SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ---- Exchange Act of 1934
For the quarterly period ended September 30, 1996
- ---- 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
I.R.S. Employment I.D. 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 No
---------- ----------
The number of shares of common stock outstanding at November 13, 1996 is
7,796,682 shares.
<PAGE>
INDEX
Page
Number
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statement
of Operations - three months 3
ended September 30,
1996 and 1995 (Unaudited)
Consolidated Balance Sheets -
September 30, 1996 (Unaudited) and 4 - 5
June 30, 1996
Consolidated Statements of Cash
Flow - three months ended 6 - 7
September 30, 1996 and 1995 (Unaudited)
Consolidated Statement of Changes
in Stockholders' Equity for three months 8
ended September 30, 1996 (Unaudited)
Notes to Consolidated
Financial Statements 9 - 10
Item 2. Management's Discussion and
Analysis of Financial Condition 11 - 18
and Results of Operations
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three months ended
September 30,
------------ -----------------
1996 1995
------------ -----------------
Net sales $29,133,723 $31,189,032
Cost of sales 19,893,622 18,851,024
------------- ---------------
Gross profit 9,240,101 12,338,008
Selling, general and
administrative expenses 8,377,834 7,638,845
------------- ---------------
Income from operations 862,267 4,699,163
Other expenses:
Interest expense 1,115,430 1,373,882
Other, net 25,956 (22)
------------- ---------------
1,141,386 1,373,860
------------- ---------------
Income/(loss) before
provision for income taxes (279,119) 3,325,303
Provision for income taxes (101,850) 1,329,491
------------- ---------------
Net income/(loss) ($177,269) $1,995,812
============= ===============
Earnings/(loss) per share ($0.02) $0.32
============= ===============
Weighted average shares 7,796,682 6,185,555
============= ===============
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
September 30, June 30,
1997 1996
------------- -------------
<S> <C> <C>
Current Assets:
Cash $1,600,757 $1,489,133
Accounts receivable, net of allowance for doubtful
accounts of $387,416 and $422,517, respectively 24,489,434 25,964,658
Inventories 27,217,036 28,046,490
Income taxes receivable 560,872 2,285,224
Other current assets 3,017,467 2,713,497
------------- -------------
Total current assets 56,885,566 60,499,002
------------- -------------
Property, plant and equipment, net 22,166,407 21,968,504
Goodwill, net 52,448,683 52,821,411
Other assets, net 1,837,541 1,471,541
------------- -------------
Total assets $133,338,197 $136,760,458
============= =============
</TABLE>
See Accompanying Notes To Consolidated Financial Statements.
4
<PAGE>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
September 30, June 30,
1997 1996
------------- -------------
<S> <C> <C>
Current liabilities:
Accounts payable $13,616,195 $13,104,299
Current portion of long-term debt 3,856,212 3,848,780
Other current liabilities 4,383,595 5,516,045
------------- -------------
Total current liabilities 21,856,002 22,469,124
------------- -------------
Long-term debt 46,401,675 49,033,545
Deferred income tax liability-noncurrent 1,371,649 1,371,649
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.01 par value; 1,500,000 shares
authorized; no shares issued and outstanding
Series A preferred stock; $.01 par value; 200,000
shares authorized; no shares issued and outstanding
Common stock; $.01 par value; 30,000,000 shares
authorized; 7,796,682 and 7,796,682 shares
issued and outstanding at September 30, 1996
and June 30, 1996, respectively 101,002 101,002
Additional paid-in capital 46,945,971 46,945,971
Common stock in treasury, at cost (20,731,428) (20,731,428)
Retained earnings 37,393,326 37,570,595
------------- -------------
63,708,871 63,886,140
Total stockholders' equity ------------- -------------
$133,338,197 $136,760,458
Total liabilities and stockholders' equity ============= =============
See Accompanying Notes To Consolidated Financial Statements.
