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 December 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 February 11, 1999 is
7,806,682 shares.
<PAGE>
INDEX
Page
Part I - Financial Information Number
Item 1. Consolidated Statement of Operations - 3
three months and six months ended December 31,
1998 and 1997 (Unaudited)
Consolidated Balance Sheet - 4-5
December 31, 1998 (Unaudited) and
June 30, 1998
Consolidated Statement of Cash Flows - 6-7
three months and six months ended December 31,
1998 and 1997 (Unaudited)
Consolidated Statement of Changes in 8
Stockholders' Equity - three months and six
months ended December 31, 1998 (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
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three months ended Six months ended
December 31, December 31,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C>
Net sales $17,092,293 $24,032,988 $34,951,396 $54,205,892
Cost of sales 13,669,635 17,290,512 27,122,125 38,234,136
------------ ------------ ------------ ------------
Gross profit 3,422,658 6,742,476 7,829,271 15,971,756
Selling, general and administrative expenses 4,724,043 6,322,144 9,601,391 13,574,731
Provision for restructuring and consolidation (200,000) 0 772,850 0
Provision for product recall 1,500,000 0 1,500,000 0
Gain on sale of business 0 (12,812,927) 0 (12,812,927)
Non-recurring impairment losses 0 9,778,259 0 9,778,259
------------ ------------ ------------ ------------
Income (loss) from operations (2,601,385) 3,455,000 (4,044,970) 5,431,693
Other expenses:
Interest expense 444,153 1,212,581 977,817 3,072,400
Other, net 5,045 40,311 23,991 87,250
------------ ------------ ------------ ------------
449,198 1,252,892 1,001,808 3,159,650
------------ ------------ ------------ ------------
Income (loss) before provision (benefit) for
income taxes and extraordinary loss (3,050,583) 2,202,108 (5,046,778) 2,272,043
Provision (benefit) for income taxes (1,138,691) 8,886,340 (1,855,629) 9,063,463
------------ ------------ ------------ ------------
Loss before extraordinary loss (1,911,892) (6,684,232) (3,191,149) (6,791,420)
Extraordinary loss on early
extinguishment of debt, net of
income tax benefit of $373,191 0 0 0 530,632
------------ ------------ ------------ ------------
Net Loss ($1,911,892) ($6,684,232) ($3,191,149) ($7,322,052)
============ ============ ============ ============
Basic and diluted loss per share:
Loss before extraordinary loss ($0.25) ($0.86) ($0.41) ($0.87)
Extraordinary loss - - - ($0.07)
------------ ------------ ------------ ------------
Net Loss ($0.25) ($0.86) ($0.41) ($0.94)
============ ============ ============ ============
Weighted average shares 7,806,682 7,806,682 7,806,682 7,803,389
============ ============ ============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
December 31, June 30,
1998 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 655,898 $ 1,194,813
Accounts receivable, net of allowance for doubtful
accounts of $1,068,787 and $1,035,833, respectively 12,716,835 14,227,314
Inventories 17,043,475 18,341,340
Other current assets 1,210,811 273,832
----------- -----------
Total current assets 31,627,019 34,037,299
----------- -----------
Property, plant and equipment, net 15,153,548 17,525,906
Goodwill, net 27,618,359 28,026,064
Other assets, net 496,945 590,933
----------- -----------
Total assets $74,895,871 $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
December 31, June 30,
1998 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 6,006,634 $ 5,807,349
Current portion of long-term debt 1,056,030 3,442,797
Accrual for restructuring and consolidation 55,146 0
Accrual for product recall 1,500,000 0
Other current liabilities 2,086,061 3,479,215
------------ ------------
Total current liabilities 10,703,871 12,729,361
------------ ------------
Long-term debt 14,904,083 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 December 31, 1998 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 22,462,033 25,653,182
------------ ------------
Total stockholders' equity 48,846,328 52,037,477
------------ ------------
Total liabilities and stockholders' equity $74,895,871 $80,180,202
============ ============
See accompanying Notes To Consolidated Financial Statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six months ended
December 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($3,191,149) ($7,322,052)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,041,725 2,891,467
Provision for restructuring and consolidation 273,072 0
Provision for product recall 1,500,000 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 9,528,398
Decrease in accounts receivable, net 1,510,479 465,885
Decrease (increase) in inventories 1,297,865 (486,272)
Increase in income taxes receivable (980,947) 0
Decrease in deferred income taxes - asset 0 2,001,014
Decrease in other current assets 43,968 358,608
