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, 1999
Transition report pursuant to Section 13 or 15(d) of the Securities
- - --- Exchange Action of 1934
For the transition period from to
Commission File Number 0-19266
ALLIED HEALTHCARE PRODUCTS, INC.
1720 Sublette Avenue
St. Louis, Missouri 63110
314/771-2400
IRS Employment ID 25-1370721
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter periods that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past ninety days.
Yes X No
--- ---
The number of shares of common stock outstanding at February 3, 2000 is
7,806,682 shares.
<PAGE>
<TABLE>
<CAPTION>
INDEX
Page
Part I - Financial Information Number
Item 1. Financial Statements
<C> <S> <C>
Consolidated Statement of Operations - 3
three months and six months ended December 31,
1999 and 1998 (Unaudited)
Consolidated Balance Sheet - 4-5
December 31, 1999 (Unaudited) and
June 30, 1999
Consolidated Statement of Cash Flows - 6
six months ended December 31, 1999 and 1998
(Unaudited)
Consolidated Statement of Changes in 7
Stockholders' Equity - six months ended
December 31, 1999 (Unaudited)
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of 12-22
Financial Condition and Results of Operations
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three months ended Six months ended
December 31, December 31,
------------------------- --------------------------
1999 1998 1999 1998
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales 16,758,311 17,092,293 32,825,830 34,951,396
Cost of sales 12,133,403 13,669,635 24,174,694 27,122,125
----------- ------------ ------------ ------------
Gross profit 4,624,908 3,422,658 8,651,136 7,829,271
Selling, general and administrative expenses 4,265,548 4,724,043 8,908,331 9,601,391
Provision for product recall 0 1,500,000 300,000 1,500,000
Provision for restructuring and consolidation 0 -200,000 0 772,850
0 0
----------- ------------ ------------ ------------
Income/(Loss) from operations 359,360 -2,601,385 -557,195 -4,044,970
Other expenses:
Interest expense 417,831 444,153 856,974 977,817
Other, net 16,406 5045 30,735 23,991
----------- ------------ ------------ ------------
434,237 449,198 887,709 1,001,808
----------- ------------ ------------ ------------
Loss before benefit for income taxes -74,877 -3,050,583 -1,444,904 -5,046,778
Provision (Benefit) for income taxes 51,592 -1,138,691 -414,877 -1,855,629
----------- ------------ ------------ ------------
Net Loss ($126,469) ($1,911,892) ($1,030,027) ($3,191,149)
=========== ============ ============ ============
Basic and diluted loss per share ($0.02) ($0.25) ($0.13) ($0.41)
=========== ============ ============ ============
Weighted average shares 7,806,682 7,806,682 7,806,682 7,806,682
=========== ============ ============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
(CONTINUED)
3
<PAGE>
<TABLE>
<CAPTION>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
(UNAUDITED)
December 31 June 30
1999 1999
(Unaudited)
------------- -----------
<S> <C> <C>
Current Assets:
Cash $ 393,345 $ 587,456
Accounts receivable, net of allowance for doubtful
accounts of $939,928 and 834,883 respectively 10,638,398 12,601,165
Inventories 17,184,967 17,499,822
Income taxes receivable 2,047,760 1,635,866
Other current assets 368,600 138,361
------------- -----------
Total current assets 30,633,070 32,462,670
------------- -----------
Property, plant and equipment, net 13,121,374 14,287,037
Goodwill, net 26,802,948 27,210,653
Other assets, net 262,666 314,828
------------- -----------
Total assets $ 70,820,058 $74,275,188
============= ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
<PAGE>
<TABLE>
<CAPTION>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
December 31, June 30,
1999 1999
------------- ------------
<S> <C> <C>
Current liabilities
Accounts payable $ 4,285,338 $ 5,434,303
Current portion fo long-term debt 962,513 907,649
Accural for restructuring and consolidation 0 0
Accrual for product recall 566,777 594,725
Other current liabilites 2,608,053 2,906,636
------------- ------------
Total current liabilities 8,422,681 9,843,313
------------- ------------
Long-term debt 15,325,714 16,330,185
Deferred income tax liability-noncurrent 182,608 182,608
