UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

OR

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

From the transition period from                      to                     

 

ALLIED HEALTHCARE INTERNATIONAL INC.

(Exact name of registrant as specified in its charter)

New York (State or other jurisdiction of incorporation or organization)		13-3098275 (I.R.S. Employer Identification No.)

245 Park Avenue, New York, New York 10167
(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 þ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

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 July 30, 2010
Common Stock		44,023,502 Shares

 

 

ALLIED HEALTHCARE INTERNATIONAL INC.

THIRD QUARTER REPORT ON FORM 10-Q
TABLE OF CONTENTS

PART I
Item 1. Financial Statements			2
Condensed Consolidated Balance Sheets — June 30, 2010 (Unaudited) and September 30, 2009			3
Condensed Consolidated Statements of Operations (Unaudited) — For the Three and Nine Months Ended June 30, 2010 and June 30, 2009			4
Condensed Consolidated Statements of Cash Flows (Unaudited) — For the Nine Months Ended June 30, 2010 and June 30, 2009			5
Notes to Condensed Consolidated Financial Statements (Unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures about Market Risk			36
Item 4. Controls and Procedures			37
PART II
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			38
Item 6. Exhibits			38
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Forward-Looking Statements: The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Certain statements contained in this Quarterly Report may be forward-looking statements. These forward-looking statements are based on current expectations and projections about future events. 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: general economic and market conditions; the effect of the change in the U.K. government and the impact of proposed changes in recent policy making related to health and social care that may reduce revenue and profitability; Allied Healthcare International Inc.’s (the “Company”) ability to continue to recruit and retain flexible healthcare staff; the Company’s ability to enter into contracts with local governmental social service departments, National Health Service Trusts, hospitals, other healthcare facility clients and private clients on terms attractive to the Company; the general level of demand and spending for healthcare and social care; dependence on the proper functioning of the Company’s information systems; the effect of existing or future government regulation of the healthcare and social care industry, and the Company’s ability to comply with these regulations; the impact of medical malpractice and other claims asserted against the Company; the effect of regulatory change that may apply to the Company and that may increase costs and reduce revenue and profitability; the ability to use net operating loss carry forwards to offset net income; the effect that fluctuations in foreign currency exchange rates may have on the Company’s dollar-denominated results of operations; and the impairment of goodwill, of which the Company has a substantial amount on the balance sheet, may have the effect of decreasing earnings or increasing losses. Other factors that could cause actual results to differ from those discussed in or implied by the forward-looking statements in this Quarterly Report include those described in the Company’s most recently filed SEC documents, such as its most recent annual report on Form 10-K, all quarterly reports on Form 10-Q and any current reports on Form 8-K filed since the date of the last Form 10-K. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Part I

Item 1.		Financial Statements (Unaudited).

The Condensed Consolidated Financial Statements of the Company begin on page 3.

ALLIED HEALTHCARE INTERNATIONAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

		June 30,
		2010				September 30,
		(Unaudited)				2009
ASSETS
Current assets:
Cash and cash equivalents		$	36,954			$	35,273
Accounts receivable, less allowance for doubtful accounts of $694 and $839, respectively			19,584				19,594
Unbilled accounts receivable			10,970				11,572
Deferred income taxes			403				389
Prepaid expenses and other assets			1,501				1,188
Total current assets			69,412				68,016
Property and equipment, net			9,303				7,756
Goodwill			98,114				95,649
Other intangible assets, net			3,699				1,646
Total assets		$	180,528			$	173,067
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,099			$	1,186
Current maturities of debt and capital leases			567				—
Accrued expenses, inclusive of payroll and related expenses			24,866				24,304
Taxes payable			970				201
Total current liabilities			27,502				25,691
Long-term debt and capital leases, net of current maturities			394				—
Deferred income taxes			1,425				103
Other long-term liabilities			294				—
Total liabilities			29,615				25,794
Commitments and contingencies (Note 11)
Noncontrolling interest (Note 5)			4,028				—
Shareholders’ equity:
Preferred stock, $.01 par value; authorized 10,000 shares, issued and outstanding — none			—				—
Common stock, $.01 par value; authorized 80,000 shares, issued 45,721 and 45,571 shares, respectively			457				456
Additional paid-in capital			242,312				241,555
Accumulated other comprehensive loss			(21,403	)			(14,418	)
Accumulated deficit			(70,870	)			(78,026	)
			150,496				149,567
Less cost of treasury stock (1,089 and 585 shares, respectively)			(3,611	)			(2,294	)
Total shareholders’ equity			146,885				147,273
Total liabilities and shareholders’ equity		$	180,528			$	173,067

See notes to condensed consolidated financial statements.

ALLIED HEALTHCARE INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

		Three Months Ended								Nine Months Ended
		June 30,				June 30,				June 30,				June 30,
		2010				2009				2010				2009
Revenues:
Net patient services		$	65,748			$	63,103			$	200,662			$	179,965
Cost of revenues:
Patient services			45,980				43,930				140,069				124,813
Gross profit			19,768				19,173				60,593				55,152
Selling, general and administrative expenses			17,176				16,276				50,602				46,224
Operating income			2,592				2,897				9,991				8,928
Interest income			84				76				275				453
Interest expense			(10	)			—				(10	)			(12	)
Foreign exchange (loss) income			(46	)			307				(259	)			(60	)
Income before income taxes and discontinued operations			2,620				3,280				9,997				9,309
Provision for income taxes			903				892				2,784				2,310
Income from continuing operations			1,717				2,388				7,213				6,999
Discontinued operations:
Income from discontinued operations, net of taxes			—				—				—				367
Net income			1,717				2,388				7,213				7,366
Less: Net income attributable to noncontrolling interest			(57	)			—				(57	)			—
Net income attributable to Allied Healthcare International Inc.		$	1,660			$	2,388			$	7,156			$	7,366
Amounts attributable to Allied Healthcare International Inc.:
Income from continuing operations, net of tax		$	1,660			$	2,388			$	7,156			$	6,999
Discontinued operations, net of tax			—				—				—				367
Net income		$	1,660			$	2,388			$	7,156			$	7,366
Earnings per share — basic and diluted attributable to Allied Healthcare International Inc. common shareholders
Income from continuing operations		$	0.04			$	0.05			$	0.16			$	0.15
Discontinued operations			—				—				—				0.01
Net income attributable to Allied Healthcare International Inc. common shareholders		$	0.04			$	0.05			$	0.16			$	0.16
Weighted average number of common shares outstanding:
Basic			45,045				44,986				45,102				44,986
Diluted			45,269				44,998				45,363				44,990

See notes to condensed consolidated financial statements.

