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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- -------- Exchange Act of 1934
For the quarterly period ended December 31, 2002
Transition report pursuant to Section 13 or 15(d) of the
---------- Securities Exchange Action of 1934
For the transition period from to
--------------------- ---------------------
Commission File Number 0-19266
ALLIED HEALTHCARE PRODUCTS, INC.
1720 Sublette Avenue
St. Louis, Missouri 63110
314/771-2400
IRS Employment ID 25-1370721
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days.
Yes X No
----------- ----------
The number of shares of common stock outstanding at February 12, 2003
is 7,813,932 shares
INDEX
Page
Number
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statement of Operations - 3
three months and six months ended December 31,
2002 and 2001 (Unaudited)
Consolidated Balance Sheet - 4-5
December 31, 2002 (Unaudited) and
June 30, 2002 (Unaudited)
Consolidated Statement of Cash Flows - 6
Six months ended December 31, 2002 and 2001
(Unaudited)
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of 10-14
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure 14
about Market Risk
Item 4. Controls and Procedures 15
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
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
the Company's annual report on Form 10-K for the year ended June 30, 2002. 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.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three months ended Six months ended
December 31, December 31,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales $ 14,852,228 $ 15,398,451 $ 30,092,899 $ 29,544,162
Cost of sales 11,467,535 11,771,124 23,524,527 23,086,160
------------ ------------ ------------ ------------
Gross profit 3,384,693 3,627,327 6,568,372 6,458,002
Selling, general and
administrative expenses 3,424,554 3,173,225 6,747,998 6,536,204
------------ ------------ ------------ ------------
Income/ (loss) from operations (39,861) 454,102 (179,626) (78,202)
Other expenses:
Interest 219,708 281,645 443,642 583,238
Other, net 10,343 11,543 22,887 27,790
------------ ------------ ------------ ------------
230,051 293,188 466,529 611,028
------------ ------------ ------------ ------------
Income/ (loss) before provision/
(benefit) for income taxes (269,912) 160,914 (646,155) (689,230)
Provision/ (benefit) for income taxes (93,823) 64,367 (229,668) (275,691)
------------ ------------ ------------ ------------
Net income/ (loss) ($ 176,089) $ 96,547 ($ 416,487) ($ 413,539)
============ ============ ============ ============
Basic and diluted earnings/ (loss)
per share ($ 0.02) $ 0.01 ($ 0.05) ($ 0.05)
============ ============ ============ ============
Weighted average shares 7,813,932 7,806,682 7,813,932 7,806,682
outstanding - basic
Weighted average shares
outstanding - diluted 7,813,932 7,953,043 7,813,932 7,806,682
See accompanying Notes to Consolidated Financial Statements.
3
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
(UNAUDITED)
December 31, June 30,
2002 2002
----------- -----------
Current assets:
Cash $ 7,050 $ 800
Accounts receivable, net of allowance for doubtful
accounts of $450,000 and $450,000, respectively 7,268,748 8,524,187
Inventories, net 14,423,476 13,200,921
Deferred income taxes 745,910 745,910
Income tax receivable 745,895 745,895
Other current assets 419,875 163,510
----------- -----------
Total current assets 23,610,954 23,381,223
----------- -----------
Property, plant and equipment, net 12,862,740 13,228,157
Deferred income taxes 100,492 100,492
Goodwill 15,979,830 15,979,830
Other assets, net 157,363 180,536
----------- -----------
Total assets $52,711,379 $52,870,238
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
(CONTINUED)
4
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
December 31, June 30,
2002 2002
------------ ------------
Current liabilities:
Accounts payable $ 3,657,496 $ 3,426,802
Current portion of long-term debt 6,978,129 7,985,406
Other current liabilities 2,236,558 2,598,140
------------ ------------
Total current liabilities 12,872,183 14,010,348
------------ ------------
Long-term debt 5,530,949 4,135,156
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock; $0.01 par value; 1,500,000 shares
authorized; no shares issued and outstanding; which
includes 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 shares issued and
outstanding at December 31, 2002 and June 30, 2002 101,175 101,175
Additional paid-in capital 47,030,549 47,030,549
Common stock in treasury, at cost (20,731,428) (20,731,428)
Retained earnings 7,907,951 8,324,438
------------ ------------
Total stockholders' equity 34,308,247 34,724,734
------------ ------------
Total liabilities and stockholders' equity $ 52,711,379 $ 52,870,238
============ ============
See accompanying Notes to Consolidated Financial Statements.
