UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities - ----- Exchange
Act of 1934
For the quarterly period ended March 31,September 30, 2004
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities - ----- Exchange
Action of 1934
For the transition period from ______________________ to ------------------- -------------------___________________
Commission File Number 0-19266
ALLIED HEALTHCARE PRODUCTS, INC.
1720 Sublette Avenue
St. Louis, Missouri 63110
314/771-2400
IRS Employment ID 25-1370721
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 twelve months (or for such shorter periods that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past ninety days.
Yes X[X] No ----- -----[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No X
----- -----[X]
The number of shares of common stock outstanding at April 30,November 5, 2004 is
7,818,432 shares.
INDEX
Page
Number
-------
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statement of Operations -
3
three months and nine months ended March 31,September 30,
2004 and 2003 (Unaudited) 3
Consolidated Balance Sheet -
4 - 5
March 31,September 30, 2004 (Unaudited) and
June 30, 20032004 (Audited) 4 - 5
Consolidated Statement of Cash Flows -
6
NineThree months ended March 31,September 30, 2004 and 2003
(Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7 - 12
Item 2. Management's Discussion and Analysis of
12-18
Financial Condition and Results of Operations 12-15
Item 3. Quantitative and Qualitative Disclosure
18
about Market Risk 15
Item 4. Controls and Procedures 1816
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 1916
Signature 1917
"SAFESAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Statements contained in this Report, which are not historical facts or
information, are "forward-looking statements." Words such as "believe,"
"expect," "intend," "will," "should," and other expressions that indicate future
events and trends identify such forward-looking statements. These
forward-looking statements involve risks and uncertainties, which could cause
the outcome and future results of operations, and financial condition to be
materially different than stated or anticipated based on the forward-looking
statements. Such risks and uncertainties include both general economic risks and
uncertainties, risks and uncertainties affecting the demand for and economic
factors affecting the delivery of health care services, and specific matters
which relate directly to the Company's operations and properties as discussed in
the Company's annual report on Form 10-K for the year ended June 30, 2003.2004. The
Company cautions that any forward-looking statements contained in this report
reflects only the belief of the Company or its management at the time the
statement was made. Although the Company believes such forward-looking
statements are based upon reasonable assumptions, such assumptions may
ultimately prove inaccurate or incomplete. The Company undertakes no obligation
to update any forward-looking statement to reflect events or circumstances after
the date on which the statement was made.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three months ended
Nine months ended
March 31, March 31,
------------------------------- -------------------------------September 30,
-----------------------------------
2004 2003
2004 2003
------------- ------------- ------------- ------------------------ -----------
Net sales $ 14,956,873 $ 16,443,114 $ 43,841,734 $ 46,536,013$13,939,720 $13,807,529
Cost of sales 10,745,206 12,201,779 32,125,005 35,726,306
------------- ------------- ------------- -------------10,533,018 10,410,955
----------- -----------
Gross profit 4,211,667 4,241,335 11,716,729 10,809,7073,406,702 3,396,574
Selling, general and
administrative expenses 3,054,399 3,423,454 9,568,968 10,171,452
------------- ------------- ------------- -------------2,929,088 3,179,912
----------- -----------
Income from operations 1,157,268 817,881 2,147,761 638,255477,614 216,662
Other expenses:
Interest 111,570 209,220 453,285 652,86173,846 196,941
Other, net 7,748 9,234 2,066 32,121
------------- ------------- ------------- -------------
119,318 218,454 455,351 684,982
------------- ------------- ------------- -------------
Income/(loss)7,362 5,359
----------- -----------
81,208 202,300
----------- -----------
Income before provision
for income taxes 1,037,950 599,427 1,692,410 (46,727)396,406 14,362
Provision for income taxes 410,115 234,194 677,595 4,527
------------- ------------- ------------- -------------160,905 11,589
----------- -----------
Net income/(loss)income $ 627,835235,501 $ 365,233 $ 1,014,815 $ (51,254)
============= ============= ============= =============2,773
=========== ===========
Basic and diluted earnings/(loss)earnings
per share $ 0.080.03 $ 0.05 $ 0.13 $ (0.01)
============= ============= ============= =============0.00
=========== ===========
Weighted average shares
7,818,432 7,813,932 7,815,748 7,813,932
outstanding - basic 7,818,432 7,813,932
Weighted average shares
outstanding - diluted 8,005,365 7,909,158 7,957,881 7,956,4488,065,741 7,951,334
See accompanying Notes to Consolidated Financial Statements.
3
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
(UNAUDITED)
March 31,September 30, June 30,
2004 2003
--------------- ---------------2004
----------- -----------
Current assets:
Cash $ 11,23093,768 $ 12,0168,256
Accounts receivable, net of allowance for doubtful
accounts of $484,589$475,000 and $475,000, respectively 7,418,561 7,848,9777,160,225 7,708,969
Inventories, net 11,004,904 12,274,97211,036,930 11,095,171
Income tax receivable 172,856 392,259- 130,548
Other current assets 403,007 149,995
--------------- ---------------291,492 127,127
----------- -----------
Total current assets 19,010,558 20,678,219
--------------- ---------------18,582,415 19,070,071
----------- -----------
Property, plant and equipment, net 12,131,818 12,630,289
Deferred income taxes 989,710 989,71011,739,786 11,999,927
Goodwill 15,979,830 15,979,830
Other assets, net 100,283 134,528
--------------- ---------------77,452 88,867
----------- -----------
Total assets $ 48,212,199 $ 50,412,576
=============== ===============$46,379,483 $47,138,695
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
(CONTINUED)
4
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
March 31,September 30, June 30,
2004 2003
--------------- ---------------2004
------------- ------------
Current liabilities:
Accounts payable $ 2,753,0092,961,361 $ 2,192,7173,125,593
Current portion of long-term debt 1,533,308 5,409,304609,258 1,245,484
Deferred income taxes 412,079 412,079389,644 389,644
Deferred revenue 465,000 -
Other current liabilities 4,153,370 3,218,981
--------------- ---------------3,816,343 3,316,603
------------ ------------
Total current liabilities 8,851,766 11,233,081
--------------- ---------------8,241,606 8,077,324
------------ ------------
Deferred income taxes 242,478 242,478
------------ ------------
Deferred revenue 426,250 -
------------ ------------
Long-term debt 3,767,453 4,612,320
--------------- ---------------780,831 2,366,076
------------ ------------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock; $0.01 par value; 1,500,000 shares
authorized; no shares issued and outstanding; which
includes Series A preferred stock; $0.01 par value; 200,000
shares authorized; no shares issued and outstanding -- --- -
Common stock; $0.01 par value; 30,000,000 shares
authorized; 7,818,432 shares issued and
outstanding at March 31,September 30, 2004
and 7,813,932
shares issued and outstanding at June 30, 2003,
respectively 101,219 101,1752004 101,220 101,220
Additional paid-in capital 47,041,492 47,030,54947,041,493 47,041,493
Common stock in treasury, at cost (20,731,428) (20,731,428)
Retained earnings 9,181,697 8,166,879
--------------- ---------------10,277,033 10,041,532
------------ ------------
Total stockholders' equity 35,592,980 34,567,175
--------------- ---------------36,688,318 36,452,817
------------ ------------
Total liabilities and stockholders' equity $ 48,212,19946,379,483 $ 50,412,576
=============== ===============47,138,695
============ ============
See accompanying Notes to Consolidated Financial Statements.
