiliates of
Hyperion Partners II L.P. and as to which Hyperion Partners II L.P.
disclaims beneficial ownership except to the extent of its pecuniary
interest therein. Scott A. Shay, a director of our company, may be deemed
to be the beneficial owner of all of such shares of common stock. Mr. Shay
disclaims beneficial ownership in such shares except to the extent of his
pecuniary interest therein.
(15) Consists of (a) 4,148,456 shares of common stock held by Hyperion TW Fund
L.P. and (b) 6,854,454 shares of common stock beneficially owned by
Hyperion Partners II L.P., 482,700 shares of common stock beneficially
owned by Hyperion TWH Fund LLC and 375,000 shares of common stock
beneficially owned by Hyperion TWH Fund II LLC, each of which are
affiliates of Hyperion TW Fund L.P. and as to which Hyperion TW Fund L.P.
disclaims beneficial ownership. Scott A. Shay, a director of our company,
may be deemed to be the beneficial owner of all of such shares of common
stock. Mr. Shay disclaims beneficial ownership in such shares except to
the extent of his pecuniary interest therein.
(16) Consists of (a) 482,700 shares of common stock held by Hyperion TWH Fund
LLC and (b) 6,854,454 shares of common stock beneficially owned by
Hyperion Partners II L.P., 4,148,456 shares of common stock beneficially
owned by Hyperion TW Fund L.P. and 375,000 shares of common stock
beneficially owned by Hyperion TWH Fund II LLC, each of which are
affiliates of Hyperion TWH Fund LLC and as to which Hyperion TWH Fund LLC
disclaims beneficial ownership. Scott A. Shay, a director of our company,
may be deemed to be the beneficial owner of all of such shares of common
stock. Mr. Shay disclaims beneficial ownership in such shares except to
the extent of his pecuniary interest therein.
(17) Consists of (a) 375,000 shares of common stock held by Hyperion TWH Fund
II LLC and (b) 6,854,454 shares of common stock beneficially owned by
Hyperion Partners II L.P., 4,148,456 shares of common stock beneficially
owned by Hyperion TW Fund L.P. and 482,700 shares of common stock
beneficially owned by Hyperion TWH Fund LLC, each of which are affiliates
of Hyperion TWH Fund II LLC and as to which Hyperion TWH Fund II LLC
disclaims beneficial ownership. Scott A. Shay, a director of our company,
may be deemed to be the beneficial owner of all of such shares of common
stock. Mr. Shay disclaims beneficial ownership in such shares except to
the extent of his pecuniary interest therein.
(18) Consists of 1,149,904 shares of common stock held by Triumph Partners III,
L.P. and 13,966 shares of common stock held by Triumph III Investors, L.P.
Triumph Partners III, L.P. and Triumph III Investors, L.P. are affiliates.
(19) Consists of 6,547,674 shares of Series A preferred stock held by Triumph
Partners III, L.P. and 79,526 shares of Series A preferred stock held by
Triumph III Investors, L.P., an affiliate of Triumph Partners III, L.P.
(20) Includes an aggregate of 1,765,666 shares subject to options held by our
executive officers and directors that are exercisable within 60 days of
December 26, 2003 and 2,600 shares owned of record by Mr. Green's wife, as
to which Mr. Green disclaims beneficial ownership.
60
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information as of September 30,
2003 regarding compensation plans under which equity securities of our company
are authorized for issuance:
EQUITY COMPENSATION PLAN INFORMATION
- ------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE EQUITY COMPENSATION
BE ISSUED UPON EXERCISE EXERCISE PRICE OF PLANS (EXCLUDING
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES REFLECTED IN
WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN (A))
PLAN CATEGORY (A) (B) (C)
------------- --- --- ---
- ------------------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
shareholders 2,604,000 $4.69 1,814,000
- ------------------------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved by
shareholders -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total 2,604,000 $4.69 1,814,000
- ------------------------------------------------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
THE REORGANIZATION - ISSUANCE OF SHARES IN DECEMBER 2002
All of the shares of our Series A preferred stock and substantially all
of the shares of our common stock that we issued in connection with the
consummation of the Reorganization were issued in June 2002. However, because
certain necessary tax clearances were not issued by the applicable U.K.
authorities until December 2002, certain shares of our common stock required to
be delivered in the Reorganization were not issued until such time. In December
2002, (a) Timothy M. Aitken, our chairman and chief executive officer, and
Aitken (English) Company Limited, an affiliate of Mr. Aitken received an
aggregate of 22,733 shares of our common stock; (b) Sarah L. Eames, our
president and chief operating officer, received an aggregate of 2,813 shares of
our common stock; and (c) Triumph Partners III, L.P. and Triumph III Investors,
L.P received an aggregate of 863,870 shares of our common stock. Frederick S.
Moseley IV, a former director of our company, may be considered the beneficial
owner of securities held by Triumph Partners III, L.P. and Triumph III
Investors, L.P.
OTHER TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
During our fiscal year ended September 30, 2003, we granted 384,000
options to purchase shares of common stock to Mr. Aitken, 334,000 options to
purchase shares of our common stock to Ms. Eames, 99,000 options to purchase
shares of our common stock to Mr. Murphy, our acting chief financial officer,
and 100,000 options to purchase shares of our
61
common stock to Mr. Bergeron, our former chief financial officer. Mr. Bergeron
resigned from our company in May 2003, without such options ever having vested.
All of such options were granted pursuant to our 2002 Stock Option Plan. See
"Item 11--Executive Compensation--Option Grants in Fiscal 2003."
On December 2, 2003, Mr. Aitken and Ms. Eames repaid in full the
principal amount of and accrued interest on the promissory notes issued by them
to our company in connection with the Reorganization in 2002. The principal and
accrued interest repaid aggregated $590,500 and $418,718, respectively. The
loans were repaid by delivery to the Company of 103,596 and 73,459 shares of
common stock held by Mr. Aitken and Ms. Eames, respectively, valued at $5.70 per
share, the closing price on the day prior to the repayment date. The Company
also agreed to reimburse Mr. Aitken and Ms. Eames for the taxes incurred by them
on the disposition of the shares to our company, which are estimated to be
approximately $83,395 and $51,421, respectively.
Our board of directors, upon the recommendation of our compensation
committee, awarded Mr. Aitken, effective December 2, 2003, 350,000 options to
acquire common stock, vesting immediately and exercisable at a price of $5.70
per share, and, on November 25, 2003, a cash bonus of $400,000. Our board of
directors, also upon the recommendation of our compensation committee, awarded
Ms. Eames, effective December 2, 2003, 300,000 options to acquire common stock,
vesting immediately and exercisable at a price of $5.70 per share, and, on
November 25, 2003, a cash bonus of $300,000.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable for our fiscal year ended September 30, 2003.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
(1) Consolidated Financial Statements: Page
--------------------------------- ----
Independent Auditors' Report F-1
Report of Independent Auditors F-2
Consolidated Balance Sheets - September 30, 2003 and 2002 F-3
Consolidated Statements of Operations - For the Years Ended
September 30, 2003, 2002 and 2001 F-4
Consolidated Statements of Changes in Stockholders' Equity -
For the Years Ended September 30, 2003, 2002 and 2001 F-5
Consolidated Statements of Cash Flows - For the Years Ended
September 20, 2003, 2002 and 2001 F-6
Notes to Consolidated Financial Statements F-8
62
(2) Consolidated Financial Statement Schedules:
-------------------------------------------
Schedule II - Valuation and Qualifying Accounts S-1
Schedules other than that listed above are omitted
because they are not required or are not applicable or
the information is shown in the audited consolidated
financial statements or related notes.
(3) Exhibits:
---------
Exhibit
Number Title
------ -----
3.1 Restated Certificate of Incorporation of our company filed with the
New York Secretary of State on December 12, 1990, as amended on
August 7, 1992 (incorporated herein by reference to Exhibit 3.1 of
our Quarterly Report on Form 10-Q for the quarter ended April 30,
1997).
3.2 Certificate of Amendment to the Restated Certificate of
Incorporation of our company filed with the New York Secretary of
State on June 28, 1995 (incorporated herein by reference to Exhibit
3.2 of our Quarterly Report on Form 10-Q for the quarter ended April
30, 1997).
3.3 Certificate of Amendment to the Restated Certificate of
Incorporation of our company filed with the New York Secretary of
State on October 9, 1996 (incorporated herein by reference to
Exhibit 3.3 of our Quarterly Report on Form 10-Q for the quarter
ended April 30, 1997).
3.4 Certificate of Amendment to the Restated Certificate of
Incorporation of our company filed with the New York Secretary of
State on May 6, 1997 (incorporated herein by reference to Exhibit
3.4 of our Quarterly Report on Form 10-Q for the quarter ended April
30, 1997).
3.5 Certificate of Amendment of the Certificate of Incorporation of our
company filed with the New York Secretary of State on April 16, 1998
(incorporated herein by reference to Exhibit 3.5 of our Registration
Statement on Form S-4 (Reg. St. No. 333-87304) filed with the
Securities and Exchange Commission on May 1, 2002).
3.6 Certificate of Amendment to the Certificate of Incorporation of our
company filed with the New York Secretary of State on June 7, 2002
(incorporated herein by reference to Exhibit 3.1 of our Current
Report on Form 8-K filed with the Securities and Exchange Commission
on June 10, 2002).
3.7 Restated Bylaws of our company, as amended (incorporated herein by
reference to Exhibit 3.4 of our Annual Report on Form 10-K for the
year ended October 31, 1996).
3.8 Amendment to the Bylaws of our company effective June 7, 2002
(incorporated herein by reference to Exhibit 3.2 of our Current
Report on Form 8-K filed with the
63
Securities and Exchange Commission on June 10, 2002).
3.9 Certificate of Amendment to the Certificate of Incorporation of our
company which defines the rights of the Series A Convertible
Preferred Stock, filed with the New York Secretary of State on June
26, 2002 (incorporated herein by reference to Exhibit 4.1 of our
Current Report on Form 8-K filed with the Securities and Exchange
Commission on August 9, 2002).
3.10 Certificate of Amendment to the provisions of the Certificate of
Incorporation of our company that defines the rights of the Series A
Convertible Preferred Stock, filed with the New York Secretary of
State on February 12, 2003 (incorporated herein by reference to
Exhibit 3.8 of our Quarterly Report on Form 10-Q for the quarter
ended March 31, 2003).
4.1 Specimen Certificate of Common Stock (incorporated herein by
reference to Exhibit 4.1 of our Current Report on Form 8-K filed
with the Securities and Exchange Commission on June 10, 2002).
4.2 Specimen Certificate of Series A Convertible Preferred Stock
(incorporated herein by reference to Exhibit 4.2 of Amendment No. 1
to our Registration Statement on Form S-4 (Reg. St. No. 333-87304)
filed with the Securities and Exchange Commission on May 21, 2002).
10.1 Transworld Home HealthCare, Inc. 1992 Stock Option Plan, as amended
(incorporated herein by reference to Exhibit 10.3 of our Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998).
10.2 Form of Indemnification Agreement with our company (incorporated
herein by reference to Exhibit 10.31 of our Annual Report on Form
10-K for the year ended October 31, 1994).
10.3 Transworld Home HealthCare, Inc. 1997 Option Plan for Non-Employee
Directors (incorporated herein by reference to Exhibit A of our
Proxy Statement for its Annual Meeting held on May 28, 1997).
10.4 Voting Trust Agreement dated December 17, 1999 by and among
Transworld Holdings (UK) Limited (now known as Allied Healthcare
Group Limited ("Allied Healthcare (UK)"), Transworld Healthcare (UK)
Limited ("TWUK"), our company, Triumph Partners III, L.P. and
Richard Green, as trustee (incorporated herein by reference to
Exhibit 10.65 of our Annual Report on Form 10-K for the year ended
September 30, 1999).