Increase (decrease) in accounts payable 199,285 (2,906,836)
Increase (decrease) in accrued income taxes (942,036)
5,530,512
Decrease in other current liabilities (451,118) (1,490,204)
Increase in deferred income taxes - liability 0 634,849
------------ ------------
Net cash provided by (used in) operating activities 1,301,144 (2,703,735)
------------ ------------
Cash flows from investing activities:
Capital expenditures, net (746,783) (468,856)
Proceeds on sale of Toledo, Ohio facilities 1,393,287 0
Proceeds on sale of Bear Medical, net of disposal costs 0 36,001,160
------------ ------------
Net cash provided by investing activities 646,504 35,532,304
------------ ------------
</TABLE>
(CONTINUED)
6
<PAGE>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
(UNAUDITED)
Six months ended
December 31,
1998 1997
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 5,000,000 26,000,000
Payments of long-term debt (6,186,306) (35,642,061)
Borrowings under revolving credit agreement 44,295,422 74,751,622
Payments under revolving credit agreement (45,563,575) (96,659,252)
Issuance of common stock 0 68,750
Debt issuance costs (32,104) (961,532)
------------ ------------
Net cash used in financing activities (2,486,563) (32,442,473)
------------ ------------
Net increase (decrease) in cash and equivalents (538,915) 386,096
Cash and equivalents at beginning of period 1,194,813 988,436
------------ ------------
Cash and equivalents at end of period $ 655,898 $ 1,374,532
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,120,525 $ 3,668,177
Income taxes $ 82,348 $ 77,118
See accompanying Notes To Consolidated Financial Statements.
7
<PAGE>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
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
six months ended
December 31, 1998 (3,191,149)
Balance,
December 31, 1998 $ 0 $ 101,102 $47,014,621 ($20,731,428) $22,462,033
========= ========== =========== ============= ===========
</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, 1998.
2. Inventories
Inventories are comprised as follows:
December 31, June 30, 1998
1998
(Unaudited)
Work-in progress $ 1,086,031 $ 2,424,041
Component Parts 13,419,243 14,820,526
Finished Goods 2,538,201 1,096,773
------------ -------------
$ 17,043,475 $ 18,341,340
============ =============
The above amounts are net of a reserve for obsolete and excess inventory of
approximately $2.0 million and $2.2 million at December 31, 1998 and June 30,
1998, respectively.
3. 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
9
<PAGE>
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 NASA's White Sands National
Laboratories. Meanwhile, two fires involving the Company's regulators were
reported. While preliminary findings lead 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"),
has 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 will soon be introducing new brass regulators and will offer a trade in
program to the existing users. Based on an estimated population of 100,000
regulators, 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 this
quarter.
4. 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".
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.
5. 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,
10
<PAGE>
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 six
months ended December 31, 1998. 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:
Provision Balance, September 30, 1998 $ 614,008
Noncash asset impairments (4,196)
Cash payments associated with severance (498,570)
Other exit costs incurred (56,096)
----------
Ending Balance, December 31, 1998 $ 55,146
==========
6. 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 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 six month period ending
December 31, 1997.
Results for the ventilation products division are included in the
Consolidated Statement of Operations for one month and four months in the three
month and six month periods ended December 31, 1997, respectively. Had the
divestiture occurred on July 1, 1997, consolidated pro forma net sales, net
loss, and loss per share for the three months ended December 31, 1997 would have
been $20.7 million, $(10.3) million, and $(1.32), respectively. Consolidated
pro forma net sales, net loss, and loss per share for the six months ended
December 31, 1997 would have been $43.8 million, $(11.2) million, and $(1.43),
respectively.
11
<PAGE>
7. 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.
12
<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 six month
periods ended December 31, 1998 compared to the three month and six month
periods ended December 31, 1997. 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, 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 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 one
month and four months in the three month and six month periods ended December
31, 1997, respectively.
