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 September 30, 1999
Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Action of 1934
For the transition period from to ____________ 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 November 4, 1999 is
7,806,682 shares.
<PAGE>
<TABLE>
<CAPTION>
INDEX
Page
Part I - Financial Information Number
Item 1. Financial Statements
<S> <C> <C>
Consolidated Statement of Operations - 3
three months ended September 30, 1999 and 1998 (Unaudited)
Consolidated Balance Sheet - 4-5
September 30, 1999 (Unaudited) and
June 30, 1999
Consolidated Statement of Cash Flows - 6
three months ended September 30, 1999 and 1998 (Unaudited)
Consolidated Statement of Changes in 7
Stockholders' Equity - three months ended September 30, 1999 (Unaudited)
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of 13-22
Financial Condition and Results of Operations
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three months ended
September 30,
---------------------------
1999 1998
------------ -------------
<S> <C> <C>
Net sales $16,067,519 $ 17,859,103
Cost of sales 12,041,291 13,452,490
Gross profit 4,026,228 4,406,613
Selling, general and administrative expenses 4,642,783 4,877,348
Provision for product recall 300,000 0
Provision for restructuring and consolidation 0 972,850
------------ -------------
Loss from operations (916,555) (1,443,585)
Other expenses:
Interest expense 439,143 533,664
Other, net 14,329 18,946
------------ -------------
453,472 552,610
------------ -------------
Loss before benefit for income taxes (1,370,027) (1,996,195)
Benefit for income taxes (466,469) (716,938)
------------ -------------
Net loss ($903,558) ($1,279,257)
============ =============
Basic and diluted loss per share ($0.12) ($0.16)
============ =============
Weighted average shares 7,806,682 7,806,682
============ =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
September 30, June 30,
1999 1999
-------------- -----------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 472,957 $ 587,457
Accounts receivable, net of allowance for doubtful
accounts of $902,594 and $834,883, respectively 11,181,485 12,601,165
Inventories 18,388,762 17,499,822
Income taxes receivable 2,102,335 1,635,866
Other current assets 493,989 138,360
-------------- -----------
Total current assets 32,639,528 32,462,670
-------------- -----------
Property, plant and equipment, net 13,717,997 14,287,037
Goodwill, net 27,006,800 27,210,653
Other assets, net 288,747 314,828
-------------- -----------
Total assets $ 73,653,072 $74,275,188
============== ===========
</TABLE>
See accompanying Notes To Consolidated Financial Statements.
(CONTINUED)
<PAGE>
<TABLE>
<CAPTION>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, June 30,
1999 1999
--------------- -------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 4,826,731 $ 5,434,303
Current portion of long-term debt 935,157 907,649
Accrual for product recall 751,358 594,725
Other current liabilities 3,266,334 2,906,636
--------------- -------------
Total current liabilities 9,779,580 9,843,313
--------------- -------------
Long-term debt 16,675,360 16,330,185
Deferred income tax liability-noncurrent 182,608 182,608
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 September 30, and June 30, 1999, respectively 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 20,631,229 21,534,787
--------------- -------------
Total stockholders' equity 47,015,524 47,919,082
--------------- -------------
Total liabilities and stockholders' equity $ 73,653,072 $ 74,275,188
--------------- -------------
</TABLE>
See accompanying Notes To Consolidated Financial Statements.
<TABLE>
<CAPTION>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three months ended
September 30,
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($903,558) ($1,279,257)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation and amortization 884,825 1,038,334
Provision for restructuring and consolidation 0 827,738
Provision for product recall 156,633 0
Decrease in accounts receivable, net 1,419,680 1,261,598
Decrease (increase) in inventories (888,940) 1,099,993
Increase in income taxes receivable (466,469) 0
Increase in other current assets (355,629) (80,552)
Decrease in accounts payable (607,572) (403,039)
Increase (decrease) in accrued income taxes 186,424 (721,186)
Increase (decrease) in other current liabilities 173,274 (289,505)
------------- -------------
Net cash (used in) provided by operating activities (401,332) 1,454,124
------------- -------------
Cash flows from investing activities:
Capital expenditures, net (85,851) (358,679)
------------- -------------
Net cash used in investing activities (85,851) (358,679)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 0 5,000,000
Payments of long-term debt (224,160) (6,008,240)
Borrowings under revolving credit agreement 19,427,295 24,880,849
Payments under revolving credit agreement (18,830,452) (25,510,134)
Debt issuance costs 0 (1,750)
------------- -------------
Net cash provided by (used in) financing activities 372,683 (1,639,275)
------------- -------------
Net decrease in cash and equivalents (114,500) (543,830)
Cash and equivalents at beginning of period 587,457 1,194,813
------------- -------------
Cash and equivalents at end of period $ 472,957 $ 650,983
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 465,754 $ 621,945
Income taxes $ 54,050 $ 8,941
</TABLE>
See accompanying Notes To Consolidated Financial Statements.