10.5 Securities Purchase Agreement , dated December 17, 1999, among
Allied Healthcare (UK), TWUK and the Purchasers identified therein
(incorporated herein by reference to Exhibit 10.66 of our Annual
Report on Form 10-K for the year ended September 30, 1999).
64
10.6 Senior Credit Agreement, dated as of December 17, 1999, among Allied
Healthcare (UK), TWUK, Paribas as Arranger, Paribas and Barclays
Bank PLC as Underwriters, Barclays Bank PLC as Agent and Security
Agent and Others (incorporated herein by reference to Exhibit 10.67
of our Annual Report on Form 10-K for the year ended September 30,
1999).
10.7 Mezzanine Credit Agreement, dated as of December 17, 1999, among
Allied healthcare (UK), TWUK, Paribas as Arranger, Underwriter and
Agent, Barclays Bank PLC as Security Agent and Others (incorporated
herein by reference to Exhibit 10.68 of our Annual Report on Form
10-K for the year ended September 30, 1999).
10.8 Warrant Instrument to subscribe for Shares in TWUK in favor of the
mezzanine lenders, dated as of December 17, 1999 (incorporated
herein by reference to Exhibit 10.69 of our Annual Report on Form
10-K for the year ended September 30, 1999).
10.9 Share Sale and Purchase Agreement of Nightingale Nursing Bureau
Limited, dated as of April 6, 2000, between Transworld Healthcare
(UK) Limited, W.A. Thompson, D.T. Thompon and others (incorporated
herein by reference to Exhibit 99.1 of our Current Report on Form
8-K dated April 20, 2000).
10.10 Asset Purchase Agreement, dated as of September 18, 2000, between MK
Diabetic Support Services, Inc., Respiflow, Inc. and Transworld
Ostomy, Inc. and Express-Med, Inc. (incorporated herein by reference
to Exhibit 10.1 of our Current Report on Form 8-K filed October 11,
2000).
10.11 Sale and Purchase Agreement of entire share capital of Amcare
Limited with its subsidiary Novacare UK Limited dated November 22,
2000 between Omnicare Limited and Bristol-Myers Squibb Holdings
Limited (incorporated herein by reference to Exhibit 10.73 of our
Annual Report on Form 10-K for the year ended September 30, 2000).
10.12 Agreement for Sale and Purchase of Staffing Enterprise Limited and
Staffing Enterprise (PSV) Limited between Allied Healthcare (UK)
Limited and David Christopher Pain and Deborah Kay Pain dated
September 27, 2001 (incorporated herein by reference to Exhibit 10.2
of our Current Report on Form 8-K filed October 12, 2001).
10.13 Second Amendment Agreement, dated September 27, 2001, relating to
the Mezzanine Credit Agreement dated December 17, 1999 among Allied
Healthcare Group Limited, Transworld Healthcare (UK) Limited, BNP
Paribas as Arranger, Underwriter and Agent, Barclays Bank PLC as
Agent and Security Agent and Others (incorporated herein by
reference to Exhibit 10.3 of our Current Report on Form 8-K filed
October 12, 2001).
10.14 Second Amendment Agreement, dated September 27, 2001, relating to
the Senior Credit Agreement dated December 17, 1999 among Allied
Healthcare Group
65
Limited, Transworld Healthcare (UK) Limited, BNP Paribas as
Arranger, Underwriter and Agent, Barclays Bank PLC as Agent and
Security Agent and Others (incorporated herein by reference to
Exhibit 10.4 of our Current Report on Form 8-K filed October 12,
2001).
10.15 Employment Agreement, dated September 24, 2001, between our company
and Timothy M. Aitken (incorporated herein by reference to Exhibit
10.16 of our Annual Report on Form 10-K for the year ended September
30, 2001).
10.16 Employment Agreement, dated September 24, 2001, between our company
and Sarah Eames (incorporated herein by reference to Exhibit 10.17
of our Annual Report on Form 10-K for the year ended September 30,
2001).
10.17 Master Reorganization Agreement, dated as of April 24, 2002, among
our company, Allied Healthcare (UK), TWUK and the Investors named
therein (incorporated herein by reference to Annex A-1 to the proxy
statement/prospectus forming a part of our Registration Statement on
Form S-4 (Reg. St. No. 333-87304) filed with the Securities and
Exchange Commission on May 1, 2002).
10.17A First Amendment to Master Reorganization Agreement, dated as of May
16, 2002, by and among our company, Allied Healthcare (UK), TWUK and
the Investors named therein (incorporated herein by reference to
Exhibit 10.17A of Amendment No. 1 to our Registration Statement on
Form S-4 (Reg. St. No. 333-87304) filed with the Securities and
Exchange Commission on May 21, 2002).
10.17B Second Amendment to Master Reorganization Agreement, dated as of
June 26, 2002, by and among our company, Allied Healthcare (UK),
TWUK and the Investors named therein (incorporated herein by
reference to Exhibit 10.3 of our Current Report on Form 8-K filed
with the Securities and Exchange Commission on August 9, 2002).
10.18 Amendment No. 1, dated as of July 25, 2002, among Allied Healthcare
(UK), TWUK and the Purchasers identified therein to the Securities
Purchase Agreement dated December 17, 1999 (incorporated herein by
reference to Exhibit 10.4 of our Current Report on Form 8-K filed
with the Securities and Exchange Commission on August 9, 2002).
10.19 Registration Rights Agreement, dated as of July 25, 2002, among our
company and the persons named therein (incorporated herein by
reference to Exhibit 10.5 of our Current Report on Form 8-K filed
with the Securities and Exchange Commission on August 9, 2002).
10.20 Amendment No. 1, dated as of July 25, 2002, among TWUK, Allied
Healthcare (UK), Richard Green, Triumph Partners III, L.P. and our
company to the Voting Trust Agreement dated December 17, 1999
(incorporated herein by reference to Exhibit 10.6 of our Current
Report on Form 8-K filed with the Securities and
66
Exchange Commission on August 9, 2002).
10.21A Tax Bonus, Tax Loan and Tax Indemnification Agreement, dated as of
April 22, 2002, by and among TWUK, our company and Timothy M. Aitken
(incorporated herein by reference to Exhibit 10.21 of our
Registration Statement on Form S-4 (Reg. St. No. 333-87304) filed
with the Securities and Exchange Commission on May 1, 2002).
10.21B Tax Bonus, Tax Loan and Tax Indemnification Agreement, dated as of
April 22, 2002, by and among TWUK, our company and Sarah L. Eames
(incorporated herein by reference to Exhibit 10.22 of our
Registration Statement on Form S-4 (Reg. St. No. 333-87304) filed
with the Securities and Exchange Commission on May 1, 2002).
10.22A Promissory Note, dated April 30, 2002, executed by Timothy M. Aitken
in favor of our company (incorporated herein by reference to Exhibit
10.7A of our Quarterly Report on Form 10-Q for the quarterly period
ended June 10, 2002).
10.22B Promissory Note, dated April 30, 2002, executed by Sarah L. Eames in
favor of our company (incorporated herein by reference to Exhibit
10.7B of our Quarterly Report on Form 10-Q for the quarterly period
ended June 10, 2002).
10.23A Pledge and Security Agreement, dated as of April 30, 2002, between
Timothy M. Aitken and our company (incorporated herein by reference
to Exhibit 10.8A of our Quarterly Report on Form 10-Q for the
quarterly period ended June 10, 2002).
10.23B Pledge and Security Agreement, dated as of April 30, 2002, between
Sarah L. Eames and our company (incorporated herein by reference to
Exhibit 10.8B of our Quarterly Report on Form 10-Q for the quarterly
period ended June 10, 2002).
10.24 Registration Rights Agreement, dated April 30, 2002, among our
company, Timothy M. Aitken and Sarah L. Eames (incorporated herein
by reference to Exhibit 10.25 of our Registration Statement on Form
S-4 (Reg. St. No. 333-87304) filed with the Securities and Exchange
Commission on May 1, 2002).
10.25A Irrevocable Undertaking, dated April 22, 2002, of Timothy M. Aitken
relating to the redeemable shares of TWUK (incorporated herein by
reference to Exhibit 10.26 of our Registration Statement on Form S-4
(Reg. St. No. 333-87304) filed with the Securities and Exchange
Commission on May 1, 2002).
10.25B Irrevocable Undertaking, dated April 22, 2002, of Sarah L. Eames
relating to the redeemable shares of TWUK (incorporated herein by
reference to Exhibit 10.27 of our Registration Statement on Form S-4
(Reg. St. No. 333-87304) filed with the Securities and Exchange
Commission on May 1, 2002).
67
10.26 Stock Purchase Agreement, dated as of April 22, 2002, among our
company, Hyperion TWH Fund II LLC, Triumph Partners III, L.P. and
Triumph III Investors, L.P. (incorporated herein by reference to
Exhibit 10.28 of our Registration Statement on Form S-4 (Reg. St.
No. 333-87304) filed with the Securities and Exchange Commission on
May 1, 2002).
10.27 Registration Rights Agreement, dated April 30, 2002, among our
company, Triumph Partners III, L.P. and Triumph III Investors, L.P.
(incorporated herein by reference to Exhibit 10.29 of our
Registration Statement on Form S-4 (Reg. St. No. 333-87304) filed
with the Securities and Exchange Commission on May 1, 2002).
10.28 2002 Stock Option Plan (incorporated herein by reference to Annex D
to the proxy statement/prospectus forming a part of Amendment No. 1
to our Registration Statement on Form S-4 (Reg. St. No. 333-87304)
filed with the Securities and Exchange Commission on May 21, 2002).
10.29 Stock Purchase Agreement, dated as of April 6, 2002, by and between
Promptcare Acquisition Corporation and our company (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).
11 Statement re: computation of earnings per share (computation can be
determined clearly from the material contained in this Annual Report
on Form 10-K).
14* Allied Healthcare International Inc. Code of Conduct.
16 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).
21* Subsidiaries of our company.
23.1* Consent of Deloitte & Touche LLP, independent auditors of our
company.
23.2* Consent of Ernst & Young LLP, former independent auditors of our
company.
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.
68
- -----------------------
* Filed herewith.
(b) Reports on Form 8-K.
During the quarter ended September 30, 2003, we furnished the following
Current Report on Form 8-K to the Securities and Exchange Commission:
On August 13, 2002, we furnished to the Securities and Exchange
Commission a Current Report on Form 8-K that included information required by
Item 12 of Form 8-K. The Form 8-K disclosed that we had issued a press release
on August 13, 2003 announcing our earnings for the quarter ended June 30, 2003.
No financial statements were filed. However, the press release attached to the
Form 8-K included a table containing statement of operations data.
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ALLIED HEALTHCARE INTERNATIONAL INC.
By: /s/ Timothy M. Aitken
--------------------------------
Timothy M. Aitken
Chairman of the Board and
Chief Executive Officer
Dated: December 29, 2003
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Sarah
L. Eames, Charles F. Murphy and Marvet Abbassi, and each of them, his or her
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities, to sign any and all amendments to this Annual Report on
Form 10-K, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Timothy M. Aitken Chairman of the Board and December 29, 2003
- -------------------------------- Chief Executive Officer
Timothy M. Aitken (Principal Executive Officer)
/s/ Sarah L. Eames Director, President and Chief December 29, 2003
- -------------------------------- Operating Officer
Sarah L. Eames
/s/ Charles F. Murphy Acting Chief Financial Officer December 29, 2003
- -------------------------------- (Principal Financial and
Charles F. Murphy Accounting Officer)
70
/s/ G. Richard Green Director December 29, 2003
- --------------------------------
G. Richard Green
/s/ David J. MacFarlane Director December 24, 2003
- --------------------------------
David J. MacFarlane
/s/ John W. Matthews Director December 24, 2003
- --------------------------------
John W. Matthews
/s/ Wayne Palladino Director December 23, 2003
- --------------------------------
Wayne Palladino
/s/ Jeffrey S. Peris Director December 21, 2003
- --------------------------------
Jeffrey S. Peris
/s/ Scott A. Shay Director December 23, 2003
- --------------------------------
Scott A. Shay
71
ALLIED HEALTHCARE INTERNATIONAL INC.
