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, 1999
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 26, 1999 is
7,806,682 shares.
<PAGE>
<TABLE>
<CAPTION>
INDEX
Page
Part I - Financial Information Number
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statement of Operations - 3
three months and nine months ended March 31,
1999 and 1998 (Unaudited)
Consolidated Balance Sheet - 4-5
March 31, 1999 (Unaudited) and
June 30, 1998
Consolidated Statement of Cash Flows - 6-7
three months and nine months ended March 31, 1999 and 1998 (Unaudited)
Consolidated Statement of Changes in 8
Stockholders' Equity - nine months ended March
31, 1999 (Unaudited)
Notes to Consolidated Financial Statements 9-12
Item 2. Management's Discussion and Analysis of 13-27
Financial Condition and Results of Operations
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 28
Signature 29
</TABLE>
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,
------------------------- ----------------------------
1999 1998 1999 1998
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . $19,227,327 $22,784,952 $ 54,178,723 $ 76,990,844
Cost of sales . . . . . . . . . . . . . . . . . 14,287,294 16,277,638 41,409,419 54,511,774
------------ ----------- ------------- -------------
Gross profit. . . . . . . . . . . . . . . . . . 4,940,033 6,507,314 12,769,304 22,479,070
Selling, general and administrative expenses. 4,601,409 5,407,382 14,202,800 18,982,113
Provision for restructuring and consolidation . 0 0 772,850 0
Provision for product recall. . . . . . . . . . 0 0 1,500,000 0
Gain on sale of business. . . . . . . . . . . . 0 0 0 (12,812,927)
Non-recurring impairment losses . . . . . . . . 0 0 0 9,778,259
------------ ----------- ------------- -------------
Income (loss) from operations . . . . . . . . . 338,624 1,099,932 (3,706,346) 6,531,625
Other expenses:
Interest expense. . . . . . . . . . . . . . . 468,007 492,828 1,445,824 3,565,228
Other, net. . . . . . . . . . . . . . . . . . 49,451 69,101 73,442 156,351
------------ ----------- ------------- -------------
517,458 561,929 1,519,266 3,721,579
------------ ----------- ------------- -------------
Income (loss) before provision
(benefit) for income taxes and
extraordinary loss. . . . . . . . . . . . . . (178,834) 538,003 (5,225,612) 2,810,046
Provision (benefit) for income taxes. . . . . . 10,006 297,144 (1,845,623) 9,360,607
------------ ----------- ------------- -------------
Income (loss) before extraordinary loss . . . . (188,840) 240,859 (3,379,989) (6,550,561)
Extraordinary loss on early
extinguishment of debt, net of
income tax benefit of $373,191. . . . . . . . 0 0 0 530,632
------------ ----------- ------------- -------------
Net income (loss) . . . . . . . . . . . . . . . ($188,840) $ 240,859 ($3,379,989) ($7,081,193)
============ =========== ============= =============
Basic and diluted income (loss) per share:
Income (loss) before extraordinary loss . . . ($0.02) $ 0.03 ($0.43) ($0.84)
Extraordinary loss --- --- --- ($0.07)
------------ ----------- ------------- -------------
Net income (loss) . . . . . . . . . . . . . . ($0.02) $ 0.03 ($0.43) ($0.91)
============ =========== ============= =============
Weighted average shares . . . . . . . . . . . . 7,806,682 7,806,682 7,806,682 7,804,471
============ =========== ============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
March 31, June 30,
1999 1998
------------ -----------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . $ 496,683 $ 1,194,813
Accounts receivable, net of allowance for doubtful
accounts of $921,254 and $1,035,833, respectively 13,617,488 14,227,314
Inventories. . . . . . . . . . . . . . . . . . . . . 18,532,365 18,341,340
Other current assets . . . . . . . . . . . . . . . . 1,020,112 273,832
------------ -----------
Total current assets. . . . . . . . . . . . . . . 33,666,648 34,037,299
------------ -----------
Property, plant and equipment, net . . . . . . . . . 14,766,659 17,525,906
Goodwill, net. . . . . . . . . . . . . . . . . . . . 27,414,506 28,026,064
Other assets, net. . . . . . . . . . . . . . . . . . 400,035 590,933
------------ -----------
Total assets. . . . . . . . . . . . . . . . . . . $ 76,247,848 $80,180,202
============ ===========
</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,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . $ 6,651,929 $ 5,807,349
Current portion of long-term debt . . . . . . . . . . . . . 898,906 3,442,797
Accrual for restructuring and consolidation . . . . . . . . 7,816 0
Accrual for product recall. . . . . . . . . . . . . . . . . 1,097,365 0
Other current liabilities . . . . . . . . . . . . . . . . . 1,720,587 3,479,215
------------- -------------
Total current liabilities. . . . . . . . . . . . . . . . 10,376,603 12,729,361
------------- -------------
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 16,772,168 14,971,775
Deferred income tax liability-noncurrent . . . . . . . . . . . 441,589 441,589
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 shares issued and outstanding
at March 31, 1999 and June 30, 1998. . . . . . . . . . . . 101,102 101,102
Additional paid-in capital. . . . . . . . . . . . . . . . . 47,014,621 47,014,621
Common stock in treasury, at cost . . . . . . . . . . . . . (20,731,428) (20,731,428)
Retained earnings . . . . . . . . . . . . . . . . . . . . . 22,273,193 25,653,182
------------- -------------
Total stockholders' equity . . . . . . . . . . . . . . . 48,657,488 52,037,477
------------- -------------
Total liabilities and stockholders' equity . . . . . . . $ 76,247,848 $ 80,180,202
============= =============
</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,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . ($3,379,989) ($7,081,193)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization. . . . . . . . . . . . 2,974,934 3,916,961
Provision for restructuring and consolidation. . . . 225,742 0
Provision for product recall . . . . . . . . . . . . 1,097,365 0
Gain on sale of Bear Medical . . . . . . . . . . . . 0 (12,812,927)
Loss on refinancing of long-term debt. . . . . . . . 0 903,823
Noncash portion of non-recurring impairment losses . 0 9,572,390
Decrease in accounts receivable, net . . . . . . . . 609,826 607,124
