Attached files
file | filename |
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EX-31.1 - EXHIBIT 31.1 - ALLIED HEALTHCARE INTERNATIONAL INC | c12008exv31w1.htm |
EX-32.2 - EXHIBIT 32.2 - ALLIED HEALTHCARE INTERNATIONAL INC | c12008exv32w2.htm |
EX-32.1 - EXHIBIT 32.1 - ALLIED HEALTHCARE INTERNATIONAL INC | c12008exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - ALLIED HEALTHCARE INTERNATIONAL INC | c12008exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 |
For The Quarterly Period Ended December 31, 2010 |
OR
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
From the transition period from to |
Commission File Number 001-11570
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.) |
245 Park Avenue, New York, New York 10167
(Address of principal executive offices) (Zip Code)
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (212) 750-0064
(Former name, former address and former fiscal year, if changed since last report)
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 (Do not check if a smaller reporting company) |
Smaller reporting company o |
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 issuers classes of common stock, as of
the latest practicable date.
Class | Outstanding at February 8, 2011 | |
Common Stock | 43,571,251 Shares |
ALLIED HEALTHCARE INTERNATIONAL INC.
FIRST QUARTER REPORT ON FORM 10-Q
TABLE OF CONTENTS
TABLE OF CONTENTS
PART I |
||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
19 | ||||||||
34 | ||||||||
35 | ||||||||
PART II |
||||||||
36 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
Page 1
Table of Contents
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 recent change in the United Kingdom (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; |
| the impact of the recent HM Treasury Comprehensive Spending Review setting out the U.K.
governments plans to reduce spending; |
| the introduction of the individualized budgets and direct payment for service users (the
personalization agenda), which could lead to Allied Healthcare International Inc.s (the
Company) hospital, healthcare facility and other customers to bypass the Companys
services and which might decrease its revenues and margins; |
| the Companys ability to continue to recruit and retain flexible healthcare staff; |
| the Companys 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 for healthcare and social care; |
| dependence on the proper functioning of the Companys information systems; |
| the effect of existing or future government regulation of the healthcare and social care
industry, and the Companys 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 effect of existing or future governmental regulation in relation to employment and
agency workers rights and benefits, including changes to National Insurance rates and
pension provisions; |
| 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
Companys 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 Companys 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.
Page 2
Table of Contents
Part I
Item 1. | Financial Statements. |
The Condensed Consolidated Financial Statements of the Company begin on page 4.
Page 3
Table of Contents
ALLIED HEALTHCARE INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31, | ||||||||
2010 | September 30, | |||||||
(Unaudited) | 2010 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 34,639 | $ | 39,031 | ||||
Accounts receivable, less allowance for doubtful
accounts of $734 and $732, respectively |
20,354 | 20,092 | ||||||
Unbilled accounts receivable |
12,561 | 13,393 | ||||||
Deferred income taxes |
480 | 552 | ||||||
Prepaid expenses and other assets |
2,339 | 1,943 | ||||||
Total current assets |
70,373 | 75,011 | ||||||
Property and equipment, net |
9,553 | 8,924 | ||||||
Goodwill |
100,793 | 102,945 | ||||||
Other intangible assets, net |
3,121 | 3,501 | ||||||
Total assets |
$ | 183,840 | $ | 190,381 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 2,286 | $ | 1,581 | ||||
Current maturities of debt and capital leases |
620 | 614 | ||||||
Accrued expenses, inclusive of payroll and related expenses |
20,879 | 25,897 | ||||||
Taxes payable |
1,395 | 2,310 | ||||||
Total current liabilities |
25,180 | 30,402 | ||||||
Long-term debt and capital leases, net of current maturities |
305 | 389 | ||||||
Deferred income taxes |
1,282 | 1,534 | ||||||
Other long-term liabilities |
302 | 308 | ||||||
Total liabilities |
27,069 | 32,633 | ||||||
Commitments and contingencies (Note 10) |
||||||||
Noncontrolling interest (Note 5) |
4,389 | 4,358 | ||||||
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 45,721 shares, respectively |
457 | 457 | ||||||
Additional paid-in capital |
242,567 | 242,478 | ||||||
Accumulated other comprehensive loss |
(18,202 | ) | (15,267 | ) | ||||
Accumulated deficit |
(66,320 | ) | (68,158 | ) | ||||
158,502 | 159,510 | |||||||
Less cost of treasury stock (2,150 shares) |
(6,120 | ) | (6,120 | ) | ||||
Total shareholders equity |
152,382 | 153,390 | ||||||
Total liabilities and shareholders equity |
$ | 183,840 | $ | 190,381 | ||||
See notes to condensed consolidated financial statements.
Page 4
Table of Contents
ALLIED HEALTHCARE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
(Unaudited)
Three Months Ended | ||||||||
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Revenues: |
||||||||
Net patient services |
$ | 69,199 | $ | 69,384 | ||||
Cost of revenues: |
||||||||
Patient services |
47,862 | 48,507 | ||||||
Gross profit |
21,337 | 20,877 | ||||||
Selling, general and administrative expenses |
18,330 | 17,080 | ||||||
Operating income |
3,007 | 3,797 | ||||||
Interest income |
90 | 105 | ||||||
Interest expense |
(21 | ) | | |||||
Foreign exchange loss |
(5 | ) | (18 | ) | ||||
Income before income taxes |
3,071 | 3,884 | ||||||
Provision for income taxes |
1,106 | 1,030 | ||||||
Net income |
1,965 | 2,854 | ||||||
Less: Net income attributable to noncontrolling interest |
(127 | ) | | |||||
Net income attributable to Allied Healthcare International
Inc. |
$ | 1,838 | $ | 2,854 | ||||
Basic net income per share attributable to Allied Healthcare
International Inc. common shareholders |
$ | 0.04 | $ | 0.06 | ||||
Diluted net income per share attributable to Allied
Healthcare
International Inc. common shareholders |
$ | 0.04 | $ | 0.06 | ||||
Weighted average number of common shares outstanding: |
||||||||
Basic |
43,571 | 45,127 | ||||||
Diluted |
43,923 | 45,417 | ||||||
See notes to condensed consolidated financial statements.
Page 5
Table of Contents
ALLIED HEALTHCARE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
(Unaudited)
Three Months Ended | ||||||||
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 1,965 | $ | 2,854 | ||||
Adjustments to reconcile net income to net
cash (used in) provided by operating activities: |
||||||||
Depreciation and amortization |
883 | 728 | ||||||
Amortization of intangible assets |
312 | 324 | ||||||
Foreign exchange loss |
1 | 15 | ||||||
Increase in provision for allowance for doubtful accounts |
47 | 130 | ||||||
Loss on sale of fixed assets |
| 2 | ||||||
Stock based compensation |
89 | 115 | ||||||
Deferred income taxes |
73 | (55 | ) | |||||
Changes in operating assets and liabilities, excluding
the effect of businesses acquired and sold: |
||||||||
Increase in accounts receivable |
(758 | ) | (209 | ) | ||||
Decrease (increase) in prepaid expenses and other assets |
114 | (1,983 | ) | |||||
Decrease in accounts payable and other liabilities |
(4,588 | ) | (859 | ) | ||||
Net cash (used in) provided by operating activities |
(1,862 | ) | 1,062 | |||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(1,729 | ) | (806 | ) | ||||
Proceeds from sale of property and equipment |
8 | | ||||||
Net cash used in investing activities |
(1,721 | ) | (806 | ) | ||||
Cash flows from financing activities: |
||||||||
Repayments of debt and capital lease obligations |
(357 | ) | | |||||
Borrowings under invoice discounting facility, net |
300 | | ||||||
Stock options exercised |
| 288 | ||||||
Net cash (used in) provided by financing activities |
(57 | ) | 288 | |||||
Effect of exchange rate on cash |
(752 | ) | (6 | ) | ||||
(Decrease) increase in cash |
(4,392 | ) | 538 | |||||
Cash and cash equivalents, beginning of year |
39,031 | 35,273 | ||||||
Cash and cash equivalents, end of year |
$ | 34,639 | $ | 35,811 | ||||
Supplemental cash flow information: |
||||||||
Cash paid for interest |
$ | 21 | $ | | ||||
Cash paid for income taxes, net |
$ | 1,792 | $ | | ||||
Supplemental disclosure of non-cash investing and financing activities: |
||||||||
Capital expenditures included in accrued expenses and other long-term liabilities |
$ | 603 | ||||||
See notes to condensed consolidated financial statements.
