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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 March 31, 2003
| | 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 May 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 nine months ended March 31,
2003 and 2002 (Unaudited)
Consolidated Balance Sheet - 4 - 5
March 31, 2003 (Unaudited) and
June 30, 2002 (Audited)
Consolidated Statement of Cash Flows - 6
Nine months ended March 31, 2003 and 2002
(Unaudited)
Notes to Consolidated Financial Statements 7 - 11
Item 2. Management's Discussion and Analysis of 12-17
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure 17
about Market Risk
Item 4. Controls and Procedures 17-18
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
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 Nine months ended
March 31, March 31,
--------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net sales $ 16,443,114 $ 15,187,809 $ 46,536,013 $ 44,731,971
Cost of sales 12,201,779 11,797,177 35,726,306 34,881,548
------------ ------------ ------------ ------------
Gross profit 4,241,335 3,390,632 10,809,707 9,850,423
Selling, general and
administrative expenses 3,423,454 3,066,113 10,171,452 9,604,106
------------ ------------ ------------ ------------
Income from operations 817,881 324,519 638,255 246,317
Other expenses:
Interest 209,220 273,374 652,861 856,612
Other, net 9,234 3,516 32,121 31,306
------------ ------------ ------------ ------------
218,454 276,890 684,982 887,918
------------ ------------ ------------ ------------
Income/ (loss) before provision/
(benefit) for income taxes 599,427 47,629 (46,727) (641,601)
Provision/ (benefit) for income taxes 234,194 19,051 4,527 (256,640)
------------ ------------ ------------ ------------
Net income/ (loss) $ 365,233 $ 28,578 ($ 51,254) ($ 384,961)
============ ============ ============ ============
Basic and diluted earnings/ (loss)
per share $ 0.05 $ 0.00 ($ 0.01) ($ 0.05)
============ ============ ============ ============
Weighted average shares 7,813,932 7,809,768 7,813,932 7,807,711
outstanding - basic
Weighted average shares
outstanding - diluted 7,909,158 7,986,844 7,813,932 7,807,711
See accompanying Notes to Consolidated Financial Statements.
3
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
(UNAUDITED)
March 31, June 30,
2003 2002
----------- -----------
Current assets:
Cash $ 8,018 $ 800
Accounts receivable, net of allowance for doubtful
accounts of $550,000 and $450,000, respectively 8,367,890 8,524,187
Inventories, net 12,580,224 13,200,921
Deferred income taxes 745,910 745,910
Income tax receivable -- 745,895
Other current assets 339,330 163,510
----------- -----------
Total current assets 22,041,372 23,381,223
----------- -----------
Property, plant and equipment, net 12,717,684 13,228,157
Deferred income taxes 100,492 100,492
Goodwill 15,979,830 15,979,830
Other assets, net 145,942 180,536
----------- -----------
Total assets $50,985,320 $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)
March 31, June 30,
2003 2002
------------ ------------
Current liabilities:
Accounts payable $ 2,316,550 $ 3,426,802
Current portion of long-term debt 5,884,374 7,985,406
Other current liabilities 2,699,284 2,598,140
------------ ------------
Total current liabilities 10,900,208 14,010,348
------------ ------------
Long-term debt 5,411,632 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 March 31, 2003
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 8,273,184 8,324,438
------------ ------------
Total stockholders' equity 34,673,480 34,724,734
------------ ------------
Total liabilities and stockholders' equity $ 50,985,320 $ 52,870,238
============ ============
See accompanying Notes to Consolidated Financial Statements.