5
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
NineThree months ended
March 31,
------------------------------September 30,
-------------------------------
2004 2003
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 1,014,815235,501 $ (51,254)2,773
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 970,169 972,979323,816 331,290
Changes in operating assets and liabilities:
Accounts receivable, net 430,416 156,297548,744 153,072
Inventories, net 1,270,069 620,69758,241 528,832
Income tax receivable 130,548 -
Other current assets (33,609) 570,075(164,365) (282,716)
Accounts payable 560,296 (1,110,252)(164,232) 760,689
Deferred Revenue 891,250 -
Other accruedcurrent liabilities 934,388 101,144499,740 33,249
------------ ------------
Net cash provided by operating activities 5,146,544 1,259,6862,359,243 1,527,189
------------ ------------
Cash flows from investing activities:
Capital expenditures (437,453) (427,912)(52,260) (188,044)
------------ ------------
Net cash used in investing activities (437,453) (427,912)(52,260) (188,044)
------------ ------------
Cash flows from financing activities:
Payments of capital lease obligations -- (192,426)
Payments of long-term debt (844,867) (324,820)
Net payments(2,181,471) (242,129)
Borrowings under revolving credit agreement (3,875,997) (307,310)
Proceeds from issuance of common stock 10,987 --14,688,257 13,541,978
Payments under revolving credit agreement (14,728,257) (14,638,392)
------------ ------------
Net cash used in financing activities (4,709,877) (824,556)(2,221,471) (1,338,543)
------------ ------------
Net increase (decrease) in cash (786) 7,21885,512 602
Cash at beginning of period 8,256 12,016 800
------------ ------------
Cash at end of period $ 11,23093,768 $ 8,01812,618
============ ============
See accompanying Notes to Consolidated Financial Statements.
6
ALLIED HEALTHCARE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Unaudited Consolidated Financial Statements
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and do not include
all of the information and disclosures required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments considered necessary for a fair presentation, have
been included. Operating results for any quarter are not necessarily indicative
of the results for any other quarter or for the full year. These statements
should be read in conjunction with the consolidated financial statements and
notes to the consolidated financial statements thereto included in the Company's
Form 10-K for the year ended June 30, 2003.2004.
2. Significant Accounting Policies - Stock Options
The Company accounts for employee stock options in accordance with
Accounting Principles Board No. (APB) 25, "Accounting for Stock Issued to
Employees". Under APB 25, the Company applies the intrinsic value method of
accounting. The Company has not recognized compensation expense for options
granted because the Company grants options at a price equal to market value at
the time of grant. During 1996, the Financial Accounting Standard Board (FASB)
issued Statement of Financial Accounting Standard No. 123, (SFAS 123), "Accounting for
Stock-Based Compensation,Compensation." SFAS 123 prescribes the recognition of compensation
expense based on the fair value of options determined on the grant date.
However, SFAS 123 grants an exception that allows companies currently applying
APB 25 to continue using that method. The Company has elected to continue applying
the intrinsic value method under APB 25.
The fair value of options granted (which is amortized over the option
vesting period in determining the pro forma impact) is estimated on the date of
grant using the Black-Scholes multiple option-pricing model. No options were
granted during the three months ended September 30, 2004 and 2003. The following
table shows stock-based compensation expense included in net income/(loss),income, pro forma
stock-based compensation expense, net income/(loss), and earnings per share had
the Companywe elected to record compensation expense based on the fair value of options at
the grant date for the three and nine months ended March 31,September 30, 2004 and 2003.
7
Three Months Ended Nine Months Ended
March 31, March 31,September 30,
2004 2003 2004 2003
------------ ------------
------------ ------------
Net income/(loss)income, as reported:reported $ 627,835235,501 $ 365,233 $ 1,014,815 $ (51,254)2,773
Add: Stock-based employee
compensation expense included in
Net income/(loss)
as reported -- -- -- --net income, net of
related tax effects - -
------------ ------------
Deduct: Total Stock-basedstock-based
employee compensation expense determined
under fair value based methods 11,918 52,563 53,326 130,282method for all
awards granted since July 1, 1994, net of
related tax effects ($ 12,055) ($ 30,540)
------------ ------------
Pro forma net (loss)income $ 223,446 ($ 27,767)
============ ============
Earnings per share:
Basic-as reported $ 0.03 $ -
------------ ------------
Proforma net income/(loss):Basic-pro forma $ 615,9170.03 $ 312,670-
------------ ------------
Diluted -as reported $ 961,4890.03 $ (181,536)
============ ============ ============ ============
Basic and diluted earnings/(loss)
per share:
As reported:-
------------ ------------
Diluted -pro forma $ 0.080.03 $ 0.05 $ 0.13 $ (0.01)
Proforma: $ 0.08 $ 0.04 $ 0.12 $ (0.02)-
------------ ------------
The effects of applying SFAS 123 in this proforma disclosure are not necessarily
indicative of future amounts.
