SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No.: 1-11570
ALLIED HEALTHCARE INTERNATIONAL INC.
(Exact Name of Registrant as Specified in Its Charter)
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New York
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13-3098275 |
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(State or Other Jurisdiction of Incorporation
or Organization)
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(I.R.S. Employer Identification Number) |
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245 Park Avenue
New York, New York
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10167
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(212) 750-0064 |
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(Address of Principal Executive Offices)
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(Zip Code)
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(Registrants telephone number,
including area code) |
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered |
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Common Stock, $.01 par value
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The NASDAQ Stock Market LLC |
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Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such reporting requirements for the past 90 days. Yes þ
No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Date 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best or registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated file 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. (Check one):
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Large accelerated filer o | |
Accelerated filer þ | |
Non-accelerated filer o | |
Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of March 31, 2010, the last business day of its most-recently
completed second fiscal quarter, was approximately $122,205,172, based on the closing sales price of $2.72 per share of common stock of the registrant on such date, as reported by
The NASDAQ Stock Market LLC. The calculation of the number of shares held by non-affiliates is based on the assumption that the affiliates of the registrant include only directors
and executive officers of the registrant.
The number of shares of common stock of the registrant outstanding on December 9, 2010 was 43,571,251.
DOCUMENTS INCORPORATED BY REFERENCE:
None
ALLIED HEALTHCARE INTERNATIONAL INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended September 30, 2010
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements.
Forward-looking statements are identified by words such as believe, anticipate, expect,
intend, plan, will, may, should, could, think, estimate and predict, and other
similar expressions. In addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking statements.
We based these forward-looking statements on our current expectations and projections about
future events. Our actual results could differ materially from those discussed in, or implied by,
these forward-looking statements. Factors that could cause actual results to differ from those
implied by the forward-looking statements include:
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general economic and market conditions; |
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the effect of the recent change in the U.K. government and the impact of proposed
changes in recent policy making related to health and social care that may reduce
revenue and profitability; |
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the impact of the recent HM Treasury Comprehensive Spending Review setting out the
U.K. governments plans to reduce spending; |
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the introduction by the U.K. government of individualized budgets and direct
payments for service users (the personalization agenda), which could lead our
hospital, healthcare facility and other customers to bypass our services and which
might decrease our revenues and margins; |
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our ability to continue to recruit and retain flexible healthcare staff; |
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our 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 us; |
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the general level of demand for healthcare and social care; |
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our dependence on the proper functioning of our information systems; |
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the effect of existing or future government regulation of the healthcare and social
care industry, and our ability to comply with these regulations; |
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the impact of medical malpractice and other claims asserted against us; |
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the effect of regulatory change that may apply to us and that may increase our costs
and reduce our revenue and profitability; |
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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;
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our ability to use our net operating loss carryforward to offset net income; |
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the effect that fluctuations in foreign currency exchange rates may have on our
dollar-denominated results of operations; and |
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the impairment of our goodwill, of which we have a substantial amount on our balance
sheet, may have the effect of decreasing our earnings or increasing our losses. |
Other factors that could cause actual results to differ from those implied by the
forward-looking statements in this Annual Report on Form 10-K are more fully described elsewhere in
this document, as well as changes in any of the following: the demand for our services, general
economic conditions, governmental regulation, the level of competition we face, customer strategies
and pricing and reimbursement policies.
Preliminary Notes
As used in this Annual Report on Form 10-K, the company, our company, we, us and
similar terms mean Allied Healthcare International Inc. and its subsidiaries.
Historical financial and other data originally denominated in pounds sterling have been
converted to dollars at the then applicable exchange rate.
When we use Ireland in this Annual Report, we mean the Republic of Ireland and Northern
Ireland, collectively.
PART I
Item 1. Business
Our Company
We are a leading provider of flexible, or temporary, healthcare staffing services to the
healthcare and social care (often referred to as domiciliary care) industry in the United Kingdom,
as measured by revenues, market share and number of staff. We provide personal or basic care and
nursing services in the home, in nursing and care homes and in hospitals. As of September 30, 2010
we operated an integrated network of approximately 115 branches throughout most of the United
Kingdom. Our healthcare staff consists principally of homecare aides (known as carers in the
United Kingdom), nurses and nurses aides. We maintain a listing of approximately 12,000 homecare
aides, nurses and nurses aides. During fiscal 2010, we placed an average of approximately 8,000
individuals each week with our customers.
In May 2010, we acquired a shareholding in a group of businesses 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 ($12.1 million at the closing exchange rate at September 30, 2010). The maximum
amount payable by us for 100% of the HILG business will be £11.2 million ($17.7 million at the
closing exchange rate at September 30, 2010) and is subject to HILG achieving certain annual
earnings before interest, taxes, depreciation and amortization targets.
HILG is a leading provider of homecare to the elderly, physically disabled and mentally
disabled 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
with what management believes to be a good growth potential. 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.
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We were incorporated in New York in 1981. Our principal executive offices are located at 245
Park Avenue, New York, New York 10167, and our telephone number at that location is (212) 750-0064.
As our principal operations are predominantly in the United Kingdom, we also maintain an English
head office in Stone, Staffordshire. Our common stock trades on the NASDAQ Global Select Market
under the symbol AHCI.
Our Philosophy
We strive to maintain our vision, strategy and focus by:
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Assisting individuals in maintaining and improving their quality of life
by addressing a broad range of health and care needs. |
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Expanding our range of healthcare staffing services over the long-term. |
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Enhancing our service and quality levels to build upon our reputation for
patient satisfaction by concentrating on service and the professional
development of our employees. |
Our Business and Market
We provide a diverse range of flexible staffing services, principally consisting of homecare
aides, nurses aides and nurses, to our customers throughout most of the United Kingdom. As of
September 30, 2010, our mix of flexible staff was approximately 87% homecare aides, 10% nurses
aides and 3% nurses. We have a strong and comprehensive regional branch structure covering
approximately 90% of the U.K. population. Our branches are located in England, Wales, Scotland and
Ireland.
The major purchasers of flexible healthcare staffing services in Great Britain are:
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Local governmental social service departments, which oversee social care. |
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The government-funded National Health Service (the NHS). The NHS
oversees healthcare in the local community through its Primary Care Trusts. The NHS
operates its hospitals mainly through NHS Acute Trusts and Foundation Trusts (NHS
Hospitals). |
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Independent hospitals and nursing and care homes in the United Kingdom. |
In Northern Ireland, social care services and healthcare services are provided as an
integrated service under what is known as health and social care. The major purchaser of flexible
healthcare staffing services in Northern Ireland is the Health and Social Care Board, which
includes five local commissioning groups. The Health and Social Care Board is responsible for
commissioning services, resource management and performance management and service improvement.
Delivering the services is the responsibility of the five Health and Social Care Trusts. We are
contracted by the Health and Social Care Trusts to deliver domiciliary care.
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In the Republic of Ireland social care services and healthcare services are provided as an
integrated service and the Department of Health and Children has the responsibility to formulate
and evaluate policies for the health services. This is carried out in conjunction with the Health
Service Executive, voluntary service providers, government departments and other interested
parties. The Health Service Executive is responsible for the delivery of services over the four
regions into which Republic of Ireland is divided for this purpose. Currently, we are contracted
to deliver domiciliary care in one region.
Our business 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 (such as severe and complex
communication needs, sensory loss and challenging behavior), and individuals of all ages who
require health-related services for continuing healthcare needs.
Homecare services are mainly provided by homecare aides who provide personal or basic care in
the home (known as social care or domiciliary care in the United Kingdom). Where the homecare
service includes a healthcare element, nursing support is provided. In addition, while our HILG
acquisition provides homecare services, it also provides housing and support services that provide
fully-furnished temporary housing and tailored support to vulnerable members of the community and
peripatetic services, which combines domiciliary care, housing and support for individuals with
highly complex needs. We believe that the homecare services market will continue to grow in the
medium term despite the U.K government spending review due to the following:
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shift from residential care services to homecare services; |
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the potential outsourcing of more work by local governmental social
service departments and the NHS over the next few years as the government addresses its
financial deficit. We anticipate this will provide an opportunity for us as private
sector-provided homecare is a lower-cost option than government-provided homecare; |
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local authorities reducing the number of suppliers; and |
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more specialist care services being provided in the home
environment. |
We also supply nursing staff services to nursing homes and hospitals that account for our
remaining healthcare staffing services. This includes nurses aides who perform many of the
functions of homecare aides, mainly in the hospital setting, and nurses.
Our healthcare and social care business is well established and we believe that the current
market dynamics provides an opportunity for us in the medium term despite the U.K. government
spending review. We believe that the lower costs of homecare services, as compared to
institutional care, is a strong incentive to utilize our services for local governmental social
service departments and NHS Primary Care Trusts. Our long-term business strategy of expanding our
homecare service line is intended to capitalize on the fact that we believe that
these entities will continue to utilize our homecare services to meet their home healthcare
needs either directly or through the personalization agenda.
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The U.K. healthcare and social care staffing market is highly fragmented, with no one company
possessing a dominant market share. This allows for opportunities for acquisition growth as well
as organic growth.
Our Business Strategy
Our strategy is to become the provider of choice to purchasers of healthcare staffing services
as well as the employer of choice to flexible healthcare workers and to expand our range of
healthcare staffing services over the long-term. The key elements in achieving these strategic
objectives are:
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Increase revenues on a per branch basis. We believe the increasing demand
for quality healthcare staffing with national coverage and diversity of services will
support organic growth in our branches and the development of new services. We intend
to foster continued same-branch revenue growth by leveraging and enhancing our brand
name, competitive benefits package and leadership position in providing temporary
healthcare staffing services. |
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Recruit and retain healthcare staff. We intend to continue to recruit and
retain high-quality staff to take advantage of the opportunities in the market place.
We intend to continue our recruitment efforts and to encourage loyalty from our
healthcare staff by matching their flexible working preferences (both with regards to
scheduling preferences and types of assignments desired) with our customers needs,
maintaining regular contact and promoting opportunities for training and development.
In general, the U.K. population is becoming increasingly diverse in its composition.
We seek to reflect that diversity and to attract, retain and develop staff that will
put the patients needs first and recognize the difference each staff member can make. |
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Expand our homecare service line. We intend to focus our marketing
efforts on (1) securing new contracts with local governmental social service
departments to provide homecare services to the elderly and to individuals with
learning disabilities, (2) growing our business from NHS Primary Care Trusts and in the
future from the General Practitioner Commissioning Consortia (which is an organization
intended to replace the NHS Primary Care Trusts), especially services for individuals
requiring continuing healthcare at home, and (3) developing our business and marketing
strategy in response to the government introduction of the personalization agenda and
the right of the individual to choose their supplier of choice via individual budgets
and direct payment. Under the personalization agenda, individual budgets and direct
payment service users become the commissioners of their own individual service
requirements. |
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Provide a higher standard of quality care. We intend to continue our
efforts to enhance our service and quality levels as we believe that the achievement of
these is essential to our future business growth. |
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Provide a higher standard of training. We continue to make significant
investments in the area of training. All our carers are required to take a training
course that lasts at least five days, as well as annual refresher courses. We also
encourage our carers to enhance their qualifications by attaining National Vocational
Qualifications. |
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Continue our market penetration into specialist service lines. We plan to
continue to continue the expansion of our continuing care services and our learning
disabilities services across our branch network where demand exists and where we have
the staff expertise to provide these services. |
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Invest in technology and improved business processes. We are investing in
a new branch operating system, which is currently being rolled out across our branch
network, and improved business processes. Our aim is to find solutions to improve our
business flows and to eliminate paperwork from our business once we have a common
information systems platform in place. We believe this will contribute to our aim of
maintaining increases in selling, general and administrative expenses in our business
below revenue growth. |
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Further expand our strong presence in the U.K. healthcare staffing
industry through the strategic acquisition of other companies. In addition to organic
growth, we intend to grow our presence in the U.K. healthcare staffing services market
through the acquisition of other companies. |
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Continue our policy of ensuring that all of our workers meet our
compliance standards before being placed to serve our customer needs. |
We believe that focusing on these elements will ensure that we can remain a leading provider
of homecare services in the U.K. and, in so doing, enhance shareholder value.
Our Operations
Our integrated branch network is spread throughout most of Great Britain. A typical branch is
overseen by a branch manager, who is responsible for all the activities in the branch, including
the achievement of its financial targets, developing local customer relations, recruiting staff and
ensuring compliance with regulatory standards. The branches are organized into geographical
regions that are overseen by our operations managers, who report to our operations directors. Our
branches serve as our direct contact with our customers and our healthcare staff. Additionally, we
employ regional commissioning managers who focus on developing and acquiring new business
opportunities by securing sales contracts with the local governmental social service departments
and NHS Primary Care Trusts.
We hold regular management meetings that are attended by our operations managers, operations
directors, related corporate office departments and representatives of senior management where the
financial and other performance of the branches is assessed and actions for improvement are agreed
upon.
We generally maintain centralized management control in the areas of payroll, accounts
receivable, contracts, pricing, regulatory matters, quality control, training and information
technology.
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Our operations in Ireland are operated on a similar basis. The current size of the Ireland
operations allows us to run the majority of the services from our main Ireland operating office at
Milford, Armagh using satellite offices in Belfast and Dundalk to support the administration and
management of the Ireland business.
Recruitment of Flexible Staff
Many healthcare workers are attracted to flexible staffing positions because of their desire
to tailor work schedules to personal and family needs, obtain varied and challenging work
experiences and acquire new skills. We believe that our ability to offer quality flexible staffing
assignments well-matched to individuals preferences assists in our attracting a large number of
flexible healthcare workers. Our flexible healthcare workers services are retained through a
standard written employment contact. Individual working schedules are agreed on an individual
basis and our staff is paid in the majority of cases purely for hours worked.
Our branch managers are primarily responsible for recruiting staff. Branch managers recruit
on a local basis, with referrals from existing staff providing an important source of new staff.
From time to time, we may run internal financial promotions to encourage referrals from our staff.
We also formally recruit through local and national print advertising and online job boards and
organize recruitment events, including national recruitment days, at the branch level. Our website
also advertises local branch vacancies.
We impose a standardized recruitment process on our branches. Before they can place a
homecare aide, nurse or nurses aide, our branches must obtain, among other things, two professional
references and evidence of proper immunizations, as well as a police background check. Our
branches must also confirm that each nurse has been licensed by the appropriate governmental body
and that each nurses aide and homecare aide has received the training mandated by law for their
occupation.
Training and Retention of Flexible Staff
Our retention philosophy is based upon each branch maintaining personal contact with the
flexible staff on its register, including a structured campaign whereby current and former staff
are contacted periodically by each branch to assess their needs and to attempt to meet their
individual working preferences. We also conduct a formal process of reviewing all charge and pay
rates within the business and compare them to prevailing market rates to ensure that our pay rates
are competitive.
Quality Assurance
We invest heavily in quality assurance systems to ensure that our flexible healthcare staff
meet our internal quality assurance standards, as well as those mandated under the Care Standards
Act 2000. It is the branch managers responsibility to ensure that all flexible workers are
compliant with our internal quality assurance standards when they are booked on shifts.
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We have a quality assurance audit team whose primary job responsibility is to visit each of
our branches on a periodic basis to assure that the branches adhere to our companys policies and
procedures. The quality assurance audit team is independent of our operations management.
A member of our quality assurance audit team visits each branch at least twice per year.
During its visits to our branches, the quality assurance audit team reviews employee files to
confirm that staff have proper levels of training for the jobs in which they are being placed by
the branch and that the documents required by our standardized recruitment process are in order.
The quality assurance audit team also confirms that nurses have been licensed with the appropriate
U.K. body. In addition, to minimize injury to our staff, the quality assurance audit team checks
customer files to confirm that all risk assessments, including health and safety checks for
customers facilities, have been made. Reviews of staff and customer files are done on a random
sample basis. In addition, our quality assurance audit team also visits some of our customers to
ensure that the quality of our services is meeting our standards. As part of this review, we also
survey our key local governmental social service department customers.
Customers
We provide healthcare staffing services to six types of customers:
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Local governmental social service departments. Local governmental social service
departments retain us to provide social care staffing services, generally homecare
aides, to individuals in their homes. |
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Nursing homes, care homes and independent hospitals. We provide nurses and homecare
aides to nursing homes and homecare aides to care homes. Care homes, like nursing
homes, generally provide shelter and food for their residents, but, unlike nursing
homes, generally do not provide medical services to their residents. We also provide
nurses and nurses aides to independent hospitals in the private sector. |
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The NHS. We provide nurses, nurses aides and homecare aides to the NHS. We provide
staff or nursing and care services both to NHS Hospitals and NHS Primary Care Trusts. |
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The Health and Social Care Board. In Northern Ireland, the Health and Social Care
Board retains us to provide health and social care services. |
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The Health Service Executive. In the Republic of Ireland, the Health Service
Executive retains us to provide health and social care services. |
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Private patients. We provide both nurses and homecare aides to private patient
customers. These patients may include incapacitated individuals who require daily
attention or patients with long-term illnesses living at home. |
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Types of Customer Contracts
We provide staff to our customers under a variety of arrangements, including the following
categories of contracts common to the healthcare staffing industry:
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Spot and framework contracts. These contracts, which are the most common type of
contracts in the U.K. healthcare staffing industry, are price-per-contract arrangements
for the provision of flexible staffing services, usually with local governmental social
service departments, NHS Primary Care Trusts and nursing and care homes. Spot and
framework contracts have the price and other terms agreed on a contract-by-contract
basis with no obligation to commit to any set volume of business. |
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Block contracts. These contracts are usually with local governmental social service
departments and involve the purchase of a quantity (or block) of flexible staffing
care services over a period of time. A block contract usually commits the customer to
purchase an agreed-upon volume of staffing services over a specified period. These
contracts may enable customers to negotiate lower prices in return for agreeing to
minimum volumes of business. |
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NHS Framework Agreement and Service Level Agreements. The NHS requires any
healthcare staffing company that provides temporary staff to certain NHS bodies, mainly
hospitals, to enter into their Framework Agreement. The Framework Agreement sets out
pay structures for the supply of nurses of all specifications. The intent of these
agreements was that only those staffing companies that successfully tendered for
inclusion on the Framework Agreement (including meeting all of the specified quality
standards) would be eligible to provide temporary staff to NHS bodies in the region
covered by the Framework Agreement. However, some suppliers still supply to the NHS
outside of these agreements. |
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Individual NHS Hospitals may select from the list of approved staffing companies
qualified under the Framework Agreement and enter into Service Level Agreements. |
We typically provide in our written contracts that we will indemnify our customers against
liability that they may incur in the event that the members of our staff cause death, personal
injury or property damage in the performance of their services. We maintain liability insurance
designed to reimburse us in the event that claims of this type are made. See Insurance below.
In addition, in some of our written contracts, we agree to indemnify our customers for the costs
they incur if we are not able to provide them with the number of staff or man-hours required during
the term of the contract and the customer has to outsource its staffing requirements to another
entity.
Marketing Activities
We market our flexible healthcare staffing services to key decision makers in local
governmental social service departments, the NHS, nursing and care homes and independent hospitals.
These decision makers can be procurement officers, contract officers or social workers.
Fundamental to our ability to obtain and retain staffing assignments is establishing and
maintaining a reputation for quality service and responsiveness to the needs of our customers and
their patients. Further, as a result of the governmental introduction of the individualized budget
and personalized agenda, we will need to increase our marketing and market our business in a
different manner to private individuals.
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Competition
The U.K. flexible healthcare staffing services business is highly fragmented with numerous
small operators providing staff locally. The market at the local level is characterized by
relatively low barriers to entry. The barriers to entry at a U.K.-wide level are more significant,
as the establishment and growth of a flexible healthcare staffing services business is largely
dependent on access to capital.
The privately-owned competitors of our flexible staffing services business are mainly small,
locally-based companies serving a limited area or group of customers. These businesses compete
with our relevant branch covering the same local area, but do not otherwise compete for U.K.-wide
market share. In addition, a limited number of larger U.K.-based companies and charities compete
with us. Such companies include Nestor Healthcare Group plc, Care UK, Housing 21 (which includes
the Claimar Care Group), Mears Group plc (under the Careforce brand) and Carewatch.
The nature of the U.K. marketplace is such that homecare aides and nurses can accept
placements with more than one flexible staffing services business.
Since 2000, the NHS has had its own internal agency, called NHS Professionals, which has
attempted to provide NHS Hospitals with high volume/low margin contracts for flexible healthcare
workers and to reduce the NHSs dependence on external agencies.
Payment for Staffing Services
In most cases, we contract directly with the governmental entity or private entity or
individual to whom we provide flexible staffing services. The party with whom we contract for the
supply of staff is responsible for paying us directly. In general, reimbursement is received
regularly and reliably from all governmental and private customers. We generally collect payments
from our customers within two months after services are rendered but we pay accounts payable and
employees currently.
For the year ended September 30, 2010, our operations received approximately 83.3% of revenues
from customers that were governmental entities (primarily local governmental social service or
health and social care service departments and the NHS), compared to approximately 75% for the year
ended September 30, 2009. The remaining 16.7% and 25% of revenues received for fiscal 2010 and
2009, respectively, were derived from services and products provided to privately-owned nursing
homes, privately-owned care homes, independent hospitals and private patients.
Trade Names
We operate our healthcare staffing services business in Great Britain principally under the
Allied Healthcare Group trade name and in Ireland under the Homecare Independent Living trade name.
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Employees
As of November 2010, we employed approximately 1,160 individuals in our branch network, our
U.K. head office and our other offices. None of these employees are represented by a labor union.
In addition, we maintain a listing of approximately 12,000 homecare aides, nurses and nurses
aides who are available to staff our customer base on a temporary basis. During fiscal 2010, we
placed an average of approximately 8,000 individuals each week with our customers. Three of these
individuals are represented by a labor union. We consider our relationship with our employees and
staff to be good.
Government Regulation
General
We are subject to regulation by the government of the United Kingdom via acts of Parliament
relating to healthcare provision and by the general health regulations of the Department of Health.
Healthcare Laws and Regulations
Our operations are subject to licensing and approval regulations from both governmental and
non-governmental bodies according to terms of service and operating procedures decided by the U.K.
government.
The Care Standards Act 2000 provides for the registration and regulatory structure for all
non-NHS healthcare services in England and Wales. It also provides for an arm of the National
Assembly for Wales to be the regulatory body for healthcare services in Wales (although this power
is now exercised by the Welsh Ministers). The Care Standards Act 2000 also made provision for a
General Social Care Council in England and a Care Council for Wales to be established as
non-departmental statutory bodies responsible to the Department of Health and National Assembly for
Wales, respectively, with the aim of increasing the protection of service users, their homecare
aides and the general public. The Regulation of Care (Scotland) Act 2001 also introduced
legislation relating to this area in Scotland and appointed the registration authority for
Scotland, the Scottish Commission for the Regulation of Care.
The Care Standards Act 2000 is essentially an enabling Act that provides for regulations to be
made by secondary legislation. It provides that regulations can be made imposing any requirements
which the appropriate Minister thinks fit relating to establishments and agencies. Regulations
relating to registration of companies working in the healthcare sector are already in force.
Position in Great Britain Prior to October 2010. The National Care Standards
Commission (Registration) Regulations 2001 applied until they were revoked on October 1, 2010. The
2001 Regulations were made under the Care Standards Act 2000 and applied in England only. The 2001
Regulations made provision for the registration of the establishments
and agencies supplying healthcare services. In particular, the 2001 Regulations specified the
information and documents that were to be provided by an applicant for registration.
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Other regulations that were introduced pursuant to the Care Standards Act (2000) included
provisions relating to the services to be provided by suppliers of healthcare staff, the keeping of
accounts, the keeping of records and documents and arrangements that were to be made for dealing
with complaints made by those seeking or receiving any of the services provided by the suppliers of
healthcare staff.
The Nurses Agencies Regulations 2002 and the Domiciliary Care Agencies Regulations 2002)
applied until they were revoked on October 1, 2010 by the Health and Social Care Act 2008. These
regulations required that a person who carried on a business for the supply of nurses be a holder
of a certificate from the registration authority in the relevant jurisdiction to certify that the
business was registered to supply nurses.
We were registered in England and Wales under the Care Standards Act 2000 and the Nurses
Agencies Regulations 2002 in relation to England to carry on a business for the supply of nurses
prior to October 1, 2010.
Current Position in Great Britain. The Care Standards Act 2000 (Registration)
(England) Regulations 2010 apply from October, 1 2010. Under the 2010 Regulations, the previous
Care Standards Act 2000 system of categorizing providers by organization type or service type no
longer applies. From October 1, 1 2010 there are no categories for service type, for example, for
domiciliary care or care homes. Rather, the need for registration depends on the regulated
activities carried on by the service provider. The Health and Social Care Act (Regulated
Activities) Regulations 2010 set out the regulated activities that require registration by a
service provider under the new system. Subject to the various exceptions, a provider of any
regulated activity must register with the Care Quality Commission. All of our locations in England
are registered with the Care Quality Commission.
We are registered under the Nurses Agencies (Wales) Regulations 2003 in relation to Wales and
we are similarly registered in Scotland under the Regulation of Care (Scotland) Act 2001. Any of
our branches that supply homecare aides working in individuals homes are authorized under the Care
Standards Act 2000.
The Health and Social Care Act 2008 (the 2008 Act) was enacted in July 2008 and is now
effective. It provides that persons carrying on regulated activities must be registered under the
2008 Act and contains new provisions on registration of healthcare providers, such as the procedure
for the grant or refusal of registration, conditions for registration of managers and guidance as
to code of practice and compliance with requirements. The majority of the provisions relating to
the grant or refusal of registration came into force in January 2009 and the final provisions
became effective in April 2010.
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The 2008 Act also established the Care Quality Commission (the CQC), a new independent
registration and regulatory body for independent healthcare services and social care in England.
The CQC enforces registration of adult care agencies and establishments and promotes improvements
in the quality of healthcare and public health. Health and social care
providers, including NHS providers, are not only required to register with the CQC in order to
provide services, but must also comply with the rules relating to management and staffing, fitness
of premises and the conduct of specified services. The CQCs ambit includes responsibility for
assessing and reporting on the performance of both NHS and independent healthcare organizations.
This registration and regulatory structure is currently being reformed pursuant to the 2008 Act and
the vast majority of its provisions have not become effective, including provisions relating to
registration in respect of the provision of health or social care.
Contracts between suppliers of healthcare staff and NHS Hospitals for the provision of
services, as well as the performance by the parties of their obligations thereunder, are reviewed
by the CQC. We are accredited by various U.K. social services agencies for the supply of homecare
aides within their jurisdiction.
Position in Northern Ireland. The Health and Personal Social Services (Quality,
Improvement and Regulation) (Northern Ireland) Order 2003 provides for the registration and
regulation of non-NHS healthcare services in Northern Ireland. This registration and regulation is
overseen by the Regulation and Quality Improvement Authority, which enforces registration of
residential care homes, nursing homes, nursing and domiciliary agencies. Health care providers
within these sectors are required to comply with statutory guidance on the conduct of the
establishment or agency, staffing, record keeping, complaints management and the fitness of
premises (when relevant). The Regulation Quality and Improvement Authority has oversight
responsibilities for both the NHS and private sectors.
As with the Care Standards Act 2000, The Health and Personal Social Services (Quality,
Improvement and Regulation) (Northern Ireland) Order 2003 is an enabling Act that provides for
regulations to be made by secondary legislation. It gives the Department of Health, Personal
Social Services and Public Safety (the DHSSPS) the power to make regulations about the
registration of establishments and agencies. Regulations already introduced under this enabling
legislation include The Regulation and Improvement Authority (Registration) Regulations (Northern
Ireland) 2005 (governing the registration of affected organizations), The Nursing Agencies
Regulations (Northern Ireland) 2005 and The Domiciliary Care Agencies Regulations (Northern
Ireland) 2007.
The Health and Personal Social Services Act (Northern Ireland) 2001 made provision for the
establishment of the Northern Ireland Social Care Council, which is a non-departmental public body
(sponsored by the DHSSPS) responsible for the regulation of Northern Irelands social care
workforce.
Position in the Republic of Ireland. Domiciliary care in the Republic of Ireland is
currently largely unregulated. Although the Health Information and Quality Authority (the HIQA)
is empowered to regulate all residential care providers under the Health Act 2007, it does not have
the statutory authority to set standards on safety and quality in relation to providers of health
care services in private homes. In order to address this gap, the Law Reform Commission, in its
report delivered in July 2009 (the LRC Report), provisionally recommended that the section of the
Health Act 2007 prescribing the regulatory parameters of HIQA be amended to include the regulation
and monitoring of domiciliary care providers.
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While there is no clear legislative regime for regulating the domiciliary care sector, the
care provided in the institutional setting of hospitals and nursing homes is subject to a clear
legislative scheme under the standard-setting HIQA, operating under the Health Act 2007.
The Health (Nursing Homes) Act 1990 sets out the legislative framework for care standards in
private nursing homes. The Health Act 2007 sets out a framework to set standards for both private
residential care providers (including nursing homes) and also public residential care providers
including those provided from the Health Services Authority. HIQA is also the national inspection
authority for all such residential care providers, be they public or private sector.
Compliance. We believe that we are in substantial compliance in all material respects
with healthcare laws and regulations applicable to our operations in each of the U.K. and the
Republic of Ireland.
Healthcare Reform
General. Our business is subject to extensive and complex laws and regulations in the
United Kingdom. These include, but are not limited to, laws and regulations relating to licensing,
conduct of operations, payment for services and referrals, treatment of staff, benefits payable to
temporary staff and taxation. Moreover, many political, economic and regulatory organizations are
either seeking or supporting fundamental change in the U.K. healthcare industry. A summary of the
material existing and proposed healthcare reforms that affect our business follows.
HM Treasury Comprehensive Spending Review. In order to reduce the U.K. governments
fiscal deficit, following its Comprehensive Spending Review, HM Treasury announced in October 2010
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 $3.2 billion at the
closing exchange rate at September 30, 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.
Governmental Healthcare and Social Care Initiatives.
The United Kingdom. The U.K. governments stated ambition is to put service users/patients
first through radical reform of public services.
The traditional service-led approach has often meant that people have not received the right
help at the right time and in the right place and have been unable to shape the kind of support
they need. To address this problem the U.K. government is seeking to introduce a greater level of
personalization.
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Personalization is a social care approach described by the Department of Health as meaning
that every person who receives support, whether provided by statutory services or funded
themselves, will have choice and control over the shape of that support in all care settings. The
overall aim is 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. 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 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 and NHS Primary Care Trusts with whom we currently deal and replacing them with NHS
Commissioning Boards and General Practitioner Commissioning Consortia (GP Consortia).
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. Further, the changes which are proposed in relation
to the commissioning bodies also create an increased risk of disruption and alteration to the
current outsourcing arrangements.
Northern Ireland. The Health and Social Care Board, which includes five local commissioning
groups and a public health group, was established in April 2009 and is responsible for the
commissioning of health and social care services in Northern Ireland. The Health and Social Care
Board Commissioning Plan 2010/2011 identifies the promotion of living at home strategies for
patients. It is anticipated that a framework for older peoples health and wellbeing will be
implemented which will guide the future direction for commissioning services for domiciliary and
community care. The aim of the framework will be to provide evidence based standards, targets and
measurable outcomes for the provision of community care.
Republic of Ireland. The Law Reform Commission, in the LRC Report, provisionally recommended
that the section of the Health Act, 2007 (prescribing the regulatory parameters of HIQA) be amended
to include the regulation and monitoring of domiciliary care providers. This
amendment would provide for regulation of the domiciliary care sector in the Republic of
Ireland.
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These initiatives represent changes to the way in which we are commissioned to provide
services, the services that are being commissioned and their regulation and therefore represent an
increased risk to our business in order to maintain and grow in such an environment.
Regulations Affecting Employment
U.K. rules affecting our staff. All of our flexible healthcare workers are engaged
pursuant to standard written employment contracts. Under the contracts with a majority of our
staff, we pay them only for work actually performed. Employees in the United Kingdom are entitled
to numerous statutory protections and benefits. For examples, employees are protected from
discrimination based on sex, race, religion, national origin, disability, sexual orientation and
age (and, in Northern Ireland, on the basis of religious belief or political opinion) and once they
have accrued one years continuous service they are entitled to the right to not be unfairly
dismissed. Our employees are also entitled to receive the national minimum wage, and are subject
to the provisions of the Working Time Regulations 1998 (as amended) (the WTR), which governs
hours of work, night work, breaks and holidays. There are protections in the Republic of Ireland
that are roughly equivalent to those mandated by the WTR.
We are subject to the Employment Agencies Act 1973 and Conduct of Employment Agencies and
Employment Business Regulations 2003 (the 2003 Regulations) and applicable case law as our
business is classified as an employment business. The 2003 Regulations govern the charging for
services to a work-seeker and also impose minimum obligations to ensure that the work-seeker and
the hirer are suitable. A breach of the 2003 Regulations (or the Employment Agencies Act 1973)
resulting in damage is actionable in the civil courts as well as giving potential liability to
prosecution and a fine. However, as the focus of the 2003 Regulations is to govern the actions of
employment agencies rather than employment businesses, our business falls outside the scope of
a number of the provisions of the 2003 Regulations.
