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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2003
OR
[ ] Transition Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934 From the
transition period from _____ to _____
COMMISSION FILE NUMBER 1-11570
-------------------------------------------------------------
ALLIED HEALTHCARE INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)
NEW YORK 13-3098275
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
555 MADISON AVENUE, NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 750-0064
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 9, 2004
Common Stock 22,104,628 Shares
ALLIED HEALTHCARE INTERNATIONAL INC.
FIRST QUARTER REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I
Item 1. Financial Statements (Unaudited)............................................................3
Condensed Consolidated Balance Sheets - December 31, 2003 (Unaudited) and
September 30, 2003........................................................................4
Condensed Consolidated Statements of Operations (Unaudited) - For the Three
Months Ended December 31, 2003 and December 31, 2002......................................5
Condensed Consolidated Statements of Cash Flows (Unaudited) - For the Three
Months Ended December 31, 2003 and December 31, 2002......................................6
Notes to Condensed Consolidated Financial Statements (Unaudited)............................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................19
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................33
Item 4. Controls and Procedures.....................................................................35
PART II
Item 6. Exhibits and Reports on Form 8-K............................................................36
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This Quarterly Report contains certain
forward-looking statements and information that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. The statements contained in this Quarterly Report relating to
matters that are not historical facts are forward-looking statements that
involve risks and uncertainties, including, but not limited to, future demand
for the company's products and services, general economic conditions, government
regulation, competition and customer strategies, capital deployment, the impact
of pricing and reimbursement and other risks and uncertainties. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected.
Page 2
PART I
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).
The condensed consolidated financial statements of Allied Healthcare
International Inc. (the "Company") begin on page 4.
Page 3
ALLIED HEALTHCARE INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, SEPTEMBER 30,
2003 2003
(UNAUDITED)
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 19,928 $ 21,691
Restricted cash 1,779 37,693
Accounts receivable, less allowance for doubtful
accounts of $3,820 and $3,346, respectively 36,637 35,745
Unbilled accounts receivable 8,790 11,278
Inventories 525 431
Prepaid expenses and other assets 2,651 1,772
--------- ---------
Total current assets 70,310 108,610
Property and equipment, net 11,474 10,326
Restricted cash 2,900 3,008
Goodwill 197,267 183,703
Other intangible assets, net 2,128 2,019
Deferred financing costs and other assets 3,848 4,002
Derivative asset 410 --
--------- ---------
Total assets $ 288,337 $ 311,668
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,779 $ 37,693
Current portion of long-term debt 12,097 9,005
Dividends payable 5,402 4,464
Liabilities of discontinued operations 690 690
Accounts payable 2,723 2,676
Accrued expenses 23,377 24,969
Taxes payable 4,305 4,332
--------- ---------
Total current liabilities 50,373 83,829
Long-term debt 120,652 118,680
Derivative liability -- 211
Deferred income taxes and other long-term liabilities 831 634
--------- ---------
Total liabilities 171,856 203,354
--------- ---------
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) 33,270 33,151
--------- ---------
Shareholders' equity:
Preferred stock, $.01 par value; authorized 2,000 shares,
issued and outstanding - none -- --
Common stock, $.01 par value; authorized 62,000 shares,
issued 22,689 shares 227 227
Additional paid-in capital 141,841 142,897
Accumulated other comprehensive income 10,489 3,140
Accumulated deficit (67,052) (68,814)
--------- ---------
85,505 77,450
Less notes receivable from officers -- (1,002)
Less cost of treasury stock (585 and 408 shares, respectively) (2,294) (1,285)
--------- ---------
Total shareholders' equity 83,211 75,163
--------- ---------
Total liabilities and shareholders' equity $ 288,337 $ 311,668
========= =========
See notes to condensed consolidated financial statements.
Page 4
ALLIED HEALTHCARE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
----------------------------
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
Revenues:
Net patient services $ 76,723 $ 66,529
Net respiratory, medical equipment and supplies 1,820 1,469
-------- --------
Total revenues 78,543 67,998
-------- --------
Cost of revenues:
Patient services 55,188 48,233
Respiratory, medical equipment and supplies 1,045 867
-------- --------
Total cost of revenues 56,233 49,100
-------- --------
Gross profit 22,310 18,898
Selling, general and administrative expenses 16,706 11,806
-------- --------
Operating income 5,604 7,092
Interest income (224) (590)
Interest expense 2,426 3,788
Foreign exchange loss 11 8
-------- --------
Income before income taxes and discontinued operations 3,391 3,886
Provision for income taxes 1,629 1,767
-------- --------
Income from continuing operations 1,762 2,119
Income from discontinued operations -- 184
-------- --------
Net income 1,762 2,303
Redeemable preferred dividends and accretion 1,056 994
-------- --------
Net income available to common shareholders $ 706 $ 1,309
======== ========
Basic and diluted income per share of common stock from:
Income from continuing operations $ 0.03 $ 0.05
Income from discontinued operations -- 0.01
-------- --------
Net income available to common shareholders $ 0.03 $ 0.06
======== ========
Weighted average number of common shares outstanding:
Basic 22,224 21,171
======== ========
Diluted 22,651 21,559
======== ========
See notes to condensed consolidated financial statements.