5
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six months ended
December 31,
----------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net loss ($ 416,487) ($ 413,539)
Adjustments to reconcile net loss to net
cash (used in)/provided by operating activities:
Depreciation and amortization 721,422 880,362
Changes in operating assets and liabilities:
Accounts receivable, net 1,255,439 2,584,231
Inventories, net (1,222,555) (204,852)
Other current assets (256,365) 45,067
Accounts payable 230,694 (572,891)
Other current liabilities (361,582) (995,623)
------------ ------------
Net cash (used in)/provided by operating activities (49,434) 1,322,755
------------ ------------
Cash flows from investing activities:
Capital expenditures (332,832) (623,521)
------------ ------------
Net cash used in investing activities (332,832) (623,521)
------------ ------------
Cash flows from financing activities:
Payments of capital lease obligations (192,426) (249,940)
Payments of long-term debt (106,718) (210,338)
Borrowings under revolving credit agreement 32,882,759 31,787,000
Payments under revolving credit agreement (32,195,099) (32,032,933)
------------ ------------
Net cash provided by/(used in) financing activities 388,516 (706,211)
------------ ------------
Net increase/(decrease) in cash and equivalents 6,250 (6,977)
Cash and equivalents at beginning of period 800 20,365
------------ ------------
Cash and equivalents at end of period $ 7,050 $ 13,388
============ ============
See accompanying Notes to Consolidated Financial Statements.
6
ALLIED HEALTHCARE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Unaudited Consolidated Financial Statements
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and do not include
all of the information and disclosures required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments considered necessary for a fair presentation, have
been included. Operating results for any quarter are not necessarily indicative
of the results for any other quarter or for the full year. These statements
should be read in conjunction with the consolidated financial statements and
notes to the consolidated financial statements thereto included in the Company's
Form 10-K for the year ended June 30, 2002.
2. Inventories
Inventories are comprised as follows (unaudited):
December 31, 2002 June 30, 2002
------------------------- ------------------------
Work-in progress $789,129 $541,855
Raw materials and component parts 13,095,378 13,176,743
Finished goods 4,053,824 4,294,397
Reserve for obsolete and excess
inventory (3,514,855) (4,812,074)
------------------------- ------------------------
$14,423,476 $13,200,921
========================= ========================
3. Earnings per share
Basic earnings per share are based on the weighted average number of
shares of all common stock outstanding during the period. Diluted earnings per
share are based on the sum of the weighted average number of shares of common
stock and common stock equivalents outstanding during the year. The number of
basic shares outstanding for the three months ended December 31, 2002 and 2001
was 7,813,932 and 7,806,682 shares, respectively. The number of diluted shares
outstanding for the three months ended December 31, 2002 and 2001 was 7,813,932
and 7,953,043 shares, respectively. The number of basic and diluted shares
outstanding for the six months ended December 31, 2002 and 2001 was 7,813,932
and 7,806,682 shares, respectively.
7
4. New Accounting Standards
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144 (SFAS 144), "Accounting for
the Impairment or Disposal of Long-Lived Assets" which supercedes 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 Accounting Principles Bulletin 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 was required to adopt the provisions of SFAS
144 effective July 1, 2002. Adoption of SFAS 144 did not 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.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 (SFAS 148), "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FAS 123," which provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. Additionally, SFAS 148 amends
the disclosure requirements of Statement of Financial Accounting Standards No.
123 (SFAS 123), "Accounting for Stock-Based Compensation," to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The provisions of SFAS 148 are effective for financial
statements issued for fiscal years ending after December 15, 2002 and for
financial reports containing condensed financial statements for interim periods
beginning after December 15, 2002. Adoption of SFAS 148 is not expected to have
a material impact on the Company's results of operations, financial position or
cash flows.
8
5. 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. 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 to believe 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.
