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 March 31, 1997
- - --- 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 May 15, 1997 is
7,796,682 shares.
<PAGE>
INDEX
Page
Number
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statement
of Operations - three months and nine months 3
ended March 31,
1997 and 1996 (Unaudited)
Consolidated Balance Sheets -
March 31, 1997 (Unaudited) and 4-5
June 30, 1996
Consolidated Statements of Cash
Flow - nine months ended 6-7
March 31, 1997 and 1996 (Unaudited)
Consolidated Statement of Changes
in Stockholders' Equity for nine months 8
ended March 31, 1997 (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 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<S> <C> <C> <C> <C>
Three months ended Nine months ended
March 31, March 31,
-------------------------- ----------------------------
1997 1996 1997 1996
-------------------------- ----------------------------
Net sales $30,465,975 $30,334,242 $87,988,350 $89,962,188
Cost of sales 20,740,804 20,561,905 60,298,361 57,962,667
------------ ------------ ------------- -------------
Gross profit 9,725,171 9,772,337 27,689,989 31,999,521
Selling, general and
administrative expenses 8,143,489 7,311,241 24,754,757 22,134,712
------------ ------------ ------------- -------------
Income from operations 1,581,682 2,461,096 2,935,232 9,864,809
Other expenses:
Interest expense 1,731,777 988,103 4,255,952 3,346,904
Other, net 71,387 29,557 126,323 62,196
------------ ------------ ------------- -------------
1,803,164 1,017,660 4,382,275 3,409,100
------------ ------------ ------------- -------------
Income/(loss) before provision/
(benefit) for income taxes (221,482) 1,443,436 (1,447,043) 6,455,709
Provision/(benefit) for income taxes 80,800 465,600 (411,050) 2,470,352
------------ ------------ ------------- -------------
Net income/(loss) ($302,282) $977,836 ($1,035,993) $3,985,357
============ ============ ============= =============
Earnings/(loss) per share ($0.04) $0.12 (0.13) 0.55
============ ============ ============= =============
Weighted average shares 7,796,682 7,796,671 7,796,682 7,240,091
============ ============ ============= =============
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
<S> <C> <C>
March 31, June 30,
1997 1996
------------- -------------
(Unaudited)
Current Assets:
Cash $964,462 $1,489,133
Accounts receivable, net of allowance for doubtful
accounts of $469,764 and $422,517, respectively 26,324,255 25,964,658
Inventories 27,484,839 28,046,490
Income taxes receivable 930,543 2,285,224
Other current assets 2,749,858 2,713,497
------------- -------------
Total current assets 58,453,957 60,499,002
------------- -------------
Property, plant and equipment, net 21,337,196 21,968,504
Goodwill, net 51,695,716 52,821,411
Other assets, net 1,599,643 1,471,541
------------- -------------
Total assets $133,086,512 $136,760,458
============= =============
</TABLE>
See Accompanying Notes To Consolidated Financial Statements.
<PAGE>
<TABLE>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
March 31, June 30,
1997 1996
------------- -------------
(Unaudited)
Current liabilities:
Accounts payable $12,459,266 $13,104,299
Current portion of long-term debt 3,881,107 3,848,780
Other current liabilities 4,241,434 5,516,045
------------- -------------
Total current liabilities 20,581,807 22,469,124
------------- -------------
Long-term debt 48,282,909 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 shares issued and
outstanding at March 31, 1997 and June 30, 1996 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 36,534,602 37,570,595
------------- -------------
62,850,147 63,886,140
Total stockholders' equity ------------- -------------
$133,086,512 $136,760,458
Total liabilities and stockholders' equity ============= =============
See Accompanying Notes To Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<S> <C> <C>
Nine Months ended
March 31,
-----------------------------
1997 1996
Cash flows from operating activities: ------------- -------------
Net income (loss) ($1,035,993) $3,985,357
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 4,088,674 2,851,026
Increase in accounts receivable, net (359,597) (116,460)
Decrease (increase) in inventories 561,651 (6,402,898)
Decrease in income taxes receivable 1,354,681 0
Decrease (increase) in other current assets (36,361) 246,670
Increase (decrease) in accounts payable (645,033) 2,934,576
Increase in accrued income taxes 0 24,410
Decrease in other current liabilities (728,843) (4,293,213)
------------- -------------
Net cash provided by (used in) operating activities 3,199,179 (770,532)