Page 5
ALLIED HEALTHCARE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
-------------------------------
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 1,762 $ 2,303
Adjustments to reconcile net income to net
cash provided by operating activities:
Income from discontinued operations -- (184)
Depreciation and amortization 532 390
Amortization of intangible assets 124 --
Amortization of debt issuance costs and warrants 472 560
Write-off of debt discount -- 601
Provision for doubtful accounts 244 164
Interest accrued on loans to officers (7) (11)
Interest in kind 171 152
Deferred income taxes 162 --
Changes in operating assets and liabilities, excluding the effect of
businesses acquired and sold:
Decrease in accounts receivable 1,193 1,253
(Increase) decrease in inventories (62) 23
Decrease (increase) in prepaid expenses and other assets 2,729 (624)
Decrease in accounts payable and other liabilities (4,128) (2,632)
-------- --------
Net cash provided by continuing operations 3,192 1,995
Net cash provided by discontinued operations -- 198
-------- --------
Net cash provided by operating activities 3,192 2,193
-------- --------
Cash flows from investing activities:
Capital expenditures (973) (759)
Payments for acquisitions - net of cash acquired (1,772) (5,280)
Proceeds limited to future acquisitions 37,184 21,683
Payments on acquisitions payable -- (3,004)
-------- --------
Net cash provided by investing activities 34,439 12,640
-------- --------
Cash flows from financing activities:
Payments for issuance costs -- (15)
Payments on notes payable (36,888) (15,239)
Principal payments on long-term debt (3,585) (3,303)
-------- --------
Net cash used in financing activities (40,473) (18,557)
-------- --------
Effect of exchange rate on cash 1,079 419
-------- --------
Decrease in cash (1,763) (3,305)
Cash and cash equivalents, beginning of period 21,691 18,278
-------- --------
Cash and cash equivalents, end of period $ 19,928 $ 14,973
======== ========
Supplemental cash flow information:
Cash paid for interest $ 2,639 $ 2,627
======== ========
Cash paid for income taxes $ 1,769 $ 1,598
======== ========
Supplemental disclosure of non-cash investing and financing activities: Details
of business acquired in purchase transactions:
Fair value of assets acquired $ 2,238 $ 7,637
======== ========
Liabilities assumed or incurred $ 119 $ 2,209
======== ========
Cash paid for acquisitions (including related expenses) $ 2,119 $ 5,427
Cash acquired 347 147
-------- --------
Net cash paid for acquisitions $ 1,772 $ 5,280
======== ========
Issuance of notes payable $ 34,671
========
Issuance of common stock $ 6,360
========
See notes to condensed consolidated financial statements.
Page 6
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1. BASIS OF PRESENTATION:
Allied Healthcare International Inc. and its subsidiaries (the "Company")
is one of the leading providers of healthcare staffing services, including
nursing and ancillary services, to the United Kingdom ("U.K.") healthcare
industry. The Company operates a community-based network of 119 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.
The Condensed Consolidated Financial Statements presented herein are
unaudited and include all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position and results of operations of the
interim periods pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America
("U.S.") have been condensed or omitted. The balance sheet at September
30, 2003 has been derived from the audited consolidated balance sheet at
that date, but does not include all information and footnotes required by
U.S. generally accepted accounting principles for complete financial
statements. These condensed financial statements should be read in
conjunction with the consolidated financial statements included in the
Company's Form 10-K for the year ended September 30, 2003. Although the
Company's operations are not highly seasonal, the results of operations
for the three months ended December 31, 2003 are not necessarily
indicative of operating results for the full year.
Certain prior period balances have been reclassified to conform to the
current period presentation.
2. STOCK-BASED COMPENSATION:
In accordance with FAS No. 123, "Accounting for Stock-Based Compensation"
("FAS No. 123"), the Company continues to apply APB No. 25, "Accounting
for Stock Issued to Employees," and related interpretations, in accounting
for its stock-based compensation plans. Accordingly, no compensation cost
has been recognized for its stock option plans. The fair value of each
option granted is estimated on the date of grant using the Black-Scholes
option-pricing model.
Page 7
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
2. STOCK-BASED COMPENSATION (CONTINUED):
Had compensation costs for the Company's stock options been determined
consistent with the fair value method prescribed by FAS No. 123, the
Company's net income and related per share amounts would have been
adjusted to the pro forma amounts indicated below:
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2003 2002
----------- ------------
Net income available to common shareholders, as reported $ 706 $ 1,309
Total stock-based compensation expense determined under fair value
based method for all awards, net of related tax effects (2,983) (155)
------- -------
Pro forma net (loss) income available to common shareholders $(2,277) $ 1,154
======= =======
Net (loss) income per share:
Basic and diluted - as reported $ 0.03 $ 0.06
Basic and diluted - pro forma $ (0.10) $ 0.05
3. RESTRICTED CASH:
Restricted cash represents proceeds limited to future acquisitions. The
proceeds refer to amounts available for payment of consideration for
certain permitted acquisitions under the Company's senior 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.
4. INTANGIBLE ASSETS:
Intangible assets, consisting principally of goodwill, are carried at
cost, net of accumulated amortization.
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 are 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.
Page 8
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
4. INTANGIBLE ASSETS (CONTINUED):
The following table presents the changes in the carrying amount of
goodwill for the three months ended December 31, 2003:
THREE MONTHS ENDED DECEMBER 31, 2003
------------------------------------
U.K. U.S.
OPERATIONS CORPORATE TOTAL
---------- ---------- ----------
Balance at September 30, 2003 $ 181,403 $ 2,300 $ 183,703
Goodwill acquired during the period, net 1,442 -- 1,442
Foreign exchange effect 12,122 -- 12,122
---------- ---------- ----------
Balance at December 31, 2003 $ 194,967 $ 2,300 $ 197,267
========== ========== ==========
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:
DECEMBER 31, 2003
----------------------------------------
Range Gross Net
Of Carrying Accumulated Carrying
Lives Amount Amortization Amount
----- -------- ------------ ------
Customer relationships 5 - 10 $2,230 $270 $1,960
Trade names 3 183 66 117
Non-Compete agreements 2 - 3 54 17 37
Favorable leasehold interests 2 - 5 21 7 14
------ ---- ------
Total $2,488 $360 $2,128
====== ==== ======
Amortization expense for other intangible assets still subject to
amortization was $124 for the three months ended December 31, 2003. At
December 31, 2003, estimated future amortization expense of other
intangible assets still subject to amortization is as follows:
approximately $224 for the nine months ending September 30, 2004 and $292,
$229, $214 and $212 for the fiscal years ending September 30, 2005, 2006,
2007 and 2008, respectively.