5
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine months ended
March 31,
----------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net loss ($51,254) ($384,961)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 972,979 1,222,375
Changes in operating assets and liabilities:
Accounts receivable, net 156,297 2,642,452
Inventories, net 620,697 547,334
Other current assets 570,075 59,967
Accounts payable (1,110,252) (987,111)
Other current liabilities 101,144 (941,976)
------------ ------------
Net cash provided by operating activities 1,259,686 2,158,080
------------ ------------
Cash flows from investing activities:
Capital expenditures (427,912) (1,406,618)
------------ ------------
Net cash used in investing activities (427,912) (1,406,618)
------------ ------------
Cash flows from financing activities:
Payments of capital lease obligations (192,426) (362,004)
Payments of long-term debt (324,820) (318,829)
Borrowings under revolving credit agreement 47,961,279 47,602,000
Payments under revolving credit agreement (48,268,589) (47,689,305)
Proceeds from exercise of stock options -- 16,001
------------ ------------
Net cash used in financing activities (824,556) (752,137)
------------ ------------
Net increase/(decrease) in cash and equivalents 7,218 (675)
Cash and equivalents at beginning of period 800 20,365
------------ ------------
Cash and equivalents at end of period $ 8,018 $ 19,690
============ ============
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. Significant Accounting Policies - Stock Options
The Company accounts for employee stock options in accordance with
Accounting Principles Board No. (APB) 25, "Accounting for Stock Issued to
Employees". Under APB 25, we apply the intrinsic value method of accounting and,
therefore, have not recognized compensation expense for options granted, because
the Company grants options at a price equal to market value at the time of
grant. During 1996, the Financial Accounting Standard Board (FASB) issued
Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" became effective for the Company. SFAS 123 prescribes the
recognition of compensation expense based on the fair value of options
determined on the grant date. However, SFAS 123 grants an exception that allows
companies currently applying APB 25 to continue using that method. We have,
therefore, elected to continue applying the intrinsic value method under APB 25.
The fair value of options granted (which is amortized over the option
vesting period in determining the pro forma impact) is estimated on the date of
grant using the Black-Scholes multiple option-pricing model. For options granted
during the three months ended March 31, 2003, the assumptions utilized in the
Black-Scholes multiple option-pricing model included expected option life of 10
years, risk-free interest rates ranging from 4.13% to 4.56%, volatility of 47%
and no dividend yield. No options were granted during the three months ended
March 31, 2002. The following table shows stock-based compensation expense
included in net income and pro forma stock-based compensation expense, net
income/(loss) and earnings per share had we elected to record compensation
expense based on the fair value of options at the grant date for the three
months ended March 31, 2003 and 2002.
7
THREE MONTHS ENDED MARCH 31,
2003 2002
Stock-based compensation
As reported $ -- $ --
Pro forma 52,563 48,523
Net income
As reported $365,233 $ 28,578
Pro forma 312,670 (19,945)
Basic earnings per share
As reported $ 0.05 $ --
Pro forma 0.04 $ --
3. Inventories
Inventories are comprised as follows (unaudited):
March 31, 2003 June 30, 2002
-------------- -------------
Work-in progress $ 777,648 $ 541,855
Raw materials and component parts 10,954,621 13,176,743
Finished goods 3,578,821 4,294,397
Reserve for obsolete and excess
inventory (2,730,866) (4,812,074)
------------ ------------
$ 12,580,224 $ 13,200,921
============ ============
4. 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 March 31, 2003 and 2002 was
7,813,932 and 7,809,768 shares, respectively. The number of diluted shares
outstanding for the three months ended March 31, 2003 and 2002 was 7,909,158 and
7,986,844 shares, respectively. The number of basic and diluted shares
outstanding for the nine months ended March 31, 2003 and 2002 was 7,813,932 and
7,807,711 shares, respectively.
8
5. 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 did not 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 did not have a material
impact on the Company's results of operations, financial position or cash flows.
9
In November 2002, the FASB issued Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". This interpretation elaborates
on the disclosures to be made by a guarantor in its financial statements about
its obligations under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The Company does not have any commitments that are within the scope
of FIN No. 45.
In January 2003, the FASB released FIN No. 46, "Consolidation of Variable
Interest Entities - an Interpretation of ARB No. 51". The Interpretation
clarifies issues regarding the consolidation of entities which may have features
that make it unclear whether consolidation or equity method accounting is
appropriate. FIN 46 is generally effective in 2003. The Company is evaluating
FIN 46 to determine any potential impact on its financial reporting, but does
not anticipate any impact.
