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UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended December 31, 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 February 10, 2005 is
7,818,432 shares.
INDEX
Page
Number
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statement of Operations -
three months and six months ended December 31,
2004 and 2003 (Unaudited) 3
Consolidated Balance Sheet -
December 31, 2004 (Unaudited) and
June 30, 2004 (Audited) 4 - 5
Consolidated Statement of Cash Flows -
Six months ended December 31, 2004 and 2003
(Unaudited) 6
Notes to Consolidated Financial Statements 7 - 13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14 - 19
Item 3. Quantitative and Qualitative Disclosure
about Market Risk 19
Item 4. Controls and Procedures 19
Part II - Other Information
Item 6. Exhibits 20
Signature 20
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 Six months ended
December 31, December 31,
-------------------------- --------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales $ 13,667,568 $ 15,077,334 $ 27,607,288 $ 28,884,862
Cost of sales 10,254,672 10,968,845 20,787,691 21,379,800
------------ ------------ ------------ ------------
Gross profit 3,412,896 4,108,489 6,819,597 7,505,062
Selling, general and
administrative expenses 3,056,555 3,334,657 5,985,643 6,514,568
------------ ------------ ------------ ------------
Income from operations 356,341 773,832 833,954 990,494
Other expenses:
Interest 28,966 144,774 102,811 341,716
Other, net 11,410 (11,040) 18,772 (5,682)
------------ ------------ ------------ ------------
40,376 133,734 121,583 336,034
------------ ------------ ------------ ------------
Income before provision
for income taxes 315,965 640,098 712,371 654,460
Provision for income taxes 131,779 255,891 292,684 267,480
------------ ------------ ------------ ------------
Net income $ 184,186 $ 384,207 $ 419,687 $ 386,980
============ ============ ============ ============
Basic and diluted earnings
per share $ 0.02 $ 0.05 $ 0.05 $ 0.05
============ ============ ============ ============
Weighted average shares
outstanding - basic 7,818,432 7,814,910 7,818,432 7,814,421
Weighted average shares
outstanding - diluted 8,104,869 7,995,788 8,087,657 7,974,834
See accompanying Notes to Consolidated Financial Statements.
3
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
(UNAUDITED)
December 31, June 30,
2004 2004
----------- -----------
Current assets:
Cash $ 10,398 $ 8,256
Accounts receivable, net of allowance for doubtful
accounts of $475,000 and $475,000, respectively 7,023,692 7,708,969
Inventories, net 10,605,306 11,095,171
Income tax receivable - 130,548
Other current assets 325,564 127,127
----------- -----------
Total current assets 17,964,960 19,070,071
----------- -----------
Property, plant and equipment, net 11,504,339 11,999,927
Goodwill 15,979,830 15,979,830
Other assets, net 65,804 88,867
----------- -----------
Total assets $45,514,933 $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)
December 31, June 30,
2004 2004
------------ ------------
Current liabilities:
Accounts payable $ 2,821,427 $ 3,125,593
Current portion of long-term debt 1,275,325 1,245,484
Deferred income taxes 389,644 389,644
Deferred revenue 465,000 -
Other current liabilities 3,138,553 3,316,603
------------ ------------
Total current liabilities 8,089,949 8,077,324
------------ ------------
Deferred income taxes 242,478 242,478
------------ ------------
Deferred revenue 310,000 -
------------ ------------
Long-term debt - 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 December 31, 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 10,461,221 10,041,532
------------ ------------
Total stockholders' equity 36,872,506 36,452,817
------------ ------------
Total liabilities and stockholders' equity $ 45,514,933 $ 47,138,695
============ ============
See accompanying Notes to Consolidated Financial Statements.