Commitments and contingencies 0 0
Stockholders' equity:
Preferred stock; $0.01 par value; 1,500,000 shares
authorized; no shares issued and outstanding'
which included 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
Retaining earnings 20,504,760 21,534,787
------------- ------------
Total stockholders' equity 46,889,055 47,919,082
------------- ------------
Total liabilities and stockholders' equity $ 70,820,058 $ 74,275,188
============= ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
5
<PAGE>
<TABLE>
<CAPTION>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six months ended
December 31,
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activites:
Net loss -$1,030,027 -$3,191,149
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,769,650 2,041,725
Provision for restructing and consolidation 0 273,072
Provsion for product recall -27,948 1,500,000
Decrease in accounts receivable, net 1,962,767 1,510,479
Decrease in inventories 314,855 1,297,865
Increase in income taxes receivable -411,894 -980,947
(Increase) decrease inother current assets -230,239 43,968
(Decrease) increase in accounts payable -1,148,965 199,285
Increase (decrease) in accrued income taxes 158,635 -942,036
Decrease in other currnet liabilities -457,218 -451,118
------------- -------------
Net cash provided by operating activities 899,616 1,301,144
------------- -------------
Cash flows from investing activities:
Capital expenditures, net -144,120 -746,783
Proceeds on sale of Toledo, Ohiofacilities 0 1,393,287
------------- -------------
Net cash provided by (used-in) investing activities -144,120 646,504
------------- -------------
Cash flows from financing activities:
Proceeds from issuancance of long-terrm debt 0 5,000,000
Payment of long-term debt -450,131 -6,186,306
Borrowings under revolving credit agreement 36,724,753 44,295,422
Payment under revolving credit agreement -37,224,229 -45,563,575
Debt issuance cost 0 -32,104
------------- -------------
Net cash used in financing activities -949,607 -2,486,563
------------- -------------
Net (decrease) in cash and equivalents -194,111 -538,915
Cash and equivalents at beginning of period 587,456 1,194,813
------------- -------------
Cash and equivalents at end of period $ 393,345 $ 655,898
============= =============
Supplimental disclosures of cash flow information:
Cash paid during the period for:
interest $ 1,026,589 $ 1,120,525
Income taxes $ 86,987 $ 82,348
</TABLE>
See accompanying Notes to Consolidated Financial Statements
6
<PAGE>
<TABLE>
<CAPTION>
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
(UNAUDITED)
Additional
Preferred Common Paid-in Treasury Retained
Stock Stock capital Stock earnings
---------- -------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1999 $ 0 $101,102 $47,014,621 ($20,731,428) $21,534,787
Net loss for the
Six months ended
December 31, 1999 (1,030,027)
---------- -------- ----------- ------------- ------------
Balance
December 31, 1999 $ 0 $101,102 $47,014,621 ($20,731,428) $20,504,760
========== ======== =========== ============= ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
7
<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>
December 31, 1999 June 30, 1999
(Unaudited)
<S> <C> <C>
Work-in progress $ 1,281,720 $ 779,027
Component Parts 11,422,413 13,848,272
Finished Goods 4,480,834 2,872,523
------------------- --------------
$ 17,184,967 $ 17,499,822
=================== ==============
</TABLE>
The above amounts are net of a reserve for obsolete and excess inventory of
approximately $1.9 million at December 31, 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.
8
<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 December 31,1999 would
have been $16.2 million, $(2.0) million and $(0.26), respectively. For the six
month period ending December 31, 1999 pro forma net sales, net loss, and loss
per share would have been $32.9 million, $(3.3) million and $(0.42),
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. While preliminary findings
led the Company to believe the Company's products did not cause those fires,
there was 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, $.9 million after tax, or $0.12 per share in the second
quarter of fiscal 1999.