In December 2008, the Temporary Agency Workers Directive (the Directive), which introduced
additional protection for agency workers, was published by the European Union. The Directive gives
member states until December 5, 2011 to implement its provisions. The U.K. government has
announced its intention for the relevant legislation to come into effect on October 1, 2011 in
Great Britain. The Directive will not apply to Northern Ireland. Pursuant to this legislation,
once agency workers have been engaged for a period of 12 weeks, they will be entitled to at least
the basic working and employment conditions to which they would have been entitled if they had been
recruited directly by the client.
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.
This obligation will apply in respect of all qualifying full time, part time and agency workers who
have been in employment for longer than three months. The legislation details the
requirements that a qualifying jobholder must satisfy to be eligible for automatic enrollment;
in general, a jobholder must be between 22 years old and state pension age and earn more than the
national insurance contributions threshold in order to be a qualifying jobholder. 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.
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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. The jobholders contributions
will start at a minimum of 1% (including tax relief), rising to a maximum of 5% (including tax
relief) after five years. 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.
Irish rules affecting our staff. Similar to the U.K., employees in Republic of
Ireland are entitled to numerous statutory protections and benefits. Employees are protected from
discrimination based on gender, marital status, family status, age, race, religious belief,
disability and sexual orientation. They are also entitled to the right to not be unfairly
dismissed, usually once they have accrued one years continuous service. Employees are entitled to
receive the national minimum wage and are subject to the provisions of the Organization of Working
Time Act, 1997 which governs hours of work, night work, breaks and holidays.
We are currently subject to the Employment Agencies Act 1971 (the 1971 Act). However, the
Employment Agency Regulation Bill, 2009 (the Bill) is intended to replace the 1971 Act and
strengthen the regulation of employment agencies. The Bill proposes a modernization of many
elements of the 1971 Act as well as a range of new provisions not previously contained in the
legislation. The main purpose of the Bill is to provide that employment agencies established in
Republic of Ireland may operate only under a license granted by the Minister for Enterprise, Trade
and Innovation. Employment agencies based outside of Republic of Ireland will also be required to
have such a license unless they are already licensed in another European Economic Area country.
Other provisions include a code of practice to set out standards and practices for employment
agencies to follow.
The Republic of Ireland has yet to enact legislation to implement the Directive. Currently,
the arrangements outlined in the Directive for equal treatment for agency workers are the default
position that will apply unless the Republic of Ireland avails itself of one of its specific
exceptions. However, the Department of Enterprise, Trade and Innovation has recently entered into
a consultation period with interested parties so as to inform the approach in developing the
necessary bill to give effect to the Directive. It is expected that draft legislation will be
available some time next year.
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Insurance
We maintain general liability insurance, professional liability insurance, malpractice
liability insurance and excess liability coverage that provide coverage in the event that a claim
is brought against us alleging negligence, product liability or similar legal theories. Each of
these policies provides coverage on an occurrence basis and has certain exclusions from coverage.
Our insurance policies must be renewed annually.
Available Information
We maintain a website at www.alliedhealthcare.com. The contents of our website are not part
of, nor are they incorporated by reference into, this Annual Report on Form 10-K.
We make available free of charge on or through our website our last three Annual Reports on
Form 10-K, our last three quarterly reports on Form 10-Q and the current reports on Form 8-K that
we have filed since the beginning of fiscal 2010, as well as amendments to those reports, as soon
as reasonably practicable after they are filed with the Securities and Exchange Commission. We
will provide paper copies of our 10-Ks, 10-Qs and 8-Ks to any shareholder free of charge upon
request. Requests should be sent to us at 245 Park Avenue, New York, New York 10167, Attn.:
Secretary.
Item 1A. Risk Factors
Our business is subject to many risks that may negatively affect our business, financial
condition and/or results of operations.
Risks Relating To Our Business And Strategy
If we are unable to attract and retain healthcare staff at reasonable costs, it could increase our
operating costs and negatively impact our business.
We rely significantly on our ability to attract and retain homecare aides, nurses and nurses
aides who possess the skills, experience and, if required, licenses necessary to meet the
requirements of our customers. We compete for flexible healthcare staffing personnel with other
flexible healthcare staffing companies, with hospitals and healthcare facilities and with other
entry-level employment opportunities. Staff choose to work for a healthcare staffing company based
on the quantity, diversity and quality of assignments offered and on compensation packages and
other benefits. We must continually evaluate and upgrade our flexible staffing network to keep
pace with our customers needs and to remain competitive in our business. While the shortage of
homecare aides, nurses and nurses aides in most areas of the United Kingdom has become less of an
issue in the current worldwide economic downturn, we anticipate that over time as the economy
recovers a shortage will reoccur. We may be unable to continue to increase the number of
healthcare staff that we recruit, decreasing the potential for growth of our business. Our ability
to attract and retain healthcare staff depends on several factors, including our ability to provide
them with assignments that they view as attractive and to provide them with competitive benefits
and wages. We cannot assure that we will be successful in any of these areas. The cost of
attracting healthcare staff and providing them with attractive benefit packages may be higher than
we anticipate and, as a result, if we are unable to pass these
costs on to our customers, our profitability could decline. Moreover, if we are unable to
attract and retain healthcare staff, our ability to provide adequate services to our customers may
decline and, as a result, we could lose customers.
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We operate in a highly competitive market and our success depends on our ability to obtain and
retain customers.
The flexible healthcare staffing business is highly competitive. We compete in national,
regional and local markets in the United Kingdom with full-service staffing companies, specialized
flexible staffing agencies, NHS Professionals, hospitals, nursing homes and other home healthcare
businesses. There are relatively few barriers to entry in the markets we serve and, historically,
our industry has been highly fragmented. While we expect to continue to face competition from a
broad range of companies, the recent consolidation trend in our industry is likely to result in an
increase in the number of larger companies that are able to service regional or national markets.
We believe that the primary competitive factors in obtaining and retaining customers are
identifying appropriate healthcare staff for specific job requirements, providing staff in a timely
manner, pricing services competitively and effectively monitoring job performance. With the
introduction by the U.K. government of individualized budgets and direct payments for service users
(the personalization agenda), another competitive factor is the ability to transition from the
business to business sales model (whereby currently the local governmental social service
department chooses the level and type of care and support services the service user requires) to a
business to consumer model (whereby the service user chooses the level and type of care and support
services they require).
Competition for customers may increase in the future and, as a result we may not be able to
remain competitive. To the extent competitors seek to gain or retain market share by reducing
prices or increasing marketing expenditures, we could lose revenues and our margins could decline,
which could harm our operating results. In addition, the development of alternative recruitment
channels and the introduction of the individualized budget and direct payments could lead our
hospital, healthcare facility and other customers to bypass our services, which would also cause
our revenues and margins to decline.
A change in treatment of flexible staff for U.K. tax, employment, benefits and pension purposes
could result in increased costs.
In December 2008, the Temporary Agency Workers Directive (the Directive), which introduced
additional protection for agency workers, was published by the European Union. The Directive gives
member states until December 5, 2011 to implement its provisions. The U.K. government has
announced its intention for the relevant U.K. legislation to come into effect on October 1, 2011 in
Great Britain. The Directive will not apply to Northern Ireland. Pursuant to this legislation,
once agency workers have been engaged for a period of 12 weeks, they will be entitled to at least
the basic working and employment conditions to which they would have been entitled if they had been
recruited directly by the client. Engagement in a substantially different role breaks the
continuity.
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The implementation of the U.K. legislation in 2011 could adversely affect our business. The
requirement to give agency workers engaged for a period of more than 12 weeks at least the
same basic working and employment conditions as other employees of the client or the same
basic working and employment conditions that they would have received had they been recruited
directly by the client may make the use of agency workers less attractive to our hospital and
institutional care customers. It is not yet clear how an assessment of working and employment
conditions can be conducted where the client does not have any of its own employees providing the
same services or whether it is even applicable to homecare services, which constitutes the majority
of our business.
In the U.K., 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.
Our branch structure could result in unforeseen costs and could adversely impact our business.
Our branches operate on a relatively autonomous basis in terms of the recruitment and
placement of staff and the marketing of customers. However, we generally maintain centralized
management control in the areas of payroll, accounts receivable, contracts, pricing, regulatory
matters, quality control and information technology. If we fail to exert proper centralized
management control, our local branches could engage in unauthorized activities, our management
initiatives may not be successfully implemented and our business, financial condition and results
of operations may be adversely affected.
The loss of key senior management personnel could adversely affect our ability to remain
competitive.
We rely heavily on our senior management team, led by Alexander (Sandy) Young, our chief
executive officer, and Paul Weston, our chief financial officer. We have entered into an
employment agreement with Mr. Young. Mr. Youngs employment agreement provides that it shall
continue until terminated by either party giving the other party no less than 12 months prior
written notice. In addition, the employment agreement automatically terminates on Mr. Youngs 65th
birthday (although, under legislation to take effect in October 2011, such an automatic retirement
would need to be justified). We have also entered into an employment
agreement with Mr. Weston. Mr. Westons employment does not have a fixed term, but provides
that either party may terminate the agreement upon six months written notice. The loss or
unavailability for an extended period of time of either Mr. Young or Mr. Weston could have a
material adverse effect on our operations and prospects.
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We are dependent on the proper functioning of our information systems.
We are dependent on the proper functioning of our information systems in operating our
business. Our operations have an IT disaster recovery plan. However, they are still vulnerable to
fire, storm, flood, power loss, telecommunications failures, physical or software break-ins and
similar events. If critical information systems fail or are otherwise unavailable, these functions
would have to be accomplished manually, which could temporarily impact our ability to identify
business opportunities quickly, to maintain billing and clinical records reliably, to bill for
services efficiently and to maintain our accounting and financial reporting effectively.
In fiscal 2008, we approved the purchase of a new branch operating system supplied by
Coldharbour, a privately-owned U.K. company that supplies many of our competitors. This system is
currently being rolled out across our branch network with a targeted completion date in fiscal
2012. We anticipate incurring total expenditures, both contractual and non-contractual, relating
to software, hardware, hosting services and training costs, of approximately $6.9 million (at the
closing exchange rate at September 30, 2010), of which $4.5 million has been incurred and $2.4
million is expected to be incurred in fiscals 2011 and 2012.
Our business is subject to certain risks inherent to international operations.
We operate in the United Kingdom and Ireland. As a result, we are subject to a variety of
risks, including:
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because the revenues and expenses of our principal operations are denominated in
pounds sterling and euros but we report our financial results in U.S. dollars, our
financial results are affected by fluctuations in currency exchange rates that are
unrelated to our results of operations; |
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varying laws relating to, among other things, employment and employment termination; |
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changes in regulatory requirements; and |
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potentially adverse tax consequences. |
These risks may materially and adversely affect our business results of operations or
financial condition.
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Our business may be adversely affected by the current economic recession.
The United Kingdom, Irish and other international economies are experiencing a significant
recession. The recession has been magnified by the tightening of the credit markets. Although our
business was not significantly affected at the beginning of fiscal 2010 by the
recession, we have noticed some impact in our fourth quarter results as we did not see typical
increases in either service prices or the number of service hours. We believe this is as a result
of the efforts by the U.K. government to restrict its public spending in an effort to reduce its
fiscal deficit. In addition, due to the Republic of Irelands request for external funding support
from the International Monetary Fund and other European bodies, it will be forced to implement
plans to significantly reduce its spending. There can be no assurance that our business will not
be materially affected by the consequences of these events during fiscal 2011 and in future years.
Risks Relating To The Flexible Healthcare Staffing Market
Our ability to compete in the homecare services market depends on our ability to obtain assignments
from local governmental social service departments and NHS Primary Care Trusts.
The largest providers of homecare services in the United Kingdom are local governmental social
service departments and NHS Primary Care Trusts. Outsourcing of homecare by these bodies is the
principal source of revenue and growth in the homecare staffing market. Though figures vary widely
among local governments, homecare provided directly by the local governments typically is
significantly more expensive per hour of care than homecare outsourced to independent homecare
providers. While we believe there is potential for further outsourcing of homecare by local
governments and NHS Primary Care Trusts, the benefits arising from these benefits may be reduced by
tighter local governmental and NHS Primary Care Trust budgets, the implementation of the
personalization agenda or by policy changes or legislation. Both governmental and NHS bodies are
under pressure to achieve significant cost savings and efficiencies and to support the
personalization agenda. Moreover, there can be no assurance that we will be chosen by local
governmental social service departments or NHS Primary Care Trusts, or other providers of homecare
services, to provide outsourced homecare services in the future, or that we will be able to recruit
and retain homecare staff at hourly rates that local governments and NHS Primary Care Trusts are
willing to pay.
Further, U.K. government proposals made in June 2010 provide for the abolition of NHS Primary
Care Trusts in 2013 and commissioning of services to be performed at a local level by new GP
Consortia and at a national level for certain larger projects by a new NHS Commissioning Board.
These potential changes give rise to further risk of disruption and alteration of current
outsourcing/commissioning arrangements.
The introduction of the personalization agenda, individual budgets and direct payments could result
in the service user utilizing companies other than us to provide healthcare services.
The government introduction of the personalization agenda, individualized budgets and direct
payments, whereby the service user chooses the level and type of care and support services they
require instead of the local governmental social service departments, could result in the service
user utilizing companies other than us to provide healthcare services. There is currently a public
debate as to the applicability of employment protection legislation where personal budgets result
in a change of provider. If such legislative protections were to apply it would have the effect of
dedicated staff transferring to the new provider.
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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.
Currently we benefit from grants received from the U.K. government in respect of training
provided to carers. Based on the U.K. government budget constraints and in an effort to reduce its
costs, the current level of training grants may be reduced, which would have an adverse impact on
our results of operations.
Local governmental social service departments continue to outsource the majority of their homecare
service requirements.
Currently local authorities outsource the majority of the homecare service requirements under
a block or spot contract with private providers. New initiatives include local governmental social
service departments working to deliver on the governments concord on individual choice and
control, as a result of which the United Kingdom is seeing the introduction of the personalization
agenda. Direct payments may allow some service users to choose the level and type of care and
support services they require and effectively moves the power of the purchasing decision from the
local governmental social service department to the individual. Our ability to sell effectively to
this new group of purchasers is affected by our ability to access the contact details of all
service users receiving direct funding from the local governmental social service department. This
information is secured under the Data Protection Act of 1998 and is often inaccessible.
If NHS Primary Care Trusts (or, in the future, GP Consortia and NHS Commissioning Boards) do not
continue to use homecare as an alternative to residential or NHS Hospitals, our revenues may be
adversely affected.
We anticipate that healthcare at home will continue to expand, but there can be no assurance
that this trend will continue, especially if legislation or NHS Primary Care Trust (or, in the
future, GP Consortia and NHS Commissioning Boards) provision preferences and allocated funding
change. If this trend does not continue, our revenues may be adversely affected.
Demand for flexible staffing may fail to rise, remain at current levels or may decline for a
variety of reasons, including general economic conditions.
Although we anticipate that the market for flexible staffing in the healthcare sector will
continue to expand, there can be no assurance that growth will occur at all or continue at historic
rates or at the rate currently expected. Our growth could be adversely affected by changes in
legislation and the procurement method for homecare services that allows service users (the
individual receiving healthcare services) to choose his or her level and type of care.
In the last few years, U.K. case law on agency workers has indicated that in limited
circumstances agency workers could be deemed to be employees of the customer end-user.
Consequently, it is possible that some of the advantages to hospitals and other purchasers of using
temporary workers may be lost because of the risk that they will be deemed to be the employer of
such workers, and therefore they may decide to hire permanent staff rather than temporary staff.
However, current case law suggests that the circumstances in which an end user can be found to be
the employer of any agency worker is rare when that agency worker is
engaged directly by the agency provider, there is no direct relationship between the end user
and the individual and certain other criteria are satisfied (for example, the end user does not
performance-manage the individual). In addition, demand for flexible healthcare staffing services
may be significantly affected by the general level of economic activity and economic conditions in
the regions in which we operate.
- 23 -
If demand for staffing in the healthcare sector generally declines or does not increase at the
rate we anticipate, our business, financial condition and results of operations may be materially
and adversely affected.
Fluctuations in patient occupancy at the hospitals, nursing homes and care homes of our customers
may adversely affect the demand for our services and therefore our financial performance.
Demand for our flexible healthcare staff is affected by the general level of patient occupancy
at the hospitals and nursing and care homes of our customers. When occupancy increases, our
employees are often added before full-time employees are hired. As occupancy decreases, healthcare
facility customers typically will reduce their use of temporary employees before undertaking
layoffs of their regular employees. In addition, we may experience more competitive pricing
pressure during periods of occupancy downturn. Occupancy at our healthcare customers facilities
also fluctuates due to the seasonality of some elective procedures. We are unable to predict the
level of patient occupancy at any particular time and its effect on our revenues and earnings.
We operate in a regulated industry and violations of laws or regulations may result in increased
costs or sanctions that could impact our financial performance. Moreover, recent and proposed
changes in U.K. regulations affecting flexible staffing companies may result in increased costs
that reduce our revenue and profitability.
Our business is subject to extensive and complex laws and regulations in the United Kingdom.
These include, but are not limited to, laws and regulations relating to licensing, conduct of
operations, payment for services and referrals, treatment of staff, benefits payable to temporary
staff and taxation. If we fail to comply with the laws and regulations that are applicable to our
business, we could suffer civil and/or criminal penalties or we could be required to stop operating
in one or more jurisdictions.
The Pension Act 2008, which will be phased in over a five year period starting in 2012, 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 unless they actively opt out of that arrangement.
The extent to which we can recover this additional cost from our customers is uncertain and could
impact our profit margins.
We may not be able to pass along to our customers the costs of complying with these or other
legislative changes.
- 24 -
NHS reforms may have a substantial negative impact upon us.
Flexible staffing providers, such as our company, are subject to the risk that the NHS will
continue to regulate the price it pays for temporary staffing services, reduce its use of temporary
staffing services or replace its use of temporary staffing services where possible with permanent
employees.
One initiative undertaken by the NHS is the requirement that agencies wishing to supply the
NHS Hospitals with temporary staff enter into Framework Agreements. Any attempt to expand the
Framework Agreements to cover local governmental social service departments or a wider group of
customers, including NHS Primary Care Trusts (and, in the future, GP Consortia and NHS
Commissioning Boards), could have a material adverse effect on our consolidated financial position
or results of operations.
Since the provision of flexible staff is exempt from VAT, we are largely unable to recover any VAT
that we incur, thereby increasing our costs of doing business.
In some of our supply of healthcare staffing services we have historically benefited from a
concession under U.K. law (the Staff Hire Concession) which allowed us to charge value-added tax
(VAT) only on the amount of commission charged to the purchaser of flexible staff. The Staff Hire
Concession expired in March 2009. We undertook a review of our post-concession VAT treatment and
concluded that, other than permanent placement, our supplies are exempt from VAT on the basis that
we provide nursing and welfare services and not the supply of staff (which are not exempt from
VAT). However, if we are deemed to supply staff, there is, by concession, a further exemption from
VAT under U.K. law for the supply of nursing staff and nursing auxiliaries if certain conditions
are met. A change in VAT legislation and/or concessions could have a material adverse effect on
our financial position or results of operations.
Since the majority of our services are now exempt from VAT, our overall costs have increased
as we are not able to recover any VAT that we incur on purchases from our suppliers (such as, for
example, utilities) in respect of the goods and services that they supply to us.
Significant legal actions could subject us to substantial uninsured liabilities.
In recent years, healthcare providers have become subject to an increasing number of legal
actions alleging medical malpractice, abuse, neglect, negligent hiring, product liability or other
breaches of duty. Many of these actions involve large claims and significant defense costs. In
addition, we may be subject to civil or criminal claims arising from actions taken by our employees
or staff, such as misuse of proprietary information or theft of property. In some instances, we
are required to indemnify customers against some or all of these risks. A failure of any of our
employees or personnel to observe our policies and guidelines intended to reduce these risks,
relevant customer policies and guidelines or applicable laws, rules and regulations could result in
negative publicity, payment of fines or other damages. In addition, breaches of the Care Standards
Act 2000 and associated regulations could result in the revocation of registration or the
imposition of conditions on that registration that could adversely effect the
continuation of our business in the United Kingdom. Litigation is costly and, even if we do
prevail, the cost of such litigation could adversely affect our consolidated financial statements.
- 25 -
In addition, in the course of our operations we may face possible claims by employees or
employee candidates of discrimination or harassment (including for actions our customers or their
employees may have taken), violations of health and safety regulations, workers compensation
claims, retroactive entitlement to benefits, unfair dismissal and other similar claims.
Our insurance may not be adequate to protect us from claims for which we may become liable.
To protect ourselves from the cost of claims alleging medical malpractice or other causes of
action, we maintain malpractice liability insurance and general liability insurance coverage in
amounts and with deductibles that we believe are appropriate for our operations. While we have
been able to obtain liability insurance in the past, this insurance varies in cost, is difficult to
obtain and may not be available in the future on terms acceptable to us, if it is available at all.
The failure to maintain insurance coverage or a successful claim not covered by or in excess of
our insurance coverage could have a material adverse effect on our business, financial position,
cash flows or results of operations. In addition, claims, regardless of their merit or eventual
outcome, may have a material adverse effect on our reputation.
Risks Relating To Our Financial Condition
We have incurred substantial amounts of goodwill from our acquisitions, some or all of which we may
be required to write off, which could adversely affect our financial condition or results of
operations.
Goodwill represents the purchase price of an acquisition less the fair value of the net
tangible and intangible assets acquired. We have incurred substantial amounts of goodwill from our
acquisitions. Part of our strategy involves making additional acquisitions. Because businesses of
the type we target often do not have substantial tangible assets, we expect that our acquisition of
these businesses will cause us to continue to incur significant amounts of goodwill.
At September 30, 2010 we had goodwill of approximately $102.9 million, which equaled
approximately 54.1% of our total assets at that date.
All goodwill and intangible assets deemed to have indefinite lives are carried at cost and are
subject to an annual impairment test. We evaluate, on a regular basis, whether events or
circumstances have occurred that indicate all, or a portion, of the carrying amount of goodwill may
no longer be recoverable, in which case an impairment charge to our earnings would become
necessary. We completed our annual impairment test during the fourth quarter of fiscal 2010 and
determined that there was no impairment to our recorded goodwill balance. However, any future
determination requiring the write-off of a significant portion of the carrying value of our
goodwill could have a material adverse effect on our financial condition or results of operations.
- 26 -
Our ability to use our net operating loss carryforward in the future is limited.
As of September 30, 2010, we had a U.S. federal net operating loss carryforward of
approximately $70.4 million, expiring between 2018 and 2024. Our current operations are in the
United Kingdom and Ireland. Under U.S. federal tax law, we can only offset our federal net
operating loss carryforward against U.S. taxable income, including income earned from operations in
the United States and certain other income, including dividends from our U.K. subsidiaries. As of
September 30, 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.
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 recently 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.
Risks Relating To Our Common Stock
Future sales of our common stock by existing shareholders may lower the price of our common stock.
As of December 9, 2010, we had 43,571,251 shares of common stock outstanding.
In addition, as of November 30, 2010, our officers, directors, employees and consultants own
options to acquire an aggregate of 3,520,334 shares of common stock under our 2002 Stock Option
Plan. We may issue additional options under our 2002 Stock Option Plan. The shares of common
stock to be issued upon exercise of the options granted under our 2002 Stock Option Plan have been
registered and may be freely sold when issued. We have also issued stock appreciation rights to
our chief executive officer that, if earned, will be paid in shares of our common stock. See Item
11Executive CompensationEmployment Agreements; Potential Payments Upon Termination or
Change-in-Control for a description of these stock appreciation rights.
Sales of substantial amounts of common stock into the public market could lower the market
price of our common stock.
- 27 -
If provisions in our corporate documents and New York law delay or prevent a change in control of
our company, we may be unable to consummate a transaction that our shareholders consider favorable.
Provisions of our certificate of incorporation, our bylaws or the New York Business
Corporation Law may discourage, delay or prevent a merger or acquisition involving us that our
shareholders may consider favorable. These provisions include the following:
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|
|
Our certificate of incorporation authorizes our board of directors to issue up
to ten million shares of blank check preferred stock. Without shareholder
approval, the board of directors has the authority to attach special rights,
including voting and dividend rights, to these shares of preferred stock. With
these rights, preferred shareholders could make it more difficult for a third party
to acquire us. |
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|
|
Our by-laws require shareholders to provide advance notice of any stockholder
nominations of directors or any proposal of new business to be considered at any
meeting of shareholders. |
|
|
|
We are subject to Section 912 of the New York Business Corporation Law, which,
with certain exceptions, prohibits business combinations, including mergers,
between a New York corporation and an interested stockholder, which is generally
defined as a stockholder who becomes a beneficial owner of 20% or more of a New
York corporations voting stock, for a five-year period following the date that the
shareholder became an interested shareholder. |
Under the employment agreement that we have entered into with Alexander (Sandy) Young, our
chief executive officer, we are required to give Mr. Young 12 months notice of the termination of
his employment, during which time Mr. Young would continue to be paid his salary. Under the
employment agreement with Paul Weston, our chief financial officer, we are required to pay him 12
months salary in the event he is terminated due to an acquisition. These provisions of the
employment agreements may have the effect of preventing or delaying a change of control of our
company, even if the change of control was favored by our shareholders.
Our shareholder rights plan may make it more difficult for a third-party to acquire us.
In April 2009, our board adopted a shareholder rights plan pursuant to which each share of our
outstanding common stock is accompanied by one preferred share purchase right. The shareholder
rights plan was ratified by our shareholders at the 2010 annual meeting of shareholders. The
rights generally will not become exercisable until a person or group acquires 20% or more of our
common stock in a transaction that is not approved in advance by our board of directors. In that
event, each right will entitle the holder, other than the unapproved acquirer and its affiliates,
upon exercise of the right to acquire from us shares of our common stock having a value equal to
two times the exercise price. Our board of directors may redeem the rights for a nominal amount at
any time prior to ten days after a person or group announces that it has acquired 20% or more of
our common stock. If not redeemed by the board, the rights will expire on April 1, 2019. Because
the rights may substantially dilute the stock ownership of a
person or group attempting to take over our company without the approval of our board of
directors, the shareholder rights plan could make it more difficult for a third party to acquire us
(or 20% or more of our outstanding shares of common stock) without first negotiating with our board
of directors regarding such acquisition, even if our shareholders might receive a price in excess
of the then-current market price for their shares.
- 28 -
Our stock price may be volatile.
In recent years, the stock market has experienced significant price and volume fluctuations
that are often unrelated to the operating performance of specific companies. Our market price may
fluctuate based on a number of factors, including:
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our operating performance and the performance of other similar companies; |
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news announcements relating to us, our industry or our competitors; |
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changes in earnings estimates or recommendations by research analysts; |
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changes in general economic conditions; |
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the number of shares that are publicly traded; |
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actions of our current shareholders; and |
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other developments affecting us, our industry or our competitors. |
Item 1B. Unresolved Staff Comments
We have not received, during the 180 days preceding the end of our 2010 fiscal year, any
written comments from the staff of the Securities and Exchange Commission regarding our periodic or
current reports under the Securities Exchange Act of 1934 that remain unresolved.
Item 2. Properties
We lease 275 facilities in the United Kingdom and the Republic of Ireland, of which 146 are
for a period of three months or less. We lease our corporate headquarters in the United States.
We believe that our existing leases will be renegotiated as they expire or that alternative
properties can be leased on acceptable terms. We also believe that our present facilities are well
maintained and are suitable for continuing our existing operations. (See Contractual Cash
Obligations in Note 10 of Notes to Consolidated Financial Statements for our fiscal year ended
September 30, 2010).
Item 3. Legal Proceedings
We are involved in various other legal proceedings and claims incidental to our normal
business activities. We are vigorously defending our position in all such proceedings. We believe
that these matters should not have a material adverse impact on our consolidated financial
position, cash flows, or results of operations.
- 29 -
Item 4. [Removed and Reserved].
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
Our common stock trades on the NASDAQ Global Select Market, a segment of the NASDAQ Global
Market, under the symbol AHCI. The following table sets forth, for the periods indicated, the
high and low intraday sales price of our common stock on the NASDAQ Global Select Market:
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|
PERIOD |
|
HIGH |
|
|
LOW |
|
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|
|
|
|
|
|
|
|
Year Ended September 30, 2009 |
|
$ |
2.15 |
|
|
$ |
1.00 |
|
First Quarter |
|
|
1.50 |
|
|
|
.94 |
|
Second Quarter |
|
|
2.48 |
|
|
|
1.21 |
|
Third Quarter |
|
|
2.90 |
|
|
|
1.92 |
|
Fourth Quarter |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2010 |
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|
|
|
|
|
|
|
First Quarter |
|
$ |
3.40 |
|
|
$ |
2.27 |
|
Second Quarter |
|
|
3.09 |
|
|
|
2.40 |
|
Third Quarter |
|
|
2.95 |
|
|
|
2.22 |
|
Fourth Quarter |
|
|
2.62 |
|
|
|
1.86 |
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|
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|
Year Ended September 30, 2010: |
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|
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|
First Quarter (through
December 9, 2010) |
|
$ |
3.10 |
|
|
$ |
2.37 |
|
From December 2005 until August 2010, depository interests representing our shares of common
stock traded on the Alternative Investment Market (AIM) of the London Stock Exchange. We did not
realize the benefits we anticipated with the AIM listing. In light of this and the costs and
regulatory burdens associated with the listing on AIM of our depository interests, in August 2010
we cancelled the admission of trading on AIM of the depository interests.
We have neither declared nor paid any dividends on our common stock and do not anticipate
paying dividends on our common stock in the foreseeable future. Any future payment of dividends
will be at the discretion of our board of directors and will depend upon, among other things, our
earnings, financial position, cash flows, capital requirements and other relevant considerations,
including the extent of our indebtedness and any contractual restrictions with respect to the
payment of dividends.
As of December 9, 2010, there were approximately 145 holders of record of our common stock.
Holders of record do not include shareholders who hold their shares through one or more
intermediaries, such as banks, brokers or depositaries.
- 30 -
Equity Compensation Plan Information
For certain information concerning securities authorized for issuance under our equity
compensation plans, see Item 12Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder MattersEquity Compensation Plan Information.
Recent Repurchases of Equity Securities
The following table presents information about our repurchases of our common stock during the
quarter ended September 30, 2010:
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Approximate |
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Total Number of |
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|
Dollar Value of |
|
|
|
|
|
|
|
|
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Shares Purchased |
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|
Shares that May |
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as Part of Publicly |
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Yet Be Purchased |
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Total Number of |
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|
Average |
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|
Announced Plans |
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Under the Plans |
|
|
|
Shares Purchased |
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|
Price Paid |
|
|
or Programs(1) |
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|
or Programs |
|
Period |
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(Thousands) |
|
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Per Share |
|
|
(Thousands) |
|
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(Millions) |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2010 July 31, 2010 |
|
|
609 |
|
|
$ |
2.34 |
|
|
|
609 |
|
|
$ |
7.2 |
|
August 1, 2010 August 31, 2010 |
|
|
452 |
|
|
$ |
2.33 |
|
|
|
452 |
|
|
$ |
6.2 |
|
September 1, 2010 September 30, 2010 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
6.2 |
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|
|
|
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|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total |
|
|
1,061 |
|
|
|
2.34 |
|
|
|
1,061 |
|
|
$ |
6.2 |
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|
|
|
|
|
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(1) |
|
In May 2010, we announced that our board of directors had approved a stock repurchase program under which we are authorized to repurchase, from
time to time in the open market or negotiated transactions, shares of our outstanding common stock in an aggregate amount up to $10 million. The
2010 program does not have a stated expiration date. |
Our Comparative Performance
The graph below compares the performance of our common stock for the period from September 30,
2005 to September 30, 2010 with (1) the Center for Research in Security Prices (CRSP) Total
Returns Index for The NASDAQ Stock Market LLC (US Companies), and (2) the CRSP Total Returns Index
for NASDAQ Health Services Stocks (US and Foreign Companies). The CRSP Total Returns Index for The
NASDAQ Stock Market LLC (US Companies) measures the performance of all US companies listed on the
NASDAQ Global Market (formerly known as the NASDAQ National Market) and the NASDAQ Capital Market
(formerly known as the NASDAQ SmallCap Market). The CRSP Total Returns Index for NASDAQ Health
Services Stocks (US and Foreign Companies) measures the performance of all US and foreign companies
listed on NASDAQ whose Standard Industry Classification (SIC) Codes are 8000-8099.
The graph assumes that $100 was invested on September 30, 2005 in our common stock and each
group of companies whose securities comprise the various indices against which we are being
compared and that all dividends, if any, have been reinvested.
The graph was prepared for us by Zacks Investment Research, Inc.
- 31 -
The information contained in this section of this Annual Report on Form 10-K shall not be
deemed filed with the Securities and Exchange Commission nor shall it be deemed to be
incorporated by reference into any filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except to the extent that we specifically incorporate it by reference.
