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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission File Number 0-19266
-------------------------------
ALLIED HEALTHCARE PRODUCTS, INC.
[EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER]
DELAWARE 25-1370721
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1720 SUBLETTE AVENUE
ST. LOUIS, MISSOURI 63110
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (314) 771-2400
----------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock
Preferred Stock
Preferred Stock Purchase Rights
(Title of class)
-----------------------
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 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes. X No.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
As of September 26, 2002, the aggregate market value of the voting
stock held by non-affiliates of the Registrant was approximately $15,300,000.
As of September 26, 2002, there were 7,813,932 shares of common stock,
$0.01 par value (the "Common Stock"), outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement dated October 7, 2002 (portion) (Part III)
ALLIED HEALTHCARE PRODUCTS, INC.
INDEX TO FORM 10-K
Page
PART I
Item 1. Business ..................................................................... 1
Item 2. Properties ................................................................... 10
Item 3. Legal Proceedings ............................................................ 10
Item 4. Submission of Matters to a Vote of Security Holders .......................... 10
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters .......................................................... 11
Item 6. Selected Financial Data ...................................................... 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................................... 13
Item 8. Financial Statements and Supplementary Data .................................. 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .......................................... 48
PART III
Item 10. Directors and Executive Officers of the Registrant .......................... 48
Item 11. Executive Compensation ...................................................... 48
Item 12. Security Ownership of Certain Beneficial Owners and Management .............. 48
Item 13. Certain Relationships and Related Transactions .............................. 48
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K ............. 48
SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
Statements contained in this Report which are not historical facts or
information are "forward-looking statements." Words such as "believe," "expect,"
"intend," "will," "should," and other expressions that indicate future events
and trends identify such forward-looking statements. These forward-looking
statements involve risks and uncertainties which could cause the outcome and
future results of operations and financial condition to be materially different
than stated or anticipated based on the forward-looking statements. Such risks
and uncertainties include both general economic risks and uncertainties, risks
and uncertainties affecting the demand for and economic factors affecting the
delivery of health care services, and specific matters which relate directly to
the Company's operations and properties as discussed in Items 1, 3 and 7 in this
Report. The Company cautions that any forward-looking statements contained in
this report reflects only the belief of the Company or its management at the
time the statement was made. Although the Company believes such forward-looking
statements are based upon reasonable assumptions, such assumptions may
ultimately prove inaccurate or incomplete. The Company undertakes no obligation
to update any forward-looking statement to reflect events or circumstances after
the date on which the statement was made.
PART I
ITEM 1. BUSINESS
GENERAL
Allied Healthcare Products, Inc. ("Allied" or the "Company")
manufactures a variety of respiratory products used in the health care industry
in a wide range of hospital and alternate site settings, including sub-acute
care facilities, home health care and emergency medical care. The Company's
product lines include respiratory care products, medical gas equipment and
emergency medical products. The Company believes that it maintains significant
market shares in selected product lines.
The Company's products are marketed under well-recognized and respected
brand names to hospitals, hospital equipment dealers, hospital construction
contractors, home health care dealers, emergency medical products dealers and
others. Allied's product lines include:
RESPIRATORY CARE PRODUCTS
- respiratory care/anesthesia products
- home respiratory care products
MEDICAL GAS EQUIPMENT
- medical gas system construction products
- medical gas system regulation devices
- disposable oxygen and specialty gas cylinders
- portable suction equipment
EMERGENCY MEDICAL PRODUCTS
- respiratory/resuscitation products
- trauma and patient handling products
The Company's principal executive offices are located at 1720 Sublette
Avenue, St. Louis, Missouri 63110, and its telephone number is (314) 771-2400.
1
MARKETS AND PRODUCTS
In fiscal 2002, respiratory care products, medical gas equipment and
emergency medical products represented approximately 28%, 55% and 17%,
respectively, of the Company's net sales. In fiscal 2001, respiratory care
products, medical gas equipment and emergency medical products represented
approximately 28%, 57%, and 15% respectively of the Company's net sales. The
Company operates in a single industry segment and its principal products are
described in the following table:
PRINCIPAL
PRODUCT DESCRIPTION BRAND NAMES PRIMARY USERS
- -------------------------------------- ----------------------------------- ----------------- -------------------
RESPIRATORY CARE PRODUCTS
Respiratory Care/Anesthesia Large volume compressors; Timeter Hospitals and
Products ventilator calibrators; sub-acute
humidifiers and mist tents facilities
Home Respiratory Care Products O2 cylinders; pressure Timeter; B&F; Patients at home
regulators; nebulizers; portable Schuco
large volume compressors;
portable suction equipment and
disposable respiratory products
MEDICAL GAS EQUIPMENT
Construction Products In-wall medical gas system Chemetron; Hospitals and
components; central station pumps Oxequip sub-acute
and compressors and headwalls facilities
Regulation Devices Flowmeters; vacuum regulators; Chemetron; Hospitals and
pressure regulators and related Oxequip; Timeter sub-acute
products facilities
Disposable Cylinders Disposable oxygen and gas Lif-O-Gen First aid
cylinders providers and
specialty gas
distributors
Suction Equipment Portable suction equipment and Gomco; Allied; Hospitals;
disposable suction canisters Schuco sub-acute
facilities and
home care products
EMERGENCY MEDICAL PRODUCTS
Respiratory/Resuscitation Demand resuscitation valves; bag LSP; Omni-Tech Emergency service
mask resuscitators; emergency providers
transport ventilators and oxygen
regulators
Trauma and Patient Handling Spine immobilization products; LSP Emergency service
Products pneumatic anti-shock garments and providers
trauma burn kits
2
RESPIRATORY CARE PRODUCTS
MARKET. Respiratory care products are used in the treatment of acute
and chronic respiratory disorders such as asthma, emphysema, bronchitis and
pneumonia. Respiratory care products are used in both hospitals and alternate
care settings. Sales of respiratory care products are made through distribution
channels focusing on hospitals and other sub-acute facilities. Sales of home
respiratory care products are made through durable medical equipment dealers
through telemarketing, and by contract sales with national chains.
RESPIRATORY CARE/ANESTHESIA PRODUCTS. The Company manufactures and
sells a broad range of products for use in respiratory care and anesthesia
delivery. These products include large volume air compressors, calibration
equipment, humidifiers, croup tents, equipment dryers, CO2 absorbent and a
complete line of respiratory disposable products such as oxygen tubing, face
masks, cannulas and ventilator circuits.
HOME RESPIRATORY CARE PRODUCTS. Home respiratory care products
represent one of Allied's potential growth areas. Allied's broad line of home
respiratory care products include aluminum oxygen cylinders, oxygen regulators,
pneumatic nebulizers, portable suction equipment and the full line of
respiratory disposable products.
MEDICAL GAS EQUIPMENT
MARKET. The market for medical gas equipment consists of hospitals,
alternate care settings and surgery centers. The medical gas equipment group is
broken down into three separate categories: construction products, regulation
devices and suction equipment, and disposable cylinders.
CONSTRUCTION PRODUCTS. Allied's medical gas system construction
products consist of in-wall medical system components, central station pumps and
compressors, and headwalls. These products are typically installed during
construction or renovation of a health care facility and are built in as an
integral part of the facility's physical plant. Typically, the contractor for
the facility's construction or renovation purchases medical gas system
components from manufacturers and ensures that the design specifications of the
health care facility are met.
Allied's in-wall components, including outlets, manifolds, alarms,
ceiling columns and zone valves, serve a fundamental role in medical gas
delivery systems.
Central station pumps and compressors are individually engineered
systems consisting of compressors, reservoirs, valves and controls designed to
drive a hospital's medical gas and suction systems. Each system is designed
specifically for a given hospital or facility, which purchases pumps and
compressors from suppliers. The Company's sales of pumps and compressors are
driven, in large part, by its share of the in-wall components market.
The Company's construction products are sold primarily to hospitals,
alternate care settings and hospital construction contractors. The Company
believes that it holds a major share of the U.S. market for its construction
products, that these products are installed in more than three thousand
hospitals in the United States and that its installed base of equipment in this
market will continue to generate follow-on sales. The Company believes that most
hospitals and sub-acute care facility construction spending is for expansion or
renovation of existing facilities. Many hospital systems and individual
hospitals undertake major renovations to upgrade their operations to improve the
quality of care they provide, reduce costs and attract patients and personnel.
3
While Allied sold the assets of its headwall manufacturing division,
Hospital Systems, Inc. on May 28, 1999, the Company continues to sell headwall
products in the construction product market. Allied's participation in this
market includes the distribution of headwall components utilized by various
headwall manufacturers, as well as the distribution of complete headwall systems
purchased from outside manufacturers that are utilized in hospital construction
and renovation.
REGULATION DEVICES AND SUCTION EQUIPMENT. The Company's medical gas
system regulation products include flowmeters, vacuum regulators and pressure
regulators, as well as related adapters, fittings and hoses which measure,
regulate, monitor and help transfer medical gases from walled piping or
equipment to patients in hospital rooms, operating theaters or intensive care
areas. The Company's leadership position in the in-wall components market
provides a competitive advantage in marketing medical gas system regulation
devices that are compatible with those components.
Portable suction equipment is typically used when in-wall suction is
not available or when medical protocol specifically requires portable suction.
The Company also manufactures disposable suction canisters, which are clear
containers used to collect the fluids suctioned by in-wall or portable suction
systems. The containers have volume calibrations which allow the medical
practitioner to measure the volume of fluids suctioned.
The market for regulation devices and suction equipment includes
hospital and sub-acute care facilities. Sales of these products are made through
the same distribution channel as our respiratory care products. The Company
believes that it holds a significant share of the U.S. market in both regulation
devices and suction equipment.
DISPOSABLE CYLINDERS. Disposable oxygen cylinders are designed to
provide oxygen for short periods of time in emergency situations. Since they are
not subjected to the same pressurization as standard containers, they are much
lighter and less expensive than standard gas cylinders. The Company markets
filled disposable oxygen cylinders through industrial safety distributors and
similar customers, principally to first aid providers, restaurants, industrial
plants and other customers that require oxygen for infrequent emergencies.
EMERGENCY MEDICAL PRODUCTS
MARKET. Emergency medical products are used in the treatment of
trauma-induced injuries. The Company's emergency medical products provide
patients resuscitation or ventilation during cardiopulmonary resuscitation or
respiratory distress as well as immobilization and treatment for burns. The
Company believes that the trauma care venue for health care services is
positioned for growth in light of the continuing trend towards providing health
care outside the traditional hospital setting. The Company also expects that
other countries will develop trauma care systems in the future, although no
assurance can be given that such systems will develop or that they will have a
favorable impact on the Company. Sales of emergency medical products are made
through specialized emergency medical products distributors to ambulance
companies, fire departments and emergency medical systems volunteer
organizations.
The emergency medical products are broken down into two account groups:
respiratory/resuscitator products and trauma patient handling products.
RESPIRATORY/RESUSCITATION PRODUCTS. The Company's
respiratory/resuscitation products include demand resuscitation valves, portable
resuscitation systems, bag masks and related products, emergency transport
ventilators, precision oxygen regulators, minilators, multilators and
humidifiers.
4
Demand resuscitation valves are designed to provide 100% oxygen to
breathing or non-breathing patients. In an emergency situation, they can be used
with a mask or tracheotomy tubes and operate from a standard regulated oxygen
system. The Company's portable resuscitation systems provide fast, simple and
effective means of ventilating a non-breathing patient during cardiopulmonary
resuscitation and 100% oxygen to breathing patients on demand with minimal
inspiratory effort. The Company also markets a full line of disposable and
reusable bag mask resuscitators, which are available in a variety of adult and
child-size configurations. Disposable mouth-to-mask resuscitation systems have
the added advantage of reducing the risk of transmission of communicable
diseases.
The Company's autovent transport ventilator can meet a variety of needs
in different applications ranging from typical emergency medical situations to
more sophisticated air and ground transport. Each autovent is accompanied by a
patient valve which provides effective ventilation during cardiopulmonary
resuscitation or respiratory distress. When administration of oxygen is required
at the scene of a disaster, in military field hospitals or in a multiple-victim
incident, Allied's minilators and multilators are capable of providing oxygen to
one or a large number of patients.
To complement the family of respiratory/resuscitation products, the
Company offers a full line of oxygen product accessories. This line of accessory
products includes reusable aspirators, tru-fit masks, disposable cuffed masks
and related accessories.
TRAUMA AND PATIENT HANDLING PRODUCTS. The Company's trauma and patient
handling products include spine immobilization products, pneumatic anti-shock
garments and trauma burn kits. Spine immobilization products include a backboard
that is designed for safe immobilization of injury victims and provides a
durable and cost effective means of emergency patient transportation and
extrication. The infant/pediatric immobilization board is durable and scaled for
children. The half back extractor/rescue vest is useful for both suspected
cervical/spinal injuries and for mountain and air rescues. The Company's
pneumatic anti-shock garments are used to treat victims experiencing hypovolemic
shock. Allied's trauma burn kits contain a comprehensive line of products for
the treatment of trauma and burns.
SALES AND MARKETING
Allied sells its products primarily to respiratory care/anesthesia
product distributors, hospital construction contractors, emergency medical
equipment dealers and directly to hospitals. The Company maintains a sales force
of 35 sales professionals, all of whom are full-time employees of the Company.
The sales force includes 25 medical gas specialists, 4 emergency
specialists and 6 international sales representatives. Four product managers are
responsible for the marketing activities of our product lines.
The 25 medical gas specialists are responsible for sales of all Allied
products with the exception of emergency products within their territory. Sales
of products are accomplished through respiratory care/anesthesia distributors
for the regulation devices, suction equipment, respiratory care/anesthesia
products and disposable cylinders. The homecare products are sold primarily
through our own in house telemarketing. Construction products are sold direct to
hospital construction contractors and through distributors.
Emergency medical specialists are responsible for sales of
respiratory/resuscitation products, trauma and patient handling products. These
products are principally sold to ambulance companies, fire departments and
emergency medical systems volunteer organizations through specialized emergency
medical products distributors.
5
INTERNATIONAL
Allied's international business represents a potential growth area that
the Company has been pursuing. Allied's net sales to foreign markets totaled 16%
of the Company's net sales in fiscal 2002 and 21% of the Company's net sales in
fiscal 2001. International sales are made through a network of dealers, agents
and U.S. exporters who distribute the Company's products throughout the world.
Allied has market presence in Canada, Mexico, Central and South America, Europe,
the Middle East and the Far East.
MANUFACTURING
Allied's manufacturing processes include fabrication,
electro-mechanical assembly operations and plastics manufacturing. A significant
part of Allied's manufacturing operations involves electro-mechanical assembly
of proprietary products and the Company is vertically integrated in most
elements of metal machining and fabrication. Most of Allied's hourly employees
are involved in machining, metal fabrication, plastics manufacturing and product
assembly.
Allied manufactures small metal components from bar stock in a machine
shop which includes automatic screw machines, horizontal lathes and drill
presses and computer controlled machining centers. The Company makes larger
metal components from sheet metal using computerized punch presses, brake
presses and shears. In its plastics manufacturing processes, the Company
utilizes both extrusion and injection molding. The Company believes that its
production facilities and equipment are in good condition and sufficient to meet
planned increases in volume over the next few years and that conditions in local
labor markets should permit the implementation of additional shifts and days
operated.