Decrease (increase) in inventories . . . . . . . . . (191,025) 573,594
Increase in income taxes receivable. . . . . . . . . (969,603) 0
Decrease in deferred income taxes - asset. . . . . . 0 2,001,014
Decrease in other current assets . . . . . . . . . . 223,323 542,437
Increase (decrease) in accounts payable. . . . . . . 844,580 (6,070,629)
Increase (decrease) in accrued income taxes. . . . . (942,036) 1,776,585
Decrease in other current liabilities. . . . . . . . (816,592) (1,818,329)
Increase in deferred income taxes - liability. . . . 0 634,849
------------ ------------
Net cash used in operating activities . . . . . . . (323,475) (7,254,301)
------------ ------------
Cash flows from investing activities:
Capital expenditures, net . . . . . . . . . . . . . . . (992,340) (420,143)
Proceeds on sale of Toledo, Ohio facilities . . . . . . 1,393,287 0
Proceeds on sale of Bear Medical, net of disposal costs 0 35,378,957
------------ ------------
Net cash provided by investing activities . . . . . 400,947 34,958,814
------------ ------------
</TABLE>
(CONTINUED)
6
<PAGE>
<TABLE>
<CAPTION>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
(UNAUDITED)
Nine months ended
March 31,
-----------------------------
1999 1998
------------- --------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of long-term debt. . . . 5,000,000 26,000,000
Payments of long-term debt. . . . . . . . . . . (7,117,798) (36,747,627)
Borrowings under revolving credit agreement . . 66,598,886 106,514,530
Payments under revolving credit agreement . . . (65,224,586) (122,358,410)
Issuance of common stock. . . . . . . . . . . . 0 68,750
Debt issuance costs . . . . . . . . . . . . . . (32,104) (961,532)
Net cash used in financing activities . . . (775,602) (27,484,289)
------------- --------------
Net increase (decrease) in cash and equivalents (698,130) 220,224
Cash and equivalents at beginning of period . . 1,194,813 988,436
Cash and equivalents at end of period . . . . . $ 496,683 $ 1,208,660
============= ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . $ 1,573,400 $ 4,213,765
Income taxes. . . . . . . . . . . . . . . . $ 91,938 $ 4,140,629
</TABLE>
See accompanying Notes To Consolidated Financial Statements.
7
<PAGE>
8
<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, 1998 $ 0 $101,102 $47,014,621 ($20,731,428) $25,653,182
Net loss for the
nine months ended
March 31, 1999 (3,379,989)
---------- -------- ----------- ------------- ------------
Balance,
March 31, 1999. . . $ 0 $101,102 $47,014,621 ($20,731,428) $22,273,193
========== ======== =========== ============= ============
</TABLE>
See accompanying Notes To Consolidated Financial Statements.
9
<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, 1998.
2. Inventories
Inventories are comprised as follows:
<TABLE>
<CAPTION>
March 31, 1999 June 30, 1998
(Unaudited)
<S> <C> <C>
Work-in progress $ 1,404,664 $ 2,424,041
Component Parts. 14,330,126 14,820,526
Finished Goods . 2,797,575 1,096,773
$ 18,532,365 $ 18,341,340
================ ==============
</TABLE>
The above amounts are net of a reserve for obsolete and excess inventory of
approximately $2.0 million and $2.2 million at March 31, 1999 and June 30, 1998,
respectively.
3. Debt Arrangement
On March 3, 1999 Allied purchased the remaining $505,000 of its outstanding
Missouri Industrial Revenue Bonds. The bonds, which bore a variable interest
rate, had a final maturity date of April 1, 2001 and were repaid early using
borrowings from the Company's revolving credit facility.
10
<PAGE>
4. LSP Oxygen Regulator Recall
On February 4, 1999, Allied announced a recall of aluminum oxygen regulators
marketed under its Life Support Products label. These products are used to
regulate pressure of bottled oxygen for administration to patients under
emergency situations. Following reports of regulator fires, the Company had
instituted a recall in May 1997, under which it provided retrofit kits to
prevent contaminants from entering the regulators. The Company has also been
testing regulator design with the help of the National Aeronautical and Space
Administration's White Sands National Laboratories. Meanwhile, two fires
involving the Company's regulators were reported. While preliminary findings
led the Company to believe the Company's products did not cause those fires,
there is enough concern among the users that the Company, in cooperation with
the U. S. Food and Drug Administration ("FDA"), agreed to institute a voluntary
recall to replace aluminum components in the high pressure chamber of the
regulators with brass components at pre-existing authorized service centers.
The FDA has recommended that all regulator manufacturers cease use of aluminum
in regulators. Accordingly, the Company has now introduced new brass regulators
and is also offering a trade in program to the existing users. Based on an
estimated population of 100,000 regulators, the Company estimates that the
recall could cost as much as $2.7 million or more. However, the Company will
make every effort to mitigate these costs and has recorded a charge of $1.5
million pre-tax, $0.9 million after tax, or $0.12 per share in the second
quarter of fiscal 1999.
A reconciliation of activity with respect to the Company's product
recall is as follows:
<TABLE>
<CAPTION>
<S> <C>
Provision Balance, December 31, 1998 . . . . . $1,500,000
Product costs for retrofitting and replacement (304,552)
Administrative costs incurred. . . . . . . . . (98,083)
Ending Balance, March 31, 1999 . . . . . . . . $1,097,365
===========
</TABLE>
5. Debt Refinancing
On August 7, 1998, the Company borrowed approximately $5.0 million from
LaSalle National Bank. The borrowing was secured by a first security interest
in the Company's St. Louis facility. The loan requires monthly principal and
interest payments of $.06 million, with a final payment of all principal and
interest remaining unpaid due at maturity on August 1, 2003. Interest is fixed
at 7.75% per annum. Proceeds from the borrowing were used to pay down existing
debt, which bore a higher interest rate. The loan agreement includes certain
debt covenants which the Company must comply with over the term of the loan.