3. Inventories
Inventories are comprised of the following:as follows (unaudited):
March 31,September 30, 2004 June 30, 2003
--------------- ---------------2004
------------------ -------------
Work-in-progressWork-in progress $ 1,026,913828,668 $ 536,695722,894
Raw materials and component parts 8,962,558 10,577,7139,041,335 9,170,682
Finished goods 2,963,641 3,484,8222,904,116 2,944,085
Reserve for obsolete and excess
inventory (1,948,208) (2,324,258)
--------------- ---------------(1,737,189) (1,742,490)
------------ -----------
$ 11,004,904 $ 12,274,972
=============== ===============11,036,930 $11,095,171
============ ===========
8
4. Earnings per share
Basic earnings per share are based on the weighted average number of
shares of all common stock outstanding during the period. Diluted earnings per
share are based on the sum of the weighted average number of shares of common
stock and common stock equivalents outstanding during the year. The weighted
number of
basic shares outstanding for the three months ended March 31,September 30, 2004 and 2003
was 7,818,432 and 7,813,932 respectively. The weighted number of diluted shares
outstanding for the three months ended March 31,September 30, 2004 and 2003 was 8,005,3658,065,741
and 7,909,1587,951,334 shares, respectively.
The weighted number of basic
shares outstanding for the nine months ended March 31, 2004 and 2003 was
7,815,748 and 7,813,932, respectively. The
8
weighted number of diluted shares outstanding for the nine months ended March
31, 2004 and 2003 was 7,957,881 and 7,956,448 shares, respectively.
5. New Accounting Standards
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets" which supercedes Statement of Financial Accounting Standards
No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets to be
Disposed Of" and the accounting and reporting provisions of Accounting
Principles Bulletin No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", for the disposal of a business.
SFAS 144 provides a single accounting model for long-lived assets to be disposed
of. Although retaining many of the fundamental recognition and measurement
provisions of SFAS 121, the new rules change the criteria to be met to classify
an asset as held-for-sale. The new rules also broaden the criteria regarding
classification of a discontinued operation. The Company was required to adopt
the provisions of SFAS 144 effective July 1, 2002. Adoption of SFAS 144 did not
have a material impact on the Company's results of operations, financial
position or cash flows.
In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 (SFAS 146), "Accounting for Costs Associated with Exit or
Disposal Activities" which addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost
was recognized at the date of an entity's commitment to an exit plan. The
provisions of SFAS 146 are effective for exit or disposal activities initiated
after December 31, 2002. Adoption of SFAS 146 did not have a material impact on
the Company's results of operations, financial position or cash flows.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 (SFAS 148), "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FAS 123," which provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. Additionally, SFAS 148 amends
the disclosure requirements of Statement of Financial Accounting Standards No.
123 (SFAS 123), "Accounting for Stock-Based Compensation," to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The provisions of SFAS 148 are effective for financial
statements issued for fiscal years
9
ending after December 15, 2002 and for financial reports containing condensed
financial statements for interim periods beginning after December 15, 2002.
Adoption of SFAS 148 did not have a material impact on the Company's results of
operations, financial position or cash flows.
In November 2002, the FASB issued Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". This interpretation elaborates
on the disclosures to be made by a guarantor in its financial statements about
its obligations under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. At March 31, 2004, the Company does not have any commitments that are
within the scope of FIN No. 45.
In January 2003, the FASB released FIN No. 46, "Consolidation of
Variable Interest Entities - an Interpretation of ARB No. 51". The
Interpretation clarifies issues regarding the consolidation of entities which
may have features that make it unclear whether consolidation or equity method
accounting is appropriate. Adoption of FIN 46 did not have a material impact on
the Company's results of operations, financial position or cash flows.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 (SFAS 150), "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity." SFAS 150 provides guidance on
distinguishing between liability and equity instruments and accounting for
instruments that have characteristics of both. SFAS 150 requires specific types
of freestanding financial instruments to be classified as liabilities including
mandatory redeemable financial instruments, obligations to repurchase the
issuer's equity shares by transferring assets and certain obligations to issue a
variable number of shares. The provisions of SFAS 150 are effective for
financial instruments entered into or modified after May 31, 2003. Adoption of
SFAS 150 did not have a material impact on the Company's results of operations,
financial position or cash flows.
6. Commitments and Contingencies
The Company is subject to various investigations, claims and legal
proceedings covering a wide range of matters that arise in the ordinary course
of its business activities. The Company has recognized the costs and associated
liabilities only for those investigations, claims and legal proceedings for
which, in its view, it is probable that liabilities have been incurred and the
related amounts are estimable. Based upon information currently available,
management believes that existing accrued liabilities are sufficient and that it
is not reasonably possible at this time to believe that any additional
liabilities will result from the resolution of these matters that would have a
material adverse effect on the Company's consolidated results of operations,
financial position or cash flows.
10
7.6. Financing Agreement Amendment
On April 24, 2002, the Company entered into a new credit facility arrangement
with LaSalle Bank National Association (the Bank)."Bank"), which was subsequently
amended on September 26, 2002, and September 26, 2003. The credit facility
providesprovided for total borrowings up to $19.0 million; consisting of up to $15.0
million through a revolving credit facility and up to $4.0 million under a term
loan for capital equipment.loan.
On September 26, 2003,August 27, 2004, the Bank and the Company agreed to a further amendedamendment
of the Company's credit facility (the amended credit facility). The Bank amended various financial
covenants in conjunction with the amended credit facility including a reduction
in the required fixed coverage charge ratio and the elimination of the EBITDA
covenant. The Bank amended the borrowing base to include 80% of eligible
accounts receivable plus the lesser of 50% of eligible inventory or $7.0
million, subject to reserves as established by the Bank. In addition, the
outstanding loans under the amended credit facility bears interest at an annual
interest rate of 1.00% plus the Bank's prime rate. In conjunction with these
amendments to the Company's credit facility, the Bank extended the maturity on
the Company's term loan on real estate, the Company's revolving credit facility,
and term loan on capital expenditures from August 1, 2003April 24, 2005 to April 24, 2005.2007. The
entire credit facility was amended to accrue interest at the Bank's prime rate.