5
<PAGE>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three Months ended
September 30,
-----------------------------
<S> <C> <C>
1996 1995
Cash flows from operating activities: ------------- -------------
Net income (loss) ($177,269) $1,995,812
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 1,241,126 966,416
Decrease in accounts receivable, net 1,475,224 601,229
Decrease (increase) in inventories 829,454 (4,556,761)
Decrease in income taxes receivable 1,724,352 0
Decrease (increase) in other current assets (303,970) 230,725
Increase in accounts payable 511,896 4,335,341
Increase in accrued income taxes 0 1,207,074
Decrease in other current liabilities (586,682) (1,943,446)
------------- -------------
Net cash provided by operating activities 4,714,131 2,836,390
------------- -------------
Cash flows from investing activities:
Capital expenditures (983,176) (363,498)
------------- -------------
Net cash used in investing activities (983,176) (363,498)
------------- -------------
(CONTINUED)
</TABLE>
6
<PAGE>
<TABLE>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
Three Months ended
September 30,
-----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of long-term debt 5,000,000 0
Payments of long-term debt (1,124,438) (1,117,408)
Borrowings under revolving credit agreement 4,000,000 5,000,000
Payments under revolving credit agreement (10,500,000) (5,000,000)
Issuance of common stock 0 8,805
Debt issuance costs (449,125) 0
Dividends paid on common stock (545,768) (432,986)
------------- -------------
Net cash used by financing activities (3,619,331) (1,541,589)
------------- -------------
Net increase in cash and equivalents 111,624 931,303
Cash and equivalents at beginning of period 1,489,133 174,952
------------- -------------
Cash and equivalents at end of period $1,600,757 $1,106,255
============= =============
</TABLE>
See Accompanying Notes To Consolidated Financial Statements.
7
<PAGE>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<S> <C> <C> <C> <C> <C>
Additional
Preferred Common paid-in Treasury Retained
stock stock capital stock earnings
--------- ---------- ------------ ------------- ------------
Balance, June 30, 1996 $0 $101,002 $46,945,971 ($20,731,428) $37,570,595
Net income for the
Three Months ended
September 30, 1996 (177,269)
---------- ---------- ------------ ------------- ------------
Balance,
September 30, 1996 $0 $101,002 $46,945,971 ($20,731,428) $37,393,326
========== ========== ============ ============= ============
</TABLE>
See Accompanying Notes To Consolidated Financial Statements.
8
<PAGE>
ALLIED HEALTHCARE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Unaudited Financial Statements
The accompanying unaudited financial statements have been
prepared in accordance with the instructions for Form 10-Q and do not include
all of the information and footnotes required by generally accepted accounting
principles 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
financial statements and notes to the consolidated financial statements thereto
included in the Company's Form 10-K for the year ended June 30, 1996.
2. Inventories
<TABLE>
Inventories are comprised as follows:
September 30, June 30,
1996 1996
(Unaudited)
<S> <C> <C>
Raw Material $ 208,878 $ 179,042
Work-in-progress 2,418,377 2,563,773
Component Parts 17,937,307 18,428,851
Finished Goods 6,652,474 6,874,824
------------- -------------
$27,217,036 $28,046,490
============= =============
</TABLE>
The above amounts are net of a reserve for obsolete and excess inventory of
approximately $1.7 million and $1.8 million at September 30, 1996 and June 30,
1996, respectively.
9
<PAGE>
3. Debt Amendment
On September 20, 1996 the Company amended its existing $125.0
million credit facilities with its commercial bank syndicate. The credit
facilities were amended such that the $68.4 million unused portion of the $70.0
million acquisition term loan facility is no longer available and the remaining
credit facilities' maturity dates were reset to July 31, 1998. In addition, the
amendments were made to reset certain covenants and to increase the advance
rates on the revolving credit facility borrowing base. Further, in connection
with the amended credit facilities, the Company entered into an addition $5.0
million term loan, also maturing July 31, 1998. The amended credit facilities
provides the Company with credit facilities totaling $60.0 million which can be
utilized to finance operations and future growth. At September 30, 1996, the
Company had total borrowings of $47.9 million on these credit facilities and was
in compliance with all covenants.
The notes payable and the revolving credit agreement contain
restrictions on the pledging of assets and various covenants regarding financial
ratios and are secured by property, plant and equipment, accounts receivable and
inventory.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
GENERAL
The following discussion summarizes the significant factors affecting the
consolidated operating results and financial condition of Allied Healthcare
Products, Inc. ("Allied" or the "Company") for the three months ended September
30, 1996 compared to the three months ended September 30, 1995. This discussion
should be read in conjunction with the September 30, 1996 consolidated financial
statements and accompanying notes thereto included in this Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996.
Certain statements contained herein are forward-looking statements. Actual
results could differ materially from those anticipated as a result of various
factors, including cyclical and other industry downturns, the effects of federal
and state legislation on health care reform, including Medicare and Medicaid
financing, the inability to achieve cost reductions through rationalization of
acquired companies, difficulties or delays in the introduction of new products
or disruptions in selling efforts.