Page 6
Table of Contents
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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 also provides these services in Ireland. The Company was incorporated in New York in 1981. The Companys flexible healthcare
staffing business provides personal or basic care and nursing services in the home, nursing and
care homes and hospitals. The Companys healthcare staff consists principally of homecare
aides (known as carers in the U.K.), nurses and nurses aides. |
Essentially, all services provided by the Company are provided by its integrated network of
approximately 115 branches, which have similar economic characteristics and are located mainly
throughout most of the U.K. The operations of the Companys Ireland operations are effectively
reviewed as one branch as they provide comparable services and are operated on a similar basis
as the Companys U.K. operations. The Companys 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, 2010 has been derived from the audited consolidated balance sheet at that date,
but does not include all information and footnotes required by U.S. GAAP for complete financial
statements. These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements included in the Companys Form 10-K for the year
ended September 30, 2010. Although the Companys operations are not highly seasonal, the
results of operations for the three months ended December 31, 2010 are not necessarily
indicative of operating results for the full year. |
2. | Stock-Based Compensation: |
Stock Options |
For the three months ended December 31, 2010 and 2009, stock-based compensation cost recognized
in selling, general and administrative expenses decreased income before income taxes and net
income by $0.1 million in each period. As of December 31, 2010, there was $0.7 million of
total unrecognized compensation cost related to share-based compensation awards, net of
estimated forfeitures, which the Company expects to recognize over a weighted average period of
approximately 1.9 years. The compensation cost as generated by the Black-Scholes
option-pricing model may not be indicative of the future benefit, if any, that may be received
by the option holder. Shares available for future grant under the 2002 Stock Option Plan were
2.9 million shares at December 31, 2010. |
Page 7
Table of Contents
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Following is a summary of stock option activity during the three months ended December 31, 2010
(in thousands, except per share data): |
Weighted- | ||||||||||||||||
Average | ||||||||||||||||
Remaining | ||||||||||||||||
Contractual | Aggregate | |||||||||||||||
Stock | Weighted-Average | Life | Intrinsic | |||||||||||||
Stock Options | Options | Exercise Price ($) | In Years | Value ($) | ||||||||||||
Outstanding at October 1, 2010 |
3,588 | 2.34 | ||||||||||||||
Forfeited |
(351 | ) | 2.33 | |||||||||||||
Outstanding at December 31, 2010 |
3,237 | 2.34 | 7.0 | 1,000 | ||||||||||||
Exercisable at December 31, 2010 |
1,592 | 2.36 | 6.1 | 625 | ||||||||||||
Vested and expected to vest at
December 31, 2010 |
2,489 | 2.34 | 7.0 | 836 | ||||||||||||
The total intrinsic value of options exercised during the three months ended December 31,
2009 was $0.2 million. For options exercised during the three months ended December 31, 2009,
$0.3 million was received in cash to cover the exercise price of the options exercised. There
were no options exercised in the three months ended December 31, 2010. |
Following is a summary of the status of the Companys nonvested stock options as of December
31, 2010 and the activity for the three months ended December 31, 2010 (in thousands, except
per share data): |
Weighted-Average | ||||||||
Stock | Grant-Date | |||||||
Nonvested Stock Options | Options | Fair Value ($) | ||||||
Nonvested at October 1, 2010 |
2,031 | 1.10 | ||||||
Vested |
(47 | ) | 1.10 | |||||
Forfeited |
(339 | ) | 1.12 | |||||
Nonvested at December 31, 2010 |
1,645 | 1.09 | ||||||
The total grant date fair value of stock options vested during the three months ended
December 31, 2010 and 2009 was $0.1 million in each period. |
Page 8
Table of Contents
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Company has granted certain options that, in addition to the time vesting requirement,
have performance conditions based on one or more of the Companys growth in sales, earnings
per share, earnings before interest and taxes, earnings before interest, taxes and
amortization or earnings before interest, taxes, depreciation and amortization. Of the 3.2
million options outstanding at December 31, 2010, 1.0 million options have both time and
performance conditions. The following is a summary of the status of the Companys options
that have both the time vesting requirement
and performance conditions (in thousands, except per share data): |
Weighted- | ||||||||||||||||
Average | ||||||||||||||||
Remaining | ||||||||||||||||
Contractual | Aggregate | |||||||||||||||
Time and Performance Based | Stock | Weighted-Average | Life | Intrinsic | ||||||||||||
Stock Options | Options | Exercise Price ($) | In Years | Value ($) | ||||||||||||
Outstanding at October 1, 2010 |
1,295 | 2.20 | ||||||||||||||
Forfeited |
(317 | ) | 2.17 | |||||||||||||
Outstanding at December 31, 2010 |
978 | 2.20 | 7.1 | 331 | ||||||||||||
Exercisable at December 31, 2010 |
310 | 1.96 | 6.6 | 173 | ||||||||||||
Vested and expected to vest at
December 31, 2010 |
385 | 1.97 | 6.7 | 211 | ||||||||||||
Stock | Grant-Date | |||||||
Time and Performance Based Stock Options | Options | Fair Value ($) | ||||||
Nonvested at October 1, 2010 |
985 | 1.04 | ||||||
Forfeited |
(317 | ) | 1.12 | |||||
Nonvested at December 31, 2010 |
668 | 1.01 | ||||||
The total grant date fair value of time and performance based stock options that vested
during the three months ended December 31, 2009 was $0.1 million.
There were no time and performance based stock options that vested in the three months ended
December 31, 2010. |
Stock Appreciation Rights: |
In fiscal 2009, the Companys 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 Companys 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 Companys 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 Companys 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. |
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 Companys common stock held by Mr. Young) is £3.0 million (approximately $4.6 million
at the closing exchange rate at December 31, 2010). If the total value of the SARs and the
value of the vested portion of Mr. Youngs 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 December 31, 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 December 31, 2010. At December 31, 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. |
Page 9
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ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 December 31, 2010 and
September 30, 2010 (in thousands): |
December 31, | September 30, | |||||||
2010 | 2010 | |||||||
Furniture, fixtures and equipment (including software) |
$ | 20,457 | $ | 19,331 | ||||
Leasehold improvements |
1,287 | 1,268 | ||||||
Vehicles |
796 | 737 | ||||||
22,540 | 21,336 | |||||||
Less, accumulated depreciation and amortization |
12,987 | 12,412 | ||||||
$ | 9,553 | $ | 8,924 | |||||
Depreciation and amortization of property and equipment for the three months ended
December 31, 2010 and 2009 were $0.9 million and $0.7 million, respectively. |
4. | Goodwill and Other Intangible Assets: |
The following table presents the changes in the carrying amount of goodwill for the three
months ended December 31, 2010 (in thousands): |
Goodwill | Accumulated | |||||||||||
Pre Impairment | Impairment | |||||||||||
Losses | Losses | Goodwill | ||||||||||
Balance at October 1, 2010 |
$ | 199,506 | $ | (96,561 | ) | $ | 102,945 | |||||
Foreign exchange effect |
(4,217 | ) | 2,065 | (2,152 | ) | |||||||
Balance at December 31, 2010 |
$ | 195,289 | $ | (94,496 | ) | $ | 100,793 | |||||
Of the $100.8 million goodwill amount, approximately $4.5 million is deductible for U.K.