ALLIED HEALTHCARE INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)

		Nine Months Ended
		June 30,				June 30,
		2010				2009
Cash flows from operating activities:
Net income		$	7,213			$	7,366
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations			—				(367	)
Depreciation and amortization			2,242				1,880
Amortization of intangible assets			952				921
Foreign exchange gain			(2	)			(221	)
(Decrease) increase in provision for allowance for doubtful accounts			(24	)			100
(Gain) loss on sale of fixed assets			(2	)			11
Stock based compensation			471				366
Deferred income taxes			102				(246	)
Changes in operating assets and liabilities, excluding the effect of businesses acquired and sold:
Increase in accounts receivable			(335	)			(518	)
Decrease (increase) in prepaid expenses and other assets			671				(1,137	)
Increase in accounts payable and other liabilities			1,693				2,875
Net cash provided by continuing operations			12,981				11,030
Cash flows from investing activities:
Capital expenditures			(2,428	)			(2,152	)
Proceeds from sale of business			—				114
Proceeds from sale of property and equipment			62				1
Acquisition of controlling interest, net of cash acquired			(5,812	)			—
Payments on acquisitions payable			—				(171	)
Net cash used in investing activities			(8,178	)			(2,208	)
Cash flows from financing activities:
Stock options exercised			288				—
Borrowings under invoice discounting facility, net			248				—
Repayments of debt and capital lease obligations			(121	)			—
Treasury shares acquired			(1,317	)			—
Net cash used in financing activities			(902	)			—
Effect of exchange rate on cash			(2,220	)			(1,361	)
Increase in cash			1,681				7,461
Cash and cash equivalents, beginning of period			35,273				26,199
Cash and cash equivalents, end of period		$	36,954			$	33,660
Supplemental cash flow information:
Cash paid for interest		$	10			$	300
Cash paid for income taxes, net		$	1,025			$	137
Supplemental disclosure of non-cash investing and financing activities:
Capital expenditures included in accrued expenses and other long-term liabilities		$	609			$	—
Details of business acquired in purchase transactions:
Fair value of assets acquired		$	12,430
Liabilities assumed or incurred		$	2,694
Noncontrolling interest		$	3,888
Cash paid for acquisitions		$	5,848
Cash acquired			36
Net cash paid for acquisitions		$	5,812

See notes to condensed consolidated financial statements.

ALLIED HEALTHCARE INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.

Basis of Presentation:

The Company is a provider of flexible, or temporary, healthcare staffing services to the United Kingdom (“U.K.”) healthcare and social care (often referred to as domiciliary care) industry. The Company was incorporated in New York in 1981. The Company’s flexible healthcare staffing business provides personal or basic care and nursing services in the home, nursing and care homes and hospitals. The Company’s healthcare staff consists principally of homecare aides (known as carers in the U.K.), nurses and nurses aides.

On May 14, 2010 the Company acquired a 50.1% shareholding in a group of businesses commonly known as Homecare Independent Living Group. The results of these acquired businesses are reflected in our condensed consolidated results as of the acquisition date. See Note 5 for details of acquisition transaction.

Essentially, all services provided by the Company are provided by its integrated network of approximately 115 branches, which are located throughout most of the U.K. The Company’s management evaluates operating results on a branch basis. For financial reporting purposes, all its branches are aggregated into one reportable segment.

The Condensed Consolidated Financial Statements presented herein are unaudited and include all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations of the interim periods pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America (“U.S.”) have been condensed or omitted pursuant to the SEC rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. The balance sheet at September 30, 2009 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 consolidated 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, 2009. Although the Company’s operations are not highly seasonal, the results of operations for the three and nine months ended June 30, 2010 are not necessarily indicative of operating results for the full year.

ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

2.

Stock-Based Compensation:

Stock Options

For the three and nine months ended June 30, 2010, stock-based compensation cost recognized in selling, general and administrative expenses decreased income before income taxes and discontinued operations by $0.3 million and $0.5 million, respectively. For the three and nine months ended June 30, 2009, stock-based compensation cost recognized in selling, general and administrative expenses decreased income before income taxes and discontinued operations by $0.1 million and $0.3 million, respectively. As of June 30, 2010, there was $1.4 million of total unrecognized compensation cost related to share-based compensation awards, net of estimated forfeitures, which the Company expects to recognize over a weighted average period of approximately 2.4 years. 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. Shares available for future grant under the 2002 Stock Option Plan were 2.1 million shares at June 30, 2010.

Following is a summary of stock option activity during the three and nine months ended June 30, 2010 (in thousands, except per share data):

		Stock				Weighted-Average
Stock Options		Options				Exercise Price ($)
Outstanding at March 31, 2010			2,714				2.25
Granted			1,018				2.59
Forfeited			(63	)			2.10
Outstanding at June 30, 2010			3,669				2.34

										Weighted-
										Average
										Remaining
										Contractual				Aggregate
		Stock				Weighted-Average				Life				Intrinsic
Stock Options		Options				Exercise Price ($)				In Years				Value ($)
Outstanding at October 1, 2009			2,991				2.22
Granted			1,018				2.59
Exercised			(150	)			1.92
Forfeited			(190	)			2.08
Outstanding at June 30, 2010			3,669				2.34				8.1				618
Exercisable at June 30, 2010			1,496				2.40				7.2				338
Vested and expected to vest at June 30, 2010			2,902				2.38				8.1				484

ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The weighted average grant-date fair value of stock options granted during the three and nine months ended June 30, 2010 was $1.25. The weighted average grant-date fair value of stock options granted during the three and nine months ended June 30, 2009 was $1.02. The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

		Three and Nine Months Ended				Three and Nine Months Ended
		June 30, 2010				June 30, 2009
Expected life (years)			6.0				6.0
Risk-free interest rate			2.0	%			2.7	%
Volatility			49.1	%			52.7	%
Expected dividend yield			0	%			0	%

The average risk-free interest rate is based on the U.S. treasury security rate in effect as of the grant date. The Company determined expected volatility using a weighted average of its historical month-end close stock price. The expected life was determined using the simplified method as the Company did not believe it had sufficient historical stock option exercise experience on which to base the expected term.

The total intrinsic value of options exercised during the nine months ended June 30, 2010 was $0.2 million. For options exercised during the nine months ended June 30, 2010, $0.3 million was received in cash to cover the exercise price of the options exercised. There were no options exercised in the three and nine months ended June 30, 2009.

Following is a summary of the status of the Company’s nonvested stock options as of June 30, 2010 and the activity for the three and nine months ended June 30, 2010 (in thousands, except per share data):

						Weighted-Average
		Stock				Grant-Date
Nonvested Stock Options		Options				Fair Value ($)
Nonvested at March 31, 2010			1,639				1.01
Granted			1,018				1.25
Vested			(434	)			1.08
Forfeited			(50	)			1.10
Nonvested at June 30, 2010			2,173				1.11

						Weighted-Average
		Stock				Grant-Date
Nonvested Stock Options		Options				Fair Value ($)
Nonvested at October 1, 2009			1,855				1.01
Granted			1,018				1.25
Vested			(525	)			1.07
Forfeited			(175	)			1.06
Nonvested at June 30, 2010			2,173				1.11

ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The total grant date fair value of stock options vested during the three and nine months ended June 30, 2010 was $0.5 million and $0.6 million, respectively. The total grant date fair value of stock options vested during the three and nine months ended June 30, 2009 was $0.3 million and $0.5 million, respectively.