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Notes: |
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A. |
|
The lines represent monthly index levels derived from compounded daily returns that include all dividends. |
|
B. |
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The indexes are reweighted daily, using the market capitalization on the previous trading day. |
|
C. |
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If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used. |
|
D. |
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The index level for all series was set to $100 on September 30, 2005. |
Item 6. Selected Financial Data
The following table sets forth our selected consolidated financial information. The financial
information for the years ended September 30, 2010, 2009 and 2008 and as of September 30, 2010 and
2009 is derived from audited financial statements that appear elsewhere in this Annual Report on
Form 10-K. The financial information for the years ended September 30, 2007 and 2006 and as of
September 30, 2008, 2007 and 2006 is derived from audited financial statements that do not appear
in this Annual Report on Form 10-K.
You should read the following information in conjunction with our financial statements and
notes thereto and the information set forth under Item 7 Managements Discussion and Analysis of
Financial Condition and Results of Operations.
- 32 -
All data in the following table is in thousands, except for per share data.
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Year Ended September 30, |
|
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2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Financial Data: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total revenues |
|
$ |
271,079 |
|
|
$ |
249,810 |
|
|
$ |
298,577 |
|
|
$ |
277,795 |
|
|
$ |
280,205 |
|
Gross profit |
|
|
82,305 |
|
|
|
76,348 |
|
|
|
90,385 |
|
|
|
83,956 |
|
|
|
85,730 |
|
Selling, general and administrative expenses |
|
|
68,846 |
|
|
|
63,234 |
|
|
|
77,655 |
|
|
|
75,284 |
(2) |
|
|
71,103 |
|
Impairment of goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,004 |
(4) |
Impairment of long-lived assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,038 |
(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
13,459 |
|
|
|
13,114 |
|
|
|
12,730 |
|
|
|
8,672 |
|
|
|
(105,415 |
) |
Interest and other income (expense), net |
|
|
331 |
|
|
|
427 |
|
|
|
393 |
|
|
|
(3,273 |
)(3) |
|
|
(2,698 |
) |
Foreign exchange (loss) income |
|
|
(210 |
) |
|
|
(197 |
) |
|
|
(586 |
) |
|
|
285 |
|
|
|
73 |
|
Provision for (benefit from) income taxes |
|
|
3,524 |
|
|
|
3,408 |
|
|
|
3,751 |
|
|
|
2,068 |
|
|
|
(1,887 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
10,056 |
|
|
|
9,936 |
|
|
|
8,786 |
|
|
|
3,616 |
|
|
|
(106,153 |
) |
Income (loss) from discontinued operations, net of
taxes(1) |
|
|
|
|
|
|
367 |
|
|
|
|
|
|
|
6,266 |
|
|
|
(17,618 |
) |
Gain on disposal of subsidiaries, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,471 |
|
|
|
|
|
Net income (loss) |
|
|
10,056 |
|
|
|
10,303 |
|
|
|
8,786 |
|
|
|
66,353 |
|
|
|
(123,771 |
) |
Less: Net income attributable to
noncontrolling interest |
|
|
(188 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Allied Healthcare
International Inc. |
|
$ |
9,868 |
|
|
$ |
10,303 |
|
|
$ |
8,786 |
|
|
$ |
66,353 |
|
|
$ |
(123,771 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share attributable to Allied
Healthcare International Inc. common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.22 |
|
|
$ |
0.22 |
|
|
$ |
0.20 |
|
|
$ |
0.08 |
|
|
$ |
(2.36 |
) |
Income from discontinued operations |
|
|
|
|
|
|
0.01 |
|
|
|
|
|
|
|
1.40 |
|
|
|
(0.39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Allied Healthcare
International Inc common shareholders |
|
$ |
0.22 |
|
|
$ |
0.23 |
|
|
$ |
0.20 |
|
|
$ |
1.48 |
|
|
$ |
(2.75 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share attributable to Allied
Healthcare International Inc. common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.22 |
|
|
$ |
0.22 |
|
|
$ |
0.19 |
|
|
$ |
0.08 |
|
|
$ |
(2.36 |
) |
Income from discontinued operations |
|
|
|
|
|
|
0.01 |
|
|
|
|
|
|
|
1.39 |
|
|
|
(0.39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Allied Healthcare
International Inc. common shareholders |
|
$ |
0.22 |
|
|
$ |
0.23 |
|
|
$ |
0.19 |
|
|
$ |
1.47 |
|
|
$ |
(2.75 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
44,796 |
|
|
|
44,986 |
|
|
|
44,986 |
|
|
|
44,962 |
|
|
|
44,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
45,009 |
|
|
|
45,011 |
|
|
|
45,078 |
|
|
|
45,147 |
|
|
|
44,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
44,609 |
|
|
$ |
42,325 |
|
|
$ |
31,550 |
|
|
$ |
20,380 |
|
|
$ |
(1,165 |
) |
Accounts receivable, net |
|
|
20,092 |
|
|
|
19,594 |
|
|
|
17,774 |
|
|
|
21,490 |
|
|
|
26,813 |
|
Goodwill |
|
|
102,945 |
|
|
|
95,649 |
|
|
|
109,292 |
|
|
|
122,843 |
|
|
|
112,538 |
|
Total assets |
|
|
190,381 |
|
|
|
173,067 |
|
|
|
183,262 |
|
|
|
252,779 |
|
|
|
195,683 |
|
Total debt and capital leases |
|
|
1,003 |
|
|
|
|
|
|
|
|
|
|
|
54,795 |
|
|
|
71,159 |
|
Total shareholders equity |
|
|
153,390 |
|
|
|
147,273 |
|
|
|
152,670 |
|
|
|
158,759 |
|
|
|
86,383 |
|
|
|
|
(1) |
|
See Note 3 of Notes to Consolidated Financial Statements for our fiscal year ended September
30, 2010 for a discussion and details of discontinued operations. |
|
(2) |
|
Includes $1.2 million of severance costs and related professional fees incurred upon the
resignation of our chairman and chief executive officer and $0.4 million related to the
issuance of new warrants and the extension of the expiration date on previously-issued
warrants. |
|
(3) |
|
Includes a $1.0 million charge related to the write-off and costs incurred on financing fees
and other income of $0.8 million related to interest rate swaps no longer being effective. |
- 33 -
|
|
|
(4) |
|
During our annual review of goodwill for impairment in the fourth quarter of fiscal 2006, we
determined there was an impairment of $110.0 million to our recorded goodwill balance by using
a combination of the market multiple, comparable transaction and discounted cash flow methods.
Based on a combination of factors, contributing to the impairment loss were the decrease in
profits due to the decline of revenues from the NHS, our companys market capitalization at
the time of testing as well as current and projected operating results. |
|
(5) |
|
Includes a charge of $9.0 million of software costs related to certain aspects of our
information system that were based on the Oracle platform that was too slow for the nature of
our business and therefore was not
achieving full functionality. Also includes a charge of $1.0 million relate to the
write-off of other intangible assets. We reviewed the carrying amount of our other
intangibles and deemed certain assets to be impaired as of September 30, 2006 as a result of
the decline in revenues from the NHS. |
Item 7.
Managements Discussion and Analysis of Financial Condition and Results of
Operations.
General
The following discussion and analysis should be read in conjunction with the consolidated
financial statements included in this Annual Report on Form 10-K and in conjunction with the
description of our business included in this Annual Report on Form 10-K. It is intended to assist
the reader in understanding and evaluating our financial position. This discussion contains, in
addition to historical information, forward-looking statements that involve risks and uncertainty.
Our actual results could differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include those discussed in
this Annual Report on Form 10-K under Forward-Looking Statements.
We are a leading provider of flexible, or temporary, healthcare staffing services to the
healthcare and social care industry in the United Kingdom, as measured by revenues, market share
and number of staff. Our flexible healthcare staffing service provides personal or basic care and
nursing services in the customers own homes, public or private hospitals and nursing and care
homes. Homecare staffing, which accounts for over 85% of our healthcare staffing services, is
provided for individuals (normally elderly individuals) who require domiciliary care, individuals
with learning disabilities and individuals of all ages who require health-related services for
complex care needs. The main purchaser of our services for customers own homes is local
governmental social service 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 ($12.1 million at the closing exchange rate at September 30, 2010). The maximum
amount payable by us for 100% of the HILG business will be £11.2 million ($17.7 million at the
closing exchange rate at September 30, 2010) and is subject to HILG achieving certain annual
earnings before interest, taxes, depreciation and amortization targets.
- 34 -
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
with what management believes to be a good growth potential. 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 recent 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.
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.
We are aware of legislative changes which will go into effect in fiscal 2011 that would
disallow the U.K. tax deduction on intra-group interest expense. We are currently evaluating our
intra-group position and the likely impact of this change on our consolidated financial statements
and results of operations.
A further legislative change that will go into effect in April 2011 is the U.K. 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 could impact our
profit margins.
In July 2010, the U.K. Finance Bill 2010 was published. As of September 30, 2010 it passed
through the House of Commons. As published, the U.K. Finance Bill 2010, announced that the rate of
corporation tax will be reducing to 27% from April 2011 and will be reducing to 24% by April 2014.
We are currently evaluating the likely impact of this proposed change on our consolidated financial
statements and results of operations.
The 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.
- 35 -
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, following its Comprehensive Spending
Review, HM Treasury announced in October 2010 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 $3.2 billion at the closing exchange rate at September 30, 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. 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. We will monitor this closely.
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.
- 36 -
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 Trust 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 Trust 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. 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.
Accounts Receivable
We are required to estimate the collectability of our accounts receivables, which requires a
considerable amount of judgment in assessing the ultimate realization of these receivables,
including the current credit-worthiness of each customer. Significant changes in required reserves
may occur in the future as we continue to expand our business and as conditions in the marketplace
change.
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 average days sales outstanding (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. |
- 37 -
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 September 30, 2010. Goodwill is tested
for impairment annually in the fourth quarter of each fiscal year. A more frequent evaluation is
performed if indicators of impairment are present. In the first three quarters of fiscal 2010, we
determined that there were not 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.
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, and
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 September 30, 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.
- 38 -
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 are measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. As of September 30, 2010, our company has
not recorded any unrecognized tax benefits, which remains unchanged from September 30, 2009.
Contingencies
We are involved in various legal proceedings and claims incidental to our normal business
activities. We are required to assess the likelihood of any adverse judgments or outcomes to these
matters as well as potential ranges of probable losses. A determination of the amount of reserves
required, if any, for these contingencies are made after careful analysis of each individual issue.
The required reserves may change in the future due to new developments in each matter or changes
in approach such as a change in settlement strategy in dealing with these matters.
Revenue Recognition
Patient services are recognized when services are performed and substantiated by proper
documentation. For patient services, which are billed at fixed rates, revenue is mainly recognized
upon the completion of timesheets that also require the signature of the recipient of our services
and through electronic call monitoring.
We receive a majority of our revenue from local governmental social service or health and
social care service departments and the NHS. For the years ended September 30, 2010, 2009 and
2008, 83.3%, 75.0%, and 69.0%, respectively, of our net revenues were attributable to local
governmental social service departments and the NHS payor program.
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.
- 39 -
In order to reduce the U.K. governments fiscal deficit, following its Comprehensive Spending
Review, HM Treasury announced in October 2010 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 $3.2 billion at the closing exchange rate at
September 30, 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. 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
September 30, 2010.
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.
The NHS requires any healthcare staffing company that provides temporary staff to NHS
Hospitals in a region to enter into a Framework Agreement setting forth, among other things,
applicable quality standards and maximum payment rates.
In the third quarter of fiscal 2010, we opened a new Midland hospital business hub from which
we hope to see benefits arising from this in our next fiscal year. If successful, we will consider
extending this hub approach into other key cities.
Year Ended September 30, 2010 vs. Year Ended September 30, 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.
- 40 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
Year Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
2010 |
|
|
% |
|
|
2009 |
|
|
% |
|
|
Change |
|
(Amounts in thousands) |
|
Revenue |
|
|
Gross Profit |
|
Homecare |
|
$ |
231,718 |
|
|
$ |
203,885 |
|
|
|
13.7 |
% |
|
$ |
71,314 |
|
|
|
30.8 |
% |
|
$ |
63,176 |
|
|
|
31.0 |
% |
|
|
12.9 |
% |
Nursing Homes |
|
|
18,469 |
|
|
|
25,863 |
|
|
|
-28.6 |
% |
|
|
5,971 |
|
|
|
32.3 |
% |
|
|
8,097 |
|
|
|
31.3 |
% |
|
|
-26.3 |
% |
Hospitals |
|
|
19,571 |
|
|
|
20,062 |
|
|
|
-2.4 |
% |
|
|
4,618 |
|
|
|
23.6 |
% |
|
|
5,075 |
|
|
|
25.3 |
% |
|
|
-9.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total, at constant exchange rates |
|
|
269,758 |
|
|
|
249,810 |
|
|
|
8.0 |
% |
|
|
81,903 |
|
|
|
30.4 |
% |
|
|
76,348 |
|
|
|
30.6 |
% |
|
|
7.3 |
% |
Effect of foreign exchange |
|
|
1,321 |
|
|
|
|
|
|
|
0.5 |
% |
|
|
402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total, as reported |
|
$ |
271,079 |
|
|
$ |
249,810 |
|
|
|
8.5 |
% |
|
$ |
82,305 |
|
|
|
|
|
|
$ |
76,348 |
|
|
|
|
|
|
|
7.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A |
|
SG&A, at constant exchange rates
& excluding acquisition costs |
|
$ |
67,776 |
|
|
$ |
63,234 |
|
|
|
7.2 |
% |
Acquisition costs, at constant
exchange rates |
|
|
752 |
|
|
|
|
|
|
|
1.2 |
% |
|
|
|
|
|
|
|
|
|
|
SG&A, at constant exchange rates |
|
|
68,528 |
|
|
|
63,234 |
|
|
|
8.4 |
% |
Effect of foreign exchange |
|
|
318 |
|
|
|
|
|
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
Total SG&A, as reported |
|
$ |
68,846 |
|
|
$ |
63,234 |
|
|
|
8.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
Operating income, at constant
exchange rates & excluding
acquisition cost |
|
$ |
14,127 |
|
|
$ |
13,114 |
|
|
|
7.7 |
% |
Acquisition costs, at constant
exchange rates |
|
|
(752 |
) |
|
|
|
|
|
|
-5.7 |
% |
|
|
|
|
|
|
|
|
|
|
Operating income, at constant
exchange rates |
|
|
13,375 |
|
|
|
13,114 |
|
|
|
2.0 |
% |
Effect of foreign exchange |
|
|
84 |
|
|
|
|
|
|
|
0.6 |
% |
|
|
|
|
|
|
|
|
|
|
Operating income, as reported |
|
$ |
13,459 |
|
|
$ |
13,114 |
|
|
|
2.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Attributable to Allied |
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
and |
|
|
|
|
|
|
and |
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
EPS |
|
|
|
|
|
|
EPS |
|
Income from continuing
operations attributable to
Allied, excluding acquisition
costs |
|
$ |
10,624 |
|
|
$ |
0.24 |
|
|
$ |
9,936 |
|
|
$ |
0.22 |
|
Acquisition costs |
|
|
(756 |
) |
|
|
-0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Allied |
|
$ |
9,868 |
|
|
$ |
0.22 |
|
|
$ |
9,936 |
|
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and acquisition 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.
- 41 -
Revenues
Total revenues for the year ended September 30, 2010, before the favorable impact of foreign
exchange rates, increased by $20.0 million, or 8.0%, to $269.8 million, compared with $249.8
million for the year ended September 30, 2009. Contributing to the increase in revenues was
homecare revenues which grew by 13.7% to $231.7 million. The acquisition of HILG completed in the
third quarter of fiscal 2010 contributed 3.2%, or $6.5 million, to the increase in homecare
revenues. Nursing home revenues declined by 28.6% to $18.5 million. Hospitals revenues decreased
by 2.4% to $19.6 million. After the favorable impact of currency exchange of $1.3 million,
revenues increased to $271.1 million.
Gross Profit
Gross profit, before the favorable impact of foreign exchange, increased 7.3% to $81.9 million
for the year ended September 30, 2010 from $76.3 million for the year ended September
30, 2009. Homecare gross profit grew 12.9% to $71.3 million. The acquisition of HILG
completed in the third quarter of fiscal 2010 contributed $2.0 million, or 3.1%, to the increase in
homecare gross profit. Nursing homes gross profit declined 26.3% to $6.0 million and hospitals
gross profit declined 9.0% to $4.6 million. Changes in foreign exchange increased gross profit by
$0.4 million to $82.3 million for the year ended September 30, 2010 compared to $76.3 million for
the year ended September 30, 2009, an increase of 7.8%. As a percentage of total revenue, gross
profit for the year ended September 30, 2010 was 30.4%, as compared to 30.6% for the comparable
prior period mainly due to our sales mix and tightening economic conditions in the United Kingdom.
Selling, General and Administrative Expenses
Total SG&A expenses for the year ended September 30, 2010, before the unfavorable impact of
foreign exchange and excluding acquisition costs of $0.8 million related to our acquisition of HILG
in the third quarter of fiscal 2010 as well as costs related to aborted acquisitions, increased by
$4.5 million, or 7.2% to $67.7 million (25.1% of revenues) compared to $63.2 million (25.3% of
revenues) for the year ended September 30, 2009. The acquisition of HILG contributed $1.5 million,
or 2.4%, to this increase in SG&A. 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 growth in revenues. For the year ended
September 30, 2010 our training costs were reduced by training support grants in respect of
training provided to carers of $1.6 million, which was partially offset by grant-related monitoring
and compliance costs incurred of $0.8 million. For the year ended September 30, 2009, we had a
reduction in training costs from receipts of training support grants of $2.1 million, which was
partially offset by grant-related monitoring and compliance costs incurred of $1.4 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. Changes in foreign exchange increased the reported
result by $0.3 million to $68.8 million compared to $63.2 million for the year ended September 30,
2009.
- 42 -
Interest Income
Total interest income for the year ended September 30, 2010 was $0.4 million compared to $0.5
million for the year ended September 30, 2009. The decrease in interest income was mainly
attributable to a decrease in interest rates.
Foreign exchange loss
Total foreign exchange loss for the year ended September 30, 2010 was $0.2 million compared to
$0.2 million for the year ended September 30, 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 $3.5 million or 25.9% of income before
income taxes and discontinued operations for the year ended September 30, 2010, compared to a
provision of $3.4 million or 25.5% of income before income taxes and discontinued operations for
the year ended September 30, 2009.
Income From Continuing Operations
As a result of the foregoing, we recorded income from continuing operations of $10.1 million
for the year ended September 30, 2010 compared to income from continuing operations of $9.9 million
for the year ended September 30, 2009.
Discontinued Operations
In fiscal 2007, we disposed of two of our U.K. subsidiaries when we sold the shares of Allied
Respiratory Limited and Medigas Limited. These two subsidiaries constituted our respiratory
therapy division, which supplied medical-grade oxygen for use in respiratory therapy to pharmacies
in the U.K., oxygen concentrators to customers in Northern Ireland and oxygen services to customers
in the South East of England. We have accounted for our respiratory therapy segment as a
discontinued operation.
In the year ended September 30, 2009, discontinued operations resulted in income, net of tax,
of $0.4 million due to the reversal of accrued refunds payable and accrued patient electric usage
reimbursement as the warranty period under the sales agreement covering these costs had expired.
Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest was $0.2 million for the year ended
September 30, 2010.
- 43 -
Net Income Attributable to Allied Healthcare International Inc.
As a result of the foregoing, we recorded net income of $9.9 million for the year ended
September 30, 2010 compared to net income of $10.3 million for the year ended September 30, 2009.
Year Ended September 30, 2009 vs. Year Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, 2009 |
|
|
Year ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
(Amounts in thousands) |
|
Revenue |
|
|
% |
|
|
Profit |
|
|
% |
|
|
Profit % |
|
|
Revenue |
|
|
% |
|
|
Profit |
|
|
% |
|
|
Profit % |
|
Homecare |
|
$ |
259,271 |
|
|
|
81.6 |
% |
|
$ |
80,337 |
|
|
|
82.7 |
% |
|
|
31.0 |
% |
|
$ |
225,460 |
|
|
|
75.5 |
% |
|
$ |
70,458 |
|
|
|
78.0 |
% |
|
|
31.3 |
% |
Nursing Homes |
|
|
32,890 |
|
|
|
10.4 |
% |
|
|
10,298 |
|
|
|
10.6 |
% |
|
|
31.3 |
% |
|
|
41,853 |
|
|
|
14.0 |
% |
|
|
12,602 |
|
|
|
13.9 |
% |
|
|
30.1 |
% |
Hospitals |
|
|
25,512 |
|
|
|
8.0 |
% |
|
|
6,454 |
|
|
|
6.7 |
% |
|
|
25.3 |
% |
|
|
31,264 |
|
|
|
10.5 |
% |
|
|
7,325 |
|
|
|
8.1 |
% |
|
|
23.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total, at constant exchange
rates |
|
|
317,673 |
|
|
|
|
|
|
|
97,089 |
|
|
|
|
|
|
|
30.6 |
% |
|
|
298,577 |
|
|
|
|
|
|
|
90,385 |
|
|
|
|
|
|
|
30.3 |
% |
Effect of foreign exchange |
|
|
(67,863 |
) |
|
|
|
|
|
|
(20,741 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total, as reported |
|
$ |
249,810 |
|
|
|
|
|
|
$ |
76,348 |
|
|
|
|
|
|
|
|
|
|
$ |
298,577 |
|
|
|
|
|
|
$ |
90,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A, at constant exchange
rates |
|
|
|
|
|
|
|
|
|
$ |
79,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
77,655 |
|
|
|
|
|
|
|
|
|
Effect of foreign exchange |
|
|
|
|
|
|
|
|
|
|
(16,353 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A, as reported |
|
|
|
|
|
|
|
|
|
$ |
63,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
77,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income, at constant
exchange rates |
|
|
|
|
|
|
|
|
|
$ |
17,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,730 |
|
|
|
|
|
|
|
|
|
Effect of foreign exchange |
|
|
|
|
|
|
|
|
|
|
(4,388 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income, as reported |
|
|
|
|
|
|
|
|
|
$ |
13,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to disclosing results of operations that are determined in accordance with GAAP ,
the chart above shows non-GAAP financial measures that exclude the impact of foreign exchange 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 year ended September 30, 2009, before the unfavorable impact of foreign
exchange rates, increased by $19.1 million, or 6.4%, to $317.7 million, compared with $298.6
million for the year ended September 30, 2008. Contributing to the increase in revenues was
homecare revenues which grew by 15.0% to $259.3 million. Nursing home revenues declined by 21.4%
to $32.9 million. Hospitals revenues decreased by 18.4% to $25.5 million. After the unfavorable
impact of currency exchange of $67.9 million, revenues decreased to $249.8 million.
- 44 -
Gross Profit
Gross profit, before the unfavorable impact of foreign exchange, increased 7.4% to $97.1
million for the year ended September 30, 2009 from $90.4 million for the year ended September 30,
2008. Changes in foreign exchange decreased gross profit by $20.8 million to $76.3 million for the
year ended September 30, 2009 compared to gross profit of $90.4 million for the year ended
September 30, 2008, a decrease of 15.5%. As a percentage of total revenue, gross profit for the
year ended September 30, 2009 was 30.6%, as compared to 30.3% for the comparable prior period
mainly due to our sales mix. We remain focused on supplying healthcare staffing services to our
higher-margin homecare customers.
Selling, General and Administrative Expenses
Total SG&A expenses for the year ended September 30, 2009, before the favorable impact of
foreign exchange, was $79.6 million compared to $77.7 million for the year ended September 30,
2008. While current period SG&A running costs of 25.3% of revenues are lower than the prior year
period of 26.0%, we are continuing to invest in certain areas of our business that includes such
items as continuing care, learning disabilities, IT systems, and business
improvement projects to ensure that we support future growth in revenues. 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 SG&A costs is 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. This increase was partially offset by additional net receipts of currently
available government grants for training support of $0.6 million as compared to the prior year. We
aim to ensure that we maintain any growth in SG&A costs to a lower degree than growth in our
revenues. Changes in foreign exchange decreased the reported result by $16.4 million to $63.2
million compared to $77.7 million for the year ended September 30, 2008.
Interest Income
Total interest income for the year ended September 30, 2009 was $0.5 million compared to $0.9
million for the year ended September 30, 2008. Even though we had higher cash balances, interest
income was negatively impacted by the decrease in interest rates and changes in foreign exchange
($0.1 million).
Provision for Income Taxes
We recorded a provision for income taxes amounting to $3.4 million or 25.5% of income before
income taxes and discontinued operations for the year ended September 30, 2009, compared to a
provision of $3.8 million or 29.9% of income before income taxes and discontinued operations for
the year ended September 30, 2008. The difference in the effective tax rate between the year ended
September 30, 2009 and the year ended September 30, 2008 is mainly due to the utilization of loss
carry forwards in the U.S. for which no benefit had been previously recorded, permanent differences
and change in enacted rate in the U.K.
- 45 -
Discontinued Operations
In fiscal 2007, we disposed of two of our U.K. subsidiaries when we sold the shares of Allied
Respiratory Limited and Medigas Limited. These two subsidiaries constituted our respiratory
therapy division, which supplied medical-grade oxygen for use in respiratory therapy to pharmacies
in the U.K., oxygen concentrators to customers in Northern Ireland and oxygen services to customers
in the South East of England. We have accounted for our respiratory therapy segment as a
discontinued operation.
In the year ended September 30, 2009, discontinued operations resulted in income, net of tax,
of $0.4 million due to the reversal of accrued refunds payable and accrued patient electric usage
reimbursement as the warranty period under the sales agreement covering these costs has expired.
Net Income
As a result of the foregoing, we recorded net income of $10.3 million for the year ended
September 30, 2009 compared to net income of $8.8 million for the year ended September 30, 2008.
Liquidity and Capital Resources
General
For our fiscal year ended September 30, 20010, we generated $16.0 million from continuing
operating activities. Cash requirements for our fiscal year ended September 30, 2010 for
acquisition of controlling interest ($5.7), capital expenditures ($2.8 million) and for treasury
shares acquired ($3.8 million) were met through cash on hand.
We believe that the existing capital resources and those to be generated from operating
activities will be adequate to conduct our operations for the next 12 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 September 30, 2010
and September 30, 2009, $20.1 million (10.6%) and $19.6 million (11.3%), respectively, of our total
assets consisted of accounts receivable. The increase in accounts receivable from 2009 to 2010 is
mainly due to the timing of invoicing as well as a higher volume of business.
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 September 30,
2010 and September 30, 2009, our average DSOs (excluding unbilled accounts receivable) were 26 and
25, respectively. At September 30, 2010 and September 30, 2009, our average DSOs (including
unbilled accounts receivable) were 43 and 40, respectively.
- 46 -
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,
either local governmental social service departments or health and social care departments (SHSD)
or the NHS. At September 30, 2009 gross receivables, excluding unapplied cash and surcharges, were
$21.8 million, of which $16.6 million or 76.3% were represented by amounts due from U.K.
governmental bodies. The remaining accounts receivable balance is due from commercial payors
(nursing homes and private hospitals) and private payors.
The following table summarizes the accounts receivable aging by payor mix at September 30,
2010 and September 30, 2009 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
4,952 |
|
|
$ |
602 |
|
|
$ |
140 |
|
|
$ |
60 |
|
|
$ |
121 |
|
|
$ |
5,875 |
|
NHS |
|
|
9,540 |
|
|
|
1,425 |
|
|
|
318 |
|
|
|
162 |
|
|
|
325 |
|
|
|
11,770 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-30 |
|
|
31-60 |
|
|
61-90 |
|
|
91-120 |
|
|
121 Days |
|
|
AR At |
|
At September 30, 2009 |
|
Days |
|
|
Days |
|
|
Days |
|
|
Days |
|
|
And Over |
|
|
9/30/2009 |
|
SHSD |
|
$ |
9,138 |
|
|
$ |
769 |
|
|
$ |
484 |
|
|
$ |
181 |
|
|
$ |
359 |
|
|
$ |
10,931 |
|
NHS |
|
|
4,670 |
|
|
|
554 |
|
|
|
241 |
|
|
|
90 |
|
|
|
161 |
|
|
|
5,716 |
|
Commercial Payors |
|
|
2,200 |
|
|
|
262 |
|
|
|
64 |
|
|
|
33 |
|
|
|
32 |
|
|
|
2,591 |
|
Private Payors |
|
|
1,994 |
|
|
|
157 |
|
|
|
104 |
|
|
|
60 |
|
|
|
275 |
|
|
|
2,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross AR at 9/30/09 |
|
$ |
18,002 |
|
|
$ |
1,742 |
|
|
$ |
893 |
|
|
$ |
364 |
|
|
$ |
827 |
|
|
$ |
21,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Unapplied Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,124 |
) |
Less: Surcharges(A) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(271 |
) |
Less: Allowance For Doubtful
Accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(839 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 above for a description of our
methodology procedure.
- 47 -
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.
As our current operations are predominantly in the United Kingdom and the majority of accounts
receivable are from U.K. 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 under Commitments below.
Financial Instrument
See Item 7AQuantitative and Qualitative Disclosures About Market RiskInterest Rate Risk.
Commitments
Employment Agreements
See Item 11Executive CompensationEmployment Agreements; Potential Payments Upon Termination
or Change-in-Control.
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 $5.5 million operating lease obligations at September
30, 2010, $0.4 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 $0.7 million at September 30, 2010.
Debt
In connection with our acquisition of HILG, we assumed debt related to two invoice discounting
facilities and bank loan for the funding of capital expenditures. The invoice discounting
facilities provide for available funds of up to $1.5 million (at the closing exchange rate at
September 30, 2010) that mature in April and June of 2011. The loans bear interest at rates equal
to LIBOR plus 2.0% with a minimum of 4.0% per annum. As of September 30, 2010, we had outstanding
borrowings of $0.3 million under the invoice discounting facilities and bank loan that bore
interest at rates ranging from 4.0% to 4.7%.
- 48 -
Contractual Cash Obligations
The following table summarizes our contractual cash obligations as of September 30, 2010
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
Total Capital |
|
|
|
|
|
|
Total Other |
|
|
|
|
Fiscal |
|
Leases |
|
|
Leases |
|
|
Total Debt |
|
|
Obligations |
|
|
Total Obligations |
|
2011 |
|
$ |
2,732 |
|
|
$ |
377 |
|
|
$ |
294 |
|
|
$ |
1,102 |
|
|
$ |
4,505 |
|
2012 |
|
|
1,591 |
|
|
|
278 |
|
|
|
40 |
|
|
|
1,021 |
|
|
|
2,930 |
|
2013 |
|
|
734 |
|
|
|
128 |
|
|
|
|
|
|
|
206 |
|
|
|
1,068 |
|
2014 |
|
|
267 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
271 |
|
2015 |
|
|
136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136 |
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total: |
|
$ |
5,460 |
|
|
$ |
787 |
|
|
$ |
334 |
|
|
$ |
2,329 |
|
|
$ |
8,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Amounts representing interest |
|
|
|
|
|
|
(118 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net present value
of capital lease
obligation |
|
|
|
|
|
|
669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current portion |
|
|
|
|
|
|
320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term lease
obligations |
|
|
|
|
|
$ |
349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Both operating and capital lease obligations reflect future minimum rental commitments
required under such lease agreements as of September 30, 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 September 30, 2010),
of which $4.5 million has been incurred in fiscals 2009 and 2010 and $2.4 million is expected to be
incurred in fiscal 2011 and 2012. We anticipate that funding will come from our existing cash and
cash provided by operating activities.
- 49 -
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. For the three months and fiscal year ended September 30, 2010,
we purchased 1.1 million and 1.6 million shares, respectively, for an aggregate purchase price of
$2.5 million and $3.8 million, respectively, under our May 2010 stock repurchase program. As of
September 30, 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 September
30, 2010. In addition, as of September 30, 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.
Litigation
See Item 3 Legal Proceedings.
Contingencies
See Note 10 of Notes to Consolidated Financial Statements for our fiscal year ended September
30, 2010 for a discussion of contingencies.
Impact of Recent Accounting Standards
See Recent Accounting Pronouncements in Note 2 of Notes to Consolidated Financial Statements
for our fiscal year ended September 30, 2010.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Exchange
We face exposure to adverse movements in foreign currency exchange rates. These exposures may
change over time as business practices evolve and could have a material adverse impact on our
consolidated financial results. Currently, we do not hedge foreign currency exchange rate
exposures.
- 50 -
The translation of the operating results of our U.K. operations is impacted by fluctuations in
foreign currency exchange rates. For the fiscal 2010 year as compared to the fiscal 2009 average
rate, the translation of our U.K. financial statements into U.S. dollars resulted in increased
revenues of $1.3 million, increased operating income of $0.1 million and increased income from
continuing operations of $47 thousand. We estimate that a 10% change in the exchange rate between
the British pound and the U.S. dollar would have a $27.1 million, $1.7 million and $1.0 million
impact on reported revenues, operating income and income from continuing operations, 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 September 30, 2010) and mature in April and June of 2011.
We had outstanding borrowings of $0.2 million under the invoice discounting facilities at
September 30, 2010. 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.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements and required financial statement schedules of our
company begin on page F-i of this Annual Report on Form 10-K and are incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
We have not changed our independent accountants in the last two fiscal years.
Item 9A. 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
September 30, 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, including this Annual Report on Form 10-K, is recorded, processed, summarized
and reported within the time periods specified in the rules of the Securities and Exchange
Commission. Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us, in 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.