6. 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.
7. 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 March 31, 2003, 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 March 31, 2003, 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
10
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 nine months of the 2003 fiscal year the Company
realized EBITDA, as defined, of approximately $1,550,000. During year ending
June 30, 2003, the Company must realize EBITDA of approximately $2,600,000, as
defined in the amended credit agreement. While the Company believes such
performance results may be 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 no longer has 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 is 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, bears interest at the
rate of 2.00% per annum in excess of the interest rate otherwise payable thereon
and both principal and interest is 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, which expired on December 24, 2002.
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 March 31, 2003.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002.
Allied had net sales of $16.4 million for the three months ended March 31,
2003, up $1.2 million, or 8.3%, from net sales of $15.2 million in the prior
year same quarter. Sales in the third quarter of fiscal 2003 have been favorably
impacted by increased activity in the medical gas construction markets. This
reflects higher orders and higher customer releases for shipment in this market
than in the prior year. This increase has been partially offset by lower sales
in other markets.
Gross profit for the three months ended March 31, 2003 was $4.2 million,
or 25.8% of net sales, compared to $3.4 million, or 22.3% of net sales, for the
three months ended March 31, 2002. This increase is the result of increased
sales, resulting in more effective utilization of the Company's manufacturing
capacity and the fixed expenses. In addition, 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
March 31, 2003 were $3.4 million, a net increase of $0.3 million, or 11.7%, from
$3.1 million for the three months ended March 31, 2002. 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.
Income from operations was $0.8 million for the three months ended March
31, 2003 compared to $0.3 million income from operations for the three months
ended March 31, 2002. Interest expense was $0.2 million for the three months
ended March 31, 2003 compared to $0.3 million for the three months ended March
31, 2002. Allied had income before provision for income taxes in the third
quarter of fiscal 2003 of $0.6 million, compared to income before provision for
income taxes of $47,629, for the third quarter of fiscal 2002. The Company
recorded a tax provision of $0.2 million for the three-month period ended March
31, 2003 versus a tax provision of $19,051 recorded for the three-month period
ended March 31, 2002.
In fiscal 2003, the net income for the third quarter was $0.4 million or
$0.05 per basic and diluted share compared to net income of $28,578, or $0.00
per basic and diluted share for the third quarter of fiscal 2002. The weighted
average number of common shares outstanding used in the calculation of basic
earnings per share for the third quarters of fiscal 2003 and 2002 was 7,813,932
and 7,809,768 shares, respectively. The weighted average number of common shares
outstanding used in the calculation of diluted earnings
12
per share for the third quarters of fiscal 2003 and fiscal 2002 was 7,909,158
and 7,986,844 shares, respectively.
NINE MONTHS ENDED MARCH 31, 2003 COMPARED TO NINE MONTHS ENDED MARCH 31, 2002.
Allied had net sales of $46.5 million for the nine months ended March 31,
2003, up $1.8 million, or 4.0%, from net sales of $44.7 million in the prior
year same period. The increase in sales is primarily a result of increased
shipments resulting from increased activity in the hospital construction market
during fiscal 2003. This increase was partially offset by lower sales in other
markets.
Gross profit for the nine months ended March 31, 2003 was $10.8 million,
or 23.2% of net sales, compared to $9.9 million, or 22.0% of net sales, for the
nine months ended March 31, 2002. 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 nine months ended
March 31, 2003 were $10.2 million, a net increase of $0.6 million, or 5.9%, from
$9.6 million for the nine months ended March 31, 2002. This increase is
primarily attributable to a $0.5 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 Company also had increased selling expenses of approximately $0.4 million.
These increases were partially offset by an approximate $0.2 million reduction
in bad debt expense and a $0.1 million decrease in capital lease amortization.
Income from operations was $0.6 million for the nine months ended March
31, 2003 compared to a $0.2 million for the nine months ended March 31, 2002.