5. NOTES PAYABLE:
During the quarter ended December 31, 2003, the Company repaid, through
its U.K. subsidiary, notes payable of $36,888 issued in connection with
the acquisition of certain U.K. flexible staffing agencies. Of this
amount, $34,671 was issued during the quarter ended December 31, 2002.
Also during the quarter ended December 31, 2002, the Company repaid,
through its U.K. subsidiary, notes payable of $15,239 issued in connection
with the acquisition of certain U.K. flexible staffing agencies and
wrote-off $601 of related debt discount.
Page 9
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
5. NOTES PAYABLE (CONTINUED):
At December 31, 2003, the Company had one remaining note payable that is
secured by the Company's senior credit lender which requires the Company
to keep an amount on deposit for the sole purpose of repaying the note
payable. The Company may not redeem the note on or before three years
after the date of issuance, September 27, 2004; however, such note 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 December 31, 2003, the note payable of $1,779, bearing interest at a
rate of 5.25%, and the related cash restricted to the payment of such note
are classified as current in the accompanying condensed consolidated
balance sheet.
6. ACCRUED EXPENSES:
Accrued expenses consist of the following at:
DECEMBER 31, SEPTEMBER 30,
2003 2003
------------ -------------
Payroll and related expenses $17,934 $17,927
Other 5,443 7,042
------- -------
$23,377 $24,969
======= =======
7. SHAREHOLDERS' EQUITY:
On December 2, 2003, Mr. Aitken, the Company's Chairman, and Ms. Eames,
the Company's Chief Executive Officer, 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 shares delivered by Mr. Aitken and Ms. Eames are held
by the Company as treasury shares. 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 were $83 and $51, respectively.
Page 10
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
8. 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 the Company 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 three months
ended December 31, 2003, the Company recorded $75 in amortization related
to such warrants.
9. BUSINESS COMBINATIONS AND DISPOSITIONS:
COMBINATIONS:
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 $1,861 dependent upon future
earnings of the acquired entity.
The acquisition has been accounted for as a purchase business combination
and the pro forma results of operations and related per share information
have not been presented as the amounts are considered immaterial.
In the first quarter of fiscal 2004, the Company completed its purchase
price allocation of the Dalesway Nursing Services acquisition completed in
fiscal 2003. Accordingly, identifiable intangible assets were assigned a
value of approximately $116 with the remaining portion of $234
attributable to goodwill.
The preliminary purchase price allocations for the remaining fiscal 2003
and fiscal 2004 acquisitions are subject to adjustments and will be
finalized once additional information concerning asset and liability
valuations are obtained. Then, final asset and liability fair values may
differ from those set forth on the accompanying condensed consolidated
balance sheet at December 31, 2003; however, the changes are not expected
to have a material effect on the consolidated financial position, results
of operations or cash flows of the Company.
Page 11
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
9. BUSINESS COMBINATIONS AND DISPOSITIONS (CONTINUED):
DISPOSITIONS:
In the third quarter of fiscal 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" ("FAS No.
144"), the Company has accounted for Home Healthcare as a discontinued
operation. The condensed consolidated financial statements reflect the
liabilities of the discontinued operations, and the operations for the
prior periods are reported in discontinued operations.
The following table presents the financial results of the discontinued
operations for the three months ended December 31, 2002:
Revenues:
Net infusion services $3,202
Net respiratory, medical equipment and supplies 1,239
------
Total revenues 4,441
------
Cost of revenues:
Infusion services 2,414
Respiratory, medical equipment and supplies 655
------
Total cost of revenues 3,069
------
Selling, general and administrative
expenses 1,188
------
Income from discontinued operations $ 184
======
Diluted income per share from discontinued operations $ 0.01
======
At December 31, 2003 and September 30, 2003, liabilities of discontinued
operations of $690 relate to tax contingencies.
Page 12
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
10. DERIVATIVE INSTRUMENT:
On March 20, 2003, the Company entered into a new Rate Cap and Floor
Collar Agreement that caps its interest rate at LIBOR of 5.50% and its
interest floor at LIBOR of 4.47%, subject to special provisions, on
approximately $88,925 of the Company's floating rate debt under 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 an asset of $410 at December 31, 2003. In addition, changes in the
value from period to period of the interest cap and floor derivative will
be recorded as and adjustment to interest expense.
11. INCOME TAXES:
The provision for income taxes from continuing operations for the three
months ended December 31, 2003 and 2002 was $1,629 and $1,767,
respectively. For the three months ended December 31, 2003, the effective
tax rate was 48.0% due to the Company recording an additional valuation
allowance for the tax benefit associated with the current year's U.S.
operating loss.
12. EARNINGS PER SHARE:
Basic earnings per share ("EPS") is computed using the weighted average
number of common shares outstanding. Diluted EPS adjusts basic EPS for the
effects of stock options, warrants and redeemable convertible stock only
when such effect is dilutive. In future periods, the impact of the assumed
conversion of the 7,774 of redeemable convertible preferred stock could
potentially dilute basic EPS. At December 31, 2003 and 2002, the Company
had outstanding stock options and warrants to purchase 1,553 and 1,282
shares, respectively, of common stock ranging in price from $5.41 to $7.25
and $4.70 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 for the first quarter of fiscal
2004.