Index to Consolidated Financial Statements Page
- ------------------------------------------ ----
Independent Auditors' Report F-1
Report of Independent Auditors F-2
Consolidated Balance Sheets - September 30, 2003
and 2002 F-3
Consolidated Statements of Operations - for the
years ended September 30, 2003, 2002 and 2001 F-4
Consolidated Statements of Changes in
Stockholders' Equity - for the years ended
September 30, 2003, 2002 and 2001 F-5
Consolidated Statements of Cash Flows - for the
years ended September 30, 2003, 2002 and 2001 F-6
Notes to Consolidated Financial Statements F-8
Index to Consolidated Financial Statements Schedule
- ---------------------------------------------------
Schedule II - Valuation and Qualifying Accounts S-1
F-i
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Allied Healthcare International Inc.
New York, NY
We have audited the accompanying consolidated balance sheet of Allied Healthcare
International Inc. and subsidiaries (the "Company") as of September 30, 2003,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the year then ended. Our audit also included the financial
statement schedule for the year ended September 30, 2003 listed in the index at
Item 15. These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule based
on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of September 30,
2003, and the results of its operations and cash flows for the year then ended
in conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such financial statement schedule for the year
ended September 30, 2003, when considered in relation to the basic consolidated
financial statements for the year ended September 30, 2003 taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Jericho, New York
December 10, 2003
(December 24, 2003 as to Note 16)
F-1
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Allied Healthcare International, Inc.
We have audited the accompanying consolidated balance sheet of Allied Healthcare
International Inc. (the "Company") as of September 30, 2002 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended September 30, 2002 and 2001. Our audits also included the
financial statement schedule listed in the Index at Item 15 for the years ended
September 30, 2002 and 2001. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Allied Healthcare
International Inc. at September 30, 2002, and the consolidated results of its
operations and its cash flows for the years ended September 30, 2002 and 2001,
in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule for the
years ended September 30, 2002 and 2001, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
As discussed in Note 2, the Company changed its method of accounting for
goodwill and other intangibles effective October 1, 2001.
/s/ Ernst & Young LLP
New York, New York
November 8, 2002
F-2
ALLIED HEALTHCARE INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 21,691 $ 18,278
Restricted cash 37,693 19,840
Accounts receivable, less allowance for doubtful
accounts of $3,346 and $22,849, respectively 35,745 32,113
Unbilled accounts receivable 11,278 7,046
Assets of discontinued operations -- 8,733
Inventories 431 359
Prepaid expenses and other assets 1,772 1,642
------------- -------------
Total current assets 108,610 88,011
Property and equipment, net 10,326 8,098
Restricted cash 3,008 43,678
Intangible assets, net 185,722 123,514
Deferred financing costs and other assets 4,002 4,812
------------- -------------
Total assets $ 311,668 $ 268,113
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 37,693 $ 19,840
Short-term debt -- 3,480
Current portion of long-term debt 9,005 6,249
Dividends payable 4,464 941
Liabilities of discontinued operations 690 1,270
Accounts payable 2,676 1,505
Accrued expenses 24,969 23,995
Taxes payable 4,332 4,813
------------- -------------
Total current liabilities 83,829 62,093
Long-term debt 118,680 118,961
Derivative liability 211 --
Deferred income taxes and other long-term liabilities 634 862
------------- -------------
Total liabilities 203,354 181,916
------------- -------------
Commitments and contingencies
Redeemable convertible Series A preferred stock,
$.01 par value; authorized 8,000 shares, 7,774 shares
issued and outstanding (liquidation value $35,213) 33,151 32,254
------------- -------------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 2,000 shares,
issued and outstanding - none -- --
Common stock, $.01 par value; authorized
40,000 shares, issued 22,689 and
20,945 shares, respectively 227 209
Additional paid-in capital 142,897 139,309
Accumulated other comprehensive income (loss) 3,140 (3,112)
Accumulated deficit (68,814) (80,785)
------------- -------------
77,450 55,621
Less notes receivable from officers (1,002) (958)
Less cost of treasury stock (408 and 266 shares, respectively) (1,285) (720)
------------- -------------
Total stockholders' equity 75,163 53,943
------------- -------------
Total liabilities and stockholders' equity $ 311,668 $ 268,113
============= =============
See notes to consolidated financial statements.
F-3
ALLIED HEALTHCARE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2001
------------- ------------- -------------
Revenues:
Net patient services $ 287,964 $ 237,890 $ 130,719
Net respiratory, medical equipment and supplies 6,415 4,938 7,322
------------- ------------- -------------
Total revenues 294,379 242,828 138,041
------------- ------------- -------------
Cost of revenues:
Patient services 209,422 173,869 90,614
Respiratory, medical equipment and supplies 3,634 2,880 4,936
------------- ------------- -------------
Total cost of revenues 213,056 176,749 95,550
------------- ------------- -------------
Gross profit 81,323 66,079 42,491
Selling, general and administrative expenses 53,648 48,847 32,514
General and administrative expenses related to mail-order
operations -- -- 3,883
Losses due to sale of subsidiary -- -- 354
------------- ------------- -------------
Operating income 27,675 17,232 5,740
Interest income (2,032) (3,024) (1,587)
Interest expense 13,311 16,496 10,020
Gain on settlement of PIK interest -- (5,143) --
Foreign exchange loss 18 19 400
------------- ------------- -------------
Income (loss) before income taxes, minority interest
and discontinued operations 16,378 8,884 (3,093)
Provision for income taxes 4,910 4,971 24,117
------------- ------------- -------------
Income (loss) before minority interest and
discontinued operations 11,468 3,913 (27,210)
Minority interest -- 120 22
------------- ------------- -------------
Income (loss) from continuing operations 11,468 3,793 (27,232)
------------- ------------- -------------
Discontinued operations:
(Loss) income from discontinued operations (16) 1,001 620
Gain on disposal of subsidiaries, net of taxes of $775 519 -- --
------------- ------------- -------------
503 1,001 620
------------- ------------- -------------
Net income (loss) 11,971 4,794 (26,612)
Redeemable preferred dividends and accretion 4,005 1,016 --
------------- ------------- -------------
Net income (loss) available to common stockholders $ 7,966 $ 3,778 $ (26,612)
============= ============= =============
Basic and diluted income (loss) per share of common stock from:
Income (loss) from continuing operations $ 0.34 $ 0.15 $ (1.57)
Income from discontinued operations 0.02 0.05 0.04
------------- ------------- -------------
Net income (loss) available to common stockholders $ 0.36 $ 0.20 $ (1.53)
============= ============= =============
Weighted average number of common shares outstanding:
Basic 21,962 18,565 17,408
============= ============= =============
Diluted 22,304 18,932 17,408
============= ============= =============
See notes to consolidated financial statements.
F-4
ALLIED HEALTHCARE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------------ PAID-IN COMPREHENSIVE
SHARES AMOUNT CAPITAL (LOSS) INCOME
--------- -------- -------- -----------
Balance, October 1, 2000 17,551 $ 176 $128,070 $ (6,248)
Comprehensive loss:
Net loss
Foreign currency translation adjustment 648
Comprehensive loss
Issuance of common stock for exercise of stock options 4 7
Cost of treasury shares
--------- -------- -------- -----------
Balance, September 30, 2001 17,555 176 128,077 (5,600)
Comprehensive income:
Net income
Foreign currency translation adjustment 2,488
Comprehensive income
Issuance of common stock for:
Hyperion shares 375 4 1,590
Triumph shares 375 4 1,590
Non-cash based compensation 1,171 11 4,205
Reorganization 1,469 14 5,727
Common stock issuance costs (864)
Accretion of Series A preferred stock issuance costs (75)
Dividends on Series A preferred stock (941)
Notes issued to officers
Interest on notes to officers
--------- -------- -------- -----------
Balance, September 30, 2002 20,945 209 139,309 (3,112)
Comprehensive income:
Net income
Foreign currency translation adjustment 6,252
Comprehensive income
Issuance of common stock for:
Reorganization 890 9 3,471
Acquisition of Medic-One Group Limited 670 7 2,873
Exercise of stock options 184 2 666
Common stock issuance costs (20)
Accretion of Series A preferred stock issuance costs (482)
Dividends on Series A preferred stock (3,523)
Issuance of warrants for professional services 603
Cost of treasury shares
Interest on notes to officers
--------- -------- -------- -----------
Balance, September 30, 2003 22,689 $ 227 $142,897 $ 3,140
========= ======== ======== ===========
RETAINED
(DEFICIT) OFFICERS' TREASURY
EARNINGS LOANS SHARES TOTAL
--------- -------- -------- ----------
Balance, October 1, 2000 $ (58,967) $-- $-- $ 63,031
Comprehensive loss:
Net loss (26,612) (26,612)
Foreign currency translation adjustment 648
----------
Comprehensive loss (25,964)
Issuance of common stock for exercise of stock options 7
Cost of treasury shares (720) (720)
--------- -------- -------- ----------
Balance, September 30, 2001 (85,579) -- (720) 36,354
Comprehensive income:
Net income 4,794 4,794
Foreign currency translation adjustment 2,488
----------
Comprehensive income 7,282
Issuance of common stock for:
Hyperion shares 1,594
Triumph shares 1,594
Non-cash based compensation 4,216
Reorganization 5,741
Common stock issuance costs (864)
Accretion of Series A preferred stock issuance costs (75)
Dividends on Series A preferred stock (941)
Notes issued to officers (940) (940)
Interest on notes to officers (18) (18)
--------- -------- -------- ----------
Balance, September 30, 2002 (80,785) (958) (720) 53,943
Comprehensive income:
Net income 11,971 11,971
Foreign currency translation adjustment 6,252
----------
Comprehensive income 18,223
Issuance of common stock for:
Reorganization 3,480
Acquisition of Medic-One Group Limited 2,880
Exercise of stock options 668
Common stock issuance costs (20)
Accretion of Series A preferred stock issuance costs (482)
Dividends on Series A preferred stock (3,523)
Issuance of warrants for professional services 603
Cost of treasury shares (565) (565)
Interest on notes to officers (44) (44)
--------- -------- -------- ----------
Balance, September 30, 2003 $(68,814) $ (1,002) $ (1,285) $ 75,163
========= ======== ======== ==========
See notes to consolidated financial statements.