------------- -------------
Cash flows from investing activities:
Capital expenditures (1,790,106) (2,628,390)
Acquisition of Omni-Tech 0 (1,557,000)
------------- -------------
Net cash used in investing activities (1,790,106) (4,185,390)
------------- -------------
</TABLE>
(CONTINUED)
<PAGE>
<TABLE>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<S> <C> <C>
Nine Months ended
March 31,
-----------------------------
1997 1996
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 5,000,000 43,600,000
Payments of long-term debt (1,652,664) (61,928,430)
Borrowings under revolving credit agreement 19,499,516 24,100,000
Payments under revolving credit agreement (23,565,161) (23,100,000)
Issuance of common stock 0 25,631,149
Debt issuance costs (669,667) (1,010,945)
Dividends paid on common stock (545,768) (1,411,809)
------------- -------------
Net cash provided by (used in) financing activities (1,933,744) 5,879,965
------------- -------------
Net increase (decrease) in cash and equivalents (524,671) 924,043
Cash and equivalents at beginning of period 1,489,133 174,952
------------- -------------
Cash and equivalents at end of period $964,462 $1,098,995
============= =============
See Accompanying Notes To Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
(UNAUDITED)
<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 loss for the
Nine Months ended
March 31, 1997 (1,035,993)
---------- ---------- ------------ ------------- ------------
Balance,
March 31, 1997 $0 $101,002 $46,945,971 ($20,731,428) $36,534,602
========== ========== ============ ============= ============
See Accompanying Notes To Consolidated Financial Statements.
</TABLE>
<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
Inventories are comprised as follows:
<TABLE>
<S> <C> <C>
March 31, June 30,
1997 1996
(Unaudited)
Raw Material $ 330,960 $ 179,042
Work-in-progress 3,147,385 2,563,773
Component Parts 17,427,839 18,428,851
Finished Goods 6,579,105 6,874,824
----------- -----------
$27,484,839 $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 March 31, 1997 and June 30,
1996, respectively.
<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 remaning credit
facilities maturity dates were reset to July 31, 1998. In addition, the
amendments were made to reset certain convenants and to increase the advance
rates on the revolving credit facility borrowing base. Further, in connection
with the amended credit facilities, the Company entered in an additional $5.0
million term loan, also maturing July 31, 1998. The amendment provides the
Company with credit facilities totaling $60.0 million which can be utilized to
finance operations and future growth. At March 31, 1997, the Company had total
borrowing of $47.8 million on these credit facilities and was in compliance with
all convenants or had received waivers of all covenants in which it was not in
compliance. In connection with the receipt of the convenant waivers at December
31, 1997 the Company agreed to pay its commercial bank syndicate a fee of
$450,000 in cash, plus $85,000 per month on a payment in kind ("PIK") basis. In
addition, the Company agreeed that if it did not reduce its aggregate borrowing
with the commerical bank syndicate by $20 million by May 15, 1997 or otherwise
obtain a Commitment which would result in proceeds to the Compayn of at least
$20 million by May 15, `997, it would pay the commercial bank syndicate an
additional fee of $450,000 on May 15, 1997. The Company was unable to complete
an alternative financing agreement or otherwise obtain a commitment to reduce
its debt with the commerical bank syndicate by $20 million and, accordingly,
paid the $450,0000 fee on May 15, 1997. The $85,0000 per month PIK fee continues
to remain in effect. In connection with the receipt of covenant waivers at March
31, 1997, the Company agreed to pay its commerical bank syndicate a fee of
$150,000, payable in cash in threee monthly installments of $50,000 each, and a
fee of $300,0000 on a PIK basis. Commencing August 15, 1997, if the loan
obligation has not been repaid in full and continuing through the loan maturity
date the bank syndicate, at its option may convert the $300,000 fee into 90,000
shares of Allied common stock. The Company continues to negotiate with the
commercial bank syndicate for a long term agreement and in addition, the Company
continues to pursue alternative financing arrangements.
The notes payable and the revolving credit agreement contains a
restrictions on the pledging of assets and various convenants regarding
financial ratios and are secured by property, plant and equipment, accounts
receivable and inventory.
