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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 March 31, 2005
[ ] 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 May 2, 2005 is
7,829,577 shares.
INDEX
Page
Number
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statement of Operations -
three months and nine months ended March 31,
2005 and 2004 (Unaudited) 3
Consolidated Balance Sheet -
March 31, 2005 (Unaudited) and
June 30, 2004 (Audited) 4 - 5
Consolidated Statement of Cash Flows -
Nine months ended March 31, 2005 and 2004
(Unaudited) 6
Notes to Consolidated Financial Statements 7 - 14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14 - 20
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 20
Item 4. Controls and Procedures 20-21
Part II - Other Information
Item 6. Exhibits 22
Signature 23
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 Nine months ended
March 31, March 31,
--------- ---------
2005 2004 2005 2004
---- ---- ---- ----
Net sales $14,328,443 $14,956,873 $41,935,731 $43,841,734
Cost of sales 10,596,050 10,745,206 31,383,741 32,125,005
----------- ----------- ----------- -----------
Gross profit 3,732,393 4,211,667 10,551,990 11,716,729
Selling, general and
administrative expenses 3,013,159 3,054,399 8,998,802 9,568,968
----------- ----------- ----------- -----------
Income from operations 719,234 1,157,268 1,553,188 2,147,761
Other expenses:
Interest 15,416 111,570 118,227 453,285
Other, net 13,791 7,748 32,563 2,066
----------- ----------- ----------- -----------
29,207 119,318 150,790 455,351
----------- ----------- ----------- -----------
Income before provision
for income taxes 690,027 1,037,950 1,402,398 1,692,410
Provision for income taxes 281,739 410,115 574,423 677,595
----------- ----------- ----------- -----------
Net income $ 408,288 $ 627,835 $ 827,975 $ 1,014,815
=========== =========== =========== ===========
Basic earnings per share $ 0.05 $ 0.08 $ 0.11 $ 0.13
=========== =========== =========== ===========
Diluted earnings per share $ 0.05 $ 0.08 $ 0.10 $ 0.13
=========== =========== =========== ===========
Weighted average shares
outstanding - basic 7,821,404 7,818,432 7,819,408 7,815,748
Weighted average shares
outstanding - diluted 8,083,671 8,005,365 8,081,925 7,957,881
See accompanying Notes to Consolidated Financial Statements.
3
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
(UNAUDITED)
March 31, June 30,
2005 2004
---- ----
Current assets:
Cash $ 800 $ 8,256
Accounts receivable, net of allowance for doubtful
accounts of $475,000 and $475,000, respectively 7,987,383 7,708,969
Inventories, net 10,635,740 11,095,171
Income tax receivable - 130,548
Other current assets 328,942 127,127
----------- -----------
Total current assets 18,952,865 19,070,071
----------- -----------
Property, plant and equipment, net 11,403,838 11,999,927
Goodwill 15,979,830 15,979,830
Other assets, net 64,493 88,867
----------- -----------
Total assets $46,401,026 $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)
March 31, June 30,
2005 2004
---- ----
Current liabilities:
Accounts payable $ 3,339,988 $ 3,125,593
Current portion of long-term debt 970,754 1,245,484
Deferred income taxes 389,644 389,644
Deferred revenue 465,000 -
Other current liabilities 3,498,559 3,316,603
------------ ------------
Total current liabilities 8,663,945 8,077,324
------------ ------------
Deferred income taxes 242,478 242,478
------------ ------------
Deferred revenue 193,750 -
------------ ------------
Long-term debt - 2,366,076
------------ ------------
Commitments and contingencies (note 5)
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; 7,829,577 and 7,818,432 shares issued and
outstanding at March 31, 2005 and June 30, 2004 101,331 101,220
Additional paid-in capital 47,061,441 47,041,493
Common stock in treasury, at cost (20,731,428) (20,731,428)
Retained earnings 10,869,509 10,041,532
------------ ------------
Total stockholders' equity 37,300,853 36,452,817
------------ ------------
Total liabilities and stockholders' equity $ 46,401,026 $ 47,138,695
============ ============
See accompanying Notes to Consolidated Financial Statements.
