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UNITED STATES
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 September 30, 2004
[ ] 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 [ ]
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 5, 2004 is
7,818,432 shares.
INDEX
Page
Number
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statement of Operations -
three months ended September 30,
2004 and 2003 (Unaudited) 3
Consolidated Balance Sheet -
September 30, 2004 (Unaudited) and
June 30, 2004 (Audited) 4 - 5
Consolidated Statement of Cash Flows -
Three months ended September 30, 2004 and 2003
(Unaudited) 6
Notes to Consolidated Financial Statements 7 - 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-15
Item 3. Quantitative and Qualitative Disclosure
about Market Risk 15
Item 4. Controls and Procedures 16
Part II - Other Information
Item 6. Exhibits 16
Signature 17
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, 2004. 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
September 30,
-----------------------------------
2004 2003
----------- -----------
Net sales $13,939,720 $13,807,529
Cost of sales 10,533,018 10,410,955
----------- -----------
Gross profit 3,406,702 3,396,574
Selling, general and
administrative expenses 2,929,088 3,179,912
----------- -----------
Income from operations 477,614 216,662
Other expenses:
Interest 73,846 196,941
Other, net 7,362 5,359
----------- -----------
81,208 202,300
----------- -----------
Income before provision
for income taxes 396,406 14,362
Provision for income taxes 160,905 11,589
----------- -----------
Net income $ 235,501 $ 2,773
=========== ===========
Basic and diluted earnings
per share $ 0.03 $ 0.00
=========== ===========
Weighted average shares
outstanding - basic 7,818,432 7,813,932
Weighted average shares
outstanding - diluted 8,065,741 7,951,334
See accompanying Notes to Consolidated Financial Statements.
3
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
(UNAUDITED)
September 30, June 30,
2004 2004
----------- -----------
Current assets:
Cash $ 93,768 $ 8,256
Accounts receivable, net of allowance for doubtful
accounts of $475,000 and $475,000, respectively 7,160,225 7,708,969
Inventories, net 11,036,930 11,095,171
Income tax receivable - 130,548
Other current assets 291,492 127,127
----------- -----------
Total current assets 18,582,415 19,070,071
----------- -----------
Property, plant and equipment, net 11,739,786 11,999,927
Goodwill 15,979,830 15,979,830
Other assets, net 77,452 88,867
----------- -----------
Total assets $46,379,483 $47,138,695
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
(CONTINUED)
4
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
September 30, June 30,
2004 2004
------------- ------------
Current liabilities:
Accounts payable $ 2,961,361 $ 3,125,593
Current portion of long-term debt 609,258 1,245,484
Deferred income taxes 389,644 389,644
Deferred revenue 465,000 -
Other current liabilities 3,816,343 3,316,603
------------ ------------
Total current liabilities 8,241,606 8,077,324
------------ ------------
Deferred income taxes 242,478 242,478
------------ ------------
Deferred revenue 426,250 -
------------ ------------
Long-term debt 780,831 2,366,076
------------ ------------
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; 7,818,432 shares issued and
outstanding at September 30, 2004
and June 30, 2004 101,220 101,220
Additional paid-in capital 47,041,493 47,041,493
Common stock in treasury, at cost (20,731,428) (20,731,428)
Retained earnings 10,277,033 10,041,532
------------ ------------
Total stockholders' equity 36,688,318 36,452,817
------------ ------------
Total liabilities and stockholders' equity $ 46,379,483 $ 47,138,695
============ ============
See accompanying Notes to Consolidated Financial Statements.
5
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three months ended
September 30,
-------------------------------
2004 2003
------------ ------------
Cash flows from operating activities:
Net income $ 235,501 $ 2,773
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 323,816 331,290
Changes in operating assets and liabilities:
Accounts receivable, net 548,744 153,072
Inventories, net 58,241 528,832
Income tax receivable 130,548 -
Other current assets (164,365) (282,716)
Accounts payable (164,232) 760,689
Deferred Revenue 891,250 -
Other current liabilities 499,740 33,249
------------ ------------
Net cash provided by operating activities 2,359,243 1,527,189
------------ ------------
Cash flows from investing activities:
Capital expenditures (52,260) (188,044)
------------ ------------
Net cash used in investing activities (52,260) (188,044)
------------ ------------
Cash flows from financing activities:
Payments of long-term debt (2,181,471) (242,129)
Borrowings under revolving credit agreement 14,688,257 13,541,978
Payments under revolving credit agreement (14,728,257) (14,638,392)
------------ ------------
Net cash used in financing activities (2,221,471) (1,338,543)
------------ ------------
Net increase in cash 85,512 602
Cash at beginning of period 8,256 12,016
------------ ------------
Cash at end of period $ 93,768 $ 12,618
============ ============
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, 2004.
