SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1998
Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Action of 1934
For the transition period from ______________ to ______________
Commission File Number 0-19266
ALLIED HEALTHCARE PRODUCTS, INC.
1720 Sublette Avenue
St. Louis, Missouri 63110
314/771-2400
IRS Employment ID 25-1370721
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter periods that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past ninety days.
Yes X No
----- -----
The number of shares of common stock outstanding at April 30, 1998 is
7,806,682 shares.
<PAGE>
INDEX
Page
Number
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statement
of Operations - three months and nine months 3
3 ended March 31, 1998 and 1997 (Unaudited)
Consolidated Balance Sheets -
March 31, 1998 (Unaudited) and 4-5
June 30, 1997
Consolidated Statements of Cash
Flow - nine months ended 6-7
March 31, 1998 and 1997 (Unaudited)
Consolidated Statement of Changes
in Stockholders' Equity for nine months
8
ended March 31, 1998 (Unaudited)
Notes to Consolidated
Financial Statements (Unaudited) 9-10
Item 2. Management's Discussion and
Analysis of Financial Condition 11-22
and Results of Operations
Part II - Other Information 23
Item 6. Exhibits and Reports on Form 8-k 23
Signature 24
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three months ended Nine months ended
March 31, March 31,
------------------------- ----------------------------
1998 1997 1998 1997
----------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . $22,784,952 $30,465,975 $ 76,990,844 $ 87,988,350
Cost of sales . . . . . . . . . . . . . . . 16,277,638 20,740,804 54,511,774 60,298,361
----------- ------------ ------------- -------------
Gross profit. . . . . . . . . . . . . . . . 6,507,314 9,725,171 22,479,070 27,689,989
Selling, general and
administrative expenses . . . . . . . . . 5,407,382 8,143,489 18,982,113 24,754,757
Gain on sale of business. . . . . . . . . . 0 0 (12,812,927) 0
Non-recurring impairment losses . . . . . . 0 0 9,778,259 0
----------- ------------ ------------- -------------
Income from operations. . . . . . . . . . . 1,099,932 1,581,682 6,531,625 2,935,232
Other expenses:
Interest expense. . . . . . . . . . . . . 492,828 1,731,777 3,565,228 4,255,952
Other, net. . . . . . . . . . . . . . . . 69,101 71,387 156,351 126,323
----------- ------------ ------------- -------------
561,929 1,803,164 3,721,579 4,382,275
----------- ------------ ------------- -------------
Income (loss) before provision
(benefit) for income taxes and
extraordinary loss. . . . . . . . . . . . 538,003 (221,482) 2,810,046 (1,447,043)
Provision (benefit) for income taxes. . . . 297,144 80,800 9,360,607 (411,050)
----------- ------------ ------------- -------------
Income (loss) before extraordinary loss . . 240,859 (302,282) (6,550,561) (1,035,993)
Extraordinary loss on early
extinguishment of debt, net of
income tax benefit of $373,191. . . . . . 0 0 530,632 0
----------- ------------ ------------- -------------
Net income (loss) . . . . . . . . . . . . . $ 240,859 ($302,282) ($7,081,193) ($1,035,993)
=========== ============ ============= =============
Basic and diluted income (loss) per share:
Income (loss) before extraordinary loss . $ 0.03 ($0.04) ($0.84) ($0.13)
Extraordinary loss --- --- ($0.07) ---
----------- ------------ ------------- -------------
Net income (loss) . . . . . . . . . . . . . $ 0.03 ($0.04) ($0.91) ($0.13)
=========== ============ ============= =============
Weighted average shares . . . . . . . . . . 7,806,682 7,796,682 7,804,471 7,796,682
=========== ============ ============= =============
<FN>
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
March 31, June 30,
1998 1997
------------ ------------
<S> <C> <C>
(Unaudited)
Current Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . $ 1,208,660 $ 988,436
Accounts receivable, net of allowance for doubtful
accounts of $998,760 and $1,225,326, respectively 16,507,534 23,093,037
Inventories. . . . . . . . . . . . . . . . . . . . . 20,180,297 26,052,991
Other current assets . . . . . . . . . . . . . . . . 91,506 1,544,811
------------ ------------
Total current assets. . . . . . . . . . . . . . . 37,987,997 51,679,275
------------ ------------
Property, plant and equipment, net . . . . . . . . . 18,005,541 20,848,870
Goodwill, net. . . . . . . . . . . . . . . . . . . . 28,229,917 50,763,511
Deferred income taxes-noncurrent . . . . . . . . . . 0 1,665,069
Other assets, net. . . . . . . . . . . . . . . . . . 652,187 1,386,291
------------ ------------
Total assets. . . . . . . . . . . . . . . . . . . $ 84,875,642 $126,343,016
============ ============
</TABLE>
See accompanying Notes To Consolidated Financial Statements.
(CONTINUED)
4
<PAGE>
<TABLE>
<CAPTION>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, June 30,
1998 1997
------------- -------------
<S> <C> <C>
(Unaudited)
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . $ 6,484,197 $ 14,048,235
Current portion of long-term debt . . . . . . . . . . . . . . 2,594,532 12,890,772
Other current liabilities . . . . . . . . . . . . . . . . . . 5,142,425 5,997,670
------------- -------------
Total current liabilities. . . . . . . . . . . . . . . . . 14,221,154 32,936,677
------------- -------------
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 17,667,043 34,041,300
Deferred income tax liability-noncurrent . . . . . . . . . . . . 634,849 0
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.01 par value; 1,500,000 shares
authorized; no shares issued and outstanding; which includes
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; 7,806,682 and 7,796,682 shares issued
and outstanding at March 31, 1998 and
June 30, 1997, respectively. . . . . . . . . . . . . . . . . 101,102 101,002
Additional paid-in capital. . . . . . . . . . . . . . . . . . 47,014,621 46,945,971
Common stock in treasury, at cost . . . . . . . . . . . . . . (20,731,428) (20,731,428)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 25,968,301 33,049,494
------------- -------------
Total stockholders' equity . . . . . . . . . . . . . . . . 52,352,596 59,365,039
------------- -------------
Total liabilities and stockholders' equity . . . . . . . . $ 84,875,642 $126,343,016
============= =============
</TABLE>
See accompanying Notes To Consolidated Financial Statements.