On September 8, 1998, the Company's credit facilities with Foothill Capital
Corporation were amended. The Company's existing term loan was eliminated and
replaced with an amended revolving credit facility. As amended, the revolving
credit facility remains at $25.0 million. The interest rate on the facility has
been reduced from the floating reference rate (7.75% at January 31, 1999) plus
0.50% to the floating reference rate plus 0.25%. The reference rate, as defined
in the credit agreement, is the variable rate of interest, per annum, most
recently announced by Norwest Bank Minnesota, National Association, or any
successor thereto, as its "base rate".
11
<PAGE>
This amendment also provides the Company with a rate of LIBOR + 2.5%.
Interest rates on the reference rate and LIBOR will drop by 0.25% at the end of
fiscal 1999 and 2000 if the company is profitable. In addition, the fees
charged to the company are also reduced.
6. B&F Relocation provision
On August 5, 1998 the Company's board of directors voted to close the
Toledo facility of its disposable products division and relocate production of
the B&F line of home care products to its manufacturing facility in St. Louis,
Missouri. This move was announced on August 10, 1998. The move was substantially
completed during the second quarter of fiscal 1999. In connection with the
shutdown of the facility, Allied recorded a provision of approximately $1.0
million pre-tax, $0.6 million after tax, or $0.07 per share, in the first
quarter of fiscal 1999 to cover the cost of closing the facility. The provision
reflects costs of certain fixed asset impairments, employee severance benefits
and other related exit costs. Subsequently, during the second quarter of
fiscal 1999, the company negotiated and received a $0.2 million cash payment
from the City of Toledo as partial reimbursement for relocation costs.
Accordingly, Allied recorded this cash payment, in the second quarter of fiscal
1999, as a reduction to the aforementioned provision resulting in a net charge
of $0.8 million pre-tax, $0.5 million after tax, or $0.06 per share for the nine
months ended March 31, 1999. These costs have substantially been paid during
the second quarter of fiscal 1999.
A reconciliation of activity with respect to the Company's restructuring
and consolidation of the B&F product line is as follows:
<TABLE>
<CAPTION>
<S> <C>
Provision Balance, December 31, 1998. . $ 55,146
Cash payments associated with severance (15,175)
Other exit costs incurred . . . . . . . (32,155)
Ending Balance, March 31, 1999. . . . . $ 7,816
=========
</TABLE>
7. Sale of Bear 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"),
collectively referred to as the ventilation products division, to
Thermo-Electron Corporation for $36.6 million plus the assumption of certain
liabilities. The net proceeds of $29.5 million, after expenses which included
federal and state taxes paid, were utilized to repay a significant portion of
the Company's subordinated debt. The sale of the ventilation products division
also resulted in a gain, for financial reporting purposes, of $12.8 million
pre-tax, $3.5 million after tax, or $0.45 per share for the nine month period
ending March 31, 1998.
12
<PAGE>
Results for the ventilation products division are included in the
Consolidated Statement of Operations for four months in the nine month period
ended March 31, 1998. Had the divestiture occurred on July 1, 1997,
consolidated pro forma net sales, net loss, and loss per share for the nine
months ended March 31, 1998 would have been $66.6 million, $(10.9) million, and
$(1.40), respectively.
8. Other Non-Recurring Items
In the second quarter of fiscal 1998, the Company reevaluated the carrying
value of its various businesses and recorded a non-recurring charge to
operations of $9.8 million. This charge consisted of $8.9 million in goodwill
writedowns, $0.5 million of consulting fees related to a cooperative purchasing
study and $0.4 million for the writedown of leasehold improvements and a reserve
for the remaining lease payments on a facility in Mt. Vernon, Ohio related to
the Company's Toledo, Ohio disposable products division. The goodwill
writedowns, pursuant to the Company's impairment policy described in Note 2 in
the June 30, 1998 financial statements, reflects overall changes in business
conditions for primarily its headwall and disposable products businesses which
continue to experience weakness in financial results due to a variety of market
conditions.
13
<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, 1999 compared to the three month and nine month periods
ended March 31, 1998. This discussion should be read in conjunction with the
June 30, 1998 consolidated financial statements and accompanying notes thereto
included in the Company's Form 10-K for the year ended June 30, 1998.
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 healthcare reform, including Medicare and Medicaid
financing, consolidation and rationalization activities, difficulties or delays
in the introduction of new products or disruptions in selling, manufacturing
and/or shipping efforts. The Company ships a significant percentage of its
products outside the U. S. and is thus subject to foreign economic fluctuations.
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 four
months in the nine month period ended March 31, 1998.
The specific transactions and events impacting 1999 and 1998 operating results,
which make meaningful comparisons more difficult, are summarized below.
LSP OXYGEN REGULATOR RECALL
- ------------------------------
On February 4, 1999, Allied announced a recall of aluminum oxygen regulators
marketed under its Life Support Products label. These products are used to
regulate pressure of bottled oxygen for administration to patients under
emergency situations. Following reports of regulator fires, some of which
involved Company product, the Company instituted a recall in May 1997, under
which it provided retrofit kits to prevent contaminants from entering the
regulators. The Company has also been testing regulator design with the help of
the National Aeronautical and Space Administration's White Sands National
Laboratories. Meanwhile, two fires involving the Company's regulators were
reported. While preliminary findings led the Company to believe the Company's
products did not cause the fires, there is enough concern among the users that
the Company, in cooperation with the U. S. Food and Drug Administration ("FDA"),
agreed to institute a voluntary recall to replace aluminum components in the
high pressure chamber of the regulators with brass components at pre-existing
authorized service centers. The FDA has recommended that all regulator
manufacturers cease use of aluminum in regulators. Accordingly, the Company has
now introduced new brass regulators and is also offering a trade in program to
the existing users. Based on an estimated population of 100,000 regulators, the
Company estimates that the recall could cost as much as $2.7 million or more.