The weighted average number of shares used in the basic and diluted
earnings income per share computations for the three months ended December
31, 2003 and 2002 are as follows:
THREE MONTHS ENDED DECEMBER 31,
2003 2002
------------- ------------
Weighted average number of common shares outstanding
as used in computation of basic EPS of common stock 22,224 21,171
Effect of dilutive securities - stock options and warrants
treasury stock method 427 388
------ ------
Shares used in computation of diluted EPS of common stock 22,651 21,559
====== ======
Page 13
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
13. COMPREHENSIVE INCOME:
Components of comprehensive income include net income and all other
non-owner changes in equity, such as the change in the cumulative
translation adjustment, which is the only item of other comprehensive
income impacting the Company. The following table displays comprehensive
income for the three months ended December 31, 2003 and 2002:
THREE MONTHS ENDED DECEMBER 31,
2003 2002
------------- ------------
Net income $1,762 $2,303
Change in cumulative translation adjustment, net of income taxes 7,349 2,252
------ ------
Comprehensive income, net of income taxes $9,111 $4,555
====== ======
14. COMMITMENTS AND CONTINGENCIES:
ACQUISITION AGREEMENTS:
Related to the Company's acquisitions of certain flexible staffing
agencies, the Company has entered into agreements to pay additional
amounts, payable in cash and shares of the Company's stock, of up to
$16,202 at December 31, 2003 in contingent consideration dependent upon
future earnings of such acquired entities.
GUARANTEES:
The Company's U.K. subsidiaries guarantee the debt and other obligations
of certain wholly-owned U.K. subsidiaries under the senior credit
facility, the mezzanine indebtedness and various notes issued in
connection with the acquisition of certain U.K. flexible staffing
agencies. At December 31, 2003 and September 30, 2003, the amounts
guaranteed, which approximates the amounts outstanding, totaled
approximately $136,000 and $167,000, 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
Page 14
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
14. COMMITMENTS AND CONTINGENCIES (CONTINUED):
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
submitted claims to the designated carrier who is the government's claims
processing administrator. From time to time, the carrier may request an
audit of Medicare Part B claims on a prepayment or postpayment basis. Some
of the Company's subsidiaries currently have pending such audits. If the
outcome of any audit results in a denial or a finding of an overpayment,
then the affected subsidiary has appeal rights. Under postpayment audit
procedures, the supplier generally pays the alleged overpayment and can
pursue appeal rights for a refund of any paid overpayment incorrectly
assessed against the supplier. Some of the subsidiaries currently are
responding to these audits and pursuing appeal rights in certain
circumstances.
The Company believes that it is substantially in compliance, in all
material respects, with the applicable provisions of the Federal statutes,
regulations and laws, and applicable state laws, together with all
applicable laws and regulations of other countries in which the Company
operates. Because of the broad and sometimes vague nature of these laws,
there can be no assurance that an enforcement action will not be brought
against the Company, or that the Company will not be found to be in
violation of one or more of these provisions. At present, the Company
cannot anticipate what impact, if any, subsequent administrative or
judicial interpretation of the applicable Federal and state laws 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 $863 to cover its estimate for exposure related to these
matters. Management believes these matters should not have a material
adverse impact on its consolidated financial position, cash flows or
results of operations.
Page 15
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
15. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS:
As disclosed in Note 9, the Company sold all of the issued and outstanding
capital stock of its Home Healthcare operations on April 16, 2003 and the
Home Healthcare results of operations have been classified as discontinued
operations. As a result of this transaction, the Company no longer
operates in the U.S. Home Healthcare segment. Accordingly, during the
three months ended December 31, 2003 and 2002, the Company's continuing
operations were in the U.K. The U.K. operations derive its revenues from
flexible healthcare services, principally nursing and ancillary services,
and provision of respiratory therapy products to patients throughout most
of the U.K.
The Company evaluates performance and allocates resources based on profit
and loss from operations before corporate expenses, interest and income
taxes. The accounting policies of the business segment are the same as
those described for the Company.
The following tables present certain financial information by reportable
business segment and geographic area of operations for the three months
ended December 31, 2003 and 2002.
THREE MONTHS ENDED DECEMBER 31, 2003
----------------------------------------
U.K.
OPERATIONS TOTAL
------------ --------------
Net patient services $ 76,723 $ 76,723
Net respiratory, medical equipment and
supplies 1,820 1,820
----------- -----------
Total revenues to unaffiliated customers $ 78,543 $ 78,543
=========== ===========
Segment operating profit $ 7,383 $ 7,383
===========
Corporate expenses (1,779)
Interest expense, net (2,202)
Foreign exchange loss (11)
-----------
Income before income taxes $ 3,391
===========
Depreciation and amortization $ 654 $ 654
===========
Corporate depreciation and amortization 2
-----------
Total depreciation and amortization $ 656
===========
Identifiable assets, December 31, 2003 $ 282,075 $ 282,075
===========
Corporate assets 6,262
-----------
Total assets, December 31, 2003 $ 288,337
===========
Total capital expenditures $ 973 $ 973
=========== ===========
Page 16
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
15. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS (CONTINUED):
THREE MONTHS ENDED DECEMBER 31, 2002
----------------------------------------
U.K.
OPERATIONS TOTAL
----------- --------------
Net patient services $ 66,529 $ 66,529
Net respiratory, medical equipment and 1,469 1,469
supplies
----------- -----------
Total revenues to unaffiliated customers $ 67,998 $ 67,998
=========== ===========
Segment operating profit $ 8,021 $ 8,021
===========
Corporate expenses (929)
Interest expense, net (3,198)
Foreign exchange loss (8)
-----------
Income before income taxes and discontinued $ 3,886
operations
===========
Depreciation $ 388 $ 388
===========
Corporate depreciation 2
-----------
Total depreciation $ 390
===========
Identifiable assets, December 31, 2002 $ 282,906 $ 282,906
===========
Assets of discontinued operations 8.978
Corporate assets 2,847
-----------
Total assets, December 31, 2002 $ 294,731
===========
Capital expenditures $ 757 $ 757
===========
Corporate capital expenditures 2
-----------
Total capital expenditures $ 759
===========
16. IMPACT OF RECENT ACCOUNTING STANDARDS:
The Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN
46") in January 2003 and a revised interpretation of FIN 46 ("FIN 46R") in
December 2003. 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. For all arrangements entered into after
January 31, 2003, the Company is required to continue to apply FIN 46
through the end of the first quarter of fiscal 2004. The Company is
required to adopt the provisions of FIN 46R, for those arrangements
entered into prior to February 1, 2003, in the second quarter of fiscal
2004. As the Company does not have any variable interest entities, the
adoption of FIN 46 did not have a material impact on the consolidated
financial position or results of operations and the adoption of FIN 46R
will not have a material impact on the Company's consolidated financial
position or results of operations.