5
<PAGE>
<TABLE>
<CAPTION>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine months ended
March 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . ($7,081,193) ($1,035,993)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . 3,916,961 4,088,674
Gain on sale of Bear Medical . . . . . . . . . . . . (12,812,927) 0
Loss on refinancing of long-term debt. . . . . . . . 903,823 0
Noncash portion of non-recurring impairment losses . 9,572,390 0
Decrease (increase) in accounts receivable, net. . . 607,124 (359,597)
Decrease in inventories. . . . . . . . . . . . . . . 573,594 561,651
Decrease in income taxes receivable. . . . . . . . . 0 1,354,681
Decrease in deferred income taxes - asset. . . . . . 2,001,014 0
Decrease (increase) in other current assets. . . . . 542,437 (36,361)
Decrease in accounts payable . . . . . . . . . . . . (6,070,629) (645,033)
Increase in accrued income taxes . . . . . . . . . . 1,776,585 0
Decrease in other current liabilities. . . . . . . . (1,818,329) (728,843)
Increase in deferred income taxes - liability. . . . 634,849 0
------------ ------------
Net cash provided by (used in) operating activities (7,254,301) 3,199,179
------------ ------------
Cash flows from investing activities:
Capital expenditures, net . . . . . . . . . . . . . . . (420,143) (1,790,106)
Proceeds on sale of Bear Medical, net of disposal costs 35,378,957 0
------------ ------------
Net cash provided by (used in) investing activities 34,958,814 (1,790,106)
------------ ------------
</TABLE>
(CONTINUED)
6
<PAGE>
<TABLE>
<CAPTION>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
(UNAUDITED)
Nine months ended
March 31,
-----------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of long-term debt. . . . 26,000,000 5,000,000
Payments of long-term debt. . . . . . . . . . . (36,747,627) (1,652,664)
Borrowings under revolving credit agreement . . 106,514,530 19,499,516
Payments under revolving credit agreement . . . (122,358,410) (23,565,161)
Issuance of common stock. . . . . . . . . . . . 68,750 0
Debt issuance costs . . . . . . . . . . . . . . (961,532) (669,667)
Dividends paid on common stock. . . . . . . . . 0 (545,768)
-------------- -------------
Net cash used in financing activities . . . (27,484,289) (1,933,744)
-------------- -------------
Net increase (decrease) in cash and equivalents 220,224 (524,671)
Cash and equivalents at beginning of period . . 988,436 1,489,133
-------------- -------------
Cash and equivalents at end of period . . . . . $ 1,208,660 $ 964,462
============== =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . $ 4,213,765 $ 4,349,287
Income taxes. . . . . . . . . . . . . . . . $ 4,140,629 $ 77,962
</TABLE>
See accompanying Notes To Consolidated Financial Statements.
7
<PAGE>
<TABLE>
<CAPTION>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
(UNAUDITED)
Additional
Preferred Common paid-in Treasury Retained
stock stock capital stock earnings
---------- -------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1997 . $ 0 $101,002 $46,945,971 ($20,731,428) $33,049,494
Issuance of common stock 100 68,650
Net loss for the
nine months ended
March 31, 1998 (7,081,193)
---------- -------- ----------- ------------- ------------
Balance,
March 31, 1998. . . . $ 0 $101,102 $47,014,621 ($20,731,428) $25,968,301
========== ======== =========== ============= ============
</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, 1997.
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" ("FAS 128"), in the quarter
ended December 31, 1997. FAS 128 requires the presentation of basic and diluted
earnings per share. The effect of adopting FAS 128 was not material to the
reported earnings and loss per share amounts in the accompanying financial
statements.
-
2. Inventories
Inventories are comprised as follows:
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
(Unaudited)
<S> <C> <C>
Work-in-progress $ 984,612 $ 2,726,585
Component Parts 15,621,825 18,679,482
Finished Goods 3,573,860 4,646,924
----------- -----------
$20,180,297 $26,052,991
=========== ===========
</TABLE>
The above amounts are net of a reserve for obsolete and excess inventory of
approximately $2.1 million and $1.7 million at March 31, 1998 and June 30, 1997,
respectively.
3. Debt Refinancing
On August 8, 1998 the Company refinanced its existing debt through a
new $46.0 million credit facility with Foothill Capital Corporation (Foothill),
a division of Norwest Bank. The Foothill credit facility, with a blended
average interest rate of 10.2%, is comprised of a $25.0 million three-year
revolving line of credit, three-year term loans of $10.0 million and $7.0
million, respectively, and a $4.0 million loan maturing in February 1998. In
conjunction with the new financing agreement, Allied placed an additional $5.0
million in subordinated debt financing, also scheduled to mature in February
1998, with several related parties to the Company. In addition, the Company
issued 112,500 warrants with an exercise price of $7.025 per share, 62,500 of
which were issued to the holders of the subordinated debt and the remaining
warrants were issued to Foothill. In conjunction with the debt refinancing, the
Company recorded a $0.5 million, net of taxes, extraordinary expense to write
off the unamortized loan costs of the previous credit facility.
9
<PAGE>
4. Sale of Bear Medical Systems and BiCore Monitoring Systems
On October 31, 1997, the Company sold the assets of Bear Medical
Systems and its subsidiary BiCore Monitoring Systems, to Thermo Electron
Corporation for approximately $35.7 million, net of transaction costs, plus the
assumption of certain liabilities, resulting in a one-time, pre-tax gain of
approximately $12.8 million. The provision for income taxes associated with the
gain on sale of the business approximated $9.4 million. The relatively higher
effective tax rate on the transaction reflected the fact that approximately
$12.7 million of goodwill associated with the business is not deductible for
income tax purposes.
The net proceeds of approximately $29.5 million after federal and
state taxes payable of approximately $6.1 million, were utilized to repay a
significant portion of the Company's term notes and repay all of its
subordinated debt, $15.8 million, which had a coupon rate of 14.0% per annum.
Had the divestiture occurred on July 1, 1996, pro forma consolidated
net sales, net loss and basic and diluted loss per share for the nine months
ended March 31, 1998 would have been $66.6 million, $10.9 million, and $1.40
per share respectively. For the three months ended March 31, 1997, pro forma
consolidated net sales, net loss and basic and diluted loss per share would have
been $23.6 million, $0.5 million, and $0.06 per share respectively, For the
nine months ended March 31, 1997, pro forma consolidated net sales, net basic
and diluted loss per share would have been $66.9 million, $1.7 million, and
$0.22 per share respectively.
The unaudited pro forma information is based on assumptions deemed
appropriate by Allied Healthcare Products, Inc. and is not intended to reflect
what the Company's net sales, net loss, or basic and diluted loss per share
would have been had the sale occurred on July 1, 1996 or to project the
Company's results of operations for the future.
5. Non-Recurring Items
--------------------
In the second quarter of fiscal 1997, non-recurring items of
$9,778,259 were charged to operations. These items included $8,874,129
impairment losses relative to goodwill for certain subsidiaries, $403,530 in
connection with discontinuing operations in its Mt. Vernon, Ohio facility, and
$500,000 in connection with the early termination of a consulting agreement.
The goodwill impairment provisions reflected the Company's evaluation
of the carrying value of its remaining business subsequent to the sale of Bear
and BiCore in the second quarter of fiscal 1998. Such goodwill writedowns,
which were determined pursuant to the Company's impairment accounting policy
described in Note 2 to the June 30, 1997 financial statements, primarily related
to the Company's headwall and disposable products businesses, which continue to
experience weakness in financial results due to a variety of market conditions.
Due to the non-deductible nature of these goodwill writedowns for income tax
reporting purposes, the Company's effective income rate is substantially higher
in the nine months ended March 31, 1998.
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 month and nine month
periods ended March 31, 1998 compared to the three month and nine month periods
ended March 31, 1997. This discussion should be read in conjunction with the
June 30, 1997 and March 31, 1998 consolidated financial statements and
accompanying notes thereto included in the Annual Report on Form 10-K for the
year ended June 30, 1997 and this Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998, respectively.
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 effect of currency
devaluations and recessionary conditions in certain Asian markets, the effects
of federal and state legislation on health care reform, including Medicare and
Medicaid financing, the ability to realize the full benefit of recent capital
expenditures or consolidation and rationalization activities, difficulties or
delays in the introduction of new products or disruptions in selling,
manufacturing and/or shipping efforts.
The results of operations for the first nine months of fiscal 1998 were affected
by several one time items as described further below, which were recorded in the
second quarter. On October 31, 1997, the Company sold the assets of its
ventilation products division for a gain. The proceeds from this sale were used
to significantly pay down debt and to provide additional liquidity. The Company
also recorded several non-recurring items and other charges to operations in the
second quarter of fiscal 1998. Such non-recurring items reflect changes in
business conditions resulting from the sale of the ventilation products division
and other changes in market conditions. In addition, reserves for inventories
and bad debts were increased throughout the fiscal year the effect thereof, are
included in the results of operations. As a result, the Company has
strengthened its balance sheet by reducing debt, reducing intangible assets, and
increasing reserves.