Interest expense was $0.7 million for the nine months ended March 31, 2003
compared to $0.9 million for the nine months ended March 31, 2002, as a result
of lower interest rates. Allied had a loss before benefit for income taxes for
the nine months of fiscal 2003 of $46,727, compared to a loss before benefit for
income taxes of $0.6 million for the nine months of fiscal 2002. The Company
recorded tax expense of $4,527 for the nine-month period ended March 31, 2003,
and recorded a tax benefit of $0.3 million for the nine-month period ended March
31, 2002.
In fiscal 2003, the net loss for the nine months ended was $51,254, or
$0.01 per basic and diluted share compared to a net loss of $0.4 million or
$0.05 per basic and diluted share for the nine 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 nine months ended fiscal 2003 and
2002 was 7,813,932 and 7,807,711 shares, respectively.
13
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 $11.1 million at March 31, 2003 compared to
$9.4 million at June 30, 2002. This is primarily due to a $2.1 million reduction
in the current portion of long-term debt and a $1.1 million reduction in
accounts payable. These reductions in current liabilities have been offset by a
$0.2 million reduction in accounts receivable from improved credit performance,
a $0.6 million decrease in inventory as a result of improved inventory control
procedures, and the receipt of an approximately $0.7 million tax refund. The
improvements in accounts receivable and inventory performance, along with the
receipt of the approximately $0.7 million tax refund contributed to the
reduction in accounts payable and the current portion of long term debt. The
current portion of long term debt was also reduced by the conversion of $1.6
million of revolver debt to the Company's term loan for capital expenditures.
Management continues to review inventory control procedures but expects that
inventories will exceed planned levels through much of calendar year 2003.
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 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 March 31, 2003, 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 nine months of the 2003 fiscal year the Company realized EBITDA, as
defined, of approximately $1,550,000. During the year ending June 30, 2003, the
Company must realize EBITDA of approximately $2,600,000, as defined in the
amended credit agreement. While the Company believes such performance results
may be 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 no longer has 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 is 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, bears interest at the rate of 2.00% per annum in excess
of the interest rate otherwise payable thereon and both principal and
14
interest payments is 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, which expired on December 24, 2002.
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 March 31, 2003.
At March 31, 2003, $5.2 million was outstanding against the revolving
credit facility and $6.4 million was available to borrow from the facility based
on collateral requirements.
Inflation has not had a material effect on the Company's business or
results of operations.
RECENTLY ISSUED 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
15
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 did not 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 did not have a material
impact on the Company's results of operations, financial position or cash flows.
In November 2002, the FASB issued Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". This interpretation elaborates
on the disclosures to be made by a guarantor in its financial statements about
its obligations under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The Company does not have any commitments that are within the scope
of FIN No. 45.
In January 2003, the FASB released FIN No. 46, "Consolidation of Variable
Interest Entities - an Interpretation of ARB No. 51". The Interpretation
clarifies issues regarding the consolidation of entities which may have features
that make it unclear whether consolidation or equity method accounting is
appropriate. FIN 46 is generally effective in 2003. The Company is evaluating
FIN 46 to determine any potential impact on its financial reporting, but does
not anticipate any impact.
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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 an
additional $0.1 million charge to operations during both 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 March 31, 2003, the Company had $11.3 million in debt outstanding of
which $3.2 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 $5.2 million and the Company's capital expenditure loan for
$2.9 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 March 31, 2003. Allied Healthcare Products has international
sales, however these sales are denominated in U.S. dollars, mitigating foreign
exchange rate fluctuation risk.
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.
17
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.
March 13, 2003 announcing Dennis W. Allen as Vice President of Operations,
and also announcing Eldon P. Rosentrater, former Vice President of Operations,
assumed the position of Vice President of Administration and Corporate Planning.
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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: May 12, 2003
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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
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: May 12, 2003
/s/ Earl R. Refsland
--------------------
Earl R. Refsland,
President and Chief Executive Officer
20
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 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: May 12, 2003
/s/ Daniel C. Dunn
-------------------
Daniel C. Dunn,
Vice President and Chief Financial Officer
21