RESEARCH AND DEVELOPMENT
Allied's research and development group is responsible for the
development of new products. This group is staffed with mechanical and
electrical engineers. During the 2000 fiscal year this group was segregated from
the product support function to allow the group to focus on the introduction of
new products.
During fiscal 2002 the Company released two new products as a result of
research and development programs. These products include a new portable suction
pump for the international market, and an oxygen conserver. Oxygen conservers
are used to extend the time an oxygen cylinder lasts by delivering gas flow only
when the patient inhales.
The group also developed the SurgeX surge suppressing post valve for
portable oxygen cylinders. The SurgeX post valve was designed to reduce the heat
created by recompression of oxygen released by the post valve, which is a
principle cause of regulator fires.
GOVERNMENT REGULATION
The Company's products and its manufacturing activities are subject to
extensive and rigorous government regulation by federal and state authorities in
the United States and other countries. In the United States, medical devices for
human use are subject to comprehensive review by the United States Food and Drug
Administration (the "FDA"). The Federal Food, Drug, and Cosmetic Act ("FDC
Act"), and other federal statutes and regulations, govern or influence the
research, testing, manufacture, safety, labeling, storage, record keeping,
approval, advertising and promotion of such products. Noncompliance with
applicable requirements can result in warning letters, fines, recall or seizure
of products, injunction, refusal to permit products to be imported into or
exported out of the United States, refusal of the government to clear or approve
marketing applications or to allow the Company to enter into government supply
contracts, or withdrawal of previously approved marketing applications and
criminal prosecution.
The Company is required to file a premarket notification in the form of
a premarket approval ("PMA") with the FDA before it begins marketing a new
medical device that offers new technology that is
6
currently not on the market. The Company also must file a premarket notification
in the form of a 510(k) with the FDA before it begins marketing a new medical
device that utilizes existing technology for devices that are currently on the
market. The 510(k) submission process is also required when the Company makes a
change or modifies an existing device in a manner that could significantly
affect the device's safety or effectiveness.
Compliance with the regulatory approval process in order to market a
new or modified medical device can be uncertain, lengthy and, in some cases,
expensive. There can be no assurance that necessary regulatory approvals will be
obtained on a timely basis, or at all. Delays in receipt or failure to receive
such approvals, the loss of previously received approvals, or failure to comply
with existing or future regulatory requirements could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company manufactures and distributes a broad spectrum of
respiratory therapy equipment, emergency medical equipment and medical gas
equipment. To date, all of the Company's FDA clearances have been obtained
through the 510(k) clearance process. These determinations are very fact
specific and the FDA has stated that, initially, the manufacturer is best
qualified to make these determinations, which should be based on adequate
supporting data and documentation. The FDA however, may disagree with a
manufacturer's determination not to file a 510(k) and require the submission of
a new 510(k) notification for the changed or modified device. Where the FDA
believes that the change or modification raises significant new questions of
safety or effectiveness, the agency may require a manufacturer to cease
distribution of the device pending clearance of a new 510(k) notification.
Certain of the Company's medical devices have been changed or modified
subsequent to 510(k) marketing clearance of the original device by the FDA.
Certain of the Company's medical devices, which were first marketed prior to May
28, 1976, and therefore, grandfathered and exempt from the 510(k) notification
process, also have been subsequently changed or modified. The Company believes
that these changes or modifications do not significantly affect the device's
safety or effectiveness or make a major change or modification in the device's
intended uses and, accordingly, submission of new 510(k) notification to the FDA
is not required. There can be no assurance, however, that the FDA would agree
with the Company's determinations.
In addition, commercial distribution in certain foreign countries is
subject to additional regulatory requirements and receipt of approvals that vary
widely from country to country. The Company believes it is in compliance with
regulatory requirements of the countries in which it sells its products.
The Medical Device Reporting regulation requires that the Company
provide information to the FDA on deaths or serious injuries alleged to have
been associated with the use of its devices, as well as product malfunctions
that would likely cause or contribute to death or serious injury if the
malfunction were to recur. The Medical Device Tracking regulation requires the
Company to adopt a method of device tracking of certain devices, such as
ventilators, which are life-supporting or life-sustaining devices used outside
of a device user facility, some of which are permanently implantable devices.
The regulation requires that the method adopted by the Company ensures that the
tracked device can be traced from the device manufacturer to the person for whom
the device is indicated (i.e., the patient). In addition, the FDA prohibits a
company from promoting an approved device for unapproved applications and
reviews a company's labeling for accuracy. Labeling and promotional activities
also are in certain instances, subject to scrutiny by the Federal Trade
Commission.
The Company's medical device manufacturing facilities are registered
with the FDA, and have received ISO 9001 Certification for the St. Louis
facility and certification per the Medical Device Directive (MDD - European) for
certain products in 1998. As such, the Company will be audited by the FDA, ISO,
and European auditors for compliance with the Good Manufacturing Practices
("GMP"), the ISO and MDD regulations for medical devices. These regulations
require the Company to manufacture its products and maintain its products and
documentation in a prescribed manner with respect to design, manufacturing,
testing and control activities. The Company also is subject to the registration
and inspection requirements of state regulatory agencies.
7
In March through June 2000, the FDA conducted an inspection of the
Company's St. Louis facility and provided a written report, known as an "FDA
Form 483" or simply a "483," citing FDA observations concerning GMP compliance
and quality control issues applicable to demand valves, emergency ventilators,
circumcision clamps, and regulators. The Company provided a written response to
the FDA and in August 2000, the FDA issued a warning letter and requested that
the Company clarify and supplement its responses to the 483 observations. As a
result, the Company has submitted to the FDA a written supplemental response and
actions to address the FDA concerns. The Company met with the FDA at their
Kansas City field office in March 2001 to discuss the responses and actions.
From October 27, 2001 to November 19, 2001 the FDA conducted a follow-up
inspection to the June 2000 inspection. On January 23, 2002, the FDA released a
copy of the establishment inspection report (EIR) for the October 27, 2001 to
November 19, 2001 inspection and has indicated that the inspection is closed.
The Company intends to continue to conduct business in such a manner as to avert
any FDA action seeking to interrupt or suspend manufacturing or require any
recall or modification of products.
There can be no assurance that any required FDA or other governmental
approval will be granted, or, if granted, will not be withdrawn. Governmental
regulation may prevent or substantially delay the marketing of the Company's
proposed products and cause the Company to undertake costly procedures. In
addition, the extent of potentially adverse government regulation that might
arise from future administrative action or legislation cannot be predicted. Any
failure to obtain, or delay in obtaining, such approvals could adversely affect
the Company's ability to market its proposed products.
Sales of medical devices outside the United States are subject to
foreign regulatory requirements that vary widely from country to country.
Medical products shipped to the European Community require CE certification.
Whether or not FDA approval has been obtained, approval of a device by a
comparable regulatory authority of a foreign country generally must be obtained
prior to the commencement of marketing in those countries. The time required to
obtain such approvals may be longer or shorter than that required for FDA
approval. In addition, FDA approval may be required under certain circumstances
to export certain medical devices.
The Company is also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protections, fire hazard control and disposal of hazardous or
potentially hazardous substances.
THIRD PARTY REIMBURSEMENT
The cost of a majority of medical care in the United States is funded
by the U.S. Government through the Medicare and Medicaid programs and by private
insurance programs, such as corporate health insurance plans. Although the
Company does not receive payments for its products directly from these programs,
home respiratory care providers and durable medical equipment suppliers, who are
the primary customers for several of the Company's products, depend heavily on
payments from Medicare, Medicaid and private insurers as a major source of
revenues. In addition, sales of certain of the Company's products are affected
by the extent of hospital and health care facility construction and renovation
at any given time. The federal government indirectly funds a significant
percentage of such construction and renovation costs through Medicare and
Medicaid reimbursements. In recent years, governmentally imposed limits on
reimbursement to hospitals and other health care providers have impacted
spending for services, consumables and capital goods. In addition the Balanced
Budget Act of 1997 reduced reimbursements by 25% for oxygen and oxygen
equipment. A material decrease from current reimbursement levels or a material
change in the method or basis of reimbursing health care providers is likely to
adversely affect future sales of the Company's products.
PATENTS, TRADEMARKS AND PROPRIETARY TECHNOLOGY
The Company owns and maintains patents on several products that it
believes are useful to the business and provides the Company with an advantage
over its competitors. During fiscal 2002 the Company applied for one patent, and
was issued one patent for an oxygen regulator.
8
The Company owns and maintains U.S. trademark registrations for
Chemetron, Gomco, Oxequip, Lif-O-Gen, Life Support Products, Timeter, Vacutron
and Schuco, its principal trademarks. Registrations for these trademarks are
also owned and maintained in countries where such products are sold and such
registrations are considered necessary to preserve the Company's proprietary
rights therein.
COMPETITION
The Company has different competitors within each of its product lines.
Many of the Company's principal competitors are larger than Allied and the
Company believes that most of these competitors have greater financial and other
resources. The Company competes primarily on the basis of price, quality and
service. The Company believes that it is well positioned with respect to product
cost, brand recognition, product reliability, and customer service to compete
effectively in each of its markets.
EMPLOYEES
At June 30, 2002, the Company had approximately 519 full-time
employees. Approximately 331 employees in the Company's principal manufacturing
facility located in St. Louis, Missouri, are covered by a collective bargaining
agreement that will expire on May 31, 2003. Approximately 12 employees at the
Company's facility in Stuyvesant Falls, New York are also covered by a
collective bargaining agreement that will expire on April 15, 2004.
ENVIRONMENTAL AND SAFETY REGULATION
The Company is subject to federal, state and local environmental laws
and regulations that impose limitations on the discharge of pollutants into the
environment and establish standards for the treatment, storage and disposal of
toxic and hazardous wastes. The Company is also subject to the federal
Occupational Safety and Health Act and similar state statutes. From time to time
the Company has been involved in environmental proceedings involving clean up of
hazardous waste. There are no such material proceedings currently pending. Costs
of compliance with environmental, health and safety requirements have not been
material to the Company. The Company believes it is in material compliance with
all applicable environmental laws and regulations.
9
ITEM 2. PROPERTIES
The Company's headquarters are located in St. Louis, Missouri and the
Company maintains manufacturing facilities in Missouri and New York. Set forth
below is certain information with respect to the Company's manufacturing
facilities.
SQUARE FOOTAGE OWNED/
LOCATION (APPROXIMATE) LEASED ACTIVITIES/PRODUCTS
- ---------------------------------- ------------------- ------------- ------------------------------
St. Louis, Missouri 270,000 Owned Headquarters; medical gas
equipment; respiratory care
products; emergency medical
products
Stuyvesant Falls, New York 30,000 Owned CO2 absorbent
In addition, the Company owns a 16.8-acre parcel of undeveloped land in
Stuyvesant Falls, New York.
ITEM 3. LEGAL PROCEEDINGS
Product liability lawsuits are filed against the Company from time to
time for various injuries alleged to have resulted from defects in the
manufacture and/or design of the Company's products. Several such proceedings
are currently pending, which are not expected to have a material adverse effect
on the Company. The Company maintains comprehensive general liability insurance
coverage which it believes to be adequate for the continued operation of its
business, including coverage of product liability claims.
In addition, from time to time the Company's products may be subject to
product recalls in order to correct design or manufacturing flaws in such
products. The Company voluntarily effectuated the recall of its aluminum body
regulators manufactured under the Life Supports Products, Inc. brand name in
cooperation with the U.S. Food and Drug Administration ("FDA") under Product
Recall No. Z-693/698-9 to conform with the industry wide recommendation to cease
use of aluminum parts in oxygen regulators. The recall is complete and a final
audit of the results thereof was completed on December 22, 2000 by the FDA.
In March through June 2000, the FDA conducted an inspection of the
Company's St. Louis facility and provided a written report, known as an "FDA
Form 483" or simply a "483," citing FDA observations concerning GMP compliance
and quality control issues applicable to demand valves, emergency ventilators,
circumcision clamps, and regulators. The Company provided a written response to
the FDA and in August 2000, the FDA issued a warning letter and requested that
the Company clarify and supplement its responses to the 483 observations. As a
result, the Company submitted to the FDA a written supplemental response and
defined actions to address the FDA concerns. The Company met with the FDA at
their Kansas City field office in March 2001 to discuss the responses and
actions. From October 27, 2001 to November 19, 2001 the FDA conducted a
follow-up inspection to the June 2000 inspection. On January 23, 2002, the FDA
released a copy of the establishment inspection report (EIR) for the October 27,
2001 to November 19, 2001 inspection and has indicated that the inspection is
closed. The Company intends to continue to conduct business in such a manner as
to avert any FDA action seeking to interrupt or suspend manufacturing or require
any recall or modification of products.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Allied Healthcare Products, Inc. began trading on the NASDAQ National
market under the symbol AHPI on January 14, 1992, following its initial public
offering. As of September 19, 2002, there were 232 record owners of the
Company's Common Stock. The following tables summarize information with respect
to the high and low closing prices for the Company's Common Stock as listed on
the NASDAQ National market for each quarter of fiscal 2002 and 2001,
respectively. The Company currently does not pay any dividend on its Common
Stock.
COMMON STOCK INFORMATION
2002 HIGH LOW 2001 HIGH LOW
September quarter $3.55 $3.00 September quarter $3.38 $2.69
December quarter $3.70 $3.25 December quarter $3.25 $2.58
March quarter $5.10 $3.45 March quarter $3.69 $2.97
June quarter $5.25 $4.20 June quarter $3.50 $3.10
11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
Year ended June 30, 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
Net sales $ 60,415 $ 64,928 $ 65,995 $ 74,666 $ 98,619
Cost of sales 49,999 48,265 50,511 58,440 72,076
Gross profit 10,416 16,663 15,484 16,226 26,543
Selling, general and administrative expenses 12,786 14,573 16,097 18,024 23,074
Provision for restructuring and consolidation (1) -- -- -- 758 --
Provision for product recall (2) (40) 80 (18) 1,500 --
Gain on sale of business (3) -- -- -- (27) (12,813)
Impairment of goodwill (4) 9,600 -- -- -- 9,779
Income (loss) from operations (11,930) 2,010 (595) (4,029) 6,503
Interest expense 1,054 1,530 1,664 1,926 4,152
Other, net 41 74 149 36 198
Income (loss) before provision (benefit) for
income taxes and extraordinary loss (13,025) 406 (2,408) (5,991) 2,153
Provision (benefit) for income taxes (5) (1,294) 172 (695) (1,873) 9,019
Income (loss) before extraordinary loss (11,731) 234 (1,713) (4,118) (6,866)
Extraordinary loss on early extinguishment of debt,
Net of income tax benefit -- -- -- -- 530
Net income (loss) $ (11,731) $ 234 $ (1,713) $ (4,118) $ (7,396)
Basic and diluted earnings (loss) per share $ (1.50) $ 0.03 $ (0.22) $ (0.53) $ (0.95)
Basic weighted average common shares outstanding 7,809 7,807 7,807 7,807 7,805
Diluted weighted average common shares outstanding 7,809 8,126 7,807 7,807 7,805
(In thousands)
June 30, 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA
Working capital $ 9,371 $ 20,682 $ 20,261 $ 22,619 $ 21,308
Total assets 52,870 65,993 67,212 74,275 80,180
Short-term debt (6) 7,985 1,169 1,017 908 3,443
Long-term debt (net of current portion) (6) 4,135 11,019 13,056 16,330 14,972
Stockholders' equity 34,725 46,440 46,206 47,919 52,037
(1) Provision for closure of B & F manufacturing facility.
