January 28, 2005
Mr. Brian Cascio
Accounting Branch Chief
Securities and Exchange Commission
RE: Allied Healthcare Products, Inc.
Form 10-K/A for the fiscal year ended June 30, 2004
Filed October 1, 2004
Forms 10-Q for the quarter ended September 30, 2004
File No. 000-19266
Dear Mr. Cascio,
As requested, listed below are Allied Healthcare Products, Inc.'s ("Allied" or
the "Company") responses to the comments raised in your letter dated January 18,
2005 relative to the 10-K filing for the fiscal year ended June 30, 2004.
FORM 10-K FOR THE YEAR ENDED JUNE 30, 2004
CRITICAL ACCOUNTING POLICIES - PAGE 13
1. REFER TO YOUR RESPONSE TO PREVIOUS COMMENT 2. WE NOTE THAT DURING 2004 YOU
RECORDED AN ADJUSTMENT TO YOUR RESERVE FOR EXCESS AND OBSOLETE INVENTORY TO
REFLECT THE CURRENT REPLACEMENT COST OF INVENTORY. YOU RECORDED THIS ADJUSTMENT
AS AN INCREASE TO THE RESERVE AND DECREASE TO INVENTORY, HAVING A NET ZERO
IMPACT ON NET INVENTORY OR INCOME. SAB 5BB INDICATES AN IMPAIRMENT CHARGE TO
INVENTORY CREATES A NEW COST BASIS FOR THAT INVENTORY AND, THEREFORE, CANNOT BE
SUBSEQUENTLY REVALUED. AS SUCH, IT APPEARS AS THOUGH THIS CHARGE REPRESENTS
ADDITIONAL IMPAIRMENT THAT SHOULD BE RECOGNIZED CURRENTLY IN INCOME. PLEASE
CLARIFY OR PROVIDE DETAILS OF THE BASIS OF THIS ACCOUNTING METHOD.
When the Company provides an inventory reserve on a specific item, it records an
impairment charge (to cost of goods sold) and a credit to the inventory
valuation allowance. Due to current limitations in the accounting software and
the large number of components in the Company's inventory, a direct reduction of
each inventory item's costs has not been practical. Subsequently, when new cost
standards are set in the accounting software, all items are updated, including
those previously written down. The accounting software has not been used to
selectively change standards on the non-impaired items only. As such, this
write-up has been corrected through an additional increase in the valuation
allowance, resulting in no balance sheet or income statement impact. In no
circumstances are the impaired items ever allowed to be increased in value after
an impairment charge. In accordance with SAB Topic 5BB, the Company does not
increase the recorded value of these items when new standards are applied. Due
to the current methods employed in the accounting software, what results is an
overstatement of cost and an overstatement of the reserve. However, the net
inventory value is correctly stated.
2. AS A RELATED MATTER, YOU STATE THAT WHEN OBSOLETE INVENTORY HAS BEEN SOLD FOR
LESS THAN COST, THE LOSS ON THE SALE HAS BEEN CHARGED TO THE INVENTORY RESERVE.
AGAIN, THIS APPEARS TO BE ADDITIONAL IMPAIRMENT IN YOUR INVENTORY THAT SHOULD BE
RECOGNIZED CURRENTLY IN INCOME. PLEASE TELL US IN DETAIL THE BASIS OF YOUR
ACCOUNTING TREATMENT.
In our response to previous comment 2 we stated that when obsolete inventory has
been sold for less than cost, the loss on the sale has been charged to the
inventory reserve. Our previous response should be clarified. Our response to
previous comment 2 relates to items for which a reserve was previously
specifically established. When items with no previous reserve are sold below
cost, the charge is directly to cost of sales.