F-5
ALLIED HEALTHCARE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2001
------------- ------------- -------------
Cash flows from operating activities:
Net income (loss) $ 11,971 $ 4,794 $(26,612)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Income from discontinued operations (503) (1,001) (620)
Depreciation and amortization 1,778 1,337 1,402
Amortization of goodwill -- -- 3,722
Amortization of other intangible assets 207 -- 3
Amortization of debt issuance costs and warrants 1,858 2,218 1,117
Provision for doubtful accounts 1,205 985 2,586
(Gain) loss on sale of fixed assets (48) (13) 33
Losses due to sale of subsidiary -- -- 354
Interest in kind 645 3,063 3,964
Minority interest -- 120 22
Stock based compensation - employees 587 5,835 --
Interest accrued on loans to officers (44) (18) --
Write-off of deferred financing fees and debt discount 613 925 --
Gain on settlement of PIK interest -- (5,143) --
Gain on acquisition of minority interest -- (179) --
Deferred income taxes (906) 159 21,494
Changes in assets and liabilities, excluding
the effect of businesses acquired and sold:
Increase in accounts receivable (30) (3,251) (4,511)
(Increase) decrease in inventories (45) 1 (414)
Increase in prepaid expenses and other assets (3,313) (1,434) (1,305)
Increase (decrease) in accounts payable and other liabilities 674 (1,268) 1,376
------------- ------------- -------------
Net cash provided by continuing operations 14,649 7,130 2,611
Net cash provided by (used in) discontinued operations 461 2,936 (259)
------------- ------------- -------------
Net cash provided by operating activities 15,110 10,066 2,352
------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures (4,026) (3,091) (1,259)
Proceeds from sale of property and equipment 175 105 12
Notes issued to officers -- (940) --
Proceeds from sale of discontinued operations 8,195 -- --
Payments for acquisitions - net of cash acquired (9,531) (2,047) (14,616)
Proceeds limited to future acquisitions 26,053 11,018 (52,487)
Proceeds from sale of business -- -- 15,075
Payments on acquisitions payable (7,031) (1,038) (2,163)
------------- ------------- -------------
Net cash provided by (used in) investing activities 13,835 4,007 (55,438)
------------- ------------- -------------
(Continued)
See notes to consolidated financial statements.
F-6
ALLIED HEALTHCARE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2001
------------- ------------- -------------
Cash flows from financing activities:
Payments for financing fees and issuance costs (20) (4,053) (2,004)
Proceeds from issuance of stock -- 3,188 --
Payments on notes payable (19,363) (4,575) --
Payments on revolving loan -- -- (6,550)
Proceeds from long-term debt -- -- 72,115
Principal payments on long-term debt (6,727) (5,150) (4,038)
Payments for treasury shares acquired (565) -- (720)
Stock options and warrants exercised, net, including tax benefit 80 -- 7
-------- -------- --------
Net cash (used in) provided by financing activities (26,595) (10,590) 58,810
-------- -------- --------
Effect of exchange rate on cash 1,063 1,461 584
-------- -------- --------
Increase in cash 3,413 4,944 6,308
Cash and cash equivalents,
beginning of period 18,278 13,334 7,026
-------- -------- --------
Cash and cash equivalents,
end of period $ 21,691 $ 18,278 $ 13,334
======== ======== ========
Supplemental cash flow information:
Cash paid for interest $ 10,679 $ 10,728 $ 5,669
======== ======== ========
Cash paid for income taxes, net $ 6,691 $ 5,914 $ 2,101
======== ======== ========
Supplemental disclosure of non-cash investing and financing activities:
Details of business acquired in purchase transactions:
Fair value of assets acquired $ 12,254 $ 2,525 $ 44,395
======== ======== ========
Liabilities assumed or incurred $ 2,408 $ 341 $ 6,080
======== ======== ========
Cash paid for acquisitions (including related expenses) $ 9,846 $ 2,184 $ 18,297
Cash acquired 315 137 3,681
-------- -------- --------
Net cash paid for acquisitions $ 9,531 $ 2,047 $ 14,616
======== ======== ========
Issuance of notes payable $ 36,026 $ 3,747 $ 20,018
======== ======== ========
Issuance of common stock $ 6,360 $ 9,960
======== ========
Issuance of Series A preferred stock $ 35,051
========
See notes to consolidated financial statements.
F-7
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BUSINESS AND OPERATIONS:
Allied Healthcare International Inc. and its subsidiaries (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 Great Britain. 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF ACCOUNTING AND PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements of the Company are
prepared on the accrual basis of accounting in accordance with accounting
principles generally accepted in the United States of America ("U.S.").
All intercompany accounts and transactions are eliminated in
consolidation.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include highly liquid short-term investments
purchased with initial maturities of 90 days or less.
RESTRICTED CASH:
Restricted cash represents 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 for completed transactions, 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. (See Notes 4 and 7.)
INVENTORIES:
Inventories, which consist primarily of finished goods, include oxygen for
use in respiratory therapy, ancillary medical supplies and certain medical
equipment, are valued at the lower of cost (determined using a first-in,
first-out method) or market.
F-8
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
PROPERTY AND EQUIPMENT:
Property and equipment, including revenue-producing equipment, is carried
at cost, net of accumulated depreciation and amortization.
Revenue-producing equipment consists of oxygen cylinders, oxygen
concentrators and oxygen values. Depreciation for revenue-producing
equipment is provided on the straight-line method over their estimated
useful lives ranging from seven to twenty years. Buildings are being
depreciated over their useful lives of twenty-five to fifty years and
leasehold improvements are amortized over the related lease terms or
estimated useful lives, whichever is shorter.
INTANGIBLE ASSETS:
Intangible assets, consisting principally of goodwill, are carried at
cost, net of accumulated amortization. All goodwill is enterprise
goodwill.
In accordance with Statement of Financial Accounting Standards ("FAS") No.
142, "Goodwill and Other Intangible Assets" ("FAS No. 142"), all goodwill
and intangible assets deemed to have indefinite lives are no longer
subject to amortization but will be subject to annual impairment tests.
The Company completed its annual impairment test required under FAS No.
142 during the fourth quarter of fiscal 2003 and determined there is no
impairment to its recorded goodwill balance.
Had amortization of goodwill not been recorded during the year ended
September 30, 2001, the net loss would have been reduced by $3,722, net of
taxes, and basic and diluted net loss per share would have decreased by
$0.21.
The following table presents the changes in the carrying amount of
goodwill for the year ended September 30, 2003:
YEAR ENDED SEPTEMBER 30, 2003
---------------------------------------------------------------
U.K. U.S.
OPERATIONS CORPORATE TOTAL
------------------- ----------------- ----------------
Balance at September 30, 2002 $ 121,214 $ 2,300 $ 123,514
Goodwill acquired during year 51,983 -- 51,983
Foreign exchange effect 8,206 -- 8,206
----------------- ---------------- -------------
Balance at September 30, 2003 $ 181,403 $ 2,300 $ 183,703
================= ================ =============
Of the $51,983 of goodwill acquired during the year ended September 30,
2003, $41,036 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 $36,026 to satisfy amounts owed under these
agreements. The notes predominately relate to the Company's September 27,
2001 acquisition of the issued and
F-9
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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.
Intangible assets subject to amortization after the adoption of FAS No.
142 are being amortized on the straight-line method and consist of the
following:
September 30, 2003
------------------------------------------------------------
Range Gross Net
of Carrying Accumulated Carrying
Lives Amount Amortization Amount
------------ --------------- ---------------------- ---------------
Customer relationships 10 $ 1,996 $ 150 $ 1,846
Trade names 3 175 49 126
Non-Compete agreements 10 43 11 32
Favorable leasehold interests 2 - 5 20 5 15
--------------- ---------------------- ---------------
Total $ 2,234 $ 215 $ 2,019
=============== ====================== ===============
Amortization expense for other intangible assets still subject to
amortization was $207 for the year ended September 30, 2003. At September
30, 2003, estimated future amortization expense of other intangible assets
still subject to amortization is as follows: approximately $281, $274,
$214, $202 and $200 for the years ended September 30, 2004, 2005, 2006,
2007 and 2008, respectively.
DEFERRED FINANCING COSTS:
Costs incurred in obtaining long-term financing are amortized over the
terms of the long-term financing agreements using the interest method. At
September 30, 2003 and 2002, other assets included $3,675 and $4,746 of
deferred financing costs, net of accumulated amortization of $4,250 and
$2,677, respectively. Amortization of deferred financing costs is included
in interest expense in the accompanying Consolidated Statements of
Operations.
INCOME TAXES:
The Company accounts for income taxes using the liability method in
accordance with FAS No. 109, "Accounting for Income Taxes." Under this
method, deferred income tax assets and liabilities reflect tax
carryforwards and the net effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting and
income tax purposes, as determined under currently enacted tax rates.
Deferred tax assets are recorded if future realization is more likely than
not.
Deferred taxes are recorded primarily for bad debts, Federal and state net
operating loss carryforwards, depreciation and amortization of
intangibles, which are reported in different periods for Federal income
tax purposes than for financial reporting purposes. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the
amounts expected to be realized.
F-10
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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 the 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.
Unbilled accounts receivable represents amounts due for services performed
but not billed as of the balance sheet date. Revenues from the rental of
home medical equipment (including respiratory equipment) are recognized
over the rental period (typically on a month-to-month basis) and
approximated $457, $328 and $274 in fiscal 2003, 2002 and 2001,
respectively. Revenues from the sale of oxygen and supplies for use in
respiratory therapy are recognized when products are shipped, a
contractual arrangement exists, the sales price is either fixed or
determinable and collection is reasonably assured.
The Company receives a majority of its revenue from the National Health
Services (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. For the years ended September 30, 2003, 2002 and
2001, 65%, 68% and 61%, respectively, of the Company's net revenues were
attributable to the NHS and other U.K. governmental payor programs.
EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share ("EPS") is computed using the weighted
average number of common shares outstanding. Diluted EPS adjusts basic EPS
for the effects of stock options, warrants and redeemable convertible
stock only when such effect is dilutive. In future periods, the impact of
the assumed conversion of the 7,774 of redeemable convertible preferred
stock could potentially dilute basic EPS. At September 30, 2003, 2002 and
2001, the Company had outstanding stock options and warrants to purchase
2,244, 705 and 579 shares, respectively, of common stock ranging in price
from $4.00 to $7.25, $5.41 to $7.25 and $4.31 to $7.25 per share,
respectively, that were not included in the computation of diluted EPS
because the exercise price was greater than the average market price of
the common shares.
The weighted average number of shares used in the basic and diluted
earnings (loss) per share computations for the years ended September 30,
2003, 2002 and 2001 are as follows:
2003 2002 2001
--------- -------- ---------
Weighted average number of common shares outstanding 21,962 18,399 17,408
Weighted average number of common shares
contingently issuable -- 166 --
--------- -------- ---------
Weighted average number of common shares
outstanding as used in computation of basic earnings
(loss) per share of common stock 21,962 18,565 17,408
Effect of dilutive securities - stock options 342 367 --
--------- -------- ---------
Shares used in computation of diluted earnings (loss)
per share of common stock 22,304 18,932 17,408
========= ======== =========
F-11
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
COMPREHENSIVE INCOME (LOSS):
Components of comprehensive income (loss) include net income (loss) and
all other non-owner changes in equity, such as the change in the
cumulative translation adjustment, unrealized gains and losses on
investments available for sale and minimum pension liability. Currency
translation is the only item of other comprehensive income (loss)
impacting the Company.
STOCK-BASED COMPENSATION:
The accompanying consolidated financial statements of the Company have
been prepared in accordance with the Accounting Principles Board's Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Under
APB No. 25, generally, no compensation expense is recognized in connection
with the awarding of stock option grants to employees provided that, as of
the grant date, all terms associated with the award are fixed and the
quoted market price of the stock is equal to or less than the amount an
employee must pay to acquire the stock as defined.
The Company adopted the disclosure only provisions of FAS No. 123,
"Accounting for Stock-Based Compensation," which requires certain
financial statement disclosures, including pro forma operating results had
the Company prepared its consolidated financial statements in accordance
with the fair value based method of accounting for stock-based
compensation. In December 2002, the Financial Accounting Standards Board
("FASB") issued 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 adoption of FAS No. 148 did not have an impact on the
Company's financial position or results of operations.