Page 17
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
16. IMPACT OF RECENT ACCOUNTING STANDARDS (CONTINUED)
In December 2003, the FASB revised FAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("FAS No. 132"), to
require additional disclosures to those in the original FAS No. 132 about
assets, obligations, cash flows and net periodic benefit costs of defined
benefit pension plans and other defined benefit postretirement plans. The
year-end provisions of FAS No. 132 will be effective for the Company for
the year ending September 30, 2004. The interim disclosure requirements of
FAS No. 132 will be effective for the Company in the quarter ending March
31, 2004. The Company believes that the adoption of the disclosure
requirements of FAS No. 132 will not have a material impact on its
consolidated financial position or results of operations.
Page 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with the
information contained in the Condensed Consolidated Financial Statements and
notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. This
discussion contains, in addition to historical information, forward-looking
statements that involve risks and uncertainty. Our actual results could differ
materially from the results discussed in the forward-looking statements.
We are one of the leading providers of flexible healthcare staffing services,
including nursing and ancillary services, to the United Kingdom ("U.K.")
healthcare industry. We operate a community-based network of 119 branches, with
the capacity to provide nurses, carers (often referred to as home health aides
in the United States ("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. Through our U.K. operations, we
also supply medical grade oxygen for use in respiratory therapy to the U.K.
pharmacy market and to private patients in Northern Ireland.
In the third quarter of fiscal 2003, 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 Statement of Financial Accounting Standards ("FAS") 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 condensed consolidated financial statements reflect the
liabilities of the discontinued operations, and the operations for the prior
periods are reported in discontinued operations.
CRITICAL ACCOUNTING POLICIES
Accounts Receivable
We are required to estimate the collectibility of our accounts receivable, which
requires a considerable amount of judgment in assessing the ultimate realization
of these receivables, including the current credit-worthiness of each customer.
Significant changes in required reserves may occur in the future as we continue
to expand our business and as conditions in the marketplace change.
Page 19
Intangible Assets
We have significant amounts of goodwill. The determination of whether or not
goodwill has become impaired involves a significant amount of judgment. Changes
in strategy and/or market conditions could significantly impact these judgments
and require adjustments to recorded amounts of goodwill. In addition, goodwill
is evaluated annually in the fourth quarter. However, a more frequent evaluation
would be performed if indicators of impairment were present.
Deferred Income Taxes
We account for deferred income taxes based upon differences between the
financial reporting and income tax bases of our assets and liabilities.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amounts expected to be realized. The determination of whether or
not valuation allowances are required to be recorded involves significant
estimates regarding the future profitability of our company, as well as
potential tax strategies for the utilization of net loss and operating loss
carryforwards.
Contingencies
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 company's stock, in contingent consideration dependent upon future earnings
of such acquired entities. See Note 9 of the Notes to Condensed Consolidated
Financial Statements.
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.
Page 20
We receive a majority of our 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.
RESULTS OF OPERATIONS
Three Months Ended December 31, 2003 vs. Three Months Ended December 31, 2002
Revenues
Total revenues for the three months ended December 31, 2003 and 2002 were
$78,543,000 and $67,998,000, respectively, an increase of $10,545,000 or 15.5%.
This increase relates to the growth of our U.K. flexible staffing operations as
a result of internal growth ($4,305,000) and the acquisition of Primary Care
Agency Limited ($65,000). The remaining increase of $6,175,000 was due to the
favorable effects of changes in foreign exchange.
Gross Profit
Total gross profit increased by $3,412,000 to $22,310,000 for the three months
ended December 31, 2003 from $18,898,000 for the three months ended December 31,
2002. The favorable effects of changes in foreign exchange accounted for
$1,754,000 of the increase. As a percentage of total revenue, gross profit for
the three months ended December 31, 2003 increased to 28.4% from 27.8% for the
comparable prior period. Gross margins for patient services increased (28.1% for
the three months ended December 31, 2003 versus 27.5% for the comparable prior
period) mainly as a result of the sales mix. Gross margins for the respiratory,
medical equipment and supplies sales increased (42.6% for the three months ended
December 31, 2003 versus 41.0% 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 for the three months ended
December 31, 2003 and 2002 were $ 16,706,000 and $11,806,000, respectively, an
increase of $4,900,000 or 41.5%. Changes in foreign exchange accounted for
$1,174,000 of this increase. The remaining increase was mainly a result of
higher levels of overhead costs in the U.K. operations due principally to
increased expenditures on quality assurance programs to ensure compliance with
recently introduced changes to legislation, internal growth and acquisitions
($2,876,000) and the compensation payments to key executives to complete the
reimbursement of tax liabilities and to resolve other consequences incurred by
them in connection with the exchange of equity investments and subordinated debt
investments in our U.K. subsidiaries' for shares of our common stock and shares
of our new Series A preferred stock in fiscal 2002 (the "Reorganization")
($860,000), which was partially offset by lower overhead costs in the U.S.
corporate office ($10,000). We do not anticipate incurring further
Page 21
compensation expense related to the Reorganization.
Interest Income
Total interest income for the three months ended December 31, 2003 was $224,000
compared to $590,000 for the three months ended December 31, 2002, which
represents a decrease of $366,000. This decrease was principally attributable to
lower levels of funds invested and was partially offset by favorable effects of
changes in foreign exchange ($17,000).
Interest Expense
Total interest expense for the three months ended December 31, 2003 was
$2,426,000 compared to $3,788,000 for the three months ended December 31, 2002,
which represents a decrease of $1,362,000. Excluding the $191,000 increase due
to the effect of foreign exchange, the actual decrease in interest expense was
$1,553,000. This decrease was principally attributable to the recording of a
$610,000 benefit related to the change in the fair value of our company's
interest rate cap and floor collar agreement and reduced bank debt.