<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, 1999 $ 0 $101,102 $47,014,621 ($20,731,428) $21,534,787
Net loss for the
three months ended
September 30, 1999 (903,558)
Balance,
September 30, 1999 $ 0 $101,102 $47,014,621 ($20,731,428) $20,631,229
</TABLE>
See accompanying Notes To Consolidated Financial Statements.
<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, 1999.
2. Inventories
Inventories are comprised as follows:
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
(Unaudited)
<S> <C> <C>
Work-in progress $ 1,147,025 $ 779,027
Component Parts 13,098,072 13,848,272
Finished Goods 4,143,665 2,872,523
-------------------- --------------
$ 18,388,762 $ 17,499,822
==================== ==============
</TABLE>
The above amounts are net of a reserve for obsolete and excess inventory of
approximately $1.9 million at September 30, 1999 and June 30, 1999.
3. Litigation and Contingencies
The Company becomes, from time to time, a party to personal injury
litigation arising out of incidents involving the use of its products. More
specifically there have been lawsuits filed against the Company alleging that
its aluminum oxygen pressure regulator, marketed under its Life Support Products
label, has caused fires that have led to personal injury. The Company believes,
based on preliminary findings, that its products did not cause the fires.
However, the Company intends to defend these claims in cooperation with its
insurers. Based on the progression of certain cases the Company has recorded a
$0.4 million charge to operations in the first quarter of fiscal 2000 for
cumulative amounts estimated to be payable by the Company under its
self-insurance retention for legal costs associated with defending these claims.
The Company believes that any potential judgements resulting from these claims
over its self-insurance retention would be covered by the Company's product
liability insurance.
<PAGE>
4. Senior Management Change
On July 28, 1999 the Company's President, Chief Executive Officer and
Director Uma Nandan Aggarwal resigned. Subsequently on August 24, 1999 the
Company announced Earl R. Refsland as President, Chief Executive Officer and
Director of the Company. As a result of Mr. Aggarwal's resignation, the Company
has recorded a $0.2 million charge to operations in the first quarter of fiscal
year 2000 per terms of a mutually accepted departure agreement.
5. Sale of Headwall Products Division
On May 28, 1999, the Company sold the assets of Hospital Systems, Inc.
("HSI") to David Miller (former General Manager-Hospital Systems, Inc.) for $0.5
million. The net proceeds of $0.5 million were utilized to repay a portion of
the Company's revolving credit facility. The sale of HSI, located in Oakland,
California, resulted in a gain before taxes for financial reporting purposes of
$0.03 million.
Had the divestiture occurred on July 1, 1998, consolidated pro forma net
sales, net loss, and loss per share for the quarter ended September 30, 1998
would have been $16.7 million, $(1.3) million and $(0.16), respectively.
6. LSP Oxygen Regulator Recall
On February 4, 1999, Allied announced a recall of aluminum oxygen
regulators marketed under its Life Support Products ("LSP") 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 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. 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. 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. As a result of the recall, the Company 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.
<PAGE>
The LSP brand of regulator is substantially used by Emergency Medical
Services ("EMS") for the administration of oxygen in the emergency environment.
To date, all known fires are believed to have been confined to incidents
involving EMS. This is presumably due to the environment in which aluminum
pressure regulators are used to administer oxygen in emergency situations. Even
though the recall is focused on oxygen pressure regulators used in the EMS
market, other markets have been experiencing significant sales resistance to
regulators manufactured with aluminum bodies and brass components in the high
pressure chamber. As a result, the Company will transition the manufacturing of
aluminum bodied oxygen pressure regulators, marketed under the B&F brand name,
to one with an all-brass design. Accordingly, the Company has recorded a $0.3
million addition to the provision for product recall in the first quarter of
fiscal year 2000 to write-down the value of remaining aluminum regulator
component inventories for all markets.