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. 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 grants an exception that allows companies currently applying
APB 25 to continue using that method. 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, 2004 and 2003. The following
table shows stock-based compensation expense included in net income, 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, 2004 and 2003.
7
Three Months Ended September 30,
2004 2003
------------ ------------
Net income, as reported $ 235,501 $ 2,773
Add: Stock-based employee
compensation expense included in
reported net income, net of
related tax effects - -
------------ ------------
Deduct: Total stock-based
employee compensation expense determined
under fair value based method for all
awards granted since July 1, 1994, net of
related tax effects ($ 12,055) ($ 30,540)
------------ ------------
Pro forma net (loss)income $ 223,446 ($ 27,767)
============ ============
Earnings per share:
Basic-as reported $ 0.03 $ -
------------ ------------
Basic-pro forma $ 0.03 $ -
------------ ------------
Diluted -as reported $ 0.03 $ -
------------ ------------
Diluted -pro forma $ 0.03 $ -
------------ ------------
3. Inventories
Inventories are comprised as follows (unaudited):
September 30, 2004 June 30, 2004
------------------ -------------
Work-in progress $ 828,668 $ 722,894
Raw materials and component parts 9,041,335 9,170,682
Finished goods 2,904,116 2,944,085
Reserve for obsolete and excess
inventory (1,737,189) (1,742,490)
------------ -----------
$ 11,036,930 $11,095,171
============ ===========
8
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, 2004 and 2003
was 7,818,432 and 7,813,932 respectively. The number of diluted shares
outstanding for the three months ended September 30, 2004 and 2003 was 8,065,741
and 7,951,334 shares, respectively.
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 credit facility arrangement
with LaSalle Bank National Association (the "Bank"), which was subsequently
amended on September 26, 2002, and September 26, 2003. The credit facility
provided 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 August 27, 2004, the Bank and the Company agreed to a further amendment
of the credit facility (the amended credit facility). 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, the Company's revolving credit facility,
and term loan on capital expenditures from April 24, 2005 to April 24, 2007. The
entire credit facility was amended to accrue interest at the Bank's prime rate.
The Prime rate was 4.5% on August 27, 2004. The interest rate on Prime rate
loans may increase from Prime to Prime plus 0.75% if the ratio of the Company's
funded debt to EBITDA exceeds 1.5. The amended credit facility also provides the
Company with a rate of LIBOR plus 2.25%, at the Company's option. The optional
LIBOR rate may increase from LIBOR plus 2.25% to LIBOR plus 3.00% based on the
Company's fixed charge coverage ratio. The 90-day LIBOR rate was 1.79% at August
27, 2004. Amortization on the real estate term loan
9
shall continue on a five-year schedule with equal monthly payments of $49,685.
Amortization on the capital expenditure term loan shall continue on a five-year
schedule with equal monthly payments of $50,772.
At September 30, 2004, 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, 2004, 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, 2004, the
Company realized a Fixed Charge Coverage Ratio, as defined, of approximately
2.40 to 1.0 based on the prior twelve months. During year ending June 30, 2005,
the Company must realize a Fixed Charge Coverage Ratio of at least 1.0 to 1.0,
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 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 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, 2007.
Additionally, the Bank has not notified the Company of any indication of a MAE
at September 30, 2004.
7. Agreement with Abbott Laboratories
On August 27, 2004, Allied Healthcare Products, Inc. ("Allied") entered
into an agreement with Abbott Laboratories ("Abbott") pursuant to which Allied
will cease production of its product Baralyme(R), will, within sixty days,
affect the withdrawal of Baralyme(R) product held by distributors and will
pursue the development of a new carbon dioxide absorbent product. Baralyme(R), a
carbon dioxide absorbent product, has been used safely and effectively in
connection with inhalation anesthetics since its introduction in the 1920s. In
recent years, the number of inhalation anesthetics has increased, giving rise to
concerns regarding the use of Baralyme(R) in conjunction with these newer
inhalation anesthetics when Baralyme(R) has been allowed, contrary to
recommended
10
practice, to become desiccated. The agreement also provides that, for a period
of eight years, Allied will not manufacture, distribute, promote, market, sell,
commercialize or donate any Baralyme(R) product or similar product based upon
potassium hydroxide and will not develop or license any new carbon dioxide
absorbent product containing potassium hydroxide.