EXHIBITS 31.1 AND 31.2
3. REFER TO PREVIOUS COMMENT 17. WE SEE THAT YOU FILED AN AMENDMENT ON OCTOBER
1, 2004 TO CORRECT THE TEXT OF YOUR CERTIFICATIONS. HOWEVER, THE CERTIFICATIONS
INCLUDED IN THAT AMENDED FILING ARE STILL NOT IN THE PROPER FORM. THE REQUIRED
CERTIFICATIONS MUST BE IN THE EXACT FORM PRESCRIBED; THE WORDING OF THE REQUIRED
CERTIFICATIONS MUST NOT BE CHANGED IN ANY RESPECT. REFER TO PART II.B.4 OF
RELEASE NO. 8124. ACCORDINGLY, PLEASE FILE AN AMENDMENT TO YOUR FORM 10-K THAT
INCLUDES THE ENTIRE FILING TOGETHER WITH CURRENTLY DATED CERTIFICATIONS OF EACH
OF YOUR CURRENT CEO AND CFO IN THE FORM CURRENTLY SET FORTH IN ITEM 601(b) (31)
OF REGULATION S-K.
We have attached as an appendix to this letter a corrected form of certification
which we believe complies with the revised form of S-K Item 601(b)(31) as in
effect as of the date of filing the Company's Form 10-K for the year ended June
30, 2004, in order that the staff may review this form prior to the Company
filing a further amendment to the 10-K. We understand that, given the compliance
dates applicable to the Company, the introductory portion of paragraph 4 may be
modified and that paragraph 4(b) may be omitted.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2004
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. AGREEMENT WITH ABBOTT LABORATORIES - PAGE 10
4. WE SEE THAT YOU ARE RECOGNIZING $600,000 FOR COSTS INCURRED IN CONNECTION
WITH THE WITHDRAWAL OF BARALYME(R) FROM THE MARKET AS NET SALES WITH A
CORRESPONDING COST OF SALES FOR THE ESTIMATED COST OF THE SUSPENDED OPERATIONS
AT YOUR STUYVESANT FALLS, NEW YORK, FACILITY. YOU DISCLOSE THAT THE ESTIMATED
AMOUNT OF SEVERANCE AND BENEFITS WILL TOTAL $138,000. TELL US AND DISCLOSE IN
FUTURE FILINGS THE NATURE OF THE REMAINDER OF THESE COSTS. ADDITIONALLY, TELL US
HOW YOU HAVE CONSIDERED WHETHER THESE ARE EXIT COSTS UNDER SFAS 146 AND THE
RELATED DISCLOSURE REQUIREMENTS. IN ADDITION, CLARIFY THE BASIS FOR RECOGNIZING
THE $600,000 PAYMENT IN NET SALES RATHER THAN AS A REDUCTION (REIMBURSEMENT) OF
COSTS INCURRED. IS THERE ANY OBLIGATION TO REPAY ANY OF THESE AMOUNTS? MORE
DETAILS SHOULD ALSO BE PROVIDED OF THE BASIS FOR RECOGNITION OF AMOUNTS OVER THE
TERM OF THE AGREEMENT AND ANY ADDITIONAL OBLIGATIONS OR OTHER FACTORS THAT COULD
IMPACT THIS TREATMENT.
The Company recognized the $600,000 payment from Abbott as net sales during the
first quarter. 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. Using the framework set forth in EITF 99-19, two main factors
indicate gross reporting is appropriate. First, the Company is the primary
obligor in the arrangement. It has sole authority to determine the method of
withdrawal of Baralyme(R) and discretion in such matters as employee layoffs,
disposal methods, and customer communications regarding the sale of replacement
products. Second, the amount the Company earns from this
contract is not fixed. If the Company is able to execute its withdrawal plans
for less than the $600,000 amount, it is under no obligation to return the
savings to Abbott.
The discussion in EITF 01-14 considers the merits of gross versus net reporting
for "reimbursement" type transactions. We note that the EITF concluded the
factor of being the primary obligor was weighed more heavily than the fact that
a reimbursement type transaction realizes minimal or no margin. The conclusion
to treat these payments and expenses gross is consistent with the EITF's
conclusion on this issue.
Future filings of the Company will include those disclosures required by SFAS
146. The following table summarizes those costs associated with the agreement
with Abbott Laboratories to cease production of Baralyme(R). These costs were
recorded as Cost of Sales during the three months ended September 30, 2004, and
the three months ended December 31, 2004.