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 NASA's White Sands National Laboratories. Meanwhile, two fires involving the
Company's regulators were reported. While preliminary findings lead 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"), has 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
13
<PAGE>
recommended that all regulator manufacturers cease use of aluminum in
regulators. Accordingly, the Company will soon be introducing new brass
regulators and will offer a trade in program to the existing users. Based on an
estimated population of 100,000 regulators, 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 this quarter.
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 six months ended December 31, 1998. 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 5 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 these
new credit facilities, 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, has 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 reduces the Company's borrowing interest rate and
increases liquidity.
SALE OF VENTILATION DIVISION ASSETS
- ---------------------------------------
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
14
<PAGE>
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 one month and four months in the three month and six
month periods ended December 31, 1997.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
------- ------ ------ --------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 80.0 71.9 77.6 70.5
------- ------ ------ --------
Gross profit 20.0 28.1 22.4 29.5
Selling, general and administrative expenses 27.6 26.3 27.5 25.0
Provision for restructuring and consolidation (1.2) 0.0 2.2 0.0
Provision for product recall 8.8 0.0 4.3 0.0
Gain on sale of business 0.0 (53.3) 0.0 (23.6)
Non-recurring impairment losses 0.0 40.7 0.0 18.0
------- ------ ------ --------
Income (loss) from operations (15.2) 14.4 (11.6) 10.0
Interest and other expense 2.6 5.2 2.8 5.8
Income (loss) before provision (benefit)
------- ------ ------ --------
for income taxes (17.8) 9.2 (14.4) 4.2
Provision (benefit) for income taxes (6.6) 37.0 (5.3) (16.7)
------- ------ ------ --------
Loss before extraordinary item (11.2) (27.8) (9.1) (12.5)
Extraordinary loss 0.0 0.0 0.0 (1.0)
------- ------ ------ --------
Net loss (11.2)% (27.8)% (9.1)% (13.5)%
------- ------ ------ --------
</TABLE>
15
<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 three
month and six month periods ended December 31, 1997 were $3.3 million and $10.4
million, respectively and these results are included in the Respiratory Care
Products.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31,1998 DECEMBER 31,1997
% of % of
Total Total
Net Net Net Net
Sales Sales Sales Sales
------- ------ ------- ------
<S> <C> <C> <C> <C>
Medical Gas Equipment $ 9,348 54.7% $10,691 44.5%
Respiratory Care Products 5,537 32.4% 10,763 44.8%
Emergency Medical Products 2,207 12.9% 2,579 10.7%
------- ------ ------- ------
Total $17,092 100.0% $24,033 100.0%
======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31,1998 DECEMBER 31,1997
% of % of
Total Total
Net Net Net Net
Sales Sales Sales Sales
------- ------ ------- ------
<S> <C> <C> <C> <C>
Medical Gas Equipment $18,201 52.1% $22,827 42.1%
Respiratory Care Products 12,150 34.8% 25,821 47.6%
Emergency Medical Products 4,600 13.1% 5,558 10.3%
------- ------ ------- ------
Total $34,951 100.0% $54,206 100.0%
======= ====== ======= ======
</TABLE>
16
<PAGE>
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1997.
- -----
Allied had net sales of $17.1 million for the three months ended December 31,
1998, down $6.9 million, or 28.9%, from net sales of $24.0 million in the prior
year same quarter. $3.3 million of this decrease was attributable to the now
divested ventilation products division. Base business sales declined by $3.6
million or 17.4% primarily due to disruption caused by the relocation of the B&F
product line, slow ramp-up of production in St. Louis, hold up of production of
LSP regulators which are not subject to recall as described in Note 3 in the
Notes to the Consolidated Financial Statements, as well as production problems
in St. Louis that were not resolved in a timely manner. The Company is rapidly
improving its manufacturing efficiency for B&F products and is supplementing its
capacity with outsourced products. Most of the manufacturing problems have now
been resolved. Capacities needed to handle the LSP regulator recall will,
however, continue to adversely impact revenues for that product line for the
rest of the fiscal year.