F-12
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
If the Company had elected to recognize compensation expense based on the
fair value of the options at grant date as prescribed by FAS No. 123, net
income (loss) and net income (loss) per share would have been adjusted to
the pro forma amounts indicated in the table below for the three years
ended September 30:
2003 2002 2001
-------------- ----------------- -----------------
Net income (loss) available to common stockholders, as reported
Add: Stock-based compensation included in reported net income (loss), $7,966 $3,778 $(26,612)
net of related tax effect 587 -- --
Less: Total stock-based compensation expense determined under fair
value based method for all awards, net of related tax effects (728) (173) (96)
-------------- ----------------- -----------------
Pro forma net income (loss) available to common stockholders $ 7,825 $3,605 $ (26,708)
============== ================= =================
Net income (loss) per share:
Basic - as reported $ 0.36 $ 0.20 $ (1.53)
Basic - pro forma $ 0.36 $ 0.19 $ (1.53)
Net income (loss) per share:
Diluted - as reported $ 0.36 $ 0.20 $ (1.53)
Diluted - pro forma $ 0.35 $ 0.19 $ (1.53)
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions:
2003 2002 2001
------------- ------------- -------------
Expected life (years) 9 9 4
Risk-free interest rate 4.1% 5.1% 5.5%
Volatility 66.1% 69.1% 61.4%
Expected dividend yield 0% 0% 0%
The compensation cost as generated by the Black-Scholes option-pricing
model may not be indicative of the future benefit, if any, that may be
received by the option holder.
IMPAIRMENT OF LONG-LIVED ASSETS:
Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable.
If the sum of the undiscounted future cash flows is less than the carrying
amount of the asset, a loss is recognized for the difference between the
fair value (discounted future cash flows) and carrying value of the asset.
Impairment loss on assets to be sold, if any, is based on the estimated
proceeds to be received, less estimated costs to sell.
F-13
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FOREIGN CURRENCY TRANSLATION:
Assets and liabilities of foreign subsidiaries whose functional currency
is other than the U.S. dollar are translated to U.S. dollars using the
exchange rates in effect at the balance sheet date. Results of operations
are translated using weighted average exchange rates during the period.
Adjustments resulting from the translation process are included as a
separate component of stockholders' equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Cash, restricted cash, accounts receivable, unbilled accounts receivable,
dividends payable, accounts payable, accrued expenses and taxes payable
approximate fair value due to the short-term maturity of those
instruments. The derivative liability is recorded at its estimated fair
value. The estimated fair value of the Company's outstanding borrowings
was $166,772 and $149,198 at September 2003 and 2002, respectively,
compared to $165,378 and $148,530 total debt outstanding.
CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash equivalents and accounts
receivable. The Company places its cash equivalents with high credit
quality financial institutions. The Company believes no significant
concentration of credit risk exists with respect to these cash
equivalents.
The Company grants credit without collateral to its patients, who are
primarily insured under third-party agreements. The Company maintains an
allowance for doubtful accounts based on the expected collectibility of
accounts receivable. At September 30, 2003 and 2002, 78.2% and 77.1% of
accounts receivable was due from the NHS and other U.K. governmental
payors, respectively, with the balance due from various other third-party
payors and self-pay patients (none of which comprise greater than 10% of
the balance).
USE OF MANAGEMENT'S ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
and disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Estimates are used for, but not limited to, the accounting for
allowance for doubtful accounts, contractual allowances, valuation of
inventories, accrued expenses, depreciation and amortization.
RECLASSIFICATIONS:
Certain prior year balances have been reclassified to conform to the
current year presentation.
F-14
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
RECENT ACCOUNTING PRONOUNCEMENTS:
In 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"). 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)" ("FAS No. 146"). This statement is effective for exit and
disposal activities initiated after December 15, 2002. The adoption of FAS
No. 146 did not have a material impact on the Company's consolidated
financial position or results of operations.
In November 2002, the FASB approved FASB Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees,
including Indirect Guarantees of Indebtedness of Others, an Interpretation
of FASB Statement No. 5, 57 and 107 and Rescission of FASB Interpretation
No. 34 ("FIN 45"). FIN 45 clarifies the requirements of SFAS No. 5,
Accounting for Contingencies, relating to a guarantor's accounting for,
and disclosure of, the issuance of certain types of guarantees.
Specifically, FIN 45 requires a guarantor to recognize a liability for the
non-contingent component of certain guarantees, representing the
obligation to stand ready to perform in the event that specified
triggering events or conditions occur. The provisions for initial
recognition and measurement are effective on a prospective basis for
guarantees that are issued or modified after December 31, 2002,
irrespective of a guarantor's fiscal year end. However, the disclosure
provisions of FIN 45 are effective for financial statements for the
interim and annual periods ending after December 15, 2002. The adoption of
FIN 45 did not have a material impact on the Company's consolidated
financial position or results of operations. The Company has disclosed all
guarantees in Note 7 to the Notes to Consolidated Financial Statements.
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 does not have any
variable interest entities and therefore, the adoption of FIN 46 will not
have a material impact on its consolidated financial position or results
of operations.
F-15
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
In April 2003, the FASB issued FAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("FAS No. 149"). 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 adoption of FAS No. 149
did not have a material effect on the Company's consolidated financial
position or 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"). 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 adoption of FAS No. 150 did not have a material effect
on the Company's consolidated financial position or results of operations.
3. CORPORATE REORGANIZATION:
On April 24, 2002, the Company entered into a Master Reorganization
Agreement ("Reorganization Agreement") with two of its U.K. subsidiaries
- Allied Healthcare Group Limited ("Allied Healthcare (UK)") and
Transworld Healthcare (UK) Limited ("TWUK") - and certain investors in
such subsidiaries. Both the Reorganization Agreement and the
reorganization (the "Reorganization") were voted upon and approved at the
Company's annual meeting of shareholders on June 7, 2002 and the
Reorganization subsequently was consummated on July 25, 2002. 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.
F-16
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. 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 (pound)22,287 ($35,213) 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
holders of the Series A preferred stock and the Company agreed to a fixed
exchange rate of $1.58 set forth in an amendment to the Company's
certificate of incorporation defining the rights of the Series A preferred
stock. 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 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.
The following table displays the unaudited pro forma results of operations
and related per share information as if the Reorganization was completed
as of October 1, 2001. The unaudited pro forma results principally reflect
the reversal of interest expense, net of tax, related to the Notes of
Allied Healthcare (UK) to reflect the exercise of Equity Warrants and the
related exchange of TWUK shares for the Company's new Series A preferred
stock.
Year Ended
September 30, 2002
-------------------
Net revenues $242,828
Gross profit 66,079
Operating income 19,536
Net income 4,984
Net income available for common stockholders 869
Income per share of common stock -
Basic and Diluted $ 0.04
F-17
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. CORPORATE REORGANIZATION (CONTINUED):
The above pro forma results, exclude the following one time and
non-recurring adjustments related to the Reorganization:
o The Company recognized compensation expense of $1,619 on the
exchange of 2,523 management's and employees' redeemable shares
of TWUK for 414 shares of the Company's common stock calculated
using a net exercise method.
o The Company recognized a gain of $5,143 on the settlement of
accrued and unpaid interest owed to the holders of the Notes of
Allied Healthcare (UK).
o The Company recognized a charge of $925 to reflect the write
off of deferred costs associated with the Notes of Allied
Healthcare (UK) issued in 1999, which were exchanged in the
Reorganization.
o The Company recognized a charge of $686 to reflect the costs
associated in completing the Reorganization transaction.
4. BUSINESS COMBINATIONS AND DISPOSALS:
COMBINATIONS:
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 $1,751 dependent upon future earnings of the acquired
entity.
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 $1,575 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 $2,084 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 dependent upon future earnings of the acquired
entities. In August of 2003, contingent cash consideration of $630 was
earned and paid. No additional consideration is required in connection
with this acquisition.
F-18
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
4. BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED):
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 $642
dependent upon future earnings of the acquired entity. Such contingent
consideration was earned and paid in August of 2003. No additional
consideration is required in connection with this acquisition.
On November 28, 2002, the Company completed its acquisition of Medic-One
Group Limited, a supplier of temporary staffing to the NHS hospitals and
private hospitals in the U.K. The consideration included $4,642 in cash,
and the issuance of 670 shares of the Company's common stock and up to
approximately $14,270 of additional contingent consideration based on
future earnings. At September 30, 2003, the Company is only obligated to
issue additional contingent consideration of up to approximately $8,169
dependent upon future earnings of the acquired entity as $6,101 of the
previous contingent consideration was unearned and will not be required.
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 Company completed its purchase price allocation of the Medic-One Group
Limited acquisition. Accordingly, tangible assets, identifiable intangible
assets and liabilities were assigned values of approximately $2,861,
$1,410 and $2,157, respectively, with the remaining portion of $6,576
attributable to goodwill.
The preliminary purchase price allocations for the remaining 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 September 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.
As noted above, the transactions related to the acquisitions of Cynon
Health Agency, Carewise Nursing Agency, First Force Medical Recruitments
Limited and Medic-One Group Limited include provisions to pay additional
amounts in contingent consideration dependent upon future earnings of the
acquired entities, payable by a combination of cash and shares of the
Company's stock, aggregating $13,579 at September 30, 2003.
F-19
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
4. BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED):
In fiscal 2002, the Company acquired a total of 6 flexible staffing
agencies for approximately $2,184 in cash. The transactions included
provisions to pay additional amounts, payable in cash, of up to $5,606 in
contingent consideration dependent upon future earnings of the acquired
entities. Of the $5,606 in contingent consideration, $4,450 was earned and
paid in fiscal 2003. The remaining amount of contingent consideration of
$1,156 was unearned and will not be required. These acquisitions were
accounted for as purchase business combinations. The pro forma results of
operations and related per share information for these acquisitions have
not been presented as the amounts are considered immaterial.
On September 27, 2001, TWUK acquired all of the issued and outstanding
shares of Staffing Enterprise Limited and Staffing Enterprise (PSV)
Limited (collectively "Staffing Enterprise"), a London based provider of
flexible staffing of specialist nurses and other healthcare professionals
to London NHS Trust and independent hospitals. The consideration included
$7,100 in cash, $14,800 in demand notes plus an additional sum of up to
approximately $30,800 in contingent consideration dependent upon Pre-Tax
Profits (as defined in the agreement for sale and purchase) for the fiscal
year ended September 30, 2002. The Company satisfied its obligation to pay
under this contingent consideration agreement by the issuance of notes
payable, in the first quarter of fiscal 2003.
The following table displays the unaudited pro forma results of operations
and related per share information for the year ended September 30, 2001,
as if the acquisition of Staffing Enterprise was completed as of October
1, 1999:
2001
----------------------
(unaudited)
Net revenues $191,936
Net loss (24,181)
Net loss per share of common stock:
Basic and Diluted (1.39)
The acquisition was accounted for as a purchase business combination.
Accordingly, the total cost of the acquisition was allocated on the basis
of the estimated fair value of the assets acquired and liabilities assumed
and incurred. Assets acquired and liabilities assumed were assigned values
of approximately $11,200 and $4,200, respectively, with the remaining
portion of approximately $14,900 attributable to goodwill and other
identifiable intangible assets. As the acquisition was completed on
September 27, 2001, there are no amounts relating to Staffing Enterprise
included in the Consolidated Statement of Operations for fiscal 2001.
F-20
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
4. BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED):
In addition to the acquisition of Staffing Enterprise, during fiscal 2001,
the Company acquired a total of 11 other flexible staffing agencies for
approximately $9,144 in cash and the issuance of $5,720 in demand notes
and resulted in the Company recording approximately $13,300 of additional
goodwill and other identifiable intangible assets. The transactions
included provisions to pay additional amounts, payable in cash, of up to
$12,993 in contingent consideration dependent upon future earnings of the
acquired entities. Of the $12,993 in contingent consideration, $6,588 was
earned and paid in fiscal 2002 and 2003. The remaining amount of
contingent consideration of $6,405 was unearned and will not be required.
These acquisitions were accounted for as purchase business combinations.