The Prime rate was 4.5% on August 27, 2004. The interest rate on Prime rate
loans may increase from Prime to Prime plus 0.75% if the ratio of the Company's
funded debt to EBITDA exceeds 1.5. The amended credit facility also provides the
Company with a rate of LIBOR plus 2.25%, at the Company's option. The optional
LIBOR rate may increase from LIBOR plus 2.25% to LIBOR plus 3.00% based on the
Company's fixed charge coverage ratio. The 90-day LIBOR rate was 1.79% at August
27, 2004. Amortization on the real estate term loan
continues9
shall continue on a five-year schedule with equal monthly payments of $49,685.
The real estateAmortization on the capital expenditure term loan bears interest at
an annual interest rateshall continue on a five-year
schedule with equal monthly payments of 1.00% plus the Bank's prime rate. The Company also
received a waiver from the Bank for its covenant violations pertaining to its
EBITDA covenant, which the Company was in default of on June$50,772.
At September 30, 2003.
At March 31, 2004, the Company was in compliance with its financial
covenants under the amended credit facility. Although the Company was in
compliance with its financial covenants under the amended credit facility at
March 31,September 30, 2004, the ability of the Company to remain in compliance with
these ratios for the remainder of the current fiscal year depends on the
cumulative operating results and related fixed charges , and is subject to
achieving satisfactory revenue and expense levels sufficient to enable the
Company to meet heightened performance standards. At March 31,September 30, 2004, the
Company realized a Fixed Charge Coverage Ratio, as defined, of approximately
1.42.40 to 1.0 based on the prior twelve months. During the year ending June 30, 2004,2005,
the Company must realize a Fixed Charge Coverage Ratio of at least .751.0 to 1.0,
as defined in the amended credit agreement. In addition, the outstanding loans under the amended credit facility
bear interest at an annual interest rate at the Bank's prime rate plus 1.00% andWhile the Company believes such
performance results may be attainable, there can be no longer has an option to elect a LIBOR rate of interest for its
outstanding borrowings. The Company's per annum fee on any outstanding letters
of credit under the amended credit facility is 2.50%. Under the terms of the
amended credit facility, the interest rate on each loan outstanding at an Event
of Default, as defined in the amended credit facility, bears interest at the
rate of 2.00% per annum in excess of the interest rate otherwise payable thereon
and both principal and interest would become payable on demand.assurance that they will
be achieved.
The Company's credit facility requires a lockbox arrangement, which
provides for all receipts to be swept daily to reduce borrowings outstanding
under the credit facility. This arrangement, combined with the existence of a
Material Adverse Effect (MAE) clause in the credit facility, cause the revolving
credit facility to be classified as a current liability, per guidance in the
FASB's EITF Issue No. 95-22, "Balance Sheet Classification of Borrowings
Outstanding under Revolving Credit Agreements that Include Both a Subjective
Acceleration Clause and a Lock-Box Arrangement." However, the Company does not
expect to repay, or be required to repay, within one year, the balance of the
revolving credit facility classified as a current liability. The MAE clause,
which is a typical requirement in commercial credit agreements, allows the
lender to require the loan to become due if it determines there has been a
material adverse effect on the Company's operations, business, properties,
assets, liabilities, condition or prospects. The classification of the revolving
credit facility as a current liability is a result only of the combination of
the two aforementioned factors: the lockbox arrangement and the MAE clause.
However, the revolving credit facility does not expire or have a maturity date
within one year, but rather has a final expiration date of April 25, 2007.
Additionally, the Bank has not notified the Company of any indication of a MAE
at September 30, 2004.
7. Agreement with Abbott Laboratories
On August 27, 2004, Allied Healthcare Products, Inc. ("Allied") entered
into an agreement with Abbott Laboratories ("Abbott") pursuant to which Allied
will cease production of its product Baralyme(R), will, within sixty days,
affect the withdrawal of Baralyme(R) product held by distributors and will
pursue the development of a new carbon dioxide absorbent product. Baralyme(R), a
carbon dioxide absorbent product, has been used safely and effectively in
connection with inhalation anesthetics since its introduction in the 1920s. In
recent years, the number of inhalation anesthetics has increased, giving rise to
concerns regarding the use of Baralyme(R) in conjunction with these newer
inhalation anesthetics when Baralyme(R) has been allowed, contrary to
recommended
10
practice, to become desiccated. The agreement also provides that, for a period
of eight years, Allied will not manufacture, distribute, promote, market, sell,
commercialize or donate any Baralyme(R) product or similar product based upon
potassium hydroxide and will not develop or license any new carbon dioxide
absorbent product containing potassium hydroxide.
In consideration of the foregoing, Abbott has agreed to pay Allied an
aggregate of $5,250,000 of which $1,530,000 which was paid on September 30,
2004, and the remainder payable in 4 equal annual installments of $930,000 due
on July 1, 2005 through July 1, 2008. Allied has agreed with Abbott that in the
event that it receives approval from the U.S. Food & Drug Administration for the
commercial sale of a new carbon dioxide absorbent product not based upon
potassium hydroxide prior to January 1, 2008, that Abbott will be relieved of
any obligation to fund the $930,000 installment due July 1, 2008. The majority
of the $5,250,000 Allied is to receive from Abbott will be recognized into
income, as net sales, over the eight-year term of the agreement.
In addition to the provisions of the agreement relating to the withdrawal
of the Baralyme(R) product, Abbott has agreed to pay to Allied up to $2,150,000
in product development costs to pursue development of a new carbon dioxide
absorption product for use in connection with inhalation anesthetics that does
not contain potassium hydroxide and does not produce a significant exothermic
reaction with currently available inhalation agents.
The initial payment of $1,530,000 due from Abbott Laboratories was
received on September 30, 2004. The agreement required Abbott Laboratories to
pay Allied $600,000 for cost incurred in connection with withdrawal of
Baralyme(R) from the market, the disposal of such product, and severance
payments payable as a result of such withdrawal. This payment by Abbott
Laboratories of $600,000 has been included in Net sales during the three months
ended September 30, 2004. The remaining $4,650,000 of the payments to be
received from Abbott, including the remaining $930,000 received on September
30th, 2004, will be recognized into income, as net sales, over the eight-year
term of the agreement. During the three months ended September 30, 2004, $38,750
was recognized as net sales.