- 51 -
Based on such evaluation, our chief executive officer and our chief financial officer have
concluded that, as of September 30, 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.
Report of Management on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting for the company. Under the rules of the Securities and Exchange Commission,
internal control over financial reporting procedures is defined as a process designed to provide
reasonable assurance regarding the reliability of our financial reporting and
the preparation of financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America.
Internal control over financial reporting includes maintaining records, that in reasonable
detail, accurately and fairly reflect our transactions and our dispositions of assets; provide
reasonable assurance that transactions are recorded as necessary for preparation of our financial
statements in accordance with accounting principles generally accepted in the United States of
America; provide reasonable assurance that receipts and expenditures of company assets are made
only in accordance with management authorization; and provide reasonable assurance regarding the
prevention or the timely detection of the unauthorized acquisition, use or disposition of company
assets that could have a material effect on our financial statements. Because of its inherent
limitations, internal control over financial reporting may not provide absolute assurance that a
misstatement of our financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of our internal control over financial
reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal ControlIntegrated Framework. Based on this evaluation, management
concluded that the companys internal control over financial reporting was effective as of
September 30, 2010.
EisnerAmper LLP, our auditor, has audited our financial statements, which are included in this
Annual Report on Form 10-K, and, as part of its audit, has issued its report, set forth at page F-2
of our financial statements, on the effectiveness of our internal control over financial reporting
as of September 30, 2010. Such report is incorporated herein by reference.
Changes in Internal Control Over Financial Reporting.
There have not been any changes in our internal control over financial reporting during the
quarter ended September 30, 2010 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B. Other Information.
There was no information that we were required to disclose in a Current Report on Form 8-K
during the fourth quarter of fiscal 2010 that was not so disclosed.
- 52 -
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Our Directors and Officers
The following table sets forth certain information concerning the directors and executive
officers of our company:
|
|
|
|
|
|
|
Name |
|
Age |
|
Positions with our Company |
|
|
|
|
|
|
|
Alexander (Sandy) Young
|
|
|
56 |
|
|
Chief Executive Officer and Director |
Paul Weston
|
|
|
46 |
|
|
Chief Financial Officer |
Leslie J. Levinson
|
|
|
55 |
|
|
Secretary |
Sophia Corona
|
|
|
47 |
|
|
Director |
Mark Hanley
|
|
|
49 |
|
|
Director |
Wayne Palladino
|
|
|
52 |
|
|
Director |
Jeffrey S. Peris
|
|
|
64 |
|
|
Non-Executive Chairman of the Board |
Raymond J. Playford
|
|
|
50 |
|
|
Director |
Ann Thornburg
|
|
|
61 |
|
|
Director |
The following paragraphs provide certain biographical information regarding each director and
executive officer. For each director, the paragraphs include a description of the experiences,
qualifications, attributes or skills that led our Nominating and Corporate Governance Committee to
conclude that he or she should be nominated to our board of directors. In addition, another factor
the Nominating and Corporate Governance Committee considered in reaching its conclusion that the
individuals listed below (other than Professor Playford, who joined the board in August 2010)
should be nominated to our board of directors was that each of them has served for a number of
years on our board and is thus familiar with our company and its operations.
Alexander (Sandy) Young has served as chief executive officer and a director of our company
since January 2008. From 2004 until joining our company, Mr. Young was the managing director of
electronic security at Chubb Electronic Security (Chubb), a subsidiary of United Technologies
Corporation, a U.S.-based conglomerate. Prior to working at Chubb, Mr. Young worked for 27 years
at Rentokil Initial, UK, a U.K.-based conglomerate, and its predecessors, rising from branch
management to regional managing director for Northern Europe.
Paul Weston assumed the office of chief financial officer of our company in October 2008.
From May 2008 until September 2008, Mr. Weston served as our companys chief financial officer
designate and, from 2004 until September 2008, Mr. Weston served as the companys financial
director in the United Kingdom, with responsibility for all of our U.K. operating subsidiaries. In
addition, from June 2006 until July 2006, Mr. Weston served as interim chief financial officer of
our company. From 2001 to 2004, Mr. Weston was group financial controller at SSL plc, a global
manufacturer and distributor of healthcare and consumer products, and prior to that he spent seven
years in various corporate finance positions for the European operations of Fruit of the Loom, a
textile manufacturer. Mr. Weston qualified with the Institute of Chartered Accountants (ACA) in
England and Wales in 1990.
- 53 -
Leslie J. Levinson has served as secretary of our company since September 1999 and had
previously served in such capacity from October 1990 until July 1997. Since April 2009, he has
been a partner in the law firm of Edwards Angell Palmer & Dodge LLP, where he serves as chair of
the healthcare practice. Edwards Angell Palmer & Dodge LLP serves as counsel to our company. From
March 2007 until April 2009, he was a partner in WolfBlock LLP, which firm
served as counsel to our company. From 2002 until March 2007 he was a partner in Brown
Raysman Millstein Felder & Steiner LLP and its successor, Thelen Reid Brown Raysman & Steiner LLP,
which firm served as counsel to our company, and from 1991 until 2002 he was a partner in the law
firm of Baer Marks & Upham LLP, which firm served as counsel to our company.
Sophia Corona has been a director of our company since November 2006. Since February 2007,
she has been employed by Creditex Group Inc., an inter-dealer broker that provides market
participants with an electronic credit derivatives trading platform. From February 2007 until
January 2010, she served as chief financial officer of Creditex Group Inc. and from January 2010
until the present she has served as chief operating officer of Creditex Group Inc. From April 2006
until February 2007, Ms. Corona was a financial advisor to privately-owned companies. From October
2001 until March 2006, she was the chief financial officer of Bigfoot Interactive, Inc (now known
as Epsilon Interactive, Inc.), a provider of e-mail communications and marketing services, which
was acquired by Alliance Data Systems Corporation, a New York Stock Exchange-listed company that is
a provider of transaction services, credit services and marketing services, in September 2005.
From 2000 until 2001, Ms. Corona was the vice president of business development for Visual Radio,
LLC, a technology incubation fund that she co-founded in 1996 and in which she was employed as the
chief financial officer from 1996 until 1998. From 1998 until 2000, she was a senior vice
president with Prism Communications Services, Inc., a telecommunications provider. Ms. Corona has
a strong background in operating businesses and in financial reporting.
Mark Hanley has been a director of our company since January 2009. Mr. Hanley previously
served as a member of the board of directors of our company from November 2005 until April 2007.
Since February 2007, Mr. Hanley has served as the president and chief executive officer of Clinical
Research Advantage Inc., a pharmaceutical clinical trials company. From August 2005 until February
2007, he was a consultant to companies in the healthcare industry. From 2000 to August 2005, Mr.
Hanley was president and chief executive of O2 Science Acquisition Corporation, a provider of
respiratory services. From 1998 to 1999, he was a senior vice president, sales and marketing, of
Coram Healthcare Corporation, which provides specialized home infusion therapies and services in
the United States and Canada. From 1995 to 1997, Mr. Hanley was an executive director/director of
business development of Transworld Healthcare (UK) Limited, a subsidiary of the company now known
as Allied Healthcare Holdings Limited. From 1987 to 1995, he held various positions with Apria
Healthcare Group, Inc., a California-based home healthcare company. Mr. Hanley has extensive
experience in the health-care industry, including prior service in management of one of our
subsidiaries.
- 54 -
Wayne Palladino has been a director of our company since September 2003. Mr. Palladino has
worked at Pzena Investment Management LLC, an asset management firm, since June 2002, where he is a
principal and serves as head of client service. From May 2007 until April 2009, he was the chief
financial officer of Pzena Investment Management LLC. From August 2000 until June 2002, he was
senior vice president and chief financial officer of Lillian Vernon Corporation, a catalog
retailer. Mr. Palladino was a vice president of our company from February 1991 until September
1996, senior vice president of our company from September 1996 until August 2000 and chief
financial officer of our company from February 1991 until
August 2000. Mr. Palladino has an extensive background in public company finance, including
prior service as chief financial officer of our company.
Jeffrey S. Peris has been a director of our company since May 1998 and the non-executive
chairman of the board of our company since June 2009. From April 2009 until June 2009, he served
as the interim non-executive chairman of the board of our company. Since May 2006, Dr. Peris has
served as an executive advisor to leading established global and new business entities. Dr. Peris
served as the corporate vice president of human resources and chief learning officer of Wyeth
(formerly American Home Products Corporation), a global pharmaceutical company, from 2001 until
2006. Dr. Peris was a corporate vice president of Knoll Pharmaceutical (Abbott Laboratories),
where he was responsible for human resources, public affairs and investor relations, from 1998
until 2001. Dr. Peris was a management consultant to various Fortune 100 companies from 1997 until
1998. From 1972 until 1997, Dr. Peris was employed by Merck Co., Inc., a leading global
pharmaceutical company, where he served in senior executive officer roles in research and
development, clinical drug development, global marketing and corporate human resources. He was
also a member of Mercks world-renowned Research Management Council. Dr. Peris has extensive
pharmaceutical-healthcare experience in the clinical research, marketing and human resources
fields, including executive compensation, recruitment and leadership development.
Raymond J. Playford has been a director of our company since August 2010. From April 2010
until August 2010, Professor Playford served as medical advisor to the board of directors of our
company. Professor Playford has been vice principal of Queen Mary University of London since 2006.
From 2000 to 2006, he was a professor of gastroenterology at Imperial College. Professor Playford
has also served as the company secretary of Nutritional Bioscience Ltd., which is engaged in health
research, since 2005, as a non-executive director of Barking Havering & Redbrige NHS Trust since
2009 and as a director of Repair and Protection Foods Ltd., which is engaged in food research,
since 2010. Professor Playford has extensive experience in U.K. healthcare issues.
Ann Thornburg has been a director of our company since November 2006. From October 1982 until
September 2006, Ms. Thornburg was a partner at PricewaterhouseCoopers LLP, an auditing firm. At
PricewaterhouseCoopers LLP, she served in a variety of client service and management roles,
including acting as audit partner for major health care clients. From 2001 until 2005, Ms.
Thornburg was a member of the U.S. Board of Partners and Principals of PricewaterhouseCoopers LLP.
Since July 2007 she has been a member of the faculty of the Kennedy School of Government at Harvard
University. Ms. Thornburg has extensive experience in auditing public companies, including health
care companies.
- 55 -
All directors of our company are elected by the shareholders for a one-year term and hold
office until their successors are elected and qualified or until their earlier death, resignation
or removal. Officers are chosen by and serve at the discretion of the board of directors, subject
to any applicable employment contracts. There are no family relationships among our directors and
officers.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 and the rules thereunder promulgated by
the Securities and Exchange Commission require the reporting of transactions in our equity
securities by our directors and certain of our officers and by shareholders who beneficially own
more than 10% of our common stock (collectively, the Reporting Persons). Section 16(a) and the
rules thereunder require the Reporting Persons to report initial statements of ownership of our
equity securities on Form 3 and changes in ownership of our equity securities on Form 4 or Form 5.
Based on a review of these reports filed by the Reporting Persons and written representations from
our directors and our executive officers that no Forms 5 were required to be filed by them in
respect of our fiscal year ended September 30, 2010, we believe that no Reporting Person failed to
file a Section 16 report on a timely basis during our fiscal year ended September 30, 2010.
Code of Conduct
In September 2003, our board of directors adopted a Code of Conduct that applies to all of our
directors, officers and employees, including our chief executive officer and our chief financial
officer. As required by the regulations of the Securities and Exchange Commission, the Code of
Conduct is designed to deter wrongdoing and to promote:
(1) honest and ethical conduct, including the ethical handling of actual or apparent conflicts
of interest between personal and professional relationships;
(2) full, fair, accurate, timely, and understandable disclosure in reports and documents that
we file with, or submit to, the Securities and Exchange Commission and in other public
communications made by us;
(3) compliance with applicable governmental laws, rules and regulations;
(4) the prompt internal reporting of violations of the Code of Conduct to the Audit Committee;
and
(5) accountability for adherence to the Code of Conduct.
A copy of our Code of Conduct is filed as an exhibit to this Annual Report on Form
10-K. A copy of our Code of Conduct is also available on our website at
www.alliedhealthcare.com under Investors.
- 56 -
In May 2009, our board of directors adopted a Supplemental Code of Conduct that applies to all
of our directors, officers and executive managers, including our chief executive officer and our
chief financial officer. The Supplemental Code of Conduct, like the Code of Conduct, is designed
to deter wrongdoing and to promote the behavior described in the regulations of the Securities and
Exchange Commission. Unlike the Code of Conduct, the Supplemental Code of Conduct does not apply
to all employees. A copy of the Supplemental Code of Conduct is filed as an exhibit to this Annual
Report on Form 10-K. A copy of the Supplemental Code of Conduct is also available on our website
at www.alliedhealthcare.com under Investors.
Board Committees
Our board of directors has four standing committees: an Audit Committee, a Compensation
Committee, a Nominating and Corporate Governance Committee and a Strategic Investment Committee.
In addition, our board of directors on occasion may appoint ad hoc committees of directors for
discrete purposes. The members of each committee are appointed by the board of directors.
Audit Committee. The Audit Committee assists our board of directors in monitoring (1) the
integrity of our financial statements, (2) the independence and qualifications of our independent
auditors, and (3) the performance of our independent auditors and our internal audit functions.
The charter for the Audit Committee was adopted by our board of directors in May 2007. A copy of
the charter of the Audit Committee is available on our website at www.alliedhealthcare.com under
Investors.
The Audit Committee consists of Ms. Corona, Mr. Palladino and Ms. Thornburg. Ms. Thornburg
serves as chair of the Audit Committee. Each member of the Audit Committee is an independent
director, as such term is defined in the rules of The NASDAQ Stock Market LLC. The board of
directors has determined that Ann Thornburg is an audit committee financial expert, as such term
is defined in the regulations promulgated by the Securities and Exchange Commission.
Compensation Committee. See Item 11 Executive Compensation Compensation Discussion and
Analysis The Compensation Committee.
Nominating and Corporate Governance Committee. The purposes of the Nominating and Corporate
Governance Committee are to (1) identify individuals qualified to become members of our board of
directors, (2) recommend to the board a slate of director nominees to be elected by shareholders,
(3) recommend to the board director candidates to be elected by the board to fill any vacancies,
(4) recommend directors for appointment to board committees, (5) review and recommend changes to
the corporate governance documents of our company and (6) oversee the annual evaluation of the
board and the committees thereof and conduct the annual performance evaluation of our chairman.
The Nominating and Corporate Governance Committee is also charged with considering any other
corporate governance issues that arise from time to time and developing appropriate recommendations
for the board. It is authorized to conduct investigations into or studies of matters within the
committees scope of responsibilities. A copy of the charter of the Nominating and Corporate
Governance Committee is available on our website at www.alliedhealthcare.com under Investors.
- 57 -
Our Nominating and Corporate Governance Committee consists of Ms. Corona, Dr Peris and Ms.
Thornburg. Ms. Thornburg serves as chair of the Nominating and Corporate Governance Committee.
All of the members of the Nominating and Corporate Governance Committee are independent
directors, as such term is defined in the rules of The NASDAQ Stock Market LLC.
Strategic Investment Committee. In June 2009, our board established a Strategic Investment
Committee and adopted a charter for the committee. A copy of the charter of the
Strategic Investment Committee is available on our website at www.alliedhealthcare.com under
Investors. The Strategic Investment Committee charter provides that the committee shall be
composed of three members, a majority of whom must be independent directors under the rules of
The NASDAQ Stock Market LLC. Our Strategic Investment Committee consists of Ms. Corona and Messrs.
Palladino and Young. Ms. Corona and Mr. Palladino serve as co-chairs of the Strategic Investment
Committee.
The purposes of the Strategic Investment Committee are to assist our board of directors in
fulfilling its responsibilities to oversee the strategic investment management of our company, to
focus the attention of our board on long-range investment objectives for our company and to review
and assess strategies to implement such long-range investment objectives.
Director Nominations
Director nominees are recommended to the full board by our Nominating and Corporate Governance
Committee. The Nominating and Corporate Governance Committee charter provides that, in
recommending the selection of a nominee for director, the Nominating and Corporate Governance
Committee shall do so based on such nominees business experience and skills, leadership ability,
independence, judgment, integrity and ability to commit sufficient time and attention to the
activities of our board, as well as the absence of any potential conflicts of interest with our
companys interests and such other considerations as the Nominating and Corporate Governance
Committee shall deem appropriate. In addition, the Nominating and Corporate Governance Committee
charter provides that the Nominating and Corporate Governance Committee shall, in considering
whether to recommend a nominee for director, consider all requirements of applicable laws and
regulations, as well as our charter documents, with regard to director qualifications.
The Nominating and Corporate Governance Committee charter provides that the Nominating and
Corporate Governance Committee shall establish specific minimum qualifications that must be met by
any nominee to be selected or recommended by the Nominating and Corporate Governance Committee and
the specific qualities or skills that the Nominating and Corporate Governance Committee may
determine from time to time to be necessary for one or more of our directors to possess. The
Nominating and Corporate Governance Committee has determined that, in selecting or recommending a
nominee, it shall consider, at a minimum, (i) whether the nominee has demonstrated, by significant
accomplishment in his or her field, an ability to make a meaningful contribution to the board of
directors oversight of the business and affairs of the company, (ii) the nominees reputation for
honesty and ethical conduct in his or her personal and professional activities, and (iii) whether
the nominee has any material personal,
- 58 -
financial or professional interest in a competitor of the company. In order for the Nominating and Corporate Governance Committee to maintain flexibility in
choosing appropriate board candidates, the Nominating and Corporate Governance Committee will not
require that nominees meet any other specific or minimum requirements. When evaluating potential
director candidates, the Nominating and Corporate Governance Committee will consider, in addition
to the minimum requirements set forth above and in addition to those contained in the charter of
the Nominating and Corporate Governance Committee, such matters as it deems appropriate, including
the candidates independence under
the rules of The NASDAQ Stock Market LLC. All nominees are expected to be able to commit the
time and effort necessary to fulfill their duties and responsibilities as a director.
The Nominating and Corporate Governance Committee will consider proposed director nominees
whose names are submitted by shareholders in accordance with the notice provisions of our by-laws,
which are included in the amended and restated by-laws that we adopted in December 2010. The
provisions of our by-laws relating to notice of shareholder nominations for directors are
summarized below. Shareholders nominees will be evaluated in the same manner as nominees submitted
by directors, officers and large shareholders.
Nominations of persons for election to our board of directors may be made at an annual meeting
of shareholders or at any special meeting of shareholders called for the purpose of electing
directors by any shareholder of our company who complies with the following notice procedures.
Such nominations shall be given in writing in a timely manner to our Secretary. To be timely in
the case of an annual meeting of shareholders, a shareholders notice must be delivered to or
mailed and received at our principal executive offices not less than 90 nor more than 120 days
prior to the anniversary of the preceding years annual meeting. However, if the annual meeting is
called for a date that is not within 30 days before or after such anniversary date, notice must be
received by the Company no later than the 10th day following the earlier of the day on
which notice of the annual meeting was mailed or public disclosure of the date of the annual
meeting was made. In the case of a special meeting called for the purpose of electing directors,
to be timely the shareholders notice must be delivered to or mailed and received at our principal
executive offices no later than the 10th day following the earlier on which notice of
the special meeting was mailed or public disclosure of the date of the special meeting was made.
The shareholder notice must set forth, among other things, the name, business address and
residence address of each nominee, the principal occupation of each nominee and any other
information relating to each nominee that would be required in a proxy statement under the federal
securities laws. The shareholder notice must also set forth, among other things, the name and
address of the shareholder making the nomination, the number of shares of our stock that are owned
by the proposing shareholder, whether and to what extent the proposing shareholder has any hedges,
economic incentives or rights to vote any securities of our company and a description of all
arrangements and understandings between the proposing shareholder and any other person in
connection with the director nomination.
The foregoing is a summary of the provisions of our by-laws relating to notice of shareholder
nominations of directors. Our amended and restated by-laws are attached as an exhibit to the Form
8-K that we filed with the Securities and Exchange Commission on December 8, 2010.
- 59 -
Communications with the Board
Shareholders may communicate with our board of directors by sending a letter to our principal
executive offices, 245 Park Avenue, New York, New York 10167 (Attn.: Secretary). Our corporate
secretary will forward the correspondence to our chairman or, if the correspondence is directed to
a specific director, such director, unless the correspondence is unduly hostile, threatening or
illegal, or unless it does not reasonably relate to our company or
our business or is otherwise inappropriate. Notwithstanding the foregoing, our corporate
secretary may determine to forward any such correspondence, even if addressed to a specific
director, to the entire board.
Item 11. Executive Compensation.
Compensation Discussion and Analysis
General
This Compensation Discussion and Analysis addresses the compensation of our named executive
officers. Our named executive officers consist of all individuals who served as our principal
executive officer and our principal financial officer during fiscal 2010, as well as each of the
other most-highly compensated executive officers of our company whose total annual compensation
exceeded $100,000 in fiscal 2010. These individuals are listed in the following table:
|
|
|
Name |
|
Title |
|
|
|
Alexander (Sandy) Young
|
|
Chief Executive Officer(1) |
|
|
|
Paul Weston
|
|
Chief Financial Officer (2) |
|
|
|
(1) |
|
Mr. Young became our chief executive office in January 2008. |
|
(2) |
|
From 2004 until September 2008, Mr. Weston was our companys financial director
in the United Kingdom. In May 2008, Mr. Weston was appointed the chief financial
officer designate of our company and in October 2008 he became the chief financial
officer of our company. |
The Compensation Committee
Our Compensation Committee reviews and approves overall policy with respect to compensation
matters for our executive officers, including compensation plans and employment agreements. The
charter for our Compensation Committee was revised and restated by our board of directors in June
2009. A copy of the charter of the Compensation Committee is available on our website at
www.alliedhealthcare.com under Investors.
Our Compensation Committee consists of Sophia Corona, Mark Hanley and Jeffrey S. Peris. Dr.
Peris serves as chairman of the Compensation Committee.
- 60 -
The charter of the Compensation Committee requires that each member of the Compensation
Committee satisfy the definition of independent director, as that term is defined in the rules of
The NASDAQ Stock Market LLC. Members of the Compensation Committee are appointed by the full
board, which makes the determination that a director is an independent director, as defined in
the NASDAQ rules.
Other than the requirement that they be independent, the charter of the Compensation Committee
does not require that members of the Compensation Committee have any special qualifications.
However, in appointing Dr. Peris to the Compensation Committee, and as its chairman, the board
considered the fact that he has spent over 20 years overseeing human resources at leading global
pharmaceutical companies, during which time he was involved in the hiring, compensation, retention
and termination of employees of all levels, including senior corporate and divisional executives.
Likewise, in appointing Mr. Hanley to the Compensation Committee, the board considered the fact
that he served as the president and chief executive officer of two health care service companies
and, in such capacities, has been involved in various aspects of executive compensation.
Policy
Our Compensation Committee believes that the compensation for the executive officers of our
company should be designed with the objective of attracting, motivating and retaining talented
individuals who contribute to the success of our company. The Compensation Committee has used the
components of compensation discussed below in an effort to reward executive officers whose
performance is essential to our companys success, both in the near-term and over the long-term,
and to encourage their continued service with our company. Our Compensation Committee also reviews
individual contributions to our company and the financial performance of our company in determining
the compensation to recommend to the board.
Our compensation program is comprised of three elements: (a) base salary; (b) short-term
incentive awards in the form of cash bonuses; and (c) a long-term incentive program, which consists
principally of stock-based awards in which participants receive an economic benefit only if the
trading price of our common stock increases or, in certain cases, if certain specified financial
goals set forth in the awards are met by our company.
Base Salary. The Compensation Committee strives to set a fair and competitive base
salary for each of the executive officers of our company. The Compensation Committee
generally reviews the base salaries of our executive officers on an annual basis, but may do
so more frequently (for example, upon a change in position or responsibilities). In
considering adjustments to base salary, various factors are considered, including company
performance, the executives individual performance, scope of responsibility and changes in
that scope (including as a result of promotions), tenure, prior experience and competitive
market practice.
Bonus. The Compensation Committee may award, or recommend that the full board
award, cash bonuses to executive officers that are tied to individual contributions to our
company and the financial performance of our company. We do not have a written bonus plan
in place; rather, individual awards of bonus payments are determined, or
recommended to the full board, by our Compensation Committee based upon its assessment of
the contribution by the individual to our company and our financial performance, as well as
such other factors as the Compensation Committee may deem relevant at the time of
determining the bonus.
- 61 -
Long-Term Incentives. The Compensation Committee uses stock-based long-term
incentives, such as stock option grants and stock appreciation rights, to align the
financial interests of our executive officers with those of our companys shareholders, to
provide that our executive officers have a continuing stake in our long-term success, and to
provide executive officers with an incentive to manage our company from the perspective of
an owner. We typically grant these stock-based awards with an exercise price equal to the
closing price of a share of our companys common stock on the NASDAQ Global Select Market on
the date of grant, so that the executives to whom they are granted will only realize value
if the trading price of our shares increase or, in certain cases, if certain specified
financial goals set forth in the stock-based awards are met by our company.
In fiscal 2008, fiscal 2009 and fiscal 2010 we awarded our executive officers, as well as
our non-executive officers, performance-based option awards that vest wholly or partly only
if our companys financial performance meets certain specified criteria. Performance-based
options will only be of value to those awarded the options if our company meets the
performance criteria specified in the option grants. As it is increasingly common for stock
option plans to include performance-based option awards, we have incorporated that component
to trigger vesting of the option grants. The terms of the performance-based options that we
awarded in fiscal 2008, fiscal 2009 and fiscal 2010 to our named executive officers are
described below under Compensation of Our Named Executive OfficersLong-Term
Incentives2008 Stock Option Grants, Compensation of Our Named Executive
OfficersLong-Term Incentives2009 Stock Option Grants and Compensation of Our Named
Executive OfficersLong-Term Incentives2010 Stock Option Grants.
In April 2009 we granted to Mr. Young stock appreciation rights that will be settled in
shares of our common stock. The exact amount of shares to be awarded to Mr. Young pursuant
to the stock appreciation rights will be dependent on the average growth during the period
from October 1, 2009 through September 30, 2011 in sales, earnings per share and earnings
before interest, taxes and amortization of our company as compared to the base year ended
September 30, 2007. The stock appreciation rights are described in more detail in
Employment Agreements; Potential Payments Upon Termination or Change-in-Control below. In
connection with the negotiation of Mr. Youngs employment agreement, the Compensation
Committee determined that a long-term incentive award was an appropriate equity incentive to
further align Mr. Youngs interests with those of shareholders, as well as a means to
provide Mr. Young with liquidity upon the exercise of such rights. There is no current
expectation that a long-term incentive award will be adopted for other executive officers.
- 62 -
No constant criteria or formula is used in determining the amount of a bonus or the number of
stock-based awards to grant to our executive officers or in determining the allocation of
compensation among salary, bonus and stock-based awards. The Compensation Committee
considers compensation in total (base salary, bonus and long-term incentives) for each
executive officer. The Compensation Committee uses its discretion to make a determination of the
effectiveness of the executive and the extent of the executives contributions to our companys
success and, based on that determination, recommends to the full board the amount of a bonus and/or
the number of stock-based awards to be awarded to executive officers. In determining the bonus
amounts for fiscal 2008, fiscal 2009 and fiscal 2010, the Compensation Committee reviewed the
practices of other companies with similar businesses and similar positions in the marketplace that
are of like size. In determining whether to make grants of stock-based awards to our executive
officers, the Compensation Committee will often review the history of prior grants made to these
individuals, the status of the vesting of prior grants and the amounts, if any, that have been or
may be realized by these individuals from the prior grants.
We generally pay bonuses shortly after our fiscal year has ended, in conjunction with a review
of our companys performance during that fiscal year. We do not have fixed dates on which we issue
stock-based awards, but we typically make our awards of stock options shortly after the date of our
annual meeting of shareholders. We often issue stock-based awards to executive officers when they
are hired or when they assume a new position or take on greater responsibilities. We usually grant
stock-based awards outside of the blackout period established under our insider trading policy
during which directors and executive officers are forbidden to purchase or sell their shares of our
common stock. We do not have a program, plan or practice to coordinate stock-based grants to our
executives or any other recipients of stock-based awards with the release of material non-public
information.
The Compensation Committee has not historically benchmarked or tied any element of
compensation to the performance by our company relative to a peer group or to a broader index, such
as the S&P 500 Index, and it did not do so in fiscal 2008, fiscal 2009 or fiscal 2010.
In addition to the three main elements of compensation, we have traditionally paid for some
personal benefits and perquisites of our executive officers. The amounts of the personal benefits
and perquisites have traditionally been modest. While the personal benefits and perquisites that
we award confer a direct or indirect benefit, often of a personal nature, on our executive officers
and are not generally available to all employees, our Compensation Committee and board have
determined that there are sound business reasons for awarding them, such as the ability to attract
and retain executive officers. For example, as discussed below under the Summary Compensation
Table, in fiscal 2008, fiscal 2009 and fiscal 2010 we provided a car allowance to each of our two
named executive officers. Our Compensation Committee believes that a car allowance for members of
senior management is a standard reimbursement item for similarly-situated companies and is thus a
necessary expense to attract and retain executive officers.
Our company pays for a group life insurance policy that covers certain of our employees,
including Mr. Young and Mr. Weston. Benefits under the group life insurance policy are payable to
the beneficiaries of the covered employees in the event of their death. Our company also pays for
a group health insurance policy that covers certain of our employees, including Mr. Young and Mr.
Weston. The amount of the premium attributable to coverage of each of Mr. Young and Mr. Weston
under the group life insurance policy and under the health insurance policy is de minimus.
- 63 -
Process
Under NASDAQ rules, the compensation of our executive officers must be determined, or
recommended to the board for determination, by the Compensation Committee. As a general matter,
the Compensation Committee recommends, for full board consideration and approval, the compensation
of our executive officers, to the extent not set forth in an executive officers employment
agreement. The Compensation Committee seeks the input of our chief executive officer in
determining the compensation of executive officers other than the chief executive officer to
recommend to the full board. While the Compensation Committee also seeks input from the chief
executive officer on what he believes is an appropriate salary for himself, the Compensation
Committee determines in its discretion, at a meeting of the committee at which no members of
management are present, the amount of chief executive officer compensation to recommend to the full
board.
The Compensation Committee held a number of formal meetings during fiscal 2010; it did not act
by unanimous written consent during that period. The members of the Compensation Committee held
numerous informal meetings (consisting generally of telephone conference calls) among themselves
during fiscal 2010. Mr. Youngs employment agreement was approved by the full board in January
2008 and the issuance of his stock appreciation rights was approved by the full board in April
2009. Prior to the approval of Mr. Youngs employment agreement and the issuance of his stock
appreciation rights, the members of the Compensation Committee had spent considerable time in
negotiating Mr. Youngs employment agreement and his stock appreciation rights, so that by the time
the full board approved the employment agreement and the stock appreciation rights they bore the
imprimatur of the Compensation Committee. Mr. Youngs employment agreement and his stock
appreciation rights are described below under Employment Agreements; Potential Payments upon
Termination or Change-in-Control.
At the formal meetings of the Compensation Committee that were held in fiscal 2010, no
individuals other than the members of the Compensation Committee were present. However, during its
informal meetings that it held throughout fiscal 2010, advisors were sometimes present when
executive compensation was discussed.
We retained Towers Watson, a leading compensation consultant with expertise in healthcare
services industry compensation practices, to assist us in structuring Mr. Youngs compensation.
Towers Watson provided a third-party perspective based on their extensive knowledge of the
healthcare services industry and it advised the Compensation Committee of developments in the
design of compensation programs. At the Compensation Committees discretion, Towers Watson may be
asked to attend and participate in Compensation Committee meetings that deal with executive pay
matters.
To the knowledge of the members of the Compensation Committee, no member of management
retained a compensation consultant on his behalf during fiscal 2010.
Compensation of our Named Executive Officers
This section discusses the amount of each element of compensation paid to our named executive
officers in respect of fiscal 2008, fiscal 2009 and 2010.
- 64 -
Base Salary. The base salaries for fiscal 2008, fiscal 2009 and fiscal 2010 for
Alexander (Sandy) Young, who has served as chief executive officer of our company since
January 2008, and Paul Weston, who served as chief financial officer designate from May 2008
until September 2008 and as chief financial officer since October 2008, were approved by the
full board, upon the recommendation of the Compensation Committee. In the case of Mr.
Young, his base salary was negotiated and memorialized in the employment agreement that he
entered into in January 2008 when he became our chief executive officer. Mr. Weston
received an increase in base salary when he was appointed as chief financial officer
designate in May 2008 and a subsequent increase in January 2009 as part of the annual salary
increase. Both Mr. Young and Mr. Weston received increases in their base salary of
approximately 1% in January 2010.
Bonus. The Compensation Committee recommended to the board of directors that Mr.
Young be paid a bonus of £65,000 ($128,252 at September 30, 2008 exchange rates) in respect
of our 2008 fiscal year, £86,520 ($134,244 at September 30, 2009 exchange rates) in respect
of our 2009 fiscal year and £31,500 ($49,115 at September 30, 2010 exchange rates) in
respect of our 2010 fiscal year and that Mr. Weston be paid a bonus of £44,000 ($86,816 at
September 30, 2008 exchange rates) in respect of our 2008 fiscal year, £55,878 ($86,700 at
September 30, 2009 exchange rates ) in respect of our 2009 fiscal year and £24,200 ($37,733 at September 30, 2010 exchange rates) in respect of our 2010 fiscal year. The non-employee
members of the board of directors approved the recommendations of the Compensation
Committee.