5
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine months ended
March 31,
---------
2005 2004
---- ----
Cash flows from operating activities:
Net income $ 827,975 $ 1,014,815
Depreciation and amortization 963,054 970,169
Stock Based Compensation 20,060 -
Changes in operating assets and liabilities:
Accounts receivable, net (278,414) 430,416
Inventories, net 459,431 1,270,069
Income tax receivable 130,548 (219,403)
Other current assets (201,815) (33,609)
Accounts payable 214,395 560,296
Deferred revenue 658,750 -
Income tax payable (51,102) 654,363
Other current liabilities 233,059 499,428
------------ ------------
Net cash provided by operating activities 2,975,941 5,146,544
------------ ------------
Cash flows from investing activities:
Capital expenditures (342,591) (437,453)
------------ ------------
Net cash used in investing activities (342,591) (437,453)
------------ ------------
Cash flows from financing activities:
Payments of long-term debt (3,174,646) (844,867)
Borrowings under revolving credit agreement 44,067,252 42,497,132
Payments under revolving credit agreement (43,533,412) (46,373,129)
Proceeds from exercise of stock options - 10,987
------------ ------------
Net cash used in financing activities (2,640,806) (4,709,877)
------------ ------------
Net decrease in cash (7,456) (786)
Cash at beginning of period 8,256 12,016
------------ ------------
Cash at end of period $ 800 $ 11,230
============ ============
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 at the grant
date 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. In March 2005, the
Company recognized $20,060 of compensation expense related to the modification
of stock options held by a member of the Company's board of directors.
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 nine months ended March 31, 2005 and
2004.
7
Three Months Ended Nine Months Ended
March 31st, March 31st,
----------- -----------
2005 2004 2005 2004
---- ---- ---- ----
Net income, as reported $ 408,288 $ 627,835 $ 827,975 $ 1,014,815
Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects $ 12,036 - $ 12,036 -
------------ ------------ ------------ --------------
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 ($ 14,221) ($ 11,918) ($ 39,700) ($ 53,326)
------------ ------------ ------------ --------------
Proforma net income $ 406,103 $ 615,917 $ 800,311 $ 961,489
============ ============ ============ ==============
Earnings per share:
Basic-as reported $ 0.05 0.08 $ 0.11 0.13
------------ ------------ ------------ --------------
Basic-pro forma $ 0.05 0.08 $ 0.11 0.12
------------ ------------ ------------ --------------
Diluted -as reported $ 0.05 0.08 $ 0.10 0.13
------------ ------------ ------------ --------------
Diluted -pro forma $ 0.05 0.08 $ 0.10 0.12
------------ ------------ ------------ --------------
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
8
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.
3. Inventories
Inventories are comprised of the following (unaudited):
March 31, 2005 June 30, 2004
-------------- -------------
Work-in progress $ 923,190 $ 722,894
Raw materials and component parts 8,515,514 9,170,682
Finished goods 2,517,966 2,944,085
Reserve for obsolete and excess
inventory (1,320,930) (1,742,490)
------------ ------------
$ 10,635,740 $ 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 March 31, 2005 and 2004 was 7,821,404 and 7,818,432,
respectively. The weighted number of diluted shares outstanding for the three
months ended March 31, 2005 and 2004 was 8,083,671 and 8,005,365 shares,
respectively. The weighted number of basic shares outstanding for the nine
months ended March 31, 2005 and 2004 was 7,819,408 and 7,815,748, respectively.
The number of diluted shares outstanding for the nine months ended March 31,
2005 and 2004 was 8,081,925 and 7,957,881 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.
9
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 5.75% on March 31, 2005. 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 3.12% at March
31, 2005. 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 March 31, 2005, the Company was in compliance with its financial
covenants under the amended credit facility. Although the Company was in
compliance with its financial covenants under the amended credit facility at
March 31, 2005, 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 March 31, 2005, the Company realized a
Fixed Charge Coverage Ratio, as defined, of approximately 2.03 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
10
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 March 31, 2005.