Allied has suspended manufacturing operations at its Stuyvesant Falls, New
York, facility. Costs associated with the withdrawal and suspension of
operations at that location, including severance and benefit payments due union
employees, will be approximately $600,000. These costs have been recorded as
Cost of Sales during the three months ended September 30th, 2004.
On September 9th, 2004 Allied entered into a Closedown Agreement with the
International Chemical Union representing the employees at the Stuyvesant Falls,
New York facility. The Company had advised the Union that the plant will be
closed and all bargaining unit employees related to such operation will be
permanently laid off, no later than October 15, 2004. The collective bargaining
agreement shall expire and be terminated as of the closing date. The Company
will pay severance to those 12
11
bargaining unit employees on the active payroll as of August 27, 2004. Severance
payments will total approximately $138,000.
A reconciliation of deferred revenue resulting from the agreement with
Abbott Laboratories, with the amounts received under the agreement, and amounts
recognized as net sales is as follows:
Deferred Revenue
Three Months ended
September 30,
------------ ---------
2004 2003
------------ ---------
Beginning balance $ - $ -
Payment Received from Abbott Laboratories 1,530,000
Revenue recognized as net sales (638,750) -
------------ ---------
891,250 -
------------ ---------
Less - Current portion of deferred revenue (465,000) -
------------ ---------
$ 426,250 $ -
============ =========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003.
Allied had net sales of $13.9 million for the three months ended September
30, 2004, up $0.1 million, or 1.0%, from net sales of $13.8 million in the prior
year same quarter. Sales for the three months ended September 30th, 2004 include
$38,750 for the recognition into income of payments resulting from the agreement
with Abbott Laboratories to cease the production and distribution of
Baralyme(R). The Company ceased the sale of Baralyme(R) on August 27th, 2004
upon completion of the agreement with Abbott, and recognized one month of income
during the three months ended September 30th, 2004. Income from the agreement
will continue to be recognized over eight years, the term of the agreement, at
$38,750 per month. Sales for the three months ended September 30th, 2004 also
included recognition as sales of a one-time $600,000 payment from Abbott
Laboratories for cost incurred in connection with the withdrawal of Baralyme(R)
from the market, the disposal of such product, and severance payments payable of
such withdrawal. Sales, exclusive of the $600,000 one-time payment from Abbott
Laboratories, were down 3.4%. Domestic sales were even with the
12
prior year while international business, which represented 13.4% of first
quarter sales, was down 17.7%.
Gross profit for the three months ended September 30, 2004 was $3.4
million, or 24.4% of net sales, compared to $3.4 million, or 24.6% of net sales,
for the three months ended September 30, 2003. Cost of sales for the three
months ended September 30th, 2004 does include $0.6 million in cost incurred in
connection with the withdrawal of Baralyme(R). Gross margins have continued to
improve during the three months ended September 30th, 2004 as the result of
reduced operations cost resulting from the Company's cost reduction efforts,
including automation of certain manufacturing processes, in-house production,
and material purchasing efforts. Gross profit for the three months ended
September 30, 2003 was benefited by a $0.2 million one-time distribution
representing the Company's membership interest in the liquidation of the General
American Mutual Holding Company, the Company's health care benefit provider.
Selling, general and administrative expenses for the three months ended
September 30, 2004 were $2.9 million, a net decrease of $0.3 million, or 7.8%,
from $3.2 million for the three months ended September 30, 2003. The decrease is
the result of reduced insurance cost, lower staffing levels, and other expense
reductions.
On July 28th, 2003 the Company announced a workforce reduction of 14
positions from its managerial and administrative staff and 5 positions from its
production group. This reduction resulted in severance pay of approximately
$73,000, which was paid in the first quarter of fiscal 2004. These payments are
reflected in selling, general, and administrative expenses for the three months
ended September 30, 2003.
Income from operations was $0.5 million for the three months ended
September 30, 2004 compared to $0.2 million for the three months ended September
30, 2003. Interest expense was $0.07 million for the three months ended
September 30, 2004, down from $0.2 million for the three months ended September
30, 2003. Allied had income before provision for income taxes in the first
quarter of fiscal 2005 of $396,406, compared to income before provision for
income taxes in the first quarter of fiscal 2004 of $14,362. The Company
recorded a tax provision of $160,905 for the three-month period ended September
30, 2004, versus a tax provision of $11,589 for the three-month period ended
September 30, 2003.
In fiscal 2005, the net income for the first quarter was $235,501 or $0.03
per basic and diluted share compared to net income of $2,773 or $0.00 per basic
and diluted share for the first quarter of fiscal 2004. The weighted average
number of common shares outstanding used in the calculation of basic earnings
per share for the first quarters of fiscal 2005 and 2004 were 7,818,432 and
7,813,932 share respectively. The weighted average number of common shares
outstanding used in the calculation of diluted earnings per share for the first
quarters of fiscal 2005 and fiscal 2004 were 8,065,741 and 7,951,334 shares,
respectively.
13
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that available resources and anticipated cash flows
from operations are sufficient to meet operating requirements in the coming
year.
Working capital decreased to $10.3 million at September 30, 2004 compared
to $11.0 million at June 30, 2004. This is primarily due to a $0.5 million
reduction in accounts receivable, a $0.5 million increase in other current
liabilities, and a $0.5 million dollar increase in deferred revenue as result of
the agreement with Abbott Laboratories to cease production of Baralyme(R). These
changes have been offset by a $0.6 million reduction in the current portion of
long-term debt, and a $0.2 million decrease in accounts payable.
On April 24, 2002, the Company entered into a credit facility arrangement
with LaSalle Bank National Association (the "Bank"), which was subsequently
amended on September 26, 2002, and September 26, 2003. The credit facility
provided for total borrowings up to $19.0 million; consisting of up to $15.0
million through a revolving credit facility and up to $4.0 million under a term
loan.