The review of and comparability of year to year operating results is complicated
by the sale of the ventilation products division on October 31, 1997. The
fiscal 1998 results include ventilation products division operations for zero
months and four months in the three month and nine month periods ended March 31,
1998 while the fiscal 1997 results include ventilation products division
operations for the full three month and nine month periods ended March 31, 1997.
The components impacting fiscal 1998 year to date operating results are as
follows:
SALE OF VENTILATION PRODUCTS DIVISION
- -----------------------------------------
On October 31, 1997, the Company sold the assets of Bear Medical Systems, Inc.
("Bear") and its subsidiary BiCore Monitoring Systems, Inc. ("BiCore") to Thermo
Electron Corporation for $36.6 million plus the assumption of certain
liabilities. The net proceeds of $29.5 million, after expenses, including
federal and state taxes accrued for and/or paid through March 31, 1998, were
utilized to repay a significant portion of its term notes and to repay all of
its subordinated debt, $15.8 million of which had a coupon rate of 14.0% per
annum.
11
<PAGE>
The sale of these assets resulted in a gain before taxes for financial reporting
purposes of $12.8 million, which is recorded in the Company's results of
operations for the nine months ended March 31, 1998. The gain on sale of the
ventilation products division, as a discrete item, resulted in a tax provision
of $9.4 million. The relatively higher effective tax rate on this transaction
reflected the fact that approximately $12.7 million of goodwill associated with
these businesses is not deductible for income tax purposes. The net income
effect of the gain on sale of business is income of approximately $3.4 million,
or $0.43 per share.
DEBT REDUCTION
- ---------------
The proceeds from the gain on sale of the ventilation products division were
used to significantly pay down the Company's debt during the second quarter of
fiscal 1998. The $36.6 million received from the sale of business was used to
reduce the Company's commercial debt by $31.4 million, to pay $1.0 million of
expenses associated with such sale and to pay the third quarter estimated tax
payment, which included federal and state taxes due on the gain, of $4.2
million.
Prior to the sale of the business the Company had $45.6 million in outstanding
commercial and subordinated debt. On November 3, 1997 , the Company repaid two
term notes totaling $10.8 million, which had a coupon rate of 14.0% per annum,
and significantly reduced the outstanding balance of its revolving line of
credit, and on November 4, 1997 repaid $5.0 million of 14.0% subordinated debt.
NON-RECURRING CHARGES
- ----------------------
During the second quarter of fiscal 1998, the Company re-evaluated the carrying
value of its various businesses and recorded $9.8 million of non-recurring
charges to reflect the changes in business conditions resulting from the sale of
the ventilation product division and due to other changes in market conditions
discussed below, which culminated during the second quarter of fiscal 1998. The
elements comprising the $9.8 million of non-recurring charges, which are
included in the results of operations for the nine months ended March 31, 1998,
are:
Goodwill writedowns, which were determined pursuant to the Company's impairment
policy as described in Note 2 to the June 30, 1997 financial statements, totaled
$8.9 million for the four following businesses:
$4.4 million associated with the partial goodwill writedown related to the
B&F disposable products business. Continuing weakness in financial
results of the business due to market condition changes in the home
healthcare market including pressures on pricing, and overall weakness
in financial results of the national home healthcare chains caused
Allied to re-evaluate and adjust the carrying value of this business.
$2.4 million associated with the partial writedown of goodwill for Allied's
headwall business which continues to experience weakness in financial
results due to market conditions.
12
<PAGE>
$1.6 million associated with the writedown of Omni-Tech Medical, Inc.
goodwill. This transportation ventilator business is directly related to
the recently sold Bear ventilation products division and is not
anticipated to contribute to the ongoing operations of the Company.
$0.5 million associated with the write-down of goodwill for the Design
Principles Inc. backboard business. Increased costs have significantly
eroded the margins of this business necessitating a re-evaluation of
the carrying value of its goodwill.
In addition to the non-cash goodwill write-downs, the other non-recurring items
include:
$0.5 million of consulting fees related to a co-operative purchasing study.
$0.4 million for the writedown of leasehold improvements and a reserve of
the remaining lease payments for B&F's Mt. Vernon, Ohio facility which
was closed as part of the Company's rationalization initiatives. The
tenant subletting this facility is operating under Chapter 11
reorganization protection.
The combined tax impact of these non-recurring charges resulted in a minimal
$0.4 million tax benefit, due to the non-deductibility for tax purposes of the
$8.9 million of goodwill writedowns. The non-recurring charges, as a discrete
item, resulted in a net loss of approximately $9.4 million or a loss of $1.21
per share.
As a result of the writedown of the carrying value of goodwill for certain
businesses described above, the Company expects to reduce its annual
amortization charges by $0.3 million or $0.04 per share.
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>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1998 1997 1998 1997
------ ------ ------- ------
<S> <C> <C> <C> <C>
Net Sales. . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of sales. . . . . . . . . . . . . . . . . . . . 71.4 68.1 70.8 68.5
------ ------ ------- ------
Gross profit . . . . . . . . . . . . . . . . . . . . 28.6 31.9 29.2 31.5
Total SG&A expenses. . . . . . . . . . . . . . . . . 23.7 26.7 24.7 28.1
Gain on sale of business -. - (16.6) -
Non-recurring charges. . . . . . . . . . . . . . . . - -_ 12.7 -__
------ ------ ------- ------
Income from operations . . . . . . . . . . . . . . . 4.9 5.2 8.4 3.4
Interest/other expense . . . . . . . . . . . . . . . 2.5 5.9 4.8 5.0
------ ------ ------- ------
Income (loss) before provision
(benefit) for income taxes. . . . . . . . . . . 2.4 (0.7) 3.6 (1.6)
Provision (benefit) for income taxes . . . . . . . . 1.3 (0.3) (12.1) (0.5)
------ ------ ------- ------
Net income (loss) before
extraordinary item . . . . . . . . . . . . . 1.1 (1.0) (8.5) (1.1)
Extraordinary (loss) . . . . . . . . . . . . . . . . - - (0.7) -__
------ ------ ------- ------
Net income . . . . . . . . . . . . . . . . . . . . . 1.1% (1.0)% ( 9.2)% (1.1)%
====== ====== ======= ======
</TABLE>
13
<PAGE>
RESULTS OF OPERATIONS
- -----------------------
Allied manufactures and markets medical gas equipment, respiratory therapy
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 these product lines for the three months and nine
months ended March 31, 1998 compared to the three months and nine months ended
March 31, 1997.
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998 March 31, 1997
% of % of
total total
Net net Net net
sales sales sales sales
------- ------ ------- ------
<S> <C> <C> <C> <C>
Medical Gas Equipment . . . . $12,167 53.4% $11,384 37.4%
Respiratory Therapy Equipment 7,634 33.5% 16,073 52.7%
Emergency Medical Products. . 2,984 13.1% 3,009 9.9%
------- ------ ------- ------
Total . . . . . . . . . . . . $22,785 100.0% $30,466 100.0%
======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998 March 31, 1997
%of %of
total total
Net net Net net
sales sales sales sales
------- ------ ------- ------
<S> <C> <C> <C> <C>
Medical Gas Equipment . . . . $34,993 45.4% $31,624 36.0%
Respiratory Therapy Equipment 33,456 43.5% 47,632 54.1%
Emergency Medical Products. . 8,542 11.1% 8,732 9.9%
------- ------ ------- ------
Total . . . . . . . . . . . . $76,991 100.0% $87,988 100.0%
======= ====== ======= ======
</TABLE>
Three months ended March 31, 1998 compared to three months ended March 31, 1997
- -------------------------------------------------------------------------------
Net sales for the three months ended March 31, 1998 of $22.8 million were $7.7
million below sales of $30.5 million for the three months ended March 31, 1997.