(2) See Note 4 to the June 30, 2002 Consolidated Financial Statements for
further discussion.
(3) Gain on sale of Hospital Systems, Inc. in 1999 & Bear Medical Systems,
Inc. in 1998.
(4) Non-recurring impairment loss on goodwill recorded during fiscal 2002 and
1998. See Note 3 to the June 30, 2002 Consolidated Financial Statements
for further discussion of non-recurring impairment loss recorded during
fiscal 2002.
(5) See Note 7 to the June 30, 2002 Consolidated Financial Statements for
further discussion of the Company's effective tax rate.
(6) See Note 5 to the June 30, 2002 Consolidated Financial Statements for
further discussion.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 health care reform, including Medicare and
Medicaid financing, the inability to realize the full benefit of recent capital
expenditures or consolidation and rationalization activities, difficulties or
delays in the introduction of new products or disruptions in selling,
manufacturing and/or shipping efforts.
OVERVIEW
The following discussion summarizes the significant factors affecting
the consolidated operating results and financial condition of the Company for
the three fiscal years ended June 30, 2002. This discussion should be read in
conjunction with the consolidated financial statements, notes to the
consolidated financial statements and selected consolidated financial data
included elsewhere herein.
The results of operations for fiscal 2002 were affected by several
unusual items, which are discussed further below. During the first half of
fiscal 2002 the Company transferred production of its B&F line of disposable
homecare products to its St. Louis manufacturing facility. Inefficiencies
associated with the transfer significantly reduced gross margins. As a result of
the Company's annual impairment analysis of goodwill, the Company recorded a
$9.6 million goodwill impairment charge in the fourth quarter of fiscal 2002.
The goodwill impairment charge was primarily attributable to the declining
results in the disposable home care products line. In addition, during the
fourth quarter the Company recorded a pre-tax charge of $3.2 million to increase
its reserve for slow-moving and obsolete inventory. During the fourth quarter of
fiscal 2002, a detailed review of inventory was performed. This review indicated
that due to changes in product mix, other manufacturing changes to the Company's
products, and declines in sales levels, a large number of component parts were
deemed to be obsolete.
The results of operations for fiscal 2001 were affected by several
unusual items, which are discussed further below. On July 31, 2000, the Company
reached an agreement with District No. 9 of the International Association of
Machinist and Aerospace Workers. The strike had adversely affected shipments,
revenue and income in the first quarter of fiscal 2001. Past due backlog
increased while orders and shipments were missed. Additionally, the Company
continued to benefit from the 15% workforce reduction initiated in the second
quarter of fiscal 2000. Results for fiscal 2001 also benefited from the
elimination of the valuation allowance for $0.3 million in state net operating
loss carryforwards. This valuation allowance was previously established for the
carryforwards due to uncertainty as to their eventual utilization.
The results of operations for fiscal 2000 were affected by several
unusual items, which are discussed further below. In the first quarter of fiscal
2000 the Company recorded a $0.4 million charge 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 for
severance costs. In the second quarter the Company recorded a $0.2 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. In the fourth quarter the
Company was impacted by a labor strike at the Company's St. Louis facility that
was initiated on June 1, 2000 and settled on July 31, 2000. The strike adversely
affected shipments, revenue and income in the quarter. Past due backlog
increased while orders and shipments were missed. Additionally, in the fourth
quarter the Company took a $0.9 million charge to provide for excess and slow
moving inventory purchased in prior years, recorded a $0.2 million charge
related to the resolution of a vendor contract entered into in a prior year, and
recorded an additional $.1 million charge related to product liability legal
expenses.
13
RESULTS OF OPERATIONS
Allied manufactures and markets respiratory products, including
respiratory care products, medical gas equipment and emergency medical products.
Set forth below is certain information with respect to amounts and percentages
of net sales attributable to respiratory care products, medical gas equipment
and emergency medical products for the fiscal years ended June 30, 2002, 2001,
and 2000.
Dollars in thousands
Year ended June 30, 2002
----------------------------------
Net % of Total
Sales Net Sales
------------- -------------
Respiratory care products $ 16,855 27.9%
Medical gas equipment 33,401 55.3%
Emergency medical products 10,159 16.8%
------------- -------------
Total $ 60,415 100.0%
============= =============
Year ended June 30, 2001
----------------------------------
Net % of Total
Sales Net Sales
------------- -------------
Respiratory care products $ 18,042 27.8%
Medical gas equipment 36,916 56.9%
Emergency medical products 9,970 15.3%
------------- -------------
Total $ 64,928 100.0%
============= =============
Year ended June 30, 2000
----------------------------------
Net % of Total
Sales Net Sales
------------- -------------
Respiratory care products $ 19,550 29.6%
Medical gas equipment 35,406 53.7%
Emergency medical products 11,039 16.7%
------------- -------------
Total $ 65,995 100.0%
============= =============
14
The following table sets forth, for the fiscal periods indicated, the percentage
of net sales represented by the various income and expense categories reflected
in the Company's consolidated statement of operations.
Year ended June 30, 2002 2001 2000
- -------------------------------------------------------- ------------- -------------- ----------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 82.8 74.3 76.5
------------- -------------- ----------------
Gross profit 17.2 25.7 23.5
Selling, general and administrative expenses 21.1 22.4 24.4
Provision for product recall -- 0.1 --
Impairment of goodwill 15.9 -- --
------------- -------------- ----------------
Income (loss) from operations (19.8) 3.2 (0.9)
Interest expense 1.7 2.4 2.5
Other, net 0.0 0.1 0.2
------------- -------------- ----------------
Income (loss) before provision (benefit) for
income taxes (21.5) 0.7 (3.6)
Provision (benefit) for income taxes (2.1) 0.3 (1.1)
------------- -------------- ----------------
Net income (loss) (19.4)% 0.4% (2.5)%
============= ============== ================
FISCAL 2002 COMPARED TO FISCAL 2001
Net sales for fiscal 2002 of $60.4 million were $4.5 million, or 6.9%
less than net sales of $64.9 million in fiscal 2001. The $4.5 million decline in
product sales is discussed below.
Respiratory care products sales in fiscal 2002 of $16.9 million were
$1.1 million, or 6.1% less than sales of $18.0 million in the prior year. This
decline in sales is the result of market share losses from continued production
delays in the production of our B&F disposable products which resulted in
delayed shipments and other customer service issues. These difficulties have led
the Company to move production of this product to the Company's St. Louis
facility during fiscal 2002 to improve service levels and reduce production
cost.
Medical gas equipment sales of $33.4 million in fiscal 2002 were $3.5
million, or 9.5% below prior year levels of $36.9 million. The majority of this
decline is due to a drop in international shipments from fiscal 2001 to fiscal
2002. International business is dependent upon hospital construction projects
and the development of medical facilities in those regions in which the Company
operates. Poor economic conditions in those regions have slowed development and
have resulted in lower shipments to those regions.
Emergency medical product sales in fiscal 2002 of $10.2 million were
$0.2 million, or 2.0% higher than fiscal 2001 sales of $10.0 million.
Domestically, Emergency medical product sales increased by approximately $0.5
million, primarily on the strength of orders from the Defense Department
following September 11th. The domestic increase was offset by a $0.3 million
decrease in international shipments, almost all attributable to our Japanese
market, as we continued to experience negative impacts of the oxygen regulator
recall.
International sales, which are included in the product lines discussed
above, decreased $3.9 million, or 28.5%, to $9.8 million in fiscal 2002 compared
to sales of $13.7 million in fiscal 2001. International sales declined in every
region of the world. As discussed above, the Company's international shipments
are dependent on hospital construction projects and the expansion of medical
care in those regions. Poor economic conditions which slows that development
have adversely affected the Company's sales internationally.
15
Gross profit in fiscal 2002 was $10.4 million, or 17.2% of sales,
compared to a gross profit of $16.7 million, or 25.7% of sales in fiscal 2001.
As discussed in the proceeding Overview section, fiscal 2002 gross profit was
adversely effected by a $3.2 million charge to write off excess and slow moving
inventory purchased in prior years. During the fourth quarter of fiscal 2002, a
detailed review of inventory was performed in conjunction with the Company's
long-term product planning process. This review indicated that due to changes in
product mix, other manufacturing changes to the Company's products, and declines
in sales levels, a large number of component parts were deemed to be obsolete.
In addition, gross profit was adversely effected during fiscal 2002 by
inefficiencies related to the transfer of the B&F line of disposable products to
St. Louis. This transfer of production was undertaken to improve customer
service and reduce manufacturing cost. The Company is continuing its efforts to
improve efficiencies. The Company invested $3.7 million in capital expenditures
during fiscal 2002 for manufacturing equipment, which is expected to decrease
production costs and improve efficiencies for several product lines.
Selling, General, and Administrative ("SG&A") expenses for fiscal 2002
were $12.8 million, a decrease of $1.8 million over SG&A expenses of $14.6
million in fiscal 2001. This decrease is the result of several factors. First,
the adoption of Statement of Financial Accounting Standards No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets" in fiscal 2002 resulted in the
elimination of approximately $0.8 million of goodwill amortization for the
Company's fiscal 2002 year. SG&A expenses also decreased during fiscal 2002 due
to an approximately $0.7 million decrease in selling expenses resulting from
decreases in sales commissions, reduced travel expenses, and the elimination of
expenses associated with an independent sales representative group. An
additional $0.3 million reduction in SG&A expenses was the result of computer
equipment and software which became fully amortized during fiscal 2002.
As discussed in the proceeding Overview section, financial results for
fiscal 2002 were adversely impacted by the write down of $9.6 million in
goodwill. During fiscal 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets",
which establishes new accounting and reporting standards for purchase business
combinations and goodwill. As provided by SFAS 142, the Company ceased
amortizing goodwill on July 1, 2001. During the first half of fiscal 2002, the
Company performed the transitional impairment analysis of its goodwill as of the
implementation date, following which the Company concluded that there was no
impairment of goodwill at July 1, 2001. The Company recently completed the
required annual impairment review of its goodwill at June 30, 2002 which due to
recent negative events and declining sales and profitability, resulted in a
goodwill impairment charge of $9.6 million.
Interest expense decreased by $0.4 million, or 26.7%, to $1.1 million
in fiscal 2002 from $1.5 million in fiscal 2001. Interest expense has been
reduced due to reductions in debt and a reduction in interest rates.
The Company had a loss of $13.0 million before taxes for fiscal 2002,
compared to income before taxes of $0.4 million in fiscal 2001. The Company
recorded an income tax benefit of $1.3 million in fiscal 2002, compared to tax
expense of $0.2 million in fiscal 2001. The 2002 tax benefit was negatively
impacted due to the non-deductibility of the goodwill impairment charge for
federal income tax purposes. Results for fiscal 2001 benefited from the release
of a valuation analysis for $0.3 million in state net operating loss
carryforwards. This valuation allowance was previously established for the
carryforwards due to uncertainty as to their eventual utilization. For further
discussion of the Company's income taxes please refer to the "Notes to
Consolidated Financial Statements" section included in this Form 10-K.
Net loss in fiscal 2002 was $11.7 million, or $1.50 per basic and
diluted earnings per share, a decrease of $11.9 million from net income of $0.2
million, or $0.03 per basic and diluted earnings per share in fiscal 2001.
Earnings per share amounts are diluted earnings per share, which are
substantially the same as basic earnings per share. The weighted number of
shares used in the calculation of the diluted earnings per share was 7,809,266
in fiscal 2002 and 8,125,699 in fiscal 2001.
16
FISCAL 2001 COMPARED TO FISCAL 2000
Net sales for fiscal 2001 of $65.0 million were $1.0 million, or 1.6%
less than net sales of $66.0 million in fiscal 2000. The $1.0 million decline in
product sales is discussed below.
Respiratory care product sales in fiscal 2001 of $18.0 million were
$1.6 million, or 8.2%, less than sales of $19.6 million in the prior year. The
majority of this decline can be attributed to the delays we have experienced in
our B & F disposable production.
Medical gas equipment sales of $37.0 million in fiscal 2001 were $1.6
million, or 4.5%, above prior year sales of $35.4 million. Medical gas equipment
sales experienced a $2.0 million increase resulting from growth achieved with
our vacuum regulator line. The intermittent mini-vacutron was introduced in the
second half of fiscal 2000. It was the final unit needed to complete the full
offering for the mini-vacutron line. This increase is offset by a $0.5 million
decline in construction products resulting from the continued decline in the
hospital construction market.
Emergency medical product sales in fiscal 2001 of $10.0 million were
$1.0 million, or 9.1%, less than fiscal 2000 sales of $11.0 million. The decline
in emergency medical product sales is a result of higher sales of oxygen
regulators during fiscal 2000 as a result of a trade-in program offered in
connection with the LSP regulator recall. These sales did not recur in fiscal
2001.
International sales, which are included in the product lines discussed
above increased $1.1 million, or 11.3%, to $13.7 million in fiscal 2001 compared
to sales of $12.6 million in fiscal 2000. Export sales are affected by
international economic conditions and the relative value of foreign currencies.
Gross profit in fiscal 2001 was $16.7 million, or 25.7% of net sales,
compared to a gross profit of $15.5 million, or 23.5% of net sales in fiscal
2000. Fiscal 2000 gross profit was adversely effected by a $0.9 million charge
to write off excess and slow moving inventory purchased in prior years, and a
$0.2 million charge related to the resolution of a vendor contract entered into
in a prior year.
Selling, General and Administrative ("SG&A") expenses for fiscal 2001
were $14.6 million, a decrease of $1.5 million over SG&A expenses of $16.1
million in fiscal 2000. The decrease in fiscal 2001 SG&A costs can be attributed
to cost reduction efforts initiated during the second quarter of fiscal 2000,
primarily the 15% salary staff reduction. As a percentage of net sales, fiscal
2001 SG&A expenses were 22.4% compared to 24.4% in fiscal 2000.
Interest expense decreased $0.2 million, or 10.5%, to $1.5 million in
fiscal 2001 from $1.7 million in fiscal 2000. Interest expense has been reduced
principally due to a reduction in interest rates.
The Company had income before taxes of $0.4 million in fiscal 2001,
compared to a loss before taxes of $2.4 million in fiscal 2000. The Company
recorded income tax expense of $0.2 million in fiscal 2001 compared to a benefit
for income taxes of $0.7 million in fiscal 2000. The fiscal 2001 income tax
provision benefited from the release of the valuation allowance for $0.3 million
in state net operating loss carryforwards. This valuation allowance was
previously established for the carryforwards due to uncertainty as to their
eventual utilization. For further discussion of the Company's income taxes
please refer to the "Notes to Consolidated Financial Statements" section
included in this Form 10-K.