6. Financing Agreement Amendment
On April 24, 2002, the Company entered into a new credit facility
arrangement with LaSalle Bank National Association (the Bank). The credit
facility provides for total borrowings up to $19.0 million; consisting of $15.0
million through a revolving credit facility and up to $4.0 million under a term
loan for capital equipment.
On September 26, 2002, the Bank amended the Company's credit facility
(the amended credit facility). The Bank amended various financial covenants in
conjunction with the amended credit facility to include a quarterly fixed charge
coverage ratio and EBITDA ratio through June 30, 2003, which are adjusted on an
annual basis beginning on July 1, 2003. At December 31, 2002, the Company was in
compliance with its financial covenants under the amended credit facility.
Although the Company was in compliance with its financial covenants under the
amended credit facility at December 31, 2002, the ability of the Company to
remain in compliance with these ratios for the remainder of the current fiscal
year depends on the cumulative operating results and related EBITDA for year to
date periods and is subject to achieving satisfactory revenue and expense levels
sufficient to enable the Company to meet heightened performance standards.
During the first six months of the 2003 fiscal year the Company realized EBITDA,
as defined, of approximately $500,000. During the nine months ended March 31,
2003 and the year ending June 30, 2003, the Company must realize EBITDA of
approximately $1,500,000 and $2,600,000 respectively. While the Company believes
such performance results are attainable, there can be no assurance that they
will be achieved.
In addition, the outstanding loans under the amended credit facility
bear interest at an annual interest rate at the Bank's prime rate plus 0.75% and
the Company will no longer have an 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%. Under the
terms of the amended credit facility, the interest
9
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 both principal and interest will
be payable on demand. The borrowing period under the term loan for capital
expenditures, which represent 80% of the purchase price of the related
equipment, was extended to eight months from the date of the original credit
facility.
The Company's 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, cause the
revolving credit facility to be classified as a current liability, per guidance
in the FASB's EITF Issue No. 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 December 31, 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 2001.
Allied had net sales of $14.9 million for the three months ended
December 31, 2002, down $0.5 million, or 3.2%, from net sales of $15.4 million
in the prior year same quarter. Sales in the second quarter of the prior year
were favorably impacted by improved production performance and the timing of
orders released for shipment following the events of September 11, 2001. During
the first quarter of fiscal 2002 customers delayed order releases following the
events of September 11, 2001. These orders were released for shipment in the
second quarter. Sales in the second quarter of the prior year were also
favorably impacted by the resolution of production issues which delayed
shipments in the first quarter of fiscal 2002. These sales did not recur in the
second quarter of fiscal 2003.
10
Gross profit for the three months ended December 31, 2002 was $3.4
million, or 22.8% of net sales, compared to $3.6 million, or 23.6% of net sales,
for the three months ended December 31, 2001. This decrease is a result of the
decrease in sales during the period. In addition, during the second quarter of
fiscal 2002 the Company began moving the production of the Company's line of B&F
disposable products into the Company's St. Louis production facility to improve
delivery performance This move has resulted in higher production cost during the
second quarter of fiscal 2003 than in the second quarter of fiscal 2002 . The
Company is continuing to review, automate, and further improve operations to
improve productivity and lower manufacturing and product cost.
Selling, general and administrative expenses for the three months ended
December 31, 2002 were $3.4 million, a net increase of $0.2 million, or 7.9%,
from $3.2 million for the three months ended December 31, 2001. The increase is
primarily attributable to a $0.2 million increase in insurance cost. The
increase in insurance cost is the result of widespread price increases in the
insurance market, and product liability claims experienced by the Company in
prior years.
Loss from operations was $0.04 million for the three months ended
December 31, 2002 compared to $0.5 million income for the three months ended
December 31, 2001. Interest expense was $0.2 million for the three months ended
December 31, 2002 compared to $0.3 million for the three months ended December
31, 2001. Allied had a loss before benefit for income taxes in the second
quarter of fiscal 2003 of $0.3 million compared to income before provision for
income taxes of $0.2 million, for the second quarter of fiscal 2002. The Company
recorded a tax benefit of $0.1 million for the three-month period ended December
31, 2002 versus a tax provision of $0.1 million recorded for the three-month
period ended December 31, 2001.