income tax purposes. |
Page 10
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ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Intangible assets subject to amortization are being amortized on the straight-line method and
consist of the following (in thousands): |
December 31, 2010 | ||||||||||||||||
Range | Gross | Net | ||||||||||||||
Of | Carrying | Accumulated | Carrying | |||||||||||||
Lives | Amount | Amortization | Amount | |||||||||||||
Customer relationships |
4 12 | $ | 10,165 | $ | 8,240 | $ | 1,925 | |||||||||
Trade names |
3 20 | 1,397 | 201 | 1,196 | ||||||||||||
Non-compete agreements |
2 3 | 187 | 187 | | ||||||||||||
Favorable leasehold interests |
2 5 | 7 | 7 | | ||||||||||||
Total |
$ | 11,756 | $ | 8,635 | $ | 3,121 | ||||||||||
September 30, 2010 | ||||||||||||||||
Range | Gross | Net | ||||||||||||||
Of Lives | Carrying | Accumulated | Carrying | |||||||||||||
(Years) | Amount | Amortization | Amount | |||||||||||||
Customer relationships |
4 12 | $ | 10,387 | $ | 8,124 | $ | 2,263 | |||||||||
Trade names |
3 20 | 1,427 | 189 | 1,238 | ||||||||||||
Non-compete agreements |
2 3 | 191 | 191 | | ||||||||||||
Favorable leasehold interests |
2 5 | 7 | 7 | | ||||||||||||
Total |
$ | 12,012 | $ | 8,511 | $ | 3,501 | ||||||||||
Amortization expense for other intangible assets subject to amortization was $0.3 million
for the three months ended December 31, 2010 and 2009. At December 31, 2010, estimated future
amortization expense of other intangible assets still subject to amortization for the nine
months ending September 30, 2011 and the succeeding fiscal years is as follows: |
Remainder of 2011 |
$ | 594 | ||
2012 |
599 | |||
2013 |
597 | |||
2014 |
363 | |||
2015 |
65 | |||
Thereafter |
903 | |||
$ | 3,121 | |||
The change in the net carrying amount at December 31, 2010 is due to amortization expense
and the foreign exchange effect. |
5. | Business Combinations: |
In May 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 ($5.7 million, at the acquisition date exchange
rate). Such consideration may be adjusted based on the final value of the net assets. The
purchase price was funded through the Companys 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 ($11.8 million at
the closing exchange rate at December 31, 2010). The maximum amount payable by the Company
for 100% of the HILG business will be £11.2 million ($17.3 million at the closing exchange
rate at December 31, 2010) and is subject to HILG achieving certain annual earnings before
interest, taxes, depreciation and amortization targets. |
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ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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. 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 for which management believes will provide opportunities for
future growth, especially in the Republic of Ireland. The two sellers of HILG remain in their
existing roles as directors of HILG and have been joined by additional directors appointed by
the Company to this business. |
The goodwill of $7.4 million arising from the acquisition consists largely of the benefits
expected from this transaction. None of the goodwill recognized is deductible for income tax
purposes. |
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 March 31, 2011. |
( in thousands) | Consideration | |||
Cash |
$ | 5,716 | ||
Fair value of total consideration transferred |
$ | 5,716 | ||
Preliminary | ||||
Estimates of | ||||
Acquisition Date | ||||
( in thousands) | Fair Value | |||
Property and equipment |
$ | 986 | ||
Current assets(a) |
1,753 | |||
Current liabilities(b) |
(1,781 | ) | ||
Debt and capital lease obligations |
(823 | ) | ||
Deferred tax liability |
(949 | ) | ||
Total identifiable net liabilities |
$ | (814 | ) | |
Goodwill |
7,424 | |||
Other intangible assets(c) |
2,994 | |||
Noncontrolling interest in HILG |
(3,888 | ) | ||
Total purchase price |
$ | 5,716 | ||
(a) | Includes cash, accounts receivable, unbilled accounts receivable, prepaid
expenses and other current assets. |
|
(b) | Includes accounts payable and other current liabilities. |
|
(c) | Includes customer relationships of $1.8 million with an estimated useful life of
4 years and trade names of $1.2 million with an estimated useful life of 20 years. |
In the third quarter of fiscal 2010, acquisition-related costs of $0.5 million related to
the acquisition of
HILG were included in selling, general, and administrative expenses in the Companys statement
of operations. |
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ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 companys 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. |
Due to the put option agreements, the Company has classified the noncontrolling interest as
mezzanine equity on its consolidated balance sheet. The following table presents a
reconciliation of the carrying amount of the noncontrolling interest at September 30, 2010 and
December 31, 2010 (in thousands): |
Fair value of noncontrolling interest at acquisition |
$ | 3,888 | ||
Net income attributable to noncontrolling interest |
188 | |||
Change in cumulative translation adjustment |
282 | |||
Noncontrolling interest at September 30, 2010 |
$ | 4,358 | ||
Net income attributable to noncontrolling interest |
127 | |||
Change in cumulative translation adjustment |
(96 | ) | ||
Noncontrolling interest at December 31, 2010 |
$ | 4,389 | ||
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 December 31, 2010 and September 30, 2010 (in
thousands): |
December 31, | September 30, | |||||||
2010 | 2010 | |||||||
Payroll and related expenses |
$ | 15,216 | $ | 20,112 | ||||
Professional fees |
1,226 | 1,383 | ||||||
Refunds payable |
1,108 | 1,129 | ||||||
Other |
3,329 | 3,273 | ||||||
$ | 20,879 | $ | 25,897 | |||||
7. | Income Taxes: |
The Company recorded a provision for income taxes amounting to $1.1 million or 36.0% of income
before income taxes for the three months ended December 31, 2010, compared to a provision of
$1.0 million or 26.5% of income before income taxes for the three months ended December 31,
2009. The difference in the effective tax rate between the three months ended December 31,
2010 and December 31, 2009 is mainly due to the U.K. tax deduction on intra-group interest
expense no longer being an allowable deduction effective October 1, 2010. |
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ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
As of December 31, 2010, the Company has recorded a full valuation allowance against its U.S.
deferred tax assets as management believes it is not more likely than not that these deferred
tax assets will be utilized prior to their expiration. Subsequent recognition of these
deferred tax assets would result in an income tax benefit in the year of such recognition.
The Companys public offering in July 2004 of its common shares caused an ownership change
under Section 382 of the Internal Revenue Code of 1986, as amended, (the Code).