Net income in fiscal 2001 was $0.2 million, or $0.03 per diluted share,
an improvement of $1.9 million from the net loss of $1.7 million, or $0.22 per
diluted share, in fiscal 2000. Earnings per share amounts are diluted earnings
per share, which are substantially the same as basic earnings per share. The
weighted number of shares used in the calculation of the diluted per share loss
was 8,125,699 in fiscal 2001 and 7,806,682 in fiscal 2000.
17
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information concerning Allied's
financial condition at June 30:
Dollars in thousands 2002 2001 2000
-------------------- ---- ---- ----
Cash and cash equivalents $ 1 $ 20 $568
Working Capital $9,371 $20,682 $20,261
Total Debt $12,121 $12,188 $14,073
Current Ratio 1.67:1 3.44:1 3.55:1
The Company's working capital was $9.4 million at June 30, 2002
compared to $20.7 million at June 30, 2001. The decrease in working capital is
primarily due to the classification of $7.1 million of revolving debt as a
current liability in fiscal 2002. Due to provisions in the Company's new credit
agreement which require a lock-box agreement whereby remittances from the
Company's customers automatically reduce the debt outstanding and the inclusion
of a subjective "material adverse effect" clause in the agreement, the Company
is required to classify amounts outstanding under its revolving debt as a
current liability. Inventory declined by $3.9 million, primarily as a result of
a $3.2 million increase to the Company's reserve for slow-moving and obsolete
inventory. During the fourth quarter of fiscal 2002, the Company implemented a
detailed review of inventory. This review indicated that due to changes in
product mix, other manufacturing changes to the Company's products, and declines
in sales levels, a large number of components were deemed to be obsolete.
Inventory reduction programs did result in an additional $0.7 million reduction
in inventory. Accounts receivable decreased to $8.5 million at June 30, 2002,
down $2.9 million from $11.4 million at June 30, 2001. This decrease in accounts
receivable is a result of decreased sales and an improvement in collection
performance. Accounts receivable as measured in days sales outstanding ("DSO")
decreased to 51 DSO at June 30, 2002 from 65 DSO at June 30, 2001. These working
capital reductions are partially offset by the following working capital
improvements during fiscal 2002. Operating losses generated in fiscal 2002 led
to a $0.7 million income tax receivable at June 30, 2002, representing the
federal income tax receivable resulting from the carry back of the fiscal 2002
loss, excluding the impact of the impairment of goodwill. Accounts payable
decreased to $3.4 million at June 30, 2002, down $0.4 million from $3.8 million
at June 30, 2001. Accrued liabilities decreased by $0.7 million due to decreases
in accrued income tax.
The Company's working capital was $20.7 million at June 30, 2001
compared to $20.3 million at June 30, 2000. Accounts receivable increased to
$11.4 million at June 30, 2001, up $0.9 million from $10.5 million at June 30,
2000. The increase in accounts receivable is a result of increased sales in the
fourth quarter of fiscal 2001 compared to the fourth quarter of fiscal 2000.
Accounts receivable as measured in DSO decreased to 65 DSO at June 30, 2001 from
68 DSO at June 30, 2000, as collection efforts have improved the average time
that is needed to collect from a customer. Collection efforts at the end of
fiscal 2000 were hampered by the temporary reassignment of the collection staff
to production and shipping assignments during the work stoppage by the union
work force at the St. Louis production facility. Inventories increased to $17.1
million at June 30, 2001 from $16.7 million at June 30, 2000. Programs and
policies were implemented during fiscal 2001 to reduce inventories, however, the
effect of these programs have not been realized at June 30, 2001. Accounts
payable decreased to $3.8 million at June 30, 2001, down $0.3 million from $4.1
million at June 30, 2000. Accrued liabilities increased by $0.6 million due to
increases in accrued income tax and accrued compensation expense.
The net decrease in cash for the fiscal years ended June 30, 2002,
2001, and 2000 was $0.02 million, $0.5 million, and $0.02 million, respectively.
Net cash provided by operating activities was $3.8 million, $2.1 million, and
$3.4 million for the same periods.
18
Cash flows provided by operating activities for the fiscal year ended
June 30, 2002 consisted of a net loss of $11.7 million, which was offset by $1.4
million in non-cash charges to operations for amortization and depreciation. The
net loss was also offset by a $9.6 million non-cash charge to operations for the
impairment of goodwill. Changes in the provision for product recall resulted in
a $0.1 million reduction. Changes in working capital and deferred tax accounts
favorably impacted cash flow from operations by $4.7 million. Cash flow was used
to reduce debt and capital lease obligations by $0.1 million and make capital
expenditures of $3.7 million.
Cash flows provided by operating activities for the fiscal year ended
June 30, 2001 consisted of a net income of $0.2 million, and $3.0 million in
non-cash charges to operations for amortization and depreciation. Changes in
working capital and deferred tax accounts unfavorably impacted cash flow from
operations by $1.1 million. Cash flow was used to reduce debt and capital lease
obligations by $1.9 million and make capital expenditures of $0.8 million.
Cash flows provided by operating activities for the fiscal year ended
June 30, 2000 consisted of a net loss of $1.7 million, which was offset by $3.3
million in non-cash charges to operations for amortization and depreciation. The
provision for product recall was reduced and used $0.4 million. Changes in
working capital and deferred tax accounts favorably impacted cash flow from
operations by $2.2 million. Cash flow was used to reduce debt and capital lease
obligations by $3.2 million and make capital expenditures of $0.3 million.
At June 30, 2002 the Company had aggregate indebtedness, including
capital lease obligations, of $12.1 million, including $8.0 million of
short-term debt and $4.1 million of long-term debt. At June 30, 2001 the Company
had aggregate indebtedness including capital lease obligations of $12.2 million,
including $1.2 million of short-term debt and $11.0 million of long-term debt.
On August 7, 1998, the Company obtained a $5.0 million mortgage loan on
its principal facility in St. Louis, Missouri with LaSalle National Bank
Association (the "Bank"). Under terms of this agreement the Company makes
monthly principal and interest payments, with a balloon payment in August 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%, compared to the then current rate of 9.0% under
the revolving credit agreement.
On September 8, 1998, the Company's credit facilities with Foothill
Capital Corporation (Foothill) 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 was reduced from the floating reference rate (6.75% at June
30, 2001) plus 0.50% to the floating reference rate plus 0.25%. The reference
rate as defined in the credit agreement, was 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 provided the Company
with a rate of LIBOR +2.5%. Amounts outstanding under this revolving credit
facility, which expires on January 6, 2003, totaled $7.5 million at June 30,
2001. At June 30, 2001, $5.0 million was available under the revolving facility
for additional borrowings based on working capital requirements under the terms
of the agreement.
On April 24, 2002, the Company entered into a new credit
facility arrangement with the Bank resulting in the payoff of all amounts due
Foothill. The new credit facility provides for total borrowings up to $19.0
million; consisting of up to $15.0 million through a revolving credit facility
and up to $4.0 million under a term loan. The term loan may be drawn against for
capital expenditures during the first six months of the term of the credit
facility. Repayment of the term loan begins on October 24, 2002, with principal
and interest due in equal monthly installments over five years (subject to
payment in full at the maturity of the credit facility if that facility is not
renewed or extended). The new credit facility is collateralized by substantially
all of the assets of the Company. The maturity date of the new facility is April
24, 2005.
19
The revolving credit facility provides for a borrowing base of 80% of
eligible accounts receivable plus the lesser of 50% of eligible inventory or
$8.0 million, subject to reserves as established by the Bank. At June 30, 2002,
$4.8 million was available under the revolving facility for additional
borrowings based on working capital requirements under the terms of the
agreement. The revolving credit facility also provides for a commitment guaranty
of up to $5.0 million for letters of credit and requires a per annum fee of
1.50% on outstanding letters of credit. At June 30, 2002 the Company had no
letters of credit outstanding. Any outstanding letters of credit decreases the
amount available for borrowing under the revolving credit facility.
The entire credit facility accrues interest at the floating reference
rate, which is the greater of the Bank's prime rate (plus 0.25% if the Company's
fixed charge coverage ratio falls below 1.25 to 1.00) or the Federal Funds rate
plus 0.5%. The floating reference rate was 4.75% at June 30, 2002. The credit
facility also provides the Company with a rate of LIBOR plus 2.25%, at the
Company's option. The optional LIBOR rate may increase or decrease from LIBOR
plus 2.00% to LIBOR plus 2.50% based on the Company's fixed charge coverage
ratio. At June 30, 2002, $5.6 million of the revolving credit facility was
subject to the LIBOR provision. The Company also has the option to swap the
interest rate applicable to the term loan for a fixed rate.
The new credit facility requires a lockbox arrangement, which provides
for all receipts to be swept daily to reduce borrowings outstanding under the
credit facility. This arrangement combined with the existence of a Material
Adverse Effect (MAE) clause in the new credit facility, this arrangement causes
the revolving credit facility to be classified as a current liability, per
guidance in the FASB's Emerging Issues Task Force Statement 95-22, "Balance
Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements
that Include Both a Subjective Acceleration Clause and a Lock-Box
Arrangement"(EITF 95-22). However, the Company does not expect to repay, or be
required to repay, within one year, the balance of the revolving credit facility
classified as a current liability. The MAE clause, which is a typical
requirement in commercial credit agreements, allows the lender to require the
loan to become due if it determines there has been a material adverse effect on
the operations, business, properties, assets, liabilities, condition or
prospects. The classification of the revolving credit facility as a current
liability is a result only of the combination of the two aforementioned factors:
the lockbox arrangement and the MAE clause. However, the revolving credit
facility does not expire or have a maturity date within one year, but rather has
a final expiration date of April 25, 2005. Additionally, the Bank has not
notified the Company of any indication of a MAE at June 30, 2002.
Under the terms of the new credit facility, the Company is required to
be in compliance with certain financial covenants pertaining to stockholders'
equity, capital expenditures and net income. At June 30, 2002, the Company was
in violation of its EBITDA (net income after taxes, plus interest expense,
income tax expense, and depreciation and amortization) covenant, and its fixed
charge coverage ratio covenant, which were waived by the bank in a letter dated
on September 25, 2002.
Proceeds of $8.0 million received under the new credit facility were
utilized to repay the entire amount outstanding under the Company's previous
revolving credit facility, which was thereby terminated.
20
The following table summarizes the Company's cash obligations at June
30, 2002:
Payments Due by Period
Less than 1-3 4-5 After 5
Contractual Obligations Total 1 year years years Years
- ----------------------------------------------------------------------------------------------------------------
Long-Term Debt $11,928,137 $645,778 $11,282,359 (1) $ -- $ --
Capital Lease Obligations 192,425 192,425 -- -- --
Operating Leases 466,603 248,705 173,457 44,441
Unconditional Purchase
Obligations -- -- -- -- --
Other Long-Term Obligations -- -- -- -- --
Total Contractual Cash
Obligations -- -- -- -- --
(1) Assumes the Company's revolving credit agreement currently classified as a
current liability subject to the provisions of EITF 95-22 will be paid at
maturity.
Capital expenditures, net of capital leases, were $3.7 million, $0.8
million and $0.3 million in fiscal 2002, 2001, and 2000, respectively. The
Company believes that cash flows from operations and available borrowings under
its credit facilities will be sufficient to finance fixed payments and planned
capital expenditures in 2003. Cash flows from operations may be negatively
impacted by decreases in sales, market conditions, and adverse changes in
working capital.
Inflation has not had a material effect on the Company's business or
results of operations. The Company makes its foreign sales in dollars and,
accordingly, sales proceeds are not affected by exchange rate fluctuations,
although the effect on its customers does impact the pace of incoming orders.
SEASONALITY AND QUARTERLY RESULTS
In past fiscal years, the Company has experienced moderate seasonal
increases in net sales during its second and third fiscal quarters (October 1
through March 31) which in turn have affected net income. Such seasonal
variations were likely attributable to an increase in hospital equipment
purchases at the beginning of each calendar year (which coincides with many
hospitals' fiscal years) and an increase in the severity of influenza during
winter months.
The following table sets forth selected operating results for the eight
quarters ended June 30, 2002. The information for each of these quarters is
unaudited, but includes all normal recurring adjustments which the Company
considers necessary for a fair presentation thereof. These operating results,
however, are not necessarily indicative of results for any future period.
Further, operating results may fluctuate as a result of the timing of orders,
the Company's product and customer mix, the introduction of new products by the
Company and its competitors, and overall trends in the health care industry and
the economy. While these patterns have an impact on the Company's quarterly
operations, the Company is unable to predict the extent of this impact in any
particular period.
21
Dollars in thousands, except per share data
June 30, March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
Three months ended, 2002 2002 2001 2001 2001 2001 2000 2000
- -------------------------------------------------------------------------------------------------------------------------------
Net sales $15,683 $15,188 $15,398 $14,146 $16,556 $16,643 $16,709 $15,020
Gross profit 567 3,391 3,627 2,831 4,705 4,175 4,176 3,607
Income (loss) from operations (12,177) 325 454 (532) 1,014 598 418 (20)
Net income (loss) (11,347) 29 97 (510) 631 40 (90) (347)
Basic and diluted earnings (1.44) -- 0.01 (0.07) 0.08 0.01 (0.01) (0.04)
(loss) per share
The results for the fourth quarter were effected by several unusual
items. As a result of the Company's annual impairment analysis of goodwill, the
Company recorded a $9.6 million goodwill impairment charge in the fourth quarter
of fiscal 2002. The goodwill impairment charge was primarily attributable to the
declining results in the disposable home care products line. In addition, during
the fourth quarter the Company recorded a pre-tax charge of $3.2 million to
increase its reserve for slow-moving and obsolete inventory. During the fourth
quarter of fiscal 2002, a detailed review of inventory was performed. This
review indicated that due to changes in product mix, other manufacturing changes
to the Company's products, and declines in sales levels, a large number of
component parts were deemed to be obsolete.
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. The Company intends to defend these claims in cooperation with its
insurers. Based on the progression of certain cases the Company recorded
additional charges to operations during fiscal 2001 for 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
judgments resulting from these claims over its self-insured retention will be
covered by the Company's product liability insurance.
In March through June 2000, the FDA conducted an inspection of the
Company's St. Louis facility and provided a written report, known as an "FDA
Form 483" or simply a "483," citing FDA observations concerning GMP compliance
and quality control issues applicable to demand valves, emergency ventilators,
circumcision clamps, and regulators. The Company provided a written response to
the FDA and in August 2000, the FDA issued a warning letter and requested that
the Company clarify and supplement its responses to the 483 observations. As a
result, the Company submitted to the FDA a written supplemental response and
defined actions to address the FDA concerns. The Company met with the FDA at
their Kansas City field office in March 2001 to discuss the responses and
actions. From October 27, 2001 to November 19, 2001 the FDA conducted a
follow-up inspection to the June 2000 inspection. On January 23, 2002, the FDA
released a copy of the establishment inspection report (EIR) for the October 27,
2001 to November 19, 2001 inspection and has indicated that the inspection is
closed. The Company intends to continue to conduct business in such a manner as
to avert any FDA action seeking to interrupt or suspend manufacturing or require
any recall or modification of products.