However, the Company will make every effort to mitigate these costs and has
recorded a charge of $1.5 million pre-tax, $0.9 million after tax, or $0.12 per
share in the second quarter of fiscal 1999.
14
<PAGE>
B&F RELOCATION
- ---------------
On August 10, 1998, the Company announced its intention to close the Toledo
facility of its disposable products division and relocate the B&F product line
of home care products to its St. Louis manufacturing facility. The Company
anticipates that the move, which was substantially completed in the second
quarter of fiscal 1999, will generate annual savings of nearly $1.0 million. In
connection with the shutdown of the facility, the Company recorded a one-time
charge of approximately $1.0 million ($0.6 million after taxes), or $.07 per
share during the first quarter of fiscal 1999. Subsequently, during the second
quarter of fiscal 1999, the company negotiated and received a $0.2 million cash
payment from the City of Toledo as partial reimbursement for relocation costs.
Accordingly, Allied recorded this cash payment as a reduction to the
aforementioned provision, in the second quarter of fiscal 1999, resulting in a
net charge of $0.8 million pre-tax, $0.5 million after tax, or $0.06 per share
for the nine months ended March 31, 1999. These costs have substantially been
paid during the second quarter of fiscal 1999. The Company will continue to
review its operations for opportunities to improve efficiencies. See Note 6 in
the Notes to the Consolidated Financial Statements for additional information
concerning the details of the Company's restructuring provision, including a
reconciliation of the reserve relating thereto.
DEBT REFINANCING
- -----------------
In August 1997, the Company refinanced its existing debt through a $46 million
credit facility with Foothill Capital Corporation. In conjunction with this
credit facility, Allied placed an additional $5.0 million in subordinated debt
with several related parties to the company. The Foothill Credit facility,
which was amended in November 1997 to reflect the effects of the sale of the
ventilation products division, and again in September 1998 to further reduce
interest rates, allowed the Company to improve its liquidity and reduce interest
expense in comparison to prior years. In addition, on August 7, 1998, the
Company borrowed approximately $5.0 million from LaSalle National Bank. The
borrowing was secured by a security interest in the Company's St. Louis
facility. This loan further reduced the Company's borrowing interest rate and
increased liquidity.
15
<PAGE>
SALE OF VENTILATION DIVISION ASSETS
- ---------------------------------------
On October 31, 1997 the Company sold the assets of Bear Medical Systems, Inc.
("Bear") and its subsidiary BiCore Monitoring Systems, Inc. ("BiCore"),
collectively referred to as the ventilation products division, 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, were utilized to repay a significant portion of the
Company's term notes and to repay all of its subordinated debt, $15.8 million of
which had a coupon rate of 14.0% per annum.
GOODWILL WRITEDOWNS
- --------------------
During the second quarter of fiscal 1998, the Company reevaluated 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 products division and due to other changes in market conditions
which culminated during the second quarter of fiscal 1998. Goodwill writedowns,
which were determined pursuant to the Company's impairment policy, totaled $8.9
million. As a result of the carrying value of goodwill for certain businesses,
the Company reduced 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. Results of the ventilation products
division are included for four months in the nine month period ended March 31,
1998.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
------ ------ ------ -------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.%0
Cost of sales. . . . . . . . . . . . . . . . . 74.3 71.4 76.4 70.8
Gross profit . . . . . . . . . . . . . . . . . 25.7 28.6 23.6 29.2
Selling, general and administrative expenses . 23.9 23.7 26.2 24.7
Provision for restructuring and consolidation. 0.0 0.0 1.4 0.0
Provision for product recall . . . . . . . . . 0.0 0.0 2.8 0.0
Gain on sale of business . . . . . . . . . . . 0.0 0.0 0.0 (16.6)
Non-recurring impairment losses. . . . . . . . 0.0 0.0 0.0 12.7
Income (loss) from operations. . . . . . . . . 1.8 4.9 (6.8) 8.4
Interest and other expense . . . . . . . . . . 2.7 2.5 2.8 4.8
Income (loss) before provision (benefit)
for income taxes. . . . . . . . . . . . . (0.9) 2.4 (9.6) 3.6
Provision (benefit) for income taxes . . . . . 0.1 1.3 (3.4) 12.1
Income (loss) before extraordinary loss. . . . (1.0) 1.1 (6.2) (8.5)
Extraordinary loss . . . . . . . . . . . . . . 0.0 0.0 0.0 (0.7)
Net income (loss). . . . . . . . . . . . . . . (1.0)% 1.1% (6.2)% (9.2)%
------ ------ ------ -------
</TABLE>
16
<PAGE>
RESULTS OF OPERATIONS
- -----------------------
Allied manufactures and markets medical gas equipment, respiratory care
products, and emergency medical products. Set forth below is certain
information with respect to amounts (dollars in thousands) and percentages of
net sales attributable to medical gas equipment, respiratory care products, and
emergency medical products. The ventilation products division was sold on
October 31, 1997. Net sales for the ventilation products division for the nine
month period ended March 31, 1998 were $10.4 million and these results are
included in the Respiratory Care Products.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
% of % of
Total Total
Net Net Net Net
Sales Sales Sales Sales
------- ------ ------- ------
<S> <C> <C> <C> <C>
Medical Gas Equipment. . . $10,850 56.4% $12,167 53.4%
Respiratory Care Products. 5,681 29.6% 7,634 33.5%
Emergency Medical Products 2,696 14.0% 2,984 13.1%
------- ------ ------- ------
Total. . . . . . . . . . . $19,227 100.0% $22,785 100.0%
======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
% of % of
Total Total
Net Net Net Net
Sales Sales Sales Sales
------- ------ ------- ------
<S> <C> <C> <C> <C>
Medical Gas Equipment. . . $29,051 53.6% $34,993 45.4%
Respiratory Care Products. 17,832 32.9% 33,456 43.5%
Emergency Medical Products 7,296 13.5% 8,542 11.1%
------- ------ ------- ------
Total. . . . . . . . . . . $54,179 100.0% $76,991 100.0%
======= ====== ======= ======
</TABLE>
17
<PAGE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998.