In consideration of the foregoing, Abbott has agreed to pay Allied an
aggregate of $5,250,000 of which $1,530,000 which was paid on September 30,
2004, and the remainder payable in 4 equal annual installments of $930,000 due
on July 1, 2005 through July 1, 2008. Allied has agreed with Abbott that in the
event that it receives approval from the U.S. Food & Drug Administration for the
commercial sale of a new carbon dioxide absorbent product not based upon
potassium hydroxide prior to January 1, 2008, that Abbott will be relieved of
any obligation to fund the $930,000 installment due July 1, 2008. The majority
of the $5,250,000 Allied is to receive from Abbott will be recognized into
income, as net sales, over the eight-year term of the agreement.
In addition to the provisions of the agreement relating to the withdrawal
of the Baralyme(R) product, Abbott has agreed to pay to Allied up to $2,150,000
in product development costs to pursue development of a new carbon dioxide
absorption product for use in connection with inhalation anesthetics that does
not contain potassium hydroxide and does not produce a significant exothermic
reaction with currently available inhalation agents.
The initial payment of $1,530,000 due from Abbott Laboratories was
received on September 30, 2004. The agreement required Abbott Laboratories to
pay Allied $600,000 for cost incurred in connection with withdrawal of
Baralyme(R) from the market, the disposal of such product, and severance
payments payable as a result of such withdrawal. This payment by Abbott
Laboratories of $600,000 has been included in Net sales during the three months
ended September 30, 2004. The remaining $4,650,000 of the payments to be
received from Abbott, including the remaining $930,000 received on September
30th, 2004, will be recognized into income, as net sales, over the eight-year
term of the agreement. During the three months ended September 30, 2004, $38,750
was recognized as net sales.
Allied has suspended manufacturing operations at its Stuyvesant Falls, New
York, facility. Costs associated with the withdrawal and suspension of
operations at that location, including severance and benefit payments due union
employees, will be approximately $600,000. These costs have been recorded as
Cost of Sales during the three months ended September 30th, 2004.
On September 9th, 2004 Allied entered into a Closedown Agreement with the
International Chemical Union representing the employees at the Stuyvesant Falls,
New York facility. The Company had advised the Union that the plant will be
closed and all bargaining unit employees related to such operation will be
permanently laid off, no later than October 15, 2004. The collective bargaining
agreement shall expire and be terminated as of the closing date. The Company
will pay severance to those 12
11
bargaining unit employees on the active payroll as of August 27, 2004. Severance
payments will total approximately $138,000.
A reconciliation of deferred revenue resulting from the agreement with
Abbott Laboratories, with the amounts received under the agreement, and amounts
recognized as net sales is as follows:
Deferred Revenue
Three Months ended
September 30,
------------ ---------
2004 2003
------------ ---------
Beginning balance $ - $ -
Payment Received from Abbott Laboratories 1,530,000
Revenue recognized as net sales (638,750) -
------------ ---------
891,250 -
------------ ---------
Less - Current portion of deferred revenue (465,000) -
------------ ---------
$ 426,250 $ -
============ =========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003.
Allied had net sales of $13.9 million for the three months ended September
30, 2004, up $0.1 million, or 1.0%, from net sales of $13.8 million in the prior
year same quarter. Sales for the three months ended September 30th, 2004 include
$38,750 for the recognition into income of payments resulting from the agreement
with Abbott Laboratories to cease the production and distribution of
Baralyme(R). The Company ceased the sale of Baralyme(R) on August 27th, 2004
upon completion of the agreement with Abbott, and recognized one month of income
during the three months ended September 30th, 2004. Income from the agreement
will continue to be recognized over eight years, the term of the agreement, at
$38,750 per month. Sales for the three months ended September 30th, 2004 also
included recognition as sales of a one-time $600,000 payment from Abbott
Laboratories for cost incurred in connection with the withdrawal of Baralyme(R)
from the market, the disposal of such product, and severance payments payable of
such withdrawal. Sales, exclusive of the $600,000 one-time payment from Abbott
Laboratories, were down 3.4%. Domestic sales were even with the
12
prior year while international business, which represented 13.4% of first
quarter sales, was down 17.7%.
Gross profit for the three months ended September 30, 2004 was $3.4
million, or 24.4% of net sales, compared to $3.4 million, or 24.6% of net sales,
for the three months ended September 30, 2003. Cost of sales for the three
months ended September 30th, 2004 does include $0.6 million in cost incurred in
connection with the withdrawal of Baralyme(R). Gross margins have continued to
improve during the three months ended September 30th, 2004 as the result of
reduced operations cost resulting from the Company's cost reduction efforts,
including automation of certain manufacturing processes, in-house production,
and material purchasing efforts. Gross profit for the three months ended
September 30, 2003 was benefited by a $0.2 million one-time distribution
representing the Company's membership interest in the liquidation of the General
American Mutual Holding Company, the Company's health care benefit provider.
