ALLIED HEALTHCARE PRODUCTS INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
X Act of 1934
- ---

For the quarterly period ended September 30, 2003

Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Action of 1934
- ---

For the transition to 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
----- -----

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes No X
----- -----

The number of shares of common stock outstanding at November 7, 2003 is
7,813,932 shares.

INDEX

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, 2003. 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.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)

See accompanying Notes to Consolidated Financial Statements.

3

ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
(UNAUDITED)

See accompanying Notes to Consolidated Financial Statements.

(CONTINUED)

4

ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)

See accompanying Notes to Consolidated Financial Statements.

5

ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)

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, 2003.

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, the Company applies the intrinsic value method of
accounting for stock option grants. The Company has 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." SFAS 123 prescribes the recognition
of compensation expense based on the fair value of options determined on the
grant date. However, SFAS 123 allows companies currently applying APB 25 to
continue using that method and provide pro-forma net income and earnings per
share as if the provisions of SFAS 123 had been fully adopted. The Company
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. No options were
granted during the three months ended September 30, 2003 and 2002. The following
table shows stock-based compensation expense included in net income/(loss), 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 September 30, 2003 and
2002.

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3. Inventories

Inventories are comprised as follows (unaudited):

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 September 30, 2003 and 2002
was 7,813,932. The number of diluted shares outstanding for the three months
ended September 30, 2003 and 2002 was 7,951,334 and 7,813,932 shares,
respectively.

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5. New Accounting Standards

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 effective for financial statements issued
after December 15, 2003. The Company is evaluating FIN 46 to determine any
potential impact on its financial reporting, but does not expect such impact to
be material.

In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 (SFAS 150), "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity." SFAS 150 provides guidance on
distinguishing between liability and equity instruments and accounting for
instruments that have characteristics of both. SFAS 150 requires specific types
of freestanding financial instruments to be classified as liabilities including
mandatory redeemable financial instruments, obligations to repurchase the
issuer's equity shares by transferring assets and certain obligations to issue a
variable number of shares. The provisions of SFAS 150 are effective for
financial instruments entered into or modified after May 31, 2003. Adoption of
SFAS 150 is not expected to have a material impact on the Company's results of
operations, financial position or cash flows.

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.

9

On September 26, 2003, the Bank further amended the Company's credit
facility (the amended credit facility). The Bank amended various financial
covenants in conjunction with the amended credit facility including a reduction
in the required fixed coverage charge ratio and the elimination of the EBITDA
covenant. The Bank amended the borrowing base to include 80% of eligible
accounts receivable plus the lesser of 50% of eligible inventory or $7.0
million, subject to reserves as established by the Bank. In addition, the
outstanding loans under the amended credit facility will bear interest at an
annual interest rate of 1.00% plus the Bank's prime rate. In conjunction with
these amendments to the Company's credit facility, the Bank extended the
maturity on the Company's term loan on real estate from August 1, 2003 to April
24, 2005. Amortization on the real estate term loan shall continue on a
five-year schedule with equal monthly payments of $49,685. The real estate term
loan will bear interest at an annual interest rate of 1.00% plus the Bank's
prime rate. The Company also received a waiver from the Bank for its covenant
violation pertaining to its EBITDA covenant at June 30, 2003.

At September 30, 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
September 30, 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 fixed charges , and is subject to
achieving satisfactory revenue and expense levels sufficient to enable the
Company to meet heightened performance standards. At September 30, 2003, the
Company realized a Fixed Charge Coverage Ratio, as defined, of approximately
0.87 based on the prior twelve months. For each quarter during the year ending
June 30, 2004, the Company must realize a Fixed Charge Coverage Ratio of no less
than 0.75, 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.

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.

At September 30, 2003, the Company had $3.1 million outstanding against
this facility and $7.3 million of additional borrowing capacity under the line
based on collateral requirements.

Inflation has not had a material effect on the Company's business or
results of operations.

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

10

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 September 30, 2003.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002.

Allied had net sales of $13.8 million for the three months ended
September 30, 2003, down $1.4 million, or 9.2%, from net sales of $15.2 million
in the prior year same quarter. Sales in the first quarter of fiscal 2003 have
been unfavorably impacted by decreased activity in the medical gas equipment
markets. This is reflected by lower orders and shipments in this market than in
the prior year. Demand was also weaker for the Company's respiratory care
products. These decreases have been partially offset by higher sales of
emergency medical products.

Gross profit for the three months ended September 30, 2003 was $3.4
million, or 24.5% of net sales, compared to $3.2 million, or 20.9% of net sales,
for the three months ended September 30, 2002. The improvement in gross margin
is the result of reduced operations cost resulting from the Company's cost
reduction efforts, including automation of certain manufacturing processes. In
addition, gross profit improved $0.2 million as a result of a distribution
representing the Company's membership interest in the liquidation of the General
American Mutual Holding Company, the Company's former health care benefit
provider. 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
September 30, 2003 were $3.2 million, a net decrease of $0.1 million, or 3.0%,
from $3.3

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million for the three months ended September 30, 2002. The decrease is the
result of reduced insurance cost, lower staffing levels, and other expense
reductions.