A reconciliation of activity with respect to the Company's product recall is as
follows:
<TABLE>
<CAPTION>
<S> <C>
Provision, June 30, 1999 $ 594,725
Addition to provision for write-down of inventories 300,000
Product costs for retrofitting and replacement (141,605)
Administrative costs incurred (1,762)
----------
Ending Balance, September 30, 1999 $ 751,358
==========
</TABLE>
7. B&F Consolidation Provision
On August 5, 1998 the Company's Board of Directors voted to close the
Toledo facility of its disposable products division and consolidate production
of the B&F line of home care products into 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 closure 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
fiscal year ended June 30, 1999.
8. Debt Refinancing and Arrangement
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 $0.06 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% 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,
and for which the Company was in compliance at June 30, 1999.
<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 remains at $25.0 million. The interest rate on the facility has
been reduced from the floating reference rate (8.00% at June 30, 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 Wells Fargo Bank, National Association, or any successor
thereto, as its "base rate". This amendment also provides the Company with a
rate of LIBOR + 2.50%. Interest rates on the reference rate and LIBOR will drop
by 0.25% at the end of fiscal 2000 if the Company is profitable. In addition,
the fees charged to the Company were reduced along with certain debt covenants
for which the Company was in compliance at June 30, 1999.
On March 3, 1999, the Company 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.
On March 24, 1999, the Company's credit facility with LaSalle National Bank was
amended. The amendment provided for favorable changes to certain debt
covenants.
On June 28, 1999, the Company's credit facilities with Foothill Capital
Corporation were amended. The amendment provides for favorable interest rate
reduction, based upon annual profitability, for fiscal years 2001 and 2002. The
amendment also extended the maturity date to January 6, 2003 along with a
favorable change to certain debt covenants.
On September 1, 1999 the Company's credit facility with LaSalle National
Bank (dated as of August 7,1998 and filed with the Securities and Exchange
Commission as Exhibit 10(24) to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1998) was amended. The amendment provides favorable
changes to certain debt covenants and is as follows:
The terms of Page 7, paragraph (n) of the Note requiring that the Company's
Tangible Net Worth at all times not be less than $21,000,000 are hereby waived
from this date provided the Company's Tangible Net Worth at the close of each
fiscal quarter beginning June 30, 1999 must not be less than the sum of (i)
$17,500,000 plus (ii) fifty percent (50%) of the Net Income (exclusive of any
losses) reflected in each audited income statement for each fiscal year
beginning June 30, 1999. For the purposes of this paragraph, the "Net Income"
shall mean, for any period of calculation, the Company's net income as
determined in accordance with GAAP but excluding any extraordinary gain and
losses, net of taxes.
<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 period ended
September 30, 1999 compared to the three month period ended September 30, 1998.
This discussion should be read in conjunction with the June 30, 1999
consolidated financial statements and accompanying notes thereto included in the
Company's Form 10-K for the year ended June 30, 1999.
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.
Specific transactions and events impacting 1999 and 1998 operating results,
which make meaningful comparisons more difficult, are summarized below.
LITIGATION AND CONTINGENCIES
- ------------------------------
The Company becomes, from time to time, a party to personal injury litigation
arising out of incidents involving the use of its products. More specifically
there have been a number of lawsuits filed against the Company alleging that its
aluminum oxygen pressure regulator, marketed under its Life Support Products
label, has caused fires that have led to personal injury. The Company believes,
based on preliminary findings, that its products did not cause the fires.
However, the Company intends to defend these claims in cooperation with its
insurers. Based on the progression of certain cases the Company has recorded a
$0.4 million charge to operations in the first quarter of fiscal 2000 for
cumulative amounts estimated to be payable by the Company under its
self-insurance retention for legal costs associated with defending these claims.
The Company believes that any potential judgements resulting from these claims
over its self-insurance retention would be covered by the Company's product
liability insurance.
SENIOR MANAGEMENT CHANGE
- --------------------------
On July 28, 1999 the Company's President, Chief Executive Officer and Director
Uma Nandan Aggarwal resigned. Subsequently on August 24, 1999 the Company
announced Earl R. Refsland as President, Chief Executive Officer and Director of
the Company. As a result of Mr. Aggarwal's resignation, the Company has
recorded a $0.2 million charge to operations in the first quarter of fiscal year
2000 per terms of a mutually accepted departure agreement.