Medical gas equipment sales in the second quarter of fiscal 1999 of $9.3 million
were $1.4 million, or 12.6%, lower than sales of $10.7 million in the prior year
same quarter. Headwall sales declined from $1.2 million in the second quarter
of fiscal 1998 to $0.9 million in the second quarter of fiscal 1999 due to a
lower level of bookings last year.
This business is affected by large bid business which remains weak. Medical gas
construction sales declined from $4.6 million in the second quarter of fiscal
1998 to $3.8 million in the second quarter of fiscal 1999, while medical gas
suction and regulation device sales decreased from $4.9 million in the second
quarter of fiscal 1998 to $4.6 million in the second quarter of fiscal 1999.
Both product lines experienced production problems which have now been resolved.
Respiratory care product sales in the second quarter of fiscal 1999 of $5.5
million were $5.2 million, or 48.6%, less than sales of $10.7 million in the
prior year same quarter. $3.3 million of this decline was attributable to the
sale of the ventilation products division. Home care sales declined 31.7% from
$5.6 million to $3.9 million due to the relocation of the Toledo facility and
represents most of the remaining shortfall.
Emergency product sales declined 14.4% from $2.6 million in the second quarter
of fiscal 1998 to $2.2 million in the second quarter of fiscal 1999, primarily
due to the suspension of aluminum oxygen regulator shipments.
Orders for three months ended December 31, 1998 were $18.2 million, down $5.5
million from the prior year same quarter. Excluding $3.4 million in orders from
the ventilation products division, base business orders declined $2.1 million or
10.2%. The Company's increasing backlog adversely affected incoming orders.
Emergency product orders increased 11.7% from $2.5 million to $2.8 million.
Total medical gas equipment orders were $9.5 million or 4.9% higher than last
17
<PAGE>
year same quarter of $9.1 million. Base business Respiratory care product
orders, declined 32.2% from $8.7 million to $5.9 million primarily because Home
care orders declined 31.6% from $6.7 million to $4.6 million due to factors
discussed above. Sequentially, orders decreased from $21.0 million in the first
quarter of fiscal 1999 to $18.2 million or 13.4% in the second quarter of 1999.
The Company's backlog now stands at $21.0 million, up 1.9% from the prior
quarter level of $20.6 million.
International sales, which are included in the product lines discussed above,
decreased $2.9 million, or 46.0%, to $3.5 million in the second quarter of
fiscal 1999 from $6.4 million in the prior year same period. International
sales declined $2.2 million due to the sale of the ventilation products
division, while the base business international sales declined by $0.7 million,
or 17.2%. The continued problems 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 three months ended December 31, 1998 was $3.4 million, or
20.0% of net sales compared to a gross profit of $6.7 million, or 28.1% of net
sales for the three months ended December 31, 1997. Reduced manufacturing
throughput due to the B&F relocation and lower absorption of plant overhead, a
direct result of lower sales volume, has further reduced margins as a percent to
net sales. Pricing pressures brought on by consolidations and cost containment
initiatives within the industry continue to impact margins as a percent to net
sales. In addition, the sale of the high margin ventilation products division
adversely impacted gross profit comparison of the second quarters of fiscal 1999
to fiscal 1998. Results of the ventilation products division are included for
one month in the three months ended December 31, 1997.
Selling, General and Administrative ("SG&A") expenses for the three months
ended December 31, 1998 were $4.7 million, a decrease of $1.6 million, or 25.3%
from $6.3 million for the three months ended December 31, 1997. Of the $1.6
million decline, $0.7 million is directly attributable to the sale of the
ventilation products division, $0.1 million is attributable to a reduction in
goodwill amortization resulting from the writedown of goodwill in fiscal 1998,
and $0.8 million is attributable to spending reductions in the base business
SG&A.
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.
18
<PAGE>
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 six months ended December 31, 1998. See Note 5 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.
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 six month period ending
December 31, 1997.
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 $2.6 million for the three months ended December 31,
1998 compared to income from operations of $3.5 million for the three months
ended December 30, 1997.
Interest expense decreased $0.8 million or 63.4%, to $0.4 million for the three
months ended December 31, 1998 from $1.2 million in the prior year same period.