Since December 1993, the Company has completed seven acquisitions which have
significantly expanded its product lines. These acquisitions were each accounted
for under the purchase method of accounting and were financed primarily through
bank borrowings, resulting in a large increase in the Company's debt and
interest expense. One acquisition was partially financed through the issuance of
common stock. Results of operations of each acquired company have been included
in Allied's consolidated statement of operations from the date of acquisition.
The purchase price of each acquisition was allocated to the assets acquired and
liabilities assumed, based on their estimated fair value at the date of
acquisition. The excess of purchase price over the estimated fair value of net
assets acquired was, in each instance, recorded as goodwill and is amortized
over 20- or 40-year periods from the date of acquisition. Primarily as a result
of these acquisitions, the Company will incur approximately $1.4 million in
annual goodwill amortization expense. The following table summarizes the seven
acquisitions:
<TABLE>
<S> <C> <C> <C>
Date Business Products Purchase Price
(Dollars in millions)
- -----------------------------------------------------------------------------------------------------------------------------
December 1993 Life Support Products, Inc. ("LSP") Emergency medical equipment . . . . . . . . . . . . . $15.7
March 1994 Hospital Systems, Inc. ("HSI") Headwall products . . . . . . . . . . . . . . . . . . . 2.2
September 1994 B&F Medical Products, Inc. ("B&F") Home health care and respiratory therapy products . . . 21.5
February 1995 Bear Medical Systems, Inc. ("Bear") Critical care ventilators . . . . . . . . . . . . . . . 15.4
May 1995 BiCore Monitoring Systems, Inc. ("BiCore") Mon itoring systems and equipment for ventilators . . . 4.7
June 1995 Design Principles, Inc. ("DPI") Emergency medical equipment . . . . . . . . . . . . . . 0.6
November 1995 Omni-Tech Medical, Inc. ("Omni-Tech") Transport ventilators . . . . . . . . . . . . . . . . . 1.6
</TABLE>
These seven acquisitions have strategically placed the Company in the high
growth areas of home health care and extended care markets, expanded the breadth
of products offered and are expected to provide a source of future growth in
sales and earnings. The Company believes that the expansion of product line
offerings is particularly important in international markets as the Company
continues to increase its worldwide sales force in an effort to be positioned to
reach the growth potential of these emerging international markets. While the
Company continues to believe that these acquisitions will have positive
implications for the future, the integration and rationalization of the acquired
businesses are still in progress. Accordingly, the Company continued to
undertake numerous activities towards the implementation of these integration
and rationalization objectives during the first quarter of fiscal 1997.
11
<PAGE>
Included in these activities are field sales force consolidation and training,
the development and release of new products, information system enhancements,
and capital expenditure projects. Progress made by the Company during the first
quarter of fiscal 1997 is as follows:
Field Sales Force Consolidation and Training
- ---------------------------------------------
In the first quarter of fiscal 1997, the Company consolidated its 21 patient
care specialists with its 21 ventilator specialists to create a 34 person
respiratory products specialists field sales force. Benefits expected from this
consolidation include optimization of selling expenses through increased sales
coverage, broadening product offerings for each sales call, significantly
reducing the geographic territory each sales specialist must cover, and
leveraging the strength of these complementary product lines while enabling the
sales specialists to enhance his or her relationships with customers. The
training required for this consolidation was completed in September 1996 for
half of the field sales force and training is expected to be completed in
November 1996 for the remaining half of the field sales force. The first
ventilation product sales (a multiple ventilator order), made by a former
patient care specialist, occurred in October 1996.
Research and Development and New Product Releases
- -------------------------------------------------
Consistent with its focus on more technologically-advanced products, the Company
has increased the level of its research and development activities in the first
quarter of fiscal 1996, compared to the prior year by 13.5%, to $1.0 million and
anticipates committing more resources to research and development in the future.
Expenditures for research and development activities primarily include
developing new respiratory therapy products and updating current products.
During the first quarter of fiscal 1997, the Company introduced the Connect II
universal medical gas outlet and has received 510K approval from the Food and
Drug Administration ("FDA") for its new Bear Cub 750R infant ventilator. The
Company is currently investing in other research and development projects
designed to enhance patient treatment, provide a greater ease of patient use and
to lower production costs.