5
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six months ended
December 31,
-------------------------------
2004 2003
------------ ------------
Cash flows from operating activities:
Net income $ 419,687 $ 386,980
Depreciation and amortization 647,866 638,883
Changes in operating assets and liabilities:
Accounts receivable, net 685,277 351,360
Inventories, net 489,865 1,083,637
Income tax receivable 130,548 -
Other current assets (198,437) (324,330)
Accounts payable (304,166) 1,265,591
Deferred revenue 775,000 -
Income tax payable (295,254) 244,248
Other current liabilities 117,205 (364,656)
------------ ------------
Net cash provided by operating activities 2,467,591 3,281,713
------------ ------------
Cash flows from investing activities:
Capital expenditures (129,214) (318,258)
------------ ------------
Net cash used in investing activities (129,214) (318,258)
------------ ------------
Cash flows from financing activities:
Payments of long-term debt (3,022,331) (543,498)
Borrowings under revolving credit agreement 30,691,005 28,347,752
Payments under revolving credit agreement (30,004,909) (30,717,066)
Proceeds from exercise of stock options - 10,987
------------ ------------
Net cash used in financing activities (2,336,235) (2,901,825)
------------ ------------
Net increase in cash 2,142 61,630
Cash at beginning of period 8,256 12,016
------------ ------------
Cash at end of period $ 10,398 $ 73,646
============ ============
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. Financial Accounting Standard No. 123 (SFAS 123), "Accounting
for Stock-Based Compensation," 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 has 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. The following table
shows stock-based compensation expense included in net income, pro forma
stock-based compensation expense, net income, and earnings per share had the
Company elected to record compensation expense based on the fair value of
options at the grant date for the three and six months ended December 31, 2004
and 2003.
7
Three Months Ended Six Months Ended
December 31st, December 31st,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income, as reported $ 184,186 $ 384,207 $ 419,687 $ 386,980
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 ($ 13,424) ($ 10,868) ($ 25,479) ($ 41,408)
------------ ------------ ------------ ------------
Proforma net income $ 170,762 $ 373,339 $ 394,208 $ 345,572
============ ============ ============ ============
Earnings per share:
Basic-as reported $ 0.02 0.05 $ 0.05 0.05
------------ ------------ ------------ ------------
Basic-pro forma $ 0.02 0.05 $ 0.05 0.05
------------ ------------ ------------ ------------
Diluted -as reported $ 0.02 0.05 $ 0.05 0.05
------------ ------------ ------------ ------------
Diluted -pro forma $ 0.02 0.05 $ 0.05 0.04
------------ ------------ ------------ ------------
The effects of applying SFAS 123 in this proforma disclosure are not necessarily
indicative of future amounts.
Impact of Recently Issued Accounting Standards
In November 2004, the FASB issued SFAS 151, "Inventory Costs." SFAS 151
requires the allocation of fixed production overhead costs be based on the
normal capacity of the production facilities and unallocated overhead costs
recognized as an expense in the period incurred. In addition, other items such
as abnormal freight, handling costs and wasted materials require treatment as
current period charges rather than a portion of the inventory cost. SFAS 151 is
effective for inventory costs incurred during periods beginning after June 15,
2005. The Company is currently assessing the impact of the adoption of SFAS 151
on its results of operations and financial condition.
In December 2004, the FASB issued SFAS 123R, "Share-Based Payment." SFAS
123R requires measurement of all employee stock-based compensation awards using
a fair value method and the recording of such expense in the consolidated
financial statements. In addition, the adoption of SFAS 123R will require
additional accounting related to the income tax effects and additional
disclosure regarding the cash flow effects resulting from share-based payment
arrangements. SFAS 123R is effective beginning in the first quarter of fiscal
2006. The Company is currently assessing the impact of the adoption of SFAS 123R
on its results of operations and financial condition.