Interest expense has been significantly reduced in the first six months of
fiscal 1999, as compared to the first six months of fiscal 1998, due to the
reduction of debt from the proceeds of sale of the ventilation products
division. In addition, interest expense for the three months ended December 31,
1997 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.
19
<PAGE>
Allied had a loss before benefit for income taxes in the second quarter of
fiscal 1999 of $3.1 million compared to income before provision for income taxes
of $2.2 million for the second quarter of fiscal 1998. Accordingly, the company
recorded a tax benefit of $1.1 million for the three month period ended December
31, 1998. In comparison, the Company recorded a provision for income taxes of
$8.9 million in the second quarter of fiscal 1998, 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.
In fiscal 1999, the net loss for the second quarter was $1.9 million, or $0.25
per basic and diluted share. In fiscal 1998, the net loss for the second
quarter was $6.7 million, or $0.86 per basic and diluted share. The weighted
average number of common shares outstanding used in the calculation of earnings
per share for the second quarters of fiscal 1999 and fiscal 1998 was 7,806,682.
SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1997.
- -----
Allied had net sales of $35.0 million for the six months ended December 31,
1998, down $19.2 million, or 35.5%, from net sales of $54.2 million in the prior
year first six months. $10.4 million of this decrease was attributable to the
now divested ventilation products division. Base business sales declined by $8.8
million or 20.2%. Certain internal and external factors have continued to
impact the Company's operations, including 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 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 six months of fiscal 1999 that were
not resolved in a timely manner. Most of these production problems have now
been resolved and the Company is rapidly gaining proficiency in the
manufacturing of B&F products in St. Louis.
Medical gas equipment sales in the first six months of fiscal 1999 of $18.2
million were $4.6 million, or 20.3%, lower than sales of $22.8 million in the
prior year first six months. Headwall sales declined from $2.6 million in the
first six months of fiscal 1998 to $2.0 million in the first six months of
fiscal 1999 due to a lower level of bookings last year. Medical gas
construction sales declined from $9.6 million in the first six months of fiscal
1998 to $7.3 million in the first six months of fiscal 1999, while medical gas
suction and regulation device sales decreased from $10.6 million in the first
six months of fiscal 1998 to $8.9 million in the first six months of fiscal
1999. Both product lines experienced production problems and the six month over
six month comparisons were affected by an increase in shipments during the first
quarter of fiscal 1998 as a result of an interruption in production due to the
labor strike in June, 1997.
20
<PAGE>
Respiratory care product sales in the first six months of fiscal 1999 of $12.2
million were $13.6 million, or 52.9%, under sales of $25.8 million in the prior
year same six month period. $10.4 million of this decline was attributable to
the sale of the ventilation products division while $3.2 million of the decline
relates to remaining product lines. Home care sales declined 26.2% from $11.7
million to $8.6 million due to the relocation of the Toledo facility.
Emergency product sales declined 17.2% from $5.6 million in the first six months
of fiscal 1998 to $4.6 million in the first six months of fiscal 1999, due to
the benefit of a large order in the prior year same six month period and due to
the suspension in the shipments of aluminum regulators affected by the recall.
Orders for the first six months ended December 31, 1998 were $39.1 million, down
$15.6 million from the prior year same six month period. Excluding $12.2
million in orders from the ventilation products division, base business orders
declined $3.4 million or 8.0%. Emergency product orders decreased 13.0% from
$6.3 million to $5.5 million, primarily because of a large $0.9 million order
for emergency products last year that did not recur this year. Total medical
gas equipment orders were $20.3 million for the six month period ended December
31, 1998, or 2.2% higher than orders of $19.8 million for the six months ended
December 31, 1997. Respiratory care product orders, for base business excluding
ventilation products, declined 18.3% from $16.4 million to $13.4 million. Home
care orders declined 24.0% from $12.7 million to $9.7 million due to factors
indicated earlier while respiratory care product orders for the hospital market
increased 1.4% to $3.7 million partly due to orders for Company's new Respical
calibration device. The Company's backlog now stands at $21.0 million, up 20.7%
from the fiscal 1998 year end level of $17.4 million.