Foreign Exchange Loss
For the three months ended December 31, 2003, we realized a foreign exchange
loss of $11,000 compared to $8,000 for the three months ended December 31, 2002.
Provision for Income Taxes
We recorded a provision for income taxes amounting to $1,629,000 or 48.0% of
income before income taxes for the three months ended December 31, 2003 compared
to a provision of $1,767,000 or 45.5% of income before income taxes and
discontinued operations for the three months ended December 31, 2002. The
difference between the 48.0% effective tax rate for the three months ended
December 31, 2003 and the statutory tax rate is mainly due to our recording of
an additional valuation allowance for the tax benefit associated with the
current year's U.S. operating loss.
Page 22
Discontinued Operations
Discontinued operations resulted in income of $184,000 for the three months
ended December 31, 2002. The following table presents the financial results of
the discontinued operations for the three months ended December 31, 2002:
Revenues:
Net infusion services $3,202,000
Net respiratory, medical equipment and supplies 1,239,000
----------
Total revenues 4,441,000
----------
Cost of revenues:
Infusion services 2,414,000
Respiratory, medical equipment and supplies 655,000
----------
Total cost of revenues 3,069,000
----------
Selling, general and administrative
expenses 1,188,000
----------
Income from discontinued operations $ 184,000
==========
Diluted income per share from discontinued operations $ 0.01
==========
At December 31, 2003 and September 30, 2003, liabilities of discontinued
operations of $690,000 relate to tax contingencies.
Net Income
As a result of the foregoing, we recorded net income of $1,762,000 for the three
months ended December 31, 2003 compared to net income of $2,303,000 for the
three months ended December 31, 2002.
Series A Preferred Stock
For the three months ended December 31, 2003, we accrued $937,000 of dividends
for the Series A preferred stock issued in connection with the Reorganization
and accreted $119,000 of costs related to the issuance of our Series A preferred
stock. For the three months ended December 31, 2002, we accrued $866,000 of
dividends for the Series A preferred stock issued in connection with the
Reorganization and accreted $128,000 of costs related to the issuance of our
Series A preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
General
For the three months ended December 31, 2003, we generated cash of $3,192,000
from operating activities. Cash requirements for the three months ended December
31, 2003 for capital expenditures ($973,000), payments for acquisition
($1,772,000), payments on notes payable ($36,888,000) and payments on long-term
debt ($3,585,000), were met through
Page 23
operating cash flows, restricted cash and cash on hand.
In January 2001, we initiated a stock repurchase program, whereby we may
purchase up to approximately $1,000,000 of our outstanding 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
December 31, 2003, we had acquired 584,755 shares of our common stock for an
aggregate purchase price of $2,294,000 pursuant to our stock repurchase
programs, which are reflected as treasury stock in the condensed consolidated
balance sheet at December 31, 2003. We intend to continue with our stock
repurchases during fiscal 2004.
On December 2, 2003, Mr. Aitken, our company's Chairman, and Ms. Eames, our
company's Chief Executive Officer, repaid in full the principal and accrued
interest on the promissory notes issued by them to our company in connection
with the Reorganization in fiscal 2002. The principal and accrued interest
repaid aggregated $591,000 and $419,000, respectively. The loans were repaid by
delivery to our company of 104,000 and 73,000 shares of our 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 shares delivered
by Mr. Aitken and Ms. Eames are held by our company as treasury shares. Our
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 were $83,000 and
$51,000, respectively.
We believe the existing capital resources and those generated from operating
activities and available under existing borrowing arrangements will be adequate
to conduct our operations for the next twelve months.
Restricted Cash
Restricted cash represents proceeds limited to future acquisitions. The proceeds
refer to amounts available for payment of consideration for certain permitted
acquisitions under our senior collateralized term and revolving credit facility
(the "Senior Credit Facility"), including the payment of 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 December 31, 2003 and September 30, 2003, $36,637,000
(12.7%) and $35,745,000 (11.5%), respectively, of our total assets consisted of
accounts receivable. The increase in the accounts
Page 24
receivable from fiscal year end is mainly due to timing of cash collections.
Our goal is to maintain accounts receivable levels equal to or less than
industry average, which would tend to mitigate the risk of recurrence of
negative cash flows from operations by reducing the required investment in
accounts receivable and thereby increasing cash flows from operations. Day's
sales outstanding ("DSOs") is a measure of the average number of days taken by
our company to collect its accounts receivable, calculated from the date
services are rendered. At December 31, 2003 and September 30, 2003, our average
DSOs were 42 and 41, respectively.
Borrowings
General
On December 17, 1999, as amended on September 27, 2001, our company's U.K.
subsidiary, Allied Healthcare Holdings Limited ("Allied Holdings"), formerly
known as Transworld Healthcare (UK) Limited, and its subsidiary obtained new
financing denominated in pounds sterling, which aggregates approximately
$190,171,000 at December 31, 2003. The financing consists of a $169,847,000
Senior Credit Facility and $20,324,000 in mezzanine indebtedness (the "Mezzanine
Loan").
Senior Credit Facility
The Senior Credit Facility consists of the following:
o $49,798,000 term loan A, maturing December 17, 2005;
o $22,231,000 acquisition term loan B, maturing December 17, 2006, which
may be drawn upon through September 30, 2004;
o $88,925,000 term loan C, maturing June 30, 2007, per the September 27,
2001 amendment,; and
o $8,893,000 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. As of December 31, 2003, we had
outstanding borrowings of $113,824,000 under the Senior Credit Facility that
bore interest at rates ranging from 5.82% to 7.32%.
Subject to certain exceptions, the Senior Credit Facility prohibits or restricts
the following:
o the incurrence of liens;
o the incurrence of indebtedness;
o certain fundamental corporate changes;
o dividends (including distributions to us);
o the making of specified investments; and
o certain transactions with affiliates.