Accordingly, Section 382 imposes an annual limit on the Companys ability to utilize it net
operating loss carryforward. The Company has discovered that, upon the ownership change
triggered by the 2004 public offering, an election required under Section 382 of the Code to
include the value of its foreign subsidiaries for purposes of determining the annual net
operating loss utilization limitation had not been filed. Absent this election, the annual
net operating utilization limitation would be negligible. The Company intends to obtain a
private letter ruling from the Internal Revenue Service to get relief which would allow for a
retroactive election and believes it is more likely than not that such relief will be
obtained. |
As of December 31, 2010, the Company has not recorded any unrecognized tax benefits, which
remains unchanged from September 30, 2010. |
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 December 31, 2010 and
2009, the Company had outstanding stock options (including performance-based stock options) to
purchase 1.3 million and 0.9 million shares, respectively, of common stock ranging in price
from $2.01 to $6.20 and $2.11 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 December 31, 2010. |
The weighted average number of shares used in the basic and diluted earnings per share
computations for the three months ended December 31, 2010 and 2009 are as follows (in
thousands): |
Three Months Ended | ||||||||
December 31, | ||||||||
2010 | 2009 | |||||||
Weighted average number of common shares outstanding
as used in computation of basic EPS of common stock |
43,571 | 45,127 | ||||||
Effect of dilutive securities stock options treasury stock method |
352 | 290 | ||||||
Shares used in computation of diluted EPS of common stock |
43,923 | 45,417 | ||||||
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ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. | Comprehensive (Loss) Income: |
Components of comprehensive (loss) 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 (loss) income impacting the Company. The translation of the financial
statement of the Companys U.K. operations is impacted by fluctuations in foreign currency
exchange rates. The following table displays comprehensive (loss) income for the three months
ended December 31, 2010 and 2009 (in thousands): |
Three Months Ended | ||||||||
December 31, | ||||||||
2010 | 2009 | |||||||
Net income |
$ | 1,965 | $ | 2,854 | ||||
Change in cumulative translation adjustment, net of income taxes |
(3,031 | ) | (14 | ) | ||||
Comprehensive (loss) income, net of income taxes |
(1,066 | ) | 2,840 | |||||
Comprehensive income attributable to the noncontrolling interest |
(31 | ) | | |||||
Comprehensive (loss) income attributable to the Company |
$ | (1,097 | ) | $ | 2,840 | |||
10. | 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
December 31, 2010) in fiscal 2011. |
Leases |
The Company has entered into various operating lease agreements for office space, housing
accommodations used by HILG in providing social care and equipment. Certain of these leases
provide for renewal options. Of the $5.4 million operating lease obligations at December 31,
2010, $0.3 million relates to properties that are owned by the noncontrolling interest
holders. |
In connection with the Companys acquisition of HILG, the Company assumed various capital
lease agreements mainly related to leased vehicles and furniture, fixtures and equipment,
which had gross carrying values of $0.6 million and $0.1 million at December 31, 2010 and $0.7
million and $0.1 million at September 30, 2010, respectively and are included within property
and equipment in the Companys Condensed Consolidated Balance Sheet. Accumulated amortization
related to these capital leases totaled $0.2 million and $0.1 million at December 31, 2010 and
September 30, 2010, respectively. Depreciation of assets under capital leases is included in
depreciation expense. The present value of the net minimum capital lease payments estimated
using a discounted cash flow analysis was $0.6 million at December 31, 2010. |
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ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Debt |
In connection with the Companys acquisition of HILG, the Company assumed debt related to two
invoice discounting facilities and a bank loan for the funding of capital expenditures. The
invoice discounting facilities provide for available funds of up to $1.5 million (at the
closing exchange rate at December 31, 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. At December
31, 2010 and September 30, 2010, the Company had outstanding borrowings of $0.3 million and
$0.3 million, respectively, under the invoice discounting facilities and a bank loan that bore
interest at rates ranging from 4.0% to 4.7%. |
Other Obligations |
Other obligations represent our contractual commitment for a new branch operating system and
purchase commitment for new office equipment and software. |
The following table summarizes the Companys future minimum rental commitments required under
both operating and capital lease agreements, debt and other obligations as of December 31,
2010 (in thousands): |
Total | Total | |||||||||||||||||||
Operating | Capital | Total | Total Other | Total | ||||||||||||||||
Fiscal | Leases | Leases | Debt | Obligations | Obligations | |||||||||||||||
2011 |
$ | 2,187 | $ | 261 | $ | 310 | $ | 896 | $ | 3,654 | ||||||||||
2012 |
1,864 | 269 | 39 | 999 | 3,171 | |||||||||||||||
2013 |
909 | 127 | | 201 | 1,237 | |||||||||||||||
2014 |
297 | 4 | | | 301 | |||||||||||||||
2015 |
115 | | | | 115 | |||||||||||||||
Thereafter |
5 | | | | 5 | |||||||||||||||
Total |
$ | 5,377 | $ | 661 | $ | 349 | $ | 2,096 | $ | 8,483 | ||||||||||
Less: Amounts representing interest |
(85 | ) | ||||||||||||||||||
Net present value of capital lease
obligations |
576 | |||||||||||||||||||
Less current portion |
293 | |||||||||||||||||||
Long-term capital lease obligations |
$ | 283 | ||||||||||||||||||
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 Companys 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 Companys consolidated financial position, cash flows or results of
operations. |
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ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 managements best estimate of probable
liability, the Company has accrued $0.1 million for such costs at December 31, 2010 and at
September 30, 2010. |
11. | 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 Companys 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 2011. |
12. | Recent Accounting Standards: |
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 transferors
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 transferors continuing
involvement in transferred financial assets. Effective October 1, 2010, the Company adopted
this standard, which did not have any impact on the Companys 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. Effective
October 1, 2010, the Company adopted this standard, which did not have any impact on the
Companys 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. Effective October 1, 2010, the Company adopted this standard, which did not
have any impact on the Companys consolidated financial position and results of operations. |
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ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 entitys 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 Companys consolidated financial position and results
of operations as the Companys current practice is consistent with the update. |
13. | Fair Value Measurements: |
The Companys 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 Companys long-term debt and capital lease obligations was approximately
$0.3 million and $0.4 million at December 31, 2010 and September 30, 2010, respectively. The
fair values were estimated using a discounted cash flow analysis. |
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Item 2. | Managements 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 2 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. We also provide these services in Ireland. 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,
the Health and Social Care Board 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. |
In May 2010, we acquired a shareholding in a group of business commonly known as Homecare
Independent Living Group (HILG), which has operations in Ireland. 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 ($5.7 million, at the acquisition date
exchange rate), subject to adjustment based on the final value of the net assets. This was
funded through the companys 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 ($11.8 million at the closing exchange rate
at December 31, 2010). The maximum amount payable by us for 100% of the HILG business will be
£11.2 million ($17.3 million at the closing exchange rate at December 31, 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 in Northern Ireland with four operating divisions and an increasing presence in the
Republic of Ireland. 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 for which we believe will provide opportunities for future growth, especially in the
Republic of Ireland. The two sellers of HILG remain in their existing roles as directors of
HILG and have been joined by additional directors appointed by us to this business. |
Our services are provided by our integrated network of approximately 115 branches, which have
similar economic characteristics and which are located throughout most of the U.K. The
operations of our acquisition in Ireland are effectively reviewed as one branch as they provide
comparable services
and are operated on a similar basis as our U.K. operations. 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. |
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Effective January 1, 2010, the standard rate of U.K. value-added tax (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 cost. In the first
quarter of fiscal 2011, we recorded irrecoverable VAT of $0.7 million in selling, general and
administrative expenses. Based on a similar level of future purchases, management estimates
that the increase in VAT would increase expense by $0.1 million per quarter. |
Effective for our fiscal year beginning October 1, 2010, legislative changes have gone into
effect that have disallowed the U.K. tax deduction on intra-group interest expense. This
legislative change has resulted in an increase to our tax provision amount and an increase of
approximately 9% to our effective tax rate for the quarter ended December 31, 2010. |
A further legislative change that will go into effect in April 2011 is the U.K. governments
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 will
impact our profit margins. |
In July 2010, the U.K. Finance Bill 2010-11 was published. 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. The bill was enacted into law on July 27, 2010. We are
currently evaluating the likely impact of this proposed change on our consolidated financial
statements and results of operations. |
The Pensions Act 2008 is to be introduced in phases, over a five year period beginning in 2012,
and 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. Initially employers will be
required to contribute a minimum of 1% of the jobholders qualifying earnings. Upon the final
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 jobholders 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 extent to which we can recover this additional cost from our customers is
uncertain and could impact our profit margins. |
In order to reduce the U.K. governments fiscal deficit HM Treasury announced in October 2010,
following its Comprehensive Spending Review, its plans to achieve a significant reduction in
public spending. While the U.K. government has stated that it will increase spending in the
NHS over the next four years to support healthcare, we note the increase will be partially
offset as the NHS has increased obligations and cost of treatments going forward due to the
growing population and demand for better healthcare. However, the Comprehensive Spending
Review will also allocate £2 billion (approximately $3.1 billion at the closing exchange rate
at December 31, 2010) a year of additional funding by 2014-2015 to support social care. The
Comprehensive Spending Review also announced
significant cuts in funding to local authorities, who are the main providers of social care,
and other public bodies, which are a key source of revenue to us. Local authorities are in the
process of evaluating how to apply such budget restrictions across their different areas of
spending. While we expect some negative impacts on our business as a result of the upcoming
changes, we believe that new opportunities will arise from the Comprehensive Spending Review
(for example, potential reallocation of money from residential to homecare) and the high
quality of our services, our dedicated and caring personnel and our strong market reputation
will, we also believe, continue to drive demand for our homecare services. We will monitor
this closely. |
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The U.K. government is also seeking to introduce a greater level of personalization.