The pro forma results of operations and related per share information for
these acquisitions have not been presented as the amounts are considered
immaterial.
DISPOSITIONS:
U.S. HOME HEALTHCARE
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 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 FAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," the Company has
accounted for Home Healthcare as a discontinued operation. The
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:
YEAR ENDED SEPTEMBER 30,
2003 2002 2001
----------- --------- --------------
Revenues:
Net infusion services $ 6,685 $ 12,373 $ 12,505
Net respiratory, medical equipment and supplies 2,479 4,697 4,087
----------- --------- --------------
Total revenues 9,164 17,070 16,592
----------- --------- --------------
Cost of revenues:
Infusion services 5,159 9,068 8,959
Respiratory, medical equipment and supplies 1,438 2,292 2,146
----------- --------- --------------
Total cost of revenues 6,597 11,360 11,105
----------- --------- --------------
Selling, general and administrative expenses 2,583 4,709 4,867
Gain on sale of subsidiaries, net of tax 519 -- --
----------- --------- --------------
Income from discontinued operations $ 503 $ 1,001 $ 620
=========== ========= ==============
Diluted income per share from discontinued operations $ 0.02 $ 0.05 $ 0.04
=========== ========= ==============
F-21
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
4. BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED):
At September 30, 2003, liabilities of discontinued operations of $690
relate to tax contingencies. At September 30, 2002, assets of discontinued
operations consisted primarily of goodwill, accounts receivable, property
and equipment, inventory, cash and other assets of $3,884, $1,521, $1,408,
$597, $530 and $793, respectively, and liabilities of discontinued
operations of $1,270 consisted primarily of accounts payable and accrued
payroll and related costs.
U.S MAIL-ORDER
In September 2000, the Company approved a plan to exit its U.S. Mail-Order
Operations and on September 18, 2000, entered into an agreement to sell
certain assets of this segment located in Jacksonville, Florida. Under the
terms of the transaction, the Company received $2,000 plus an additional
$556 representing the book value of on-hand saleable inventory at
September 29, 2000.
Based upon additional information and revised cost benefit estimates by
management, the Company recorded an additional charge of $1,900 to reflect
the write-down of the remaining accounts receivable to their estimated net
realizable value for the first quarter of fiscal 2001. In addition to the
write-down, the Company incurred operating expenses of $1,983 in fiscal
2001, prior to the closing of the U.S. Mail-Order Operations.
As of September 30, 2002, the Company had satisfied its obligations under
the restructuring plan and reversed the remaining lease commitments
restructuring accrual of $280 into income.
AMCARE LTD.
On November 22, 2000, the Company sold its U.K. subsidiary, Amcare Ltd.,
for approximately $13,826 in cash. The Company recorded a loss of $354 and
realized a foreign exchange loss of $391 in fiscal 2001 as a result of the
completion of the transaction.
5. PROPERTY AND EQUIPMENT:
Major classes of property and equipment, net consist of the following at
September 30:
2003 2002
------------------- ----------------
Revenue producing equipment $11,776 $8,962
Furniture, fixtures and equipment 9,901 7,300
Land, buildings and leasehold improvements 776 745
-------------- -----------
22,453 17,007
Less, accumulated depreciation and amortization 12,127 8,909
-------------- -----------
$10,326 $8,098
============== ===========
Depreciation and amortization of property and equipment for the years
ended September 30, 2003, 2002 and 2001 was $1,778, $1,337 and $1,402,
respectively. The net book value of revenue producing equipment was $6,623
and $5,398 at September 30, 2003 and September 30, 2002, respectively.
F-22
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
6. ACCRUED EXPENSES:
Accrued expenses consist of the following at September 30:
2003 2002
--------------------- --------------------
Payroll and related expenses $ 17,927 $ 13,779
Other 7,042 10,216
----------- -----------
$ 24,969 $ 23,995
=========== ===========
7. DEBT:
Outstanding borrowings consist of the following at September 30:
FINAL
FACILITY 2003 2002 INTEREST RATE MATURITY
--------- ---------- ------------ ----------------- -------------
SENIOR CREDIT FACILITIES:
Term loan A $ 26,840 $ 31,697 LIBOR + 2.00% Dec. 17, 2005
Term loan C 83,355 78,070 LIBOR + 3.50% Jun. 30, 2007
---------- ------------
Total senior credit facilities 110,195 109,767
MEZZANINE TERM LOAN(1) 17,490 15,443 LIBOR + 7.00% Dec. 17, 2007
NOTES WITH WARRANTS - 3,480 9.375% Dec. 17, 2008
NOTES PAYABLE(2) 37,693 19,840 2.65% to 5.25% Sept. 27, 2004
---------- ------------
TOTAL DEBT 165,378 148,530
LESS CURRENT MATURITIES 46,698 29,569
---------- ------------
NET LONG-TERM DEBT $ 118,680 $ 118,961
========== ============
-------------------------------
1) Net of unamortized discount of $1,394 and $1,615 as of September 30,
2003 and 2002, respectively.
2) Net of unamortized discount of $597 as of September 30, 2002.
On December 17, 1999, as amended on September 27, 2001, the Company's U.K.
subsidiaries obtained new financing denominated in pounds sterling. The
new financing consists of a senior collateralized term and revolving
credit facility (the "Senior Credit Facility"), mezzanine indebtedness
(the "Mezzanine Loan") and the Notes.
Senior Credit Facility. The Senior Credit Facility consists of a $46,679
term loan A, maturing December 17, 2005, (ii) $20,839 acquisition term
loan B, maturing December 17, 2006 which may be drawn upon during the
first nine years following closing, (iii) per the September 27, 2001
amendment, $83,355 term loan C, maturing June 30, 2007, and (iv) a $8,335
revolving credit facility, maturing December 17, 2005. Repayment of the
loans commenced on July 30, 2000 and continues until final maturity. The
loans bear interest at rates equal to LIBOR plus 2.00% to 3.50% per annum.
As of September 30, 2003, the Company had outstanding borrowings of
$110,195 under the Senior Credit Facility and $49,013 in available
borrowings. As of September 30, 2003 and 2002, borrowings under the senior
credit facilities bore interest at a rate of 5.63% to 7.13% and 6.25% to
7.50%, respectively.
F-23
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
7. DEBT (CONTINUED):
Subject to certain exceptions, the Senior Credit Facility prohibits or
restricts the incurrence of liens, the incurrence of additional
indebtedness, certain fundamental corporate changes, dividends (including
distributions to the Company), the making of specified investments and
certain transactions with affiliates. In addition, the Senior Credit
Facility contains affirmative and negative financial covenants customarily
found in agreements of this kind, including the maintenance of certain
financial ratios, such as senior interest coverage, debt to earnings
before interest, taxes, depreciation and amortization, fixed charge
coverage and minimum net worth. At September 30, 2003, the Company was in
compliance with such covenants.
The loans under the Senior Credit Facility are collateralized by, among
other things, a lien on substantially all of TWUK's and its subsidiaries'
assets, a pledge of TWUK's ownership interest in its subsidiaries and
guaranties by TWUK's subsidiaries.
Mezzanine Loan. The Mezzanine Loan is a term loan maturing December 17,
2007 and bears interest at the rate of LIBOR plus 7% per annum, where
LIBOR plus 3.5% will be payable in cash, with the remaining interest being
added to the principal amount of the loan. The Mezzanine Loan contains
other terms and conditions substantially similar to those contained in the
Senior Credit Facility. As of September 30, 2003 and 2002, borrowings
under the mezzanine term loan bore interest at a rate of 10.63% and
11.00%, respectively.
Notes with Warrants. In connection with the Reorganization, the notes with
warrants were settled with the issuance of 890 shares of the Company's
common stock in the first quarter of fiscal 2003.
Notes Due in Connection with Acquisitions. In fiscal 2003, the Company
repaid, through TWUK, notes payable of $19,363 issued in connection with
the acquisition of certain U.K. flexible staffing agencies and wrote-off
$613 of related debt discount. In fiscal 2003, the Company also issued
notes payable of $36,026 to satisfy amounts owed under agreements to pay
additional consideration dependent upon future earning of certain acquired
entities. The notes payable are secured by the Company's senior credit
lender which requires us to keep an amount on deposit for the sole purpose
of repaying the notes payable. These notes bear interest at rates ranging
from 2.65% to 5.25%. In general, the Company may not redeem the notes on
or before three years after the date of issuance; however, such notes may
be redeemed by the holder within one year from the first interest payment
due date upon giving not less than sixty days written notice. At September
30, 2003 and 2002, the Company had outstanding notes payable of $37,693
and $19,840, respectively, and related cash restricted to the payment of
such notes have been classified as current in the accompanying
Consolidated Balance Sheets.
Guarantees. 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 September 30,
2003 and September 30, 2002, the amounts guaranteed, which approximates
the amounts outstanding, totaled approximately $167,000 and $151,000,
respectively.
F-24
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
7. DEBT (CONTINUED):
Derivative Instrument. The Company is subject to fluctuating interest
rates that may impact its consolidated results of operations or cash flows
for its variable rate Senior Credit Facility, Mezzanine Loan and cash
equivalents. In accordance with provisions of the 1999 refinancing, on
January 25, 2000, the Company capped its interest rate (LIBOR cap of 9%)
on approximately $41,935 of its floating rate debt in a contract which
expired on June 30, 2003. 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 $83,355 of its floating rate debt in
a contract which expires March 20, 2008. In accordance with FAS No. 133,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities," as amended by FAS 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 $211 at September 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.
Annual maturities of long-term debt for each of the next five years are:
YEAR ENDING SEPTEMBER 30,
-----------------------------------
2004 $ 46,698
2005 11,670
2006 30,841
2007 58,348
2008 17,821
Thereafter --
----------------
$ 165,378
================
8. SERIES A PREFERRED STOCK:
In connection with the Reorganization, the Company issued 7,774 shares of
its Series A preferred stock with a liquidation preference of
(pound)22,287 ($35,213) to certain equity investors in TWUK in exchange
for 22,287 TWUK ordinary shares which were issued to the equity investors
upon exercise of their TWUK equity warrants 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 following summary highlights the terms of
the Series A preferred stock.
F-25
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
8. SERIES A PREFERRED STOCK (CONTINUED):
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 ($4.53) 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 the 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. The Company may not declare or pay any dividends, make any
distributions, or set aside any funds or assets for payment or
distribution with regard to its common stock or any other class or series
of its stock ranking junior to the Series A preferred stock until all
accumulated dividends on the Series A preferred stock have been paid.
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 the Company's shareholders. Until Triumph Partners III, L.P. (or
any of its affiliates) beneficially owns less than 50% of the shares of
Series A preferred stock issued to it in the Reorganization, the holders
of Series A preferred stock will be entitled, voting as a separate class,
to elect one director to the Company's board of directors. In addition,
the Series A preferred stock and the Company's common stock will vote as a
single class in the election of all other directors of its board of
directors. In the event of a Covenant Breach (as that term is defined in
the Certificate of Amendment (relating to the Series A preferred stock) to
the Company's Certificate of Incorporation), the holders of the Series A
preferred stock will be entitled to elect one additional director to the
Company's board of directors.
Liquidation Preference. In the event of any liquidation, dissolution or
winding up of the Company , the holders of Series A preferred stock will
be entitled to receive, before the holders of common stock or any other
class or series of stock ranking junior to the Series A preferred stock in
respect of their shares, a liquidation preference equal to (pound)2.867
($4.53) per share (subject to adjustment for stock splits, stock
dividends, recapitalizations and similar transactions), plus any accrued
or declared but unpaid dividends on such shares of Series A preferred
stock, which the Company refers to as the "Series A Preference Amount";
provided, however, that in the event that the holders of Series A
preferred stock would have received an amount greater than the Series A
Preference Amount had they converted their Series A preferred stock into
shares of common stock immediately prior to the liquidation, dissolution
or winding up of the Company , such holders will be entitled to receive an
amount per share equal to the amount they would have received had they
effectuated such a conversion.