Information Systems Enchancements
- ---------------------------------
The Company made substantial progress in implementing updated information
systems technology during the first quarter of fiscal 1997. In October 1996,
immediately subsequent to the first quarter, the Company converted its Corporate
Offices and its St. Louis manufacturing operations to a new fully integrated
software system and plans to convert all of its operations by the end of fiscal
1997. When fully implemented, the information technology systems enhancement
should enable the Company to realize potential synergies of acquisitions through
an efficient integrated data base, enhanced management reporting systems and
through consolidation of certain operational functions.
Capital Expenditure Projects
- ----------------------------
The Company is in the process of modernizing two of its primary manufacturing
facilities. In May and June of 1996, the Company purchased five computer
controlled machining centers and, in the first quarter of fiscal 1997, began the
programming and installation process for this machinery in its St. Louis,
Missouri facility. This $1.5 million investment will substantially modernize the
Company's metal machining capabilities and is expected to result in significant
opportunities to reduce product costs from shorter set-up times, elimination of
secondary operations in component manufacturing, reduced
12
<PAGE>
inventory levels, reductions in scrap and improvements in quality. The project
is expected to be completed by December 31, 1996.
During fiscal 1996, Allied's production of its disposable products was
constrained by outdated molds and injection molding machinery. Manufacturing
inefficiencies and capacity constraints prevented the Company from shipping to
the level of demand for certain products. Accordingly, the Company is in the
process of investing $2.0 million in molds and injection molding machinery to
expand the production capacity and gain efficiencies at its Toledo, Ohio
facility. This investment in enhanced injection molding capabilities is
expected, when complete, to increase annual production throughout by 20%, and to
provide significant cost reduction opportunities, including reduced product
material content, labor and utility costs, while improving overall quality. The
injection molding equipment and molds have periodic delivery schedules through
December 31, 1996. The installation of equipment delivered to date has been in
accordance with management's expectations.
While the Company has expended both monetary and human resources on these
projects in the first quarter of fiscal 1997 and intends to continue emphasizing
these and other internally controlled projects, there can be no assurance that
the Company will be successful in implementing these projects and realizing
these potential synergies.
The following table sets forth, for the fiscal period indicated, the percentage
of net sales represented by certain items reflected in the Company's
consolidated statement of operations.
Three Months Ended
September 30,
1996 1995
---- ----
Net Sales 100.0% 100.0%
Cost of sales 68.3 60.4
------- -------
Gross profit 31.7 39.6
Total SG&A expenses 28.7 24.4
------- -------
Income from operations 3.0 15.2
Interest expense 3.9 4.5
------- -------
Income (loss) before provision
[benefit] for income taxes (0.9) 10.7
Provision [benefit] for income taxes (0.3) 4.3
-------- -------
Net income [loss] (0.6)% 6.4%
======== =======
Results of Operations
- ---------------------
Allied manufactures and markets respiratory therapy equipment, medical gas
equipment and emergency medical products. Set forth below is certain information
with respect to amounts (dollars in thousands) and percentages of net sales
attributable to respiratory therapy equipment, medical gas equipment and
emergency medical products for the three months ended September 30, 1996
compared to the three months ended September 30, 1995.
13
<PAGE>
<TABLE>
Three Months Ended Three Months Ended
September 30, 1996 September 30, 1995
<S> <C> <C> <C> <C>
% of % of
total total
Net net Net net
sales sales sales sales
----- ----- ----- -----
Respiratory Therapy Equipment $15,932 54.7% $16,338 52.4%
Medical Gas Equipment 10,096 34.6% 11,261 36.1%
Emergency Medical Products 3,106 10.7% 3,590 11.5%
------- ------ -------- ------
Total $29,134 100.0% $31,189 100.0%
======= ===== ======= =====
</TABLE>
Three months ended September 30, 1996 compared to three months ended
September 30, 1995
- --------------------------------------------------------------------------------
Net sales for the three months ended September 30, 1996 of $29.1 million
decreased $2.1 million, or 6.6%, compared to net sales of $31.2 million for the
three months ended September 30, 1995. Numerous external and internal factors
which adversely impacted the Company's sales in fiscal 1996 continued to impact
the Company during the first quarter of fiscal 1997. Certain macroeconomic
factors impacting the Company's sales include the renewed concerns over
potential reductions in home oxygen therapy reimbursement levels by Medicare and
Medicaid. Policy decision on this home oxygen therapy reimbursement issue was
deferred by Congress in April 1996 but debates renewed during the first quarter.