The Company has granted certain options that, in addition to the time vesting requirement, have performance conditions based on one or more of the Company’s growth in sales, earnings per share, earnings before interest and taxes, earnings before interest, taxes and amortization or earnings before interest, taxes, depreciation and amortization. Of the 3.7 million options outstanding at June 30, 2010, 1.3 million options have both time and performance conditions. The following is a summary of the status of the Company’s options that have both the time vesting requirement and performance conditions (in thousands, except per share data):

		Stock				Weighted-Average
Time and Performance Based Stock Options		Options				Exercise Price ($)
Outstanding at March 31, 2010			999				2.05
Granted			362				2.59
Forfeited			(43	)			2.09
Outstanding at June 30, 2010			1,318				2.20

										Weighted-
										Average
										Remaining
										Contractual				Aggregate
		Stock				Weighted-Average				Life				Intrinsic
Time and Performance Based Stock Options		Options				Exercise Price ($)				In Years				Value ($)
Outstanding at October 1, 2009			1,099				2.05
Granted			362				2.59
Forfeited			(143	)			2.07
Outstanding at June 30, 2010			1,318				2.20				8.0				259
Exercisable at June 30, 2010			312				1.96				7.1				111
Vested and expected to vest at June 30, 2010			660				2.23				8.3				135

		Stock				Grant-Date
Time and Performance Based Stock Options		Options				Fair Value ($)
Nonvested at March 31, 2010			750				0.95
Granted			362				1.26
Vested			(76	)			1.03
Forfeited			(30	)			1.10
Nonvested at June 30, 2010			1,006				1.05

		Stock				Grant-Date
Time and Performance Based Stock Options		Options				Fair Value ($)
Nonvested at October 1, 2009			939				0.96
Granted			362				1.26
Vested			(168	)			1.03
Forfeited			(127	)			1.05
Nonvested at June 30, 2010			1,006				1.05

ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The total grant date fair value of time and performance based stock options that vested during the three and nine months ended June 30, 2010 was $0.1 million and $0.2 million, respectively. There were no time and performance based stock options that vested during the three months ended June 30, 2009. The total grant date fair value of time and performance based stock options that vested during the nine months ended June 30, 2009 was $0.1 million.

Stock Appreciation Rights:

In fiscal 2009, the Company’s Board of Directors, upon the recommendation of its Compensation Committee, made a grant of 0.6 million stock appreciation rights (the “SARs”) to Alexander (Sandy) Young, its Chief Executive Officer (the “CEO”). The SARs represent the right to receive a payment, in shares of the Company’s common stock, equal to the product of (a) the number of SARs granted that vest and (b) the excess of (i) the closing sale price of a share of the Company’s common stock on the date that the SARs are settled over (ii) the base price of $1.51 (the closing price of a share of the Company’s common stock on Nasdaq on April 21, 2009, the date that the SARs were granted to Mr. Young).

The SARs are subject to both time vesting and performance vesting.

Time Vesting. The SARs generally will not vest if Mr. Young’s employment with the Company is terminated prior to January 14, 2011, the third anniversary of the date he became the Company’s CEO. However, if Mr. Young’s employment terminates because of his death or disability, he shall become vested in the SARs to the extent determined by the Compensation Committee. The Compensation Committee’s determination shall be made by multiplying that portion of the SARs that are deemed potentially to have vested by reason of satisfaction of the applicable performance levels by a fraction, the numerator of which is the number of completed months elapsed since October 1, 2007 through the date of termination of employment and the denominator of which is 48.

In addition, in the event of a “change of control” (as defined in the SARs agreement), the SARs will become immediately vested to the same extent provided in the previous paragraph and shall be exercisable for a period of 30 days after the change of control. If Mr. Young’s employment with the Company is terminated for reasons that the Compensation Committee determines constitutes “cause” (as defined in the SARs agreement), the SARs will be forfeited, without regard to whether they have become vested.

Performance Vesting. The determination of whether the SARs have vested will be made as soon as practicable after the fiscal year ending September 30, 2011 and will be based on the achievement of the performance measures set forth in the SARs agreement with Mr. Young. The SARs agreement establishes a threshold, base and stretch level of improvement (in percentage terms) in growth in each of sales, earnings per share and earnings before interest, taxes and amortization (“EBITA”) during the period from October 1, 2009 through September 30, 2011 as compared to the base year ended September 30, 2007 and provides that the amount of SARs that will vest will be dependent on whether the threshold, base and stretch levels have been met in each performance measure. The determination of vesting attributable to each performance measure shall be independent from the other performance measures. A performance below threshold in one performance measure does not preclude vesting under any other performance measure.

ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

If the actual results for any performance measure fall between the threshold and the base, or between the base and the stretch, vesting of the SARs will be prorated.

The SARs agreement with Mr. Young provides that the potential maximum value of the SARs (when aggregated with the value of the vested portion of the option to purchase 0.2 million shares of the Company’s common stock held by Mr. Young) is £3.0 million (approximately $4.5 million at the closing exchange rate at June 30, 2010). If the total value of the SARs and the value of the vested portion of Mr. Young’s options exceeds £3.0 million, then the base price of $1.51 for the SARs will be increased so that the total value is equal to £3.0 million.

At June 30, 2010, the Company estimated that none of the performance measures will be achieved which resulted in zero stock-based compensation cost related to SARs to be recognized as of June 30, 2010. At June 30, 2010, the Company had $0.3 million of total unrecognized compensation cost related to SARs compensation awards. A change in the estimate of the SARs performance measures vesting could result in the Company incurring such cost over a period through September 30, 2011. The compensation cost as generated by the Monte-Carlo pricing model may not be indicative of the future benefit, if any, that may be received by the SARs holder.

3.

Property and Equipment:

Property and equipment is carried at cost, net of accumulated depreciation and amortization. Leasehold improvements are amortized over the related lease terms or estimated useful lives, whichever is shorter. Furniture, fixtures and equipment are amortized on a straight-line method over the estimated useful lives ranging from three to eight years. Computer software is amortized on a straight-line method over the estimated useful lives ranging from three to seven years.