International sales, which are included in the product lines discussed above,
decreased $9.6 million, or 59.7%, to $6.4 million in the first six months of
fiscal 1999 from $16.0 million in the prior year same period. International
sales declined $6.9 million due to the sale of the ventilation products
division, while the base business international sales declined by $2.7 million,
or 29.0%. The 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 six months ended December 31, 1998 was $7.8 million, or
22.4% of net sales compared to a gross profit of $16.0 million, or 29.5% of net
sales for the six months ended December 31, 1997. Reduced manufacturing
throughput due to B&F relocation and lower absorption of plant overhead, due to
lower sales volume, has further reduced margins as a percent to net sales.
Pricing pressures brought on by consolidations and cost containment in the
industry continue to impact margins as a percent to net sales. In addition, the
sale of the high margin ventilation products division adversely impacted the
gross profit comparison of the first six months of fiscal 1999 to the first six
months of fiscal 1998. Results of the ventilation products division are
included for four months in the six months ended December 31, 1997.
21
<PAGE>
Selling, General and Administrative ("SG&A") expenses for the six months ended
December 31, 1998 were $9.6 million, a decrease of $4.0 million, or 29.3% from
$13.6 million for the six months ended December 31, 1997. Of the $4.0 million
decline, $2.4 million is directly attributable to the sale of the ventilation
products division, $0.2 million is attributable to a reduction in goodwill
amortization resulting from the writedown of goodwill in fiscal 1998, and $1.4
million is attributable to spending reductions in the base business SG&A.
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 six
months ended December 31, 1998. See Note 5 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.
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 six month period ending
December 31, 1997.
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 $4.0 million for the six months ended December 31, 1998
compared to income from operations of $5.4 million for the six months ended
December 30, 1997.
22
<PAGE>
Interest expense decreased $2.1 million or 68.2%, to $1.0 million for the six
months ended December 31, 1998 from $3.1 million in the prior year same six
month period. Interest expense has been significantly reduced in the first six
months of fiscal 1999, as compared to the first six months of fiscal 1998, 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 six
months ended December 31, 1997 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 six months of fiscal
1999 of $5.0 million compared to income before provision for taxes and
extraordinary loss of $2.3 million for the first six months of fiscal 1998.
Accordingly, the company recorded a tax benefit of $1.9 million for the six
month period ended December 31, 1998. In comparison, the Company recorded a
provision for income taxes of $9.1 million in the first six months of fiscal
1998, 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.
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 six months was $3.2
million, or $0.41 per basic and diluted share, consisting of $0.23 loss per
share from operations and $0.18 loss per share related to B&F move and the
regulator recall. In fiscal 1998, the net loss for the first six months was
$7.3 million, or $0.94 per basic and diluted share, consisting of $0.87 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 7,803,389 for the first six months of
fiscal 1999 and fiscal 1998, respectively.
23
<PAGE>
FINANCIAL CONDITION
- --------------------
The following table sets forth selected information concerning Allied's
financial condition:
Dollars in thousands: December 31, 1998 June 30, 1998
- --------------------- ----------------- -------------
Cash $ 656 $ 1,195
Working Capital $ 20,923 $ 21,308
Total Debt $ 15,960 $ 18,415
Current Ratio 2.95:1 2.67:1
The Company's working capital was $20.9 million at December 31, 1998 compared to
$21.3 million at June 30, 1998. Decreases in accounts receivable and
inventories along with an increase in accounts payable and the aforementioned
accrual for product recall, were partially offset by an increase in income taxes
receivable and decreases in accrued income taxes and other current liabilities
to account for the decrease in net working capital. This reduction of net
working capital coupled with the proceeds from the sale of the disposable
products division facilities accounts for the reduction in the Company's
long-term debt. Accounts receivable decreased to $12.7 million at December 31,
1998 from $14.2 million at June 30, 1998. The decrease in Accounts receivable
was due to decreased sales. Accounts receivable as measured in days sales
outstanding ("DSO") increased slightly to 70 days during this period.
Inventories decreased to $17.0 million from $18.3 million at June 30, 1998.