<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 month and nine month
periods ended March 31, 1997 compared to the three month and nine month periods
ended March 31, 1996. This discussion should be read in conjunction with the
March 31, 1997 consolidated financial statements and accompanying notes thereto
included in this Quarterly Report on Form 10-Q for the quarter ended March 31,
1997.
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 or to increase prices of certain products, difficulties or
delays in the introduction of new products or disruptions in selling and/or
shipping efforts.
From December 1993 through November 1995, the Company completed seven
acquisitions which 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 $1.5
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") Monitoring 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 third quarter of fiscal 1997. Included
in these activities are a shift
<PAGE>
in homecare field sales to inside telemarketing from field sales
representatives, as well as continued information system enhancements and
capital expenditure project activities. Progress made by the Company during the
third quarter of fiscal 1997 is as follows:
HOMECARE SALES
During the third quarter of fiscal 1997 the Company completed the refocus of its
sales efforts for the homecare product line to Durable Medical Equipment Dealers
("DME's"). Allied increased its inside telemarketing sales group by six and
reduced the field sales force for homecare products by ten. The homecare product
line requires minimal or no demonstration activities and requires no in-service
activities, thus eliminating the requirement for an outside sales call.
Expanding the inside telemarketing sales efforts increases the penetration to
the DME's and provides greater coverage and improved customer response time as
each telemarketer, on average, makes approximately sixty customer contacts per
day compared to an outside sales representative average of approximately six
customer contacts per day. Allied invested in updated catalogues, literature,
and other mailings during the third quarter to augment its increased
telemarketing focus. Contracts with and sales to the national homecare chains of
these products continue to be made by the Company's national account sales
force.
INFORMATION SYSTEMS ENHANCEMENTS
The Company continued to make advances in upgrading its information technology
capabilities. In October 1996 the Company converted its Corporate Offices and
its St. Louis manufacturing operations to a new fully-integrated software
system. This computer conversion, which should provide a strategic long-term
benefit to the Company, caused short-term disruptions in manufacturing
scheduling and shipping of products and, accordingly, the Company was unable to
meet the challenges of this disruption during the fiscal 1997 second quarter,
ending the second quarter with past due shipments. During the third quarter of
fiscal 1997, the Company addressed the temporary disruptions caused by this
computer conversion in St. Louis during the second quarter. Further, the tools
and capabilities of the new system have enabled the Company to improve
manufacturing planning and scheduling, enhance forecasting and inventory
control, and has enhanced customer service by improving the quantity and quality
of customer and product information. The Company also plans to convert its
Toledo, Ohio and Riverside, California operations. Preliminary work has begun in
these other operations but the conversion at these locations will take place
only after the St. Louis systems are process proven. 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 continued its progress in modernizing two of its primary
manufacturing facilities during the fiscal 1997 third quarter. In May and June
of 1996, the Company purchased five computer controlled machining centers and,
in the third quarter of fiscal 1997 completed the programming and installation
process for this machinery in its St. Louis, Missouri facility. This $1.5
million investment modernized the Company's metal machining capabilities and
provides significant opportunities to reduce product costs from shorter set-up
times, and elimination of secondary operations in component manufacturing and in
the future this project is expected to provide the opportunity for reduced
inventory levels, reductions in scrap and improvements in quality.
<PAGE>
In addition, the Company is in the process of investing up to $2.0 million in
molds and injection molding machinery to expand the production capacity and gain
efficiencies at its Toledo, Ohio facility. Manufacturing inefficiencies and
capacity constraints caused by old, outdated injection mold machinery has
prevented the Company from shipping to the level of demand for certain products.
This investment in enhanced injection molding capabilities is expected, when
complete, to increase annual production, and to provide significant cost
reduction opportunities, including reduced product material content, labor and
utility costs, while improving overall quality. Six injection molding machines
and eleven molds have been installed as of March 31, 1997. An additional six
molds are scheduled for delivery through June, while plans to order four
additional molding machines and four additional molds are under evaluation. 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 third 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.
FINANCIAL INFORMATION:
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.