Major classes of property and equipment, net, consist of the following at June 30, 2010 and September 30, 2009 (in thousands):

		June 30,				September 30,
		2010				2009
Furniture, fixtures and equipment (including software)		$	19,108			$	16,448
Leasehold improvements			1,410				1,036
			20,518				17,484
Less, accumulated depreciation and amortization			11,215				9,728
		$	9,303			$	7,756

Included in property and equipment, net, is $1.2 million of fixed assets acquired in the HILG acquisition. Depreciation and amortization of property and equipment for the three and nine months ended June 30, 2010 were $0.8 million and $2.2 million, respectively. Depreciation and amortization of property and equipment for the three and nine months ended June 30, 2009 were $0.7 million and $1.9 million, respectively.

ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

4.

Goodwill and Other Intangible Assets:

The following table presents the changes in the carrying amount of goodwill for the nine months ended June 30, 2010 (in thousands):

		Goodwill				Accumulated
		Pre Impairment				Impairment
		Losses				Losses				Goodwill
Balance at October 1, 2009		$	192,900			$	(97,251	)		$	95,649
Goodwill acquired during the year			7,294				—				7,294
Foreign exchange effect			(10,027	)			5,198				(4,829	)
Balance at June 30, 2010		$	190,167			$	(92,053	)		$	98,114

Of the $98.1 million goodwill amount, approximately $5.2 million is deductible for U.K. income tax purposes.

Intangible assets subject to amortization are being amortized on the straight-line method and consist of the following (in thousands):

						June 30, 2010
		Range Of				Gross								Net
		Live				Carrying				Accumulated				Carrying
		(In Years)				Amount				Amortization				Amount
Customer relationships			4 – 12			$	9,901			$	7,398			$	2,503
Trade names			3 – 20				1,361				165				1,196
Non-compete agreements			2 – 3				182				182				—
Favorable leasehold interests			2 – 5				7				7				—
Total						$	11,451			$	7,752			$	3,699

						September 30, 2009
		Range Of				Gross								Net
		Live				Carrying				Accumulated				Carrying
		(In Years)				Amount				Amortization				Amount
Customer relationships			5 – 12			$	8,502			$	6,856			$	1,646
Trade names			3				164				164				—
Non-compete agreements			2 – 3				192				192				—
Favorable leasehold interests			2 – 5				8				8				—
Total						$	8,866			$	7,220			$	1,646

ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Amortization expense for other intangible assets subject to amortization was $0.3 million and $1.0 million for the three and nine months ended June 30, 2010. Amortization expense for other intangible assets subject to amortization was $0.3 million and $0.9 million for the three and nine months ended June 30, 2009. At June 30, 2010, estimated future amortization expense of other intangible assets still subject to amortization for the three months ending September 30, 2010 and the succeeding fiscal years is as follows:

Remainder of 2010		$	362
2011			876
2012			583
2013			581
2014			353
Thereafter			944
		$	3,699

The change in the net carrying amount at June 30, 2010 is due to other intangible assets acquired during the year, amortization expense and the foreign exchange effect.

5.

Business Combinations:

On May 14, 2010 the Company acquired a shareholding in a group of businesses commonly known as Homecare Independent Living Group (the “HILG”). The company acquired a 50.1% shareholding in L&B (No. 182) Limited, the holding company of the five entities that make up the HILG business, for a consideration of £3.9 million ($5.8 million, at the acquisition date exchange rate). Such consideration may be adjusted based on the final value of the net assets. This was funded through the Company’s cash on hand. In addition, the Company has also entered into call option agreements giving the Company the right to buy the remaining shares between March 2013 and March 2020. The sellers have also entered into put option agreements giving them the right to require the Company to buy the remaining shares between March 2011 and March 2020. The minimum amount payable by the Company for 100% of the HILG business will be £7.7 million ($11.5 million at the closing exchange rate at June 30, 2010). The maximum amount payable by the Company for 100% of the HILG business will be £11.2 million ($16.9 million at the closing exchange rate at June 30, 2010) and is subject to HILG achieving certain annual earnings before interest, taxes, depreciation and amortization targets.

HILG is a leading provider of homecare to the elderly, physically disabled and mentally disabled with four operating divisions in Northern Ireland and an increasing presence in the Republic of Ireland (Eire). This acquisition gives the Company a market-leading position in Northern Ireland as well as a strategic footprint in the Republic of Ireland market. Both are new territories for the Company with what management believes to be strong growth potential. Further, the two sellers of HILG will remain in their existing roles as directors of HILG and will be joined by additional directors appointed by the Company to this business.

The goodwill of $7.3 million arising from the acquisition consists largely of the benefits expected from this transaction. None of the goodwill recognized is expected to be deductible for income tax purposes.

ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The following tables summarizes the consideration paid for HILG and the estimates of the fair value of the assets acquired and liabilities assumed, the resulting goodwill recognized at the acquisition date, as well as the fair value at the acquisition date of the noncontrolling interest in HILG. The preliminary estimates of the fair value of identifiable assets acquired and liabilities assumed are subject to revisions, which may result in adjustments to the preliminary values presented below. The Company expects to finalize these amounts in its next fiscal period ended September 30, 2010.

(in thousands)		Consideration
Cash		$	5,848
Fair value of total consideration transferred		$	5,848

		Preliminary
		Estimates of
		Acquisition
		Date
(in thousands)		Fair Value
Property and equipment		$	1,226
Current assets(a)			1,753
Current liabilities(b)			(1,759	)
Debt and capital lease obligations			(823	)
Deferred tax liability			(949	)
Total identifiable net liabilities		$	(552	)
Goodwill			7,294
Other intangible assets(c)			2,994
Noncontrolling interest in HILG			(3,888	)
Total purchase price		$	5,848

For the three and nine months ended June 30, 2010, acquisition-related costs of $0.5 million related to the acquisition of HILG are included in selling, general, and administrative expenses in the Company’s statement of operations.

The fair value of the noncontrolling interest in HILG, a private company, was estimated by using the observed transaction relating to a controlling interest which occurred as of the measurement date. The fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement. Key assumptions include (i) an estimated discount to account for the lack of control feature of the noncontrolling interest derived using implied discounts as observed through control premiums of private transactions in the company’s sector, and (ii) an estimated discount to account for the lack of marketability of the noncontrolling interest derived using an option-based model which estimates the cost of holding a security for period time needed before achieving a transaction. Significant inputs into the option-based model include (i) a estimated holding period of 3 years until a transaction is consumed, (ii) an equity volatility estimate of 42% based on comparable companies, and (iii) a risk free rate of 1.34% based on the holding period selected.

ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Due to the put option agreements, the Company has classified the noncontrolling interest as mezzanine equity on its condensed consolidated balance sheet. The following table presents a reconciliation of the carrying amount of the noncontrolling interest at June 30, 2010 (in thousands):

Fair value of noncontrolling interest at acquisition		$	3,888
Net income attributable to noncontrolling interest			57
Change in cumulative translation adjustment			83
Noncontrolling interest at June 30, 2010		$	4,028

The pro forma results of operations and related per share information for this acquisition have not been presented as the amounts are considered immaterial.