Selling, general and administrative expenses for the three months ended
September 30, 2004 were $2.9 million, a net decrease of $0.3 million, or 7.8%,
from $3.2 million for the three months ended September 30, 2003. 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 its managerial and administrative staff and 5 positions from its
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 $0.5 million for the three months ended
September 30, 2004 compared to $0.2 million for the three months ended September
30, 2003. Interest expense was $0.07 million for the three months ended
September 30, 2004, down from $0.2 million for the three months ended September
30, 2003. Allied had income before provision for income taxes in the first
quarter of fiscal 2005 of $396,406, compared to income before provision for
income taxes in the first quarter of fiscal 2004 of $14,362. The Company
recorded a tax provision of $160,905 for the three-month period ended September
30, 2004, versus a tax provision of $11,589 for the three-month period ended
September 30, 2003.
In fiscal 2005, the net income for the first quarter was $235,501 or $0.03
per basic and diluted share compared to net income of $2,773 or $0.00 per basic
and diluted share for the first quarter of fiscal 2004. The weighted average
number of common shares outstanding used in the calculation of basic earnings
per share for the first quarters of fiscal 2005 and 2004 were 7,818,432 and
7,813,932 share respectively. The weighted average number of common shares
outstanding used in the calculation of diluted earnings per share for the first
quarters of fiscal 2005 and fiscal 2004 were 8,065,741 and 7,951,334 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 decreased to $10.3 million at September 30, 2004 compared
to $11.0 million at June 30, 2004. This is primarily due to a $0.5 million
reduction in accounts receivable, a $0.5 million increase in other current
liabilities, and a $0.5 million dollar increase in deferred revenue as result of
the agreement with Abbott Laboratories to cease production of Baralyme(R). These
changes have been offset by a $0.6 million reduction in the current portion of
long-term debt, and a $0.2 million decrease in accounts payable.
On April 24, 2002, the Company entered into a credit facility arrangement
with LaSalle Bank National Association (the "Bank"), which was subsequently
amended on September 26, 2002, and September 26, 2003. The credit facility
provided 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 August 27, 2004, the Bank and the Company agreed to a further amendment
of the credit facility (the amended credit facility). 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, the Company's revolving credit facility,
and term loan on capital expenditures from April 24, 2005 to April 24, 2007. The
entire credit facility was amended to accrue interest at the Bank's prime rate.
The Prime rate was 4.5% on August 27, 2004. The interest rate on Prime rate
loans may increase from Prime to Prime plus 0.75% if the ratio of the Company's
funded debt to EBITDA exceeds 1.5. The amended credit facility also provides the
Company with a rate of LIBOR plus 2.25%, at the Company's option. The optional
LIBOR rate may increase from LIBOR plus 2.25% to LIBOR plus 3.00% based on the
Company's fixed charge coverage ratio. The 90-day LIBOR rate was 1.79% at August
27, 2004. Amortization on the real estate term loan shall continue on a
five-year schedule with equal monthly payments of $49,685. Amortization on the
capital expenditure term loan shall continue on a five-year schedule with equal
monthly payments of $50,772.
At September 30, 2004, 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, 2004, 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, 2004, the
Company realized a Fixed Charge Coverage Ratio, as defined, of approximately
2.40 to 1.0 based on the prior twelve months. During year ending June 30, 2005,
the Company must realize a Fixed Charge Coverage Ratio of 1.0 to 1.0, as defined
in the amended
14
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 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, 2007.
Additionally, the Bank has not notified the Company of any indication of a MAE
at September 30, 2004.
At September 30, 2004, the company had no balance outstanding against this
facility and $10.0 million 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. 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 September 30, 2004, the Company had $1.4 million in debt outstanding.
This balance represents an amount outstanding under the Company's capital
expenditure loan for $1.4 million. The revolving credit facility, and the
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.
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The Company had no holdings of derivative financial or commodity
instruments at September 30, 2004. 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
As of September 30, 2004, 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 were effective as of September 30, 2004.
Changes in Internal Controls
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to September 30, 2004.
Part II. OTHER INFORMATION
ITEM 6. EXHIBITS
(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.
32.2 Certification by Chief Financial Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
99.1 Press Release dated November 5, 2004 announcing first quarter
earnings.
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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/ Daniel C. Dunn
--------------------------------
Daniel C. Dunn
Chief Financial Officer
Date: November 5, 2004
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