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
March 31, March 31,
1997 1996 1997 1996
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 68.1 67.8 68.5 64.4
------ ------ ----- -----
Gross profit 31.9 32.2 31.5 35.6
Total SG&A expenses 26.7 24.1 28.1 24.6
----- ---- ------ -----
Income from operations 5.2 8.1 3.4 11.0
Interest expense 5.9 3.3 5.0 3.8
------- ------- ------- ------
Income (loss) before provision
(benefit) for income taxes (0.7) 4.8 (1.6) 7.2
Provision (benefit) for income taxes 0.3 1.6 (0.4)
------- ------- -------- 2.8
Net income (loss) (1.0)% 3.2% (1.2)% 4.4%
======= ======= ======= ======
</TABLE>
<PAGE>
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 and nine months ended March 31,
1997 compared to the three months and nine months ended March 31, 1996.
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended
March 31, 1997 March 31, 1996
% of % of
total total
Net net Net net
sales sales sales sales
_____ _____ _____ _____
Respiratory Therapy Equipment $16,073 52.7% $16,587 54.7%
Medical Gas Equipment 11,384 37.4% 10,276 33.9%
Emergency Medical Products 3,009 9.9% 3,471 11.4%
------- ----- ------- -----
Total $30,466 100.0% $30,334 100.0%
======= ===== ====== =====
Nine Months Ended
March 31, 1997 March 31, 1996
%of %of
total total
Net net Net net
sales sales sales sales
_____ _____ _____ _____
Respiratory Therapy Equipment $47,632 54.1% $48,298 53.7%
Medical Gas Equipment $31,624 36.0% 31,756 35.3%
Emergency Medical Products 8,732 9.9% 9,908 11.0%
------- ----- ------- -----
Total $87,988 100.0% $89,962 100.0%
======= ===== ======= ======
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Net sales for the three months ended March 31, 1997 of $30.5 million
were $0.2 million, or 0.4% over sales of $30.3 million for the three months
ended March 31, 1996. The Company noted progress during the third quarter in
both internal and external issues that have impacted operations. It however,
improvements are still required and the process is not yet complete. The Company
has experienced sequential improvements in operations in the fiscal 1997 third
quarter compared to the three prior quarters in orders, sales, margins and
margin percent to net sales, and in operating profit. Included in internal
operating issues that have impacted the Company are disruptions to
manufacturing, scheduling and shipping created by the computer conversion in the
St. Louis, Missouri facility, capacity constraints of the Toledo, Ohio facility,
and changes in the field salesforce. During the third quarter of fiscal 1997 the
Company addressed the disruptions created by the computer conversion through
training and programming enhancements.
<PAGE>
In addition, beginning in the third
quarter the capital expenditure project in Toledo, resulted in increased
capacity and improvements in product quality and manufacturing efficiencies.
Finally, the shift to inside telemarketing sales for homecare products was
completed. Each of these activities has been previously discussed. Certain
external issues continued to impact the Company's third quarter operations. In
the home health care market, consolidation of dealers has continued to put
pressure on prices and corresponding margins. In addition, Congress has not yet
set policy on reimbursement guidelines for oxygen therapy reimbursements. The
impact of consolidation of acute health care providers appears to be improving
as the orders from and sales to these markets have both increased in the third
quarter of fiscal 1997 over the same period in the prior year. Orders, or the
pace of incoming business, for the three months ended March 31, 1997, are $32.8
million, an increase of $1.2 million, or 4.0%, over orders of $31.6 million in
the prior year comparable period. While the Company can not predict when the
full ramifications of its internal and external issues will be 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 third quarter of fiscal 1997 of $16.1
million were $0.5 million, or 3.1%, under prior year third quarter sales of
$16.6 million. Sales of ventilation products have increased due to the strong
world wide acceptance of the Smart Trigger technology for the Company's adult
critical care ventilator and the new infant ventilator, the Bear Cub 750R . The
Company has hired and trained field salesforce personnel to address the high
turnover rates experienced during fiscal 1996, and in the second quarter of
fiscal 1997, completed the combination of its ventilation and patient care sales
forces to increase sales coverage for this demonstration-based, sales-intensive
product line. Offsetting the increase in ventilation product sales is a decline
in sales of home health care products. This decline is a result of pricing
pressures caused by the ongoing consolidation of home health care dealers
combined with 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. To enhance homecare product sales the Company has
shifted its sales emphasis to inside telemarketing sales, in an effort to
increase sales coverage and penetration to DME's. The home health care sales
were additionally impacted by capacity constraints for certain products at the
Company's Toledo, Ohio facility. 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 demand will remain at current levels or
improve with the telemarketing efforts.