Personalization is a social care approach which aims for social care services users to have
control over how money allocated to their care is spent to achieve their own individual needs
for independence, well-being and dignity. |
Another of the U.K. governments visions is for primary and community care to provide high
quality, personal care and support, treating people when they are sick and helping them stay
healthy, where and when they need it most. The U.K. government wishes to ensure that there is
access to a dedicated team of family doctors, community nurses, health visitors, allied health
professionals, social care professionals, pharmacists, dentists and opticians, to enable most
patients to enjoy good quality care, close to home. The U.K. government recognizes that the
NHS needs to achieve an unprecedented transfer of care and treatment from hospital to community
settings and that community services have a pivotal role to play in this. Accordingly, the
U.K. government has stated that it wants to build on the services which are currently provided
in the community to create one integrated sustainable structure. |
In addition to the personalization agenda and the opportunity for service users and patients to
effectively commission their own care, the U.K. government is also radically reforming the NHS
organizations that currently commission care, with the proposed abolition of Strategic Health
Authorities (the SHAs) and NHS Primary Care Trusts with whom we currently deal and replacing
them with NHS Commissioning Boards and General Practitioner Commissioning Consortia (GP
Consortia). The GP Consortia 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, SHAs and NHS 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 their effects
on our business should become clearer over the next twelve months. As all these proposed
changes are continually evolving and could change at any time depending on their political
support, we will continue to monitor this closely. |
Finally, we believe that there is potential for further outsourcing of homecare by local
governments and NHS Primary Care Trusts. However, both governmental and NHS bodies are under
pressure to achieve significant cost savings and efficiencies. Consequently, the benefits
arising from the potential for outsourcing may be reduced by tighter local governmental and NHS
Primary Care Trust budgets or by policy changes or legislation. |
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. |
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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 departments 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 December 31, 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 first
quarter of fiscal 2011, we determined that there were no such indicators. We completed the
annual impairment test of goodwill during the fourth quarter of fiscal 2010 and determined that
there was no impairment to our goodwill balance. The calculation of fair value used for an
impairment test includes a number of estimates and assumptions, including future income and
cash flow projections, the identification of appropriate market multiples and the choice of an
appropriate discount rate. 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. |
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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 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. As of
December 31, 2010, we had recorded a full valuation allowance against the deferred tax asset
created by the U.S. federal net operating loss carryforward as we did not believe it was more
likely than not that such losses would be utilized prior to their expiration. Subsequent
recognition of these deferred tax assets would result in an income tax benefit in the year of
such recognition. |
Our public offering in July 2004 of shares of our common stock caused an ownership change under
Section 382 of the Internal Revenue Code of 1986, as amended (the Code). Accordingly,
Section 382 imposes an annual limit on our ability to utilize our net operating loss
carryforward. Our company has discovered that, upon the ownership change triggered by the 2004
public offering, an election required under Section 382 of the Code to include the value of our
foreign subsidiaries for purposes of determining the annual net operating loss utilization
limitation had not been filed. Absent this election, the annual net operating utilization
limitation would be negligible. We intend to seek a private letter ruling from the Internal
Revenue Service to get relief which would allow for a retroactive election. Although we
believe it is more likely than not that such relief will be obtained, there is no assurance
that we will be able to obtain such relief. An inability to use a significant portion of our
federal net operating loss carryforward could have a material adverse effect on our financial
condition or results of operations. |
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 December 31, 2010, our
company has not recorded any unrecognized tax benefits, which remains unchanged from September
30, 2010. |
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 either upon completion of timesheets that also require the signature of the
recipient of services or through electronic call monitoring. |
We receive a majority of our revenue from local governmental social service or social care
departments and the NHS. |
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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. Accordingly, final asset and
liability fair values as well as useful lives may differ from managements original estimates
and could have a material adverse impact on our consolidated financial position or results of
operations. |
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 contributed 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. |
In order to reduce the U.K. governments fiscal deficit HM Treasury announced in October 2010,
following its Comprehensive Spending Review, its plans to achieve a significant reduction in
public spending. While the U.K. government has stated that it will increase spending in the
NHS over the next four years to support healthcare, we note the increase will be partially
offset as the NHS has increased obligations and cost of treatments going forward due to the
growing population and demand for better healthcare. However, the Comprehensive Spending
Review will also allocate £2 billion (approximately $3.1 billion at the closing exchange rate
at December 31, 2010) a year of additional funding by 2014-2015 to support social care. The
Comprehensive Spending Review also announced significant cuts in funding to local authorities
and other public bodies, which are a key source of revenue to us. Local authorities are in the
process of evaluating how to apply such budget restrictions across their different areas of
spending. As a result of the imminent budget social care cuts that were anticipated after the
recent U.K. government change we have already not seen typical increases in either service
prices or the number of service hours in the quarter ended December 31, 2010. |
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While we expect some negative impacts on our business as a result of the upcoming changes, we
believe that new opportunities will arise from the Comprehensive Spending Review (for example,
potential reallocation of money from residential to homecare) and the high quality of our
services, our 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. Further, as a result of the budget restrictions arising from the
Comprehensive Spending Review, local authorities will spend less money on nursing homes. |
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. The U.K. government has stated that it will
increase spending in the NHS over the next four years to support healthcare. However, we note
the increase will be partially offset as the NHS has increased obligations and cost of
treatments going forward due to the growing population and demand for better healthcare. As
such, in the first quarter of fiscal 2011, we have noticed a tightening in NHS spending on
hospitals and temporary staff. |
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Three Months Ended December 31, 2010 vs. Three Months Ended December 31, 2009 |
To provide an increased understanding of our companys 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. |
Three Months Ended December 31, | Three Months Ended December 31, | |||||||||||||||||||||||||||||||