Inventories, as measured by Days on Hand ("DOH"), were 155 DOH at December 31,
1998 compared to 129 DOH at June 30, 1998, due to lower sales in the first half
of fiscal 1999 than in the fourth quarter of fiscal 1998. 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 six months ended December 31, 1998
and December 31, 1997 was ($0.5) million and $0.4 million, respectively. Net
cash (used by) / provided by operations was $1.3 million and ($2.7) million for
the same periods, respectively. Cash provided by operations for the six months
ended December 31, 1998 consisted of a net loss of $3.2 million, which was
offset by non-cash charges to operations of $2.0 million for depreciation and
amortization, as well as changes in working capital accounts which provided $0.7
million. The change in working capital was comprised of reductions in accounts
receivables of $1.5 million, inventory of $1.3 million, other current assets of
$0.1 million, and an increase in accounts payable of $0.2 million. These
favorable cash adjustments were partially offset by a net change in deferred
income tax accounts of ($1.9) million and a reduction in other current
liabilities of ($0.5) million. In addition, cash provided by operating
activities was favorably impacted by the $1.5 million accrual for product
recall, as discussed previously, and by the $0.3 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.
In addition to cash provided by operations in the first six months 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. The
aforementioned cash provided by operations and proceeds from the sale of the
Toledo, Ohio facilities were used to fund $0.7 million in capital expenditures
and to reduce commercial debt by $2.5 million.
Cash used by operations in the prior year same period consisted of a net loss of
$7.3 million which was offset by the non-cash charges to operations of $2.9
million for depreciation and amortization, as well as changes in working capital
accounts which used $4.1 million. The change in working capital accounts was
principally related to payments to vendors which reduced accounts payable by
$2.9 million during the first six 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 $9.5 million for the six months ended December 31, 1997. Accordingly, the
Company recorded a tax provision for the gain on the sale of the ventilation
products division which resulted in an adjustment to cash provided 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 $36.0
million which was used to reduce total debt by $31.5 million, pay debt issuance
costs of $1.0 million and make capital expenditures of $0.5 million.
Therefore, for the six months ended December 30, 1997, net cash increased $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
25
<PAGE>
reduce the obligation under the revolving credit agreement with Foothill Capital
Corporation. The mortgage loan carries a fixed rate of interest of 7.75%,
compared to a current rate of 8.5% under the revolving credit agreement.
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 $8.5 million at January 31,
1999. At January 31, 1999, $6.7 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 December 31, 1998 the Company had a backlog of $21.0 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, consist of firm 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 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 company plans to install the most
recent version of this software, which the vendor has certified as year 2000
compliant, by June 1999. The Company views this as a normal, scheduled upgrade
of software. It has not been necessary to upgrade the software at an earlier
date than anticipated to assure year 2000 compliance. New equipment is not
required to upgrade software to the new version, certified by the vendor to be
year 2000 compliant. The Company expects all critical systems will be year 2000
compliant by June 1999. Work on the upgrade is in process and the schedule for
upgrades is being met. The date methodology of the current version software is
not sensitive to year 2000 problems, therefore, if the software upgrade could
not be installed, the Company would not anticipate a problem with year 2000
26
<PAGE>
compliance. The cost of upgrading to a year 2000 compliant version of the
existing system is not expected to be significant. As of January 31, 1999 the
Company had expended no funds specifically to assure year 2000 compliance. The
Company does not expect to expend funds specifically to assure year 2000
compliance.
The Company is dependent on various third parties to conduct its business
operations. These third parties are vendors of raw material and components used
in the production process. The Company does not anticipate that the failure of
mission critical third parties would have a material effect on the Company's
operations. None of the Company's products or components of Company products
use date sensitive technology. 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.
However, there can be no assurance that the Company will not experience
unanticipated costs and/or business interruptions due to year 2000 problems in
its internal systems, or those of its vendors, and that such costs and/or
interruptions will not have a material adverse effect on the Company's
consolidated results of operations.
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 February 4, 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.
Dated: 02/12/1999 By: /s/ Uma Nandan Aggarwal
------------------------------------------------
Uma Nandan Aggarwal
President and Chief Executive Officer
29
<PAGE>
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