- --------------------------------------------------------------------------------
Certain internal and external factors continue to impact the Company's
operations, including the regulator recall, the impact of healthcare cost
containment and Medicare reimbursements, economic problems in Asia and a
reduction in sales of purchased products for home care sales, especially
aluminum cylinders, due to the Company's emphasis on improved margins. Allied's
previously announced decision to move its B&F Medical operations from Toledo,
which was completed during the second quarter of fiscal 1999, has significantly
impacted sales from that operation. The Company experienced production problems
at its St. Louis facility during the first nine months of fiscal 1999 that were
not resolved in a timely manner. Most of these production problems have now
been resolved. The Company is rapidly gaining efficiency in the manufacturing
of B&F products in St. Louis and is developing economical outside sources for
high labor content products.
Allied had net sales of $19.2 million for the three months ended March 31, 1999,
down $3.6 million, or 15.6%, from net sales of $22.8 million in the prior year
same quarter. This decrease was primarily due to the slow ramp-up of production
of the B&F product line in St. Louis, after the move from Toledo, Ohio during
the prior quarter, lower sales of emergency products due to the regulator
recall, as well as lower shipments of Headwall products.
Medical gas product sales in the third quarter of fiscal 1999 of $10.8 million
were $1.3 million, or 10.8%, lower than sales of $12.2 million in the prior year
same quarter. Headwall sales declined $1.1 million from $1.6 million in the
third quarter of fiscal 1998 to $0.5 million in the third quarter of fiscal
1999. The Headwall business is affected by large bid orders on new construction
or renovation of medical facilities. The lead time between the placing of
Headwall orders and the shipment of products can be 1 year or longer. The
decline of Headwall shipments is due to a lower level of bookings during the
prior fiscal year. Medical gas suction and regulation device sales declined from
$6.2 million in the third quarter of fiscal 1998 to $5.9 million in the third
quarter of fiscal 1999, while medical gas construction sales were flat at $4.4
million in the third quarter of fiscal 1998 compared to the third quarter of
fiscal 1999.
Respiratory care product sales in the third quarter of fiscal 1999 of $5.7
million were $1.9 million, or 25.6%, less than sales of $7.6 million in the
prior year same quarter primarily because Home care sales declined 34.2% from
$5.5 million to $3.6 million due to the relocation of the B & F product line.
Emergency product sales declined 9.6% from $3.0 million in the third quarter of
fiscal 1998 to $2.7 million in the third quarter of fiscal 1999, primarily due
to the suspension of aluminum oxygen regulator shipments. This product line is
subject to voluntary recall of oxygen regulators for which the company took a
$1.5 million pretax charge during the second quarter of fiscal 1999.
18
<PAGE>
Orders for the three months ended March 31, 1999 were $18.5 million, down $4.0
million from the prior year same quarter level of $22.5 million. Emergency
product orders decreased 42.6% from $3.5 million to $2.0 million due to the
absence of a large international order recorded the prior fiscal year and the
delay in oxygen regulator bookings affected by the product recall. Total
medical gas equipment orders were $10.8 million, which is $0.3 million or 2.3%
lower than last year same quarter of $11.1 million. Respiratory care product
orders declined $2.3 million or 29.1% from $8.0 million to $5.7 million. This
decline is due to lower Home care orders because of the factors discussed above
and also due to the loss of air compressor business from Bear Medical following
the divestiture of that unit. Sequentially, orders increased from $18.2 million
in the second quarter of fiscal 1999 to $18.5 million or 1.6% in the third
quarter of fiscal 1999. The Company's backlog now stands at $20.2 million, down
3.6% from the prior quarter level of $21.0 million.
International sales, which are included in the product lines discussed above,
decreased $0.2 million, or 7.6%, to $3.2 million in the third quarter of fiscal
1999 from $3.4 million in the prior year same period. This decline is primarily
due to the oxygen regulator issues discussed above.
Gross profit for the three months ended March 31, 1999 was $4.9 million, or
25.7% of net sales compared to a gross profit of $6.5 million, or 28.6% of net
sales for the three months ended March 31, 1998. The decrease in gross profit as
a percent of sales is attributable to reduced manufacturing throughput and lower
absorption of plant overhead due to lower sales volume and the relocation of the
B&F production lines.
Selling, General and Administrative ("SG&A") expenses for the three months
ended March 31, 1999 were $4.6 million, a decrease of $0.8 million, or 14.9%
from $5.4 million for the three months ended March 31, 1998. The $0.8 million
decline is attributable to lower selling costs that are variable in relationship
with lower sales volume and also due to management's efforts to reduce spending.
Income from operations was $0.3 million for the three months ended March 31,
1999 compared to income from operations of $1.1 million for the three months
ended March 31, 1998. Interest expense was flat at $0.5 million for both three
month periods ended March 31, 1999 and 1998. Allied had a loss before provision
for income taxes in the third quarter of fiscal 1999 of $0.2 million compared to
income before provision for income taxes of $0.5 million for the third quarter
of fiscal 1998. The company recorded a tax provision of $0.01 million and $0.3
million for the three month periods ended March 31, 1999 and 1998, respectively.
In fiscal 1999, the net loss for the third quarter was $0.2 million, or $0.02
per basic and diluted share. In fiscal 1998, net income for the third quarter
was $0.3 million, or $0.03 per basic and diluted share. The weighted average
number of common shares outstanding used in the calculation of earnings per
share for the third quarters of fiscal 1999 and fiscal 1998 was 7,806,682.
19
<PAGE>
NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO NINE MONTHS ENDED MARCH 31, 1998.