Of the $7.7 million decline in sales, $6.7 million of the decline was
attributable to sales associated with the disposal of the ventilation products
division and $1.0 million of the decline relates to the Company's remaining
product lines. The $1.0 million decline in remaining product line sales
represents a 4.1% decline from year to year. Factors impacting sales in the
third quarter of fiscal 1998 include external and internal issues. External, or
macro-economic factors include the continued pricing pressures on the home
healthcare market and the impact of the Asian currency valuations on
international sales. These external factors were partially offset by increases
in domestic sales of medical gas products, which were ordered in prior periods,
and emergency products. The internal factors include the short term disruptions
caused by the realignment of the Company's sales force subsequent to the sale of
the ventilation products division and continued refinements of manufacturing
processes in the Toledo, Ohio facility.
14
<PAGE>
New orders, or the pace of incoming business, of $22.5 million for the three
months ended March 31, 1998 were $10.3 million below orders of $32.8 million in
the prior year same period. $6.8 million of this decline was attributable to
the ventilation products division while $3.5 million of the decline in orders
relates to the remaining businesses. This 13.4% decline in orders for remaining
product lines was attributable to external and internal factors previously
discussed combined with the decline in orders for medical gas construction and
headwall products. Order patterns for these products are volatile due to their
high dollar value per order evidenced by several large bid orders received in
the third quarter of fiscal 1997 which did not repeat in the current period.
While the bid activity for these product lines remain unchanged in number of
bids, the value of the bids, on average, is lower than in prior periods.
Medical gas equipment sales in the third quarter of fiscal 1998 of $12.2 million
were $0.8 million, or 6.9%, over medical gas equipment sales in the same period
prior year of $11.4 million. Medical gas suction and regulation device sales
increased by 6.8% over the comparable prior year period, following a slow down
in sales in the second quarter of fiscal 1998 due to soft demand in Asian
markets and a planned reduction of stocking status by the Company's domestic
distributors. Headwall sales, the smallest segment of medical gas equipment,
increased 64.0% over the comparable period prior year sales on the strength of
orders booked in prior periods. Partially offsetting these increases was a
decline in medical gas construction products to $4.4 million from sales of $4.6
million in the prior year comparable period.
Orders for medical gas equipment products in the third quarter of fiscal 1998 of
$11.1 million were $3.3 million, or 23.0%, under orders of $14.4 million in the
third quarter of fiscal 1997. Medical gas construction and headwall orders are
subject to infrequent large bid orders. These products were below comparable
period prior year orders by 31.0% and 64.6%, respectively, primarily as a result
of soft demand in both the domestic and Asian markets. Medical gas suction and
regulation devices, which are principally shipped in the same period in which
they are ordered, experienced a 6.0% increase in orders. This increase is
attributable to deferments of orders for this product noted in the second
quarter of fiscal 1998, as previously discussed.
Respiratory therapy equipment sales in the third quarter of fiscal 1998 of
$7.6 million were $8.4 million below the prior year same period sales of $16.0
million. $6.7 million of this decline was attributable to the ventilation
products division while $1.7 million of the decline relates to remaining product
lines. Sales to the home healthcare market declined by 23.4%, which primarily
reflected a reduction in sales of low margin aluminum cylinders and reductions
in sales due to competitive pressures in home health care hardgood products,
such as nebulizers and aspirators. Additionally, pricing pressures caused by
the consolidation of home healthcare dealers and continued concerns over
potential reductions in home oxygen therapy reimbursement rates continued to
impact sales of home healthcare products. Current customer order patterns are
likely to continue for the foreseeable future. Sales to the hospital market
remain relatively unchanged in the three months ended March 31, 1998 compared to
the prior year same period. Plant layout changes have begun to improve
manufacturing efficiencies and throughput of disposable products in the Toledo,
Ohio facility. The new tooling for the disposable canister units has now been
placed in service which has resulted in improved fiscal 1998 third quarter sales
as compared to the previous two sequential quarters. In addition, the new
Respical calibration device has been introduced in the third quarter of fiscal
1998. Orders of respiratory therapy products in the third quarter of fiscal
1998 for the Company's home health care products declined by 16.3% compared to
the third quarter of fiscal 1997 as a result of factors discussed above, while
hospital orders increased 10.2% as a result of the new disposable canister unit
and the introduction of the Respical unit.
15
<PAGE>
Emergency medical product sales in the third quarter of fiscal 1998 of $3.0
million were relatively unchanged from the comparable prior year period. Orders
for emergency medical products increased to $3.5 million, or 22.0%, from orders
of $2.9 million in the comparable prior year period. This increase in orders is
attributable to a large international stocking order for emergency medical
products. In addition, enhancements made on two products improved product
quality and manufacturing efficiencies.
The impact of the Asian currency devaluation combined with the second
quarter sale of the ventilation products division affected the Company's
international sales in the third quarter of fiscal 1998. International sales,
which are included in the product line sales discussed above, were $3.4 million
for the three months ended March 31, 1998, a decline of $5.3 million from sales
of $8.7 million for the three months ended March 31, 1997. The decline in
international sales includes $4.2 million resulting from the ventilation
products division. Sales of core business products experienced a $1.1 million
decline in sales, primarily attributable to soft demand in the Asian markets.
International orders of core business products in the third quarter of fiscal
1998 were 58.3% below the prior year period international orders primarily
because of the factor previously discussed. As a result of the sale of the
ventilation products division and the decline in Asian markets, the percent of
the total net sales represented by the Company's international sales declined to
15.0% in the third quarter of fiscal 1998 compared to 28% in the same prior year
period.
Gross profit for the third quarter of fiscal 1998 of $6.5 million was $3.2
million below the gross profit of $9.7 million in the third quarter of fiscal
1997. Gross profit as a percent to net sales was 28.6% and 31.9% for the third
quarter fiscal 1998 and fiscal 1997, respectively. The disposal of the higher
margin ventilation products division impacted the gross margin as these products
were not part of the Company's business in the third quarter of fiscal 1998
compared to the full three months of fiscal 1997. In addition, margins were
reduced by the continued pricing pressures brought on by the consolidations and
cost containment initiatives of healthcare providers. The Company's planned
reductions in inventories resulted in reduced manufacturing throughput and
absorption of plant overhead which also served to reduce margins as a percent to
net sales. To offset these margin pressure, the Company has stabilized prices
on certain products and improved its sales mix due to a reduction in sales of
lower margin distributed products.
Selling, General, and Administrative ("SG&A") expenses for the third
quarter of fiscal 1998 were $5.4 million, a decline of $2.7 million from SG&A
expenses of $8.1 million in the third quarter of fiscal 1997. This decline is
primarily attributable to the sale of the ventilation products division. In
addition to reductions in direct SG&A expenses associated with the ventilation
products division, the Company has eliminated several sales management, sales
and marketing, and other administrative positions in its post-divestiture
realignment initiatives. Partially offsetting these declines in SG&A expenses
were key investments in technology and human resources relative to manufacturing
operations. The Company installed its upgraded computer systems in the Toledo,
Ohio operations and also incurred recruitment costs to fill several key
operations positions. As a percent to net sales, SG&A expenses declined to
23.7% in the third quarter of fiscal 1998 compared to 26.7% in the third quarter
of fiscal 1997.