Medical gas equipment sales in the third quarter of fiscal 1997 of $11.4 million
were $1.1 million, or 10.8% over prior year sales of $10.3 million. Medical
construction sales, headwall sales, and medical gas suction and regulation
device sales all were above prior year sales levels. The market demand for
Medical Gas Equipment has been strong as the pace of this business, as measured
by incoming orders, has increased compared to the prior year orders in each
quarter this fiscal year. New orders for the third quarter of fiscal 1997 of
$14.4 million are $3.1 million or 27.3% over orders of $11.3 million in the
prior year comparable quarter. It appears the impact of the consolidation of
health care providers is slowing and their rationalization process for facility
protocol and inventory consolidation is nearing completion, although management
is unable to predict when the full ramification of such consolidations will be
complete.
Emergency medical product sales in the third quarter of $3.0 million were $0.5
million, or 13.3% under sales of $3.5 million in the prior year comparable
period. This sales trend is a continuation of fiscal 1997 first and second
quarter issues and is attributable to problems the Company had in the relocation
of production of
<PAGE>
emergency products to the St. Louis facility and the absence of
a large stocking order that occurred in the prior year. The emergency business
has two elements. One is steady replacement sales and the other element is
driven by events, such as a natural disaster or change in emergency protocol in
a particular country. Management expects sales for the remainder of fiscal 1997
to primarily consist of demand driven by the replacement segment of the
business.
The Company continued to increase its presence in world wide markets during the
third quarter of fiscal 1997. International sales, which are included in the
product line sales discussion above, increased $0.1 million, or 1.5%, to $8.7
million in the third quarter of fiscal 1997 compared to sales of $8.6 million in
the second 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. Partially offsetting the increase in
international ventilator product sales is a decline in medical gas equipment and
head wall sales which was attributable to a large order in the prior year.
Gross profit for the third quarter of fiscal 1997 was $9.7 million, or 31.9% of
net sales, compared to gross profit of $9.8 million, or 32.2% of net sales for
the third quarter of fiscal 1996. An unfavorable product line sales mix, the
increase in lower margin international sales, and pricing pressures brought on
by the consolidation of health care providers all adversely impacted margins
from year to year. In addition, the gross profit margin percentage was impacted
by a planned decline in manufacturing volume as the Company continued to focus
on working capital management and did not significantly build inventory levels
as in the prior year. As a result, the decline in manufacturing volume in fiscal
1997 increased per unit costs of manufacturing and lowered margins as a percent
of sales compared to the third quarter of fiscal 1996. Sequentially, the gross
margin percentage of 31.9% in the third quarter of fiscal 1997 is greater than
the prior three quarters. The trend line improvement in gross margin is
attributable to the strengthening of the medical gas markets and strong market
acceptance of the Company's ventilation products. To further improve margins,
the Company has focused resources on two significant capital expenditure
programs which are designed to reduce manufacturing costs and reduce inventory
levels as described above. 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 for the three months ended
March 31, 1997 were $8.1 million, an increase of $0.8 million over prior year
comparable period SG&A expenses of $7.3 million. The Company continued to make
strategic investments in or incur non-recurring SG&A expenses in the third
quarter of fiscal 1997. SG&A spending includes investments in advertising and
marketing literature, investments in information technology, and continued
investments in research and development, all expenditures that potentially could
benefit future periods. In addition, the Company incurred duplicate costs for
sales efforts to the DME's in the homecare market during the transition period
of shifting to telemarketing from field sales representatives. Finally, the
fiscal 1996 SG&A expenses were lowered by a research grant of $0.3 million which
did not repeat in fiscal 1997. As a percent of net sales, SG&A expenses were
26.7%. This was greater than the fiscal 1996 third quarter percent to net sales
of 24.1% due to the investment spending discussed above. However, SG&A expenses
for the fiscal 1997 third quarter are below the prior three quarters as both a
percent to net sales and in actual spending. Management anticipates the trend
line reduction in SG&A spending to continue through the remainder of fiscal
1997.