Page 25
In addition, the Senior Credit Facility contains affirmative and negative
financial covenants customarily found in agreements of this kind, including the
maintenance of certain financial ratios, such as senior interest coverage, debt
to earnings before interest, taxes, depreciation and amortization, fixed charge
coverage and minimum net worth.
The loans under the Senior Credit Facility are collateralized by, among other
things, a lien on substantially all of Allied Holding's and its subsidiaries'
assets, a pledge of Allied Holding's ownership interest in its subsidiaries and
guaranties by Allied Holding's subsidiaries.
Mezzanine Loan
The Mezzanine Loan is a term loan maturing December 17, 2007 and bears interest
at the rate of LIBOR plus 7% per annum, where LIBOR plus 3.5% will be payable in
cash, with the remaining interest being added to the principal amount of the
loan. The Mezzanine Loan contains other terms and conditions substantially
similar to those contained in the Senior Credit Facility. As of December 31,
2003, we had outstanding borrowings under the Mezzanine Loan of $18,925,000,
which bore interest at a rate of 10.82%.
Notes with Warrants
In connection with the Reorganization, the notes with warrants, issued by one of
our U.K. subsidiaries, were settled by the issuance of 890,000 shares of our
common stock in the first quarter of fiscal 2003.
Notes Due in Connection with Acquisitions
During the quarter ended December 31, 2003, we repaid, through Allied Holdings,
notes payable of $36,888,000 issued in connection with the acquisition of
certain U.K. flexible staffing agencies. Of this amount, $34,671,000 were issued
during the quarter ended December 31, 2002. Also during the quarter ended
December 31, 2002, we repaid, through Allied Holdings, notes payable of
$15,239,000 issued in connection with the acquisition of certain U.K. flexible
staffing agencies and wrote-off $601,000 of related debt discount. At December
31, 2003, we had one remaining note payable that is secured by our senior credit
lender which requires us to keep an amount on deposit for the sole purpose of
repaying the note payable. In general, we may not redeem the note on or before
three years after the date of issuance, September 27, 2004; however, such note
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 December 31,
2003, the note payable of $1,779,000, bearing interest at a rate of 5.25%, and
the related cash restricted to the payment of such note are classified as
current in the accompanying Condensed Consolidated Balance Sheet.
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
Page 26
connection with the acquisition of certain U.K. flexible staffing agencies. At
December 31, 2003 and September 30, 2003, the amounts guaranteed, which
approximates the amounts outstanding, totaled approximately $136,000,000 and
$167,000,000, respectively.
DERIVATIVE INSTRUMENT
On March 20, 2003, we 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 $88,925,000 of our
floating rate debt under 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 an asset of $410,000 at December 31, 2003. In addition, changes
in the value from period to period of the interest cap and floor derivative will
be recorded as an adjustment to interest expense.
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
Allied Holdings in exchange for 22,286,869 ordinary shares of Allied Holdings.
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 Group Limited ("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 ($4.53 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 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.
Page 27
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. Each share of Series A
preferred stock is currently convertible into one share of common stock. 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.
Thereafter, on each six-month anniversary of the occurrence of such breach, the
holders of the Series A preferred stock will be able to elect one more director
until the breach has been cured or waived. If, at any time while the holders of
Series A preferred stock are entitled to elect a director, such director ceases
to be a director of our company, the vacancy can only be filled by the vote of
the holders of a majority of the Series A preferred stock.
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 effected 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.
Page 28
Redemption. Subject to certain limitations, a majority in interest of the
holders of the Series A preferred stock have the right to require our company to
redeem their shares of Series A preferred stock upon the occurrence of a
liquidity event (as described in the Certificate of Amendment (relating to the
Series A preferred stock) to our Certificate of Incorporation) or at any time
after December 17, 2007 if we have paid our Senior Credit Facility and the
Mezzanine Loan 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 three months ended December 31, 2003 and 2002:
2003 2002
----------- -----------
Balance at October 1, $33,151,000 $32,254,000
Accretion of issuance costs 119,000 128,000
Foreign exchange effect -- 415,000
----------- -----------
Balance at December 31, $33,270,000 $32,797,000
=========== ===========
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 $16,202,000, at December 31, 2003, in contingent
consideration dependent upon future earnings of such acquired entities.
Employment Agreements
We have two employment agreements with our Chairman and Chief Executive Officer
that provide for minimum aggregate annual compensation of $596,000 in fiscal
2004. 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 our
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.
Page 29
Further, the employment arrangement with our Chairman also provides that in the
event of a change of control of our company during fiscal 2004, his salary would
be reinstated to the amount in effect immediately prior to his resignation, in
January 2004, as Chief Executive Officer. If such an event were to occur, the
minimum aggregate annual compensation would increase to $908,000.
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," "Acquisition Agreements," and "Operating
Leases" above, the following table summarizes our contractual cash obligations
as of December 31, 2003:
Total Debt Total Lease Total Other Total
Fiscal Obligations Obligations Obligations Obligations
------ ------------ ----------- ------------ ------------
2004 $ 7,651,000 $ 1,302,000 $ 6,043,000 $ 14,996,000
2005 12,450,000 1,476,000 8,715,000 22,641,000
2006 32,902,000 1,365,000 1,444,000 35,711,000
2007 62,248,000 1,223,000 -- 63,471,000
2008 19,277,000 849,000 -- 20,126,000
Thereafter -- 2,535,000 -- 2,535,000
------------ ----------- ------------ ------------
$134,528,000 $ 8,750,000 $ 16,202,000 $159,480,000
============ =========== ============ ============
Lease obligations reflect future minimum rental commitments required under
operating leases that have non-cancelable lease terms as of December 31, 2003.
Other obligations reflect contingent consideration related to our acquisitions
of certain flexible staffing agencies.