LSP OXYGEN REGULATOR RECALL
On February 4, 1999, Allied announced a voluntary recall of aluminum
oxygen regulators marketed under its Life Support Products label. These products
are used to regulate pressure of bottled oxygen for administration to patients
under emergency situations. Following reports of regulator fires, the Company
instituted the voluntary recall in May 1997, under which it provided retrofit
kits to prevent
22
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 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 introduced new brass
regulators and also offered a trade-in program to 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. The recall
is complete and a final audit of the results thereof was completed on December
22, 2000 by the FDA. As of June 30, 2002 the Company has incurred $1.5 million
for costs associated with the recall and considers expenditures associated with
the recall to be complete.
CRITICAL ACCOUNTING POLICIES:
In preparing financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. The Company evaluates estimates and judgments on an
ongoing basis, including those related to bad debts, inventory valuations,
property, plant and equipment, intangible assets, income taxes, and
contingencies and litigation. Estimates and judgments are based on historical
experience and on various other factors that may be reasonable under the
circumstances. Actual results may differ from these estimates. The following
areas are considered to be the Company's most significant accounting policies:
Revenue recognition:
Revenue is recognized for all sales, including sales to agents and
distributors, at the time products are shipped and title has transferred to the
customer, provided that a purchase order has been received or a contract has
been executed, there are no uncertainties regarding customer acceptance, the
sales price has been fixed and determinable and collectibility is deemed
probable. The Company's standard shipping terms are FOB shipping point. Sales
discounts, returns and allowances are included in net sales, and the provision
for doubtful accounts is included in selling, general and administrative
expenses. Additionally, it is the Company's practice to include revenues
generated from freight billed to customers in net sales with corresponding
freight expense included in cost of sales in the consolidated statement of
operations.
Inventory reserve for obsolete and excess inventory:
Inventory is recorded net of a reserve for obsolete and excess
inventory which is determined based on an analysis of inventory items with no
usage in the preceding year and greater than one year's usage on hand. This
analysis considers those identified inventory items to determine, in
management's best estimate, if parts can be used beyond one year, if there are
alternate uses or at what values such parts can be disposed for. During the
fiscal year ended June 30, 2002, the Company implemented this detailed analysis
of inventory in conjunction with its long-term product planning process. This
review indicated that due to changes in product mix, other manufacturing changes
to the Company's products, and declines in sales, a large number of component
parts were deemed to be obsolete, resulting in a $3.2 million charge to increase
the Company's reserve for obsolete and excess inventory. At June 30, 2002 and
2001, inventory is recorded net of a reserve for obsolete and excess inventory
of $4.8 million and $2.6 million, respectively.
Accounts receivable allowance for doubtful accounts:
Accounts receivable are recorded net of an allowance for doubtful
accounts which is determined based on an analysis of past due accounts and
accounts placed with collection agencies. At June 30, 2002 and 2001, accounts
receivable is recorded net of an allowance for doubtful accounts of $0.5 million
and $0.6 million, respectively.
23
Goodwill:
At June 30, 2002 and 2001, the Company has goodwill of $15.6 million
and $25.6 million, resulting form the excess purchase price over the fair value
of net assets acquired in business combinations. During fiscal 2002, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets", which establishes new accounting and reporting
standards for purchase business combinations and goodwill. As provided by SFAS
142, the Company ceased amortizing goodwill on July 1, 2001. During the first
half of fiscal 2002, the Company performed a transitional impairment analysis of
its goodwill as of the implementation date, following which the Company
concluded that there was no impairment of goodwill at July 1, 2001. The Company
recently completed the required annual impairment review of its goodwill at June
30, 2002, which resulted in a goodwill impairment loss of $9.6 million. The
Company intends to perform an impairment review upon the completion of each
fiscal year. The results of these annual impairment reviews are highly dependent
on managements' projection of future results of the Company and there can be no
assurance that at the time such reviews are completed a material impairment
charge will not be recorded.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141 (SFAS 141), "Business Combinations" and Statement of Financial
Accounting Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets."
SFAS 141 requires that business combinations initiated subsequent to June 30,
2001, must be accounted for by using the purchase method of accounting. SFAS 142
supersedes Accounting Principles Board (APB) Opinion No. 17, "Intangible
Assets," however, the new statement will carry forward provisions in APB Opinion
No. 17 related to internally developed intangible assets. SFAS 142 requires that
companies discontinue the amortization of goodwill. Early adoption of SFAS 142
was allowed for those companies with fiscal years beginning after March 15,
2001. The Company adopted and applied SFAS 142 as of July 1, 2001, the beginning
of fiscal 2002. SFAS 142 further requires companies to test goodwill and other
indefinite lived intangible assets on an annual basis for impairment.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets", which supersedes Statement of Financial Accounting Standards
No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets to be
Disposed Of" and the accounting and reporting provisions of APB No. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", for the disposal of a business. SFAS 144 provides a
single accounting model for long-lived assets to be disposed of. Although
retaining many of the fundamental recognition and measurement provisions of SFAS
121, the new rules change the criteria to be met to classify an asset as
held-for-sale. The new rules also broaden the criteria regarding classification
of a discontinued operation. The Company is required to adopt the provisions of
SFAS 144 effective July 1, 2002. Adoption of SFAS 144 is not expected to have a
material impact on the Company's results of operations, financial position or
cash flows.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145 (SFAS 145), "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," that supercedes
previous guidance for the reporting of gains and losses from extinguishment of
debt and accounting for leases, among other things. SFAS 145 requires that only
gains and losses from the extinguishment of debt that meet the requirements for
classification as "Extraordinary Items," as prescribed in Accounting Principles
Board Opinion No. 30, should be disclosed as such in the financial statements.
Previous guidance required all gains and losses from the extinguishment of debt
to be classified as "Extraordinary Items." This portion of SFAS 145 is effective
for fiscal years beginning after May 15, 2002, with restatement of prior periods
required. In addition, SFAS 145 amends Statement of Financial Accounting
Standards No. 13 (SFAS 13), "Accounting for Leases," as it relates to accounting
by a lessee for certain lease modifications. Under SFAS 13, if a capital lease
is modified in such a way that the change gives rise to a new agreement
classified as an operating lease, the assets and obligation are removed, a gain
or loss is recognized and the new lease is accounted for as an operating lease.
Under
24
SFAS 145, capital leases that are modified so the resulting lease agreement is
classified as an operating lease are to be accounted for under the
sale-leaseback provisions of Statement of Financial Accounting Standards No. 98
(SFAS 98), "Accounting for Leases." These provisions of SFAS 145 are effective
for transactions occurring after May 15, 2002. SFAS 145 will be applied as
required. Adoption of SFAS 145 is not expected to have a material impact on the
Company's results of operations, financial position or cash flows.
In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 (SFAS 146), "Accounting for Costs Associated with Exit or
Disposal Activities" which addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost
was recognized at the date of an entity's commitment to an exit plan. The
provisions of SFAS 146 are effective for exit or disposal activities initiated
after December 31, 2002. Adoption of SFAS 146 is not expected to have a material
impact on the Company's results of operations, financial position or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At June 30, 2002, the Company had $11.9 million in debt outstanding,
excluding capital leases, of which $3.5 million is a term loan with a fixed
interest rate of 7.75%. The remaining balance represents amounts outstanding
under the Company's revolving credit facility of $7.2 million and the Company's
capital expenditure loan for $1.2 million. The revolving credit facility and
capital expenditure loan bear an interest rate using the commercial bank's
"floating reference rate" or LIBOR as the basis, as defined in the loan
agreement, and therefore is subject to additional expense should there be an
increase in market interest rates. With respect to the Company's fixed-rate debt
outstanding at June 30, 2002, a 10% increase in interest rates would have
resulted in approximately $0.02 million decrease in the market value of the debt
and a 10% decrease in interest rates would have resulted in approximately $0.02
increase in the fair value of the debt with respect to the Company's
variable-debt.
The Company had no holdings of derivative financial or commodity
instruments at June 30, 2002. Allied Healthcare Products has international
sales, however these sales are denominated in U.S. dollars, mitigating foreign
exchange rate fluctuation risk.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following described consolidated financial statements of Allied
Healthcare Products, Inc. are included in response to this item:
Report of Independent Accountants.
Consolidated Statement of Operations for the fiscal years ended June
30, 2002, 2001 and 2000.
Consolidated Balance Sheet for the fiscal years ended June 30, 2002 and
2001.
Consolidated Statement of Changes in Stockholders' Equity for the
fiscal years ended June 30, 2002, 2001 and 2000.
Consolidated Statement of Cash Flows for the fiscal years ended June
30, 2002, 2001 and 2000.
Notes to Consolidated Financial Statements.
Schedule of Valuation and Qualifying Accounts and Reserves for the
years ended June 30, 2002, 2001, and 2000.
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Allied Healthcare Products, Inc.
In our opinion, the consolidated financial statements listed
in the accompanying index present fairly, in all material respects, the
financial position of Allied Healthcare Products, Inc. and its subsidiaries at
June 30, 2002 and 2001, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 2002, in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
St. Louis, Missouri
September 26, 2002
27
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended June 30, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Net sales $ 60,414,884 $ 64,927,678 $ 65,994,968
Cost of sales 49,998,428 48,265,110 50,510,411
----------------------- --------------------- ----------------------
Gross profit 10,416,456 16,662,568 15,484,557
Selling, general and administrative expenses 12,786,409 14,572,963 16,096,687
Provision for product recall (39,567) 79,303 (17,600)
Impairment of goodwill 9,600,000 -- --
----------------------- --------------------- ----------------------
Income (loss) from operations (11,930,386) 2,010,302 (594,530)
----------------------- --------------------- ----------------------
Other expenses:
Interest expense 1,054,092 1,530,481 1,664,477
Other, net 40,950 73,793 149,433
----------------------- --------------------- ----------------------
1,095,042 1,604,274 1,813,910
----------------------- --------------------- ----------------------
Income (loss) before provision (benefit) for
income taxes (13,025,428) 406,028 (2,408,440)
Provision (benefit) for income taxes (1,294,420) 171,892 (694,963)
----------------------- --------------------- ----------------------
Net income (loss) $ (11,731,008) $ 234,136 $ (1,713,477)
======================= ===================== ======================
Basic and diluted income (loss) per share:
Income (loss) per share $ (1.50) $ 0.03 $ (0.22)
======================= ===================== ======================
Weighted average shares outstanding - Basic 7,809,266 7,806,682 7,806,682
----------------------- --------------------- ----------------------
Weighted average shares outstanding - Diluted 7,809,266 8,125,699 7,806,682
----------------------- --------------------- ----------------------
See accompanying Notes to Consolidated Financial Statements
28
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
June 30, 2002 2001
- --------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 800 $ 20,365
Accounts receivable, net of allowance for doubtful
accounts of $450,000 and $605,714, respectively 8,524,187 11,395,224
Inventories, net 13,200,921 17,079,033
Deferred income taxes 745,910 369,453
Income tax receivable 745,895 --
Other current assets 163,510 292,596
---------------- ----------------
Total current assets 23,381,223 29,156,671
---------------- ----------------
Property, plant and equipment, net 13,228,157 10,892,268
Deferred income taxes 100,492 197,008
Goodwill 15,979,830 25,579,830
Other assets, net 180,536 107,377
---------------- ----------------
Total assets $52,870,238 $65,933,154
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,426,802 $ 3,843,092
Current portion of long-term debt 7,985,406 1,169,044
Accrual for product recall -- 146,181
Other accrued liabilities 2,598,140 3,316,015
---------------- ----------------
Total current liabilities 14,010,348 8,474,332
---------------- ----------------
Long-term debt 4,135,156 11,019,081
Commitments and contingencies (Notes 6 and 13) -- --
Stockholders' equity:
Preferred stock; $0.01 par value; 1,500,000 shares
authorized; no shares issued and outstanding -- --
Series A preferred stock; $0.01 par value; 200,000 shares
authorized; no shares issued and outstanding -- --
Common stock; $0.01 par value; 30,000,000 shares
authorized; 7,813,932 and 7,806,682 shares issued and
outstanding at June 30, 2002 and 2001 101,175 101,102
Additional paid-in capital 47,030,549 47,014,621
Retained earnings 8,324,438 20,055,446
Common stock in treasury, at cost (20,731,428) (20,731,428)
---------------- ----------------
Total stockholders' equity 34,724,734 46,439,741
---------------- ----------------
Total liabilities and stockholders' equity $52,870,238 $65,933,154
================ ================
See accompanying Notes to Consolidated Financial Statements
29
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Additional
Preferred Common paid-in Retained Treasury
Stock stock capital Earnings stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 $ -- $101,102 $47,014,621 $ 21,534,787 $(20,731,428) $47,919,082
Net loss for the year ended
June 30, 2000 -- -- -- (1,713,477) -- (1,713,477)
---------------- -------------- ----------------- ---------------- --------------------------------
Balance, June 30, 2000 -- 101,102 47,014,621 19,821,310 (20,731,428) 46,205,605
Net income for the year ended
June 30, 2001 -- -- -- 234,136 -- 234,136
---------------- -------------- ----------------- ---------------- --------------------------------
Balance, June 30, 2001 -- 101,102 47,014,621 20,055,446 (20,731,428) 46,439,741
Issuance of common stock -- 73 15,928 -- -- 16,001
Net loss for the year ended
June 30, 2002 -- -- -- (11,731,008) -- (11,731,008)
---------------- -------------- ----------------- ---------------- --------------------------------
Balance, June 30, 2002 $ -- $101,175 $47,030,549 $8,324,438 $(20,731,428) $ 34,724,734
================ ============== ================= ================ =============== ==============
See accompanying Notes to Consolidated Financial Statements
30
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended June 30, 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (11,731,008) $ 234,136 $ (1,713,477)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,389,254 2,954,090 3,332,350
Impairment of goodwill 9,600,000 -- --
Provision for product recall (39,567) 79,303 (17,600)
Deferred income taxes (279,941) (356,668) (645,048)
Changes in operating assets and liabilities:
Accounts receivable, net 2,871,037 (852,960) 2,058,901
Inventories, net 3,878,112 (336,855) 757,644
Income tax receivable (745,895) -- 1,635,866
Other current assets 129,086 65,811 (220,047)
Accounts payable (416,290) (212,647) (1,378,564)
Accrual for product recall (106,614) (118,363) (391,884)
Other accrued liabilities (717,875) 631,992 30,034
----------------- ------------------ ------------------
Net cash provided by operating activities 3,830,299 2,087,839 3,448,175
Cash flows from investing activities:
Capital expenditures (3,698,060) (751,205) (298,040)
----------------- ------------------ ------------------
Net cash used in investing activities (3,698,060) (751,205) (298,040)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 1,246,325 -- --
Proceeds from issuance of common stock 16,001 --
Payment of long-term debt (415,440) (413,313) (367,206)
Payment of capital lease obligations (552,146) (565,751) (569,679)
Borrowings under revolving credit agreements 64,209,225 63,807,625 69,661,053
Payments under revolving credit agreements (64,555,527) (64,713,027) (71,893,563)
Debt issuance costs (100,242) -- --
----------------- ------------------ ------------------
Net cash used in financing activities (151,804) (1,884,466) (3,169,395)
Net decrease in cash and equivalents (19,565) (547,832) (19,260)
Cash and equivalents at beginning of year 20,365 568,197 587,457
----------------- ------------------ ------------------
Cash and equivalents at end of year $ 800 $ 20,365 $ 568,197
================= ================== ==================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $1,116,711 $ 1,431,750 $ 1,662,150
Income taxes $ 658,780 $ 154,892 $ 252,869
See accompanying Notes to Consolidated Financial Statements
31
ALLIED HEALTHCARE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Allied Healthcare Products, Inc. (the "Company" or "Allied") is a
manufacturer of respiratory products used in the health care industry in a wide
range of hospital and alternate site settings, including post-acute care
facilities, home health care and trauma care. The Company's product lines
include respiratory care products, medical gas equipment and emergency medical
products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by Allied are described
below.