<PAGE>
Income from operations in the third quarter of fiscal 1997 of $1.6 million was
$0.9 million, or 35.7%, below the third quarter of fiscal 1996 income from
operations of $2.5 million. As a percentage of net sales, income from operations
decreased to 5.2% from 8.1% for these same periods. This decrease is
attributable to reduced gross margins and the increase in SG&A expenses
discussed above. Sequentially, income from operations of $1.6 million, or 5.2%
of net sales, has improved from the second quarter results of $0.5 million, or
1.7% of net sales, respectively and from the first quarter results of $0.9
million, or 3.0% of net sales, respectively.
Interest expense for the third quarter of fiscal 1997 of $1.7 million was $0.7
million above interest expense of $1.0 million in the prior year comparable
period. This increase is attributable to an additional $0.2 million amortization
of loan origination fees, (caused by the accelerated maturity date of the
Company's commercial bank syndicate credit facilities), $0.1 million
attributable to a higher effective interest rate and $0.4 million attributable
to fees paid to the bank syndicate to obtain covenant waivers. Interest expense
is expected to increase substantially as a result of the modifications to the
Company's credit facilities described below.
Allied had a loss before provision for taxes in the third quarter of fiscal 1997
of $0.2 million. In addition, the Company recorded a provision for income taxes
of $0.1 million, resulting in a net loss after taxes of $0.3 million, or a loss
of $0.04 per share. The provision for income taxes recorded in the third quarter
relates to adjustments to the Company's estimated effective tax rate for fiscal
1997 which is impacted by the Company's continuing losses from operations, the
increased interest expense noted above, the non - deductibility of certain
goodwill amortization and the Company's expectations regarding the lack of
availability of the Company's foreign sales tax credit in 1997. Results for the
third quarter of fiscal 1996 were income before taxes of $1.4 million, a tax
provision of $0.5 million, an effective tax rate of 32.3%, net income of $1.0
million, and earnings per share of $0.12. The weighted average number of common
shares outstanding used in the calculation of earnings per share was 7,796,682
and 7,796,671 for the third quarter of fiscal 1997 and fiscal 1996,
respectively.
NINE MONTHS ENDED MARCH 31, 1997 COMPARED TO NINE MONTHS ENDED MARCH 31, 1996
Net sales for the nine months ended March 31, 1997 were $88.0 million, a
decrease of $2.0 million, or 2.2%, from sales of $90.0 million in the same
period in the prior year. The decline in net sales for the nine months ended
March 31, 1997 compared to the same period in the prior year is attributable to
numerous external and internal factors. The sales decline for the nine months
compared to the prior year period occurred in the first quarter of 1997. The
macroeconomic factors which impacted the Company's sales included 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 of fiscal 1997 and have continued to impact sales
through the nine months ended March 31, 1997. 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
first quarter of fiscal 1997, but appeared to stabilize in the second and the
third quarters of fiscal 1997. In the acute care market, the continued
rationalization of inventory levels of medical gas regulation devices caused
first quarter softness in this market. However, there were improvements in the
second and third quarter sales of 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 for which the Company has devoted
considerable time and resources during the first nine months of fiscal 1997 to
address. Included
<PAGE>
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 engaged in two
significant capital expenditure projects discussed above. Finally, 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 ramifications of macroeconomic
conditions will be resolved or unable to provide assurance that internal issues
will be successfully resolved, the Company has noted sequential improvements in
operations. Specifically, improvements in the pace of new business as measured
in orders have continued. Total orders for the nine months ended March 31, 1997
were $94.3 million, an increase of $4.7 million, or 5.3%, from orders of $89.6
million in the comparable prior year period. Orders for the nine months ended
March 31, 1997 compared to the nine months ended March 31, 1996 are up in the
respiratory therapy and medical gas product lines by 2.3% and 14.2%,
respectively, due to strengthening of the markets. Emergency orders were down by
7.9% in these same periods, as a result of large non-recurring stocking orders
made in the prior fiscal year and due to manufacturing disruptions noted above.
Respiratory therapy equipment sales were $47.6 million for the nine months ended
March 31, 1997 compared to sales of $48.3 million for the nine months ended
March 31, 1996, a decline of $0.7 million, or 1.4%. This decline in sales was
attributable to a 9.1% decline in homecare sales caused by pricing pressures and
operational difficulties previously discussed. Partially offsetting this decline
was a 5.8% increase in sales to hospital markets. This increase in sales to
hospital markets is primarily attributable to the strong worldwide market
acceptance of recent technology improvements in the Company's adult critical
care ventilator and the new infant ventilator.