6.

Accrued Expenses:

Accrued expenses consist of the following at June 30, 2010 and September 30, 2009 (in thousands):

		June 30,				September 30,
		2010				2009
Payroll and related expenses		$	19,264			$	19,750
Professional fees			1,266				1,087
Refunds payable			1,012				1,024
Other			3,324				2,443
		$	24,866			$	24,304

7.

Income Taxes:

The Company recorded a provision for income taxes amounting to $0.9 million or 34.5% of income before income taxes and discontinued operations for the three months ended June 30, 2010, compared to a provision of $0.9 million or 27.2% of income before income taxes and discontinued operations for the three months ended June 30, 2009. The Company recorded a provision for income taxes amounting to $2.8 million or 27.8% of income before income taxes and discontinued operations for the nine months ended June 30, 2010, compared to a provision of $2.3 million or 24.8% of income before income taxes and discontinued operations for the nine months ended June 30, 2009. The difference in the effective tax rate between the three and nine months ended June 30, 2010 and the three and nine months ended June 30, 2009 is mainly due to the utilization of loss carry forwards in the U.S. for which no benefit had been previously recorded and permanent differences, mainly related to acquisition costs that are not deductible for income tax purposes.

As of June 30, 2010, the Company has not recorded any unrecognized tax benefits, which remains unchanged from September 30, 2009.

ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

8.

Earnings Per Share:

Basic earnings per share (“EPS”) is computed using the weighted average number of common shares outstanding. Diluted EPS adjusts basic EPS for the effects of stock options and warrants only when such effect is dilutive. The Company uses the treasury stock method to calculate the effect of potential common shares, which require it to compute total assumed proceeds as the sum of (a) the amount the employee must pay upon exercise of the award, (b) the amount of unrecognized share-based compensation costs attributed to future services and (c) the amount of tax benefits, if any, that would be credited to additional paid-in capital assuming exercise of the award. Share-based compensation awards for which total assumed proceeds exceed the average market price over the applicable period have an antidilutive effect on EPS and are excluded from the calculation of diluted EPS. At June 30, 2010 and 2009, the Company had outstanding stock options (including performance-based stock options) to purchase 2.3 million and 3.0 million shares, respectively, of common stock ranging in price from $2.11 to $6.20 and $1.92 to $6.20 per share, respectively, that were not included in the computation of diluted EPS either because the exercise price was greater than the average market price of the common shares or the conditions of the performance-based stock options have yet to be satisfied or such effect would have been anti-dilutive. Further, 0.6 million of contingently issuable shares related to the SARs issued to the CEO, as further described in Note 2, have not been included in the computation of diluted EPS at June 30, 2010.

The weighted average number of shares used in the basic and diluted earnings per share attributable to the Company computations for the three and nine months ended June 30, 2010 and 2009 are as follows (in thousands):

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Weighted average number of common shares outstanding as used in computation of basic EPS of common stock			45,045				44,986				45,102				44,986
Effect of dilutive securities — stock options and warrants			224				12				261				4
Shares used in computation of diluted EPS of common stock			45,269				44,998				45,363				44,990

9.

Comprehensive Income (Loss):

Components of comprehensive income (loss) 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 (loss) impacting the Company. The translation of the financial statement of the Company’s U.K. operations is impacted by fluctuations in foreign currency exchange rates. The following table displays comprehensive income (loss) for the three and nine months ended June 30, 2010 and 2009 (in thousands):

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Net income			1,717				2,388			$	7,213			$	7,366
Change in cumulative translation adjustment			121				17,716				(6,902	)			(11,531	)
Comprehensive income (loss), net of income taxes			1,838				20,104				311				(4,165	)
Comprehensive income attributable to the noncontrolling interest			(140	)			—				(140	)			—
Comprehensive income (loss) attributable to the Company		$	1,698			$	20,104			$	171			$	(4,165	)

ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

10.

Shareholder’s Equity:

In January 2001, the Company initiated a stock repurchase program, whereby it was authorized to purchase up to approximately $1.0 million of its outstanding shares of common stock in open-market transactions or in privately-negotiated transactions. In May 2003, the Company initiated a second stock repurchase program, pursuant to which it was authorized to purchase up to an additional $3.0 million of its outstanding shares of common stock in open-market transactions or in privately-negotiated transactions. In May 2010, these two stock repurchase programs were terminated and the Company initiated a new stock repurchase program, whereby it may purchase up to approximately $10 million of its outstanding shares of common stock in open-market transactions or in privately-negotiated transactions. For the three and nine months ended June 30, 2010, the Company purchased 0.5 million shares for an aggregate purchase price of $1.3 million under its May 2010 stock repurchase program. As of June 30, 2010, the Company had acquired 0.9 million shares of its common stock for an aggregate purchase price of $2.6 million pursuant to its stock repurchase programs, which are reflected as treasury stock in the Company’s Condensed Consolidated Balance Sheet at June 30, 2010. In addition, as of June 30, 2010, the Company had acquired 0.2 million shares of its common stock for an aggregate value of $1.0 million from certain of its former executive officers. Such shares were acquired in fiscal 2004 and delivered to the Company as payment on promissory notes issued by the Company to them.

11.

Commitments and Contingencies:

Employment Agreements

The Company has employment agreements with its two executive officers that provide for minimum aggregate annual compensation of approximately $0.6 million (at the closing exchange rate at June 30, 2010) in fiscal 2010.

Contractual Cash Obligations

The Company has entered into various operating lease agreements for office space and equipment. Certain of these operating leases provide for renewal options. Of the $5.6 million operating lease obligations at June 30, 2010, $0.4 million relates to properties that are owned by the noncontrolling interest holders. In connection with the Company’s acquisition of HILG, the Company assumed various capital lease agreements mainly related to leased vehicles. The present value of the net minimum capital lease payments estimated using a discounted cash flow analysis was $0.6 million at June 30, 2010. Both operating and capital lease obligations reflect future minimum rental commitments required under such lease agreements as of June 30, 2010.

In connection with the Company’s acquisition of HILG, the Company assumed debt related to two invoice discounting facilities and bank loan for the funding of capital expenditures. The invoice discounting facilities provide for available funds of up to $1.4 million (at the closing exchange rate at June 30, 2010) that mature in April and June of 2011. The loans bear interest at rates equal to LIBOR plus 2.0% with a minimum of 4.0% per annum. As of June 30, 2010, the Company had outstanding borrowings of $0.3 million under the invoice discounting facilities and bank loan that bore interest at rates ranging from 4.0% to 4.7%.

Other obligations represent our contractual commitment for a new branch operating system, investment bank fees associated with our capital resources review and purchase commitment for new office equipment and software.

ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The following table summarizes the Company’s contractual cash obligations as of June 30, 2010 (in thousands):

		Total				Total
		Operating				Capital				Total				Total Other				Total
Fiscal		Leases				Leases				Debt				Obligations				Obligations
2010		$	951			$	81			$	152			$	164			$	1,348
2011			2,215				300				65				1,200				3,780
2012			1,452				222				38				974				2,686
2013			621				100								195				916
2014			213				3												216
Thereafter			119																119
		$	5,571			$	706			$	255			$	2,533			$	9,065

Contingencies:

The Company believes that it has been in compliance, in all material respects, with the applicable provisions of the federal statutes, regulations and laws and applicable state laws, together with the applicable laws and regulations of other countries in which the Company operates. There can be no assurance that an enforcement action will not be brought against the Company for violations of applicable law or that the Company will not be found to be in violation of one or more of these provisions. If the Company is found to have violated laws or regulations that are applicable to it, the Company could incur civil and/or criminal penalties as well as adverse publicity. In addition, in such circumstances, the parties to certain of the Company’s existing contracts could exercise their right to terminate their contracts with the Company and/or the Company might find itself disadvantaged when bidding on new contracts. At present, the Company cannot anticipate what impact, if any, administrative or judicial interpretation of the applicable federal and state laws and those of other countries may have on the Company’s consolidated financial position, cash flows or results of operations.

The Company is involved in various legal proceedings and claims incidental to its normal business activities. The Company is vigorously defending its position in all such proceedings. 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.

Liabilities for loss contingencies, arising from claims, assessments, litigation and other sources are recorded when it is probable that a liability has been incurred and the amount of liability can be reasonably estimated. Based on management’s best estimate of probable liability, the Company has accrued $0.3 million and $0.2 million for such costs at June 30, 2010 and at September 30, 2009, respectively.

In some of the Company’s supply of healthcare staffing services it has historically benefited from a concession under U.K. law (the “Staff Hire Concession”) which allowed it to charge value-added tax (“VAT”) only on the amount of commission charged to the purchaser of flexible staff. The Staff Hire Concession expired on March 31, 2009. The Company undertook a review of its post-concession VAT treatment and concluded that, other than permanent placement, its supplies are exempt from VAT on the basis that it provides nursing and welfare services and not the supply of staff (which are not exempt from VAT). However, if the Company is deemed to supply staff, there is, by concession, a further exemption from VAT under U.K. law for the supply of nursing staff and nursing auxiliaries where certain conditions are met (the “Nursing Agencies Concession”). The foregoing reflects the Company’s advisors view of the law as it currently stands, but there was a risk that this interpretation could be challenged by Her Majesty’s Revenue and Customs (“HMRC”). The Company sent correspondences to HMRC to seek its concurrence with its VAT position. In the third quarter of fiscal 2010, the Company received communication from HMRC that it has examined the information provided by the Company and that it does not propose to take any further action regarding the Company’s VAT treatment.

ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

12.

Profit Sharing and Private Pension Plans:

The Company has a defined contribution plan, pursuant to Section 401(k) of the Internal Revenue Code, covering all U.S. employees who meet certain requirements. In addition to the U.S. plan, the Company’s U.K. subsidiaries also sponsor personal pension plans that operate as salary reduction plans. Further, as part of certain employees’ compensation, the company has agreed to make payments towards their U.K. — based private pension fund. The Company expects to contribute $0.2 million to such plans in fiscal 2010.

13.

Recent Accounting Standards:

Noncontrolling Interests. In December 2007, the Financial Accounting Standards Board (“the FASB”) issued a standard which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Effective October 1, 2009, the Company adopted this standard, at which date it did not have any impact on the Company’s consolidated financial position and results of operations. However, as a result of the acquisition completed in the third quarter of fiscal 2010, the consolidated financial position and results of operations were impacted to reflect the new presentation for noncontrolling interest.

Business Combinations. In December 2007, the FASB issued a standard which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. This standard also provides guidance for recognizing and measuring the goodwill acquired in the business combination, requires that acquisition costs be expensed and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Effective October 1, 2009, the Company adopted this standard, at which date it did not have any impact on the Company’s consolidated financial position and results of operations. However, as a result of the acquisition completed in the third quarter of fiscal 2010, the consolidated financial position and results of operations were impacted to reflect the requirements of this standard.

Disclosures about Derivative Instruments and Hedging Activities. In March 2008, the FASB issued a standard which enhances required disclosures regarding derivative instruments and hedging activities, including enhanced disclosure regarding how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. Effective October 1, 2009, the Company adopted this standard, which did not have any impact on the Company’s consolidated financial position and results of operations.

ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Transfers of Financial Assets. In June 2009, the FASB issued a standard which provides guidance to improve transparency about transfers of financial assets and a transferor’s continuing involvement, if any, with transferred financial assets. This standard amends various provisions of the previously issued standard relating to transfers and servicing of financial assets and extinguishments of liabilities to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. This standard is effective for the Company in fiscal year beginning October 1, 2010 and is not expected to have an impact on the Company’s consolidated financial position and results of operations.

Consolidation of Variable Interest Entities. In June 2009, the FASB issued a standard, which changes the criteria to determine whether to consolidate a variable interest entity, to provide more relevant and reliable information to users of financial statements. This standard is effective for the Company in fiscal year beginning October 1, 2010 and is not expected to have an impact on the Company’s consolidated financial position and results of operations as the Company does not have variable interest entities.

Fair Value Measurements and Disclosures. In August 2009, the FASB issued a standard to further update the fair value measurement guidance to clarify how an entity should measure liabilities at fair value. This standard update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain techniques. When quoted prices are not available, the quoted price of the identical liability traded as an asset, quoted prices for similar liabilities or similar liabilities traded as an asset, or another valuation approach should be used. This standard update also clarifies that restrictions preventing the transfer of a liability should not be considered as a separate input or adjustment in the measurement of fair value. This standard is effective for the Company in fiscal year beginning October 1, 2010 and is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

Stock Compensation. In April 2010, the FASB issued an update to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, the entity would not classify such an award as a liability if it otherwise qualifies as equity. This update is effective for the Company in fiscal year beginning October 1, 2011 and is not expected to have an impact on the Company’s consolidated financial position and results of operations as the Company’s current practice is consistent with the update.

14.

Fair Value Measurements:

The Company’s short term financial instruments include cash, accounts receivable, unbilled accounts receivable, accounts payable, current maturities of debt and capital leases, accrued expenses and taxes payable. The carrying value of the short term financial instruments approximates the fair value due to their short term nature. These financial instruments have no stated maturities or the financial instruments have short term maturities that approximate market value.

The fair value of the Company’s long-term debt and capital lease obligations was approximately $0.4 million at June 30, 2010. The fair values were estimated using a discounted cash flow analysis.