8
3. Inventories
Inventories are comprised of the following (unaudited):
December 31, 2004 June 30, 2004
----------------- -------------
Work-in progress $ 723,569 $ 722,894
Raw materials and component parts 8,640,227 9,170,682
Finished goods 2,754,839 2,944,085
Reserve for obsolete and excess
inventory (1,513,329) (1,742,490)
------------ ------------
$ 10,605,306 $ 11,095,171
============ ============
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 (consisting of employee stock options)
outstanding during the year. The weighted number of basic shares outstanding for
the three months ended December 31, 2004 and 2003 was 7,818,432 and 7,814,910,
respectively. The weighted number of diluted shares outstanding for the three
months ended December 31, 2004 and 2003 was 8,104,869 and 7,995,788 shares,
respectively. The weighted number of basic shares outstanding for the six months
ended December 31, 2004 and 2003 was 7,818,432 and 7,814,421, respectively. The
number of diluted shares outstanding for the six months ended December 31, 2004
and 2003 was 8,087,657 and 7,974,834 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
9
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 capital expenditure term loan shall continue on a
five-year schedule with equal monthly payments of $50,772.Amortization on the
real estate term loan was to continue on a five-year schedule with equal monthly
payments of $49,685. The real estate term loan was retired on September 30,
2004.
At December 31, 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
December 31, 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 December 31, 2004, the Company realized a
Fixed Charge Coverage Ratio, as defined, of approximately 2.12 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. The Company believes such performance results are
attainable, however, 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
10
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 December 31, 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
agreed to cease production of its product Baralyme(R), and to affect the
withdrawal of Baralyme(R) product held by distributors. The agreement permits
Allied to 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 if Baralyme(R) has been allowed, contrary to
recommended 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 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 initial payment of $1,530,000 from Abbott Laboratories was received on
September 30, 2004. The agreement required Abbott Laboratories to pay Allied
$600,000 for reimbursement of Allied's 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 six
months ended December 31, 2004, in accordance with the FASB's EITF Issue No.
99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent." The
Company is the primary obligor in the arrangement. It has sole authority to
determine the method of withdrawal of Baralyme(R) and discretion in such matters
as employee layoffs, disposal methods, and customer communications regarding the
sale of replacement products. The costs of executing the withdrawal are the sole
responsibility of the Company.
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
11
income, as net sales, over the eight-year term of the agreement. Allied has no
further obligations under this agreement which would require the Company to
repay these amounts or otherwise impact this accounting treatment. During the
three and six months ended December 31, 2004, $116,250 and $155,000 was
recognized as net sales, respectively.
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 Six Months ended
December 31, December 31,
------------------------- ---------------------
2004 2003 2004 2003
---------- ---------- ---------- ------
Beginning balance $ 891,250 $ - $ - $ -
Payment Received from
Abbott Laboratories - 1,530,000
Revenue recognized
as net sales (116,250) - (755,000) -
---------- ---------- ---------- ------
775,000 - 775,000 -
---------- ---------- ---------- ------
Less - Current portion
of deferred revenue (465,000) - (465,000) -
---------- ---------- ---------- ------
$ 310,000 $ - $ 310,000 $ -
========== ========== ========== ======
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, have been and will be recorded in accordance with SFAS 146,
"Accounting for the Costs Associated with Exit or Disposal Activities".
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 expired and was terminated as of the closing date. The Company paid
severance to those 12 bargaining unit employees on the active payroll as of
August 27, 2004.
During the first quarter of fiscal 2005, the Company recorded a charge to
Cost of Sales of $600,000. This charge included $216,000 for severance payments
and fringe benefits for the 12 bargaining unit employees. The charge included
$200,000 for the value of Baralyme(R) inventory in stock and the time of the
withdrawal, and associated disposal cost. The charge also included $184,000 for
replacement of Baralyme(R)
12
inventory which was returned by our customers as a result of the withdrawal. The
Company has replaced Baralyme(R) returned by its customers with Carbolime(R), a
carbon dioxide absorption product which continues to be offered for sale by
Allied.
During the second quarter of fiscal 2005, the Company recorded an
adjustment of $127,912 to reflect an increase in the estimated product
withdrawal cost and disposal cost, as more inventory was returned by customers
than originally estimated. The remaining cash expenditures are expected to be
paid over the next four quarters. The amounts accrued represent management's
best estimate of the obligations we expect to incur with this plan, and could be
subject to change. Adjustments may be required as conditions and facts change
throughout the implementation period.