% | % | |||||||||||||||||||||||||||||||
2010 | 2009 | Change | 2010 | % | 2009 | % | Change | |||||||||||||||||||||||||
(Amounts in thousands) | Revenue | Gross Profit | ||||||||||||||||||||||||||||||
Homecare |
$ | 63,263 | $ | 58,622 | 7.9 | % | $ | 19,749 | 31.2 | % | $ | 18,027 | 30.8 | % | 9.6 | % | ||||||||||||||||
Nursing Homes |
3,885 | 5,325 | -27.0 | % | 1,241 | 31.9 | % | 1,687 | 31.7 | % | -26.4 | % | ||||||||||||||||||||
Hospitals |
4,278 | 5,437 | -21.3 | % | 1,033 | 24.1 | % | 1,163 | 21.4 | % | -11.2 | % | ||||||||||||||||||||
Total, at constant exchange rates |
71,426 | 69,384 | 3.0 | % | 22,023 | 30.8 | % | 20,877 | 30.1 | % | 5.5 | % | ||||||||||||||||||||
Effect of foreign exchange |
(2,227 | ) | | -3.3 | % | (686 | ) | | -3.3 | % | ||||||||||||||||||||||
Total, as reported |
$ | 69,199 | $ | 69,384 | -0.3 | % | $ | 21,337 | $ | 20,877 | 2.2 | % | ||||||||||||||||||||
SG&A | ||||||||||||||||||||||||||||||||
SG&A, at constant exchange rates
& excluding US Corporate Overhead
Costs and Amortization Costs |
$ | 17,492 | $ | 16,093 | 8.7 | % | ||||||||||||||||||||||||||
SG&A US Corporate Overhead Costs |
1,071 | 663 | 61.5 | % | ||||||||||||||||||||||||||||
SG&A Amortization, at constant
exchange rates |
322 | 324 | -0.6 | % | ||||||||||||||||||||||||||||
SG&A, at constant exchange rates |
18,885 | 17,080 | 10.6 | % | ||||||||||||||||||||||||||||
Effect of foreign exchange |
(555 | ) | | -3.3 | % | |||||||||||||||||||||||||||
Total SG&A, as reported |
$ | 18,330 | $ | 17,080 | 7.3 | % | ||||||||||||||||||||||||||
Operating Income | ||||||||||||||||||||||||||||||||
Operating income, at constant
exchange rates & excluding US
Corporate Overhead Costs &
Amortization |
$ | 4,531 | $ | 4,784 | -5.3 | % | ||||||||||||||||||||||||||
Operating income US Corporate
Overhead Costs |
(1,071 | ) | (663 | ) | -61.5 | % | ||||||||||||||||||||||||||
Operating income amortization,
at constant exchange rates |
(322 | ) | (324 | ) | 0.6 | % | ||||||||||||||||||||||||||
Operating income, at constant
exchange rates |
3,138 | 3,797 | -17.5 | % | ||||||||||||||||||||||||||||
Effect of foreign exchange |
(131 | ) | | -3.3 | % | |||||||||||||||||||||||||||
Operating income, as reported |
$ | 3,007 | $ | 3,797 | -20.8 | % | ||||||||||||||||||||||||||
Net Income Attributable to Allied | ||||||||||||||||||||||||||||||||
Basic | Basic | |||||||||||||||||||||||||||||||
and | and | |||||||||||||||||||||||||||||||
Diluted | Diluted | |||||||||||||||||||||||||||||||
EPS | EPS | |||||||||||||||||||||||||||||||
Net income attributable to Allied |
$ | 1,838 | $ | 0.04 | $ | 2,854 | $ | 0.06 | ||||||||||||||||||||||||
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In addition to disclosing results of operations that are determined in accordance with
generally accepted accounting principles (GAAP), the chart above shows non-GAAP financial
measures that exclude the impact of foreign exchange, U.S. corporate overhead costs and
amortization costs on our current period results. Management believes that the presentation of
these non-GAAP measures provides useful information to investors regarding our companys
results of operations, as these non-GAAP measures allow investors to better evaluate ongoing
business performance. Investors should consider non-GAAP measures in addition to, and not as a
substitute for, financial measures prepared in accordance with GAAP. The chart also provides a
reconciliation of the non-GAAP measures with the most directly comparable GAAP measures. |
Revenues |
Total revenues for the three months ended December 31, 2010, before the unfavorable impact of
foreign exchange rates, increased by $2.0 million, or 3.0%, to $71.4 million, compared with
$69.4 million for the three months ended December 31, 2009. Contributing to the increase in
revenues was homecare revenues which grew by 7.9% to $63.2 million. The acquisition completed
in the third quarter of fiscal 2010 contributed 8.0%, or $4.7 million, to the increase in
homecare revenues. Nursing homes revenues declined by 27.0% to $3.9 million. Hospitals
revenues decreased by 21.3% to $4.3 million. After the unfavorable impact of currency exchange
of $2.2 million, revenues decreased to $69.2 million. |
Gross Profit |
Gross profit, before the unfavorable impact of foreign exchange, increased 5.5% to $22.0
million for the three months ended December 31, 2010 from $20.9 million for the three months
ended December 31, 2009. Homecare gross profit grew 9.6% to $19.8 million. The acquisition
completed in the third quarter of fiscal 2010 contributed $1.5 million, or 8.1%, to the
increase in homecare gross profit. Nursing homes gross profit declined 26.4% to $1.2 million
and hospitals gross profit declined 11.2% to $1.0 million. Changes in foreign exchange
decreased gross profit by $0.7 million to $21.3 million for the three months ended December 31,
2010 compared to $20.9 million for the three months ended December 31, 2009, an increase of
2.2%. As a percentage of total revenue, gross profit for the three months ended December 31,
2010 was 30.8%, as compared to 30.1% for the comparable prior period. The improvement from
30.1% to 30.8% is primarily due to the sales mix change within our hospital staffing business
and also a reduction in some of our lower homecare margin service lines arising from the
Comprehensive Spending Review. We continue to focus on efforts to maintain our normal 30%
range of expectation gross margin percentage despite on-going pricing pressures and increased
national insurance charges, which will go into effect in April 2011, which will impact us. |
Selling, General and Administrative Expenses |
Total SG&A expenses for the three months ended December 31, 2010, before the favorable impact
of foreign exchange, increased by $1.8 million, or 10.6% to $18.9 million (26.4% of revenues)
compared to $17.1 million (24.6% of revenues) for the three months ended December 31, 2009.
The acquisition completed in the third quarter of fiscal 2010 contributed 6.7%, or $1.1
million, to the 8.7% increase in SG&A, excluding US corporate overhead costs and
amortization costs. The remaining increase is mainly a result of us incurring additional
costs, in the current fiscal year, in certain areas of our business mainly related to the
opening of new branches, investment in specialized service lines which include continuing care
and learning disabilities, and costs associated with process improvements including the roll
out of our new IT system, all to ensure that we support future |
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growth in revenues. For the three months ended December 31, 2010 our
training costs were reduced by training support grants in respect of training provided to
carers of $0.4 million, which was partially offset by grant-related monitoring and compliance
costs incurred of $0.2 million. For the three months ended December 31, 2009, we had a
reduction in training costs from receipts of training support grants of $0.5 million, which was
partially offset by grant-related monitoring and compliance costs incurred of $0.3 million.
However, lower U.K. government spending arising from the Comprehensive Spending Review may
result in lower training support grants being awarded, which may increase our training costs.
At the same time, we maintain tight controls over other areas of SG&A costs so as to maintain
our objective of reducing SG&A costs as a percent of revenues. The increase in U.S. corporate
overhead costs is mainly attributable to amounts incurred in our continuous efforts to increase
shareholder value over time. Changes in foreign exchange decreased the reported SG&A result by
$0.6 million to $18.3 million compared to $17.1 million for the three months ended December 31,
2009. |
Interest Income |
Total interest income for the three months ended December 31, 2010 was $0.1 million compared to
$0.1 million for the three months ended December 31, 2009. |
Foreign exchange loss |
Total foreign exchange loss for the three months ended December 31, 2010 was $5 thousand
compared to $18 thousand for the three months ended December 31, 2009. Foreign exchange is
impacted by gains or losses resulting from foreign currency exchange fluctuations on our
intercompany obligations for which settlement is intended. |
Provision for Income Taxes |
We recorded a provision for income taxes amounting to $1.1 million or 36.0% of income before
income taxes for the three months ended December 31, 2010, compared to a provision of $1.0
million or 26.5% of income before income taxes for the three months ended December 31, 2009.