The LSP brand of regulator is predominantly 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. 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. The new
brass regulator has been tested and meets the International Standards
Organization ("ISO") E-4 Ignition Standard. This is the only recognized
standard for ignition resistance which is recognized by the Compressed Gas
Association ("CGA") and ISO. 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.
9
<PAGE>
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 (324,471)
Administrative costs incurred (3,477)
----------
Ending Balance, December 31, 1999 $ 566,777
==========
</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 . Workforce Reduction
In an effort to bring operating expenses in line with ongoing revenue
levels, the Company announced and instituted in October of 1999 a 15% workforce
reduction estimated to result in $2.6 million in annualized savings.
Accordingly, the Company recorded a $0.2 million charge to operations in the
second quarter of fiscal 2000 for severance related expenses.
9. 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
10
<PAGE>
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 December 31, 1999.
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.
11
<PAGE>
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.
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, 1999 compared to the three and six month periods
ended December 31, 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 fiscal 2000 and fiscal 1999 operating
results, which make meaningful comparisons more difficult, are summarized below.
12
<PAGE>
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.
Accordingly, 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.
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. While preliminary findings led the Company to believe the Company's
products did not cause the fires, there was 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. The new brass regulator has been tested and meets the
International Standards Organization ("ISO") E-4 Ignition Standard. This is the
only recognized standard for ignition resistance which is recognized by the
Compressed Gas Association and the ISO. 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, $.9 million after
tax, or $0.12 per share in the second quarter of fiscal 1999.
13
<PAGE>
The LSP brand of regulator is predominantly 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. 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.
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. 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 year ended December 31, 1999. These costs were substantially paid
during the second quarter of fiscal 1999.
14
<PAGE>
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 Six Months
Ended Ended
December 31, December 31,
--------------- ------ ------
1999 1998 1999 1998
------ ------- ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 72.4 80.0 73.6 77.6
------ ------- ------ ------
Gross profit 27.6 20.0 26.4 22.4
Selling, general and administrative expenses 25.5 27.6 27.1 27.5
Provision for product recall 0.0 (1.2) 0.9 2.2
Provision for restructuring and consolidation 0.0 8.8 0.0 4.3
------ ------- ------ ------
Income/(Loss) from operations 2.1 (15.2) (1.7) (11.6)
Interest and other expense 2.6 2.6 2.7 2.9
------ ------- ------ ------
Loss before benefit for income taxes (0.4) (17.8) (4.4) (14.4)
Income taxes 0.3 6.7 1.3 5.3
------ ------- ------ ------
Net(loss) (0.8)% (11.2)% (3.1)% (9.1)%
====== ======= ====== ======
</TABLE>
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 and six month periods ending December 31, 1998. The
headwall products division was sold on May 28, 1999. Net sales of headwall
products for the three and six month periods ended December 31, 1998 were $.9
million and $2.0 million respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
% of % of
Total Total
Net Net Net Net
Sales Sales Sales Sales
------- ------ ------- ------
<S> <C> <C> <C> <C>
Medical Gas Equipment $ 8,740 52.2% $ 9,348 54.7%
Respiratory Care Products 5,063 30.2% 5,536 32.4%
Emergency Medical Products 2,955 17.6% 2,208 12.9%
------- ------ ------- ------
Total $16,758 100.0% $17,092 100.0%
======= ====== ======= ======
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1999 DECEMBER 31,, 1998
% of % of
Total Total
Net Net Net Net
Sales Sales Sales Sales
<S> <C> <C> <C> <C>
Medical Gas Equipment $17,691 53.9% $18,201 52.0%
Respiratory Care Products 9,426 28.7% 12,150 34.8%
Emergency Medical Products 5,709 17.4% 4,600 13.2%
Total $32,826 100.0% $34,951 100.0%
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED
- - -----------------------------------------------------------------------------
DECEMBER 31, 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 $16.8 million for the three months ended December 31,
1999, down $0.3 million, or 1.9%, from net sales of $17.1 million in the prior
year same quarter. The now divested headwall business had sales of $.9 million
in the three months ended December 31, 1998 indicating that the Company's base
business increased sales by $.6 million in the quarter ended December 31, 1999
compared to the prior year same period.