<PAGE>
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.
The LSP brand of regulator is substantially used by Emergency Medical Services
("EMS") for the administration of oxygen in the emergency environment. To date,
all known fires are believed to have been confined to incidents involving EMS.
This is presumably due to the environment in which aluminum pressure regulators
are used to administer oxygen in emergency situations. Even though the recall
is focused on oxygen pressure regulators used in the EMS market, other markets
have been experiencing significant sales resistance to regulators manufactured
with aluminum bodies and brass components in the high pressure chamber. As a
result, the Company will transition the manufacturing of aluminum bodied oxygen
pressure regulators, marketed under the B&F brand name, to one with an all-brass
design. Accordingly, the Company has recorded a $0.3 million addition to the
provision for product recall in the first quarter of fiscal year 2000 to
write-down the value of remaining aluminum regulator component inventories for
all markets.
<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 September 30, 1999. These costs have substantially
been paid during the second quarter of fiscal 1999.
FINANCIAL INFORMATION
- ----------------------
The following table sets forth, for the fiscal period indicated, the percentage
of net sales represented by certain items reflected in the Company's
consolidated statement of operations.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
------- -------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 74.9 75.3
------- -------
Gross profit 25.1 24.7
Selling, general and administrative expenses 28.9 27.3
Provision for product recall 1.9 0.0
Provision for restructuring and consolidation 0.0 5.5
------- -------
Loss from operations (5.7) (8.1)
Interest and other expense 2.8 3.1
------- -------
Loss before benefit for income taxes (8.5) (11.2)
Benefit for income taxes (2.9) (4.0)
------- -------
Net loss (5.6)% (7.2)%
======= =======
</TABLE>
<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. Headwall products are included in medical gas
equipment for the three months ended September 30, 1998. The headwall products
division was sold on May 28, 1999. Net sales of headwall products for the three
months ended September 30, 1998 were $1.1 million.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30,, 1998
<S> <C> <C> <C> <C>
% of % of
Total Total
Net Net Net Net
Sales Sales Sales Sales
------- ------ ------- ------
Medical Gas Equipment $ 8,951 55.7% $ 8,852 49.6%
Respiratory Care Products 4,363 27.2% 6,614 37.0%
Emergency Medical Products 2,754 17.1% 2,393 13.4%
------- ------ ------- ------
Total $16,068 100.0% $17,859 100.0%
======= ====== ======= ======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
- --------------------------------------------------------------------------------
30, 1998.
- ----------
Certain internal and external factors continue to impact the Company's
operations. These factors include the oxygen regulator recall, the inability to
service the customer with acceptable on-time shipping levels of certain
products, and the ongoing impact of health care cost containment and Medicare
reimbursements. Home health care product sales, mainly the B&F product line,
continue to be weak due to lingering effects of the shutdown and relocation of
production of the B&F product line to St. Louis. The Company continues its
efforts to improve stocking levels of the B&F product line through outsourcing
of labor intensive assembly operations. The Company believes that the ability
to meet customer demand in a timely manner is fundamental in improving customer
satisfaction, which will in turn result in an increase in incoming business.
Management's efforts are therefore focused on ways to improve on-time shipping
levels to the customer.
Allied had net sales of $16.1 million for the three months ended September 30,
1999, down $1.8 million, or 10.0%, from net sales of $17.9 million in the prior
year same quarter. Of the $1.8 million decline, $1.1 million is due to first
quarter fiscal 1999 sales from the now divested headwall products division,
while the balance of the decline is attributable to respiratory therapy
products. The decline in sales of respiratory therapy products, particularly
home care products, reflects the factors discussed above.
Medical gas product sales in the first quarter of fiscal 2000 of $9.0 million
were $0.1 million higher than sales of $8.9 million in the prior year same
quarter. Excluding $1.1 million of first quarter fiscal 1999 sales from the now
divested headwall products division, core medical gas product sales increased
$1.2 million, or 15.3%, in the first quarter of fiscal 2000 compared to prior
year first quarter. Medical gas suction and regulation device sales increased
$0.8 million, or 18.4%, from $4.3 million in the first quarter of fiscal 1999 to
$5.1 million in the first quarter of fiscal 2000. Medical gas construction
sales increased $0.4 million, or 11.5%, from $3.5 million in the first quarter
of fiscal 1999 to $3.9 million in the first quarter of fiscal 2000.