The difference in the effective tax rate between the three months ended December 31, 2010 and
the three months ended December 31, 2009 is mainly due to the U.K. tax deduction on intra-group
interest expense no longer being an allowable deduction effective October 1, 2010. |
Net Income |
As a result of the foregoing, we recorded net income of $2.0 million for the three months
ended December 31, 2010 compared to net income of $2.9 million for the three months ended
December 31, 2009. |
Net Income Attributable to Noncontrolling Interest |
Net income attributable to noncontrolling interest was $0.1 million for the three months ended
December 31, 2010. |
Net Income Attributable to Allied Healthcare International Inc. |
As a result of the foregoing, we recorded net income attributable to Allied Healthcare
International Inc. of $1.8 million for the three months ended December 31, 2010 compared to net
income attributable to
Allied Healthcare International Inc. of $2.9 million for the three months ended December 31,
2009. |
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Liquidity and Capital Resources |
General |
For the three months ended December 31, 2010, we utilized $1.9 million of cash from operating
activities. Cash requirements for the three months ended December 31, 2010 for accounts
payable and other liabilities ($4.6 million) and capital expenditures ($1.7 million) were met
through cash on hand. Our cash flow is susceptible to the timing of our payroll payments. In
the current quarter we had a lower payroll and related expenses accrual of $15.2 million as
compared to $18.0 million for the quarter ended December 31, 2009. |
At December 31, 2010 our cash balance was $34.6 million, a decrease of $4.4 million from $39.0
million at September 30, 2010. The decrease is mainly attributable to the timing of payments
related to our payroll accruals and estimated tax payments. Accrued payroll and related
expenses was $15.2 million and $20.1 million, at December 31, 2010 and September 30, 2010,
respectively. Taxes payable was $1.4 million and $2.3 million at December 31, 2010 and
September 30, 2010, respectively. |
We believe existing capital resources and those to be generated from operating activities will
be adequate to conduct our operations for the next twelve months. |
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, 2010
and September 30, 2010, $20.3 million (11.1%) and $20.1 million (10.6%), respectively, of our
total assets consisted of accounts receivable. |
Our goal is to maintain accounts receivable levels equal to or less than 45 days (including
unbilled accounts receivable), which would tend to mitigate the risk of negative cash flows
from operations by reducing the required investment in accounts receivable and thereby
increasing cash flows from operations. We maintain credit controls to ensure cash collection
on a timely basis. Days sales outstanding (DSOs), excluding unbilled accounts receivable, is
a measure of the average number of days taken by our company to collect its accounts
receivable, calculated from the date services are invoiced. The timing of our invoicing and
cash collections as well as the pattern of our weekly invoicing cycles causes fluctuations in
our monthly DSOs. At December 31, 2010 and September 30, 2010, our average DSOs, excluding
unbilled accounts receivable, were 26 and including unbilled accounts receivable were 43. |
At December 31, 2010 gross receivables, excluding unapplied cash and surcharges, were $22.8
million, of which $18.9 million or 82.8% were represented by amounts due from governmental
bodies, either the local governmental social service departments or health and social care
departments (SHSD) or the NHS. At September 30, 2010 gross receivables, excluding unapplied
cash and surcharges, were $22.2 million, of which $17.6 million or 79.5% were represented by
amounts due from governmental bodies. The remaining accounts receivable balance is due from
commercial payors (nursing homes and private hospitals) and private payors. |
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The following table summarizes the accounts receivable aging by payor mix at December 31, 2010
and September 30, 2010 (dollars in thousands): |
0-30 | 31-60 | 61-90 | 91-120 | 121 Days | AR At | |||||||||||||||||||
At December 31, 2010 | Days | Days | Days | Days | And Over | 12/31/2010 | ||||||||||||||||||
SHSD |
$ | 10,387 | $ | 1,493 | $ | 438 | $ | 240 | $ | 326 | $ | 12,884 | ||||||||||||
NHS |
4,991 | 737 | 118 | 103 | 56 | 6,005 | ||||||||||||||||||
Commercial Payors |
1,375 | 217 | 60 | 29 | 47 | 1,728 | ||||||||||||||||||
Private Payors |
1,702 | 120 | 67 | 71 | 240 | 2,200 | ||||||||||||||||||
Gross AR at 12/31/10 |
$ | 18,455 | $ | 2,567 | $ | 683 | $ | 443 | $ | 669 | $ | 22,817 | ||||||||||||
Less: Unapplied Cash |
(1,470 | ) | ||||||||||||||||||||||
Less: Surcharges(A) |
(259 | ) | ||||||||||||||||||||||
Less: Allowance For Doubtful
Accounts |
(734 | ) | ||||||||||||||||||||||
Accounts Receivable, net |
$ | 20,354 | ||||||||||||||||||||||
0-30 | 31-60 | 61-90 | 91-120 | 121 Days | AR At | |||||||||||||||||||
At September 30, 2010 | Days | Days | Days | Days | And Over | 9/30/2010 | ||||||||||||||||||
SHSD |
$ | 9,540 | $ | 1,425 | $ | 318 | $ | 162 | $ | 325 | $ | 11,770 | ||||||||||||
NHS |
4,952 | 602 | 140 | 60 | 121 | 5,875 | ||||||||||||||||||
Commercial Payors |
1,674 | 376 | 63 | 24 | 54 | 2,191 | ||||||||||||||||||
Private Payors |
1,860 | 142 | 91 | 68 | 186 | 2,347 | ||||||||||||||||||
Gross AR at 9/30/10 |
$ | 18,026 | $ | 2,545 | $ | 612 | $ | 314 | $ | 686 | $ | 22,183 | ||||||||||||
Less: Unapplied Cash |
(1,120 | ) | ||||||||||||||||||||||
Less: Surcharges(A) |
(239 | ) | ||||||||||||||||||||||
Less: Allowance For Doubtful
Accounts |
(732 | ) | ||||||||||||||||||||||
Accounts Receivable, net |
$ | 20,092 | ||||||||||||||||||||||
(A) | Surcharges represent interest charges to customers on overdue accounts.
The surcharges are recognized in income only upon receipt of payment. |
Each fiscal year we undertake a review of our methodology and procedure for reserving for
our doubtful accounts. This process also takes into account our actual experience of write
offs in the period. The policy is then applied at each quarter end to arrive at a closing
reserve for doubtful accounts. See Critical Accounting PoliciesAccounts Receivable, for a
description of our methodology procedure. |
Given the high percentage of U.K. governmental debt, the large number of customer accounts with
low-value debt within the remainder of the accounts receivable ledger and the methodology for
making provisions for doubtful accounts, we believe our provisioning method is prudent and
appropriate to our business. |
We provide homecare aides and nurses on the basis of terms (payment due within 7 to 30 days of
invoice) and prices (rate per hour or fraction of an hour) agreed to in advance with our
customers. The work is either logged by electronic call monitoring or time sheets are signed
by clients for the work performed and then invoices are generated based on agreed billing
rates. Consequently, there is no process for approval of invoices. Our credit control
policies currently achieve an average collection of approximately 26 days from submission of
invoices. |
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As our current operations are in the U.K. and Ireland and the majority of accounts receivable
are from governmental bodies for which payment terms and prices are agreed in advance, we have
not recorded any contractual allowances. |
Debt and Capital Leases |
See Leases and Debt below under Commitments. |
Commitments |
Employment Agreements |
We have employment agreements with our two executive officers that provide for minimum
aggregate annual compensation of approximately $0.6 million (at the closing exchange rate at
December 31, 2010), in fiscal 2011. |
In January 2008, we entered into an employment agreement with Sandy Young, our chief executive
officer. The employment agreement is terminable by either Mr. Young or the company by giving
not less than twelve months prior written notice to the other party or automatically on Mr.