COST ASSOCIATED WITH WITHDRAWAL OF BARALYME
INVENTORY SEVERANCE
TO BE DISPOSED PAY AND PRODUCT
OF BENEFITS WITHDRAWAL TOTAL
-------------- --------- ---------- ---------
PROVISION $ 200,000 $ 216,000 $ 184,000 $ 600,000
CASH EXPENDITURES ($149,677) ($ 85,431) ($119,798) ($354,906)
--------- --------- --------- ---------
BALANCE AT $ 50,323 $ 130,569 $ 64,202 $ 245,094
SEPTEMBER 30, 2004
CASH EXPENDITURES ($ 66,079) ($ 87,171) ($128,479) ($281,729)
PROVISION ADJUSTMENTS $ 55,756 ($ 2,852) $ 75,008 $ 127,912
--------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2004 $ 40,000 $ 40,546 $ 10,731 $ 91,277
========= ========= ========= =========
Additional provisions were made for Product Withdrawal and Disposal Cost during
the three months ended December 31, 2004. These additional provisions were made
to reflect more inventory being returned to Allied from customers than was
originally anticipated. Our analysis indicates that this process is nearly
complete.
Under the terms of the agreement with Abbott Allied has agreed that it will not,
for a period of eight years, 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. Allied has no further
obligations under this agreement which would require the Company to repay these
amounts or otherwise impact this treatment. This will be disclosed in all future
filings.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
5. PLEASE REVISE FUTURE FILINGS TO EXPLAIN SIGNIFICANT CHANGES IN YOUR OPERATING
TRENDS. FOR EXAMPLE, YOU STATE THAT INTERNATIONAL BUSINESS WAS DOWN 17% BUT DO
NOT PROVIDE AN EXPLANATION.
Allied will expand the explanations of changes in operating trends as described
herein in all applicable future filings with the SEC.
ITEM 4. CONTROLS AND PROCEDURES - PAGE 16
6. IN FUTURE FILINGS, PLEASE REVISE YOUR DISCLOSURE CONCERNING CHANGES IN
INTERNAL CONTROLS OVER FINANCIAL REPORTING TO INDICATE WHETHER THERE WAS ANY
CHANGE IN YOUR INTERNAL CONTROL OVER FINANCIAL REPORTING THAT OCCURRED DURING
THE FISCAL QUARTER, NOT SUBSEQUENT TO PERIOD END, THAT HAS MATERIALLY AFFECTED
OR IS REASONABLY LIKELY TO MATERIALLY AFFECT YOUR INTERNAL CONTROL OVER
FINANCIAL REPORTING, AS REQUIRED BY ITEM 308 (c) OF REGULATION S-K AS AMENDED
EFFECTIVE AUGUST 13, 2003.
This disclosure will properly reflect the requirements of Item 308 (c) of
regulation S-K in all future filings of the company.
In accordance with the staff's request, the Company acknowledges that:
- the Company is responsible for the adequacy and accuracy of
the disclosure in the filings;
- staff comments or changes to disclosure in response to staff
comments in the filings reviewed by the staff do not foreclose
the Commission from taking any action with respect to the
filing; and
- the Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
As described in the preceding comments, Allied is committed to modifying certain
footnote disclosures and Certifications in future filings with the commission.
If you would like to speak to me with further comments or questions, I may be
reached at 314-771-2400. We appreciate the opportunity to provide these
responses and clarification to the SEC.
Sincerely,
Daniel C. Dunn
Vice-President and Chief Financial Officer
Appendix
EXHIBIT 31.1
CERTIFICATION
I, EARL R. REFSLAND, certify that:
1. I have reviewed the annual report on Form 10-K of ALLIED HEALTHCARE PRODUCTS,
INC.
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rule 13a-15(e)) and for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this annual report is being prepared;
b) [omitted as not yet applicable];
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) disclosed in this report any change in registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date:
/s/ EARL R. REFSLAND
--------------------
Earl. R. Refsland
President & Chief Executive Officer