Litigation
On April 13, 1998, one of our shareholders, purporting to sue derivatively on
our behalf, commenced a derivative suit in the Supreme Court of the State of New
York, County of New York, entitled Kevin Mak, derivatively and on behalf of
Transworld Healthcare, Inc., Plaintiff, vs. Timothy Aitken, Scott A. Shay, Lewis
S. Ranieri, Wayne Palladino and Hyperion Partners II L.P., Defendants, and
Transworld Healthcare, Inc., Nominal Defendant, Index No. 98-106401. The suit
alleges that certain of our officers and directors, and Hyperion Partners II
L.P. ("HPII"), breached fiduciary duties owed to us and our shareholders, in
connection with a transaction, approved by a vote of our shareholders on March
17, 1998, in which we were to issue certain shares of stock to Hyperion Partners
II L.P. in exchange for certain receivables due from Health Management, Inc.
("HMI"). The action seeks injunctive relief against this transaction, and
damages, costs and attorneys' fees in unspecified amounts. The transaction
subsequently closed and the plaintiff has, on numerous occasions, stipulated to
extend the defendants' time to respond to this suit.
Page 30
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 December 31, 2003, have recorded an accrual of $863,000 to
cover our estimated exposure related to these matters. We believe that these
matters should not have a material adverse impact on our consolidated financial
position, cash flows or results of operations.
Impact of Recent Accounting Standards
The Financial Accounting Standards Board ("FASB") issued FASB Interpretation No.
46, Consolidation of Variable Interest Entities ("FIN 46") in January 2003 and a
revised interpretation of FIN 46 ("FIN 46R") in December 2003. 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. For all arrangements entered
into after January 31, 2003, the company is required to continue to apply FIN 46
through the end of the first quarter of fiscal 2004. The company is required to
adopt the provisions of FIN 46R, for those arrangements entered into prior to
February 1, 2003, in the second quarter of fiscal 2004. As the company does not
have any variable interest entities, the adoption of FIN 46 did not have a
material impact on the consolidated financial position or results of operations
and the adoption of FIN 46R will not have a material impact on our company's
consolidated financial position or results of operations.
Page 31
In December 2003, the FASB revised FAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" ("FAS No. 132"), to require
additional disclosures to those in the original FAS No. 132 about assets,
obligations, cash flows and net periodic benefit costs of defined benefit
pension plans and other defined benefit postretirement plans. The year-end
provisions of FAS No. 132 will be effective for the company for the year ending
September 30, 2004. The interim disclosure requirements of FAS No. 132 will be
effective for our company in the quarter ending March 31, 2004.
Page 32
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange
We face exposure to adverse movements in foreign currency exchange rates. These
exposures may change over time as business practices evolve and could have a
material adverse impact on our consolidated financial results. Our primary
exposures relate to non-U.S. dollar denominated sales in the U.K. where the
principal currency is Pounds Sterling and to the Pounds Sterling debt
denominated obligations. See "Interest Rate Risk" for debt obligations principal
cash flows and related weighted average interest rates by expected maturity
dates. Currently, we do not hedge foreign currency exchange rate exposures.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relate primarily to
our cash equivalents and the U.K. subsidiaries' December 17, 1999 refinancing
which includes the Senior Credit Facility and Mezzanine Loan. Our cash
equivalents include highly liquid short-term investments purchased with initial
maturities of 90 days or less. We are subject to fluctuating interest rates that
may impact, adversely or otherwise, our consolidated results of operations or
cash flows for our variable rate Senior Credit Facility, Mezzanine Loan and cash
equivalents. In accordance with provisions of the 1999 refinancing, on January
25, 2000, we hedged the interest rate (LIBOR cap of 9%) on approximately
$41,935,000 of our floating rate debt in a contract which expired on June 30,
2003.
On March 20, 2003, we entered into a new Rate Cap and Floor Collar Agreement
that caps our interest rate at LIBOR of 5.50% and our interest floor at LIBOR of
4.47%, subject to special provisions, on approximately $88,925,000 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 an asset of $410,000 at December 31, 2003. In addition, changes
in the value from period to period of the interest cap and floor derivative are
recorded as an adjustment to interest expense.
Page 33
As of December 31, 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 a note payable of $1,779,000,
which was issued in connection with the acquisition of a U.K. flexible staffing
agency. The note payable is redeemable, at the holder's option, in fiscal 2004
and bears interest at 5.25% per annum at December 31, 2003. The table below
represents the expected maturity of our variable rate debt and their weighted
average interest rates at December 31, 2003.
EXPECTED WEIGHTED AVERAGE
FISCAL MATURITY RATE
------ -------- ----
2004 $ 5,872,000 LIBOR +1.64%
2005 12,450,000 LIBOR +2.00%
2006 32,902,000 LIBOR +3.22%
2007 62,248,000 LIBOR +3.50%
2008 19,277,000 LIBOR +7.00%
Thereafter --
------------
$132,749,000 LIBOR +3.69%
============
The aggregate fair value of the our debt was estimated based on quoted market
prices for the same or similar issues and approximated $135,926,000 at December
31, 2003.
Page 34
ITEM 4. 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 December 31, 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 Quarterly Report on Form
10-Q, is recorded, processed, summarized and reported within the time periods
specified in the rules of the Securities and Exchange Commission. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by us in our
reports that we file or submit under the 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 December 31, 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 December 31, 2003 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Page 35
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Rule 13a-14(a)/15d-14(a) Certification of President 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 President and Chief Executive
Officer
32.2 Section 1350 Certification of Acting Chief Financial Officer
(b) Reports on Form 8-K.
On November 25, 2003, 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 November 25,
2003 announcing our earnings for the quarter and fiscal year ended September 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.
Page 36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 13, 2004
ALLIED HEALTHCARE INTERNATIONAL INC.
By: /s/ Charles F. Murphy
------------------------------------
Charles F. Murphy
Acting Chief Financial Officer
(Principal Financial Officer and
Duly Authorized to Sign on Behalf of
Registrant)
Page 37