Youngs 65th birthday. The salary of Mr. Young is currently £218,463 (approximately
$338,000 at the closing exchange rate at December 31, 2010). In addition, pursuant to his
employment agreement: |
| we awarded Mr. Young 0.2 million stock options in February 2008; |
| we granted Mr. Young 0.6 million stock appreciation rights in April 2009, the terms
of which are described in Note 2 of the Notes to Condensed Consolidated Financial
Statements for our quarter ended December 31, 2010; |
| we provide Mr. Young with a car allowance; and |
| we have agreed to make a payment equal to 15% of Mr. Youngs annual salary towards
his U.K.-based private pension fund. |
In May 2008 we entered into an employment agreement with Paul Weston, our chief financial
officer. Our employment agreement with Mr. Weston provides that either party may terminate the
agreement upon six months written notice. In addition, under our employment agreement with
Mr. Weston, we are required to pay him 12 months salary in the event he is terminated due to
an acquisition. Our employment agreement with Mr. Weston further provides that Mr. Weston will
not compete against us for a period of six months following the termination of his employment
with us. Pursuant to his employment agreement, Mr. Weston currently receives a salary of
£161,247 (approximately $249,500 at the closing exchange rate at December 31, 2010). In
addition, pursuant to his employment agreement with us, Mr. Weston receives a car allowance and
we have agreed to make a payment equal to 15% of his annual salary towards his U.K.-based
private pension fund. |
Leases |
We have entered into various operating lease agreements for office space and equipment, as
well as housing accommodations used by HILG in providing social care. Certain of these
operating leases provide for renewal options. Of the $5.4 million operating lease obligations
at December 31, 2010, $0.3 million relates to properties that are owned by the noncontrolling
interest holders. In connection with our acquisition of HILG, we 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 December 31,
2010. |
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Debt |
In connection with our acquisition of HILG, we assumed debt related to two invoice
discounting facilities and a bank loan for the funding of capital expenditures. The invoice
discounting facilities
provide for available funds of up to $1.5 million (at the closing exchange rate at December 31,
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 December 31, 2010 and September 30, 2010, we
had outstanding borrowings of $0.3 million and $0.3 million, respectively, under the invoice
discounting facilities and a bank loan that bore interest at rates ranging from 4.0% to 4.7%. |
Contractual Cash Obligations |
The following table summarizes our contractual cash obligations as of December 31, 2010
(dollars in thousands): |
Total | Total | |||||||||||||||||||
Operating | Capital | Total | Total Other | Total | ||||||||||||||||
Fiscal | Leases | Leases | Debt | Obligations | Obligations | |||||||||||||||
2011 |
$ | 2,187 | $ | 261 | $ | 310 | $ | 896 | $ | 3,654 | ||||||||||
2012 |
1,864 | 269 | 39 | 999 | 3,171 | |||||||||||||||
2013 |
909 | 127 | | 201 | 1,237 | |||||||||||||||
2014 |
297 | 4 | | | 301 | |||||||||||||||
2015 |
115 | | | | 115 | |||||||||||||||
Thereafter |
5 | | | | 5 | |||||||||||||||
Total |
$ | 5,377 | $ | 661 | $ | 349 | $ | 2,096 | $ | 8,483 | ||||||||||
Less: Amounts representing interest |
(85 | ) | ||||||||||||||||||
Net present value of capital lease
obligations |
576 | |||||||||||||||||||
Less current portion |
293 | |||||||||||||||||||
Long-term capital lease obligations |
$ | 283 | ||||||||||||||||||
Both operating and capital lease obligations reflect future minimum rental commitments
required under such lease agreements as of December 31, 2010. Other obligations represent our
contractual commitment for a new branch operating system and purchase commitment for new office
equipment and software. We anticipate incurring total expenditures for our new branch
operating system, both contractual and non-contractual, including software, hardware, hosting
services and training costs, of approximately $6.9 million (at the closing exchange rate at
December 31, 2010), of which $4.9 million has been incurred in fiscals 2009 and 2010 and in the
three months ended December 31, 2010 and $2.0 million is expected to be incurred in the nine
months ended September 30, 2011 through fiscal 2012. We anticipate that funding will come from
our existing cash and cash provided by operating activities. |
Contingencies |
See Note 10 of the Notes to Condensed Consolidated Financial Statements for our quarter ended
December 31, 2010 for a discussion of contingencies. |
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Impact of Recent Accounting Standards |
See Note 12 of the Notes to Condensed Consolidated Financial Statements for our quarter ended
December 31, 2010. |
Miscellaneous |
Treasury Shares |
In January 2001, we initiated a stock repurchase program, whereby we were authorized to
purchase up to approximately $1.0 million 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 were authorized to purchase up to an
additional $3.0 million of our outstanding shares of common stock in open-market transactions
or in privately-negotiated transactions. In May 2010, these two stock purchase programs were
terminated and we initiated a new stock repurchase program, whereby we may purchase up to
approximately $10 million of our outstanding shares of common stock in open-market transactions
or in privately-negotiated transactions. In fiscal 2010 we purchased 1.6 million shares for an
aggregate purchase price of $3.8 million under our May 2010 stock repurchase program. As of
December 31, 2010, we had acquired an aggregate of 2.0 million shares of our common stock for
an aggregate purchase price of $5.1 million pursuant to our stock repurchase programs
(including stock repurchase programs which have been terminated), which are reflected as
treasury stock in our consolidated balance sheet at December 31, 2010. In addition, as of
December 31, 2010, we had acquired 0.2 million shares of our common stock for an aggregate
value of $1.0 million from certain of our former executive officers. Such shares were acquired
in fiscal 2004 and delivered to us as payment on promissory notes issued by us to them. |
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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. Currently, we do not hedge foreign currency exchange rate
exposures. |
The translation of the operating results of our U.K. operations is impacted by fluctuations in
foreign currency exchange rates. For the year to date fiscal 2011 period as compared to the
year to date fiscal 2010 average rate, the translation of our U.K. financial statements into
U.S. dollars resulted in decreased revenues of $2.2 million, decreased operating income of $0.1
million and decreased net income of $0.1 million. We estimate that a 10% change in the
exchange rate between the British pound and the U.S. dollar would have a $6.9 million, $0.4
million and $0.2 million impact on reported quarterly revenues, operating income and net
income, respectively. |
Interest Rate Risk |
Our exposure to market risk for changes in interest rates relates primarily to our invoice
discount facilities. Our invoice discounting facilities provide for available funds of up to
$1.5 million (at the closing exchange rate at December 31, 2010) and mature in April and June
of 2011. We had outstanding borrowings of $0.3 million and $0.2 million under the invoice
discounting facilities at December 31, 2010 and September 30, 2010, respectively. Our
remaining debt and capital lease obligations are at fixed interest rates. As such, we believe
our exposure to interest rate risk to be minimal. |
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Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures. Our companys management, with the
participation of our chief executive officer and our chief financial officer, has evaluated the
effectiveness of our disclosure controls and procedures as of December 31, 2010. |
Under the rules of the Securities and Exchange Commission, disclosure controls and procedures
are defined as 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 and forms 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 chief financial
officer, as appropriate to allow timely decisions regarding required disclosure. |
Based on such evaluation, our chief executive officer and chief financial officer have
concluded that, as of December 31, 2010, 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. Under the rules of the
Securities and Exchange Commission, internal control over financial reporting is defined as a
process designed by, or under the supervision of, an issuers principal executive and principal
financial officers, and effected by the issuers board of directors, management and other
personnel, to provide reasonable assurances regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. |
There have not been any changes in our internal control over financial reporting during the
quarter ended December 31, 2010 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting. |
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Part II
Item 6. | Exhibits |
3 | Amended and Restated By-laws of Allied Healthcare International Inc. (incorporated
herein by reference to Exhibit 3.1 of our Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 8, 2010; File No. 001-11570). |
|||
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
|||
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
|||
32.1 | Section 1350 Certification of Chief Executive Officer. |
|||
32.2 | Section 1350 Certification of Chief Financial Officer. |
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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 9, 2011
ALLIED HEALTHCARE INTERNATIONAL INC. |
||||
By: | /s/ Paul Weston | |||
Paul Weston | ||||
Chief Financial Officer (Principal Financial Officer and Duly Authorized to Sign on Behalf of Registrant) |
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