Medical Gas Equipment sales of $8.8 million in the second quarter of fiscal 2000
were $0.4 million higher than sales of $8.4 million in the prior year same
quarter. Excluding $.9 million of second quarter fiscal 1999 sales from the now
divested headwall products division, core medical gas product sales increased
$1.3 million, or 17%, in the first quarter of fiscal 2000 compared to prior year
first quarter.
Respiratory care product sales in the second quarter of fiscal 2000 of $5.1
million were $.5 million, or 8.9%, less than sales of $5.6 million in the prior
year same quarter. This decline is primarily attributable to the B&F product
line due to the factors discussed above.
16
<PAGE>
Emergency product sales increased $0.7 million, or 32%, from $2.2 million in the
second quarter of fiscal 1999 to $2.9 million in the second 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.
Gross profit for the three months ended December 31, 1999 was $4.6 million, or
27.6%, of net sales compared to a gross profit of $3.4 million, or 20% of net
sales for the three months ended December 31, 1998. Gross profit as a percentage
of net sales for the now divested headwall products division was 31.5% and 20.4%
for the 3 month and 6 month periods ending December 31, 1998 respectively. The
increase in gross profit as a percent of sales is attributable to higher
manufacturing efficiency and the outsourcing of labor intensive assembly
operations primarily in the production of the B&F product line. In the second
quarter of fiscal 1999, the B&F product line was moved to St. Louis and caused
a reduction of manufacturing throughput. As previously discussed, the headwall
products division was sold on May 28, 1999 and its results are included in the
second 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.
Selling, General and Administrative ("SG&A") expenses for the three months
ended December 31, 1999 were $4.3 million, a net decrease of $0.4 million, or
8.5% from $4.7 million for the three months ended December 31,1998. In the
second quarter the company recorded a $.2 million charge to operations for
severance and related expenses to cover the cost of the previously announced 15%
work force reduction estimated to yield $2.6 million annualized savings in
payroll and benefit costs.
Income from operations was $.4 million for the three months ended December 31,
1999 compared to a loss of $2.6 million for the three months ended December 31,
1998. Interest expense for both the second quarter of fiscal 2000 and the
second quarter of fiscal 1999 was $.4 million. Allied had a loss before income
taxes in the second quarter of fiscal 2000 of $.1 million compared to a loss
before benefit for income taxes of $3.1 million for the second quarter of fiscal
1999. The company recorded a taxes of $.1 million in the second quarter of
fiscal 2000 compared to a tax benefit of $1.1 million in the second quarter of
fiscal 1999.
In fiscal 2000, the net loss for the second quarter was $0.1 million, or $0.02
per basic and diluted share compared to a net loss of $1.9 million for the
second quarter of fiscal 1999, or $0.25 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 2000 and fiscal 1999 was
7,806,682.
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
17
<PAGE>
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.
SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
- - --------------------------------------------------------------------------------
1998.
- - -----
Allied had net sales of $32.8 million for the six months ended December 31,
1999, down $2.1 million, or 6.1%, from net sales of $35.0 million in the prior
first six months. The now divested headwall business had sales of $2.0 million
in the six month period ending December 31,1998 indicating that the Company's
core business had a sales decline of $.1 million or .3% from the same period
prior year.