In fiscal 2003, the net loss for the second quarter was $0.2 million or
$0.02 per basic and diluted share compared to net income of $0.1 million, or
$0.01 per basic and diluted share for the second quarter of fiscal 2002. The
weighted average number of common shares outstanding used in the calculation of
basic earnings per share for the second quarters of fiscal 2003 and 2002 was
7,813,932 and 7,806,682 shares, respectively. The weighted average number of
common shares outstanding used in the calculation of diluted earnings per share
for the second quarters of fiscal 2003 and fiscal 2002 was 7,813,932 and
7,953,043 shares, respectively.
SIX MONTHS ENDED DECEMBER 31, 2002 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 2001.
Allied had net sales of $30.1 million for the six months ended December
31, 2002, up $0.6 million, or 1.9%, from net sales of $29.5 million in the prior
year same period. The increase in sales is primarily a result of increased
shipments resulting from improvements in shipping and production performance
from the prior year.
11
Gross profit for the six months ended December 31, 2002 was $6.6
million, or 21.8% of net sales, compared to $6.5 million, or 21.9% of net sales,
for the six months ended December 31, 2001. The increase in gross profit is
primarily attributable to increased sales. The Company is continuing to review,
automate, and further improve operations to improve productivity and lower
manufacturing and product cost.
Selling, general and administrative expenses for the six months ended
December 31, 2002 were $6.7 million, a net increase of $0.2 million, or 3.2%,
from $6.5 million for the six months ended December 31, 2001. This increase is
attributable to a $0.3 million increase in insurance cost. The increase in
insurance cost is the result of price increases in the insurance market, and
product liability claims experienced by the Company in prior years. The increase
in insurance cost was partially offset by a $0.1 million reduction in lease
amortization on the Company's computer systems.
Loss from operations was $0.2 million for the six months ended December
31, 2002 compared to a $0.1 million loss for the six months ended December 31,
2001. Interest expense was $0.4 million for the six months ended December 31,
2002 compared to $0.6 million for the six months ended December 31, 2001. Allied
had a loss before benefit for income taxes for the first six months of fiscal
2003 of $0.6 million compared to a loss before benefit for income taxes of $0.7
million for the first six months of fiscal 2002. The Company recorded a tax
benefit of $0.2 million and $0.3 million for the six-month periods ended
December 31, 2002 and 2001, respectively.
In fiscal 2003, the net loss for the first six months was $0.4 million,
or $0.05 per basic and diluted share compared to a net loss of $0.4 million or
$0.05 per basic and diluted share for the first six months of fiscal 2002. The
weighted average number of common shares outstanding used in the calculation of
basic and diluted earnings per share for the first six months of fiscal 2003 and
fiscal 2002 was 7,813,932 and 7,806,682 shares, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that available resources and anticipated cash
flows from operations are sufficient to meet operating requirements in the
coming year.
Working capital increased to $10.7 million at December 31, 2002
compared to $9.4 million at June 30, 2002. The increase was primarily due to the
conversion of $1.0 million of revolver debt to the Company's term loan for
capital expenditures, and a $0.3 million increase in other current assets,
primarily prepaid expenses. Accounts receivable declined by $1.3 million as a
result of decreased sales during the first six months of the 2003 fiscal year,
offset by a $1.2 million increase in inventory resulting, in part, from lower
than expected demand during the second quarter. Management continues to review
inventory control procedures and expects these components to be used in the
normal course of business, although it is expected that inventories will exceed
targeted levels through much of calendar year 2003.
12
On April 24, 2002, the Company entered into a new credit facility
arrangement with LaSalle Bank National Association (the Bank). The 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.
On September 26, 2002, the Bank amended the Company's credit facility
(the amended credit facility). The Bank amended various financial covenants in
conjunction with the amended credit facility to include a quarterly fixed charge
coverage ratio and EBITDA ratio through June 30, 2003, which are adjusted on an
annual basis beginning on July 1, 2003. Although the Company was in compliance
with its financial covenants under the amended credit facility at December 31,
2002, the ability of the Company to remain in compliance with these ratios for
the remainder of the current fiscal year depends on the cumulative operating
results and related EBITDA for year to date periods and is subject to achieving
satisfactory revenue and expense levels sufficient to enable the Company to meet
heightened performance standards. During the first six months of the 2003 fiscal
year the Company realized EBITDA, as defined, of approximately $500,000. During
the nine months ended March 31, 2003 and the year ending June 30, 2003, the
Company must realize EBITDA of approximately $1,500,000 and $2,600,000
respectively. While the Company believes such performance results are
attainable, there can be no assurance that they will be achieved.