In determining the bonuses to recommend in respect of our 2008 fiscal year, the Compensation
Committee, in addition to reviewing our financial performance during the year, took note of
the fact that Mr. Young and Mr. Weston had performed their duties well and achieved a smooth
transition of responsibilities from their respective predecessors. In determining the
bonuses to recommend in respect of our 2009 and 2010 fiscal years, the
Compensation Committee, in addition to reviewing our financial performance during the year,
took note of the fact that Mr. Young continued to lead our company in a manner approved by
the board and had improved our operations by, among other things, implementing actions to
accelerate growth, and that Mr. Weston had continued to provide solid financial leadership
to our company and continued to be a critical executive in driving the Company s growth.
Long-Term Incentives 2008 Stock Option Grants. During fiscal 2008, we granted the
following options to purchase shares of our common stock under our 2002 Stock Option Plan to
our named executive officers as compensation in respect of our 2008 fiscal year, all of
which have time-based vesting and performance-based vesting: (1) 200,000 to Mr. Young, and
(2) 80,000 to Mr. Weston. The exercise price of Mr. Youngs options is $2.11 per share and
the exercise price of Mr. Westons options is $2.01 per share (in each case, the closing
price of a share of our common stock on the date of grant). Each of the options has a
ten-year term.
Mr. Youngs options were granted pursuant to the employment agreement with our company that
he entered into in January 2008. The terms of Mr. Youngs options were finalized in April
2009. The options will vest in full on September 30, 2011, subject to
the satisfaction by our company of certain performance criteria. The performance criteria
for Mr. Youngs options are the same as the performance criteria for his stock appreciation
rights, which are described below under Long-Term IncentivesStock Appreciation Rights.
- 65 -
The terms of the options granted to Mr. Weston in fiscal 2008 provided that 25% vest on the
date that our company filed its Annual Report on Form 10-K for its fiscal year ending
September 30, 2009 with the Securities and Exchange Commission, 25% vest on May 14, 2010 and
50% will vest on May 14, 2011. In addition to, and not in lieu of these time-based vesting
requirements, the options are subject to performance-based vesting requirements as follows:
if our earnings before interest, taxes, depreciation and amortization (EBITDA) for
fiscal 2009 exceeds our EBITDA for fiscal 2008 by 20% or more, then all of the options will
vest;
if our EBITDA for fiscal 2009 exceeds our EBITDA for fiscal 2008 by 15% or more but less
than 20%, then 50% of the options will vest;
if our EBITDA for fiscal 2009 exceeds our EBITDA for fiscal 2008 by 10% or more but less
than 15%, then 25% of the options will vest; and
if our EBITDA for fiscal 2009 exceeds our EBITDA for fiscal 2008 by less than 10%, then
none of the options will vest.
In December 2009, when we filed our Annual Report on Form 10-K for the fiscal year ended
September 30, 2009, 20,000 of the 2008 options granted to Mr. Weston vested. An additional
20,000 options vested on May 14, 2010.
Long-Term Incentives2009 Stock Option Grants. During fiscal 2009, we granted Mr.
Weston options to purchase 80,000 shares of our common stock under our 2002 Stock Option
Plan as compensation in respect of our 2009 fiscal year. These options have both time-based
vesting and performance-based vesting. We did not grant Mr. Young any options in fiscal
2009 (although, as described above under Long-Term Incentives2008 Stock Option Grants, we
finalized the terms of Mr. Youngs fiscal 2008 option grants in April 2009). The exercise
price of Mr. Westons options is $2.12 per share (the closing price of a share of our common
stock on the date of grant). The options have a ten-year term.
Of the 80,000 shares underlying the options granted to Mr. Weston in fiscal 2009, 48,000 are
denominated Performance Based Shares and 32,000 are denominated Non-Performance Based
Shares. Twenty five percent (25%) of the Performance Based Shares will vest on the date
that our company files its Annual Report on Form 10-K for its fiscal year ending September
30, 2010 with the Securities and Exchange Commission, 25% of the Performance Based Shares
will vest on June 17, 2011 and 50% of the Performance Based Shares will vest on June 17,
2012. In addition to, and not in lieu of these time-based vesting requirements, the
Performance Based Shares are subject to performance-based vesting requirements as follows:
if our earnings before interest, taxes and amortization (EBITA) for fiscal 2010 exceeds
our EBITA for fiscal 2009 by 30% or more, then all of the Performance Based Shares will
vest;
if our EBITA for fiscal 2010 exceeds our EBITA for fiscal 2009 by 25% or more but less
than 30%, then 50% of the Performance Based Shares will vest;
- 66 -
if our EBITA for fiscal 2010 exceeds our EBITA for fiscal 2009 by 20% or more but less
than 25%, then 25% of the Performance Based Shares will vest; and
if our EBITA for fiscal 2010 exceeds our EBITA for fiscal 2009 by less than 20%, then none
of the Performance Based Shares will vest.
With respect to the Non-Performance Based Shares granted to Mr. Weston:
25% will vest on the date that our company files its Annual Report on Form 10-K for its
fiscal year ending September 30, 2010 with the Securities and Exchange Commission;
25% will vest on June 17, 2011; and
50% will vest on June 17, 2012.
Since our EBITA for fiscal 2010 exceeded our EBITA for fiscal 2009 by less than 20%, none of
the Performance-Based Shares will vest. However, the Non-Performance Based Shares will vest
in accordance with the schedule set forth immediately above.
Long-Term Incentives2010 Stock Option Grants. During fiscal 2010, we granted Mr.
Weston options to purchase 80,000 shares of our common stock under our 2002 Stock Option
Plan as compensation in respect of our 2010 fiscal year. These options have both time-based
vesting and performance-based vesting. We did not grant Mr. Young any options in fiscal
2010. The exercise price of Mr. Westons options is $2.59 per share (the closing price of a
share of our common stock on the date of grant). The options have a ten-year term.
Of the 80,000 shares underlying the options granted to Mr. Weston in fiscal 2009, 48,000 are
denominated Performance Based Shares and 32,000 are denominated Non-Performance Based
Shares. Twenty five percent (25%) of the Performance Based Shares will vest on the date
that our company files its Annual Report on Form 10-K for its fiscal year ending September
30, 2011 with the Securities and Exchange Commission, 25% of the Performance Based Shares
will vest on May 20, 2012 and 50% of the Performance Based Shares will vest on May 20, 2013.
In addition to, and not in lieu of these time-based vesting requirements, the Performance
Based Shares are subject to performance-based vesting requirements as follows:
if our EBITA fiscal 2011 exceeds our EBITA for fiscal 2010 by 25% or more, then all of the
Performance Based Shares will vest;
if our EBITA for fiscal 2011 exceeds our EBITA for fiscal 2010 by 20% or more but less
than 25%, then 50% of the Performance Based Shares will vest;
- 67 -
if our EBITA for fiscal 2011 exceeds our EBITA for fiscal 2010 by 15% or more but less
than 20%, then 25% of the Performance Based Shares will vest; and
if our EBITA for fiscal 2011 exceeds our EBITA for fiscal 2010 by less than 15%, then none
of the Performance Based Shares will vest.
With respect to the Non-Performance Based Shares granted to Mr. Weston:
25% will vest on the date that our company files its Annual Report on Form 10-K for its
fiscal year ending September 30, 2011 with the Securities and Exchange Commission;
25% will vest on May 20, 2012; and
50% will vest on May 20, 2013.
Long-Term IncentivesStock Appreciation Rights. In our employment agreement with
Mr. Young, we agreed to grant to him (in addition to stock options) a long-term incentive
award. In April 2009, our board of directors, upon the recommendation of the Compensation
Committee, made a grant of 566,135 stock appreciation rights to Mr. Young. The stock
appreciation rights will vest on September 30, 2011 and will be settled in shares of common
stock of our company. The exact amount of stock appreciation rights to be awarded to Mr.
Young is dependent on the average growth of our company during the period from October 1,
2009 through September 30, 2011 in each of three areas: (1) sales, (2) earnings per share
and (3) EBITA, in each case as compared to the base year ended September 30, 2007. However,
the potential maximum value of the stock appreciation rights (when aggregated with the value
of the vested portion of the option to purchase 200,000 shares of our common stock held by
Mr. Young) will be capped at £3,000,000. The stock appreciation rights are described in
more detail in Employment Agreements; Potential Payments Upon Termination or
Change-in-Control.
Personal Benefits and Perquisites. Our company has traditionally paid a relatively
modest amount to our named executive officers by way of personal benefits and perquisites.
For each of our two named executive officers, we paid a car allowance in fiscal 2008
($17,060 in the case of Mr. Young and $7,399 in the case of Mr. Weston), fiscal 2009
($18,619 in the case of Mr. Young and $13,964 in the case of Mr. Weston) and fiscal 2010
($18,710 in the case of Mr. Young and $14,033 in the case of Mr. Weston). We also
contributed $44,781 and $19,114, respectively, to Mr. Youngs and Mr. Westons U.K.-based
private pension fund in fiscal 2008, $49,731 and $33,700, respectively, in fiscal 2009 and
$50,968 and $37,619, respectively, in fiscal 2010. The contribution to Mr. Youngs and Mr.
Westons private pension fund was made pursuant to the terms of their respective employment
agreements.
- 68 -
Potential Payments upon Termination or Change-in- Control
As discussed more fully below under Employment Agreements; Potential Payments Upon
Termination or Change-in-Control, we have entered into employment agreements with each of Mr.
Young and Mr. Weston. The decisions to enter into employment agreements and the terms of those
agreements were based on our companys need to attract and retain executives responsible for the
long-term growth of our company.
Pursuant to our employment agreement with Mr. Young, we are required to give him at least 12
months notice of termination of employment. Pursuant to our employment agreement with Mr. Weston,
we are required to give him six months notice of termination of employment. In addition, Mr.
Westons employment agreement provides that if he is terminated due to an acquisition, we will pay
him 12 months salary in lieu of notice.
We have structured Mr. Westons change in control severance compensation as double trigger
benefits. In other words, the change of control does not itself trigger benefits; rather, benefits
are paid only if the employment of the executive is terminated due to a change of control. We
believe a double trigger benefit maximizes shareholder value because it prevents an unintended
windfall to executives in the event of a friendly change of control, while still providing
appropriate incentives to cooperate in negotiating any change of control. In all, the severance
benefits were designed to provide our executive officers with a certain measure of job security and
protection against termination without cause and termination or loss of employment through no fault
of their own.
Information regarding our change of control arrangements with Mr. Weston is set forth below
under Employment Agreements; Potential Payments Upon Termination or Change-in-Control.
Tax and Accounting Implications of Executive Compensation
Tax and accounting issues are considered by the Compensation Committee in setting compensation
policies.
Section 162(m) of the Internal Revenue Code denies a deduction to any publicly-held
corporation for compensation paid to certain covered employees in a taxable year to the extent that
compensation exceeds $1,000,000 for the covered employee. Under Section 162(m), certain
performance-based compensation that has been approved by our shareholders is not subject to this
limitation. As a result of this exclusion, stock options granted under our 2002 Stock Option Plan
are not subject to the limitations of Section 162(m). However, since our board retains discretion
over cash bonuses, those bonuses do not qualify for the exemption for performance-based
compensation. Since none of our executive officers had compensation in excess of $1,000,000 that
was subject to Section 162(m) limitations in fiscal 2008, fiscal 2009 or fiscal 2010, Section
162(m) was not applicable.
We make decisions about the grant of stock options based partly on the accounting treatment
they receive under the accounting guidance for stock compensation. This guidance requires
companies to recognize in their income statement the grant-date fair value of stock options and
other equity-based compensation issued to employees. The effect of this guidance is
to reduce our reported profits by the cost of our stock-based awards. See Note 9 of Notes to
Consolidated Financial Statements for our fiscal year ended September 30, 2010 for a discussion of
the assumptions made in determining the grant-date fair value.
- 69 -
While the Compensation Committee attempts to recommend compensation for executives that
produces favorable tax and accounting treatment for our company, its main objective is to develop
fair and equitable compensation arrangements that attract, motivate and retain talented executives.
Stock Ownership Guidelines
While we have not adopted equity or other security ownership requirements or guidelines that
specify any minimum amounts of ownership for our directors or our executive officers, we encourage
our officers and directors to maintain at least some equity in our company and to align their
interests with those of our stockholders. We have adopted policies that restrict the circumstances
in which executives may hedge the economic risk of common stock ownership. Our insider trading
policy prohibits both short sales (i.e., selling stock that is not owned and borrowing shares to
make delivery) and the buying or selling of puts, calls or other derivatives in respect of
securities of our company, other than long-term hedging transactions that are designed to protect
an individuals investment in our company and that are pre-cleared in accordance with the
procedures set forth in our insider trading policy. In order to meet the criteria that a long-term
hedging transaction be designed to protect an individuals investment in our company, our insider
trading policy requires that any hedge must be for at least one year and relate to stock or options
held by the individual.
Compensation Committee Report
The information contained in this Compensation Committee Report shall not be deemed
soliciting material or to be filed with the Securities and Exchange Commission or subject to
the liabilities of Section 18 of the Securities Exchange Act of 1934, except to the extent that we
specifically incorporate it by reference into a document filed under the Securities Act of 1933 or
the Securities Exchange Act of 1934.
The Compensation Committee of the board of directors has reviewed and discussed the
Compensation Discussion and Analysis set forth above with management and, based on such review and
discussions, the Compensation Committee recommended to the board of directors that the Compensation
Discussion and Analysis be included in this Annual Report on Form 10-K.
The Compensation Committee
Sophia Corona
Mark Hanley
Jeffrey S. Peris
- 70 -
Executive Compensation
Summary Compensation Table
The following table summarizes all compensation earned by or paid to our named executive
officers in fiscal 2010, fiscal 2009 and fiscal 2008.
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Option |
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Awards |
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(including |
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Stock |
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Name and |
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Appreciation |
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All Other |
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Principal |
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Fiscal |
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Salary |
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Bonus |
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Rights) |
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Compensation |
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Total |
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Position(s) |
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Year |
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($) |
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($) |
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($)(3) |
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($) |
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($) |
|
Alexander (Sandy) Young, |
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2010 |
|
|
$ |
339,784 |
|
|
$ |
49,115 |
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|
|
|
|
$ |
69,678 |
(5)(6) |
|
$ |
458,577 |
|
Chief Executive Officer(1) |
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2009 |
|
|
$ |
333,167 |
|
|
$ |
134,244 |
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|
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(4) |
|
$ |
68,350 |
(5)(6) |
|
$ |
535,761 |
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|
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2008 |
|
|
$ |
298,545 |
|
|
$ |
128,252 |
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|
|
|
|
$ |
61,842 |
(5)(6) |
|
$ |
488,639 |
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Paul Weston, |
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2010 |
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|
$ |
250,794 |
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$ |
37,733 |
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$ |
100,424 |
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|
$ |
51,652 |
(6)(7) |
|
$ |
440,603 |
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Chief Financial Officer(2) |
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2009 |
|
|
$ |
245,909 |
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$ |
86,700 |
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|
$ |
88,016 |
|
|
$ |
47,664 |
(6)(7) |
|
$ |
468,289 |
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|
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2008 |
|
|
$ |
127,429 |
|
|
$ |
86,816 |
|
|
$ |
82,616 |
|
|
$ |
26,514 |
(6)(7) |
|
$ |
323,375 |
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(1) |
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Mr. Young became our chief executive office in January 2008. |
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(2) |
|
From 2004 until September 2008, Mr. Weston was our companys financial director in the United
Kingdom. In May 2008, Mr. Weston was appointed the chief financial officer designate of our
company and in October 2008 he became the chief financial officer of our company. |
|
(3) |
|
The amounts in this column represent the fair value of grants, on the date of grant,
calculated in accordance with the rules of the Securities and Exchange Commission and the
accounting guidance for option awards. They do not reflect compensation actually received by
the named executive officers. See Note 9 of Notes to Consolidated Financial Statements for
our fiscal year ended September 30, 2010 for a discussion of the assumptions made in
determining the grant-date fair value. The actual value, if any, that an executive officer
will realize upon the exercise of the stock options or stock appreciation rights issued to him
will be equal to the excess of the trading price of shares of our common stock on the date
that the shares underlying the options or the stock appreciation rights are sold over the
exercise price of the options or the base price of the stock appreciation rights, less any
transaction costs. |
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(4) |
|
Amount does not reflect $0.4 million grant date value of the 200,000 options awarded in 2008
to Mr. Young, the terms of which were finalized in 2009, and the 566,135 stock appreciation
rights awarded in 2009 to Mr. Young as we estimated that none of the performance measures will
be achieved. Because the terms of the 200,000 options were finalized in April 2009, the grant
date value of the options was calculated as of such date. |
|
(5) |
|
In fiscal 2010, represents payment for a car allowance of $18,710 and payments of $50,968
toward Mr. Youngs U.K.-based private pension fund. In fiscal 2009, represents payment for a
car allowance of $18,619 and payments of $49,731 toward Mr. Youngs U.K.-based private pension
fund. In fiscal 2008, represents payment for a car allowance of $17,060 and payments of
$44,782 towards Mr. Youngs U.K.- based private pension fund. |
- 71 -
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(6) |
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Our company pays for a group life insurance policy that covers certain of our employees,
including the named executive officer, and is payable to the beneficiaries of the covered
employees in the event of their death. Our company also pays for a group health insurance
policy that covers certain of our employees, including the named executive officers. The
amount listed in the All Other Compensation column does not include premiums in a de minimus
amount that are attributable to the coverage of the named executive officer under such group
life insurance policy or such group health insurance policy. |
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(7) |
|
In fiscal 2010, represents payment for a car allowance of $14,033 and payments of $37,619
towards Mr. Westons U.K.- based private pension fund. In fiscal 2009, represents payment for
a car allowance of $13,964 and payments of $33,700 towards Mr. Westons U.K.- based private
pension fund. In fiscal 2008, represents payment for a car allowance of $7,399 and payments
of $19,115 towards Mr. Westons U.K.- based private pension fund. |
Grants of Plan-Based Awards
The following table summarizes the options that our company granted to our named executive
officers during fiscal 2010. All options listed in the table were granted under our 2002 Stock
Option Plan.
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Exercise |
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Estimated Future Payouts |
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or Base |
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Grant Date |
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under Equity |
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Price of |
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Fair Value |
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Incentive Plan Awards |
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Option |
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of Stock |
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Grant |
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Threshold |
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Target |
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Maximum |
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Awards |
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and Option |
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Name |
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Date |
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(#) |
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(#) |
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(#) |
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($/Sh) |
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Awards(2) |
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Paul Weston |
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5/20/10 |
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32,000 |
(1) |
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(1) |
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80,000 |
(1) |
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$ |
2.59 |
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$ |
100,424 |
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(1) |
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Of the 80,000 shares underlying the options granted to Mr. Weston in fiscal 2010, 48,000 are
denominated Performance Based Shares and 32,000 are denominated Non-Performance Based Shares.
Twenty five percent (25%) of the Performance Based Shares will vest on the date that our company
files its Annual Report on Form 10-K for its fiscal year ending September 30, 2011 with the
Securities and Exchange Commission, 25% of the Performance Based Shares will vest on May 20, 2012
and 50% of the Performance Based Shares will vest on May 20, 2013. In addition to, and not in lieu
of these time-based vesting requirements, the Performance Based Shares are subject to
performance-based vesting requirements as follows: |
if our EBITA for fiscal 2011 exceeds our EBITA for fiscal 2010 by 25% or more, then all of
the Performance Based Shares will vest;
if our EBITA for fiscal 2011 exceeds our EBITA for fiscal 2010 by 20% or more but less than
25%, then 50% of the Performance Based Shares will vest;
if our EBITA for fiscal 2011 exceeds our EBITA for fiscal 2010 by 15% or more but less than
20%, then 25% of the Performance Based Shares will vest; and
if our EBITA for fiscal 2011 exceeds our EBITA for fiscal 2010 by less than 15%, then none
of the Performance Based Shares will vest.
- 72 -
With respect to the Non-Performance Based Shares granted to Mr. Weston:
25% will vest on the date that our company files its Annual Report on Form 10-K for its
fiscal year ending September 30, 2011 with the Securities and Exchange Commission;
25% will vest on May 20, 2012; and
50% will vest on May 20, 2013.
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(2) |
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The amounts in this column represent the fair value of grants, on the date of grant, calculated
in accordance with the rules of the Securities and Exchange Commission and the accounting guidance
for option awards. They do not reflect compensation actually received by the named executive
officers. See Note 9 of Notes to Consolidated Financial Statements for our fiscal year ended
September 30, 2010 for a discussion of the assumptions made in determining the grant-date fair
value. The actual value, if any, that an executive officer will realize upon the exercise of the
stock options or stock appreciation rights issued to him will be equal to the excess of the trading
price of shares of our common stock on the date that the shares underlying the options or the stock
appreciation rights are sold over the exercise price of the options or the base price of the stock
appreciation rights, less any transaction costs. |
Outstanding Equity Awards at Fiscal Year End
The following table summarizes the outstanding options held by our named executive officers at
September 30, 2010.
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Option Awards |
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Equity |
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Incentive |
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Plan |
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Awards: |
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Number of |
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Number of |
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Number of |
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Securities |
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Securities |
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Securities |
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Underlying |
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Underlying |
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Underlying |
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Unexercised |
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Unexercised |
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Unexercised |
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Option |
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Options |
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Options |
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Unearned |
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Exercise |
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(#) |
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(#) |
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Options |
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Price |
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Option Expiration |
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Name |
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Exercisable |
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Unexercisable |
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(#) |
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($) |
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Date |
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Alexander (Sandy) Young |
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200,000 |
(1) |
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$ |
2.11 |
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2/6/2015 |
(3) |
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566,135 |
(2) |
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1.51 |
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Paul Weston |
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12,000 |
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$ |
6.20 |
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3/23/2015 |
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10,000 |
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5.65 |
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9/30/2015 |
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60,000 |
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1.92 |
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10/16/2016 |
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40,000 |
(4) |
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40,000 |
(4) |
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2.01 |
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5/14/2018 |
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32,000 |
(5) |
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48,000 |
(5) |
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2.12 |
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6/17/2019 |
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32,000 |
(6) |
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48,000 |
(6) |
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2.59 |
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5/20/2020 |
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(1) |
|
Represents options to purchase 200,000 shares of our common stock. See Employment Agreements;
Potential Payments Upon Termination or Change-in-Control for a description of these options. |
|
(2) |
|
Represents stock appreciation rights to purchase up to 566,135 shares of our common stock. See
Employment Agreements; Potential Payments Upon Termination or Change-in-Control for a description
of these stock appreciation rights. The potential maximum value of the stock appreciation rights
(when aggregated with the actual or, if still unexercised, expected value of the 200,000 stock
options) will be £3.0 million (approximately $4.7 million at the closing exchange rate at September
30, 2010). |
- 73 -
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(3) |
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If earned, the shares of common stock underlying the stock appreciation rights will be paid to
Mr. Young as soon as practicable after September 30, 2011. |
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(4) |
|
In May 2008, Mr. Weston was granted 80,000 options. The terms of these options provide that
25% vest on the date that our company files its Annual Report on Form 10-K for the fiscal year
ended September 30, 2009 with the Securities and Exchange Commission, 25% vest on May 14, 2010 and
50% will vest on May 14, 2011. In addition to, and not in lieu of these time-based vesting
requirements, the options are subject to the following performance-based vesting requirements: |
if our EBITDA for fiscal 2009 exceeds our EBITDA for fiscal 2008 by 20% or more, then all of the
options will vest;
if our EBITDA for fiscal 2009 exceeds our EBITDA for fiscal 2008 by 15% or more but less than
20%, then 50% of the options will vest;
if our EBITDA for fiscal 2009 exceeds our EBITDA for fiscal 2008 by 10% or more but less than
15%, then 25% of the options will vest; and
if our EBITDA for fiscal 2009 exceeds our EBITDA for fiscal 2008 by less than 10%, then none of
the options will vest.
Since our EBITDA for fiscal 2009 exceeded our EBITDA for fiscal 2008 by 20% or more, 25% (or
20,000) of the options vested on December 4, 2009 (the date that we filed our Annual Report on Form
10-K for the fiscal year ended September 10, 2009 with the Securities and Exchange Commission) and
25% (or 20,000) of the options vested on May 14, 2010.
|
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(5) |
|
In June 2009, Mr. Weston was granted 80,000 options. Of these options, 48,000 are denominated
Performance Based Shares and 32,000 are denominated Non-Performance Based Shares. Twenty five
percent (25%) of the Performance Based Shares will vest on the date that our company files its
Annual Report on Form 10-K for the fiscal year ended September 30, 2010 with the Securities and
Exchange Commission, 25% of the Performance Based Shares will vest on June 17, 2011 and 50% of the
Performance Based Shares will vest on June 17, 2012. In addition to, and not in lieu of these
time-based vesting requirements, the Performance Based Shares are subject to performance-based
vesting requirements as follows: |
if our EBITA for fiscal 2010 exceeds our EBITA for fiscal 2009 by 30% or more, then all of the
Performance Based Shares will vest;
if our EBITA for fiscal 2010 exceeds our EBITA for fiscal 2009 by 25% or more but less than 30%,
then 50% of the Performance Based Shares will vest;
if our EBITA for fiscal 2010 exceeds our EBITA for fiscal 2009 by 20% or more but less than 25%,
then 25% of the Performance Based Shares will vest; and
if our EBITA for fiscal 2010 exceeds our EBITA for fiscal 2009 by less than 20%, then none of the
Performance Based Shares will vest.
With respect to the Non-Performance Based Shares granted to Mr. Weston:
25% will vest on the date that our company files its annual report on Form 10-K for its fiscal
year ending September 30, 2010 with the Securities and Exchange Commission;
25% will vest on June 17, 2011; and
- 74 -
50% will vest on June 17, 2012.
Since our EBITA for fiscal 2010 exceeded our EBITA for fiscal 2009 by less than 20%, none of the
Performance-Based Shares will vest. However, the Non-Performance Based Shares will vest in
accordance with the schedule set forth immediately above.
|
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(6) |
|
The terms of these options are described in the footnotes to the Grant of Plan Based Awards
table above. |
Exercise of Options During Fiscal 2010
None of our named executive officers exercised any options of our company held by them in our
fiscal year ended September 30, 2010.
Employment Agreements; Potential Payments
Upon Termination or Change-in-Control
Chief Executive Officer
In January 2008, we entered into an employment agreement with Alexander Young, our chief
executive officer. Pursuant to his employment agreement, Mr. Young serves as the chief executive
officer of our company at a salary of £218,463 per annum (approximately $345,370 at the closing
exchange rate at September 30, 2010), subject to annual review by the Compensation Committee, and
as a director of our company. Mr. Youngs employment agreement provides that it shall continue
until terminated by either party giving the other party no less than 12 months prior written
notice. In addition, the employment agreement automatically terminates on Mr. Youngs 65th
birthday. Pursuant to his employment agreement:
|
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|
we awarded Mr. Young 200,000 stock options in February 2008; |
|
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|
we granted Mr. Young 566,135 stock appreciation rights in April 2009, the terms of
which are described below; |
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|
we provide Mr. Young with a car allowance; and |
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|
we have agreed to make a payment equal to 15% of Mr. Youngs annual salary towards
his U.K.-based private pension fund. |
In April 2009, our board of directors, upon the recommendation of our Compensation Committee,
made a grant of 566,135 stock appreciation rights to Mr. Young. The stock appreciation rights
represent the right to receive a payment, in shares of our common stock, equal to the product of
(a) the number of stock appreciation rights granted that vest and (b) the excess of (i) the closing
sale price of a share of our common stock on the date that the stock appreciation rights are
settled over (ii) the base price of $1.51 (the closing price of a share of our common stock on the
NASDAQ Global Select Market on April 21, 2009, the date that the stock appreciation rights were
granted to Mr. Young).
The stock appreciation rights are subject to both time vesting and performance vesting.
- 75 -
Time Vesting. The stock appreciation rights generally will not vest if Mr. Youngs
employment with our company is terminated prior to January 14, 2011, the third anniversary
of the date he became our chief executive officer. However, if Mr. Youngs
employment terminates because of his death or disability, he shall become vested in the
stock appreciation rights to the extent determined by the Compensation Committee. The
Compensation Committees determination shall be made by multiplying that portion of the
stock appreciation rights that are deemed potentially to have vested by reason of
satisfaction of the applicable performance levels by a fraction, the numerator of which is
the number of completed months elapsed since October 1, 2007 through the date of termination
of employment and the denominator of which is 48.
In addition, in the event of a change of control (as defined in the stock appreciation
rights agreement), the stock appreciation rights will become immediately vested to the same
extent provided in the previous paragraph and shall be exercisable for a period of 30 days
after the change of control. If Mr. Youngs employment with our company is terminated for
reasons that the Compensation Committee determines constitutes cause (as defined in the
stock appreciation rights agreement), the stock appreciation rights will be forfeited,
without regard to whether they have become vested.
Performance Vesting. The determination of whether the stock appreciation rights
have vested will be made as soon as practicable after the fiscal year ending September 30,
2011 and will be based on the achievement of the performance measures set forth in the stock
appreciation rights agreement with Mr. Young. The stock appreciation rights agreement
establishes a threshold, base and stretch level of improvement (in percentage terms) in
growth in each of sales, earnings per share and EBITA during the period from October 1, 2009
through September 30, 2011 as compared to the base year ended September 30, 2007 and
provides that the amount of stock appreciation rights that will vest will be dependent on
whether the threshold, base and stretch levels have been met in each performance measure.
The determination of vesting attributable to each performance measure shall be independent
from the other performance measures. A performance below threshold in one performance
measure does not preclude vesting under any other performance measure.
If the actual results for any performance measure fall between the threshold and the base,
or between the base and the stretch, vesting of the stock appreciation rights will be
prorated.
The stock appreciation rights agreement with Mr. Young provides that the potential maximum
value of the stock appreciation rights (when aggregated with the value of the vested portion
of the option to purchase 200,000 shares of our company common stock held by Mr. Young) is
£3 million. If the total value of the stock appreciation rights and the value of the vested
portion of Mr. Youngs options exceeds £3 million, then the base price of $1.51 for the
stock appreciation rights will be increased so that the total value is equal to £3 million.
In April 2009, in addition to the grant of the stock appreciation rights, our board of
directors, upon the recommendation of our Compensation Committee, finalized the performance-based
vesting conditions of the 200,000 options to purchase shares of common stock of the company held by
Mr. Young. These options had been granted in February 2008 at an exercise
price of $2.11 per share. The vesting of the stock options will be subject to vesting in the
same manner as the stock appreciation rights.
- 76 -
Mr. Youngs employment agreement does not provide for payments to be made to him at, following
or in connection with a change of control of our company. In lieu of the 12 months prior written
notice of termination, our employment agreement with Mr. Young provides that we may terminate the
employment agreement at any time by making a payment to Mr. Young equal to his salary for the
notice period (or, if applicable, the remainder of the notice period) and the cost to us of
providing Mr. Young with his health insurance, car allowance and contribution to his U.K.-based
private pension fund for the notice period (or, if applicable, the remainder of the notice period).
The following table illustrates that benefits that Mr. Young would have been entitled to receive
pursuant to this employment agreement, assuming (i) our company terminated his employment on
September 30, 2010, and (ii) we chose to pay his salary and benefits in one lump sum, rather than
provide him with 12 months notice of termination:
|
|
|
|
|
Severance payment in lieu of salary |
|
$ |
345,370 |
|
Severance payment in lieu of health insurance |
|
$ |
4,150 |
|
Severance payment in lieu of car allowance |
|
$ |
18,970 |
|
Severance payment in lieu of payment towards
U.K.-based private pension fund |
|
$ |
51,800 |
|
|
|
|
|
Total: |
|
$ |
420,290 |
(1) |
|
|
|
|
|
|
|
(1) |
|
Represents a single payment. |
Our stock appreciation rights agreement and our stock option agreement with Mr. Young provides
for acceleration of the awards granted thereunder in the event of his death or disability, by
reason of any other circumstance that the Compensation Committee determines, or in the event that
we undergo a change of control. The agreements provide that the awards will be accelerated if the
performance measures specified therein have been achieved and that the awards shall be accelerated
on a pro-rata basis based on the amount of time that has elapsed at termination. Because none of
the performance measures were achieved on a pro rata basis at September 30, 2010, had Mr. Youngs
employment terminated on September 30, 2010 due to death, disability, by reason of any other
circumstance that the Compensation Committee determines or a change of control of our company, he
would not have realized any amounts under his stock appreciation rights agreement or stock option
agreement.
- 77 -
Chief Financial Officer
In May 2008 we entered into an employment agreement with Paul Weston, who was then serving as
our chief financial officer designate. Mr. Weston became our chief financial officer in October
2008. 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 $254,915 at the closing exchange rate at September 30, 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. The following table illustrates that benefits that Mr. Weston would have been
entitled to receive pursuant to this employment agreement and U.K. law in the event that Mr.