On August 27, 2004, the Bank and the Company agreed to a further amendment
of the credit facility (the amended credit facility). In conjunction with these
amendments to the Company's credit facility, the Bank extended the maturity on
the Company's term loan on real estate, the Company's revolving credit facility,
and term loan on capital expenditures from April 24, 2005 to April 24, 2007. The
entire credit facility was amended to accrue interest at the Bank's prime rate.
The Prime rate was 4.5% on August 27, 2004. The interest rate on Prime rate
loans may increase from Prime to Prime plus 0.75% if the ratio of the Company's
funded debt to EBITDA exceeds 1.5. The amended credit facility also provides the
Company with a rate of LIBOR plus 2.25%, at the Company's option. The optional
LIBOR rate may increase from LIBOR plus 2.25% to LIBOR plus 3.00% based on the
Company's fixed charge coverage ratio. The 90-day LIBOR rate was 1.79% at August
27, 2004. Amortization on the real estate term loan shall continue on a
five-year schedule with equal monthly payments of $49,685. Amortization on the
capital expenditure term loan shall continue on a five-year schedule with equal
monthly payments of $50,772.
At September 30, 2004, the Company was in compliance with its financial
covenants under the amended credit facility. Although the Company was in
compliance with its financial covenants under the amended credit facility at
September 30, 2004, the ability of the Company to remain in compliance with
these ratios for the remainder of the current fiscal year depends on the
cumulative operating results and related fixed charges , and is subject to
achieving satisfactory revenue and expense levels sufficient to enable the
Company to meet heightened performance standards. At September 30, 2004, the
Company realized a Fixed Charge Coverage Ratio, as defined, of approximately
2.40 to 1.0 based on the prior twelve months. During year ending June 30, 2005,
the Company must realize a Fixed Charge Coverage Ratio of 1.0 to 1.0, as defined
in the amended
14
credit agreement. While the Company believes such performance results may be
attainable, there can be no assurance that they will be achieved.
The Company's credit facility requires a lockbox arrangement, which
provides for all receipts to be swept daily to reduce borrowings outstanding
under the credit facility. This arrangement, combined with the existence of a
Material Adverse Effect (MAE) clause in the new credit facility, cause the
revolving credit facility to be classified as a current liability, per guidance
in the FASB's EITF Issue No. 95-22, "Balance Sheet Classification of Borrowings
Outstanding under Revolving Credit Agreements that Include Both a Subjective
Acceleration Clause and a Lock-Box Arrangement." However, the Company does not
expect to repay, or be required to repay, within one year, the balance of the
revolving credit facility classified as a current liability. The MAE clause,
which is a typical requirement in commercial credit agreements, allows the
lender to require the loan to become due if it determines there has been a
material adverse effect on the Company's operations, business, properties,
assets, liabilities, condition or prospects. The classification of the revolving
credit facility as a current liability is a result only of the combination of
the two aforementioned factors: the lockbox arrangement and the MAE clause.
However, the revolving credit facility does not expire or have a maturity date
within one year, but rather has a final expiration date of April 25, 2005.2007.
Additionally, the Bank has not notified the Company of any indication of a MAE
at March 31, 2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003.
Allied had net sales of $15.0 million for the three months ended March
31, 2004, down $1.4 million, or 9.0%, from net sales of $16.4 million in the
prior year same quarter. Demand was lower in the third quarter of fiscal 2004
than in the prior year for the Company's products. The effect of lower sales on
gross profit was offset during the quarter by improved gross profit performance.
Gross profit for the three months ended March 31, 2004 was $4.2 million, or
28.2% of net sales, compared to $4.2 million, or 25.8% of net sales, for the
three months ended March 31, 2003. The improvement in gross margins is primarily
attributable to reduced operations cost resulting from the Company's cost
reduction efforts, including automation of certain manufacturing processes, and
greater control over manufacturing overhead expenditures. Manufacturing overhead
has been reduced for personnel and non-personnel costs.
Selling, general and administrative expenses for the three months ended
March 31, 2004 were $3.1 million, a decrease of $0.4 million, or 10.8%, from
$3.4 million for the three months ended March 31, 2003. The decrease is
primarily the result of $0.3 million in lower personnel cost and $0.1 million in
lower insurance cost.
Income from operations was $1.2 million for the three months ended
March 31, 2004 compared to $0.8 million income from operations for the three
months ended March 31, 2003. Interest expense was $0.1 million for the three
months ended March 31, 2004,
12
down from $0.2 million for the three months ended March 31, 2003. Allied had
income before provision for income taxes in the third quarter of fiscal 2004 of
$1.0 million, compared to an income before provision for income taxes of $0.6
million, for the third quarter of fiscal 2003. The Company recorded a tax
provision of $0.4 million for the three-month period ended March 31, 2004 versus
a tax provision of $0.2 million recorded for the three-month period ended March
31, 2003.
In fiscal 2004, the net income for the third quarter was $0.6 million
or $0.08 per basic and diluted share compared to a net income of $0.4 million or
$0.05 per basic and diluted share for the third quarter of fiscal 2003. The
weighted average number of common shares outstanding used in the calculation of
basic earnings per share for the third quarters of fiscal 2004 and 2003 was
7,818,432 and 7,813,932 shares, respectively. The weighted average number of
common shares outstanding used in the calculation of diluted earnings per share
for the third quarters of fiscal 2004 and fiscal 2003 was 8,005,365 and
7,909,158 shares, respectively.
NINE MONTHS ENDED MARCH 31, 2004 COMPARED TO NINE MONTHS ENDED MARCH 31, 2003.
Allied had net sales of $43.8 million for the nine months ended March
31, 2004, down $2.7 million, or 5.8%, from net sales of $46.5 million in the
prior year same period. Sales in the first nine months of fiscal 2004 have been
unfavorably impacted by decreased activity in the medical gas equipment markets.
This is reflected by lower orders and shipments in this market than in the prior
year. Demand was also down for the Company's respiratory care products and
emergency medical products for the first nine months than in the prior year.