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 these forward-looking statements. Factors that could cause or contribute to such differences include those discussed on page 1 in this Quarterly Report on Form 10-Q under “Forward-Looking Statements.”

We are a leading provider of flexible, or temporary, healthcare staffing services to the healthcare and social care industry in the United Kingdom, as measured by revenues, market share and number of staff. Our flexible healthcare staffing service provides personal or basic care and nursing services in the customers’ own homes, public or private hospitals and nursing and care homes. Homecare staffing, which accounts for over 85% of our healthcare staffing services, is provided for individuals (normally elderly individuals) who require domiciliary care, individuals with learning disabilities and individuals of all ages who require health-related services for complex care needs. The main purchaser of our services for customers’ own homes is local governmental social services departments, private individuals and National Health Services (the “NHS”) Primary Care Trusts. We also supply nursing staff services to nursing homes and hospitals that account for our remaining healthcare staffing services.

On May 14, 2010 we acquired a shareholding in a group of business commonly known as Homecare Independent Living Group (the “HILG”). We acquired a 50.1% shareholding in L&B (No. 182) Limited, the holding company of the five entities that make up the HILG business, for a consideration of £3.9 million ($5.8 million, at the acquisition date exchange rate). Such consideration may be adjusted based on the final value of the net assets. This was funded through the company’s cash on hand. In addition, we also entered into call option agreements giving us the right to buy the remaining shares between March 2013 and March 2020. The sellers have also entered into put option agreements giving them the right to require us to buy the remaining shares between March 2011 and March 2020. The minimum amount payable by us for 100% of the HILG business will be £7.7 million ($11.5 million at the closing exchange rate at June 30, 2010). The maximum amount payable by us for 100% of the HILG business will be £11.2 million ($16.9 million at the closing exchange rate at June 30, 2010) and is subject to HILG achieving certain annual earnings before interest, taxes, depreciation and amortization targets.

HILG is a leading provider of homecare to the elderly, physically disabled and mentally disabled with four operating divisions in Northern Ireland and an increasing presence in the Republic of Ireland (Eire). This acquisition gives us a market-leading position in Northern Ireland as well as a strategic footprint in the Republic of Ireland market. Both are new territories for us with what management believes to be a strong growth potential. Further, the two sellers of HILG will remain in their existing roles as directors of HILG and will be joined by additional directors appointed by the company to this business.

Our services are provided by our integrated network of approximately 115 branches, which are located throughout most of the U.K. Our healthcare staff consists principally of homecare aides (known as carers in the U.K.), nurses and nurses aides. Our management evaluates operating results on a branch basis. All our branches are aggregated into one reportable segment for financial reporting purposes.

In some of our supply of healthcare staffing services we have historically benefited from a concession under U.K. law (the “Staff Hire Concession”) which allowed us to charge value-added tax (“VAT”) only on the amount of commission charged to the purchaser of flexible staff. The Staff Hire Concession expired on March 31, 2009. We undertook a review of our post-concession VAT treatment and concluded that, other than permanent placement, our supplies are exempt from VAT on the basis that we provide nursing and welfare services and not the supply of staff (which are not exempt from VAT). However, if we are deemed to supply staff, there is, by concession, a further exemption from VAT under U.K. law for the supply of nursing staff and nursing auxiliaries if certain conditions are met (the “Nursing Agencies Concession”). The foregoing reflects our advisors’ view of the law as it currently stands, but there was a risk that this interpretation could be challenged by Her Majesty’s Revenue and Customs (“HMRC”). We sent correspondences to HMRC to seek its concurrence with our VAT position. In the third quarter of fiscal 2010, we received communication from HMRC that it has examined the information provided by us and that it does not propose to take any further action regarding our VAT treatment. Since the majority of our services are now exempt from VAT, our overall costs have increased as we are not able to recover any VAT that we incur on purchases from our suppliers (such as, for example, utilities) in respect of the goods and services that they supply to us.

Effective January 1, 2010, the standard rate of U.K. VAT reverted to 17.5% (from the previous rate of 15%) and will further increase to 20% effective January 4, 2011, which has and will continue to increase the amount of any irrecoverable VAT.

We are aware of legislative changes which will go into effect in fiscal 2011 that would disallow the U.K. tax deduction on intra-group interest expense. We are currently evaluating our intra-group position and the likely impact of this change on our consolidated financial statements and results of operations.

A further legislative change that will go into effect in April 2011 is the U.K. government’s introduction of a 1% increase to the National Insurance employer contribution amounts. The extent to which we can recover this additional cost from our customers is uncertain and could impact our profit margins.

In July 2010, the U.K. Finance Bill 2010 was published. As of June 30, 2010 it had not yet passed through the House of Commons. As published, the U.K. Finance Bill 2010, announced that the rate of corporation tax will be reducing to 27% from April 2011 and will be reducing to 24% by April 2014. We are currently evaluating the likely impact of this proposed change on our consolidated financial statements and results of operations.

The provisions of the Pensions Act 2008 relating to personal accounts were enacted to address the U.K. government’s concerns that many U.K. workers are not saving enough for retirement. The Pensions Act 2008 will require employers to automatically enroll all eligible jobholders, who are not already in a qualifying workplace or personal pension plan, into either a qualifying workplace or personal pension plan or a new type of savings arrangement, known as the personal accounts plan. Automatic enrollment means that if jobholders do not wish to be a member of the plan offered to them they must actively opt out of that arrangement. Upon the phase in of the legislation, employers will be required to contribute a minimum of 3% of the jobholders qualifying earnings, which will be supplemented by contributions from the jobholder so that, in total, the pension contribution for each jobholder should equal a minimum of 8% of the jobholder’s qualifying earnings. There will be limits set on the amount that employers and jobholders can contribute in any one year. The personal accounts plan will be a new trust-based occupational plan, which is independent of the U.K. government and run by a Trustee Corporation. The current U.K. government plan is to introduce these new requirements starting in October 2012 and they will be phased in over a number of years. The extent to which we can recover this additional cost from our customers is uncertain and could impact our profit margins.

Critical Accounting Policies

The preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures in a given reporting period. We believe the following accounting policies are critical areas affecting our financial condition and results of operations where estimates are required.

Accounts Receivable

We estimate the collectability 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.

Our company maintains credit controls to ensure cash collection on a timely basis. The credit terms agreed with our customers range from 7 days to a maximum of 30 days from invoice date. We maintain a credit department which consists of approximately 20 personnel who are targeted to collect outstanding receivables. We have established the following guidelines for the credit department to use as well as for us to assess the credit department’s performance:

	•		to maintain accounts receivable levels (including unbilled accounts receivable) to below 45 days;
	•		to limit our overdues (greater than 90 days) within agreed targets; and
	•		to limit bad debt write off in the year within agreed targets.

We also apply a policy of withdrawing supply from customers who are significantly overdue. Many private customers are contracted on a “direct debit” basis where we can collect payment direct from customers’ bank accounts.