Westons employment had been terminated on September 30, 2010 due to an acquisition:
|
|
|
|
|
Severance payment in lieu of salary |
|
$ |
254,915 |
|
Severance payment in lieu of health insurance |
|
$ |
2,650 |
|
Severance payment in lieu of car allowance |
|
$ |
14,230 |
|
Severance payment in lieu of payment towards
U.K.-based private pension fund |
|
$ |
38,240 |
|
|
|
|
|
Total: |
|
$ |
310,035 |
(1) |
|
|
|
|
|
|
|
(1) |
|
Represents a single payment. |
Certain of our stock option agreements with Mr. Weston provide that they shall become
immediately exercisable in full in the event that we undergo a change in control. In the event
that we had undergone a change of control on September 30, 2010, the spread (the difference
between the closing price of our stock on September 30, 2010 and the option exercise price) of the
in-the-money options held by Mr. Weston that would have accelerated would have aggregated $50,000.
Risk Considerations in Our Compensation Program
Our Compensation Committee has considered whether our compensation policies and practices for
our employees, including, but not limited to, our executive officers, encourage excessive or
inappropriate risk taking and determined that they do not for the following reasons:
Substantially all of our homecare aides, nurses and nurses aids are paid on an hourly basis
and none participate in our stock option plan.
Those employees who participate in our stock option plan receive both a salary and options
(or, in the case of our chief executive officer, options and stock appreciation right) as part of
their compensation package. Our Compensation Committee believes that the salary component is a
sufficiently meaningful part of the compensation package that our employees, including our
executive officers, will not take unnecessary or excessive risks in order to maximize their chances
of realizing on their options or stock appreciation rights.
- 78 -
The options we have granted in last few years have had vesting schedule that is in whole or in
part based on growth in earnings (as opposed to growth in revenues). The Compensation Committee
believes that the performance goals in our options are reasonably achievable. The time-based
vesting for our stock options ensures that our employees long-term interests align with those of
our shareholders.
Our Compensation Committee believes that the use of earnings growth as a condition to vesting
focuses employees on profitability in a manner that vesting tied to revenues growth, which might
incentive employees to drive sales without regard to the costs of sales, does not.
Although the vesting of the stock appreciation rights of our chief executive officer are
dependent, in part, on growth in revenues, we believe that there are a number of features of the
stock appreciation rights which discourage excessive or inappropriate risk taking. First, a larger
percentage of the vesting is determined by growth in earnings than by growth in revenues. Tying
the vesting of the stock appreciation rights to earnings acts as a check on entering into contracts
that increase sales but not earnings. Second, the stock appreciation rights provide for partial
vesting for various levels of achievement in earnings and revenues, thereby permitting payouts at
levels below full target achievement, rather than providing for an all-or-nothing approach.
As a healthcare staffing company, our company does not face the same level of risks associated
with compensation of employees at companies, such as financial service companies, that reward at
least some of their employees for successfully taking substantial risks.
Director Compensation
The following table summarizes the compensation paid to our directors during fiscal 2010.
Director Compensation Table for Fiscal 2010
|
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Fees Earned |
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or Paid in |
|
|
Option |
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Cash |
|
|
Awards |
|
|
Total |
|
Name (1)(2) |
|
($) |
|
|
($)(6)(7) |
|
|
($) |
|
Sophia Corona |
|
$ |
50,000 |
|
|
$ |
86,415 |
|
|
$ |
136,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G. Richard Green(3) |
|
$ |
35,000 |
|
|
$ |
74,070 |
|
|
$ |
109,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark Hanley |
|
$ |
35,000 |
|
|
$ |
74,070 |
|
|
$ |
109,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wayne Palladino |
|
$ |
45,000 |
|
|
$ |
86,415 |
|
|
$ |
131,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey S. Peris |
|
$ |
100,000 |
|
|
$ |
98,760 |
|
|
$ |
198,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raymond J. Playford(4) |
|
$ |
3,333 |
(5) |
|
$ |
|
|
|
$ |
3,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ann Thornburg |
|
$ |
50,000 |
|
|
$ |
92,588 |
|
|
$ |
142,588 |
|
- 79 -
|
|
|
(1) |
|
Alexander (Sandy) Young, who has served as a director of our company since January 2008,
is not included in this table because he is an employee of our company who received no additional
compensation for services as a director. The compensation received by Mr. Young as an employee of
our company during fiscal 2010 is reflected in the Summary Compensation Table. |
|
(2) |
|
Except as otherwise indicated, each individual named below served as a director of our
company for all of fiscal 2010. |
|
(3) |
|
Mr. Green resigned from our board of directors effective as of August 21, 2010. |
|
(4) |
|
Professor Playford joined our board of directors on August 21, 2010. |
|
(5) |
|
Does not include $15,566 in fees that Professor Playford received for serving as medical
advisor to our board of directors from April 2010 until he joined our board in August 2010. |
|
(6) |
|
The amounts in this column represent the fair value of grants, on the date of grant,
calculated in accordance with the rules of the Securities and Exchange Commission and the
accounting guidance for option awards. They do not reflect compensation actually received by the
directors. See Note 9 of Notes to Consolidated Financial Statements for our fiscal year ended
September 30, 2010 for a discussion of the assumptions made in determining the grant-date fair
value. The actual value, if any, that a director will realize upon the exercise of the stock
options issued to him or her will be equal to the excess of the trading price of shares of our
common stock on the date that the shares underlying the options are sold over the exercise price of
the options, less any transaction costs. |
|
(7) |
|
As of September 30, 2010, our directors had the option awards outstanding set forth below: |
Sophia Corona: 290,000
G. Richard Green: 237,000
Mark Hanley: 120,000
Wayne Palladino: 311,000
Jeffrey S. Peris: 379,000
Raymond J. Playford:
Ann Thornburg: 350,000
- 80 -
Director Compensation General
We use a combination of cash and stock option grants to attract and retain qualified
candidates to serve on our board of directors. In setting director compensation, our board
considers the amount of time that directors expend in fulfilling their duties, as well as the
expertise that the board members bring to our company.
Cash Compensation
We do not pay directors who are employees of our company additional cash compensation for
their services as a director. Our cash compensation program for non-employee directors is as
follows:
|
|
|
each non-employee director is entitled to an annual retainer of $30,000 per year; |
|
|
|
|
each non-employee director who is a member of our Audit Committee, our Compensation
Committee or our Nominating and Corporate Governance Committee (other than the
chairpersons) is entitled to receive an additional $5,000 per year for service on those
committees; |
|
|
|
|
the chairperson of our Audit Committee and our Nominating and Corporate Governance
Committee, is entitled to receive $20,000 per year for serving as such, which amount is
in addition to the $30,000 annual retainer paid to non-employee directors; |
|
|
|
|
the co-chairpersons of the Strategic Investment Committee are each entitled to
receive $10,000 per year for serving as such, which amounts are in addition to the
$30,000 annual retainer paid to all non-employee directors; |
|
|
|
|
the non-executive chairman of the board is entitled to receive $100,000 per year
(which amount includes the $30,000 annual retainer paid to all non-employee directors).
Our non-executive chairman of the board also serves as the chairperson of our
Compensation Committee, but he does not receive additional remuneration for serving as
such. |
In addition, in June 2009 the board approved a one-time payment of $10,000 to each
non-employee member of the board in recognition of the unusual and extraordinary services that had
been performed by such individuals for the benefit of our company over the previous year.
We make payments to our directors of the amounts to which they are entitled on a quarterly
basis.
Equity-Based Compensation
In order to ensure that directors have an ownership interest aligned with our shareholders,
our board has granted to non-employee directors options to purchase shares of our common stock. In
connection with its periodic review of director compensation, in May 2010 our board granted options
to purchase 60,000 shares of our common stock at a price of $2.59 per share (the closing price of a
share of our common stock on the date of grant) to each non-employee director. In connection with
this grant of options, the chairperson of both our Audit Committee and our Nominating and Corporate
Governance Committee received options to purchase an additional 15,000 shares of our common stock,
our chairman, who also serves as the chairman of
our Compensation Committee, received options to purchase an additional 20,000 shares of our
common stock, and the co-chairs of our Strategic Investment Committee each received options to
purchase an additional 10,000 shares of our common stock. Accordingly, in May 2010 we issued
options to purchase an aggregate of 415,000 shares of our common stock to our non-employee
directors.
- 81 -
The equity-based compensation that we pay to our chief executive officer, who is also a
director of our company, is discussed above under Executive Compensation and Employment
Agreements; Potential Payments Upon Termination or Change-in-Control.
Our board anticipates that it will review board compensation annually in conjunction with the
boards review of executive officer salaries and benefits.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists of Sophia Corona, Mark Hanley and Jeffrey S. Peris. Dr.
Peris serves as chairman of the Compensation Committee. Ms. Corona and Messrs. Hanley and Peris
served on our Compensation Committee throughout fiscal 2010. Except for Mr. Hanley, who served
from 1995 to 1997 as an executive director/director of business development of Transworld
Healthcare (UK) Limited, a subsidiary of our company now known as Allied Healthcare Holdings
Limited, no member of our Compensation Committee has ever served as an officer or employee of our
company or any of our subsidiaries, nor has any such individual had a business relationship with
our company or any of our subsidiaries during fiscal 2010 that requires disclosure under the rules
of the Securities and Exchange Commission. In addition, during fiscal 2010, no executive officer
of our company served as either a director or a member of the compensation committee (or other
board committee performing equivalent functions) of another entity, one of whose executive officers
served on our companys Compensation Committee or board of directors.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth the number of shares of common stock, and the percentage of
shares of common stock, beneficially owned as of December 9, 2010 (the Determination Date)
(except as noted in the footnotes below) by (1) each director of our company, (2) each current
named executive officer, (3) all persons known by us to be the beneficial owner of more than 5% of
our outstanding shares of common stock, and (4) all current directors and named executive officers
of our company as a group (8 persons). The information as to the number of shares of our common
stock beneficially owned by the individuals and entities listed below was derived from reports
filed with the Securities and Exchange Commission by such persons and company records. To our
knowledge, except as indicated in the footnotes to the table, the persons named in the table have
sole voting and investment power with respect to all shares of our common stock shown as
beneficially owned by them. Except as set forth below, the address of each of the following
holders of shares of our common stock is c/o Allied Healthcare International Inc., 245 Park Avenue,
New York, New York 10167.
- 82 -
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Shares of |
|
|
Percentage of |
|
|
|
Common Stock |
|
|
Common Stock |
|
|
|
Beneficially |
|
|
Beneficially |
|
Name |
|
Owned |
|
|
Owned(1) |
|
|
|
|
|
|
|
|
|
|
Alexander (Sandy) Young |
|
|
116,839 |
(2) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
Paul Weston |
|
|
130,000 |
(3) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
Sophia Corona |
|
|
177,500 |
(4) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
Mark Hanley |
|
|
45,000 |
(5) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
Wayne Palladino |
|
|
204,664 |
(6) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
Jeffrey S. Peris |
|
|
243,500 |
(7) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
Raymond J. Playford |
|
|
3,162 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
Ann Thornburg |
|
|
218,750 |
(8) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
Rutabaga Capital Management |
|
|
3,985,347 |
(9) |
|
|
9.1 |
|
|
|
|
|
|
|
|
|
|
Dimensional Fund Advisors LP |
|
|
3,642,953 |
(10) |
|
|
8.4 |
|
|
|
|
|
|
|
|
|
|
Austin W. Marxe and David
M. Greenhouse |
|
|
2,929,718 |
(11) |
|
|
6.7 |
|
|
|
|
|
|
|
|
|
|
Keane Capital Management, Inc. |
|
|
2,614,581 |
(12) |
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
All current executive
officers and directors as a
group (8 persons) |
|
|
1,139,415 |
(13) |
|
|
2.6 |
|
|
|
|
* |
|
Less than 1%. |
|
(1) |
|
As of the Determination Date, there were 43,571,251 shares of our
common stock outstanding. The percentage given for each shareholder
assumes that such shareholder has exercised the options held by such
shareholder that are exercisable within 60 days of the Determination
Date, but that no other shareholders have exercised the options held
by them. |
|
(2) |
|
Consists of 10,000 shares held by Mr. Young and 106,839 shares held
by Mr. Youngs wife. Does not include 200,000 shares subject to
options and 566,135 stock appreciation rights held by Mr. Young that
are not exercisable within 60 days of the Determination Date. |
|
(3) |
|
Consists of 130,000 shares subject to options held by Mr. Weston that
are exercisable within 60 days of the Determination Date. Does not
include 192,000 shares subject to options held by Mr. Weston that are
not exercisable within 60 days of the Determination Date. |
|
(4) |
|
Consists of 177,500 shares subject to options held by Ms. Corona that
are exercisable within 60 days of the Determination Date. Does not
include 112,500 shares subject to options held by Ms. Corona that are
not exercisable within 60 days of the Determination Date. |
|
(5) |
|
Consists of 45,000 shares subject to options held by Mr. Hanley that
are exercisable within 60 days of the Determination Date. Does not
include 75,000 shares subject to options held by Mr. Hanley that are
not exercisable within 60 days of the Determination Date. |
- 83 -
|
|
|
(6) |
|
Consists of 5,914 shares of common stock held by Mr. Palladino, 250
shares held jointly by Mr. Palladino and his wife and 198,500 shares
subject to options that are exercisable within 60 days of the
Determination Date. Does not include an additional 112,500 shares
subject to options held by Mr. Palladino that are not exercisable
within 60 days of the Determination Date. |
|
(7) |
|
Consists of 2,000 shares of common stock held by Marjon Repjel, LP
and 241,500 shares subject to options held by Dr. Peris that are
exercisable within 60 days of the Determination Date. Dr. Peris has
sole voting and sole dispositive power over the shares of common
stock held by Marjon Repjel, LP. Does not include an additional
137,500 shares subject to options held by Dr. Peris that are not
exercisable within 60 days of the Determination Date. |
|
(8) |
|
Consists of 218,750 shares subject to options held by Ms. Thornburg
that are exercisable within 60 days of the Determination Date. Does
not include 131,250 shares subject to options held by Ms. Thornburg
that are not exercisable within 60 days of the Determination Date. |
|
(9) |
|
The number of shares owned is given as of February 11, 2010, the date
of filing of the Schedule 13G amendment by Rutabaga Capital
Management (Rutabaga) with the Securities and Exchange Commission.
According to the Schedule 13G amendment, Rutabaga has sole voting
power with respect to 2,422,020 shares of our common stock, shared
voting power with respect to 1,563,327 shares of our common stock,
sole dispositive power with respect to 3,985,347 shares of our common
stock and shared dispositive power with respect to no shares of our
common stock. Rutabagas address is 64 Broad Street, 3rd Floor,
Boston, Massachusetts 02109. |
|
(10) |
|
The number of shares owned is given as of February 8, 2010, the date
of filing of the Schedule 13G amendment by Dimensional Fund Advisors
LP (Dimensional) with the Securities and Exchange Commission.
According to the Schedule 13G amendment, Dimensional has sole voting
power with respect to 3,561,850 shares of our common stock, shared
voting power with respect to no shares of our common stock, sole
dispositive power with respect to 3,642,953 shares of our common
stock and shared dispositive power with respect to no shares of our
common stock. Dimensionals address is Palisades West, Building One,
6300 Bee Cave Road, Austin, Texas 78746. |
|
(11) |
|
The number of shares owned is given as of February 16, 2010, the date
of the joint filing on Schedule 13G by Mr. Marxe and Mr. Greenhouse
with the Securities and Exchange Commission. According to the
Schedule 13G, Messrs. Marxe and Greenhouse share voting and
investment power over 351,231 shares of our common stock owned by
Special Situations Cayman Fund, L.P. and 2,578,487 shares of our
common stock owned by Special Situations Fund III QP, L.P. Messrs.
Marxes and Greenhouses address is 527 Madison Avenue, Suite 2600,
New York, NY 10022. |
|
(12) |
|
The number of shares owned is given as of February 17, 2009, the date
of filing of the Schedule 13G amendment by Keane Capital Management,
Inc. (Keane) with the Securities and Exchange Commission.
According to the Schedule 13G amendment, Keane has sole voting power
with respect to 2,614,581 shares of our common stock, shared voting
power with respect to no shares of our common stock, sole dispositive
power with respect to 2,614,581 shares of our common stock and share
dispositive power with respect to no shares of our common stock.
Keanes address is 3440 Torringdon Way, Suite 308, Charlotte, North
Carolina 28277. |
|
(13) |
|
Includes an aggregate of 1,011,250 shares subject to options held by
our executive officers and directors that are exercisable within 60
days of the Determination Date, 106,839 shares held by Mr. Youngs
wife, 250 shares held jointly by Mr. Palladino and his wife and 2,000
shares held by Marjon Repjel, LP, an entity over which Dr. Peris has
sole voting and dispositive power. |
- 84 -
Equity Compensation Plan Information
The following table sets forth certain information as of September 30, 2010 regarding
compensation plans under which equity securities of our company are authorized for issuance:
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
|
remaining available for |
|
|
|
|
|
|
|
|
|
|
|
future issuance under |
|
|
|
Number of securities to |
|
|
Weighted-average |
|
|
equity compensation |
|
|
|
be issued upon exercise |
|
|
exercise price of |
|
|
plans (excluding |
|
|
|
of outstanding options, |
|
|
outstanding options, |
|
|
securities reflected in |
|
|
|
warrants and rights |
|
|
warrants and rights |
|
|
column (a)) |
|
Plan Category |
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity compensation
plans approved by
shareholders |
|
|
3,588,334 |
|
|
$ |
2.34 |
|
|
|
2,134,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans not approved
by shareholders |
|
|
566,135 |
(1) |
|
$ |
1.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,154,469 |
|
|
$ |
2.23 |
|
|
|
2,134,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The securities covered by the equity compensation plan that has not been approved by our
shareholders consist of the stock appreciation rights granted in April 2009 to our chief executive
officer. For a description of the stock appreciation rights, see Item 11 Executive
CompensationEmployment Agreements; Potential Payments Upon Termination or Change-in-Control. |
Item 13. Certain Relationships and Related Transactions, and Director
Independence.
Related Party Transactions
In March 2010, Professor Playford and our company entered into a letter agreement pursuant to
which Professor Playford agreed to serve as medical advisor to the board of directors of our
company for the period from April 1, 2010 through September 30, 2010 or such other term as
Professor Playford and the Company shall mutually agree upon. The letter agreement provided that
it could be terminated at any time by either of party upon written notice to the other. In
consideration of serving as advisor, the Company agreed to pay Professor Playford the sum of
$10,000 per quarter and to reimburse him for reasonable out-of-pocket expenses incurred by him in
connection with performing his services for the Company. The letter agreement was terminated in
August 2010, when Professor Playford joined our board of directors.
- 85 -
Our certificate of incorporation and bylaws provide that our company shall indemnify our
directors and officers to the fullest extent permitted by New York law. In addition, we have
entered into indemnification agreements with each of our directors and executive officers. Neither
our certificate of incorporation, our bylaws nor our indemnification agreements place a cap on our
maximum indemnification obligations; however, our directors and officers liability
insurance may enable us to recover some or all of the amounts, if any, that we pay by way of
indemnification to our directors and executive officers.
Other than as described in the previous paragraph and other than the compensation and
severance arrangements with our named executive officers and the director compensation arrangements
described in Item 11Executive Compensation, we are not a participant in any transaction
involving more than $120,000 in which any shareholder holding more than 5% of our outstanding
common stock, any of our executive officers or directors or their immediate family members, or any
other related person (as such term is defined in the rules of the Securities and Exchange
Commission) has or will have a direct or indirect material interest.
Review of Related Party Transactions
Our Code of Conduct (a copy of which is filed as an exhibit to this Annual Report on Form
10-K) prohibits, among other things, our directors, officers and employees from, directly or
indirectly, engaging or participating in any transaction involving, or raising questions of, a
possible conflict between the interests of our company and the personal interests of the employee
or his or her family.
Under its charter, the Audit Committee has the responsibility of reviewing related party
transactions (other than executive and director compensation) between our company and our officers,
directors, key employees and any of their affiliates. Notwithstanding the foregoing, in some cases
(such as executive compensation arrangements), the full board has approved the related party
transaction. In addition, as a general matter, the Compensation Committee recommends, for full
board consideration and approval, the compensation of our executive officers, to the extent not set
forth in an executive officers employment agreement.
The Audit Committee considers whether to ratify or approve a related party transaction on a
case-by-case basis, rather than pursuant to a written policy. To date, there have been no
instances in which the Audit Committee has been called upon to review a related party transaction.
In reviewing any related party transaction, it is expected that the Audit Committee will examine
the terms of the transaction to determine how close they are to terms that would be likely to be
found in a similar arms-length transaction and whether they are fair and reasonable to our
company. If the related party transaction involves a non-employee director, the Audit Committee
may also consider whether the transaction would compromise the directors independence.
Director Independence
Our board of directors has determined that Sophia Corona, Mark Hanley, Wayne Palladino,
Jeffery A. Peris, Raymond J. Playford and Ann Thornburg are independent directors, as such term
is defined in the rules of The NASDAQ Stock Market LLC. The only current member of our board of
directors who is not independent is Alexander (Sandy) Young, who serves an executive officer of our
company.
- 86 -
All of the members of each of our Audit Committee, our Compensation Committee and our
Nominating and Corporate Governance Committee are independent directors, as such term is defined
in the rules of The NASDAQ Stock Market LLC. The members of our Audit
Committee also satisfy the requirements for independence imposed upon audit committee members
by Rule 10A-3 promulgated under the Securities Exchange Act of 1934 by the Securities and Exchange
Commission.
The NASDAQ rules for independent directors provide, among other things, that a director cannot
be considered independent if he or she has been employed by the issuer in the past three years. In
determining whether Mr. Palladino qualifies as an independent director under the NASDAQ rules,
our board of directors considered the fact that he served from February 1991 until August 2000 as
an officer of our company in various positions (including chief financial officer). In determining
whether Mr. Hanley qualifies as an independent director under the NASDAQ rules, our board of
directors considered the fact that he served from 1995 until 1997 as an executive director/director
of business development of Transworld Healthcare (UK) Limited, a subsidiary of our company now
known as Allied Healthcare Holdings Limited. In determining whether Mr. Playford qualifies as an
independent director under the NASDAQ rule, our board of directors considered the fact that he
served from April 2010 until August 2010 as medical advisor to our board of directors.
Item 14. Principal Accountant Fees and Services.
Audit and Other Fees During Fiscal 2010 and Fiscal 2009
The following table sets forth the fees for professional services provided by our independent
auditor in respect of our fiscal years ended September 30, 2010 and September 30, 2009 for various
audit and other services. Our independent auditor for those fiscal years was EisnerAmper LLP
(formerly known as Eisner LLP).
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010 |
|
|
Fiscal 2009 |
|
|
|
|
|
|
|
|
|
|
Audit fees |
|
$ |
647,000 |
|
|
$ |
764,000 |
|
|
|
|
|
|
|
|
|
|
Audit-related fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other fees |
|
|
|
|
|
|
|
|
Audit fees include the fees for auditing our annual financial statements and reviewing the
financial statements included in our quarterly reports on Form 10-Q, as well auditing the internal
controls over financial reporting required by Section 404 of the Sarbanes-Oxley Act of 2002. Audit
fees also include fees for services that were provided in connection with regulatory filings and
consents related to filings with the Securities and Exchange Commission.
- 87 -
Pre-Approval Policy
The charter of the Audit Committee was adopted by the board of directors in May 2007. The
charter of the Audit Committee provides that the Audit Committee shall pre-approve all auditing and
permitted non-audit services (including the fees and terms thereof) to be performed
for us by our independent auditor, subject to the de minimus exception (the de minimus
exception) for non-audit services that are permitted by Section 10A(i)(1)(B) of the Securities
Exchange Act of 1934 and that are approved by the Audit Committee prior to the completion of the
audit.
We did not incur audit-related fees, tax fees or other fees during fiscal 2010 or fiscal 2009
from services provided to us by our independent auditor for those periods. Accordingly, no
non-audit services provided by our independent auditor were approved by the Audit Committee after
the fact in reliance upon the de minimus exception.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
The following documents are filed as part of this Annual Report on Form 10-K:
|
|
|
|
|
|
|
Page |
|
(1) Consolidated Financial Statements: |
|
|
|
|
|
|
|
|
|
Reports of Independent Registered Public Accounting Firm |
|
|
F-1 |
|
|
|
|
|
|
Consolidated Balance Sheets September 30, 2010 and 2009 |
|
|
F-3 |
|
|
|
|
|
|
Consolidated Statements of Operations for the years ended
September 30, 2010, 2009 and 2008 |
|
|
F-4 |
|
|
|
|
|
|
Consolidated Statements of Changes in Shareholders Equity for
the years ended September 30, 2010, 2009 and 2008 |
|
|
F-5 |
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the years ended
September 30, 2010, 2009 and 2008 |
|
|
F-6 |
|
|
|
|
|
|
Notes to Consolidated Financial Statements |
|
|
F-7 |
|
|
|
|
|
|
(2) Consolidated Financial Statement Schedules: |
|
|
|
|
|
|
|
|
|
Schedule II Valuation and Qualifying Accounts |
|
|
S-1 |
|
|
|
|
|
|
Schedules other than those listed above are omitted because they
are not required or are not applicable or the information is shown
in the audited consolidated financial statements or related notes. |
|
|
|
|
|
|
|
|
|
(3) Exhibits: |
|
|
|
|
- 88 -
|
|
|
|
|
Exhibit |
|
|
Number |
|
Title |
|
|
|
|
|
2.1 |
|
|
Agreement, dated September 30, 2007, among Air Liquide Limited,
Omnicare Limited, Allied Healthcare Group Holdings Limited and Air
Liquide UK Limited (incorporated herein by reference to Exhibit 2.1 of
our Annual Report on Form 10-K for the fiscal year ended September 30,
2007; File No. 001-11570). |
|
|
|
|
|
3.1 |
|
|
Restated Certificate of Incorporation of United States Home Health Care
Corp. (now known as Allied Healthcare International Inc.) filed with
the Department of State of the State of New York on December 12, 1990,
as amended on August 7, 1992 (incorporated herein by reference to
Exhibit 3.1 of our Quarterly Report on Form 10-Q for the quarter ended
April 30, 1997; File No. 000-20918). |
|
|
|
|
|
3.2 |
|
|
Certificate of Amendment of the Certificate of Incorporation of
Transworld Home Healthcare, Inc. (now known as Allied Healthcare
International Inc.) filed with the Department of State of the State of
New York on June 28, 1995 (incorporated herein by reference to Exhibit
3.2 of our Quarterly Report on Form 10-Q for the quarter ended April
30, 1997; File No. 000-20918). |
|
|
|
|
|
3.3 |
|
|
Certificate of Amendment of the Certificate of Incorporation of
Transworld Home Healthcare, Inc. (now known as Allied Healthcare
International Inc.) filed with the Department of State of the State of
New York on October 9, 1996 (incorporated herein by reference to
Exhibit 3.3 of our Quarterly Report on Form 10-Q for the quarter ended
April 30, 1997; File No. 000-20918). |
|
|
|
|
|
3.4 |
|
|
Certificate of Amendment of the Certificate of Incorporation of
Transworld Home Healthcare, Inc. (now known as Allied Healthcare
International Inc.) filed with the Department of State of the State of
New York on May 6, 1997 (incorporated herein by reference to Exhibit
3.4 of our Quarterly Report on Form 10-Q for the quarter ended April
30, 1997; File No. 000-20918). |
|
|
|
|
|
3.5 |
|
|
Certificate of Amendment of the Certificate of Incorporation of
Transworld Healthcare, Inc. (now known as Allied Healthcare
International Inc.) filed with the Department of State of the State of
New York on April 16, 1998 (incorporated herein by reference to Exhibit
3.5 of our Registration Statement on Form S-4 (Reg. St. No. 333-87304)
filed with the Securities and Exchange Commission on May 1, 2002; File
No. 333-87304). |
|
|
|
|
|
3.6 |
|
|
Certificate of Amendment to Certificate of Incorporation of Transworld
Healthcare, Inc. (now known as Allied Healthcare International Inc.)
filed with the Department of State of the State of New York on June 7,
2002 (incorporated herein by reference to Exhibit 3.1 of our Current
Report on Form 8-K filed with the Securities and Exchange Commission on
June 10, 2002; File No. 001-11570). |
|
|
|
|
|
3.7 |
|
|
Certificate of Amendment of the Certificate of Incorporation of Allied
Healthcare International Inc. that defines the rights of the Series A
Convertible Preferred Stock, filed with the Department of State of the
State of New York on June 26, 2002 (incorporated herein by reference to
Exhibit 4.1 of our Current Report on Form 8-K filed with the Securities
and Exchange Commission on August 9, 2002; File No. 001-11570). |
- 89 -
|
|
|
|
|
Exhibit |
|
|
Number |
|
Title |
|
|
|
|
|
|
|
3.8 |
|
|
Certificate of Amendment of the provisions of the Certificate of
Incorporation of Allied Healthcare International Inc. that defines the
rights of the Series A Convertible Preferred Stock, filed with the
Department of State of the State of New York on February 12, 2003
(incorporated herein by reference to Exhibit 3.8 of our Quarterly
Report on Form 10-Q for the quarter ended December 31, 2002; File No.
001-11570). |
|
|
|
|
|
|
|
3.9 |
|
|
Certificate of Amendment of the Certificate of Incorporation of Allied
Healthcare International Inc. that eliminates all references to the
Series A Convertible Preferred Stock, filed with the Department of
State of the State of New York on July 20, 2004 (incorporated herein by
reference to Exhibit 9 of our Form 8-A/A filed with the Securities and
Exchange Commission on July 21, 2004; File No. 001-11570). |
|
|
|
|
|
|
|
3.10 |
|
|
Certificate of Amendment of the Certificate of Incorporation of Allied
Healthcare International Inc. filed with the Department of State of the
State of New York on September 10, 2004 (incorporated herein by
reference to Exhibit 3.1 of our Current Report on Form 8-K filed with
the Securities and Exchange Commission on September 15, 2004; File No.
001-11570). |
|
|
|
|
|
|
|
3.11 |
|
|
Certificate of Change of Allied Healthcare International Inc. filed
with the Department of State of the State of New York on April 26, 2007
(incorporated herein by reference to Exhibit 3.11 of our Annual Report
on Form 10-K for the fiscal year ended September 30, 2007; File No.
001-11570). |
|
|
|
|
|
|
|
3.12 |
|
|
Certificate of Amendment to Certificate of Incorporation of Allied
Healthcare International Inc., as filed with the Department of State of
the State of New York on April 2, 2009 (incorporated herein by
reference to Exhibit 3.1 of our Current Report on Form 8-K filed with
the Securities and Exchange Commission on April 2, 2009; File No.
001-11570). |
|
|
|
|
|
|
|
3.13 |
|
|
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). |
|
|
|
|
|
|
|
4.1 |
|
|
Specimen Certificate of Common Stock (incorporated herein by reference
to Exhibit 4.1 of our Current Report on Form 8-K filed with the
Securities and Exchange Commission on June 10, 2002; File No.
001-11570). |
|
|
|
|
|
|
|
4.2 |
|
|
Rights Agreement, dated as of April 2, 2009, between Allied Healthcare
International Inc. and Computershare Trust Company, N.A., as Rights
Agent (incorporated herein by reference to Exhibit 4.1 of our Current
Report on Form 8-K filed with the Securities and Exchange Commission on
April 2, 2009; File No. 001-11570). |
|
|
|
|
|
|
|
4.3 |
|
|
Amendment No. 1 to Rights Agreement, dated as of March 10, 2010,
entered into by Allied Healthcare International Inc. and Computershare
Trust Company, N.A., as rights agent (incorporated herein by reference
to Exhibit 4.1 of our Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 11, 2010; File No.
001-11570). |
- 90 -
|
|
|
|
|
Exhibit |
|
|
Number |
|
Title |
|
|
|
|
|
|
|
4.4 |
|
|
Amendment No. 2 to Rights Agreement, dated as of May 10, 2010, entered
into by Allied Healthcare International Inc. and Computershare Trust
Company, N.A., as rights agent (incorporated herein by reference to
Exhibit 4.1 of our Current Report on Form 8-K filed with the Securities
and Exchange Commission on May 11, 2010; File No. 001-11570). |
|
|
|
|
|
|
|
10.1 |
|
|
Form of Indemnity Agreement for officers and directors (incorporated
herein by reference to Exhibit 10.2 of our Annual Report on Form 10-K
for the fiscal year ended September 30, 2008; File No. 001-11570). |
|
|
|
|
|
|
|
10.2 |
|
|
Registration Rights Agreement, dated April 30, 2002, among Transworld
Healthcare, Inc. (now known as Allied Healthcare International Inc.),
Triumph Partners III, L.P. and Triumph III Investors, L.P.
(incorporated herein by reference to Exhibit 10.29 of our Registration
Statement on Form S-4 (Reg. St. No. 333-87304) filed with the
Securities and Exchange Commission on May 1, 2002; File No. 333-87304). |
|
|
|
|
|
|
|
10.3 |
|
|
2002 Stock Option Plan (incorporated herein by reference to Annex D to
the proxy statement/prospectus forming a part of Amendment No. 1 to our
Registration Statement on Form S-4 (Reg. St. No. 333-87304) filed with
the Securities and Exchange Commission on May 21, 2002; File No.