F-26
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
8. SERIES A PREFERRED STOCK (CONTINUED):
Conversion into Common Stock. Each share of Series A preferred stock is
currently convertible, at the option of the holder thereof, into one share
of common stock without the payment of additional consideration. Subject
to the satisfaction of certain conditions, the Company has the right to
require the holders of the Series A preferred stock to convert all, but
not less than all, of their shares into common stock. 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 the
Company to redeem their shares of Series A preferred stock upon the
occurrence of a liquidity event (as described in the Certificate of
Amendment (relating to the Series A preferred stock) to the Company's
Certificate of Incorporation) or at any time after December 17, 2007 if
the Company has paid its Senior Credit Facility and the Mezzanine Loan in
full on or before such date. The redemption right can be exercised up to
three times, but for not less than (pound)5 million on any one occasion
(or such lower amount as is necessary to redeem all of the shares of
Series A preferred stock then outstanding). Upon such a redemption, the
holders of the Series A preferred stock will be entitled to receive an
amount equal to the Series A Preference Amount.
The following table presents the changes in the carrying amount of the
Series A preferred stock for the years ended September 30, 2003 and 2002:
2003 2002
----------- ----------
Balance at October 1 , $ 32,254 $ --
Issuance of Series A preferred stock -- 35,051
Issuance costs -- (2,620)
Accretion of issuance costs 482 75
Foreign exchange effect 415 (252)
----------- ----------
Balance at September 30, 33,151 32,254
=========== ==========
F-27
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
9. STOCKHOLDERS' EQUITY:
On April 22, 2002, the Company issued 684 shares of common stock to
Timothy M. Aitken, Chairman and Chief Executive Officer, and 487 shares of
common stock to Sarah L. Eames, President and Chief Operating Officer.
Simultaneously with this issuance, the Company entered into agreements
with Mr. Aitken and Ms. Eames in which the Company agreed to provide them
(through cash bonuses and loans) with substantially all of the cash
necessary for them to pay the income taxes that they are expected to incur
as a result of the issuances. Pursuant to these agreements, the Company
made a cash bonus payment to Mr. Aitken of $1,401 and loaned him $550 and
made a cash bonus payment to Ms. Eames of $846 and loaned her $390. The
loans, which have been issued on a recourse basis, provide for interest at
the rate of 4.65% compounded annually. All outstanding principal and
accrued interest will be due on the earlier of April 30, 2007 or the date
on which the employee disposes of the common shares received in accordance
with the agreements. As collateral for the loans the employees have
pledged an aggregate of 1,155 fully vested non-qualified stock options
held by the employees and any proceeds received from the sale of the
underlying securities. In addition, pursuant to these agreements, TWUK
agreed to indemnify Mr. Aitken and Ms. Eames for certain income tax
liabilities that they may incur as a result of these share issuances,
subject to a maximum aggregate amount of $1,000. These executive bonuses
and loans have been approved by the Company's Board of Directors. The
Company had recognized an aggregate expense of $6,558 related to these
transactions in the year ended September 30, 2002.
The Company registered, at its expense, the resale of the shares issued to
Mr. Aitken and Ms. Eames.
On April 22, 2002, the Company entered into a Stock Purchase Agreement
with Hyperion TWH Fund II LLC, Triumph Partners III, L.P. and Triumph III
Investors, L.P pursuant to which the Company issued, on April 30, 2002, an
aggregate of 750 shares of the Company's common stock at a per share
purchase price of $4.25 per share. In addition, the Company registered, at
its expense, the resale of such shares.
In January 2001, the Company initiated a stock repurchase program, whereby
the Company may purchase up to approximately $1,000 of its outstanding
common stock in open market or privately negotiated transactions. In May
2003, the Company initiated another stock repurchase program, whereby the
Company may purchase up to an additional $3,000 of its outstanding common
stock in open market transactions or in privately negotiated transactions.
As of September 30, 2003, the Company had acquired 408 shares for an
aggregate purchase price of $1,285 which is reflected as treasury stock in
the consolidated balance sheet at September 30, 2003.
F-28
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
10. INCOME TAXES:
The provision for income taxes from continuing operations for the years
ended September 30 is summarized as follows:
2003 2002 2001
----------------- ------------------- --------------------
Current:
Federal $ (1,806) $ -- $ --
Foreign 7,622 4,770 2,623
Deferred:
Federal -- -- 21,462
Foreign (906) 201 32
----------- -------------- ------------
Provision for income taxes $ 4,910 $ 4,971 $ 24,117
=========== ============== ============
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities recorded for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and
liabilities as of September 30 are as follows:
2003 2002
------------------ --------------------
Deferred tax assets:
Provision for doubtful accounts $ 958 $ 6,755
Accrued expenses 233 265
Federal net operating loss carryforward 24,450 19,916
State net operating loss carryforward 1,998 1,666
Capital loss carryforward 768 768
Charitable contribution 8 --
AMT credit 68 --
Other, net 83 592
------------ --------------
Gross deferred tax assets 28,566 29,962
Valuation allowance (27,645) (28,187)
------------ --------------
Net deferred tax assets 921 1,775
------------ --------------
Deferred tax liabilities:
Depreciation (938) (1,949)
Intangible assets (510) --
Other, net -- (575)
------------ --------------
Deferred tax liabilities (1,448) (2,524)
------------ --------------
Net deferred tax liability $ (527) $ (749)
============ ==============
Management had been previously committed to implementing tax strategies
that provided for the sale of appreciated assets, including a portion of
the Company's ownership interest in its U.K. subsidiary, to generate
sufficient taxable income to realize the tax net operating losses prior to
their expiration. While the Company believes it will eventually realize
the value of its tax losses, current developments, including the continued
expansion of the U.K. operations, have increased the uncertainty as to
both the execution of the original strategy and the appropriateness of a
tax strategy which may not align with the Company's current business
strategy. These uncertainties have impaired the Company's ability to
determine whether it is more likely than not that its deferred tax assets
will be realized. Accordingly, a full valuation allowance for all
remaining U.S. deferred tax assets has been provided.
F-29
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
10. INCOME TAXES (CONTINUED):
As of September 30, 2003, the Company has a Federal net operating loss
carryforward of approximately $73,000 which if unused, will expire in the
years 2019 through 2023. The Company has a capital loss carryforward of
approximately $2,100 which, if unused, will expire in fiscal 2004.
Reconciliations of the differences between income taxes computed at
Federal statutory tax rates and consolidated provisions for income taxes
on income (loss) before equity income of and interest income earned from
U.K. subsidiaries for the years ended September 30 are as follows:
2003 2002 2001
----------------- -------------------- --------------------
Income taxes at 34% $ 5,569 $ 3,021 $ (1,052)
Tax contingency (1,874) -- --
Nondeductible expenses, primarily 6 943
amortization and write down of intangible assets 1,305
Valuation allowance 1,304 1,896 24,745
Foreign tax, net (189) -- --
Other, net 94 (889) (881)
------------ ------------ ------------
Provision for income taxes $ 4,910 $ 4,971 $ 24,117
============ ============ ============
Provision has not been made for U.S. or additional foreign taxes on
approximately $109,556 of undistributed earnings of the U.K. foreign
subsidiaries. Those earnings have been and will continue to be reinvested.
Determination of the amount of unrecognized deferred tax liability with
respect to such earnings is not practical. We believe that the amount of
additional taxes that might be payable on the earnings of foreign
subsidiaries, if remitted, would be partially offset by the U.S. foreign
tax credits.
Income before income taxes generated from the U.K. operations for the
years ended September 30, 2003, 2002 and 2001 was $20,307, $14,271 and
$3,684, respectively.
11. STOCK OPTION PLAN AND WARRANTS:
STOCK OPTIONS:
Under the Company's 2002 Option Plan ("Option Plan"), options may be
granted by the Compensation Committee of the Board of Directors which
determines the exercise price, vesting provisions and term of such grants.
In accordance with the terms of the Option Plan, the number of shares
available for issuance increases by one percent of the number of shares of
Common Stock outstanding as of the first day of each fiscal year.
F-30
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
11. STOCK OPTION PLAN AND WARRANTS (CONTINUED):
Following is a summary of transactions under the Option Plan during the
year ended September 30, 2003, 2002 and 2001:
2003 2002 2001
----------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF STOCK EXERCISE OF STOCK EXERCISE OF STOCK EXERCISE
OPTIONS PRICE ($) OPTIONS PRICE ($) OPTIONS PRICE ($)
----------------------------------------------------------------------
Outstanding beginning of year 1,530 4.24 1,394 4.22 1,040 5.22
Granted 1,415 4.30 205 5.41 400 1.75
Exercised (403) 2.40 -- (4) 1.75
Forfeited (288) 4.42 (69) 7.25 (42) 5.59
----------- ----------- -----------
Outstanding end of year 2,254 4.58 1,530 4.24 1,394 4.22
=========== =========== ===========
Weighted-average fair
value of options granted
during the year 3.29 2.93 0.34
=========== ============ ============
Available for future grants 1,814
===========
On May 28, 1997, the Company adopted a stock option plan for non-employee
directors (the "Directors Plan") which gives non-employee directors
options to purchase up to 100 shares of common stock. As of September 30,
2003, no options have been granted under the Directors Plan. Options under
the Directors Plan may be granted by the Board of Directors which
determines the exercise price, vesting provisions and term of such grants.
A summary of the 2,254 options outstanding as of September 30, 2003 is as
follows:
RANGE WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
OF EXERCISE PRICE REMAINING EXERCISE PRICE
EXERCISE NUMBER OF OPTIONS CONTRACTUAL LIFE NUMBER OF OPTIONS
PRICE ($) OUTSTANDING OUTSTANDING ($) IN YEARS EXERCISABLE EXERCISABLE ($)
----------------------------------- ---------------------------------------------------------------------------
1.75 351 1.75 351 1.75
2.2
3.83 9 3.83 9.9 - -
4.00 237 4.00 9.7 185
4.00
4.00 556 4.00 11.0 - -
4.31 10 4.31 5.2 10 4.31
4.70 501 4.70 9.1 - -
5.41 90 5.41 8.7 30 5.41
7.25 500 7.25 4.3 500 7.25
------- -------
1.75 to 7.25 2,254 4.58 7.5 1,076 4.82
======= =======
F-31
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
11. STOCK OPTION PLAN AND WARRANTS (CONTINUED):
WARRANTS:
In the fourth quarter of fiscal 2003, in connection with the execution of
an agreement with an unaffiliated third party pursuant to which such third
party agreed to provide us with consulting services related to corporate
finance and investment banking matters, the Company issued to such third
party warrants to purchase up to an aggregate of 350 shares of its common
stock. Of the 350 warrants issued, 100 of the warrants are exercisable at
$4.75 per share, 175 of the warrants are exercisable at $5.50 per share
and 75 of the warrants are exercisable at a price of $6.00 per share. The
warrants expire on August 13, 2007. At issuance, the fair value of the
warrants of $603 was recorded as a deferred cost and is being amortized
over the two year life of the agreement. For the year ended September 30,
2003, the Company recorded $41 in amortization related to such warrants.
12. COMMITMENTS AND CONTINGENCIES:
ACQUISITION AGREEMENTS:
Related to the Company's acquisitions of certain flexible staffing
agencies, we have entered into agreements to pay additional amounts,
payable in cash and shares of the Company's stock, of up to $13,579 at
September 30, 2003, in contingent consideration dependent upon future
earnings of such acquired entities.