Medical gas product sales in the first six months of fiscal 2000 of $17.7
million were $.5 million lower than sales of $18.2 million in the prior year
same six month period. Excluding $2.0 million of first six months fiscal 1999
sales from the now divested headwall products division, core medical gas product
sales increased $1.5 million, or 9.3%, in the first six months of fiscal 2000
compared to prior year first six months.
Respiratory care product sales in the first six months of fiscal 2000 of $9.4
million were $2.7 million, or 22.4%, less than sales of $12.2 million in the
prior year same six month period. The decline in home care sales is mainly
attributable to the B&F product line due to factors discussed above.
Emergency product sales increased $1.1 million, or 24.1%, from $4.6 million in
the first six month of fiscal 1999 to $5.7 million in the first six month 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.
18
<PAGE>
Gross profit for the six months ended December 31, 1999 was $8.7 million, or
26.4%, of net sales compared to a gross profit of $7.8 million, or 22.4% of net
sales for the six months ended December 31, 1998. The increase in gross profit
as a percent of sales is attributable to higher manufacturing efficiency and the
outsourcing of labor intensive assembly operations primarily in the production
of the B&F product line. In the second quarter of fiscal 1999, the B&F product
line was moved to St. Louis and caused a reduction of manufacturing throughput.
As previously discussed, the headwall products division was sold on May 28, 1999
and its results are included in the second 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.
Selling, General and Administrative ("SG&A") expenses for the six months ended
December 31, 1999 were $8.9 million, a net decrease of $0.7 million, or 7.2%
from $9.6 million for the six months ended December 31,1998. In the second
quarter the company recorded a $.2 million charge to operations for severance
and related expenses to cover the cost of the previously announced 15% work
force reduction estimated to yield $2.6 million annualized savings in payroll
and benefit costs.
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 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 primarily 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. 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.
19
<PAGE>
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 $.6 million for the six months ended December 31, 1999
compared to a loss of $4.0 million for the six months ended December 31, 1998.
Interest expense for the six months ended December 31, 1999 was $.9 million
compared to $1.0 million in the six month period ending December 31,1998.
Allied had a loss before benefit for income taxes in the first six months of
fiscal 2000 of $1.4 million compared to a loss before benefit for income taxes
of $5.0 million for the first six months of fiscal 1999. The company recorded
a tax benefit of $.4 million in the first six months of fiscal 2000 compared to
a tax benefit of $1.9 million in the six month period of the prior year.
In fiscal 2000, the net loss for the first six months was $1.0 million, or $0.13
per basic and diluted share compared to a net loss of $3.2 million for the first
six months of fiscal 1999, or $0.41 per basic and diluted share. The weighted
average number of common shares outstanding used in the calculation of earnings
per share for fiscal 2000 and fiscal 1999 was 7,806,682.
20
<PAGE>
FINANCIAL CONDITION
- - --------------------
The following table sets forth selected information concerning Allied's
financial condition:
<TABLE>
<CAPTION>
Dollars in thousands: December 30, 1999 June 30, 1999
- - --------------------- ------------------ --------------
<S> <C> <C>
Cash $ 393 $ 587
Working Capital $ 22,210 $ 22,619
Total Debt $ 16,288 $ 17,238
Current Ratio 3.63:1 3.30:1
</TABLE>
The Company's working capital was $22.2 million at December 31, 1999 compared to
$22.6 million at June 30, 1999. A decrease in accounts receivable and
inventory, coupled with an increase in the current portion of long term debt
that were not completely offset by increases in deferred income taxes and other
current assets and decreases in accounts payable and other current liabilities
account for the decrease in working capital. Accounts receivable decreased to
$10.6 million at December 31, 1999 from $12.6 million at June 30, 1999,
primarily due to decreased sales. Accounts receivable as measured in days sales
outstanding ("DSO") at 62 days was same as at June 30, 1999. Inventories
decreased to $17.2 million from $17.5 million at June 30, 1999.