333-87304). |
|
|
|
|
|
|
|
10.4 |
|
|
Executive Service Agreement, dated December 22, 2007, between Allied
Healthcare International Inc. and Alexander Young, but executed by
Allied Healthcare International Inc. on January 8, 2008 (incorporated
herein by reference to Exhibit 10.1 of our Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 14, 2008;
File No. 001-11570). |
|
|
|
|
|
|
|
10.5 |
|
|
Employment Agreement, dated May 1, 2008, between Allied Healthcare
Group Limited and Paul Weston (incorporated herein by reference to
Exhibit 10.1 of our Quarterly Report on Form 10-Q for the quarter ended
June 30, 2008; File No. 001-11570). |
|
|
|
|
|
|
|
10.6 |
|
|
Stock Appreciation Rights Agreement, entered into effective as of April
21, 2009, between Allied Healthcare International Inc. and Alexander
Young (incorporated by reference to Exhibit 10.1 of our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2009; File No.
001-11570). |
|
|
|
|
|
|
|
11 |
|
|
Statement re: computation of earnings per share (computation can be
determined clearly from the material contained in this Annual Report on
Form 10-K). |
|
|
|
|
|
|
|
14.1 |
|
|
Allied Healthcare International Inc. Code of Conduct (incorporated
herein by reference to Exhibit 14 to our Form 10-K for the fiscal year
ended September 30, 2003; File No. 001-11570). |
|
|
|
|
|
|
|
14.2 |
|
|
Allied Healthcare International Inc. Supplemental Code of Conduct
(incorporated herein by reference to Exhibit 14.2 to our Form 10-K for
the fiscal year ended September 30, 2009; File No. 001-11570). |
- 91 -
|
|
|
|
|
Exhibit |
|
|
Number |
|
Title |
|
|
|
21
|
(1) |
|
Subsidiaries of Allied Healthcare International Inc. |
|
|
|
23
|
(1) |
|
Consent of EisnerAmper LLP, independent registered public accounting
firm of Allied Healthcare International Inc. |
|
|
|
31.1
|
(1) |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
|
|
|
31.2
|
(1) |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
|
|
|
32.1
|
(1) |
|
Section 1350 Certification of Chief Executive Officer. |
|
|
|
32.2
|
(1) |
|
Section 1350 Certification of Chief Financial Officer. |
- 92 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
ALLIED HEALTHCARE INTERNATIONAL INC.
|
|
|
By: |
/s/ Sandy Young |
|
|
|
Name: |
Sandy Young |
|
|
|
Title: |
Chief Executive Officer |
|
|
Dated: December 14, 2010
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Sandy Young, Paul Weston
and Marvet Abbassi, and each of them, his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him or her and in his or her name, place and
stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form
10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and thing requisite and
necessary to be done to effectuate the intent and purpose of this paragraph, as fully as he or she
might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his or her substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
/s/ Sandy Young
|
|
Chief Executive Officer and Director
|
|
December 14, 2010 |
|
|
|
|
|
Sandy Young
|
|
(principal executive officer) |
|
|
|
|
|
|
|
|
|
Chief Financial Officer
|
|
December 14, 2010 |
Paul Weston
|
|
(principal financial and accounting officer) |
|
|
|
|
|
|
|
/s/ Sophia Corona |
|
Director
|
|
December 14, 2010 |
|
|
|
|
|
Sophia Corona
|
|
|
|
|
|
|
|
|
|
/s/ Mark Hanley |
|
Director
|
|
December 13, 2010 |
|
|
|
|
|
Mark Hanley
|
|
|
|
|
- 93 -
|
|
|
|
|
/s/ Wayne Palladino |
|
Director
|
|
December 14, 2010 |
|
|
|
|
|
Wayne Palladino
|
|
|
|
|
|
|
|
|
|
/s/ Jeffrey S. Peris
|
|
Director
|
|
December 8, 2010 |
|
|
|
|
|
Jeffrey S. Peris |
|
|
|
|
|
|
|
|
|
/s/ Raymond J. Playford
|
|
Director
|
|
December 8, 2010 |
|
|
|
|
|
Raymond J. Playford |
|
|
|
|
|
|
|
|
|
/s/ Ann Thornburg |
|
Director
|
|
December 13, 2010 |
|
|
|
|
|
Ann Thornburg
|
|
- 94 -
ALLIED HEALTHCARE INTERNATIONAL INC.
|
|
|
|
|
Index to Consolidated Financial Statements |
|
Page |
|
|
|
|
|
|
|
|
|
F-1 |
|
|
|
|
|
|
|
|
|
F-3 |
|
|
|
|
|
|
|
|
|
F-4 |
|
|
|
|
|
|
|
|
|
F-5 |
|
|
|
|
|
|
|
|
|
F-6 |
|
|
|
|
|
|
|
|
|
F-7 |
|
|
|
|
|
|
Index to Consolidated Financial Statement Schedules |
|
|
|
|
|
|
|
|
|
|
|
|
S-1 |
|
F-i
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Allied Healthcare International Inc.
We have audited the accompanying consolidated balance sheets of Allied Healthcare International
Inc. and subsidiaries (the Company) as of September 30, 2010 and 2009, and the related
consolidated statements of operations, changes in shareholders equity and cash flows for each of
the years in the three-year period ended September 30, 2010. Our audits also included the financial
statement schedule listed in the index at Item 15. These financial statements and schedule are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Allied Healthcare International Inc. and
subsidiaries as of September 30, 2010 and 2009, and the consolidated results of their operations
and their consolidated cash flows for each of the years in the three-year period ended September
30, 2010, in conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the financial statement schedule referred to above, when considered
in relation to the consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, effective October 1, 2009, the
Company adopted revised guidance relating to accounting and reporting
for business combinations and
noncontrolling interests in a subsidiary.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Allied Healthcare International Inc.s internal control over financial
reporting as of September 30, 2010, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated December 13, 2010 expressed an unqualified opinion thereon.
/s/ EisnerAmper LLP
New York, New York
December 13, 2010
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Allied Healthcare International Inc.
We have audited the internal control over financial reporting of Allied Healthcare International
Inc. and subsidiaries (the Company) as of September 30, 2010, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Companys management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Report of Management on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A companys internal
control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of the effectiveness to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of September 30, 2010, based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Allied Healthcare International Inc. and
subsidiaries as of September 30, 2010 and 2009, and the related consolidated statements of
operations, changes in shareholders equity, and cash flows and financial statement schedule listed
in the Index at Item 15 for each of the years in the three-year period ended September 30, 2010,
and our report dated December 13, 2010 expressed an unqualified opinion on those consolidated
financial statements and includes an explanatory paragraph regarding the Companys adoption of
revised accounting guidance related to business combinations and noncontrolling interests.
/s/ EisnerAmper LLP
New York, New York
December 13, 2010
F-2
ALLIED HEALTHCARE INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
39,031 |
|
|
$ |
35,273 |
|
Accounts receivable, less allowance for doubtful
accounts of $732 and $839, respectively |
|
|
20,092 |
|
|
|
19,594 |
|
Unbilled accounts receivable |
|
|
13,393 |
|
|
|
11,572 |
|
Deferred income taxes |
|
|
552 |
|
|
|
389 |
|
Prepaid expenses and other assets |
|
|
1,943 |
|
|
|
1,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
75,011 |
|
|
|
68,016 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
8,924 |
|
|
|
7,756 |
|
Goodwill |
|
|
102,945 |
|
|
|
95,649 |
|
Other intangible assets, net |
|
|
3,501 |
|
|
|
1,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
190,381 |
|
|
$ |
173,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,581 |
|
|
$ |
1,186 |
|
Current maturities of debt and capital leases |
|
|
614 |
|
|
|
|
|
Accrued expenses, inclusive of payroll and related expenses |
|
|
25,897 |
|
|
|
24,304 |
|
Taxes payable |
|
|
2,310 |
|
|
|
201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
30,402 |
|
|
|
25,691 |
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital leases, net of current maturities |
|
|
389 |
|
|
|
|
|
Deferred income taxes |
|
|
1,534 |
|
|
|
103 |
|
Other long-term liabilities |
|
|
308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
32,633 |
|
|
|
25,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest (Note 3) |
|
|
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 45,571 shares, respectively |
|
|
457 |
|
|
|
456 |
|
Additional paid-in capital |
|
|
242,478 |
|
|
|
241,555 |
|
Accumulated other comprehensive loss |
|
|
(15,267 |
) |
|
|
(14,418 |
) |
Accumulated deficit |
|
|
(68,158 |
) |
|
|
(78,026 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159,510 |
|
|
|
149,567 |
|
Less cost of treasury stock (2,150 and 585 shares, respectively) |
|
|
(6,120 |
) |
|
|
(2,294 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
153,390 |
|
|
|
147,273 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
190,381 |
|
|
$ |
173,067 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
ALLIED HEALTHCARE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Net patient services |
|
$ |
271,079 |
|
|
$ |
249,810 |
|
|
$ |
298,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Patient services |
|
|
188,774 |
|
|
|
173,462 |
|
|
|
208,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
82,305 |
|
|
|
76,348 |
|
|
|
90,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
68,846 |
|
|
|
63,234 |
|
|
|
77,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
13,459 |
|
|
|
13,114 |
|
|
|
12,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
361 |
|
|
|
537 |
|
|
|
935 |
|
Interest expense |
|
|
(30 |
) |
|
|
(110 |
) |
|
|
(542 |
) |
Foreign exchange loss |
|
|
(210 |
) |
|
|
(197 |
) |
|
|
(586 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and discontinued operations |
|
|
13,580 |
|
|
|
13,344 |
|
|
|
12,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
3,524 |
|
|
|
3,408 |
|
|
|
3,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
10,056 |
|
|
|
9,936 |
|
|
|
8,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of taxes |
|
|
|
|
|
|
367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
10,056 |
|
|
|
10,303 |
|
|
|
8,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interest |
|
|
(188 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Allied Healthcare International Inc. |
|
$ |
9,868 |
|
|
$ |
10,303 |
|
|
$ |
8,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts attributable to Allied Healthcare International Inc.: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax |
|
$ |
9,868 |
|
|
$ |
9,936 |
|
|
$ |
8,786 |
|
Discontinued operations, net of tax |
|
|
|
|
|
|
367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,868 |
|
|
$ |
10,303 |
|
|
$ |
8,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share attributable to Allied Healthcare
International Inc. common shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.22 |
|
|
$ |
0.22 |
|
|
$ |
0.20 |
|
Income from discontinued operations |
|
|
|
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Allied Healthcare International
Inc. common shareholders |
|
$ |
0.22 |
|
|
$ |
0.23 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share attributable to Allied Healthcare
International Inc. common shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.22 |
|
|
$ |
0.22 |
|
|
$ |
0.19 |
|
Income from discontinued operations |
|
|
|
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Allied Healthcare International
Inc. common shareholders |
|
$ |
0.22 |
|
|
$ |
0.23 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
44,796 |
|
|
|
44,986 |
|
|
|
44,986 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
45,009 |
|
|
|
45,011 |
|
|
|
45,078 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-4
ALLIED HEALTHCARE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Other |
|
|
Retained |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Comprehensive |
|
|
(Deficit) |
|
|
Treasury |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
(Loss) Income |
|
|
Earnings |
|
|
Shares |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2007 |
|
|
45,571 |
|
|
$ |
456 |
|
|
$ |
240,206 |
|
|
$ |
18,018 |
|
|
$ |
(97,627 |
) |
|
$ |
(2,294 |
) |
|
$ |
158,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,786 |
|
|
|
|
|
|
|
8,786 |
|
Foreign currency translation adjustment, net of taxes of $(1,747) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,199 |
) |
|
|
|
|
|
|
|
|
|
|
(16,199 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,413 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of guidance for uncertainty in income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
512 |
|
|
|
|
|
|
|
512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation |
|
|
|
|
|
|
|
|
|
|
812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2008 |
|
|
45,571 |
|
|
$ |
456 |
|
|
$ |
241,018 |
|
|
$ |
1,819 |
|
|
$ |
(88,329 |
) |
|
$ |
(2,294 |
) |
|
$ |
152,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,303 |
|
|
|
|
|
|
|
10,303 |
|
Foreign currency translation adjustment, net of taxes of $(2,057) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,237 |
) |
|
|
|
|
|
|
|
|
|
|
(16,237 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,934 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation |
|
|
|
|
|
|
|
|
|
|
537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2009 |
|
|
45,571 |
|
|
$ |
456 |
|
|
$ |
241,555 |
|
|
$ |
(14,418 |
) |
|
$ |
(78,026 |
) |
|
$ |
(2,294 |
) |
|
$ |
147,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,868 |
|
|
|
|
|
|
|
9,868 |
|
Foreign currency translation adjustment, net of taxes of $(31) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(849 |
) |
|
|
|
|
|
|
|
|
|
|
(849 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of treasury shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,826 |
) |
|
|
(3,826 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises |
|
|
150 |
|
|
|
1 |
|
|
|
287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation |
|
|
|
|
|
|
|
|
|
|
636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010 |
|
|
45,721 |
|
|
$ |
457 |
|
|
$ |
242,478 |
|
|
$ |
(15,267 |
) |
|
$ |
(68,158 |
) |
|
$ |
(6,120 |
) |
|
$ |
153,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
ALLIED HEALTHCARE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
10,056 |
|
|
$ |
10,303 |
|
|
$ |
8,786 |
|
Adjustments to reconcile net income to net
cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
|
|
|
|
(367 |
) |
|
|
|
|
Depreciation and amortization |
|
|
3,108 |
|
|
|
2,590 |
|
|
|
3,231 |
|
Amortization of intangible assets |
|
|
1,324 |
|
|
|
1,252 |
|
|
|
1,634 |
|
Foreign exchange (gain) loss |
|
|
(43 |
) |
|
|
7 |
|
|
|
|
|
Increase (decrease) in provision for allowance for doubtful accounts |
|
|
30 |
|
|
|
360 |
|
|
|
(167 |
) |
Loss on sale of fixed assets |
|
|
31 |
|
|
|
20 |
|
|
|
166 |
|
Stock based compensation |
|
|
636 |
|
|
|
537 |
|
|
|
812 |
|
Deferred income taxes |
|
|
61 |
|
|
|
117 |
|
|
|
88 |
|
Changes in operating assets and liabilities, excluding
the effect of businesses acquired and sold: |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable |
|
|
82 |
|
|
|
(4,281 |
) |
|
|
1,579 |
|
(Increase) decrease in prepaid expenses and other assets |
|
|
(1,544 |
) |
|
|
2,318 |
|
|
|
(3,488 |
) |
Increase (decrease) in accounts payable and other liabilities |
|
|
2,260 |
|
|
|
2,867 |
|
|
|
(3,779 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operations |
|
|
16,001 |
|
|
|
15,723 |
|
|
|
8,862 |
|
Net cash used in discontinued operations |
|
|
|
|
|
|
|
|
|
|
(561 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
16,001 |
|
|
|
15,723 |
|
|
|
8,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(2,768 |
) |
|
|
(2,850 |
) |
|
|
(3,344 |
) |
Acquisition of controlling interest, net of cash acquired |
|
|
(5,680 |
) |
|
|
|
|
|
|
|
|
Proceeds from sale of business held in escrow and designated for debt repayment |
|
|
|
|
|
|
116 |
|
|
|
53,638 |
|
Proceeds from sale of property and equipment |
|
|
73 |
|
|
|
1 |
|
|
|
50 |
|
Payments on acquisitions payable |
|
|
|
|
|
|
(1,082 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(8,375 |
) |
|
|
(3,815 |
) |
|
|
50,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of debt and capital lease obligations |
|
|
(152 |
) |
|
|
|
|
|
|
|
|
Payments under revolving loan, net |
|
|
|
|
|
|
|
|
|
|
(24,664 |
) |
Borrowings (payments) under invoice discounting facility, net |
|
|
255 |
|
|
|
|
|
|
|
(4,458 |
) |
Principal payments on long-term debt |
|
|
|
|
|
|
|
|
|
|
(23,678 |
) |
Proceeds from sale of interest rate swap agreements |
|
|
|
|
|
|
|
|
|
|
617 |
|
Treasury shares acquired |
|
|
(3,826 |
) |
|
|
|
|
|
|
|
|
Stock options exercised |
|
|
288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(3,435 |
) |
|
|
|
|
|
|
(52,183 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash |
|
|
(433 |
) |
|
|
(2,834 |
) |
|
|
(504 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash |
|
|
3,758 |
|
|
|
9,074 |
|
|
|
5,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year |
|
|
35,273 |
|
|
|
26,199 |
|
|
|
20,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
39,031 |
|
|
$ |
35,273 |
|
|
$ |
26,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
30 |
|
|
$ |
405 |
|
|
$ |
1,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes, net |
|
$ |
1,459 |
|
|
$ |
1,102 |
|
|
$ |
4,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures included in accrued expenses and other long-term liabilities |
|
$ |
609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details of business acquired in purchase transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired |
|
$ |
12,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed or incurred |
|
$ |
2,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest |
|
$ |
3,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions |
|
$ |
5,716 |
|
|
|
|
|
|
|
|
|
Cash acquired |
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash paid for acquisitions |
|
$ |
5,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-6
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements
1. Business and Operations:
Allied Healthcare International Inc. and its subsidiaries (the Company) is a provider of
flexible, or temporary, healthcare staffing services to the United Kingdom (U.K.) healthcare and
social care (often referred to as domiciliary care) industry. The Company was incorporated in New
York in 1981. The 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. The Company maintains a listing of approximately 12,000 homecare aides, nurses and nurses
aides. During fiscal 2010, the Company generally placed an average of 8,000 individuals each week
with its customers.
In May 2010 the Company acquired a 50.1% shareholding in a group of businesses commonly known
as Homecare Independent Living Group (the HILG) which has operations in Ireland. 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. The
results of these acquired businesses are reflected in our consolidated results as of the
acquisition date. See Note 3 for details of acquisition transaction.
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 recent acquisition in Ireland 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 our branches are aggregated into
one reportable segment.
2. Summary of Significant Accounting Policies:
Basis of Accounting and Principles of Consolidation:
The accompanying consolidated financial statements of the Company are prepared on the accrual
basis of accounting in accordance with accounting principles generally accepted in the United
States of America (U.S.). All intercompany accounts and transactions are eliminated in
consolidation.
Cash and Cash Equivalents:
Cash and cash equivalents include highly liquid short-term investments purchased with
initial maturities of 90 days or less.
F-7
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
Stock-Based Compensation:
The Company accounts for stock-based compensation in accordance with the Financial Accounting
Standards Board (the FASB) guidance for stock-based compensation which requires companies to
measure, at the grant date, and recognize in the financial statements compensation expense for all
share-based payments at fair value over the requisite service period. The Company generally
recognizes compensation expense on a straight-line basis over the requisite service period for its
employee and director share-based compensation plan.
Accounts Receivable:
The Company maintains a cash management program that focuses on the reimbursement function, as
growth in accounts receivable has been the main operating use of cash historically. At September
30, 2010 and September 30, 2009, $20.1 million (10.6%) and $19.6 million (11.3%), respectively, of
the Companys total assets consisted of accounts receivable.
The Company maintains credit controls to ensure cash collection on a timely basis. The credit
terms agreed with the Companys customers range from 7 days to a maximum of 30 days from invoice
date. The Company has devised a provisioning methodology based on its customer profile and
historical credit risk across its U.K. business. Accounts receivable are written off when the
credit control department determines the amount is no longer collectible. Each fiscal year the
Company undertakes a review of its methodology and procedure for reserving for its doubtful
accounts. This process also takes into account the Companys actual experience of write offs in
the period. The policy is applied at each quarter end to arrive at a closing reserve for doubtful
accounts.
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.
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 impact on the Companys consolidated financial position or results of operations.
F-8
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
Goodwill and Other Intangible Assets:
Goodwill and other intangible assets deemed to have indefinite lives are carried at cost, and
are subject to annual impairment tests. Other intangible assets are carried at cost, net of
accumulated amortization. The Company completed its annual impairment test during the fourth
quarter of fiscal 2010 and determined there was no impairment to its recorded goodwill balance.
The Company does not have other intangible assets with indefinite lives.
The following table presents the changes in the carrying amount of goodwill for the years
ended September 30, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
Accumulated |
|
|
|
|
|
|
Pre Impairment |
|
|
Impairment |
|
|
|
|
|
|
Losses |
|
|
Losses |
|
|
Goodwill |
|
Balance at October 1, 2008 |
|
$ |
220,304 |
|
|
$ |
(111,012 |
) |
|
$ |
109,292 |
|
Foreign exchange effect |
|
|
(27,024 |
) |
|
|
13,761 |
|
|
|
(13,263 |
) |
Acquisitions payable adjustment |
|
|
(380 |
) |
|
|
|
|
|
|
(380 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009 |
|
$ |
192,900 |
|
|
$ |
(97,251 |
) |
|
$ |
95,649 |
|
Goodwill acquired during the
year |
|
|
7,424 |
|
|
|
|
|
|
|
7,424 |
|
Foreign exchange effect |
|
|
(818 |
) |
|
|
690 |
|
|
|
(128 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010 |
|
$ |
199,506 |
|
|
$ |
(96,561 |
) |
|
$ |
102,945 |
|
|
|
|
|
|
|
|
|
|
|
In the fourth quarter of fiscal 2009, the Company negotiated a final settlement with the
owner of a previously acquired entity relating to its contingent consideration acquisitions payable
which resulted in a $0.4 million adjustment to goodwill. Of the $102.9 million goodwill balance at
September 30, 2010, approximately $5.0 million is deductible for U.K. income tax purposes.
Intangible assets subject to amortization are being amortized on the straight-line method and
consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-9
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
|
Range |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
Of Lives |
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
|
(Years) |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Customer relationships |
|
|
5 12 |
|
|
$ |
8,502 |
|
|
$ |
6,856 |
|
|
$ |
1,646 |
|
Trade names |
|
|
3 |
|
|
|
164 |
|
|
|
164 |
|
|
|
|
|
Non-compete agreements |
|
|
2 3 |
|
|
|
192 |
|
|
|
192 |
|
|
|
|
|
Favorable leasehold interests |
|
|
2 5 |
|
|
|
8 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
8,866 |
|
|
$ |
7,220 |
|
|
$ |
1,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for other intangible assets subject to amortization was $1.3
million, $1.3 million and $1.6 million for the years ended September 30, 2010, 2009 and 2008,
respectively. At September 30, 2010, estimated future amortization expense of other intangible
assets still subject to amortization for the succeeding fiscal years is as follows:
|
|
|
|
|
2011 |
|
$ |
919 |
|
2012 |
|
|
612 |
|
2013 |
|
|
610 |
|
2014 |
|
|
371 |
|
2015 |
|
|
67 |
|
Thereafter |
|
|
922 |
|
|
|
|
|
|
|
$ |
3,501 |
|
|
|
|
|
The change in the net carrying amount at September 30, 2010 is due to other intangible
assets acquired during the year, amortization expense and the foreign exchange effect.
Income Taxes:
The Company accounts 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 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. At September 30, 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.
F-10
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
The Company recognizes a 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 are measured based on the largest benefit that has a greater than
fifty percent likelihood of being realized upon ultimate settlement. As of September 30, 2010,
the Company has not recorded any unrecognized tax benefits, which remains unchanged from September
30, 2009.
Revenue Recognition:
Patient services are recognized when services are performed and substantiated by proper
documentation. For patient services, which are billed at fixed rates, revenue is mainly recognized
upon completion of timesheets that also require the signature of the recipient of services and
through electronic call monitoring. Unbilled accounts receivable represents amounts due for
services performed, but not billed as of the balance sheet date. At September 30, 2010 and 2009,
the Company had $13.4 million and $11.6 million, respectively in unbilled accounts receivable.
The Company receives a majority of its revenue from the local governmental social service or
health and social care service departments and the National Health Services (the NHS) payors.
For the years ended September 30, 2010, 2009 and 2008, 83.3%, 75.0% and 69.0%, respectively, of the
Companys net revenues were attributable to the U.K. local governmental social service departments
and the NHS payor programs.
Advertising Costs:
Advertising costs are expensed as incurred. Advertising expense for the fiscal years ended
September 30, 2010, 2009 and 2008 was $0.2 million, $0.4 million and $0.8 million, respectively.
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 September 30, 2010, 2009 and 2008, the Company had outstanding stock options
(including performance-based stock options) and warrants to purchase 2.2 million, 1.9 million and
2.2 million shares, respectively, of common stock ranging in exercise price from $2.11 to $6.20,
$2.01 to $6.20, and $2.01 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 stock
appreciation rights (the SARs) issued to the Chief Executive Officer (the CEO), as further
described in Note 9, have not been included in the computation of diluted EPS at September 30,
2010.
F-11
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
The
weighted average number of common shares used in the basic and diluted earnings per share
computations for the years ended September 30, 2010, 2009 and 2008 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Weighted average number of common shares outstanding
as used in computation of basic EPS of common stock |
|
|
44,796 |
|
|
|
44,986 |
|
|
|
44,986 |
|
Effect of dilutive securities stock options and warrants |
|
|
213 |
|
|
|
25 |
|
|
|
92 |
|
|
|
|
|
|
|
|
|
|
|
Shares used in computation of diluted EPS of common stock |
|
|
45,009 |
|
|
|
45,011 |
|
|
|
45,078 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss):
Components of comprehensive income (loss) include net income and all other non-owner changes
in equity, such as the change in the cumulative translation adjustment, which is the only item of
other comprehensive income (loss) impacting the Company. The translation of the financial
statements of the Companys U.K. operations is impacted by fluctuation in foreign currency exchange
rates. The following table displays comprehensive income (loss) for the years ended September 30,
2010, 2009 and 2008 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Net income |
|
$ |
10,056 |
|
|
$ |
10,303 |
|
|
$ |
8,786 |
|
Change in cumulative translation adjustment |
|
|
(567 |
) |
|
|
(16,237 |
) |
|
|
(16,199 |
) |
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss), net of income
taxes |
|
|
9,489 |
|
|
|
(5,934 |
) |
|
|
(7,413 |
) |
Comprehensive income attributable to the
noncontrolling interest |
|
|
(470 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable
to the Company |
|
$ |
9,019 |
|
|
$ |
(5,934 |
) |
|
$ |
(7,413 |
) |
|
|
|
|
|
|
|
|
|
|
F-12
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
Impairment of Long-Lived Assets:
Long-lived assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. If the sum of the undiscounted future
cash flows is less than the carrying amount of the asset, a loss is recognized for the difference
between the fair value (discounted future cash flows) and carrying value of the asset. Impairment
loss on assets to be sold, if any, is based on the estimated proceeds to be received, less
estimated costs to sell.
Foreign Currency Translation:
Assets and liabilities of foreign subsidiaries whose functional currency is other than the
U.S. dollar are translated to U.S. dollars using the exchange rates in effect at the balance sheet
date. Results of operations are translated using weighted average exchange rates during the period.
Adjustments resulting from the translation process are included as a separate component of
accumulated other comprehensive income (loss) included in shareholders equity.
Fair Value of Financial Instruments:
Cash, accounts receivable, unbilled accounts receivable, accounts payable, current maturities
of debt and capital leases, accrued expenses and taxes payable approximate fair value due to the
short-term maturity of those instruments. 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
$0.4 million at September 30, 2010. The fair values were estimated using a discounted cash flow
analysis.
Concentrations of Credit Risk:
Financial instruments which potentially subject the Company to concentrations of credit risk
are cash equivalents and accounts receivable. The Company places its cash equivalents with various
financial institutions. The Company believes no significant concentration of credit risk exists
with respect to these cash equivalents.
The Company grants credit without collateral to its patients. The Company maintains an
allowance for doubtful accounts based on the expected collectability of accounts receivable. At
September 30, 2010 and 2009, 78.2% and 76.0%, respectively, of accounts receivable was due from
governmental local social service or health and social care service departments and the NHS payors
with the balance due from various other third-party payors and self-pay patients (none of which
comprise greater than 10% of the balance).
F-13
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
Use of Managements Estimates:
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles (GAAP) requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Estimates are used for, but not limited
to, the accounting for allowance for doubtful accounts, contingencies, accrued expenses, and
determination of impairment, depreciation and amortization.
Recent Accounting Pronouncements:
Noncontrolling Interests. In December 2007, the FASB issued a standard which establishes
accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity in the consolidated
financial statements. Effective October 1, 2009, the Company adopted this standard, at which date
it did not have any impact on the Companys consolidated financial position and results of
operations. However, as a result of the acquisition of HILG completed in the third quarter of
fiscal 2010, the consolidated financial position and results of operations were impacted to reflect
the new presentation for noncontrolling interest.
Business Combinations. In December 2007, the FASB issued a standard which establishes
principles and requirements for how the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree. This standard also provides guidance for recognizing and
measuring the goodwill acquired in the business combination, requires that acquisition costs be
expensed and determines what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. Effective October 1, 2009,
the Company adopted this standard, at which date it did not have any impact on the Companys
consolidated financial position and results of operations. However, as a result of the acquisition
of HILG completed in the third quarter of fiscal 2010, the consolidated financial position and
results of operations were impacted to reflect the requirements of this standard.
Disclosures about Derivative Instruments and Hedging Activities. In March 2008, the FASB
issued a standard which enhances required disclosures regarding derivative instruments and hedging
activities, including enhanced disclosure regarding how and why an entity uses derivative
instruments, how derivative instruments and related hedged items are accounted for, and how
derivative instruments and related hedged items affect an entitys financial position, financial
performance and cash flows. Effective October 1, 2009, the Company adopted this standard, which
did not have any impact on the Companys consolidated financial position and results of operations.
F-14
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
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. This standard is effective for the Company in fiscal year beginning October 1, 2010 and is
not expected to have an 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. This standard is effective
for the Company in fiscal year beginning October 1, 2010 and is not expected to have an 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. This standard is
effective for the Company in fiscal year beginning October 1, 2010 and is not expected to have a
material impact on the Companys consolidated financial position and results of operations.
Subsequent Events. In February 2010, the FASB amended its authoritative guidance related to
subsequent events to alleviate potential conflicts with current SEC guidance. Effective upon
issuance, these amendments removed the requirement that an SEC filer disclose the date through
which it has evaluated subsequent events. The adoption of this new guidance did not have any impact
on the Companys consolidated financial position and results of operations.
F-15
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
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.
3. Business Combinations and Dispositions:
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. This 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 ($12.1 million at the closing exchange
rate at September 30, 2010). The maximum amount payable by the Company for 100% of the HILG
business will be £11.2 million ($17.7 million at the closing exchange rate at September 30, 2010)
and is subject to HILG achieving certain annual earnings before interest, taxes, depreciation and
amortization targets.
HILG is a leading provider of homecare to the elderly, physically disabled and mentally
disabled with four operating divisions in Northern Ireland and an increasing presence in the
Republic of Ireland. This acquisition gives the Company a market-leading position in Northern
Ireland as well as a strategic footprint in the Republic of Ireland market. Both are new
territories for the Company with what management believes to be a good growth potential. 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 expected to be deductible for
income tax purposes.
F-16
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
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 December 31, 2010.
|
|
|
|
|
(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. |
For the fiscal year end September 30, 2010, acquisition-related costs of $0.5 million related
to the acquisition of HILG are included in selling, general, and administrative expenses in the
Companys statement of operations.
The fair value of the noncontrolling interest in HILG, a private company, was estimated by
using the observed transaction relating to a controlling interest which occurred as of the
measurement date. The fair value measurement is based on significant inputs that are not observable
in the market and thus represents a Level 3 measurement. Key assumptions include (i) an estimated
discount to
F-17
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
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 (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 |
|
|
|
|
|
The pro forma results of operations and related per share information for this acquisition
have not been presented as the amounts are considered immaterial.
Dispositions:
In fiscal 2007, the Company disposed of two of its U.K. subsidiaries when it sold the shares
of Allied Respiratory Limited and Medigas Limited. These two subsidiaries constituted the
Companys respiratory therapy division, which supplied medical-grade oxygen for use in respiratory
therapy to pharmacies in the U.K., oxygen concentrators to customers in Northern Ireland and oxygen
services to customers in the South East of England. The Company has accounted for its respiratory
therapy segment as a discontinued operation.
In fiscal 2009, discontinued operations resulted in income, net of tax, of $0.4 million due to
the reversal of accrued refunds payable and accrued patient electric usage reimbursement as the
warranty period under the sales agreement covering these costs had expired.
F-18
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
4. Property and Equipment:
Major classes of property and equipment, net, consist of the following at September 30 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Furniture, fixtures and equipment (including software) |
|
$ |
19,331 |
|
|
$ |
16,448 |
|
Leasehold improvements |
|
|
1,268 |
|
|
|
1,036 |
|
Vehicles |
|
|
737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,336 |
|
|
|
17,484 |
|
Less, accumulated depreciation and amortization |
|
|
12,412 |
|
|
|
9,728 |
|
|
|
|
|
|
|
|
|
|
$ |
8,924 |
|
|
$ |
7,756 |
|
|
|
|
|
|
|
|
Included in property and equipment, net, is $1.0 million of fixed assets acquired in the HILG
acquisition in fiscal 2010. In fiscal 2009, the Company wrote-off fully depreciated property and
equipment of approximately $8.9 million due to obsolescence. Depreciation and amortization of
property and equipment for the years ended September 30, 2010, 2009 and 2008 were $3.1 million,
$2.6 million and $3.2 million, respectively.