Income from operations in the third quarter of fiscal 1998 of $1.1 million
was $0.5 million below income from operations of $1.6 million in the third
quarter of fiscal 1997. The decrease was attributable to the net effects of the
reduction in sales and gross margins, which were partially offset by reductions
in SG&A expenses. The sale of the ventilation products division resulted in a
net reduction in income from operations, but also result in significantly
reduced debt and related interest costs as described below.
16
<PAGE>
Interest expense for the third quarter of fiscal 1998 was $0.5 million, a
decrease of $1.2 million from interest expense of $1.7 million in the third
quarter of fiscal 1997. The decrease is attributable to the significant
reduction in debt and the absence of fees paid in the prior year to the
Company's previous bank group. The Company reduced its outstanding debt early
in November 1997 by $35.7 million by applying the net proceeds from the sale of
the ventilation products division. The third quarter estimated tax payment of
$4.2 million, which included taxes due on the gain, was paid in March 1998,
which increased federal and state debt. As a result of this asset sale,
combined with a net reduction in debt due to cash provided from operations in
the third quarter of fiscal 1998, the Company reduced its aggregate debt level
to $20.3 million at March 31, 1998 compared to debt of $52.2 million at March
31, 1997. In addition, the Company incurred approximately $0.6 million in fees
and loan cost amortization in the third quarter of fiscal 1997, which did not
repeat in the third quarter of fiscal 1998.
Allied had income before provision for income taxes of $0.5 million in the
third quarter of fiscal 1998 compared to a loss before provision for income
taxes of $0.2 million in the prior year as result of the factors discussed
above.
Allied recorded a provision for income taxes of $0.3 million in the third
quarter of fiscal 1998, resulting in a relatively high effective tax rate
of 55%, which primarily reflects the non-deductibility of $0.2 million of
goodwill amortization in the third quarter of fiscal 1998. In the comparable
prior year period the Company recorded a tax provision of $0.1 million on a
$0.2 million loss before provision for income taxes.
The net income for the third quarter is $0.2 million, or $0.03 per diluted
share. The net income for the third quarter of fiscal 1998 ends seven
consecutive quarters of net losses from operations. The net loss for the third
quarter of fiscal 1997 was $0.3 million, or $0.04 per basic share. The number
of common shares utilized in the calculation of earnings per share was 7,806,682
and 7,804,471 for the third quarter of fiscal 1998 and fiscal 1997,
respectively.
Nine months ended March 31, 1998 compared to nine months ended March 31, 1997
- --------------------------------------------------------------------------------
Net sales for the nine months ended March 31, 1998 were $77.0 million, a
decrease of $11.0 million from sales of $88.0 million in the same period in the
prior year. Of the $11.0 million decline in net sales, $10.5 million relates to
sales associated with the disposal of the ventilation products division and $0.5
million relates to a decline in sales of core business products. Certain
external and internal factors, as previously discussed, impacted sales for the
nine months ended March 31, 1998, particularly in the last two fiscal quarters,
each of which experienced a decline in sales of core business products. The
pace of incoming business, as measured in new orders, continues to be soft.
Orders for the nine months ended March 31, 1998 of $77.2 million were $17.1
million less than orders of $94.3 million for the nine months ended March 31,
1997. Of the $17.1 million decline in orders, $11.4 million relate to the
disposed ventilation products division while $5.7 million relates to the
Company's core business products. The decline in core business orders of $5.7
million represents an 8.1% decrease for the nine months ended March 31, 1998,
and consists of declines in the second and third quarters of fiscal 1998, as
compared to the prior year periods, which were partially offset by an increase
in orders during the first quarter of fiscal 1998. Management can not predict
when the ramifications of the previously discussed macroeconomic conditions will
be resolved, particularly the decline in the Asian market and pressures from the
home healthcare market. Internal operational issues, as previously discussed,
are being addressed and have been improving, however, there can be no assurance
as to the extent that these issues will be resolved.
17
<PAGE>
Medical gas equipment sales for the nine months ended March 31, 1998 of $35.0
million were $3.4 million, or 10.7% above same period prior year sales of $31.6
million. Medical gas system construction sales, headwall sales, medical gas
suction and regulation device sales experienced increases of 11.0%, 48.0% and
3.9%, respectively, for the nine months ended March 31, 1998 compared to the
same period prior year sales. The increase in sales of these products for the
nine months ended March 31, 1998 primarily related to shipments of orders from
backlog which had accumulated prior to June 30, 1997.
Orders for medical gas equipment of $30.9 million for the nine months ended
March 31, 1998 were $4.7 million, or 13.2% less than orders of $35.6 million for
the nine months ended March 31, 1997. Medical gas construction orders and
headwall orders, which are subject to frequent fluctuations in order patterns,
declined 9.5% and 56.6%, respectively, and orders for medical gas suction and
regulation devices, which experienced soft first and second quarter fiscal 1998
demand, have declined 4.2% as compared to the prior year period. Two
significant orders for medical gas construction and headwall products, which
were booked in the prior year, did not repeat in the current fiscal year. Bid
and quote activity for these products remain approximately the same in number of
quotes, but the dollar value of these quotes have, on average, declined. Orders
for medical gas suction and regulation devices had declined earlier in the
fiscal year due to soft Asian demand and the domestic distributors desire to
reduce their stocking status of these products, however, orders for these
products strengthened in the third quarter of fiscal 1998 as previously
discussed.
Respiratory therapy equipment sales for the nine months ended March 31, 1998 of
$33.5 million were $14.1 million below the same period prior year sales of $47.6
million. Of the decline, $10.5 million was attributable to the disposal of the
ventilator products division and $3.6 million of the decline relates to the
Company's remaining product lines. Sales to the home healthcare market declined
by 18.6% due to external factors as previously discussed. Pricing pressures
caused by the consolidation of home healthcare dealers and continued concerns
over potential Medicare and Medicaid reductions in home oxygen therapy
reimbursement rates continued to impact sales of home healthcare products. The
Company has continued to experience capacity limitations at the Toledo, Ohio
facility although recent improvements in direct labor constraints and plant
layout changes have begun to improve manufacturing efficiencies and throughput
of disposable products. Sales to the hospital market increased by 4.8% in the
nine months ended March 31, 1998 compared to the prior year same period but had
declined by 2.9% in the third quarter of fiscal 1998. The new tooling for the
disposable canister units has now been placed in service, and, in addition, the
new Respical calibration device has been introduced in the third quarter of
fiscal 1998, these products have been well received by the market. Orders of
respiratory therapy products for the nine months ended March 31, 1998, for the
core business products, declined by 5.6% as a result of factors discussed above.
Emergency medical product sales of $8.5 million for the nine months ended March
31, 1998 were $0.2 million, or 2.2% under sales of $8.7 million in the
comparable prior year period. Orders for emergency medical products increased
to $9.8 million for the nine months ended March 31, 1998 from $9.4 million for
the nine months ended March 31, 1997. The increase is attributable to a $0.6
million stocking order made in the third quarter of fiscal 1998, as previously
discussed.