Medical gas equipment sales for the nine months ended March 31, 1997 of $31.6
million were $0.2 million , or 0.4%, below comparable period prior year sales of
$31.8 million. Although sales of medical gas products continue to be below prior
year levels for the nine month comparable period, orders for these products
continue to outpace the prior year, resulting in a strengthening of the backlog
and an improvement in third quarter sales in fiscal 1997, which exceeded the
prior year third quarter sales. Orders for medical gas equipment for the nine
months ended March 31, 1997 of $35.6 million were $4.4 million, or 14.2%, over
orders of $31.2 million for the nine months ended March 31, 1996. While the
consolidation of acute care facilities and the resultant combination of
consolidated inventories and delays in refurbishing projects appears to be
slowing, management cannot predict when the full ramifications of such
consolidation activities will be complete.
Emergency medical products sales for the nine months ended March 31, 1997 of
$8.7 million were $1.2 million, or 11.9%, below comparable period prior year
sales of 9.9 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.
International sales, which are included in the above discussion of sales by
product lines, increased $1.1 million, or 4.6%, to $24.7 million for the nine
months ended March 31, 1997 compared to sales of $23.6 million for the nine
months ended March 31, 1996. This increase in sales is attributable to the
strong worldwide acceptance of the Company's ventilation products combined with
increased sales of the Company's medical gas equipment. International sales were
28.1% of total sales during the nine months ended March 31, 1997, compared to
26.3% of total sales for the nine months ended March 31, 1996.
<PAGE>
Gross profit of $27.7 million for the nine months ended March 31, 1997 declined
by $4.3 million, or 13.5%, from $32.0 million for the nine months ended March
31, 1997. The gross profit margin as a percentage of sales decreased to 31.5%
from 35.6% as a result of a change in product line sales mix, the change in the
mix of domestic versus international sales, pricing pressures on sales to
national accounts, planned declines in manufacturing volume to reduce
inventories, and manufacturing inefficiencies experienced at one of the
Company's plants.
SG&A expenses for the nine months ended March 31, 1997 increased $2.6 million to
$24.7 million, or 11.8%, from $22.1 million for the nine months ended March 31,
1996. The Company has made significant investments in field sales force training
and restructuring, promotional literature and advertisements, and in information
technology throughout the first nine months of fiscal 1997. As a result of
decreased net sales combined with an increase in spending, SG&A expenses as a
percentage of net sales increased to 28.1% for the nine months ended March 31,
1997 compared to 24.6% for the nine months ended March 31, 1996.
Income from operations was $2.9 million for the nine months ended March 31, 1997
compared to $9.9 million for the prior year. As a percentage of net sales,
income from operations decreased to 3.3% from 11.0% for the same period in the
prior year. This percentage decrease in income from operations is attributable
to reduced sales, reduced gross margins, and increased SG&A expenses discussed
above.
Interest expense was $4.3 million for the nine months ended March 31, 1997
compared to $3.3 million for the nine months ended March 31, 1996. The increase
in interest expense of $1.0 million is attributable to increased amortization of
prepaid loan costs and an increase in the effective interest rate, which were
partially offset by a lower average debt balance during the nine months ended
March 31, 1997 compared to the same period in the prior year. In addition,
interest expense has increased by approximately $0.4 million in the first nine
months of fiscal 1997 compared to the same period in the prior year as a result
of fees paid to the Company's bank syndicate to obtain covenant waivers.
Interest expense is expected to increase substantially as a result of the
modifications to the Company's credit facilities described below.
Allied had a loss before provision / (benefit) for taxes for the nine months
ended March 31, 1997 of $1.4. million. This loss is partially offset by a tax
benefit of $0.4 million, resulting in an effective tax rate of 28.4%. This
effective tax rate reflects adjustments to the Company's estimated effective tax
rate for fiscal 1997 which is impacted by the Company's continuing losses from
operations, the increased interest expense noted above, the non - deductibility
of certain goodwill amortization and the Company's expectations regarding the
lack of availability of the Company's foreign sales tax credit in 1997. The net
loss after taxes was $1.0 million, or $0.13 per share. Results for the nine
months ended March 31, 1996 were income before taxes of $6.5 million, a tax
provision of $2.5 million, an effective tax rate of 48.2%, net income of $4.0
million, and earnings per share of $0.55. The weighted average number of common
shares outstanding used in the calculation of earnings per share was 7,796,682
and 7,240,091 for the first nine months 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.