- --------------------------------------------------------------------------------
On October 31,1997 the company sold its ventilation products division. The
results of this business are contained in the Company's consolidated financial
results for four months in the nine month period ended March 31, 1998.
Allied had net sales of $54.2 million for the nine months ended March 31, 1999,
down $22.8 million, or 29.6%, from net sales of $77.0 million in the prior year
nine month period. $10.4 million of this decrease was attributable to the now
divested ventilation products division. Base business sales declined by $12.4
million or 18.6%.
Medical gas product sales in the first nine months of fiscal 1999 of $29.1
million were $5.9 million, or 17.0%, lower than sales of $35.0 million in the
prior year first nine months. Headwall sales declined from $4.2 million in the
first nine months of fiscal 1998 to $2.6 million in the first nine months of
fiscal 1999. The Headwall business is affected by large bid orders on new
construction or renovation of medical facilities. The lead time between the
placing of Headwall orders and the shipment of products can be 1 year or longer.
The decline of Headwall shipments is due to a lower level of bookings during
the prior fiscal year. Medical gas construction sales declined from $14.0
million in the first nine months of fiscal 1998 to $11.7 million in the first
nine months of fiscal 1999, while medical gas suction and regulation device
sales decreased from $16.8 million in the first nine months of fiscal 1998 to
$14.8 million in the first nine months of fiscal 1999. Both product lines
experienced production problems and the nine month versus nine month comparisons
were affected by an increase in shipments during the first quarter of fiscal
1998 following a labor strike in June, 1997.
Respiratory care product sales in the first nine months of fiscal 1999 of $17.8
million were $15.7 million, or 46.7%, less than sales of $33.5 million in the
prior year same nine month period. $10.4 million of this decline was
attributable to the sale of the ventilation products division while $5.3 million
of the decline relates to remaining product lines. Home care sales declined
28.7% from $17.2 million to $12.2 million primarily due to the relocation of the
Toledo facility.
Emergency product sales declined 14.6% from $8.5 million in the first nine
months of fiscal 1998 to $7.3 million in the first nine months of fiscal 1999,
due to the absence of a large order recorded in the prior year same nine month
period and due to the suspension in the shipments of aluminum regulators
affected by the recall.
Orders for the first nine months ended March 31, 1999 were $57.6 million, down
$19.6 million from the prior year same nine month period. Excluding $12.2
million in orders from the ventilation products division, base business orders
declined $7.4 million or 11.5%. Emergency product orders decreased 23.6% from
$9.8 million to $7.5 million, primarily because of a large $0.9 million order
for emergency products last fiscal year that did not recur this fiscal year.
Total medical gas equipment orders were $31.1 million for the nine month period
ended March 31, 1999, or 0.6% lower than orders of $30.9 million for the nine
months ended March 31, 1998. Respiratory care product orders, for base business
excluding ventilation products, declined 21.8% from $24.4 million to $19.0
million. Home care orders declined 26.0% from $18.2 million to $13.4 million due
to factors indicated earlier, while respiratory care product orders for the
hospital market decreased 9.5% to $5.6 million. The Company's backlog now
stands at $20.2 million, up 16.1% from the fiscal 1998 year end level of $17.4
million.
20
<PAGE>
International sales, which are included in the product lines discussed above,
decreased $9.8 million, or 50.5%, to $9.6 million in the first nine months of
fiscal 1999 from $19.4 million in the prior year same period. Excluding sales
of the divested ventilation products division, base business international sales
declined by $2.9 million, or 23.1%. While continued uncertainty in Asia, Russia
and South America, have reduced international sales and orders, the Company
continues to emphasize the importance of worldwide markets as advances in
medical protocol in various markets throughout the world will lead to increased
demand for medical products.
Gross profit for the nine months ended March 31, 1999 was $12.8 million, or
23.6% of net sales compared to a gross profit of $22.5 million, or 29.2% of net
sales for the nine months ended March 31, 1998. Reduced manufacturing throughput
due to the B&F relocation and lower absorption of plant overhead due to lower
sales volume, as well as the sale of the high margin ventilation products
division, has reduced margins as a percent to net sales. Pricing pressures
brought on by consolidations and cost containment in the industry continue to
unfavorably impact margins as a percent to net sales.
Selling, General and Administrative ("SG&A") expenses for the nine months ended
March 31, 1999 were $14.2 million, a decrease of $4.8 million, or 25.2% from
$19.0 million for the nine months ended March 31, 1998. Of the $4.8 million
decline, $2.4 million is directly due to the sale of the ventilation products
division, $2.1 million is due to spending reductions in the base business SG&A
and $0.3 million is attributable to a reduction in goodwill amortization
resulting from the writedown of goodwill in fiscal 1998.
On August 10, 1998 the Company announced its intention to close the Toledo
facility of its disposable products division and relocate the B&F product line
of home care products to its St. Louis manufacturing facility. The move was
substantially completed during the second quarter of fiscal 1999. In connection
with the shutdown of the facility, the Company recorded a one-time charge of
approximately $1.0 million ($0.6 million after taxes), or $.07 per share during
the first quarter of fiscal 1999. Subsequently, during the second quarter of
fiscal 1999, the company negotiated and received a $0.2 million cash payment
from the City of Toledo as partial reimbursement for relocation costs.
Accordingly, Allied recorded this cash payment, in the second quarter of fiscal
1999, as a reduction to the aforementioned provision resulting in a net charge
of $0.8 million pre-tax, $0.5 million after tax, or $0.06 per share for the nine
months ended March 31, 1999. See Note 6 in the Notes to the Consolidated
Financial Statements for additional information concerning the details of the
Company's restructuring provision, including a reconciliation of the reserve
relating thereto.
21
<PAGE>
On October 31, 1997, the Company sold the assets of Bear Medical Systems, Inc.