18
<PAGE>
The impact of the Asian currency devaluations combined with the sale of the
ventilation products division affected the Company's international sales for the
nine months ended March 31, 1998. International sales, which are included in
the product line sales discussed above, were $19.4 million for the nine months
ended March 31, 1998, a decline of $5.3 million from international sales of
$24.7 million for the nine months ended March 31, 1997. A $5.8 million decline
in sales resulting from the previously discussed sale of the ventilation
products division was partially offset by a year to year increase in core
business sales of $0.5 million. Core business international sales increased by
3.5% from year to year, however, the shipments primarily related to orders
received in prior quarters. International orders of core business products for
the nine months ended March 31, 1998 were 23.5% below the prior year period
principally relating to softness in Asian markets.
Gross profit for the nine months ended March 31, 1998 of $22.5 million was $5.2
below the gross profit of $28.6 million for the nine months ended March 31,
1997. Gross profit as a percent to net sales was 28.1% and 31.5% for the nine
months ended March 31, 1998 and March 31, 1997, respectively. The sale of the
high margin ventilation products division impacted the decline in gross margin
as these products were part of the Company's business for only four months of
fiscal 1998 compared to the full nine months in fiscal 1997. Continued pricing
pressures brought on by the consolidations and cost containment initiatives of
healthcare providers and the Company's planned reductions in inventories which
resulted in reduced manufacturing throughput and lower absorption of plant
overhead further served to reduce margins as a percent to net sales. Finally,
the Company increased inventory reserves in excess of $1.0 million in the nine
months ended March 31, 1998, the effects which are reflected in the results of
operations.
Selling, General, and Administrative ("SG&A") expenses for the nine months ended
March 31, 1998 were $19.0 million, a decline of $5.7 million from SG&A expenses
of $24.7 million for the nine months ended March 31, 1997. The decline in SG&A
expenses primarily relates to the sale of the ventilation products division. In
addition, certain investments in field sales force training, product literature
expenditures, and other consulting expenses made in the prior year did not
repeat in fiscal 1998. Partially offsetting these reductions in SG&A expenses,
the Company, in the current year, installed its upgraded computer systems at its
Toledo, Ohio operations and also incurred recruitment costs to fill several key
operations positions. As a percent to net sales, SG&A expenses declined to
24.7% for the nine months ended March 31, 1998 compared to 28.1% for the nine
months ended March 31, 1997.
As previously discussed, the Company recorded a non-recurring gain on sale of
the ventilation products division of $12.8 million and recorded several
non-recurring charges totaling $9.8 million in the second quarter of fiscal
1998.
Income from operations for the nine months ended March 31, 1998 of $6.5 million
was $3.6 million above income from operations of $2.9 million for the nine
months ended March 31, 1997. The increase was primarily attributable to the net
effects of the non-recurring items and other matters described above. Without
the non-recurring items discussed above, income from operations would have been
$3.5 million for the nine months ended March 31, 1998 compared to $2.9 million
for the prior year same period.
19
<PAGE>
Interest expense for the nine months ended March 31, 1998 was $3.6 million, a
decrease of $0.7 million from interest expense of $4.3 million in the prior year
period. This decrease primarily relates to lower debt levels, as described
below. On August 8, 1997, the Company refinanced its commercial debt and
entered into a $46.0 million credit facility with Foothill Capital Corporation
and the Company also obtained $5.0 million of subordinated debt. The
refinancing arrangement eliminated the requirement of making significant
quarterly fee payments to obtain covenant waivers from the Company's previous
bank group. The Company reduced its outstanding debt in early November by $35.7
million dollars by applying the net proceeds of the sale of the ventilation
products division. The third quarter estimated federal and state tax payment of
approximately $4.2 million, which included taxes due on the gain, was paid in
March, 1998. Interest expense during the nine months ended March 31, 1998 also
included $0.4 million for the full amortization of loan costs related to the
portion of debt that was paid down with the proceeds from the gain, and fees
paid to the previous bank group in the first quarter of fiscal 1998. Interest
expense for the nine months ended March 31, 1997 included fees paid to the
previous bank group in the third quarter of fiscal 1997.
Allied had income before provision for income taxes of $2.8 million in the nine
months ended March 31, 1998 compared to a loss before provision for income taxes
of $1.4 million in the prior year comparable period, an increase of $4.2
million, resulting from the factors described above.
The provision for income taxes of $9.4 million for the nine months ended March
31, 1998 as compared to income before taxes and extraordinary loss of $2.8
million, resulted in an unusual effective tax rate of 333% due to the tax
effects relative to the non-recurring items recorded in fiscal 1998. In the
nine months ended March 31, 1997, Allied recorded a tax benefit of $0.4 million,
for an effective tax rate of 28% on a loss before taxes of $1.4 million.
Allied recorded an extraordinary loss on the early extinguishment of debt, which
is discussed further below, of $0.5 million, or $0.07 diluted per share, in the
first quarter of fiscal 1998. This extraordinary loss is net of a tax benefit
of $0.4 million. The net loss for the nine months ended March 31, 1998 was $7.1
million, or $0.91 per diluted share. Exclusive of the extraordinary loss, the
non-recurring gain on the sale of the ventilation products division business,
and the non-recurring charges, the net loss for the nine months ended March 31,
1998 would have been $0.5 million or $0.06 per diluted share. The net loss for
the nine months ended March 31, 1997 was $1.0 million, or $0.13 per diluted
share. Earnings per share amounts reported are diluted earnings per share,
which are substantially the same as basic earnings per share. The number of
common shares used in the calculation of earnings per share was 7,804,471 and
7,796,682 for the first nine months of fiscal 1998 and fiscal 1997,
respectively.
FINANCIAL CONDITION
- --------------------
The following table sets forth selected information concerning Allied's
financial condition:
<TABLE>
<CAPTION>
Dollars in thousands March 31, 1998 June 30, 1997
- -------------------- --------------- ---------------
<S> <C> <C>
Cash. . . . . . . $ 1,209 $ 988
Working Capital . $ 23,767 $ 18,743
Total Debt. . . . $ 20,262 $ 46,932
Current Ratio . . 2.67:1 1.57:1
</TABLE>
20
<PAGE>
The Company's working capital was $23.8 million at March 31, 1998, compared to
$18.7 million at June 30, 1997. Inventories, other current assets, and accounts
payable all decreased as a result of the previously discussed sale of the
ventilation products division. Proceeds from such sale were utilized to
significantly reduce debt during the second quarter of fiscal 1998. Accounts
receivable declined to $16.5 million at March 31, 1998, or $6.6 million from
$23.1 million at June 30, 1997. Of this decline, $7.3 million are receivables
attributable to the ventilator business which was partially offset by an
increase in receivables of $0.7 million for the Company's core business.
Accounts receivable as measured in days sales outstanding ("DSO") decreased to
69 DSO from 71 DSO in this period while the amount of receivables over 90 days
from date of invoice declined by $0.9 million. Inventories declined to $20.2
million, at March 31, 1998 or $5.8 million, from $26.0 million at June 30, 1997.
Of this decline, $4.7 million is attributable to the ventilation products
division sale while a decline of $1.1 million in inventories related to the core
business. The Company has focused on improving the mix of inventories and has
been increasing stocking levels of high volume products while simultaneously
reducing the stocking levels of low volume products. Inventories, as measured
in days on hand ("DOH"), increased to 140 DOH at March 31, 1998 from 124 DOH at
June 30, 1997. Accounts payable decreased to $6.5 million at March 31, 1998,
down $7.5 million from the June 30, 1997 balance of $14.0 million. Of this
decline, $1.2 million of payables related to the ventilation products division.