USE OF ESTIMATES
The policies utilized by the Company in the preparation of the
consolidated financial statements conform to accounting principles generally
accepted in the United States of America, and require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
amounts could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions and intercompany balances are eliminated.
RECLASSIFICATIONS
Certain financial statement amounts have been reclassified to conform
with the current year presentation.
REVENUE RECOGNITION
Revenue is recognized for all sales, including sales to agents and
distributors, at the time products are shipped and title has transferred to the
customer, provided that a purchase order has been received or a contract has
been executed, there are no uncertainties regarding customer acceptance, the
sales price is fixed and determinable and collectibility is deemed probable. The
Company's standard shipping terms are FOB shipping point. Sales discounts,
returns and allowances are included in net sales, and the provision for doubtful
accounts is included in selling, general and administrative expenses.
Additionally, it is the Company's practice to include revenues generated from
freight billed to customers in net sales with corresponding freight expense
included in cost of sales in the consolidated statement of operations.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less when acquired
to be cash equivalents. Book cash overdrafts on the Company's disbursement
accounts totaling $1,348,309 and $1,053,134 at June 30, 2002 and 2001,
respectively, are included in accounts payable.
FOREIGN CURRENCY TRANSACTIONS
Allied has international sales which are denominated in U.S. dollars,
the functional currency for these transactions.
32
CONCENTRATIONS OF CREDIT RISK
The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains
reserves for potential credit losses and historically such losses have been
within management's expectations. The Company's customers can be grouped into
three main categories: medical equipment distributors, construction contractors
and health care institutions. At June 30, 2002 the Company believes that it has
no significant concentration of credit risk.
INVENTORIES
Inventories are stated at the lower of cost, determined using the
last-in, first-out ("LIFO") method, or market. If the first-in, first-out method
(which approximates replacement cost) had been used in determining cost,
inventories would have been $692,128 and $758,770 higher at June 30, 2002 and
2001, respectively. Changes in the LIFO reserve are included in cost of sales.
Cost of sales were reduced by $66,642 and $84,000 in fiscal 2002 and 2001,
respectively, as a result of LIFO liquidations. Costs in inventory include raw
materials, direct labor and manufacturing overhead.
Inventory is recorded net of a reserve for obsolete and excess
inventory which is determined based on an analysis of inventory items with no
usage in the preceding year and greater than one year's usage on hand. At June
30, 2002 and 2001 the reserve for obsolete and excess inventory was $4,812,074
and $2,572,967, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and are depreciated
using the straight-line method over the estimated useful lives of the assets,
which range from 3 to 35 years. Properties held under capital leases are
recorded at the present value of the non-cancelable lease payments over the term
of the lease and are amortized over the shorter of the lease term or the
estimated useful lives of the assets. Expenditures for repairs, maintenance and
renewals are charged to income as incurred. Expenditures which improve an asset
or extend its estimated useful life are capitalized. When properties are retired
or otherwise disposed of, the related cost and accumulated depreciation are
removed from the accounts and any gain or loss is included in income.
GOODWILL
At June 30, 2002 and 2001, the Company has goodwill of $15,979,830 and
$25,579,830, resulting from the excess of the purchase price over the fair value
of net assets acquired in business combinations. During fiscal 2002, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets", which establishes new accounting and reporting
standards for purchase business combinations and goodwill. As provided by SFAS
142, the Company ceased amortizing goodwill on July 1, 2001. During the first
half of fiscal 2002, the Company performed the transitional impairment analysis
of its goodwill as of the implementation date, following which the Company
concluded that there was no impairment of goodwill at July 1, 2001. The Company
recently completed the required annual impairment review of its goodwill at June
30, 2002 which due to recent negative events and declining sales and
profitability, resulted in a goodwill impairment loss of $9,600,000. The Company
intends to perform an impairment review upon the completion of each fiscal year.
The results of these annual impairment reviews are highly dependent on
management's projection of future results of the Company and there can be no
assurance that at the time such reviews are completed a material impairment
charge will not be recorded. See Note 3 for additional disclosure.
OTHER ASSETS
Other assets are primarily comprised of debt issuance costs. These
costs are amortized using the effective interest rate method over the life of
the related obligations.
33
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates impairment of long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of. " SFAS
121 requires that long-lived assets and identifiable intangible assets to be
reviewed for impairment whenever events or changes in circumstances indicated
that the carrying amount of the assets may not be recoverable. Under SFAS 121,
if the sum of the expected future cash flows (undiscounted and without interest
charges) of the long-lived assets is less than the carrying amount of such
assets, an impairment loss will be recognized. No impairment losses of
long-lived assets or identifiable intangibles were recorded by the Company for
fiscal years ended June 30, 2002 and 2001.
In August 2001, the FASB issued Statement of Financial Accounting
Standard No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets", which supersedes Statement of Financial Accounting Standards
No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets to be
Disposed Of" and the accounting and reporting provisions of APB No. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", for the disposal of a business. SFAS 144 provides a
single accounting model for long-lived assets to be disposed of. Although
retaining many of the fundamental recognition and measurement provisions of SFAS
121, the new rules change the criteria to be met to classify an asset as
held-for-sale. The new rules also broaden the criteria regarding classification
of a discontinued operation. The Company is required to adopt the provisions of
SFAS 144 effective July 1, 2002. Adoption of SFAS 144 is not expected to have a
material impact on the Company's results of operations, financial position or
cash flows.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts
receivable, accounts payable and debt. The carrying amounts for cash, accounts
receivable and accounts payable approximate their fair value due to the short
maturity of these instruments. The fair value of long-term debt, excluding
capital leases, was $12.0 million and $11.5 million at June 30, 2002 and 2001,
respectively, and the related carrying amounts were $11.9 million and $11.4
million, respectively. The Company estimated the fair value of its long-term,
fixed-rate debt using a discounted cash flow analysis based on the Company's
current borrowing rates for debt with similar maturities.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
SFAS 109, the deferred tax provision is determined using the liability method,
whereby deferred tax assets and liabilities are recognized based upon temporary
differences between the financial statement and income tax bases of assets and
liabilities using presently enacted tax rates. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred and are
included in selling, general and administrative expenses. Research and
development expenses for the years ended June 30, 2002, 2001 and 2000 were
$622,793, $592,815 and $726,315, respectively.
EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of
shares of common stock outstanding during the year. Diluted earnings per share
are based on the sum of the weighted averaged number of shares of common stock
and common stock equivalents outstanding during the year. The weighted average
number of basic shares outstanding for the years ended June 30, 2002, 2001 and
2000 was 7,809,266, 7,806,682, and 7,806,682 shares, respectively. The weighted
average number of diluted shares outstanding for the years ended June 30, 2002,
2001 and 2000 was 7,809,266, 8,125,699, and
34
7,806,682 shares, respectively. The dilutive effect of Company's employee's and
director's stock option plans are determined by use of the treasury stock
method. Employee and director stock option plans are not included as common
stock equivalents for earnings per share purposes in fiscal 2002 and 2000 as the
impact on the number of shares outstanding would have been anti-dilutive.
EMPLOYEE STOCK-BASED COMPENSATION
The Company accounts for employee stock options and variable stock
awards in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and its related
interpretations. Under APB 25, the Company applies the intrinsic value method of
accounting. For employee stock options accounted for using the intrinsic value
method, no compensation expense is recognized because the options are granted
with an exercise price equal to the market value of the stock on the date of
grant.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") prescribes the recognition of
compensation expense based on the fair value of options or stock awards
determined on the date of grant. Companies that elect to account for stock-based
compensation plans in accordance with APB 25 are required to make certain pro
forma disclosures as if the fair value method had been utilized. See Note 9 for
additional disclosure.
NEW ACCOUNTING STANDARDS
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145 (SFAS 145), "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," that supercedes
previous guidance for the reporting of gains and losses from extinguishment of
debt and accounting for leases, among other things. SFAS 145 requires that only
gains and losses from the extinguishment of debt that meet the requirements for
classification as "Extraordinary Items," as prescribed in Accounting Principles
Board Opinion No. 30, should be disclosed as such in the financial statements.
Previous guidance required all gains and losses from the extinguishment of debt
to be classified as "Extraordinary Items." This portion of SFAS 145 is effective
for fiscal years beginning after May 15, 2002, with restatement of prior periods
required. In addition, SFAS 145 amends Statement of Financial Accounting
Standards No. 13 (SFAS 13), "Accounting for Leases," as it relates to accounting
by a lessee for certain lease modifications. Under SFAS 13, if a capital lease
is modified in such a way that the change gives rise to a new agreement
classified as an operating lease, the asset and obligations are removed, a gain
or loss is recognized and the new lease is accounted for as an operating lease.
Under SFAS 145, capital leases that are modified so the resulting lease
agreement is classified as an operating lease are to be accounted for under the
sale-leaseback provisions of Statement of Financial Accounting Standards No. 98
(SFAS 98), "Accounting for Leases." These provisions of SFAS 145 are effective
for transactions occurring after May 15, 2002. Adoption of SFAS 145 is not
expected to have a material impact on the Company's results of operations,
financial position or cash flows.
In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 (SFAS 146), "Accounting for Costs Associated with Exit or
Disposal Activities" which addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost
was recognized at the date of an entity's commitment to an exit plan. The
provisions of SFAS 146 are effective for exit or disposal activities initiated
after December 31, 2002. Adoption of SFAS 146 is not expected to have a material
impact on the Company's results of operations, financial position or cash flows.
3. GOODWILL
For the fiscal year ending June 30, 2002, the Company adopted SFAS 142,
"Goodwill and Other Intangible Assets" which establishes new accounting and
reporting standards for purchase business combinations and goodwill. As provided
by SFAS 142, the Company ceased amortizing goodwill on July
35
1, 2001. The following table summarizes the effect of adoption of SFAS 142 on
net income/(loss) and earnings/(loss) per share.
For the year ended June 30,
2002 2001 2000
-------------- ----------- -----------
Reported net income / (loss) $ (11,731,008) $ 234,136 $(1,713,477)
Add back: Goodwill amortization -- 815,411 815,411
-------------- ----------- -----------
Adjusted net income / (loss) $ (11,731,008) $ 1,049,547 $ (898,066)
BASIC AND DILUTED EARNINGS / (LOSS) PER
SHARE:
Reported net earnings / (loss) per share $ (1.50) $ 0.03 $ (0.22)
Goodwill amortization per share --
0.10 0.10
-------------- ----------- -----------
Adjusted earnings/ (loss) per share $ (1.50) $ 0.13 $ (0.12)
-------------- ----------- -----------
Summarized goodwill activity for fiscal 2002 is as follows:
Goodwill at June 30, 2001 $ 25,579,830
Impairment charge (9,600,000)
------------
Goodwill at June 30, 2002 $ 15,979,830
============
As required by SFAS 142, the Company completed its transitional
goodwill impairment analysis as of July 1, 2001, for which it concluded that the
carrying value of its goodwill was not impaired. The fair value of the Company
utilized in the transitional goodwill impairment analysis was estimated using a
discounted cash flow approach incorporating the Company's fiscal 2002 plan.
The Company completed its annual goodwill impairment test during the
fourth quarter of the fiscal year ended June 30, 2002. Due to operating
inefficiencies, a general slow down in orders, and delivery issues, which led to
a drop in market share, operating profits and cash flows were lower than
expected during fiscal 2002. Based on that trend, management revised its
earnings forecast for fiscal 2003. During the fourth quarter of the fiscal year
ended June 30, 2002, the Company recognized a goodwill impairment loss of
$9,600,000. The fair value of the Company was estimated using a discounted cash
flow approach incorporating its most recent business plan forecasts in the
performance of its annual analysis of goodwill impairment.
4. LSP OXYGEN REGULATOR RECALL
On February 4, 1999, Allied announced a voluntary 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 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
introduced new brass regulators and also offered 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. The original provision for regulator recall included
estimated costs of $1.3 million for
36
aluminum regulator retrofitting and replacement, as well as $0.2 million for
certain communications and legal costs expected to be incurred by the Company
under the terms of the recall.
A reconciliation of activity with respect to the Company's product
recall is as follows:
2002 2001 2000 1999
----------- ----------- ----------- -----------
Balance, beginning of year $ 146,181 $ 185,241 $ 594,725 $ --
Provision for recall established -- -- -- 1,500,000
Addition to provision for recall -- 79,303 300,000 --
Reduction to provision for recall (39,567) -- (317,600) --
Costs incurred related to product retrofitting and
replacement (106,614) (118,363) (391,884) (905,275)
----------- ----------- ----------- -----------
Balance, end of year $ -- $ 146,181 $ 185,241 $ 594,725
=========== =========== =========== ===========
During the first quarter of fiscal 2000, the Company recorded an
additional provision of $0.3 million relative to the regulator recall. The
addition represented a provision for additional aluminum regulator inventory not
identified as part of the original $1.5 million estimate. The $0.3 million
reduction to the provision in fiscal 2000 represented the subsequent disposal of
the aluminum regulator inventory on a basis more favorable than originally
estimated. During fiscal 2001, the Company recorded an additional provision of
$0.1 million for the estimated additional cost to be incurred for product
retrofitting and replacement. During fiscal 2002, the provision was reduced by
$0.04 million, as the recall is considered complete at June 30, 2002.
The Company has incurred various legal expenses related to claims
associated with the LSP regulator recall. Accordingly, the Company recorded an
additional provision for product liability litigation during fiscal 2001 for
amounts estimated to be payable by the Company under its self-insurance
retention for legal costs associated with defending these claims. These amounts
are included along with other legal expenses of the Company as selling, general
and administrative expenses. At June 30, 2002, the Company has a litigation cost
accrual balance of $0.1 million for legal expense associated to the LSP
regulator recall.
The Company received notification from the FDA that the recall was
complete in December 2000. As of June 30, 2002 the Company has incurred $1.5
million for costs associated with the recall and considers expenditures
associated with the recall to be complete.
37
5. FINANCING
Long-term debt consisted of the following at June 30,:
2002 2001
------------ ------------
UNSUBORDINATED DEBT
Notes payable to bank or other financial lending institution
Term loan on real estate -- principal due in varying monthly maturities
ranging from $27,714 to $40,518
with remaining balance due August 1, 2003 $ 3,534,609 $ 3,950,049
Revolving credit facility -- aggregate revolving commitment of
$15,000,000; principal due at maturity on April 24, 2005 7,147,203 --
Revolving credit facility -- aggregate revolving commitment of
$25,000,000; repaid during fiscal 2002 -- 7,493,505
Term loan on capital expenditures -- principal due over 60 months with
remaining balance due on April 24, 2005
1,246,325 --
------------ ------------
11,928,137 11,443,554
------------ ------------
SUBORDINATED DEBT
Capital lease obligations 192,425 744,571
------------ ------------
12,120,562 12,188,125
Less -- Current portion of long-term debt, including $192,425 and $744,571 of
capital lease obligations at June 30, 2002 and June 30,
2001, respectively (7,985,406) (1,169,044)
------------ ------------
$ 4,135,156 $ 11,019,081
============ ============
On August 7, 1998, the Company borrowed approximately $5.0 million from
a bank. The real estate term loan is collateralized by the Company's St. Louis
facility. The real estate term 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 term loan was amended on March 24 and September
1, 1999 resulting in changes to certain debt covenants for which the Company was
in compliance at June 30, 2002 and 2001.