<PAGE>
FINANCIAL CONDITION
The following table sets forth selected information concerning Allied's
financial condition:
Dollars in thousands March 31, 1997 June 30, 1996
-------------------- -------------- -------------
Cash $ 964 $1,489
Working Capital 37,872 38,030
Total Debt 52,164 52,882
Current Ratio 2.84 :1 2.69 :1
The Company's working capital was $37.9 million at March 31, 1997, compared to
$38.0 million at June 30, 1996. Accounts receivable increased to $26.3 million
from $26.0 million while inventories declined to $27.5 million at March 31, 1997
from $28.0 million at June 30, 1996. The increase in accounts receivable is
primarily the result of an increase in sales during the most recent quarter
combined with a one day increase in Days Sales Outstanding ("DSO"). The decrease
in inventories is a net result of the Company's attempt to reduce slower moving
inventories while at the same time increasing inventory levels of higher demand
products to have them in stock in order to reduce the shipment cycle time.
Inventories have declined to 130 days on hand ("DOH") at March 31, 1997, from
140 DOH at June 30, 1996.
Net cash used for the nine months ended March 31, 1997 was $0.5 million. The net
cash used resulted from a reduction in debt of $0.7 million, capital expenditure
of $1.8 million dividends of $0.5 million and debt issuance costs of $0.7
million, which were partially offset by income from operations (a net after tax
loss plus non-cash operating charges), and a net reduction in working capital
accounts. The Company believes that cash flow from operations and available
borrowings under its amended revolving credit facility will be sufficient to
finance fixed debt service and planned capital expenditures in fiscal 1997.
At March 31, 1997, the Company had aggregate indebtedness of $52.2 million,
which included short-term debt of $3.9 million and long-term debt of $48.3
million, a decrease in total debt of $0.7 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 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 resolving 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 faciliites provide the Company with credit facilities totaling
$60.0 million which can be utilized to finance operations and future growth. At
March 31, 1997 the Company had total borrowings of $47.8 million on these credit
facilities and was in compliance with all covenants or had received waivers of
all covenants in which it was not in compliance. In connection with the receipt
of covenant waivers, the Company agreed to pay its commercial bank syndicate a
fee of $450,000 plus $85,000 per month, payable in kind (PIK). In addition, the
Company agreed that if it did not reduce its aggregate borrowings with the
commercial bank syndicate by $20.0 million by May 15, 1997, or otherwise obtain
a commitment which would result in proceeds to the Company of at least $20
million by May 15, 1997, it would pay the commercial bank syndicate an
additional fee of $450,000 on May 15, 1997. The Company was unable to complete
an alternative financing agreement or otherwise obrtain a commitment to reduce
its debt with the commercial bank syndicate $20 million and, accordingly, paid
the $450,000 fee on May 15, 1997. The $85,000 per month PIK fee continues to
remain in effect. In connection with the receipt of covenant waivers at March
31, 1997, the Company agreed to pay its commercial bank
<PAGE>
syndicate a fee of $150,000,
payable in case in three monthly installments of $50,000 each, and a fee of
$300,000 on a PIK basis. Commencing August 15, 1997, if the loan obligation has
not been repaid in full and continuing through the loan maturity date the bank
syndicate, at its option may convert the $300,000 fee into 90,000 shares of
Allied common stock. The Company continues to negotiate with the commercial bank
syndicate for a long term agreement and in addition, the Company continues to
pursue alternative financing arrangements. There can be no assurance that the
Company will be able to achieve satisfactory long-term or alternative financing
arrangments or that any such arrangement will not contain provisions which would
have a material adverse effect on the Company.
As of March 31, 1997 the Company had a backlog of $27.4 million compared to a
backlog of $25.4 million at March 31, 1997. The backlog increase during the
third quarter of fiscal 1997 of $2.0 million is attributable to the
strengthening of the medical gas equipment markets. The Company's backlog
consists of firm customer purchase orders which are subject to cancellation by
the customer upon notification. The backlog principally 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.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
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: May 15, 1997 /S/ BARRY F. BAKER
----------------------------------
Barry F. Baker
Vice President - Finance and Chief
Financial Officer
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