The Company experienced limited liquidity during fiscal 1997 due to a reduction
in borrowing availability caused by principal payments made on its term loans
combined with the high level of fees paid to the Company's previous commercial
bank group. Consequently, payments to vendors and other obligations were
extended. The Company' s limited liquidity situation was alleviated with the
completion of its debt refinancing on August 8, 1997, which is discussed further
below. The Company is current on all its obligations. The current portion of
long term debt at March 31, 1998 was $2.6 million compared to $12.9 million at
June 30, 1997. The June 30, 1997 current portion of long term debt included
$4.0 million of term notes and $5.0 million of subordinated debt which were due
to mature on February 1, 1998, but were repaid on November 3, 1997 and November
4, 1997, respectively, with proceeds from the sale of the ventilation products
division.
The net increase/(decrease) in cash for the nine months ended March 31, 1998 and
1997 was $0.2 million and $(0.5) million, respectively. Net cash provided by
(used by) operations was $(7.3) million and $3.2 million for the same periods.
Cash used by operations for the nine months ended March 31, 1998 consisted of a
net loss of $7.1 million which was partially offset by $3.9 million in non-cash
charges to operations for amortization and depreciation, a non-cash loss on
refinancing charges of $0.9 million and changes in working capital and deferred
tax accounts of $1.7 million. In addition, the Company reported a $12.8 million
gain on sale the ventilation products division and also recorded non-recurring
charges, for which the non-cash portion is $9.6 million, in the nine months
ended March 31, 1998. The Company received pre-tax proceeds of $35.4 million on
the sale of the ventilation products division, reduced total debt by a net $27.5
million, and made capital expenditures of $0.4 million in the nine months ended
March 31, 1998. Cash provided by operations for the comparable prior year
period consisted of a net loss of $1.0 million which was offset by the non-cash
charges of $4.1 million for depreciation and amortization, as well as cash
generated by changes in working capital accounts, which included a tax refund of
$1.8 million, of $0.1 million. The cash provided by operations for the nine
months ended March 31, 1997 was used for capital expenditures of $1.7 million,
net debt reduction of $1.4 million and dividends of $0.5 million. The adverse
results of operations during the latter half of fiscal 1996 and during fiscal
1997 impacted the Company's liquidity and the ability of the Company to continue
historical levels of fixed payments. Accordingly, August 21, 1996 the Company's
Board of Directors had voted to suspend quarterly dividends effective
immediately subsequent to the payment of dividends for the fourth quarter of
fiscal 1996. In addition, to improve the liquidity of the Company and to reduce
interest expense, on August 8, 1997, the Company refinanced its existing debt,
which is discussed further below.
21
<PAGE>
At March 31, 1998, the Company had aggregate indebtedness of $20.3 million,
including $2.6 million of short-term debt and $17.7 million of long-term debt.
At June 30, 1997, the Company had aggregate indebtedness of $46.9 million,
including $12.9 million of short-term debt and $34.0 million of long-term debt.
Throughout fiscal 1996, the Company entered into a series of amendments and
waiver negotiations with its previous bank syndicate. During fiscal 1997, the
Company paid waiver fees totaling approximately $2.2 million for the September
1996 amendment to its credit facilities, to obtain waivers for technical
covenant violations at December 31, 1996 and March 31, 1997 and paid additional
fees of $0.4 million in the first quarter of fiscal 1998. The Company was
unsuccessful in its attempts to negotiate a long-term agreement with its
previous bank syndicate. Accordingly, on August 8, 1997 the Company refinanced
its existing debt through a new $46.0 million credit facility with Foothill
Capital Corporation. The new credit facility, with a blended average interest
rate of 10.2%, was comprised of a $25.0 million three-year revolving line of
credit, three-year term loans of $10.0 million and $7.0 million, respectively,
and a $4.0 million term loan maturing in February 1998. In conjunction with its
new credit facilities, Allied placed an additional $5.0 million in subordinated
debt, with several related parties to the Company maturing in February 1998. In
addition, the Company issued 112,500 warrants at an exercise price of $7.025 per
share, 62,500 of which were issued to the subordinated debt holders with the
balance issued to Foothill Capital Corporation. Such warrants are exerciseable
at the option of the holder beginning February 8, 1998. The proceeds from the
August 8, 1997 refinancing were used to replace the Company's outstanding debt
with the previous commercial bank syndicate, and to provide additional
liquidity. On October 31, 1997 the Company completed the sale of its
ventilation products division. On November 3, 1997 the Company repaid two term
notes and a significant portion of its revolving credit facility to Foothill.
On November 4, 1997 the Company repaid its $5.0 million subordinated debt.
Amendments to the Foothill credit facility were completed in the fiscal 1998
third quarter to reflect the impact of the significant reductions in the
Company's outstanding debt and the sale of the ventilation products division.
The Company believes that cash flow from operations and available borrowings
under its credit facilities will be sufficient to finance fixed payments and
planned capital expenditures in fiscal 1998.
As of March 31, 1998, the Company had a backlog of $18.7 million compared to a
backlog of $24.9 million at June 30, 1997. The Company's backlog, a significant
portion of which is attributable to the Company's medical gas equipment
products, consists of firm customer purchase orders which may be subject to
cancellation by the customer. The sale of the ventilation products division
reduced the Company's backlog by $3.7 million as compared to June 30, 1997. The
Company's backlog increased in emergency medical products and respiratory
therapy products in the nine months ended March 31, 1998, such increase was
more than offset by a decline in backlog for medical gas equipment products.
Inflation has not had a material effect on the Company's business or results of
operations. The Company makes its foreign sales in dollars and, accordingly,
sales proceeds are not affected by exchange rate fluctuations, although the
effect on its customers does impact the pace of incoming orders.
22
<PAGE>
PART II. OTHER INFORMATION
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 10.1 - Amendment Number One to Loan and Security Agreement
with Foothill Capital Corporation
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
23
<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: April 30, 1998 /s/ Barry F. Baker
-------------------
Barry F. Baker
Vice President - Finance and Chief Financial Officer
(Principal Accounting and Financial Officer)
24
<PAGE>
AMENDMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT
This Amendment Number One to Loan and Security Agreement ("Amendment")
is entered into as of March 3, 1998, by and among FOOTHILL CAPITAL CORPORATION
("Foothill"), ALLIED HEALTHCARE PRODUCTS, INC., B&F MEDICAL PRODUCTS, INC.,
HOSPITAL SYSTEMS, INC., and LIFE SUPPORT SYSTEMS, INC. (jointly "Borrowers"), in
light of the following:
FACT ONE: Borrowers and Foothill have previously entered into that
certain Loan and Security Agreement, dated as of August 7, 1997 (the
"Agreement").
FACT TWO: Bear Medical Systems, Inc. and Bicore Monitoring Systems,
Inc. were previously borrowers under the Agreement; the assets of such
corporations were sold as of October 31, 1997 and Foothill concurrently released
such corporations as borrowers and released its security interests in the assets
of such corporations.
FACT THREE: Borrowers and Foothill desire to amend the Agreement as
provided for and on the conditions herein.
NOW, THEREFORE, Borrowers and Foothill hereby amend and supplement the
Agreement as follows:
1. DEFINITIONS. All initially capitalized terms used in this
-----------
Amendment shall have the meanings given to them in the Agreement unless
specifically defined herein.
2. AMENDMENTS.
----------
(a) Section 1.1 of the Agreement is hereby amended by
revising the definitions of "Average Unused Portion of Maximum Revolving
Amount," "Borrower," "Inventory Reserve," and "Term Loans" to read as follows:
"Average Unused Portion of Maximum Revolving Amount means,
----------------------------------------------------
as of any date of determination, (a) $15,000,000 less (b) the sum of (i) the
----
average Daily Balance of Advances that were outstanding during the immediately
preceding month, plus (ii) the average Daily Balance of the undrawn Letters of
----
Credit that were outstanding during the immediately preceding month."