On September 8, 1998, the Company's revolving credit facility with a
bank was amended. As amended, the revolving credit facility provides for
borrowings up to $25.0 million. The revolving credit facility provided a
borrowing base of the lesser of 85% of eligible accounts receivable or $8.0
million plus the lesser of 45% of eligible inventory or $10.0 million, adjusted
as deemed appropriate by the bank. At June 30, 2001 $5.0 million was available
under the revolving credit facility for additional borrowings. The revolving
credit facility accrued interest at the floating reference rate (6.75% at June
30, 2001) plus 0.25%, as defined in the agreement. The amended revolving credit
facility also provided the Company with a rate of LIBOR + 2.50%. At June 30,
2001 no portion of the revolving credit facility was subject to the LIBOR
provision. The amended revolving credit facility was collateralized by
substantially all of the assets of the company. On June 28, 1999, the Company's
credit facilities with a bank were further amended. The amendment provided 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 for which the
Company was in compliance at June 30, 2001.
38
The revolving credit facility also provided for a commitment guarantee
up to a maximum of $3.0 million for letters of credit and required a per annum
fee of 0.75% on unused letters of credit. At June 30, 2001 and 2000, the Company
had no letters of credit outstanding.
On April 24, 2002, the Company entered into a new credit facility
arrangement with LaSalle Bank National Association (the "Bank"). The new credit
facility provides for total borrowings up to $19.0 million; consisting of up to
$15.0 million through a revolving credit facility and up to $4.0 million under a
term loan. The term loan may be drawn against for capital expenditures during
the first six months of the term of the credit facility. Repayment of the term
loan begins on October 24, 2002, with principal and interest due in equal
monthly installments over five years (subject to payment in full at the maturity
of the credit facility if that facility is not renewed or extended). The new
credit facility is collateralized by substantially all of the assets of the
Company. The maturity date of the new facility is April 24, 2005.
The revolving credit facility provides for a borrowing base of 80% of
eligible accounts receivable plus the lesser of 50% of eligible inventory or
$8.0 million, subject to reserves as established by the Bank. At June 30, 2002,
$4.8 million was available under the revolving credit facility for additional
borrowings. The new credit facility calls for a 0.25% commitment fee payable
quarterly based on the average daily unused portion of the revolving credit
facility. The revolving credit facility also provides for a commitment guaranty
of up to $5.0 million for letters of credit and requires a per annum fee of
1.50% on outstanding letters of credit. At June 30, 2002 the Company had no
letters of credit outstanding. Any outstanding letters of credit decreases the
amount available for borrowing under the revolving credit facility.
The entire credit facility accrues interest at the floating reference
rate, which is the greater of the Bank's prime rate (plus 0.25% if the Company's
fixed charge coverage ratio falls below 1.25 to 1.00) or the Federal Funds rate
plus 0.5%. The floating reference rate was 4.75% at June 30, 2002. The credit
facility also provides the Company with a rate of LIBOR plus 2.25%, at the
Company's option. The optional LIBOR rate may increase or decrease from LIBOR
plus 2.00% to LIBOR plus 2.50% based on the Company's fixed charge coverage
ratio. The 90 day LIBOR rate was 1.90% at June 30, 2002. At June 30, 2002, $5.6
million of the revolving credit facility was subject to the LIBOR provision. The
Company also has the option to swap the interest rate applicable to the term
loan for a fixed rate.
The new credit facility requires lockbox arrangement, which provide for
all receipts to be swept daily to reduce borrowings outstanding under the credit
facility. This arrangement, combined with the existence of a Material Adverse
Effect (MAE) clause in the new credit facility, cause the revolving credit
facility to be classified as a current liability, per guidance in the FASB's
Emerging Issues Task Force Issue 95-22, "Balance Sheet Classification of
Borrowings Outstanding under Revolving Credit Agreements that Include Both a
Subjective Acceleration Clause and a Lock-Box Arrangement." However, the Company
does not expect to repay, or be required to repay, within one year, the balance
of the revolving credit facility classified as a current liability. The MAE
clause, which is a typical requirement in commercial credit agreements, allows
the lender to require the loan to become due if it determines there has been a
material adverse effect on the Company's operations, business, properties,
assets, liabilities, condition or prospects. The classification of the revolving
credit facility as a current liability is a result only of the combination of
the two aforementioned factors: the lockbox arrangement and the MAE clause.
However, the revolving credit facility does not expire or have a maturity date
within one year, but rather has a final expiration date of April 25, 2005.
Additionally, the Bank has not notified the Company of any indication of a MAE
at June 30, 2002.
Under the terms of the new credit facility, the Company is required to
be in compliance with certain financial covenants pertaining to stockholders'
equity, capital expenditures and net income. At June 30, 2002, the Company was
in violation of its EBITDA (net income after taxes, plus interest expense,
income tax expense, and depreciation and amortization) covenant, and its fixed
charge coverage ratio covenant, which were waived by the bank in a letter dated
on September 25, 2002. See Note 15 for further discussion. Additionally, the
terms of the new credit facility restrict the Company from the payment of
dividends on any class of its stock.
39
Proceeds of $8.0 million received under the new credit facility were
utilized to repay the entire amount outstanding under the Company's previous
revolving credit facility. The previous credit facility was thereby terminated.
Aggregate maturities of long-term debt, excluding capital leases, for
each of the three fiscal years subsequent to June 30, 2002 are as follows,
assuming that the Company's bank does not claim a MAE with respect to the
revolving credit facility. While the revolving credit facility is classified as
a current liability, it is not expected to mature until 2005.
Fiscal Revolving Real Estate Capital Expenditure
Year Credit Facility Term Loan Term Loan Total
- ------ --------------- ----------- ------------------- -----------
2003 $ -- $ 458,829 $ 186,949 $ 645,778
2004 -- 3,075,780 249,265 3,325,045
2005 7,147,203 -- 810,111 7,957,314
----------- ----------- ----------- -----------
$ 7,147,203 $ 3,534,609 $ 1,246,325 $11,928,137
=========== =========== =========== ===========
6. LEASE COMMITMENTS
The Company leases certain of its manufacturing equipment under
non-cancelable lease agreements. These agreements extend for a period of 12
months and contain purchase or renewal options on a month-to-month basis. The
leases are reflected in the consolidated financial statements as capitalized
leases in accordance with the requirements of Statement of Financial Accounting
Standards No. 13 ("SFAS 13"), "Accounting for Leases". In addition, the Company
leases certain office equipment under non-cancelable operating leases.
Minimum lease payments under long-term capital leases and operating
leases at June 30, 2002 are as follows:
Capital Operating
Fiscal Year Leases Leases
----------- --------- ---------
2003 $ 198,839 $ 248,705
2004 -- 136,990
2005 -- 36,467
2006 -- 28,068
2007 -- 16,373
--------- ---------
Total minimum lease payments 198,839 $ 466,603
--------- =========
Less amount representing interest (6,414)
---------
Present value of future net minimum lease payments, including
current portion of $192,425 $ 192,425
=========
Rental expense incurred on operating leases in fiscal 2002, 2001, and
2000 totaled $489,154, $658,426 and $678,888, respectively.
40
7. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
2002 2001 2000
----------- ----------- -----------
Current:
Federal $(1,014,479) $ 528,560 $ (49,915)
State -- -- --
----------- ----------- -----------
Total current (1,014,479) 528,560 (49,915)
----------- ----------- -----------
Deferred:
Federal (124,267) (110,410) (561,137)
State (155,674) (246,258) (83,911)
----------- ----------- -----------
Total deferred (279,941) (356,668) (645,048)
----------- ----------- -----------
$(1,294,420) $ 171,892 $ (694,963)
=========== =========== ===========
Income taxes were 9.9%, 42.3%, and 28.9% of pre-tax earnings (losses)
in 2002, 2001, and 2000, respectively. The Company reversed $0.3 million in
deferred tax valuation allowances during fiscal 2001 pursuant to the Company's
reassessment of the underlying deferred tax assets and determination that it is
more likely than not that the deferred tax assets will be fully utilized. A
reconciliation of income taxes, with the amounts computed at the statutory
federal rate is as follows:
2002 2001 2000
----------- ----------- -----------
Computed tax at federal statutory rate $(4,428,646) $ 138,050 $ (818,869)
State income taxes, net of federal tax benefit (88,959) 43,779 (55,381)
Non deductible goodwill 3,264,000 277,240 277,240
Change in valuation allowance -- (325,391) --
Other, net (40,815) 38,214 (97,953)
----------- ----------- -----------
Total $(1,294,420) $ 171,892 $ (694,963)
=========== =========== ===========
The deferred tax assets and deferred tax liabilities recorded on the
balance sheet as of June 30, 2002 and 2001 are as follows:
2002 2001
---- ----
Deferred Deferred Tax Deferred Deferred Tax
Tax Assets Liabilities Tax Assets Liabilities
---------- ------------ ---------- ------------
Current:
Bad debts $ 175,500 $ -- $ 236,228 $ --
Accrued liabilities 319,868 -- 328,817 --
Inventory 192,042 -- -- 646,275
Other property basis 58,500 -- 450,683 --
---------- ------------ ---------- ------------
745,910 -- 1,015,728 646,275
---------- ------------ ---------- ------------
Non Current:
Depreciation -- 131,295 107,753 --
Other property basis -- 125,116 -- 147,192
Intangible assets 158,480 -- 176,737 --
Net operating loss carryforward 302,059 -- 170,998 --
Other -- 103,636 -- 111,288
---------- ------------ ---------- ------------
460,539 360,047 455,488 258,480
---------- ------------ ---------- ------------
---------- ------------ ---------- ------------
Total deferred taxes $1,206,449 $ 360,047 $1,471,216 $ 904,755
========== ============ ========== ============
41
8. RETIREMENT PLAN
The Company offers a retirement savings plan under Section 401(k) of
the Internal Revenue Code to certain eligible salaried employees. Each employee
may elect to enter a written salary deferral agreement under which a portion of
such employee's pre-tax earnings may be contributed to the plan.
During the fiscal years ended June 30, 2002, 2001 and 2000, the Company
made contributions of $252,997, $234,472, and $296,134, respectively.
9. STOCKHOLDERS' EQUITY
The Company has established a 1991 Employee Non-Qualified Stock Option
Plan, a 1994 Employee Stock Option Plan, and a 1999 Incentive Stock Plan
(collectively the "Employee Plans"). The Employee Plans provide for the granting
of options to the Company's executive officers and key employees to purchase
shares of common stock at prices equal to the fair market value of the stock on
the date of grant. Options to purchase up to 1,800,000 shares of common stock
may be granted under the Employee Plans. Options generally become exercisable
ratably over a four year period or one-fourth of the shares covered thereby on
each anniversary of the date of grant, commencing on the first or second
anniversary of the date granted, except certain options granted under the 1994
Employee Stock Option Plan which become exercisable when the fair market value
of the common stock exceeds required levels. The right to exercise the options
expires in ten years, from the date of grant, or earlier if an option holder
ceases to be employed by the Company.
In addition, the Company has established a 1991 Directors Non-Qualified
Stock Option Plan and a 1995 Directors Non-Qualified Stock Option Plan
(collectively the "Directors Plans"). The Directors Plans provide for the
granting of options to the Company's directors who are not employees of the
Company to purchase shares of common stock at prices equal to the fair market
value of the stock on the date of grant. Options to purchase up to 250,000
shares of common stock may be granted under the Directors Plans. Options shall
become exercisable with respect to one-fourth of the shares covered thereby on
each anniversary of the date of grant, commencing on the second anniversary of
the date granted, except for certain options granted under the 1995 Directors
Non-Qualified Stock Option Plan which become exercisable with respect to all of
the shares covered thereby one year after the grant date. The right to exercise
the options expires in ten years from the date of grant, or earlier if an option
holder ceases to be a director of the Company.
42
A summary of stock option transactions in 2002, 2001 and 2000,
respectively, pursuant to the Employee Plans and the Directors Plans is as
follows:
Weighted Average Shares Subject
Price To Option
---------------------- ------------------
June 30, 1999 $7.13 529,750
Options granted 2.00 567,500
Options exercised --
Options canceled 7.89 (329,500)
------------------
June 30, 2000 $3.50 767,750
------------------
Exercisable at June 30, 2000 227,000
==================
June 30, 2000 $3.50 767,750
Options granted 3.17 95,500
Options exercised --
Options canceled 3.04 (67,850)
------------------
June 30, 2001 $3.50 795,400
------------------
Exercisable at June 30, 2001 369,025
==================
June 30, 2001 $3.50 795,400
Options granted 3.40 35,500
Options exercised 2.21 (7,250)
Options canceled 6.43 (27,350)
------------------
June 30, 2002 $3.41 796,300
------------------
Exercisable at June 30, 2002 525,675
==================
The following table provides additional information for options
outstanding and exercisable at June 30, 2002.
OPTIONS OUTSTANDING
Weighted Average Weighted Average
Range of Prices Number Remaining Life Exercise Price
- -------------------- ----------------- ---------------------- ---------------------
$ 1.00-1.99 14,250 6.8 years $1.88
2.00 542,000 7.3 years 2.00
2.01-6.99 126,500 8.2 years 3.81
7.00-7.99 66,000 5.4 years 7.50
8.00-18.50 47,550 2.8 years 13.16
-----------------
$1.00-18.50 796,300 7.0 years $3.41
OPTIONS EXERCISABLE
Weighted Average
Range of Prices Number Exercise Price
- -------------------- ----------------- ----------------------
$ 1.00-1.99 6,750 $1.88
2.00 372,625 2.00
2.01-6.99 46,000 4.58
7.00-7.99 52,750 7.48
8.00-18.50 47,550 13.16
-----------------
$1.00-18.50 525,675 $ 3.79
43
The Company has elected to follow the provisions prescribed by APB 25
and its related interpretations, for financial reporting purposes, whereby the
difference between the exercise price and the fair value at the date of grant is
recognized as compensation expense.
The Company has elected to follow the disclosure provisions of SFAS No,
123. Accordingly, no compensation expense has been recognized for the plans
under the provisions of SFAS No. 123. Had compensation cost for the plans been
determined based upon the fair value at the grant date for employee awards under
the Plan consistent with the methodology prescribed under SFAS No. 123, the
Company's net loss would have been increased or decreased, respectively, to the
following pro forma amount (in thousands, except per share).