("Bear") and its subsidiary BiCore Monitoring Systems, Inc. ("BiCore"),
collectively referred to as the ventilation products division, to
Thermo-Electron Corporation for $36.6 million plus the assumption of certain
liabilities. The net proceeds of $29.5 million, after expenses which included
federal and state taxes paid, were utilized to pay a significant portion of the
Company's subordinated debt. The sale of the ventilation products division also
resulted in a gain, for financial reporting purposes, of $12.8 million pre-tax,
$3.5 million after tax, or $0.45 per share for the nine month period ending
March 31, 1998.
During the second quarter of fiscal 1998, the Company reevaluated 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 products division and due to other changes in market conditions
which culminated during the second quarter of fiscal 1998. Goodwill writedowns,
which were determined pursuant to the Company's impairment policy, totaled $8.9
million. As a result of the carrying value of goodwill for certain businesses,
the Company reduced its annual amortization charges by $0.3 million or $0.04 per
share.
Loss from operations was $3.7 million for the nine months ended March 31, 1999
compared to income from operations of $6.5 million for the nine months ended
March 31, 1998.
Interest expense decreased $2.1 million or 59.4%, to $1.5 million for the nine
months ended March 31, 1999 from $3.6 million in the prior year same nine month
period. Interest expense has been significantly reduced due to the reduction of
debt from the application of the proceeds from the sale of the ventilation
products division. In addition, interest expense for the nine months ended
March 31, 1998 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
sale of the ventilation products division. On August 7, 1998 the Company
borrowed $5.0 million from a financial institution at a fixed rate of 7.75%,
with proceeds used to pay down existing higher rate debt. On September 8, 1998
the Company's credit facilities with Foothill Capital Corporation were amended
to further reduce interest rates. The new financial agreements are discussed
further below.
Allied had a loss before benefit for taxes in the first nine months of fiscal
1999 of $5.2 million compared to income before provision for taxes and
extraordinary loss of $2.8 million for the first nine months of fiscal 1998.
The company recorded a tax benefit of $1.8 million for the nine month period
ended March 31, 1999. For the prior year nine month period the Company recorded
a provision for income taxes of $9.4 million due to the gain on the sale of the
ventilation products division and the non-deductibility of certain goodwill
writedowns included in the non-recurring charge as previously discussed.
22
<PAGE>
In the first quarter of fiscal 1998, Allied recorded an extraordinary loss on
early extinguishment of debt of $0.5 million, net of a tax benefit of $0.4
million. In fiscal 1999, the net loss for the first nine months was $3.4
million, or $0.43 per basic and diluted share, consisting of $0.25 loss per
share from operations and $0.18 loss per share related to the B&F move and the
regulator recall. In fiscal 1998, the net loss for the first nine months was
$7.1 million, or $0.91 per basic and diluted share, consisting of $0.84 loss per
share from operations and $0.07 loss per share for the extraordinary item. The
weighted average number of common shares outstanding used in the calculation of
earnings per share was 7,806,682 and 7,804,471 for the first nine months of
fiscal 1999 and fiscal 1998, respectively.
23
<PAGE>
FINANCIAL CONDITION
- --------------------
The following table sets forth selected information concerning Allied's
financial condition:
<TABLE>
<CAPTION>
Dollars in thousands: March 31, 1999 June 30, 1998
- --------------------- --------------- --------------
<S> <C> <C>
Cash. . . . . . . . . $ 497 $ 1,195
Working Capital . . . $ 23,290 $ 21,308
Total Debt. . . . . . $ 17,671 $ 18,415
Current Ratio . . . . 3.24:1 2.67:1
</TABLE>
The Company's working capital was $23.3 million at March 31, 1999 compared to
$21.3 million at June 30, 1998. A decrease in accounts receivable and other
current assets along with an increase in accounts payable were offset by
increases in inventories and income taxes receivable as well as decreases in
accrued income taxes and other current liabilities to account for the increase
in net working capital. Accounts receivable decreased to $13.6 million at March
31, 1999 from $14.2 million at June 30, 1998, partially due to decreased sales.
Accounts receivable as measured in days sales outstanding ("DSO") decreased to
62 days at March 31, 1999 from 69 days at June 30, 1998 as collection efforts
have been successful in lowering the average time it takes to collect from
customers. Inventories increased to $18.5 million from $18.3 million at June
30, 1998. Inventories, as measured by Days on Hand ("DOH"), were 159 DOH at
March 31, 1999 compared to 129 DOH at June 30, 1998, due to lower sales in the
first nine months of fiscal 1999. The Company continues to focus on improving
the mix of inventories and has been increasing stocking levels of high volume
products while simultaneously reducing stocking levels of low volume products.
24
<PAGE>
The net increase / (decrease) in cash for the nine months ended March 31, 1999
and March 31, 1998 was ($0.7) million and $0.2 million, respectively. Net cash
used by operations was $0.3 million and $7.2 million for the same periods,
respectively. Cash used by operations for the nine months ended March 31, 1999
consisted of a net loss of $3.4 million, which was partially offset by non-cash
charges to operations of $3.0 million for depreciation and amortization.
Changes in working capital accounts used $1.3 million. The change in working
capital was comprised of reductions in accounts receivables of $0.6 million and
other current assets of $0.2 million, and an increase in accounts payable of
$0.8 million. These favorable cash adjustments were offset by an increase in
inventories of ($0.2) million, a net change in deferred income tax accounts of
($1.9) million and a reduction in other current liabilities of ($0.8) million.
In addition, cash used by operating activities was favorably impacted by the
$1.1 million accrual for product recall, as discussed previously, and by the
$0.2 million non-cash portion of the provision for restructuring and
consolidation related to the relocation of the B&F product line from Toledo,
Ohio to St. Louis, Missouri.
As discussed previously, during the second quarter of fiscal 1999, the Company
received proceeds from the sale of its disposable products division facilities
which were sold to the City of Toledo for $1.4 million. These proceeds were used
to fund $1.0 million in capital expenditures and to reduce the Company's long
term debt.