"Borrower means anyone of Parent, B&F, Hospital Systems or
--------
Life Support."
"'Inventory Reserve' means $2,000,000; provided, however,
------------------ -------- -------
that on the date that the outstanding principal balance of Term Loan A is
reduced to $7,000,000 or less, the Inventory Reserve will be reduced to $0.
1
<PAGE>
"Term Loans means Term Loan A."
-----------
The following definitions and all references to such
definitions in the Agreement are hereby deleted: Bear, Bicore, Term Loan B and
Term Loan C.
(b) Section 2.3 of the Agreement is hereby amended in its
entirety to read as follows:
"2.3 TERM LOANS. Effective as of November 1, 1997,
Foothill agrees to provide Borrowers with a term loan in the amount of
$7,000,000 ("Term Loan A"). Principal payments on Term Loan A shall be made on
November 1, 1997, and shall continue on the first day of each subsequent month
until paid in full. For Term Loan A, during the first 12 months, each principal
payment shall be in the amount of $150,000; and commencing November 1, 1998,
each principal payment shall be in the amount of $200,000.
Payments of accrued interest under Term Loan A shall be
made on the first day of each month commencing on November 1, 1997. The
outstanding principal balance and all accrued and unpaid interest under Term
Loan A shall be due and payable on the earliest to occur of:
(a) The acceleration of the Obligations by Foothill
following an Event of Default; and
(b) The Maturity Date.
Upon the completion of a Financing or Sale Event, the
proceeds shall be used to prepay Term Loan A. Borrower shall have the right to
prepay Term Loan A, in whole or in part, from the proceeds of asset sales,
without penalty or premium. All such prepaid amounts to be applied to the
installments due on Term Loan A in the inverse order of their maturity. The
amounts outstanding under the Term Loans shall constitute Obligations."
(c) Section 2.11 of (f) of the Agreement is hereby amended to
read as follows:
"(f) Servicing Fee. On the first day of each month during
the term of this Agreement and thereafter so long as any obligations are
outstanding, a servicing fee in an amount equal to $3,000."
(d) Section 6.2 of the Agreement is hereby amended to read as
follows:
2
<PAGE>
"6.2 COLLATERAL REPORTING. Provide Foothill with the
following documents at the fol-lowing times in form satisfactory to Foothill:
(a) on a weekly basis, the summary page of such Borrower's Accounts aging
report, (b) on a monthly basis, a sales journal, collection journal, and credit
register since the last such schedule and a calculation of the Borrowing Base as
of such date using the amount of ineligible Accounts as determined based upon
the prior month's aging of Accounts, (c) on a monthly basis and, in any event,
by no later than the 10th day of each month during the term of this Agreement,
(i) a detailed calculation of the Borrowing Base, and (ii) a detailed aging, by
total, of such Borrower's Accounts, together with a reconciliation to the
detailed calculation of the Borrowing Base previously provided to Foothill, (d)
on a monthly basis and, in any event, by no later than the 10th day of each
month during the term of this Agreement, a summary aging, by vendor, of such
Borrower's accounts payable and any book overdraft, (e) on a monthly basis,
Inventory reports specifying such Borrower's cost, (f) upon Foothill's request,
notice of all returns, disputes, or claims, (g) upon Foothill's request, copies
of invoices in connection with its Accounts, customer statements, credit memos,
remittance advices and reports, deposit slips, shipping and delivery documents
in connection with its Accounts and for Inventory and Equipment acquired by such
Borrower, purchase orders and invoices, (h) on a quarterly basis, a detailed
list of such Borrower's customers, (i) on a monthly basis, a calculation of the
Dilution for the prior month; and (j) such other reports as to the Collateral or
the financial condition of such Borrower as Foothill may reasonably request from
time to time. Original sales invoices evidencing daily sales shall be mailed by
such Borrower to each Account Debtor and, at Foothill's direction, the invoices
shall indicate on their face that such Borrower's Account has been assigned to
Foothill and that all payments are to be made directly to Foothill. In the
event that, at any time, Borrowers' excess borrowing availability under Section
2.1 shall be less than $3,000,000, then Borrower agrees that Foothill may, in
the exercise of its reasonable credit judgment, require changes in the frequency
and type of reports required under this Section 6.2."
(e) Paragraphs (a), (b), and (c) of Section 7.20 are hereby
deleted and replaced by the following:
"(a) Minimum Tangible Net Worth. Minimum Tangible Net Worth
of Parent, at all times, of not less than $21,000,000."
3. REPRESENTATIONS AND WARRANTIES. Borrowers hereby affirm to
-------------------------------
Foothill that (a) all of Borrowers' representations and warranties set forth in
the Agreement are true, complete and accurate in all respects as of the date
hereof; and (b) each of the Junior Notes has been repaid in full.
3
<PAGE>
4. NO DEFAULTS. Borrowers hereby affirm to Foothill that no Event
-----------
of Default has occurred and is continuing as of the date hereof.
5. CONDITION PRECEDENT. The effectiveness of this Amendment is
-------------------
expressly conditioned upon the following:
(a) Receipt by Foothill of an executed copy of this Amendment
and the attached acknowledgment.
6. COSTS AND EXPENSES. Borrowers shall pay to Foothill all of
------------------
Foothill's out-of-pocket costs and expenses (including, without limitation, the
fees and expenses of its counsel, which counsel may include any local counsel
deemed necessary, search fees, filing and recording fees, documentation fees,
appraisal fees, travel expenses, and other fees) arising in connection with the
preparation, execution, and delivery of this Amendment and all related
documents.
7. LIMITED EFFECT. In the event of a conflict between the terms
--------------
and provisions of this Amendment and the terms and provisions of the Agreement,
the terms and provisions of this Amendment shall govern. In all other respects,
the Agreement, as amended and supplemented hereby, shall remain in full force
and effect.
8. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in
---------------------------
any number of counterparts and by different parties on separate counterparts,
each of which when so executed and delivered shall be deemed to be an original.
All such counterparts, taken together, shall constitute but one and the same
Amendment. This Amendment shall become effective upon the execution of a
counterpart of this Amendment by each of the parties hereto.
[SPACE INTENTIONALLY LEFT BLANK]
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first set forth above.
FOOTHILL CAPITAL CORPORATION,
a California corporation
By:
Title:
ALLIED HEALTHCARE PRODUCTS, INC.,
a Delaware corporation
By:
Title:
B&F MEDICAL PRODUCTS, INC.,
a Delaware corporation
By:
Title:
HOSPITAL SYSTEMS, INC.,
a California corporation
By:
Title:
LIFE SUPPORT PRODUCTS, INC.,
a California corporation
By:
Title:
5
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1209
<SECURITIES> 0
<RECEIVABLES> 17507
<ALLOWANCES> 999
<INVENTORY> 20180
<CURRENT-ASSETS> 37988
<PP&E> 21923
<DEPRECIATION> 3917
<TOTAL-ASSETS> 84876
<CURRENT-LIABILITIES> 14221
<BONDS> 17667
<COMMON> 101
0
0
<OTHER-SE> 52252
<TOTAL-LIABILITY-AND-EQUITY> 84876
<SALES> 22785
<TOTAL-REVENUES> 22785
<CGS> 16278
<TOTAL-COSTS> 16278
<OTHER-EXPENSES> 5476
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 493
<INCOME-PRETAX> 538
<INCOME-TAX> 297
<INCOME-CONTINUING> 241
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 241
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