The Company is unable to predict the impact of health care reimbursement policy
decisions but believes that until reimbursement issues are resolved, current
customer purchase patterns are likely to continue. The ramifications of
consolidation of healthcare providers continued to impact certain segments of
the Company's product offerings. In the acute care market, the continued
rationalization of inventory levels for medical gas regulation devices has
caused softness in this market, however, there have been signs of an upturn in
certain medical gas system products. In the home health care market,
consolidation of dealers has continued to put pressure on prices and
corresponding margins. Internal operational issues have also continued to impact
the Company's operations. As previously discussed, the Company has made
significant progress to address the integration and management of its recent
acquisitions. The Company devoted considerable time and resources during the
first quarter of fiscal 1997 to address these issues. Included in these internal
issues are previous high turnover rates in the ventilation field sales force for
which the Company had to recruit and train replacements. Manufacturing
constraints and capacity issues also impacted the Company's operations. In
response thereto, the Company is engaged in two significant capital expenditure
projects discussed above. Finally, as previously discussed, the Company is
continuing the process of integrating the businesses which have recently been
acquired, including actively upgrading its information technology systems. While
the Company is unable to predict when the macroeconomic conditions will be
resolved or provide assurance that internal issues will be successfully
resolved, the Company believes that over a long term horizon it is positioned
through a broad product offering and continued internal operational improvements
to meet the demands of respiratory health care caused by an aging population, an
increase in the occurrence and treatment of lung disease, and other respiratory
illnesses treated in the home, hospital, and sub-acute care facilities.
Respiratory Therapy Equipment sales in the first quarter of fiscal 1997 of $15.9
million were $0.4 million, or 2.4%, under prior year first quarter sales of
$16.3 million. Sales of home health care products were down from the prior year
as a result of pricing pressures caused by the ongoing
14
<PAGE>
consolidation of home health care dealers combined with renewed concerns over
potential reductions in home oxygen therapy reimbursement rates. While the
Company is unable to predict when these factors will be resolved and the impact
of potential reimbursement policy decisions, it believes that until there is a
resolution, current customer purchase patterns are likely to continue. The home
health care sales were additionally impacted by capacity constraints at the
Company's Toledo, Ohio facility. The Company is currently installing new
injection mold equipment and new molds. Additional equipment and molds are
scheduled for delivery through December 31, 1996. While the installation of
equipment and molds previously delivered have been in accordance with
management's expectations, there can be no assurance that remaining
installations will fully alleviate the Company's capacity issues or that market
demand will remain at current levels. Offsetting the decline in home health care
sales was an increase in sales of ventilation products. The Company has recently
hired field sales force personnel to address the high turnover rates experienced
during fiscal 1996. Training of these new field sales force personnel and the
combination of the ventilation field sales force with the patient care field
sales force has been an ongoing project of the Company to increase sales
coverage for this demonstration-based, sales-intensive product line. In
addition, the increase in ventilation product sales is being driven by the
strong world wide acceptance of the Smart Trigger technology for the Company's
adult critical care ventilator and due to the introduction of the new infant
ventilator, the Bear Cub 750R .
Medical Gas Equipment sales in the first quarter of fiscal 1997 of $10.1 million
were $1.2 million, or 10.4%, below prior year sales of $11.3 million. Medical
gas system sales were slightly below prior year sales and inwall systems
construction products also experienced a decline in sales, while an increase in
headwall sales partially offset these declines. Orders of construction products
have increased by over $0.8 million in the first quarter of fiscal 1997 compared
to the prior year comparable period as acute care facilities refurbishing
projects appear to be increasing. Medical gas regulation and suction device
sales continue to be below prior year levels. The consolidation of acute care
facilities and the resultant combining of their regulation and suction device
inventories have caused a decline in demand for these products as the acute care
providers continue to rationalize their consolidated inventory levels. While the
consolidation of health care providers appears to be slowing, management cannot
predict when the full ramifications of such consolidation will be complete. In
addition, in April 1996, Congress deferred resolution of policy for capital
reimbursement guidelines. Management expects sales of medical gas equipment
products to continue to be adversely impacted until policy issues are resolved.
Emergency Medical Products sales of $3.1 million were $0.5 million, or 13.5%,
below prior year first quarter sales of $3.6 million. This decline was due to
difficulties experienced in the relocation of production of emergency products
to the St. Louis facility and a large non-recurring stocking order that occurred
in the prior year.