On July 28th, 2003 the Company announced a workforce reduction of 14
positions from it's managerial and administrative staff and 5 positions from
it's production group. This reduction resulted in severance pay of approximately
$73,000, which was paid in the first quarter of fiscal 2004. These payments are
reflected in selling, general, and administrative expenses for the three months
ended September 30, 2003.

Income from operations was $0.2 million for the three months ended
September 30, 2003 compared to a $0.1 million loss from operations for the three
months ended September 30, 2002. Interest expense was $0.2 million for the three
months ended September 30, 2003, unchanged from $0.2 million for the three
months ended September 30, 2002. Allied had income before provision for income
taxes in the first quarter of fiscal 2004 of $14,362, compared to a loss before
provision for income taxes of $376,243, for the first quarter of fiscal 2003.
The Company recorded a tax provision of $11,589 for the three-month period ended
September 30, 2003 versus a tax benefit of $135,845 recorded for the three-month
period ended September 30, 2002.

In fiscal 2004, the net income for the first quarter was $2,773 or
$0.00 per basic and diluted share compared to a net loss of $240,398 or $0.03
per basic and diluted share for the first quarter of fiscal 2003. The weighted
average number of common shares outstanding used in the calculation of basic
earnings per share for the first quarters of fiscal 2004 and 2003 was 7,813,932
shares. The weighted average number of common shares outstanding used in the
calculation of diluted earnings per share for the first quarters of fiscal 2004
and fiscal 2003 was 7,951,334 and 7,813,932 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 $9.5 million at September 30, 2003
compared to $9.4 million at June 30, 2003. This is primarily due to a $1.2
million reduction in the current portion of long-term debt, and a $0.3 million
increase in other current assets as a result of insurance payments. These
changes have been offset by a $0.8 million increase in accounts payable, a $0.1
million decrease in accounts receivable, and a $0.5 million decrease in
inventory. The decrease in inventory is a result of improved inventory control
procedures during the last year.

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.

12

On September 26, 2003, the Bank further amended the Company's credit
facility (the amended credit facility). The Bank amended various financial
covenants in conjunction with the amended credit facility including a reduction
in the required fixed coverage charge ratio and the elimination of the EBITDA
covenant. The Bank amended the borrowing base to include 80% of eligible
accounts receivable plus the lesser of 50% of eligible inventory or $7.0
million, subject to reserves as established by the Bank. In addition, the
outstanding loans under the amended credit facility will bear interest at an
annual interest rate of 1.00% plus the Bank's prime rate. In conjunction with
these amendments to the Company's credit facility, the Bank extended the
maturity on the Company's term loan on real estate from August 1, 2003 to April
24, 2005. Amortization on the real estate term loan shall continue on a
five-year schedule with equal monthly payments of $49,685. The real estate term
loan will bear interest at an annual interest rate of 1.00% plus the Bank's
prime rate. The Company also received a waiver from the Bank for its covenant
violations pertaining to its EBITDA covenant at June 30, 2003.

At September 30, 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
September 30, 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 fixed charges, and is subject to
achieving satisfactory revenue and expense levels sufficient to enable the
Company to meet heightened performance standards. At September 30, 2003, the
Company realized a Fixed Charge Coverage Ratio, as defined, of approximately
0.87 based on the prior twelve months. For each quarter during the year ending
June 30, 2004, the Company must realize a Fixed Charge Coverage Ratio of no less
than 0.75, 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.

The Company's 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 September 30, 2003.

13

At September 30, 2003, the Company had $3.1 million outstanding against
this facility and $7.3 million of additional borrowing capacity under the line
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 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 effective for financial statements issued
after December, 15, 2003. The Company is evaluating FIN 46 to determine any
potential impact on its financial reporting, but does not expect such impact to
be material.

In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 (SFAS 150), "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity." SFAS 150 provides guidance on
distinguishing between liability and equity instruments and accounting for
instruments that have characteristics of both. SFAS 150 requires specific types
of freestanding financial instruments to be classified as liabilities including
mandatory redeemable financial instruments, obligations to repurchase the
issuer's equity shares by transferring assets and certain obligations to issue a
variable number of shares. The provisions of SFAS 150 are effective for
financial instruments entered into or modified after May 31, 2003. Adoption of
SFAS 150 is not expected to have a material impact on the Company's results of
operations, financial position or cash flows.

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 2004 and 2003
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.

14

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

At September 30, 2003, the Company had $8.7 million in debt
outstanding. This balance represents amounts outstanding under the Company's
revolving credit facility of $3.1 million, the Company's real estate loan for
$3.0 million, and the Company's capital expenditure loan for $2.6 million. The
revolving credit facility , the capital expenditure loan, and the real estate
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 September 30, 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.

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

(a) Exhibits:

31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a).

31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a).

32.1 Certification by Chief Executive Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.

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32.2 Certification by Chief Financial Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K:

On July 28, 2003, the Registrant filed a Form 8-K providing information
under Items 9 & 12 relating to (i) compliance with certain borrowing covenants
as of its June 30, 2003 fiscal year end and (ii) a reduction in staffing and
related matters affecting future periods.

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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: November 12, 2003

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