We have devised a provisioning methodology based on the customer profile and historical credit risk across our U.K. business. Accounts receivable are written off when the credit control department determines the amount is no longer collectible. In addition, we do not have a threshold for account balance write-offs as our policy focuses on all balances, whatever the size.

Goodwill and Other Intangible Assets

We have significant amounts of goodwill and other intangible assets. 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. We have recorded goodwill and separately identifiable intangible assets resulting from our acquisitions through June 30, 2010. Goodwill is tested for impairment annually in the fourth quarter of each fiscal year. A more frequent evaluation will be performed if indicators of impairment are present. In the interim period quarters of fiscal 2010, we determined that there were no such indicators. We completed the annual impairment test of goodwill during the fourth quarter of fiscal 2009 and determined that there was no impairment to our goodwill balance. If we are required to record an impairment charge in the future, it could have an adverse impact on our consolidated financial position or results of operations.

Income Taxes

We account for income taxes using the liability method of 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, foreign, federal and state net operating loss carryforwards, depreciation and amortization of intangibles, which are reported in different periods for 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. 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 operating loss carryforwards.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of June 30, 2010, our company has not recorded any unrecognized tax benefits, which remains unchanged from September 30, 2009.

Contingencies

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 are recognized when services are performed and substantiated by proper documentation. For patient services, which are billed at fixed rates, revenue is mainly recognized upon completion of timesheets that also require the signature of the recipient of services and through electronic call monitoring.

We receive a majority of our revenue from local governmental social services departments and the NHS.

Business Combinations

Amounts paid for acquisitions are allocated to the tangible assets acquired, liabilities assumed and noncontrolling interests based on their estimated fair value at the date of acquisition. We then allocate the purchase price in excess of net tangible assets acquired to identifiable intangible assets. Any excess purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. We obtain a third-party valuation in order to complete our purchase price allocations.

		Results of Operations
		Overview

We are one of the larger suppliers of homecare services in the U.K. Current trends in homecare services that have continued to contribute to the growth of this business include the increasing shift from care in residential homes to care in the home, which in most cases is a lower cost option, an increase in the aging population and additional opportunities as a result of the increase in demand for higher sophisticated homecare service lines, such as continuing care and care for individuals with learning disabilities. Over the last year we have seen a switch away from the traditional larger block/spot contract tenders to smaller framework preferred supplier contracts, often in specialist services.

The recent change in the U.K. government will and has already started impacting local authority and Primary Care Trusts decision making while they await further details of proposed changes in recent policy making related to health and social care. Recent pronouncements by the U.K. government will put pressure on the homecare business as it is inevitable that social care budget cuts are imminent and we have already not seen typical increases in either service prices or the number of service hours in the quarter ended June 30, 2010. In addition, according to the U.K. government’s newly announced plan to reform the NHS, groups of general practitioners will be given freedom and responsibility for commissioning healthcare for their local communities. Services will be more responsive to patients and designed around their needs, and local authorities will play a new role of supporting integration across health and social care. In the meantime, strategic Health Authorities and Primary Care Trusts will be phased out, and management costs will be reduced to commit more resources to support frontline services. While we believe there is large support for more care at home, away from more expensive residential care, these changes and the method of procurement and the extent of some of the current initiatives like personalization and independent budgets and there effects on our business should become clearer over the next twelve months. We will continue to monitor this closely.

While we expect some negative impacts on our business as a result of the upcoming changes, we believe that the high quality of our services, dedicated and caring personnel and our strong market reputation will continue to drive demand for our homecare services.

Nursing homes results have been impacted by the general economic market. We have experienced a lesser demand for our services from nursing homes, which we believe is a result of the economic recession, as nursing homes are trying to reduce their costs as well as their own permanent staff working additional hours. In addition, nursing homes have been impacted by the general move of care from establishments to homecare as well as the fact that smaller suppliers, who previously serviced local government authority work and social services, are focusing more on agency business.

The NHS requires any healthcare staffing company that provides temporary staff to NHS Hospitals in a region to enter into a Framework Agreement setting forth, among other things, applicable quality standards and maximum payment rates. In fiscal 2009, the old Framework Agreements between the NHS and healthcare staffing companies entered the formal re-tender stage and we were successfully awarded a new Framework Agreement. The new Framework Agreement came into operation in October 2009. While, the new Framework Agreement seems to be working better than the old framework agreement, the London region opted out of the new Framework Agreement and chose to re-tender separately under the London regional framework agreement. We were successful in being awarded into this separate framework agreement. In addition, we have tendered for the Scottish and Wales framework agreements and are awaiting the outcome of these. In the third quarter of this fiscal year, we opened a new Midland hospital business hub from which we hope to see benefits arising from this in our next financial year. If successful, we will consider extending this hub approach into other key cities.

Three Months Ended June 30, 2010 vs. Three Months Ended June 30, 2009

To provide an increased understanding of our company’s business we are providing a breakdown of our revenues, gross profits, selling, general and administrative (“SG&A”) costs and operating income at constant exchange rates using the comparable prior period weighted average exchange rate (in thousands, except earnings per share data).

		Three Months Ended June 30,												Three Months Ended June 30,
										%																				%
		2010				2009				Change				2010				%				2009				%				Change
		Revenue												Gross Profit
Homecare		$	59,270			$	52,801				12.3	%		$	18,023				30.4	%		$	16,272				30.8	%			10.8	%
Nursing Homes			4,237				5,774				-26.6	%			1,368				32.3	%			1,843				31.9	%			-25.8	%
Hospitals			4,551				4,528				0.5	%			1,078				23.7	%			1,058				23.4	%			2.0	%
Total, at constant exchange rates			68,058				63,103				7.9	%			20,469				30.1	%			19,173				30.4	%			6.8	%
Effect of foreign exchange			(2,310	)			—				-3.7	%			(701	)							—								-3.7	%
Total, as reported		$	65,748			$	63,103				4.2	%		$	19,768							$	19,173								3.1	%
														SG&A
SG&A, at constant exchange rates & excluding acquisition costs														$	17,114							$	16,276								5.1	%
Acquisition costs, at constant exchange rates															595								—								3.7	%
SG&A, at constant exchange rates															17,709								16,276								8.8	%
Effect of foreign exchange															(533	)							—								-3.3	%
Total SG&A, as reported														$	17,176							$	16,276								5.5	%
														Operating Income
Operating Income, at constant exchange rates & excluding acquisition costs														$	3,355							$	2,897								15.8	%
Acquisition costs, at constant exchange rates															(595	)							—								-20.5	%
Operating Income, at constant exchange rates															2,760								2,897								-4.7	%
Effect of foreign exchange															(168	)							—								-5.8	%
Operating Income, as reported														$	2,592							$	2,897								-10.5	%