2002 2001 2000
---------------- ------------------ -------------------
Reported net income/( loss) $(11,731) $234 $(1,713)
Pro forma net income/(loss) $(11,925) $45 $(1,918)
Basic and diluted earnings per share - as reported $(1.50) $0.03 $(0.22)
Basic and diluted earnings per share - pro forma $(1.53) $0.01 $(0.25)
The fair value of options granted, which is amortized to expense over
the option vesting period in determining the pro forma impact, has been
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions:
2002 2001 2000
---------------- ------------------ -------------------
Expected life of option 10 years 10 years 10 years
Risk-free interest rate 4.87% 5.00% 5.90%
Expected volatility 47% 49% 50%
Expected dividend yield 0% 0% 0%
The weighted-average fair value of options granted during fiscal 2002, 2001 and
2000 determined using the Black-Scholes options pricing model is as follows:
2002 2001 2000
---------------- ------------------ -------------------
Per share value $2.22 $2.20 $1.38
Aggregate value (in thousands) $79 $210 $780
44
STOCKHOLDER RIGHTS PLAN
The Board of Directors adopted a Stockholder Rights Plan in 1996 that
would permit stockholders to purchase common stock at prices substantially below
market value under certain change-in-control scenarios. At June 30, 2001 , no
common stock has been purchased under this plan.
10. EXPORT SALES
Export sales for the years ended June 30, 2002, 2001, and 2000 are
approximately as follows (in thousands):
2002 2001 2000
------------- ------------- ------------
Europe $1,400 $1,500 $2,100
Canada 1,300 1,500 1,800
Latin America 2,900 3,200 3,900
Middle East 1,100 1,200 1,300
Far East 2,300 4,200 2,600
Other 800 2,100 900
------------- ------------- ------------
$9,800 $13,700 $12,600
============= ============= ============
45
11. SUPPLEMENTAL BALANCE SHEET INFORMATION
June 30,
2002 2001
--------------------- --------------------
INVENTORIES
Work in progress $ 541,855 $ 922,781
Component parts 13,176,743 13,829,587
Finished goods 4,294,397 4,899,632
Reserve for obsolete and excess inventory (4,812,074) (2,572,967)
--------------------- --------------------
$ 13,200,921 $ 17,079,033
===================== ====================
Estimated
Useful Life
(years)
PROPERTY, PLANT AND EQUIPMENT
Machinery and equipment 5-10 $19,161,575 $15,670,224
Buildings 28-35 11,935,298 11,928,686
Land and land improvements 5-7 934,216 934,216
Property held under capital leases 5 -- 4,518,761
--------------------- --------------------
Total property, plant and equipment at cost 32,031,089 33,051,887
Less accumulated depreciation and amortization,
including $0 and $4,260,952, respectively,
related to property held under capital leases (18,802,932) (22,159,619)
--------------------- --------------------
$13,228,157 $10,892,268
===================== ====================
OTHER ACCRUED LIABILITIES
Accrued compensation expense $1,301,203 $1,114,128
Accrued interest expense 26,849 89,468
Accrued income tax 830,503 1,621,785
Other 439,585 490,634
--------------------- --------------------
$2,598,140 $3,316,015
===================== ====================
12. COMMITMENTS AND CONTINGENCIES
The Company is subject to various investigations, claims and legal
proceedings covering a wide range of matters that arise in the ordinary course
of its business activities. In March through June 2000, the FDA conducted an
inspection of the Company's St. Louis facility and provided a written report,
known as an "FDA Form 483" or simply a "483," citing FDA observations concerning
GMP compliance and quality control issues applicable to demand valves, emergency
ventilators, circumcision clamps, and regulators. The Company provided a written
response to the FDA and in August 2000, the FDA issued a warning letter and
requested that the Company clarify and supplement its responses to the 483
observations. As a result, the Company submitted to the FDA a written
supplemental response and defined actions to address the FDA concerns. The
Company met with the FDA at their Kansas City field office in March 2001 to
discuss the responses and actions. From October 27, 2001 to November 19, 2001
the FDA conducted a follow-up inspection to the June 2000 inspection. On January
23, 2002, the FDA released a copy of the establishment report (EIR) for the
October 27, 2001 to November 19, 2001 inspection and has indicated that the
inspection is closed. The Company intends to continue to conduct business in
such a manner as to avert any FDA action seeking to interrupt or suspend
manufacturing or require any recall or modification of products.
46
The Company has recognized the costs and associated liabilities only
for those investigations, claims and legal proceedings for which, in its view,
it is probable that liabilities have been incurred and the related amounts are
estimable. Based upon information currently available, management believes that
existing accrued liabilities are sufficient and that it is not reasonably
possible at this time that any additional liabilities will result from the
resolution of these matters that would have a material adverse effect on the
Company's consolidated results of operations, financial position, or cash flows.
13. SEGMENT INFORMATION
The Company operates in one segment consisting of the manufacturing,
marketing and distribution of a variety of respiratory products used in the
health care industry to hospitals, hospital equipment dealers, hospital
construction contractors, home health care dealers and emergency medical product
dealers. The Company's product lines include respiratory care products, medical
gas equipment and emergency medical products. The Company does not have any one
single customer that represents more than 10 percent of total sales.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for fiscal 2002 and 2001 appears
below (all amounts in thousands except per share data):
June 30, March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
Three months ended, 2002 2002 2001 2001 2001 2001 2000 2000
- --------------------------------------------------------------------------------------------------------------------------
Net sales $ 15,683 $15,188 $15,398 $ 14,146 $ 16,556 $ 16,643 $16,709 $ 15,020
Gross profit 567 3,391 3,627 2,831 4,705 4,175 4,176 3,607
Income (loss) from operations (12,177) 325 454 (532) 1,014 598 418 (20)
Net income (loss) (11,347) 29 97 (510) 631 40 (90) (347)
Basic and diluted earnings $ (1.44) $ 0.00 $ 0.01 $ (0.07) $ 0.08 $ 0.01 $ (0.01) $ (0.04)
(loss) per share
15. SUBSEQUENT EVENTS
On September 25, 2002, the Company received a waiver from the Bank for
its covenant violations pertaining to its fixed charge ratio and the earnings
before interest, taxes, depreciation, and amortization ratio (EBITDA), which the
Company was in default of on June 30, 2002.
On September 26, 2002, the Bank further amended the Company's credit
facility (the amended credit facility). Under the terms of the amended credit
facility, the interest rate on each loan outstanding at an Event of Default, as
defined in the amended credit facility, will bear interest at the rate of 2.00%
per annum in excess of the interest rate otherwise payable thereon and interest
payments will be payable on demand. The Bank amended various financial covenants
in conjunction with the amended credit facility to include a quarterly fixed
coverage charge ratio and EBITDA ratio through June 30, 2003, which are adjusted
to measurement on an annual basis beginning on July 1, 2003. In addition, the
outstanding loans under the amended credit facility will bear interest at an
annual interest rate of 0.75% plus the Bank's prime rate and the Company shall
not have the option to elect a LIBOR rate of interest for its outstanding
borrowings. The Company's per annum fee on any outstanding letters of credit
under the amended credit facility will be 2.50%. The borrowing period under the
term loan for capital expenditures, which will represent 80% of the purchase
price of the related equipment, has been extended to eight months from the date
of the original credit facility.
47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A definitive proxy statement is expected to be filed with the
Securities and Exchange Commission on or about October 7, 2002. The information
required by this item is set forth under the caption "Election of Directors",
under the caption "Executive Officers", and under the caption Section 16(a)
Beneficial Ownership Reporting Compliance in the definitive proxy statement,
which information is incorporated herein by reference thereto.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption
"Executive Compensation" in the definitive proxy statement, which information is
incorporated herein by reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
definitive proxy statement, which information is incorporated herein by
reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and its
subsidiaries are included in response to Item 8:
Consolidated Statement of Operations for the years ended
June 30, 2002, 2001, and 2000
Consolidated Balance Sheet at June 30, 2002 and 2001
Consolidated Statement of Changes in Stockholders' Equity for
the years ended June 30, 2002, 2001 and 2000
Consolidated Statement of Cash Flows for the years ended
June 30, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
Report of Independent Accountants
48
2. FINANCIAL STATEMENT SCHEDULE
Valuation and Qualifying Accounts and Reserves for the Years
Ended June 30, 2002, 2001 and 2000
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
3. EXHIBITS
The exhibits listed on the accompanying Index to Exhibits are filed as
part of this Report.
4. REPORTS ON FORM 8-K
None
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By:
/s/ Earl R. Refsland
----------------------------------------------
Earl R. Refsland
President and Chief Executive Officer
/S/ Daniel C. Dunn
----------------------------------------------
Daniel C. Dunn
Vice President, Chief Financial Officer, and
Secretary
Dated : September 27, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on September 27, 2002.
SIGNATURES TITLE
* Chairman of the Board
- ---------------------------------
John D. Weil
* President, Chief Executive Officer and Director
(Principal Executive Officer)
- ---------------------------------
Earl R. Refsland
* Director
- ---------------------------------
William A. Peck
* Director
- ---------------------------------
Brent D. Baird
*
- ---------------------------------
James B. Hickey, Jr. Director
* By: /s/ Earl R. Refsland
Earl R. Refsland
Attorney-in-Fact
- ------------
* Such signature has been affixed pursuant to the following Power of Attorney.
50
CERTIFICATIONS
I, Earl R. Refsland, President and Chief Executive Officer of Allied Healthcare
Products, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Allied Healthcare
Products, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
Date: September 30, 2002
s/ Earl R. Refsland
- -------------------
Earl R. Refsland,
President and Chief Executive Officer
I, Daniel C. Dunn, Vice President-Finance and Chief Financial Officer of Allied
Healthcare Products, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Allied Healthcare
Products, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
Date: September 30, 2002
s/ Daniel C. Dunn
- -----------------
Daniel C. Dunn,
Vice President-Finance and Chief Financial Officer
ALLIED HEALTHCARE PRODUCTS, INC.
RULE 12-09 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS OTHER ACCOUNTS - DEDUCTIONS - BALANCE AT END
DESCRIPTION PERIOD AND EXPENSES DESCRIBE DESCRIBE OF PERIOD
- ------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30, 2002
Reserve For
Doubtful Accounts $(605,714) $(171,412) $327,126 (1) $($450,000)
Inventory Allowance
For Obsolescence
And Excess Quantities $(2,572,967) $(3,216,916) $977,809 (2) $(4,812,074)
- --------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30, 2001
Reserve For
Doubtful Accounts $(882,874) $(259,997) $537,157 (1) $(605,714)
Inventory Allowance
For Obsolescence
And Excess Quantities $(2,894,610) $(149,000) $470,643 (2) $(2,572,967)
- --------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30, 2000
Reserve For
Doubtful Accounts $(834,883) $(68,667) $20,676 (1) $(882,874)
Inventory Allowance
For Obsolescence
And Excess Quantities $(1,936,402) $(958,208) -- $(2,894,610)
- --------------------------------------------------------------------------------------------------------------------------------
(1) Decrease due to bad debt write-offs and recoveries.
(2) Decrease due to disposal of obsolete inventory.
S-1
INDEX TO EXHIBITS
EXHIBIT
NO. Description
- --- -----------
3.1 Amended and Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3(1)
to the Company's Registration Statement on Form S-1, as amended, Registration No. 33-40128,
filed with the Commission on May 8, 1991 (the "Registration Statement") and incorporated
herein by reference)
3.2 By-Laws of the Registrant (filed as Exhibit 3(2) to the Registration Statement and
incorporated herein by reference)
4.1 Certificate of Designations, Preferences and Rights of Series A Preferred Stock of Allied
Healthcare Products, Inc. dated August 21, 1996 (filed with the Commission as Exhibit 4(1)
to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997 (the
"1997 Form 10-K") and incorporated herein by reference)
10.1 NCG Trademark License Agreement, dated April 16, 1982, between Liquid Air Corporation and
Allied Healthcare Products, Inc. (filed as Exhibit 10(24) to the Registration Statement and
incorporated herein by reference)
10.2 Allied Healthcare Products, Inc. 1991 Employee Non-Qualified Stock Option Plan (filed as
Exhibit 10(26) to the Registration Statement and incorporated herein by reference)
10.3 Employee Stock Purchase Plan (filed as Exhibit 10(3) to the Company's Annual Report on Form
10-K for the year ended June 30, 1998 (the "1998 Form 10-K") and incorporated by reference)
10.4 Allied Healthcare Products, Inc. 1994 Employee Stock Option Plan (filed with the Commission
as Exhibit 10(39) to the Company's Annual Report on Form 10-K for the year ended June 30,
1994 (the "1994 Form 10-K") and incorporated herein by reference)
10.5 Allied Healthcare Products, Inc. 1995 Directors Non-Qualified Stock Option Plan (filed with
the Commission as Exhibit 10(25) to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1995 (the "1995 Form 10-K") and incorporated herein by reference)
10.6 Allied Healthcare Products, Inc. Amended 1994 Employee Stock Option Plan (filed with the
Commission as Exhibit 10(28) to the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1996 (the "1996 Form 10-K") and incorporated herein by reference)
10.12 Warrant dated August 7, 1997 issued by Allied Healthcare Products, Inc. in favor of
Woodbourne Partners, L.P. (filed with the Commission as Exhibit 10(36) to the 1997 Form 10-K
and incorporated herein by reference)
10.13 Warrant dated August 7, 1997 issued by Allied Healthcare Products, Inc. in favor of Donald
E. Nickelson (filed with the Commission as Exhibit 10(37) to the 1997 Form 10-K and
incorporated herein by reference)
10.14 Warrant dated August 7, 1997 issued by Allied Healthcare Products, Inc. in favor of Dennis
W. Sheehan (filed with the Commission as Exhibit 10(38) to the 1997 form 10-K and
incorporated herein by reference)
S-2
10.22 Form of Indemnification Agreement with officers and directors (filed with the Commission as
exhibit 10.22 to the 2001 form 10-K and incorporated herein by reference)
10.25 Employment Agreement dated August 24, 1999 by and between Allied Healthcare Products, Inc.
and Earl Refsland (filed with the Commission as Exhibit 10(25) to the 1999 Form 10-K and
incorporated herein by reference)
10.26 Allied Healthcare Products, Inc. 1999 Incentive Stock Plan (filed with the Commission as
Exhibit 10(26) to the 1999 Form 10-K and incorporated herein by reference)
10.28 Agreement between Allied Healthcare Products, Inc. Medical Products Division and District
No. 9 International Association of Machinists and Aerospace Workers dated August 1, 2000
through May 31, 2003 (filed with the Commission as exhibit 10.29 to the 2000 form 10-K and
incorporated herein by reference)
10.29 Letter Agreement dated July 2, 2001 between Allied Healthcare Products, Inc. and Daniel C.
Dunn (filed with the Commission as exhibit 10.29 to the 2001 form 10-K and incorporated
herein by reference)
10.30 Loan and security agreement dated April 24, 2002 between the Company and LaSalle Bank
National Association, including form of notes (filed with the Commission as exhibit 10.1 to
quarterly report on form 10-Q for the quarter ended March 31, 2002 and incorporated herein
by reference)
21 Subsidiaries of the Registrant (filed with the Commission as exhibit 21 to the 2000 form 10-K
and incorporated herein by reference)
23 Consent of PricewaterhouseCoopers LLP
24 Powers of Attorney
99.1 Certification under Section 906 of Sarbanes-Oxley by Chief Executive Officer
99.2 Certification under Section 906 of Sarbanes-Oxley by Chief Financial Officer
S-3