The Company continued to increase its presence in world wide markets during the
first quarter of fiscal 1997. International sales, which are included in the
product line sales discussion above, increased $0.6 million, or 7.7%, to $8.1
million in the first quarter of fiscal 1997 compared to sales of $7.5 million in
the first quarter of fiscal 1996. The world wide market acceptance of the Smart
TriggerR technology for the Company's adult critical care ventilator combined
with the recent introduction of the new Bear Cub 750R infant ventilator has
fueled the growth of international sales. Offsetting the increase in
international ventilator product sales was a decline in medical gas equipment
sales which was attributable to a large, non-recurring construction order in the
prior year and a decline in sales to Mexico caused by adverse economic
conditions.
15
<PAGE>
Gross profit of $9.2 million in the first quarter of fiscal 1997 was $3.1
million, or 25.1%, below gross profit of $12.3 million in the first quarter of
fiscal 1996. The decline in sales combined with an unfavorable product line
sales mix, the increase in lower margin international sales, and customer
pricing pressures brought on by the consolidation of health care providers all
adversely impacted margins from year to year. Gross profit as a percentage of
sales was 31.7% and 39.6% during the first quarter of fiscal 1997 and the first
quarter of fiscal 1996, respectively. The gross profit margin percentage was
impacted by production volume and changes in inventory levels. During the first
quarter of fiscal 1996, the Company increased its inventory levels by $4.5
million, in anticipation of future market demand, which in turn lowered per unit
production costs and improved margins. Conversely, in fiscal 1997, the Company
reduced its inventory levels by approximately $1.0 million through its focus on
working capital management and reduced manufacturing volume, which in turn
increased per unit costs of production and lowered margins as a percentage of
sales. The Company anticipates continued pressures on margins caused by the
previously discussed external and internal factors. In response to declining
margins, the Company has embarked upon two significant capital expenditure
programs which are designed to reduce manufacturing costs, improve manufacturing
cycle times, improve quality, and reduce inventory levels. The Company continues
to evaluate its business with an intent to improve productivity, reduce costs,
and initiate vendor programs to obtain price concessions. The Company may also
implement additional strategic manufacturing programs in the future to improve
profitability.
Selling, General, and Administrative ("SG&A") expenses were $8.4 million in the
first quarter of fiscal 1997, an increase of $0.7 million, or 9.7%, over prior
year comparable period SG&A expenses of $7.6 million. The Company continued to
make strategic investments in SG&A spending during the first quarter of fiscal
1997. The Company believes it is essential to improve the skill set of its field
sales force, many of whom have been put in place during the past six months, and
to provide necessary resources to support their efforts. Accordingly, Allied
continued its investments in extensive field sales force training, investments
in advertising and promotions, investments in information technology, and
investments in research and development, all of which are examples of increased
SG&A expenditures that could potentially benefit future operations. As a
percentage of net sales, SG&A expenses increased to 28.8% in the first quarter
of fiscal 1997 compared to 24.4% in the first quarter of fiscal 1996. This
increase is attributable to the combined factors of a decline in sales of
existing products and the strategic investments in training, technology and new
products.
Income from operations in the first quarter of fiscal 1997 of $0.9 million was
$3.8 million, or 81.7%, below the first quarter of fiscal 1996 income from
operations of $4.7 million. As a percentage of net sales, income from operations
decreased to 3.0% from 15.1% for these periods. This decrease is attributable to
reduced sales, reduced gross margins, and the increase in SG&A expenses
discussed above.
Interest expense for the first quarter of fiscal 1997 of $1.1 million was $0.3
million below interest expense of $1.4 million in the prior year. This decrease
is primarily attributable to the reduction in the Company's debt level,
utilizing the proceeds from a secondary stock offering completed on October 4,
1995, by an average of approximately $19.0 million this year versus the prior
year. In addition, Allied's effective interest rate for the first quarter of
fiscal 1997 was approximately 50 basis points lower than for the prior year.
Offsetting these interest expense reductions was an increase in the amortization
of loan origination fees for the credit facilities put into place on October 13,
1995 and amended on September 20, 1996.