Gross profit for the nine months ended March 31, 2004 was $11.7
million, or 26.7% of net sales, compared to $10.8 million, or 23.2% of net
sales, for the nine months ended March 31, 2003. The improvement in gross
margins is the result of reduced operations cost resulting from the Company's
cost reduction efforts, including automation of certain manufacturing processes.
These improvements offset the decrease in gross margins attributable to lower
sales volumes. In addition, gross profit improved $0.2 million as a result of a
distribution representing the Company's membership interest in the liquidation
of the General American Mutual Holding Company, the Company's health care
benefit provider. The Company is continuing to review, automate, and further
improve operations to improve productivity and lower manufacturing and product
cost.
Selling, general and administrative expenses for the nine months ended
March 31, 2004 were $9.6 million, a decrease of $0.6 million, or 5.9%, from
$10.2 million for the nine months ended March 31, 2003. The decrease is
primarily the result of reduced $0.5 million in reduced personnel cost and $0.3
million in reduced insurance cost. These savings were partially offset by an
additional $0.2 million in legal fees in fiscal 2004.
On July 28th, 2003 the Company announced a workforce reduction of 14
positions from its managerial and administrative staff and 5 positions from its
production group.
13
This reduction resulted in severance pay of approximately $73,000, which was
paid in the first quarter of fiscal 2004. These payments are reflected in
selling, general, and administrative expenses for the nine months ended March
31, 2004.
Income from operations was $2.1 million for the nine months ended March
31, 2004 compared to a $0.6 million income from operations for the nine months
ended March 31, 2003. Interest expense was $0.5 million for the nine months
ended March 31, 2004, down from $0.7 million for the nine months ended March 31,
2003. Allied had income before provision for income taxes in the first nine
months of fiscal 2004 of $1.7 million, compared to a loss before benefit for
income taxes of $46,727, for the first nine months of fiscal 2003. The Company
recorded a tax provision of $0.7 million for the nine-month period ended March
31, 2004 versus a tax provision of $4,527 recorded for the nine-month period
ended March 31, 2003.
In fiscal 2004, the net income for the first nine months was $1.0
million, or $0.13 per basic and diluted share compared to a net loss of $0.1
million or $0.01 loss per basic and diluted share for the first nine months of
fiscal 2003. The weighted average number of common shares outstanding used in
the calculation of basic earnings per share for the first nine months of fiscal
2004 and 2003 was 7,815,748 and 7,813,932 shares, respectively. The weighted
average number of common shares outstanding used in the calculation of diluted
earnings per share for the first nine months of fiscal 2004 and fiscal 2003 was
7,957,881 and 7,956,448 shares, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that available resources and anticipated cash
flows from operations are sufficient to meet operating requirements in the next
12 months.
Working capital increased to $10.2 million at March 31, 2004 compared
to $9.4 million at JuneSeptember 30, 2003. This is primarily due to a $3.9 million
reduction in the current portion of long-term debt and $0.3 million increase in
other current assets as a result of insurance payments. These changes have been
offset by a $0.6 million increase in accounts payable, a $0.9 million increase
in accrued liabilities, a $0.4 million decrease in accounts receivable, a $0.2
million decrease in income tax receivable, and a $1.3 million decrease in
inventory. The decrease in inventory is a result of improved inventory control
procedures during the last year.
On April 24, 2002, the Company entered into a new credit facility
arrangement with LaSalle Bank National Association (the "Bank"). The new credit
facility provides -for total borrowings up to $19.0 million; consisting of up to
$15.0 million through a revolving credit facility and up to $4.0 million under a
term loan.
On September 26, 2003, the Bank further amended the Company's credit
facility (the amended credit facility). The Bank amended various financial
covenants in conjunction with the amended credit facility including a reduction
in the required fixed coverage charge ratio and the elimination of the EBITDA
covenant. The Bank amended
14
the borrowing base to include 80% of eligible accounts receivable plus the
lesser of 50% of eligible inventory or $7.0 million, subject to reserves as
established by the Bank. In addition, the outstanding loans under the amended
credit facility bears interest at an annual interest rate of 1.00% plus the
Bank's prime rate. In conjunction with these amendments to the Company's credit
facility, the Bank extended the maturity on the Company's term loan on real
estate from August 1, 2003 to April 24, 2005. Amortization on the real estate
term loan continues on a five-year schedule with equal monthly payments of
$49,685. The real estate term loan bears interest at an annual interest rate of
1.00% plus the Bank's prime rate. The Company also received a waiver from the
Bank for its covenant violations pertaining to its EBITDA covenant, which the
Company was in default of on June 30, 2003.
At March 31, 2004, the Company was in compliance with its financial
covenants under the amended credit facility. Although the Company was in
compliance with its financial covenants under the amended credit facility at
March 31, 2004, the ability of the Company to remain in compliance with these
ratios for the remainder of the current fiscal year depends on the cumulative
operating results and related fixed charges, and is subject to achieving
satisfactory revenue and expense levels sufficient to enable the Company to meet
heightened performance standards. At March 31, 2004, the Company realized a
Fixed Charge Coverage Ratio, as defined, of approximately 1.4 to 1.0 based on
the prior twelve months. During the year ending June 30, 2004, the Company must
realize a Fixed Charge Coverage Ratio of at least .75 to 1.0, as defined in the
amended credit agreement.
The Company's credit facility requires lockbox arrangement, which
provide for all receipts to be swept daily to reduce borrowings outstanding
under the credit facility. This arrangement, combined with the existence of a
Material Adverse Effect (MAE) clause in the new credit facility, cause the
revolving credit facility to be classified as a current liability, per guidance
in the FASB's Emerging Issues Task Force Issue 95-22, "Balance Sheet
Classification of Borrowings Outstanding under Revolving Credit Agreements that
Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement."
However, the Company does not expect to repay, or be required to repay, within
one year, the balance of the revolving credit facility classified as a current
liability. The MAE clause, which is a typical requirement in commercial credit
agreements, allows the lender to require the loan to become due if it determines
there has been a material adverse effect on the Company's operations, business,
properties, assets, liabilities, condition or prospects. The classification of
the revolving credit facility as a current liability is a result only of the
combination of the two aforementioned factors: the lockbox arrangement and the
MAE clause. However, the revolving credit facility does not expire or have a
maturity date within one year, but rather has a final expiration date of April
25, 2005. Additionally, the Bank has not notified the Company of any indication
of a MAE at March 31, 2004.