In addition, the outstanding loans under the amended credit facility
bear interest at the Bank's prime rate plus 0.75% and the Company will no longer
have an 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%. 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 both
principal and interest payments will be payable on demand. The borrowing period
under the term loan for capital expenditures, which represent 80% of the
purchase price of the related equipment, was extended to eight months from the
date of the original credit facility.
The Company's 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, cause the
revolving credit facility to be classified as a current liability, per guidance
in the FASB's EITF Issue No. 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.
13
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 December 31, 2002.
At December 31, 2002, $9.2 million was outstanding against this
facility and $5.7 million was available to borrow from the line based on
collateral requirements.
Inflation has not had a material effect on the Company's business or
results of operations.
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 has recorded
additional charges to operations during fiscal 2003 and 2002 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 judgements resulting from these claims over its self-insured
retention will be covered by the Company's product liability insurance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
At December 31, 2002, the Company had $12.5 million in debt outstanding
of which $3.3 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 $6.2 million and the Company's capital expenditure loan for
$3.0 million. The revolving credit facility and capital expenditure loan bear an
interest rate using the commercial bank's "floating reference rate" 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.
The Company had no holdings of derivative financial or commodity
instruments at December 31, 2002. Allied Healthcare Products has international
sales, however these sales are denominated in U.S. dollars, mitigating foreign
exchange rate fluctuation risk.
14
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Within the 90 day period prior to the filing date of this Quarterly
Report on Form 10-Q, the Company, under the supervision, and with the
participation, of its management, including its principal executive officer and
principal financial officer, performed an evaluation of the Company's disclosure
controls and procedures, as contemplated by Securities Exchange Act Rule 13a-15.
Based on that evaluation, the Company's principal executive officer and
principal financial officer concluded that such disclosure controls and
procedures are effective to ensure that material information relating to the
Company, including its consolidated subsidiaries, is made known to them,
particularly during the period for which the periodic reports are being
prepared.
Changes in Internal Controls
No significant changes were made in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of the evaluation performed pursuant to Securities Exchange Act Rule
13a-15 referred to above.
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
99.1 Certification by Chief Executive Officer pursuant to Section 906
of Sarbanes-Oxley Act of 2002.
99.2 Certification by Chief Financial Officer pursuant to Section 906
of Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
September 16, 2002 (filed September 16, 2002) announcing certain
write-offs and write-downs as of 2002 fiscal year end, related losses for 2002
fiscal year and fourth quarter, and related matters.
September 25, 2002 (filed October 1, 2002) announcing waiver under and
amendment to credit agreement.
January 7, 2003 announcing the departure of David A. Grabowski, former
Vice President Marketing, and Philip J. Strasser , former Vice President Sales
effective January 3, 2003. Announcing effective January 6, 2003, Robert Ricks
was employed as Vice President Sales & Marketing.
15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLIED HEALTHCARE PRODUCTS, INC.
/s/ Earl R. Refsland
--------------------------------------------
Earl R. Refsland
President and Chief Executive Officer
--------------------------------------------
Date: February 12, 2003
16
CERTIFICATIONS
I, Earl R. Refsland, President and Chief Executive Officer of Allied Healthcare
Products, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Allied
Healthcare Products, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
17
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 12, 2003
s/Earl R. Refsland
-----------------------
Earl R. Refsland,
President and Chief Executive Officer
18
I, Daniel C. Dunn, Vice President-Finance and Chief Financial Officer of Allied
Healthcare Products, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Allied
Healthcare Products, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could
19
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 12, 2003
s/ Daniel C. Dunn
---------------------------
Daniel C. Dunn,
Vice President and Chief Financial Officer
20
EXHIBIT INDEX
99.1 Certification by Chief Executive Officer pursuant to Section 906
of Sarbanes-Oxley Act of 2002.
99.2 Certification by Chief Financial Officer pursuant to Section 906
of Sarbanes-Oxley Act of 2002.
21