Respiratory care product sales in the first quarter of fiscal 2000 of $4.4
million were $2.2 million, or 34.0%, less than sales of $6.6 million in the
prior year same quarter. This decline is primarily due to weak home care sales
as they declined $1.8 million, or 38.2%, from $4.8 million in the first quarter
of fiscal 1999 to $3.0 million in the first quarter of fiscal 2000. The decline
in home care sales is mainly attributable to the B&F product line due to factors
discussed above.
Emergency product sales increased $0.4 million, or 15.1%, from $2.4 million in
the first quarter of fiscal 1999 to $2.8 million in the first quarter of fiscal
2000, primarily due to increased shipments of brass oxygen regulators. This
increase in brass regulator shipments is a result of the introduction of a new
brass regulator and a trade-in program instituted due to the voluntary recall of
aluminum oxygen regulators during the second quarter of fiscal 1999 as
previously discussed.
International sales, which are included in the product lines discussed above,
were flat at $3.0 million for the first quarter of both fiscal 2000 and 1999.
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 September 30, 1999 was $4.0 million, or
25.1%, of net sales compared to a gross profit of $4.4 million, or 24.7% of net
sales for the three months ended September 30, 1998. The increase in gross
profit as a percent of sales is attributable to the divestiture of the headwall
products division as those products historically bore a lower gross profit
percentage than the remaining core products. As previously discussed, the
headwall products division was sold on May 28, 1999 and its results are included
in the first quarter of fiscal 1999. The Company will continue to review its
operations to eliminate inefficiencies and also research opportunities for
lowering manufacturing and product costs through the implementation of the
latest manufacturing technologies.
Selling, General and Administrative ("SG&A") expenses for the three months
ended September 30, 1999 were $4.7 million, a net decrease of $0.2 million, or
4.8%, from $4.9 million for the three months ended September 30, 1998. As
previously discussed in the preceding "Notes to Consolidated Financial
Statements" section, SG&A expenses in the first quarter of fiscal 2000 were
impacted by certain unusual transactions. The Company has recorded a $0.4
million charge to SG&A expense in the first quarter of fiscal 2000 for
cumulative amounts estimated to be payable by the Company under its
self-insurance retention for legal costs associated with defending product
liability litigation. In addition, due to the resignation of the Company's
President, Chief Executive Officer and Director Uma Nandan Aggarwal on July 28,
1999, the Company has recorded a $0.2 million charge to SG&A expense in the
first quarter of fiscal year 2000 per terms of a mutually accepted departure
agreement. These unusual charges were offset by certain SG&A expense savings
that are a result of specific events which were discussed previously. The
aforementioned SG&A expense savings include: 1) administrative expense savings
of $0.2 million due to the closing of the Company's Toledo, Ohio facility, 2)
$0.1 million in direct expenses generated by the divested headwall products
division in the first quarter of fiscal 1999 and 3) $0.5 million in savings
attributable to management's efforts to reduce SG&A spending in the base
business.
The LSP brand of oxygen regulator, which is subject to voluntary recall as
previously discussed, is substantially used by Emergency Medical Services
("EMS") for the administration of oxygen in the emergency environment. To date,
all known fires are believed to have been confined to incidents involving EMS.
This is presumably due to the environment in which aluminum pressure regulators
are used to administer oxygen in emergency situations. Even though the recall
is focused on oxygen pressure regulators used in the EMS market, other markets
have been experiencing significant sales resistance to regulators manufactured
with aluminum bodies and brass components in the high pressure chamber. As a
result, the Company will transition the manufacturing of aluminum bodied oxygen
pressure regulators, marketed under the B&F brand name, to one with an all-brass
design. Accordingly, the Company has recorded a $0.3 million addition to the
provision for product recall in the first quarter of fiscal year 2000 to
write-down the value of remaining aluminum regulator component inventories for
all markets.
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. 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 September 30, 1999. These costs were substantially
paid during the second quarter of fiscal 1999.
Loss from operations was $0.9 million for the three months ended September 30,
1999 compared to $1.4 million for the three months ended September 30, 1998.