At March 31,September 30, 2004, the company had $0.3 millionno balance outstanding against this
facility and $9.4$10.0 million available to borrow from the line based on collateral
requirements.
15
Inflation has not had a material effect on the Company's business or
results of operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets", which supersedes Statement of Financial Accounting Standards
No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets to be
Disposed Of" and the accounting and reporting provisions of APB No. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", for the disposal of a business. SFAS 144 provides a
single accounting model for long-lived assets to be disposed of. Although
retaining many of the fundamental recognition and measurement provisions of SFAS
121, the new rules change the criteria to be met to classify an asset as
held-for-sale. The new rules also broaden the criteria regarding classification
of a discontinued operation. The Company was required to adopt the provisions of
SFAS 144 effective July 1, 2002. Adoption of SFAS 144 did not have a material
impact on the Company's results of operations, financial position or cash flows.
In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 (SFAS 146), "Accounting for Costs Associated with Exit or
Disposal Activities" which addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost
was recognized at the date of an entity's commitment to an exit plan. The
provisions of SFAS 146 are effective for exit or disposal activities initiated
after December 31, 2002. Adoption of SFAS 146 has not had a material impact on
the Company's results of operations, financial position or cash flows.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 (SFAS 148), "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FAS 123," which provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. Additionally, SFAS 148 amends
the disclosure requirements of Statement of Financial Accounting Standards No.
123 (SFAS 123), "Accounting for Stock-Based Compensation," to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The provisions of SFAS 148 are effective for financial
statements issued for fiscal years ending after December 15, 2002 and for
financial reports containing condensed financial statements for interim periods
beginning after December 15, 2002. Adoption of SFAS
16
148 did not have a material impact on the Company's results of operations,
financial position or cash flows.
In November 2002, the FASB issued Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". This interpretation elaborates
on the disclosures to be made by a guarantor in its financial statements about
its obligations under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. At March 31, 2004, the Company does not have any commitments that are
within the scope of FIN No. 45.
In January 2003, the FASB released FIN No. 46, "Consolidation of
Variable Interest Entities - an Interpretation of ARB No. 51". The
Interpretation clarifies issues regarding the consolidation of entities which
may have features that make it unclear whether consolidation or equity method
accounting is appropriate. Adoption of FIN 46 did not have a material impact on
the Company's results of operations, financial position or cash flows.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 (SFAS 150), "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity." SFAS 150 provides guidance on
distinguishing between liability and equity instruments and accounting for
instruments that have characteristics of both. SFAS 150 requires specific types
of freestanding financial instruments to be classified as liabilities including
mandatory redeemable financial instruments, obligations to repurchase the
issuer's equity shares by transferring assets and certain obligations to issue a
variable number of shares. The provisions of SFAS 150 are effective for
financial instruments entered into or modified after May 31, 2003. Adoption of
SFAS 150 did not have a material impact on the Company's results of operations,
financial position or cash flows.
LITIGATION AND CONTINGENCIES
The Company becomes, from time to time, a party to personal injury
litigation arising out of incidents involving the use of its products. More
specifically there have been a number of lawsuits filed against the Company
alleging that its aluminum oxygen pressure regulator, marketed under its Life
Support Products label, has caused fires that have led to personal injury. The
Company believes, based on preliminary findings, that its products did not cause
the fires. The Company intends to defend these claims in cooperation with its
insurers. Based on the progression of certain cases, the Company has recorded an
additional $0.1 million charge to operations evenly throughout both fiscal 2004
and 2003 for amounts estimated to be payable by the Company under its
self-insurance retention for legal costs associated with defending these claims.
The
Company believes that any potential judgements resulting from these claims over
its self-insured
17
retention will be covered by the Company's product liability
insurance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
At March 31,September 30, 2004, the Company had $5.3$1.4 million in debt outstanding.
This balance represents amountsan amount outstanding under the Company's revolving credit
facility of $0.3 million, the Company's real estate loan for $2.7 million, and the Company's capital
expenditure loan for $2.3$1.4 million. The revolving credit facility, and the
capital expenditure loan, and the real estate loan bear an interest rate using the commercial bank's
"floating reference rate" as the basis, as defined in the loan agreement, and
therefore is subject to additional expense should there be an increase in market
interest rates.
15
The Company had no holdings of derivative financial or commodity
instruments at March 31,September 30, 2004. Allied Healthcare Products has international
sales, however these sales are denominated in U.S. dollars, mitigating foreign
exchange rate fluctuation risk.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
TheAs of September 30, 2004, the Company, under the supervision, and with the
participation, of its management, including its principal executive officer and
principal financial officer, performed an evaluation of the Company's disclosure
controls and procedures, as contemplated by Securities Exchange Act Rule 13a-15, as of March
31, 2004.13a-15.
Based on that evaluation, the Company's principal executive officer and
principal financial officer concluded that such disclosure controls and
procedures arewere effective to ensure that material information relating to the
Company, including its consolidated subsidiaries, is made known to them,
particularly during the period for which the periodic reports are being
prepared.as of September 30, 2004.
Changes in Internal Controls
NoThere have been no significant changes were made in the Company's internal controls
or in other factors that could significantly affect theseinternal controls subsequent
to the date of the evaluation performed pursuant to Securities Exchange Act Rule
13a-15 referred to above.September 30, 2004.
Part II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a).
31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a).
18
32.1 Certification by Chief Executive Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
32.2 Certification by Chief Financial Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
99.1 Press Release dated April 30,November 5, 2004 announcing earnings for thefirst quarter
and nine months ended March 31, 2004.
b) Reports on Form 8-K:
For an event occurring on February 25, 2004, the Registrant filed a
Form 8-K announcing that Judy T. Graves had been elected to its board of
directors expanding the size of the board to six members.earnings.
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLIED HEALTHCARE PRODUCTS, INC.
/s/ Daniel C. Dunn
-------------------------------------------------------------------
Daniel C. Dunn
Chief Financial Officer
Date: April 30,November 5, 2004
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