EMPLOYMENT AGREEMENTS:
The Company has two employment agreements with certain executive officers
(the Company's Chief Executive Officer and the Company's Chief Operating
Officer) that provided for minimum aggregate annual compensation of $825
in fiscal 2003. Each employment agreement contains, among other things,
customary confidentiality and termination provisions and provides that in
the event of the termination of the executive following a "change of
control" of the Company (as defined in such agreements), or a significant
change in their responsibilities, such person will be entitled to receive
a cash payment of up to 2.9 times their average annual base salary during
the preceding 12 months. Each employment agreement expire on September 24,
2004; however, each employment agreement shall be automatically renewed on
such date, and on each anniversary of such date, for an additional period
of one-year, unless the Company or the executive gives notice to the other
of its intents to terminate the employment agreement within 90 days of the
then applicable termination date.
OPERATING LEASES:
The Company has entered into various operating lease agreements for office
space and equipment. Certain of these leases provide for renewal options.
F-32
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Future minimum rental commitments required under operating leases that
have non-cancelable lease terms in excess of one year as of September 30,
2003 are as follows:
2004 $1,643
2005 1,372
2006 1,191
2007 1,116
2008 789
Thereafter 2,438
-----
$8,549
======
Rent expense under non-capitalized, non-cancelable lease agreements for
the years ended September 30, 2003, 2002 and 2001 amounted to $2,749,
$2,002 and $1,565, respectively.
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.
CONTINGENCIES:
Some of the Company's subsidiaries were Medicare Part B suppliers who
submit claims to the designated carrier who is the government's claims
processing administrator. From time to time, the carrier may request an
audit of Medicare Part B claims on a prepayment or postpayment basis. Some
of the Company's subsidiaries currently have pending such audits. If the
outcome of any audit results in a denial or a finding of an overpayment,
then the affected subsidiary has appeal rights. Under postpayment audit
procedures, the supplier generally pays the alleged overpayment and can
pursue appeal rights for a refund of any paid overpayment incorrectly
assessed against the supplier. Some of the subsidiaries currently are
responding to these audits and pursuing appeal rights in certain
circumstances.
F-33
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED):
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 other legal proceedings and claims
incidental to its normal business activities. The Company is vigorously
defending its position in all such proceedings and has recorded an accrual
of approximately $1,117 to cover its estimate for exposure related to
these matters. Management believes these matters should not have a
material adverse impact on the consolidated financial position, cash flows
or results of operations of the Company.
13. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS:
As disclosed in Note 4, 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
years ended September 30, 2003, 2002 and 2001, 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 accounting policies of the business segment are the same as
those described in the summary of significant accounting policies.
F-34
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
13. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS (CONTINUED):
The following tables present certain financial information by reportable
business segment and geographic area of operations for the years ended
September 30, 2003, 2002 and 2001.
YEAR ENDED SEPTEMBER 30, 2003
--------------------------------------------
U.K.
OPERATIONS TOTAL
------------ -------------
Net patient services $ 287,964 $ 287,964
Net respiratory, medical equipment and supplies 6,415 6,415
---------- ----------
Total revenues to unaffiliated customers $ 294,379 $ 294,379
========== ==========
Segment operating profit $ 31,497 $ 31,497
==========
Corporate expenses (3,822)
Interest expense, net (11,279)
Foreign exchange loss (18)
----------
Income before income taxes and discontinued
operations $ 16,378
==========
Depreciation and amortization $ 1,976 $ 1,976
==========
Corporate depreciation and amortization 9
----------
Total depreciation and amortization $ 1,985
==========
Identifiable assets, September 30, 2003 $ 302,309 $ 302,309
==========
Corporate assets 9,359
----------
Total assets, September 30, 2003 $ 311,668
==========
Capital expenditures $ 4,015 $ 4,015
==========
Corporate capital expenditures 11
----------
Total capital expenditures $ 4,026
==========
F-35
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
13. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS (CONTINUED):
YEAR ENDED SEPTEMBER 30, 2002
---------------------------------------------
U.K.
OPERATIONS TOTAL
------------- -------------
Net patient services $ 237,890 $ 237,890
Net respiratory, medical equipment and supplies 4,938 4,938
---------- ----------
Total revenues to unaffiliated customers $ 242,828 $ 242,828
========== ==========
Segment operating profit $ 27,786 $ 27,786
==========
Corporate expenses (10,554)
Interest expense, net (13,472)
Gain on settlement of PIK interest 5,143
Foreign exchange loss (19)
----------
Income before income taxes, minority interest and
discontinued operations $ 8,884
==========
Depreciation and amortization $ 1,321 $ 1,321
==========
Corporate depreciation and amortization 16
----------
Total depreciation and amortization $ 1,337
==========
Identifiable assets, September 30, 2002 $ 256,407 $ 256,407
==========
Assets of discontinued operations 8,733
Corporate assets 2,973
----------
Total assets, September 30, 2002 $ 268,113
==========
Capital expenditures $ 3,082 $ 3,082
==========
Corporate capital expenditures 9
----------
Total capital expenditures $ 3,091
==========
F-36
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
13. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS (CONTINUED):
YEAR ENDED SEPTEMBER 30, 2001
---------------------------------------------
U.K.
OPERATIONS TOTAL
------------- -------------
Net patient services $ 130,719 $ 130,719
Net respiratory, medical equipment and supplies 7,322 7,322
---------- ----------
Revenues to unaffiliated customers $ 138,041 $ 138,041
========== ==========
Segment operating profit $ 12,676 $ 12,676
==========
Corporate expenses (3,053)
Mail-order expenses (3,883)
Interest expense, net (8,433)
Foreign exchange loss (400)
----------
Loss before income taxes, minority interest and
discontinued $ (3,093)
==========
Depreciation and amortization $ 5,080 $ 5,080
==========
Corporate depreciation and amortization 47
----------
Total depreciation and amortization $ 5,127
==========
Identifiable assets, September 30, 2001 $ 236,472 $ 236,472
==========
Assets of discontinued operations 10,899
Corporate assets 702
----------
Total assets, September 30, 2001 $ 248,073
==========
Capital expenditures $ 1,244 $ 1,244
==========
Corporate capital expenditures 15
----------
Total capital expenditures $ 1,259
==========
The net assets for the U.K. Operations were $109,556 and $81,377 as of
September 30, 2003 and 2002, respectively.
14. PROFIT SHARING PLAN:
The Company has a profit sharing plan pursuant to Section 401(k) of the
Internal Revenue Code, concerning all U.S. employees who meet certain
requirements. These requirements include, among other things, at least one
year of service and attainment of the age of 21.
The plan operates as a salary reduction plan whereby participants
contribute anywhere from 1% to 15% of their compensation, not to exceed
the maximum available under the Code.
The Company may make additional matching cash contributions at its
discretion. The Company's contributions to the plan were approximately
$35, $30 and $19 for the years ended September 30, 2003, 2002 and 2001,
respectively.
F-37
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
14. PROFIT SHARING PLAN (CONTINUED):
In addition to the U.S. plan described above, certain of the Company's
U.K. subsidiaries also sponsor personal pension plans. The plans operate
as salary reduction plans, which also allows for lump sum contributions,
whereby participants contribute anywhere from 1% to 40% of their
compensation, not to exceed the maximum available under the U.K. tax laws.
The Company may make an additional contribution (which varies according to
employee contracts and contribution elections) which is in the form of
cash. The Company's contributions to the U.K. plans were $131, $252 and
$26 for the years ended September 30, 2003, 2002 and 2001, respectively.
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
The following table presents the comparative unaudited quarterly results
for the years ended September 30, 2003 and 2002:
2003 QUARTER ENDED DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
--------------- ------------ ------------ ---------------------
Total revenues $ 67,998 $ 71,686 $ 75,274 $ 79,421
=========== =========== ========== ============
Gross profit $ 18,898 $ 19,625 $ 20,595 $ 22,205
=========== =========== ========== ============
Discontinued operations $ 184 $ (62) $ 381 $ --
=========== =========== ========== ============
Net income $ 2,303 $ 3,526 (a) $ 2,120 $ 4,022
=========== =========== ========== ============
Net income available $
to common stockholders $ 1,309 2,552 $ 1,117 $ 2,988
=========== =========== ========== ============
Basic and diluted net income per
share of common stock $ 0.06 $ 0.11 $ 0.05 $ 0.13
=========== =========== ========== ============
2002 QUARTER ENDED DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
--------------- ------------ --------------- ---------------------
Total revenues $ 56,582 $ 57,511 $ 60,587 $ 68,148
=========== =========== =========== ==========
Gross profit $ 14,903 $ 15,149 $ 16,412 $ 19,615
=========== =========== =========== ==========
Discontinued operations $ 203 $ 265 $ 234 $ 299
=========== =========== =========== ==========
Net income (loss) $ 1,457 $ 1,626 $ (5,465) (b) $ 7,176 (c)
=========== =========== =========== ==========
Net income (loss) available to $
common stockholders $ 1,457 1,626 $ (5,579) $ 6,274
=========== =========== =========== ==========
Basic net income (loss) per share of
common stock $ 0.08 $ 0.09 $ (0.30) $ 0.30
=========== =========== =========== ==========
Diluted net income (loss) per
share of common stock $ 0.06 $ 0.07 $ (0.30) $ 0.26
=========== =========== =========== ==========
(a) Includes benefit $1,873 related to the reversal of an estimated income
tax liability for a business that was previously discontinued and no
longer has any tax liabilities.
(b) Includes a non-cash charge of $4,216 for the issuance of shares of the
Company's common stock to senior management and a charge for $2,341 for
tax equalization bonuses paid to senior management for reimbursement of
income taxes incurred as a result of the share issuances.
(c) Includes net charges of $2,410 related to the completion of the
Reorganization and $5,143 gain in the settlement of PIK interest.
F-38
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
16. SUBSEQUENT EVENT:
On December 24, 2003, the Company completed its acquisition of Primary
Care Agency Limited, a supplier of flexible healthcare staffing services
primarily to hospitals, primary care trusts and learning disability homes
in the U.K. The consideration included a payment of $2,095 in cash and
additional contingent cash consideration of $1,873 dependent upon future
earnings of the acquired entity.
On December 2, 2003, Mr. Aitken and Ms. Eames repaid in full the principal
and accrued interest on the promissory notes issued by them to the Company
in connection with the Reorganization in fiscal 2002. The principal and
accrued interest repaid aggregated $591 and $419, respectively. The loans
were repaid by delivery to the Company of 104 and 73 shares of the
Company's common stock held by Mr. Aitken and Ms. Eames, respectively,
valued at $5.70 per share, the closing price on the day prior to the
repayment date. The Company also agreed to reimburse Mr. Aitken and Ms.
Eames for the taxes incurred by them on the disposition of the shares to
the Company, which are estimated to be approximately $83 and $51,
respectively.
F-39
ALLIED HEALTHCARE INTERNATIONAL INC.
(IN THOUSANDS)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- --------------------------- ------------ -------------------------------- ------------- ------------
Additions Charged to
------------- ------ -----------
Balance at Balance at
Beginning Cost and Other End of
Description of Period Expenses Accounts Deductions Period
- --------------------------- ------------ ------------- ----------- ------------- ------------
Allowance for Doubtful
Accounts:
Year ended
September 30, 2003 $ 22,849 $1,205 $ 227(B) $ 20,935(A) $ 3,346
Year ended
September 30, 2002 $ 22,737 $ 985 $ 158(B) $ 1,031(A) $ 22,849
Year ended
September 30, 2001 $ 20,751 $2,586 $ 347(B) $ 947(A) $ 22,737
(A) Doubtful accounts written off, net of recoveries and sold.
(B) Assumed in acquisitions and adjustments arising from translation of
foreign financial statements to U.S. dollars.
S-1