Interest expense decreased $0.1 million from $0.5 million in the first quarter
of fiscal 1999 to $0.4 million in the first quarter of fiscal 2000. Allied had
a loss before benefit for income taxes in the first quarter of fiscal 2000 of
$1.4 million compared to a loss before benefit for income taxes of $2.0 million
for the first quarter of fiscal 1999. The company recorded a tax benefit of
$0.5 million and $0.7 million for the three month periods ended September 30,
1999 and 1998, respectively.
In fiscal 2000, the net loss for the first quarter was $0.9 million, or $0.12
per basic and diluted share compared to a net loss of $1.3 million for the first
quarter of fiscal 1999, or $0.16 per basic and diluted share. The weighted
average number of common shares outstanding used in the calculation of earnings
per share for the first quarters of fiscal 2000 and fiscal 1999 was 7,806,682.
<PAGE>
FINANCIAL CONDITION
- --------------------
The following table sets forth selected information concerning Allied's
financial condition:
<TABLE>
<CAPTION>
Dollars in thousands: September 30, 1999 June 30, 1999
- --------------------- ------------------- --------------
<S> <C> <C>
Cash $ 473 $ 587
Working Capital $ 22,860 $ 22,619
Total Debt $ 17,611 $ 17,238
Current Ratio 3.34:1 3.30:1
</TABLE>
The Company's working capital was $22.9 million at September 30, 1999 compared
to $22.6 million at June 30, 1999. A decrease in accounts receivable, coupled
with increases in accrued and other current liabilities were partially offset by
an increase in inventories, income taxes receivable and other current assets as
well as a decrease in accounts payable to account for the increase in net
working capital. Accounts receivable decreased to $11.2 million at September 30,
1999 from $12.6 million at June 30, 1999, partially due to decreased sales.
Accounts receivable as measured in days sales outstanding ("DSO") increased
slightly to 63 days at September 30, 1999 from 62 days at June 30, 1999.
Inventories increased to $18.4 million from $17.5 million at June 30, 1999.
Inventories, as measured by Days on Hand ("DOH"), were 172 DOH at September 30,
1999 compared to 147 DOH at June 30, 1999, due to management's efforts to
increase stocking levels on high volume products. The Company will continue to
focus on improving the mix of inventories to reduce stocking levels of low
volume products.
The net decrease in cash for the three months ended September 30, 1999 and
September 30, 1998 was $0.1 million and $0.5 million, respectively. Net cash
(used in) / provided by operations was ($0.4) million and $1.5 million for the
same periods, respectively. Cash used in operations for the three months ended
September 30, 1999 consisted of a net loss of $0.9 million, which was offset by
non-cash charges to operations of $0.9 million for depreciation and
amortization. Changes in working capital accounted for the $0.4 million used in
operations.
Cash used by operations in the prior year same period consisted of a net loss of
$1.3 million which was partially offset by non-cash charges to operations of
$1.0 million for depreciation and amortization. Changes in working capital
accounts contributed $0.9 million. The change in working capital accounts was
principally related to decreases in inventories and receivables partially offset
by decreases in accounts payable, accrued income taxes and other current
liabilities. In addition, cash provided by operations was increased by $0.8
million due to the accrual for restructuring as a result of the closing of the
Company's Toledo, Ohio facility.
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%.
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 $11.3 million at October 31,
1999. At October 31, 1999, $4.5 million was available under the revolving
facility for additional borrowings.
The rates noted above will drop by 0.25% at the end of 2000 if the Company is
profitable. In addition, the fees charged to the Company are also reduced.
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. System modifications or reprogramming have been 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.
Systems identified as being impacted by the changeover to the year 2000 are
being modified or replaced. The Company estimates that the year 2000 conversion
effort is over 80% complete and expects all critical systems will be year 2000
compliant by December 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.
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 is currently evaluating the reasonable potential
risks to determine the extent of contingency planning and resources that are
appropriate.
SUBSEQUENT EVENTS
- ------------------
In an effort to bring operating expenses in line with ongoing revenue levels,
the Company announced and instituted a 15% workforce reduction estimated to
result in $2.6 million in annualized savings. Accordingly, the Company intends
to record a $0.2 million charge to operations in the second quarter of fiscal
2000 for severance related expenses.
<PAGE>
PART II. OTHER INFORMATION
------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K - none
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLIED HEALTHCARE PRODUCTS, INC.
/s/ Earl R. Refsland
-------------------------------------
Earl R. Refsland
President and Chief Executive Officer
-------------------------------------
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<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
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