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Allied had a loss before provision for taxes in the first quarter of fiscal
1997. The loss of $279,000 was partially offset by a tax benefit of $102,000,
resulting in an effective tax rate of 36.5%. The net loss after taxes was
$177,000 or $0.02 per share. Results for the first quarter of fiscal 1996 were
income before taxes of $3.3 million, a tax provision of $1.3 million, an
effective tax rate of 40.0%, net income of $2.0 million, and earnings per share
of $0.32. The weighted average number of common shares outstanding used in the
calculation of earnings per share was 7,796,682 and 6,185,555 for the first
quarter of fiscal 1997 and fiscal 1996, respectively. The increase in the
weighted average number of common shares outstanding was primarily the result of
the October 1995 sale of 1,610,000 shares of common stock in a secondary
offering.
Financial Condition
- -------------------
The following table sets forth selected information concerning Allied's
financial condition:
Dollars in thousands September 30, 1996 June 30, 1996
-------------------- ------------------ -------------
Cash $1,601 $1,489
Working Capital 35,030 38,030
Total Debt 50,258 52,882
Current Ratio 2.60 :1 2.69 :1
The Company's working capital was $35.0 million at September 30, 1996, compared
to $38.0 million at June 30, 1996. Accounts receivable decreased to $24.5
million from $26.0 million while inventories decreased to $27.2 million at
September 30, 1996 from $28.0 million at June 30, 1996. The decrease in accounts
receivable is primarily the result of a decrease in the average time that a
receivable is outstanding, as Days Sales Outstanding ("DSO") declined by three
days, as well as a decrease in revenue in the first quarter of fiscal 1997
compared to the fourth quarter of fiscal 1996. The decline in inventory was
attributable to the Company's efforts to reduce working capital. Accordingly,
production volume decreased during the quarter.
Net cash generated for the three months ended September 30, 1996 was $0.1
million. The net cash provided resulted from income from operations (a net after
tax loss plus non-cash operating charges), and a decrease in accounts
receivables and inventories which were partially offset by debt repayments,
capital expenditures and dividends. The reduction in net income during the last
three quarters of fiscal 1996 and during the first quarter of fiscal 1997 has
significantly impacted cash flows and the ability of the Company to continue
historical levels of fixed payments. Accordingly, on August 21, 1996, the
Company's Board of Directors voted to suspend quarterly dividends effective
immediately with the fourth quarter of fiscal 1996. The Company also
renegotiated its credit facilities and on September 20, 1996 amended its current
credit facilities with its commercial bank syndicate as described below. The
Company believes that subsequent to the suspension of cash dividends, cash flow
from operations and available borrowings under its amended revolving credit
facility, discussed below, will be sufficient to finance fixed debt service and
planned capital expenditures in fiscal 1997.
At September 30, 1996, the Company had aggregate indebtedness of $50.3 million,
which included short-term debt of $3.9 million and long-term debt of $46.4
million. During the first quarter of fiscal 1997, the Company's debt decreased
by $2.6 million from the June 30, 1996 aggregate indebtedness of $52.9 million.
On September 20, 1996 the Company amended its existing $125.0 million credit
facilities with its commercial bank syndicate. The credit facilities were
amended such that the $68.4
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million unused portion of the $70.0 million acquisition term loan facility is no
longer available and the remaining credit facilities' maturity dates were reset
to July 31, 1998. In addition, amendments were made to reset certain covenants
and to increase the advance rates on the revolving credit facility borrowing
base. Further, in connection with the amended credit facilities, the Company
entered into an additional $5.0 million term loan, also maturing July 31, 1998.
The amended credit facilities provides the Company with credit facilities
totaling $60.0 million which can be utilized to finance operations and future
growth. At September 30, 1996 the Company had total borrowings of $47.9 million
on these credit facilities and was in compliance with all covenants.
As of September 30, 1996, the Company had a backlog of $21.9 million compared to
a backlog of $21.0 million at June 30, 1996. The backlog increase during the
first quarter of fiscal 1997 of $0.9 million consists of an increase in
Respiratory Therapy Equipment of $0.4 million, and an increase in Medical Gas
Equipment of $1.1 million which were partially offset by a decline in Emergency
Medical Products of $0.6 million. The Company's backlog consists of firm
customer purchase orders which are subject to cancellation by the customer upon
notification. The backlog is expected to be shipped within the next twelve
months.
Inflation has not had a material effect on the Company's business or results of
operations.
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PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - none.
(b) Reports on Form 8-K dated August 7, 1996.
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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.
Date: November 13, 1996 /s/ Barry F. Baker
-----------------------------------
Barry F. Baker
Vice President - Finance and Chief Financial
Officer
(Principal Accounting and Financial Officer)
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