The following table reflects the activities related to the withdrawal of
Baralyme(R) and subsequent suspension of operations at the Stuyvesant Falls, New
York facility, and the accrued liabilities in the consolidated balance sheets at
December 31, 2004. Changes to previous estimates have been reflected as
"Provision adjustments" on the table below in the period the changes in
estimates were made.
Cost Associated with Withdrawal of Baralyme
INVENTORY SEVERANCE
TO BE DISPOSED PAY AND PRODUCT
OF BENEFITS WITHDRAWAL TOTAL
-------------- --------- ---------- ---------
PROVISION $ 200,000 $ 216,000 $ 184,000 $ 600,000
CASH EXPENDITURES ($ 149,677) ($ 85,431) ($ 119,798) ($ 354,906)
---------- ---------- ---------- ----------
BALANCE AT
SEPTEMBER 30, 2004 $ 50,323 $ 130,569 $ 64,202 $ 245,094
CASH EXPENDITURES ($ 66,079) ($ 87,171) ($ 128,479) ($ 281,729)
PROVISION ADJUSTMENTS $ 55,756 ($ 2,852) $ 75,008 $ 127,912
---------- ---------- ---------- ----------
BALANCE AT
DECEMBER 31, 2004 $ 40,000 $ 40,546 $ 10,731 $ 91,277
========== ========== ========== ==========
In addition to the provisions of the agreement relating to the withdrawal
of the Baralyme(R) product, Abbott has agreed to pay 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.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2004 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2003.
Allied had net sales of $13.7 million for the three months ended December
31, 2004, down $1.4 million, or 9.3%, from net sales of $15.1 million in the
prior year same quarter. The overall decrease in net sales for the quarter is
the result of lower customer purchase order releases than in the prior year.
Sales for the three months ended December 31, 2004 include $116,250 for the
recognition into income of payments resulting from the agreement with Abbott
Laboratories to cease the production and distribution of Baralyme(R) as
discussed below. For the three months ended December 31, 2004 the Company had
Carbolime(R) sales of $0.6 million dollars, compared to combined sales of
Carbolime(R) and Baralyme(R) of $0.6 million for the three months ended December
31, 2003.
Orders for the Company's products for the six months ended December 31,
2004 were level with orders for the six months ended December 31, 2003. However,
customer purchase order releases were lower than in the prior year, leading to
the decrease in sales in the second quarter. Purchase order release lead times
depend on the scheduling practices of the individual customers. The Company
expects that these additional orders will be released for shipment, and ship in
the second half of the fiscal year.
Demand for the Company's Emergency Products has been stronger than in the
prior year. The Company has reorganized this area replacing a sales manager and
two of the three sales specialists. This increase in demand has been offset by
decreased demand for the Company's respiratory care products and medical gas
equipment. The Company believes that the market for hospital construction
products is approximately 8% lower than in the prior year. In addition, the
demand for respiratory care products has been adversely affected by increased
foreign competition. The Company is continuing its efforts to further reduce the
cost to produce its products.
As discussed more fully in note 7 to the financial statements included
elsewhere in this report, the Company ceased the sale of Baralyme(R) on August
27th, 2004 upon completion of the agreement with Abbott, and recognized three
months of income during the three months ended December 31, 2004. Income from
the agreement will continue to be recognized over eight years, the term of the
agreement, at $38,750 per month. Allied continues to sell Carbolime(R), a carbon
dioxide absorbent with a different formulation than Baralyme(R).
Gross profit for the three months ended December 31, 2004 was $3.4
million, or 25.0% of net sales, compared to $4.1 million, or 27.2% of net sales,
for the three months
14
ended December 31, 2003. The variance in gross profit percentages from prior
year periods is primarily attributable to lower absorption rates for fixed cost
due to the lower sales and production in fiscal 2005. There has not been an
increase in our underlying manufacturing cost.