Cash used by operations in the prior year same period consisted of a net loss of
$7.1 million which was partially offset by non-cash charges to operations of
$3.9 million for depreciation and amortization. Changes in working capital
accounts used $6.2 million. The change in working capital accounts was
principally related to payments to vendors which reduced accounts payable by
$6.1 million during the first nine months of fiscal 1998. In addition, the
Company reported a $12.8 million gain on the sale of the ventilation products
division and also recorded non-recurring charges, of which the non-cash portion
was $9.6 million for the nine months ended March 31, 1998. Accordingly, the
Company recorded a tax provision for the gain on the sale of the ventilation
products division which resulted in a favorable adjustment to cash used by
operating activities of $9.4 million. Also in conjunction with the sale of the
ventilation products division, the company received pre-tax proceeds of $35.4
million which was used to reduce total debt by $26.6 million, pay debt issuance
costs of $1.0 million, pay income taxes of $4.1 million and fund capital
expenditures of $0.4 million.
On August 7, 1998, the Company obtained a $5.0 million mortgage loan on its
principal facility in St. Louis, Missouri from LaSalle National Bank. Under
terms of this agreement the Company will make monthly principal and interest
payments, with a balloon payment in 2003. Proceeds of the loan were used to
reduce the obligation under the revolving credit agreement with Foothill Capital
Corporation. The mortgage loan carries a fixed rate of interest of 7.75%.
25
<PAGE>
On September 8, 1998, the Company's credit facilities with Foothill Capital
Corporation were amended. The Company's existing term loan was eliminated and
replaced with an amended revolving credit facility. As amended, the revolving
credit facility remained at $25.0 million. The interest rate on the facility
has been reduced from the floating reference rate (7.75% at January 31, 1999)
plus 0.50% to the floating reference rate plus 0.25%. The reference rate as
defined in the credit agreement, is the variable rate of interest, per annum,
most recently announced by Norwest Bank Minnesota, National Association, or any
successor thereto, as its "base" rate. This amendment also provides the Company
with a rate of LIBOR +2.5%. Amounts outstanding under this revolving credit
facility, which expires on August 8, 2000, totaled $11.0 million at April 26,
1999. At April 26, 1999, $5.2 million was available under the revolving
facility for additional borrowings.
The rates noted above will drop by 0.25% at the end of fiscal 1999 and 2000 if
the Company is profitable. In addition, the fees charged to the Company are
also reduced.
As of March 31, 1999 the Company had a backlog of $20.2 million compared to a
backlog of $17.4 million at June 30, 1998. The Company's backlog, a significant
portion of which is attributable to the Company's medical gas equipment
products, consists of customer purchase orders which may be subject to
cancellation by the customer.
Inflation has not had a material effect on the Company's business or results of
operations.
YEAR 2000
- ----------
The Company utilizes software and related computer technologies essential to its
operations. The Company has established a plan, utilizing internal resources,
to assess the potential impact of the changeover to the year 2000 on the
Company's systems and operations and to implement solutions to address this
issue. In October 1996, the Company converted its corporate offices and its
manufacturing operation to a new fully-integrated software system. The date
methodology of this software is not sensitive to year 2000 problems. However,
the Company is in the process of implementing testing procedures to insure year
2000 readiness. Any modifications or reprogramming is expected to be minor in
nature. The Company has also analyzed other internal computerized processes,
including, but not limited to, manufacturing, engineering, personal computer
network, and other facility management systems for potential year 2000 issues.
Any systems identified as being impacted by the changeover to the year 2000 will
be modified or replaced. The Company estimates that the year 2000 conversion
effort is over 65% complete and expects all critical systems will be year 2000
compliant by October 1999.
The Company has not separately distinguished between costs incurred specifically
to assure year 2000 compliance and normal expenditures needed to maintain or
upgrade existing systems to current technology levels. The Company believes that
any such costs expended were not material. The Company does not expect to incur
any significant costs on the remaining year 2000 compliance efforts.
26
<PAGE>
The Company is dependent on various third parties to conduct its business
operations. These third parties are customers and vendors of raw material and
components used in the production process. The Company's revenues are not
dependent upon any single or any few number of customers. The Company employs a
large number of vendors, without concentration of critical vendors. The Company
believes that vendors could be replaced if they fail to meet the Company's
demand for components. None of the Company's products or components of Company
products use date sensitive technology. Therefore, the Company believes that
third party risk involving the changeover to year 2000 is relatively small.
However, while reasonable actions are being taken to mitigate the risk of
unanticipated costs and/or business interruptions due to year 2000 problems in
its internal systems, or those of its vendors, there can be no assurance that
the Company will not experience any costs and/or disruptions from any other
external year 2000 failures. The magnitude of any such costs and/or disruptions
and the possible impact on the Company's consolidated results of operations, is
unpredictable. In addition, while efforts to date have focused on mitigating
year 2000 problems, the Company plans to evaluate the reasonable potential risks
to determine the extent of contingency planning and resources that are
appropriate.
27
<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 - See Form 8-K filed April 2, 1999.
28
<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.
/s/ Thomas A. Jenuleson
Thomas A. Jenuleson
Vice President Finance and Chief Financial Officer
29
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 497
<SECURITIES> 0
<RECEIVABLES> 14538
<ALLOWANCES> (921)
<INVENTORY> 18532
<CURRENT-ASSETS> 33667
<PP&E> 33687
<DEPRECIATION> (18920)
<TOTAL-ASSETS> 76248
<CURRENT-LIABILITIES> 10377
<BONDS> 17671
<COMMON> 101
0
0
<OTHER-SE> 48556
<TOTAL-LIABILITY-AND-EQUITY> 76248
<SALES> 19227
<TOTAL-REVENUES> 19227
<CGS> (14287)
<TOTAL-COSTS> (14287)
<OTHER-EXPENSES> (4651)
<LOSS-PROVISION> (44)
<INTEREST-EXPENSE> (468)
<INCOME-PRETAX> (179)
<INCOME-TAX> 10
<INCOME-CONTINUING> (189)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (189)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> 0
</TABLE>