The net decrease in cash for the six months ended December 31, 1999 and December
31, 1998 was $0.2 million and $.5 million respectively. Net cash provided by
operations was $0.9 million and $1.3 million for the same periods, respectively.
Cash provided by operations for the six months ended December 31, 1999 consisted
of a net loss of $1.0 million, which was offset by non-cash charges to
operations of $1.8 million for depreciation and amortization, as well a changes
in working capital accounts which provided $.2 million. The change in working
capital was comprised of reductions in accounts receivable of $1.9 million,
inventory of $.3 million and an increase in income taxes payable $.2 million.
These favorable cash adjustments were partially off set by reduced accounts
receivable $1.1 million, a decrease in other current assets of $.2 million an
increase in the deferred income tax account $.4 million and a decrease in other
current liabilities $.5 million. Cash provided by operations in the prior year
same period consisted of a net loss of $3.2 million which was partially 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 $.7
million. The change in working capital was comprised of reductions in accounts
receivable of $1.5 million, inventory of $1.3 million, other current assets of
$.1 million, and an increase in accounts payable of $.2 million. These favorable
cash adjustment were partially offset by a net change in deferred income tax
accounts of $1.9 million and a reduction in other current liabilities of
$.5million. In addition , cash provided by operating activities was favorably
impacted by the $1.5million accrual for product recall, as discussed
previously, and by the $.3 million non cash portion of the provision for
restructuring related to the relocation of the B&F product line from Toledo,
Ohio to St. Louis, Missouri.
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%.
21
<PAGE>
On September 8, 1998, the Company's credit facilities with Foothill Capital
Corporation were amended. The Company's existing term loan was eliminated and
replaced with an amended revolving credit facility. As amended, the revolving
credit facility remained at $25.0 million. The interest rate on the facility
has been reduced from the floating reference rate (7.75% at January 31, 1999)
plus 0.50% to the floating reference rate plus 0.25%. The reference rate as
defined in the credit agreement, is the variable rate of interest, per annum,
most recently announced by Norwest Bank Minnesota, National Association, or any
successor thereto, as its "base" rate. This amendment also provides the Company
with a rate of LIBOR +2.5%.
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
was amended. The amendment provides favorable changes to certain debt
covenants.
Inflation has not had a material effect on the Company's business or results of
operations.
YEAR 2000
- - ----------
All critical systems were year 2000 compliant at December 31, 1999.
The Company did not separately distinguish between costs incurred specifically
to assure year 2000 compliance and normal expenditures needed to maintain or
upgrade systems. The company believes that any such costs expended were not
material.
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 numbers of customers. The company employs
large number of vendors, without concentration of critical vendors. None of the
Company's products or components uses date sensitive technology. To date the
company has not experienced any costs or business interruptions due to year 2000
problems. The Company does not anticipate any Year 2000 problems will occur in
the future but it is maintaining its contingency planning and resources at an
appropriate level
22
<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
23
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLIED HEALTHCARE PRODUCTS, INC.
/s/ Earl R. Refsland
Earl R. Refsland
President and Chief Executive Officer
-------------------------------------
24
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 393
<SECURITIES> 0
<RECEIVABLES> 11578
<ALLOWANCES> (940)
<INVENTORY> 17185
<CURRENT-ASSETS> 30633
<PP&E> 32076
<DEPRECIATION> (20006)
<TOTAL-ASSETS> 70820
<CURRENT-LIABILITIES> 8423
<BONDS> 16288
0
0
<COMMON> 101
<OTHER-SE> 46788
<TOTAL-LIABILITY-AND-EQUITY> 70820
<SALES> 16758
<TOTAL-REVENUES> 16758
<CGS> (12133)
<TOTAL-COSTS> (12133)
<OTHER-EXPENSES> (4266)
<LOSS-PROVISION> (16)
<INTEREST-EXPENSE> (418)
<INCOME-PRETAX> (75)
<INCOME-TAX> 51
<INCOME-CONTINUING> (126)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (126)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