Selling, general and administrative expenses for the three months ended
December 31, 2004 were $3.1 million, a net decrease of $0.2 million, or 6.1%,
from $3.3 million for the three months ended December 31, 2003. This decrease
includes an approximately $0.1 million decrease in compensation expense and
fringe benefits resulting from staff reductions in the prior year. Insurance
costs are approximately $0.1 million lower than in the prior year as a result of
lower negotiated insurance rates on product liability insurance.
Income from operations was $0.4 million for the three months ended
December 31, 2004 compared to $0.8 million for the three months ended December
31, 2003. Interest expense was $0.03 million for the three months ended December
31, 2004, down from $0.1 million for the three months ended December 31, 2003.
The reduction in interest expense is the result of the lower level of debt than
in the prior year. Allied had income before provision for income taxes in the
second quarter of fiscal 2005 of $0.3 million, compared to income before
provision for income taxes of $0.6 million for the second quarter of fiscal
2004. The Company recorded a tax provision of $0.1 million for the three-month
period ended December 31, 2004 compared to a tax provision of $0.3 million for
the three-month period ended December 31, 2003.
In fiscal 2005, the net income for the second quarter was $0.2 million or
$0.02 per basic and diluted share compared to net income of $0.4 million or
$0.05 per basic and diluted share for the second quarter of fiscal 2004. The
weighted average number of common shares outstanding used in the calculation of
basic earnings per share for the second quarters of fiscal 2005 and 2004 was
7,818,432 and 7,814,910 shares, respectively. The weighted average number of
common shares outstanding used in the calculation of diluted earnings per share
for the second quarters of fiscal 2005 and fiscal 2004 was 8,104,869 and
7,995,788 shares, respectively.
SIX MONTHS ENDED DECEMBER 31, 2004 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2003.
Allied had net sales of $27.6 million for the six months ended December
31, 2004, down $1.3 million, or 4.5%, from net sales of $28.9 million in the
prior year same period. The overall sales decrease is primarily due to the
timing of customer purchase order releases.
Sales for the six months ended December 31, 2004 include $155,000 for the
recognition into income of payments resulting from the agreement with Abbott
Laboratories to cease the production and distribution of Baralyme(R). Allied
continues to sell Carbolime(R), a carbon dioxide absorbent with a different
formulation than Baralyme(R). For the six months ended December 31, 2004 the
Company had carbon
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dioxide absorbent sales, including Baralyme(R) and Carbolime(R), of $1.0 million
dollars, compared with $1.1 million for the six months ended December 31, 2003.
Sales for the six months ended December 31, 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.
Orders for the Company's products for the six months ended December 31,
2004 were level with orders for the six months ended December 31, 2003. However,
customer purchase order releases were lower than in the prior year. Purchase
order release lead times depend on the scheduling practices of the individual
customers. The Company expects that these additional orders will be released for
shipment, and ship in the second half of the fiscal year.
Demand for the Company's Emergency Products has been stronger than in the
prior year. The Company has reorganized this area replacing a sales manager and
two of the three sales specialists. This increase in demand has been offset by
decreased demand for the Company's respiratory care products and medical gas
equipment. The Company believes that the market for hospital construction
products is approximately 8% lower than in the prior year. In addition, the
demand for respiratory care products has been adversely affected by increased
foreign competition. The Company is continuing its efforts to further reduce the
cost to produce its products.
Gross profit for the six months ended December 31, 2004 was $6.8 million,
or 24.7% of net sales, down from $7.5 million, or 26.0% of net sales, for the
six months ended December 31, 2003. The change in gross profit percentage is
primarily the result of two factors. Cost of sales for the six months ended
December 31, 2004 does include approximately $0.7 million in cost incurred in
connection with the withdrawal of Baralyme(R), including related - severance
costs. Gross profit for the six months ended December 31, 2003 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 former health care benefit provider.
Selling, general and administrative expenses for the six months ended
December 31, 2004 were $6.0 million, a net decrease of $0.5 million, or 7.7%,
from $6.5 million for the six months ended December 31, 2003. This decrease
includes an approximately $0.2 million decrease in compensation expense and
fringe benefits resulting from staff reductions in the prior year. Insurance
costs are approximately $0.1 million lower than in the prior year as a result of
lower negotiated insurance rates on product liability insurance. In addition,
legal costs are approximately $0.1 million lower than in the prior year.