5. Accrued Expenses:
Accrued expenses consist of the following at September 30 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Payroll and related expenses |
|
$ |
20,112 |
|
|
$ |
19,750 |
|
Professional fees |
|
|
1,383 |
|
|
|
1,087 |
|
Refunds payable |
|
|
1,129 |
|
|
|
1,024 |
|
Other |
|
|
3,273 |
|
|
|
2,443 |
|
|
|
|
|
|
|
|
|
|
$ |
25,897 |
|
|
$ |
24,304 |
|
|
|
|
|
|
|
|
6. Debt:
In connection with the Companys acquisition of HILG, the Company assumed debt related to two
invoice discounting facilities and bank loan for the funding of capital expenditures. The invoice
discounting facilities provide for available funds of up to $1.5 million (at the closing exchange
rate at September 30, 2010) that mature in April and June of 2011. The loans bear interest at
rates equal to LIBOR plus 2.0% with a minimum of 4.0% per annum. As of September 30, 2010, the
Company had outstanding borrowings of $0.3 million under the invoice discounting facilities and
bank loan that bore interest at rates ranging from 4.0% to 4.7%.
F-19
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
In the fourth quarter of fiscal 2004, the Companys U.K. subsidiary, Allied Healthcare
Group Holdings Limited (Allied Holdings) obtained a senior credit facility, which was
amended in the first quarter of fiscal 2007 to provide for additional facilities. The facility
consisted of a term loan A, revolving loan B1, invoice discounting facility B2 and revolving loan
C. In the first quarter of fiscal 2008, Allied Holdings prepaid the amounts outstanding under the
term loan A and the term loan B1 facilities from the proceeds of sale of the respiratory therapy
division in fiscal 2007. Allied Holdings also cancelled term loan A, term loan B1 and revolving
loan C in the first quarter of fiscal 2008. Allied Holdings had retained the £7.5 million ($12.4
million) invoice discounting facility B2. In the second quarter of fiscal 2008, the Company agreed
with the bank to suspend the availability of its invoice discount facility and to have the right to
reinstate availability upon nine weeks notice. As the Company did not anticipate reinstating the
invoice discount facility it had recognized interest costs of $0.4 million for bank fees in the
third quarter of fiscal 2008. In the third quarter of fiscal 2009, the Company cancelled the
invoice discounting facility B2, thus terminating the senior credit facility.
Guarantees. The senior credit facility was secured by a first priority lien on the assets of
Allied Holdings and certain of its subsidiaries. Together with Allied Holdings and certain of its
subsidiaries, the Company had guaranteed the debt and other obligations of certain wholly-owned
U.K. subsidiaries under the senior credit facility. In conjunction with the amendment to the
senior credit facility, the Company had granted the senior lenders a security interest in
substantially all of its assets to secure the payment of its guarantee. In the third quarter of
fiscal 2009 the Company terminated its senior credit facility and the liens and guarantees under
such facility have since been released.
Financial Instruments. In February 2005, the Company entered into two interest rate swap
agreements, which would have expired in July 2009, the objective of which was to protect the
Company against the potential rising of interest rates on its floating rate debt. The interest
rate under the swap agreements was fixed at 4.935% and was payable semi-annually. In October 2007,
the Company prepaid the amounts outstanding under its term loan A and term loan B1 and sold the
related interest rate swaps for $0.6 million.
7. Shareholders Equity:
In January 2001, the Company initiated a stock repurchase program, whereby it was authorized
to purchase up to approximately $1.0 million of its outstanding shares of common stock in
open-market transactions or in privately-negotiated transactions. In May 2003, the Company
initiated a second stock repurchase program, pursuant to which it was authorized to purchase up to
an additional $3.0 million of its outstanding shares of common stock in open-market transactions or
in privately-negotiated transactions. In May 2010, these two stock repurchase programs were
terminated and the Company initiated a new stock repurchase program,
F-20
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
whereby it may purchase up to
approximately $10 million of its outstanding shares of common stock in open-market transactions or
in privately-negotiated transactions. For the year
ended September 30, 2010, the Company purchased 1.6 million shares for an aggregate purchase
price of $3.8 million under its May 2010 stock repurchase program. As of September 30, 2010, the
Company had acquired 2.0 million shares of its common stock for an aggregate purchase price of $5.1
million pursuant to its stock repurchase programs, which are reflected as treasury stock in the
Companys Consolidated Balance Sheet at September 30, 2010. In addition, as of September 30, 2010,
the Company had acquired 0.2 million shares of its common stock for an aggregate value of $1.0
million from certain of its former executive officers. Such shares were acquired in fiscal 2004
and delivered to the Company as payment on promissory notes issued by the Company to them.
In April 2009, the Company adopted a shareholder rights plan pursuant to which each share of
its outstanding common stock is accompanied by one preferred share purchase right. The shareholder
rights plan was ratified by the Companys shareholders at the 2010 annual meeting of shareholders.
The rights generally will not become exercisable until a person or group acquires 20% or more of
the Companys common stock in a transaction that is not approved in advance by its Board of
Directors. In that event, each right will entitle the holder, other than the unapproved acquirer
and its affiliates, upon exercise of the right to acquire from the Company shares of Company common
stock having a value equal to two times the exercise price. The Companys Board of Directors may
redeem the rights for a nominal amount at any time prior to ten days after a person or group
announces that it has acquired 20% or more of the Companys common stock. If not redeemed by the
Board, the rights will expire on April 1, 2019.
8. Income Taxes:
The provision for income taxes from continuing operations for the years ended September 30,
2010, 2009, and 2008 is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
31 |
|
|
$ |
26 |
|
|
$ |
8 |
|
Foreign |
|
|
3,432 |
|
|
|
3,265 |
|
|
|
3,655 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
61 |
|
|
|
117 |
|
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
3,524 |
|
|
$ |
3,408 |
|
|
$ |
3,751 |
|
|
|
|
|
|
|
|
|
|
|
F-21
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
Deferred income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities recorded for financial reporting purposes and the
amounts used for income tax purposes. Significant components of the Companys deferred tax assets
and liabilities as of September 30, 2010 and 2009 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Accrued expenses |
|
$ |
563 |
|
|
$ |
380 |
|
Federal net operating loss carryforward |
|
|
23,943 |
|
|
|
24,468 |
|
State net operating loss carryforward |
|
|
8,356 |
|
|
|
8,532 |
|
Provision for doubtful accounts |
|
|
116 |
|
|
|
85 |
|
Depreciation |
|
|
622 |
|
|
|
928 |
|
Stock Options |
|
|
623 |
|
|
|
471 |
|
Other |
|
|
89 |
|
|
|
150 |
|
|
|
|
|
|
|
|
Gross deferred tax assets |
|
|
34,312 |
|
|
|
35,014 |
|
Valuation allowance |
|
|
(33,035 |
) |
|
|
(33,538 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
1,277 |
|
|
|
1,476 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Intangible assets |
|
|
(2,158 |
) |
|
|
(1,190 |
) |
Other |
|
|
(101 |
) |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
(2,259 |
) |
|
|
(1,190 |
) |
|
|
|
|
|
|
|
Net deferred tax (liability) asset |
|
$ |
(982 |
) |
|
$ |
286 |
|
|
|
|
|
|
|
|
Classification of Deferred Taxes: |
|
|
|
|
|
|
|
|
Current Deferred Tax Assets |
|
$ |
552 |
|
|
$ |
389 |
|
Long-Term Deferred Tax Liabilities |
|
|
(1,534 |
) |
|
|
(103 |
) |
|
|
|
|
|
|
|
Net deferred tax (liabilities) assets |
|
$ |
(982 |
) |
|
$ |
286 |
|
|
|
|
|
|
|
|
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.
As of September 30, 2010, the Company had U.S. federal net operating loss carryforward of
approximately $70.4 million which if unused, will expire in the years 2018 through 2024. 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 recently 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.
F-22
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
Reconciliations of the differences between income taxes computed at federal statutory tax
rates and consolidated provisions for income taxes on income before income taxes and discontinued
operations for the years ended September 30, 2010, 2009 and 2008 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes at 34% |
|
$ |
4,617 |
|
|
$ |
4,537 |
|
|
$ |
4,263 |
|
Valuation allowance |
|
|
(500 |
) |
|
|
(1,288 |
) |
|
|
(783 |
) |
Foreign tax, net |
|
|
(842 |
) |
|
|
(743 |
) |
|
|
(592 |
) |
Enacted U.K. rate change |
|
|
(120 |
) |
|
|
|
|
|
|
(78 |
) |
Stock options |
|
|
5 |
|
|
|
246 |
|
|
|
111 |
|
Expiration of warrants unexercised |
|
|
|
|
|
|
80 |
|
|
|
391 |
|
Other, net |
|
|
364 |
|
|
|
576 |
|
|
|
439 |
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
3,524 |
|
|
$ |
3,408 |
|
|
$ |
3,751 |
|
|
|
|
|
|
|
|
|
|
|
Provision has not been made for U.S. or additional foreign taxes for undistributed earnings of
the U.K. foreign subsidiaries. Any of those earnings have been and will continue to be reinvested.
Determination of the amount of unrecognized deferred tax liability with respect to such earnings
is not practicable. The Company believes that the amount of additional taxes that might be payable
on the earning of foreign subsidiaries, if remitted, would be partially offset by the U.S. foreign
tax credits.
Income before income taxes and discontinued operations generated from the U.K. operations for
the years ended September 30, 2010, 2009 and 2008 was $13.1 million, $12.4 million and $11.2
million, respectively.
In June 2006, the FASB issued guidance related to the recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. It also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods and requires increased disclosures.
Under this guidance, the Company may 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
September 30, 2010, the Company has not recorded any unrecognized tax benefits, which remains
unchanged from September 30, 2009. The Companys policy, if it had unrecognized benefits, is to
recognize accrued interest in interest expense and penalities in operating expenses.
F-23
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
Effective October 1, 2007, the Company adopted the provisions of this guidance. Upon
implementation, the Company recognized a net decrease to its opening accumulated deficit of $0.5
million and a decrease in taxes payable of $0.5 million from the cumulative effect of adoption as a
result of the Companys evaluation of its tax positions in accordance with this guidance, including
recent experience with taxing authorities. After adoption of this guidance, the accrual for
unrecognized tax benefits was zero which remains unchanged at September 30, 2010.
The Companys U.S. subsidiaries have joined in the filing of a U.S. federal consolidated
income tax return since it was formed in November 1981. The U.S. federal statute of limitations
remains open for the years 2006 onward.
State income tax returns are generally subject to examination for a period of three to five
years after filing of the respective return. The state impact of any federal changes remains
subject to examination by various states for a period of up to one year after formal notification
to the states. The Company is not currently under examination in any state jurisdictions. The
Company is currently under examination from the New York City Department of Finance for fiscal
years 2007 through 2009.
Years still open to examination by foreign tax authorities are fiscal 2009 onward. The
Company is not currently under examination in any foreign jurisdictions.
9. Stock Options:
Stock Options:
Under the shareholder approved 2002 Stock Option Plan (Option Plan), the Company may grant
incentive and non-qualified options to purchase its common stock to key employees, officers,
directors and non-employee independent contractors. Stock options are generally issued at an
exercise price per share which is not less than the fair market value of the stock on the grant
date and generally vest over a three year period and expire ten years from the grant date. Options
granted under the plans generally may be exercised upon payment of the option price in cash or by
delivery of shares of our common stock with a fair market value equal to the option price. Certain
option awards provide for accelerated vesting if there is a change in control. Shares delivered
under the Option Plan will be available from authorized but unissued shares of common stock or from
shares of common stock reacquired by the Company. Shares available for future grant under the
Option Plan were 2.1 million shares at September 30, 2010.
F-24
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
Following is a summary of transactions under the Option Plan during the years ended September
30, 2010, 2009 and 2008 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
Number |
|
|
Average |
|
|
Number |
|
|
Average |
|
|
Number |
|
|
Average |
|
|
|
Of Stock |
|
|
Exercise |
|
|
of Stock |
|
|
Exercise |
|
|
of Stock |
|
|
Exercise |
|
|
|
Options |
|
|
Price ($) |
|
|
Options |
|
|
Price ($) |
|
|
Options |
|
|
Price ($) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding beginning of year |
|
|
2,991 |
|
|
|
2.22 |
|
|
|
2,576 |
|
|
|
2.24 |
|
|
|
2,977 |
|
|
|
3.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,018 |
|
|
|
2.59 |
|
|
|
1,221 |
|
|
|
2.12 |
|
|
|
1,280 |
|
|
|
2.01 |
|
Exercised |
|
|
(150 |
) |
|
|
1.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(271 |
) |
|
|
2.20 |
|
|
|
(806 |
) |
|
|
2.12 |
|
|
|
(1,681 |
) |
|
|
4.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding end of year |
|
|
3,588 |
|
|
|
2.34 |
|
|
|
2,991 |
|
|
|
2.22 |
|
|
|
2,576 |
|
|
|
2.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the options outstanding, vested and expected to vest and exercisable as of
September 30, 2010 is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Weighted- |
|
|
|
|
Range |
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
Of |
|
|
|
|
|
Exercise Price |
|
|
Remaining |
|
|
Aggregate |
|
Exercise |
|
Number |
|
|
of Options |
|
|
Contractual |
|
|
Intrinsic |
|
Price ($) |
|
Outstanding |
|
|
Outstanding ($) |
|
|
Life in Years |
|
|
Value ($) |
|
1.92 2.59 |
|
|
3,453 |
|
|
|
2.22 |
|
|
|
7.6 |
|
|
|
1,064 |
|
3.83 4.70 |
|
|
41 |
|
|
|
4.36 |
|
|
|
2.4 |
|
|
|
|
|
5.41 6.20 |
|
|
94 |
|
|
|
6.02 |
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding |
|
|
3,588 |
|
|
|
2.34 |
|
|
|
7.4 |
|
|
|
1,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expect to vest |
|
|
2,855 |
|
|
|
2.38 |
|
|
|
7.5 |
|
|
|
836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Weighted- |
|
|
|
|
Range |
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
Of |
|
|
|
|
|
Exercise Price |
|
|
Remaining |
|
|
Aggregate |
|
Exercise |
|
Number |
|
|
of Options |
|
|
Contractual |
|
|
Intrinsic |
|
Price ($) |
|
Exercisable |
|
|
Exercisable ($) |
|
|
Life in Years |
|
|
Value ($) |
|
1.92 2.59 |
|
|
1,421 |
|
|
|
2.10 |
|
|
|
6.5 |
|
|
|
580 |
|
3.83 4.70 |
|
|
42 |
|
|
|
4.36 |
|
|
|
2.4 |
|
|
|
|
|
5.41 6.20 |
|
|
94 |
|
|
|
6.02 |
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable |
|
|
1,557 |
|
|
|
2.40 |
|
|
|
6.3 |
|
|
|
580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
The weighted average grant-date fair value of stock options granted during the years ended
September 30, 2010, 2009 and 2008 was $1.25, $1.02 and $1.00, respectively. The total grant date
fair value of stock options vested during the years ended September 30, 2010, 2009
and 2008 was $0.6 million, $0.5 million and $0.8 million, respectively. The total intrinsic
value of options exercised during the year ended September 30, 2010 was $0.2 million. For options
exercised during the year ended September 30, 2010, $0.3 million was received in cash to cover the
exercise price of the options exercised. There were no options exercised in the years ended
September 30, 2009 and 2008.
The fair value of each option granted, excluding the 0.2 million options granted to the
Companys CEO that are described below, was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Expected life (years) |
|
|
6.0 |
|
|
|
6.0 |
|
|
|
5.8 |
|
Risk-free interest rate |
|
|
2.0 |
% |
|
|
2.7 |
% |
|
|
3.1 |
% |
Volatility |
|
|
49.1 |
% |
|
|
52.7 |
% |
|
|
49.3 |
% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
The average risk-free interest rate is based on the U.S. treasury security rate in effect as
of the grant date. The Company determined expected volatility using a weighted average of its
historical month-end close stock price. The expected life was determined using the simplified
method as the Company does not believe it has sufficient historical stock option exercise
experience on which to base the expected term.
In the third quarter of fiscal 2009, in addition to the grant of the SARs, as further
described below, the Companys Board of Directors, upon the recommendation of its Compensation
Committee, finalized the performance-based vesting conditions of the 0.2 million options to
purchase shares of common stock of the Company held by the CEO. These options had been awarded in
February 2008 at an exercise price of $2.11 per share but were not considered granted for
accounting purposes as the criteria for grant date under the accounting guidance had not been
established until April 21, 2009. The market value of the Companys common stock on the
established grant date was $1.51. The vesting of the stock options is subject to vesting in the
same manner as the SARs. As such, the fair value of these 0.2 million options was estimated, in
the same manner as the SARs, on the date of grant using the Monte-Carlo pricing model with the
following weighted average assumptions for fiscal 2009:
|
|
|
|
|
Expected life (years) |
|
|
4.1 |
|
Risk-free interest rate |
|
|
1.6 |
% |
Volatility |
|
|
62 |
% |
Expected dividend yield |
|
|
0 |
% |
F-26
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
The average risk-free interest rate is based on the U.S. constant maturity treasury rates in
effect as of the grant date for terms corresponding to the valuation terms. The Company determined
expected volatility using a weighted average of its historical weekly close stock price.
The expected life was determined using the midpoint between the earliest exercise time and the
latest exercise time as the Company does not have sufficient historical exercise experience on
which to base the expected term.
Following is a summary of the status of the Companys nonvested stock options as of September
30, 2010 and changes during the year ended September 30, 2010 (in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
Stock |
|
|
Grant-Date |
|
Nonvested Stock Options |
|
Options |
|
|
Fair Value ($) |
|
Nonvested at October 1, 2009 |
|
|
1,855 |
|
|
|
1.01 |
|
Granted |
|
|
1,018 |
|
|
|
1.25 |
|
Vested |
|
|
(588 |
) |
|
|
1.08 |
|
Forfeited |
|
|
(254 |
) |
|
|
1.11 |
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2010 |
|
|
2,031 |
|
|
|
1.10 |
|
|
|
|
|
|
|
|
|
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 3.6 million options
outstanding at September 30, 2010, 1.3 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, 2009 |
|
|
1,099 |
|
|
|
2.05 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
362 |
|
|
|
2.59 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(166 |
) |
|
|
2.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2010 |
|
|
1,295 |
|
|
|
2.20 |
|
|
|
7.7 |
|
|
|
426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at
September 30, 2010 |
|
|
647 |
|
|
|
2.22 |
|
|
|
8.0 |
|
|
|
203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2010 |
|
|
310 |
|
|
|
1.96 |
|
|
|
6.8 |
|
|
|
166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Stock |
|
|
Grant-Date |
|
Time and Performance Based Stock Options |
|
Options |
|
|
Fair Value ($) |
|
Nonvested at October 1, 2009 |
|
|
939 |
|
|
|
0.96 |
|
Granted |
|
|
362 |
|
|
|
1.26 |
|
Vested |
|
|
(168 |
) |
|
|
1.03 |
|
Forfeited |
|
|
(148 |
) |
|
|
1.07 |
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2010 |
|
|
985 |
|
|
|
1.04 |
|
|
|
|
|
|
|
|
|
The weighted average grant-date fair value of time and performance based stock options granted
during the years ended September 30, 2010, 2009 and 2008 was $1.26, $0.92 and $1.02, respectively.
The total grant date fair value of time and performance based stock options that vested during the
years ended September 30, 2010, 2009 and 2008 was $0.2 million, $0.1 million and $0.3 million,
respectively.
For the years ended September 30, 2010, 2009 and 2008 stock-based compensation cost recognized
in selling, general and administrative expenses decreased income before income taxes and
discontinued operations by $0.6 million, $0.5 million and $0.8 million, respectively. For the
years ended September 30, 2010, 2009 and 2008 stock-based compensation cost decreased net income by
$0.6 million, $0.6 million and $0.8 million, respectively. For the years ended September 30, 2010,
2009 and 2008, stock-based compensation had a $0.01, $0.01 and $0.02 impact on basic and diluted
EPS, respectively. The Company recognizes compensation expense on a straight-line basis over the
requisite service period. As of September 30, 2010 there was $1.2 million of total unrecognized
compensation cost related to nonvested share-based compensation awards, net of estimated
forfeitures, which the Company expects to recognize over a weighted average period of approximately
2.2 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.
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 SARs to Alexander (Sandy) Young, its 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.
F-28
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
Time Vesting. The SARs generally will not vest if Mr. Youngs employment with the
Company is terminated prior to January 14, 2011, the third anniversary of the date he became the
Companys CEO. However, if Mr. Youngs employment terminates because of his death or disability,
he shall become vested in the SARs to the extent determined by the Compensation Committee. The
Compensation Committees determination shall be made by multiplying that portion of the SARs that
are deemed potentially to have vested by reason of satisfaction of the applicable performance
levels by a fraction, the numerator of which is the number of completed months elapsed since
October 1, 2007 through the date of termination of employment and the denominator of which is 48.
In addition, in the event of a change of control (as defined in the SARs agreement), the
SARs will become immediately vested to the same extent provided in the previous paragraph and shall
be exercisable for a period of 30 days after the change of control. If Mr. Youngs employment with
the Company is terminated for reasons that the Compensation Committee determines constitutes
cause (as defined in the SARs agreement), the SARs will be forfeited, without regard to whether
they have become vested.
Performance Vesting. The determination of whether the SARs have vested will be made
as soon as practicable after the fiscal year ending September 30, 2011 and will be based on the
achievement of the performance measures set forth in the SARs agreement with Mr. Young. The SARs
agreement establishes a threshold, base and stretch level of improvement (in percentage terms) in
growth in each of sales, earnings per share and earnings before interest, taxes and amortization
(EBITA) during the period from October 1, 2009 through September 30, 2011 as compared to the base
year ended September 30, 2007 and provides that the amount of SARs that will vest will be dependent
on whether the threshold, base and stretch levels have been met in each performance measure. The
determination of vesting attributable to each performance measure shall be independent from the
other performance measures. A performance below threshold in one performance measure does not
preclude vesting under any other performance measure.
If the actual results for any performance measure fall between the threshold and the base, or
between the base and the stretch, vesting of the SARs will be prorated.
The SARs agreement with Mr. Young provides that the potential maximum value of the SARs (when
aggregated with the value of the vested portion of the option to purchase 0.2 million shares of the
Companys common stock held by Mr. Young as described above) is £3.0 million (approximately $4.7
million at the closing exchange rate at September 30, 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.
F-29
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
At September 30, 2010, the Company estimated that none of the performance measures will be
achieved which resulted in zero stock-based compensation cost related to SARs to be recognized as
of September 30, 2010. At September 30, 2010, the Company had $0.3 million of total unrecognized
compensation cost related to SARs compensation awards. A change in the estimate of the SARs
performance measures vesting could result in the Company incurring such cost over a period through
September 30, 2011. The compensation cost as generated by the Monte-Carlo pricing model may not be
indicative of the future benefit, if any, that may be received by the SARs holder.
The weighted average grant-date fair value of SARs granted during the year ended September 30,
2009 was $0.49. The fair value of the SARs granted was estimated on the date of grant using the
Monte-Carlo pricing model with the following weighted average assumptions for the year ended
September 30, 2009:
|
|
|
|
|
Expected life (years) |
|
|
2.4 |
|
Risk-free interest rate |
|
|
1.1 |
% |
Volatility |
|
|
62 |
% |
Expected dividend yield |
|
|
0 |
% |
The average risk-free interest rate is based on the U.S. constant maturity treasury rates in
effect as of the grant date for terms corresponding to the valuation terms. The Company determined
expected volatility using a weighted average of its historical weekly close stock price. The
expected life was determined using the midpoint between the earliest exercise time and the latest
exercise time as the Company does not have historical SARs exercise experience on which to base the
expected term.
10. Commitments and Contingencies:
Guarantees:
The senior credit facility was secured by a first priority lien on the assets of Allied
Holdings and certain of its subsidiaries. Together with Allied Holdings and certain of its
subsidiaries, the Company had guaranteed the debt and other obligations of certain wholly-owned
U.K. subsidiaries under the senior credit facility. In conjunction with the amendment to the
senior credit facility, the Company had granted the senior lenders a security interest in
substantially all of its assets to secure the payment of its guarantee. In the third quarter of
fiscal 2009 the Company terminated its senior credit facility and the liens and guarantees under
such facility have since been released.
F-30
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
Employment Agreements:
The Company currently has employment agreements with its two executive officers that
provided for minimum aggregate annual compensation of $0.6 million (at the closing exchange
rate at September 30, 2010) in fiscal 2009.
In January 2008, the Company entered into an employment agreement with Alexander (Sandy)
Young, its CEO. 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
$345,400 at the closing exchange rate at September 30, 2010). In addition, pursuant to his
employment agreement:
|
|
|
the Company awarded Mr. Young 0.2 million stock options in February 2008; |
|
|
|
|
the Company granted Mr. Young 0.6 million SARs in April 2009, the terms of which are
described above in Note 9; |
|
|
|
|
the Company provides Mr. Young with a car allowance; and |
|
|
|
|
the Company has agreed to make a payment equal to 15% of Mr. Youngs annual salary
towards his U.K.-based private pension fund. |
Mr. Youngs employment agreement does not provide for payments to be made to him at, following
or in connection with a change in control of the Company. In lieu of the twelve months prior
written notice of termination, the Companys employment agreement with Mr. Young provides that it
may terminate the employment agreement at any time by making a payment to Mr. Young equal to his
salary for the notice period (or, if applicable, the remainder of the notice period) and the cost
to the Company of providing Mr. Young with his health insurance, car allowance and contribution to
his U.K.-based private pension fund for the notice period (or, if applicable, the remainder of the
notice period).
In May 2008 the Company entered into an employment agreement with Paul Weston, its then Chief
Financial Officer Designate. Mr. Weston became the Chief Financial Officer of the Company on
October 1, 2008. The Companys employment agreement with Mr. Weston provides that either party may
terminate the agreement upon six months written notice. In addition, under its employment
agreement with Mr. Weston, the Company is required to pay him twelve months salary in the event he
is terminated due to an acquisition. The Companys employment agreement with Mr. Weston further
provides that Mr. Weston will not compete against the Company for a period of six months following
the termination of his employment with the Company. Pursuant to his employment agreement, the
salary of Mr. Weston is currently £161,247 (approximately $254,900 at the closing exchange rate at
September 30, 2010). In addition, pursuant to his employment agreement with the Company, Mr.
Weston receives a car allowance and the Company has agreed to make a payment equal to 15% of his
annual salary towards his U.K.-based private pension fund.
F-31
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
Contractual Cash Obligations:
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 $5.5 million operating lease obligations at September 30,
2010, $0.4 million relates to properties that are owned by the noncontrolling interest holders.
Rent expense under non-capitalized lease or rental agreements for the years ended September
30, 2010, 2009 and 2008 amounted to $3.5 million, $2.8 million and $3.3 million, respectively.
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 $0.7 million and $0.1 million at September 30, 2010, respectively and are
included within property and equipment in the Companys Consolidated Balance Sheet. Accumulated
amortization related to these capital leases totaled $0.1 million at September 30, 2010.
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 $0.7
million at September 30, 2010.
Other Obligations:
Other obligations represent our contractual commitment for a new branch operating system and
purchase commitment for new office equipment and software.
F-32
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
The following table summarizes the Companys future minimum rental commitments required under
both operating and capital lease agreements, debt and other obligations as of September 30, 2010
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
Capital |
|
|
Total |
|
|
Total Other |
|
|
Total |
|
Fiscal |
|
Leases |
|
|
Leases |
|
|
Debt |
|
|
Obligations |
|
|
Obligations |
|
2011 |
|
$ |
2,732 |
|
|
$ |
377 |
|
|
$ |
294 |
|
|
$ |
1,102 |
|
|
$ |
4,505 |
|
2012 |
|
|
1,591 |
|
|
|
278 |
|
|
|
40 |
|
|
|
1,021 |
|
|
|
2,930 |
|
2013 |
|
|
734 |
|
|
|
128 |
|
|
|
|
|
|
|
206 |
|
|
|
1,068 |
|
2014 |
|
|
267 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
271 |
|
2015 |
|
|
136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136 |
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,460 |
|
|
$ |
787 |
|
|
$ |
334 |
|
|
$ |
2,329 |
|
|
$ |
8,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Amounts
representing
interest |
|
|
|
|
|
|
(118 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net present value
of capital lease
obligations |
|
|
|
|
|
|
669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current portion |
|
|
|
|
|
|
320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term capital
lease obligations |
|
|
|
|
|
$ |
349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
The Company is involved in various other legal proceedings and claims incidental to its normal
business activities. The Company is vigorously defending its position in all such proceedings.
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.
F-33
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
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 and $0.2 million for such costs at September 30, 2010 and
2009, respectively.
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. These requirements
include, among other things, at least one year of service and attainment of the age of 21. The plan
operates as a salary reduction plan whereby participants contribute anywhere from 1% to 15% of
their compensation, not to exceed the maximum available under the Code. The Company may make
additional matching cash contributions at its discretion. 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 Companys contribution to such
plans was $0.2 million in each of the fiscal years ended September 30, 2010, 2009 and 2008.
12. Selected Quarterly Financial Data (Unaudited):
The following table presents the comparative unaudited quarterly results for the years ended
September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Quarter Ended |
|
December 31, |
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
Total revenues |
|
$ |
69,384 |
|
|
$ |
65,530 |
|
|
$ |
65,748 |
|
|
$ |
70,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
20,877 |
|
|
$ |
19,948 |
|
|
$ |
19,768 |
|
|
$ |
21,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
2,854 |
|
|
$ |
2,642 |
|
|
$ |
1,717 |
|
|
$ |
2,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,854 |
|
|
$ |
2,642 |
|
|
$ |
1,717 |
|
|
$ |
2,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to
Allied Healthcare International
Inc. |
|
$ |
2,854 |
|
|
$ |
2,642 |
|
|
$ |
1,660 |
|
|
$ |
2,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income per
share attributable to Allied
Healthcare International Inc.
common shareholders |
|
$ |
0.06 |
|
|
$ |
0.06 |
|
|
$ |
0.04 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
45,127 |
|
|
|
45,136 |
|
|
|
45,045 |
|
|
|
43,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
45,417 |
|
|
|
45,405 |
|
|
|
45,269 |
|
|
|
43,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-34
ALLIED HEALTHCARE INTERNATIONAL INC.
Notes to Consolidated Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Quarter Ended |
|
December 31, |
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
Total revenues |
|
$ |
61,528 |
|
|
$ |
55,334 |
|
|
$ |
63,103 |
|
|
$ |
69,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
18,813 |
|
|
$ |
17,166 |
|
|
$ |
19,173 |
|
|
$ |
21,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
2,467 |
|
|
$ |
2,144 |
|
|
$ |
2,388 |
|
|
$ |
2,937 |
|
Discontinued Operations |
|
$ |
|
|
|
$ |
367 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,467 |
|
|
$ |
2,511 |
|
|
$ |
2,388 |
|
|
$ |
2,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Allied
Healthcare International Inc. |
|
$ |
2,467 |
|
|
$ |
2,511 |
|
|
$ |
2,388 |
|
|
$ |
2,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share
attributable to Allied Healthcare
International Inc. common
shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
$ |
0.07 |
|
Income from discontinued operations |
|
|
|
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Allied
Healthcare International Inc. common
shareholders |
|
$ |
0.05 |
|
|
$ |
0.06 |
|
|
$ |
0.05 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
44,986 |
|
|
|
44,986 |
|
|
|
44,986 |
|
|
|
44,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
44,986 |
|
|
|
44,986 |
|
|
|
44,998 |
|
|
|
45,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
ALLIED HEALTHCARE INTERNATIONAL INC.
(In thousands)
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A |
|
Column B |
|
|
Column C |
|
|
Column D |
|
|
Column E |
|
|
|
Balance at |
|
|
Additions Charged to |
|
|
|
|
|
|
Balance at |
|
|
|
Beginning |
|
|
Cost and |
|
|
Other |
|
|
|
|
|
|
End of |
|
Description |
|
of Period |
|
|
Expenses |
|
|
Accounts |
|
|
Deductions |
|
|
Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
Doubtful Accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
September 30, 2010 |
|
$ |
839 |
|
|
$ |
30 |
|
|
$ |
30 |
(B) |
|
$ |
167 |
(A) |
|
$ |
732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
September 30, 2009 |
|
$ |
823 |
|
|
$ |
360 |
|
|
$ |
(93 |
)(B) |
|
$ |
251 |
(A) |
|
$ |
839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
September 30, 2008 |
|
$ |
1,570 |
|
|
$ |
(167 |
) |
|
$ |
(163 |
)(B) |
|
$ |
417 |
(A) |
|
$ |
823 |
|
|
|
|
(A) |
|
Doubtful accounts written off, net of recoveries. |
|
(B) |
|
Assumed in acquisitions and adjustments arising from translation of foreign financial
statements to U.S. dollars. |
S-1