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 six months
ended December 31, 2003.
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Income from operations was $0.8 million for the six months ended December
31, 2004 compared to $1.0 million income from operations for the six months
ended December 31, 2003. Interest expense was $0.1 million for the six months
ended December 31, 2004, down from $0.3 million for the six months ended
December 31, 2003. The decrease in interest cost is the result of lower debt
levels in the current year. Allied had income before provision for income taxes
in the first six months of fiscal 2005 of $0.7 million, compared to $0.7
million, for the first six months of fiscal 2004. The Company recorded a tax
provision of $0.3 million for the six-month period ended December 31, 2004 and
2003.
In fiscal 2005, the net income for the first six months was $0.4 million,
or $0.05 per basic and diluted share compared to net income of $0.4 million or
$0.05 per basic and diluted share for the first six months of fiscal 2004. The
weighted average number of common shares outstanding used in the calculation of
basic earnings per share for the first six months of fiscal 2005 and 2004 was
7,818,432 and 7,814,421 shares, respectively. The weighted average number of
common shares outstanding used in the calculation of diluted earnings per share
for the first six months of fiscal 2005 and fiscal 2004 was 8,087,657 and
7,974,834 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 decreased to $9.9 million at December 31, 2004 compared to
$11.0 million at June 30, 2004. This is primarily due to a $0.7 million
reduction in accounts receivable, a $0.5 million reduction in inventories, a
$0.1 million reduction in income tax receivable, 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 $0.3
million decrease in accounts payable, a $0.2 million decrease in other accrued
liabilities, and a $0.2 million increase in other current assets.
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
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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 capital expenditure
term loan shall continue on a five-year schedule with equal monthly payments of
$50,772. Amortization on the real estate term loan was to continue on a
five-year schedule with equal monthly payments of $49,685. The real estate term
loan was retired on September 30, 2004.
At December 31, 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
December 31, 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 December 31, 2004, the Company realized a
Fixed Charge Coverage Ratio, as defined, of approximately 2.12 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
credit agreement. The Company believes such performance results are attainable,
however, 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 Fast'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 December 31, 2004.
At December 31, 2004, the company had $0.7 million outstanding against
this facility and $8.7 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.
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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. 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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the FASB issued SFAS 151, "Inventory Costs." SFAS 151
requires the allocation of fixed production overhead costs be based on the
normal capacity of the production facilities and unallocated overhead costs
recognized as an expense in the period incurred. In addition, other items such
as abnormal freight, handling costs and wasted materials require treatment as
current period charges rather than a portion of the inventory cost. SFAS 151 is
effective for inventory costs incurred during periods beginning after June 15,
2005. The Company is currently assessing the impact of the adoption of SFAS 151
on its results of operations and financial condition.
In December 2004, the FASB issued SFAS 123R, "Share-Based Payment." SFAS
123R requires measurement of all employee stock-based compensation awards using
a fair value method and the recording of such expense in the consolidated
financial statements. In addition, the adoption of SFAS 123R will require
additional accounting related to the income tax effects and additional
disclosure regarding the cash flow effects resulting from share-based payment
arrangements. SFAS 123R is effective beginning in our first quarter of fiscal
2006. The Company is currently assessing the impact of the adoption of SFAS 123R
on its results of operations and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
At December 31, 2004, the Company had $1.3 million in debt outstanding.
This balance represents an amount outstanding under the Company's capital
expenditure loan for $1.3 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.
The Company had no holdings of derivative financial or commodity
instruments at December 31, 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
(a) As of December 31, 2004, the Company, under the supervision, and with
the participation, of its management, including its principal executive officer
and principal
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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 December 31, 2004.
(b) There has been no change in our internal controls over financial
reporting during the quarter ended December 31, 2004, that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
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 February 10, 2005 announcing second quarter
earnings.
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: February 10, 2005
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