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 nine
months ended March 31, 2005, 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
11
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 30, 2004, will be
recognized into 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 nine months ended March 31, 2005, $116,250 and $271,250 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 Nine Months ended
March 31, March 31,
--------- ---------
2005 2004 2005 2004
---- ---- ---- ----
Beginning balance $ 775,000 $ - $ - $ -
Payment Received from
Abbott Laboratories - - 1,530,000 -
Revenue recognized
as net sales (116,250) - (871,250) -
----------- --------- ----------- ---------
658,750 - 658,750 -
----------- --------- ----------- ---------
Less - Current portion
of deferred revenue (465,000) - (465,000) -
----------- --------- ----------- ---------
$ 193,750 $ - $ 193,750 $ -
=========== ========= =========== =========
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 9, 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
12
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) 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 three 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
March 31, 2005. Changes to previous estimates have been reflected as "Provision
adjustments" on the table below in the period the changes in estimates were
made.
13
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 $ 50,323 $ 130,569 $ 64,202 $ 245,094
SEPTEMBER 30, 2004
CASH EXPENDITURES ($ 66,079) ($ 87,171) ($ 128,479) ($ 281,729)
PROVISION ADJUSTMENTS $ 55,756 ($ 2,852) $ 75,008 $ 127,912
---------- ---------- ---------- ----------
BALANCE AT $ 40,000 $ 40,546 $ 10,731 $ 91,277
DECEMBER 31, 2004
CASH EXPENDITURES ($ 35,732) ($ 15,205) ($ 10,731) ($ 61,668)
PROVISION ADJUSTMENTS - - - -
---------- ---------- ---------- ----------
BALANCE AT $ 4,268 $ 25,341 $ 0 $ 29,609
MARCH 31, 2005
========== ========== ========== ==========
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. As of March 31, 2005 no
amounts have been received, or are receivable, as a result of product
development activities.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004.
14
Allied had net sales of $14.3 million for the three months ended March 31,
2005, down $0.7 million, or 4.7%, from net sales of $15.0 million in the prior
year same quarter. The overall decrease in net sales for the quarter is
primarily the result of lower customer purchase order releases than in the prior
year. Sales for the three months ended March 31, 2005 include $116,250 for the
recognition into sales 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 March 31, 2005 the Company had
Carbolime(R) sales of $0.3 million dollars, compared to combined sales of
Carbolime(R) and Baralyme(R) of $0.3 million for the three months ended March
31, 2004.
Orders for the Company's products for the three months and nine months
ended March 31, 2005 were level with orders for the same periods ended March 31,
2004. However, customer purchase order releases were $1.5 lower than in the
prior year third quarter, leading to the decrease in sales in the third quarter.
Purchase order release lead times depend on the scheduling practices of the
individual customers.
Orders for the Company's Emergency Products are higher than in the prior
year. The Company believes that orders for these products have been favorably
impacted by Federal Homeland Security funding for emergency responders. In
addition, 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 continues to believe that the market for construction
products remains weaker than in the prior year. In addition, the demand for
respiratory care products continues to be adversely affected by increased
foreign competition. The Company is continuing its active 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 sales during the three months ended March 31, 2005. Sales 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 March 31, 2005 was $3.7 million,
or 26.0% of net sales, compared to $4.2 million, or 28.2% of net sales, for the
three months ended March 31, 2004. 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. The Company continues
to control cost and actively pursue methods to reduce its cost.
Selling, general and administrative expenses for the three months ended
March 31, 2005 were $3.0 million, a net decrease of $0.1 million, or 3.2%, from
$3.1 million for the three months ended March 31, 2004. This decrease includes
an approximately $0.1
15
million decrease in compensation expense and fringe benefits resulting from
staff reductions in the prior year.
Income from operations was $0.7 million for the three months ended March
31, 2005 compared to $1.2 million for the three months ended March 31, 2004.
Interest expense was $15,416 for the three months ended March 31, 2005, down
from $111,570 for the three months ended March 31, 2004. 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 third quarter
of fiscal 2005 of $0.7 million, compared to income before provision for income
taxes of $1.0 million for the third quarter of fiscal 2004. The Company recorded
a tax provision of $0.3 million for the three-month period ended March 31, 2005
compared to a tax provision of $0.4 million for the three-month period ended
March 31, 2004.
In fiscal 2005, the net income for the third quarter was $0.4 million or
$0.05 per basic and diluted share compared to net income of $0.6 million or
$0.08 per basic and diluted share for the third quarter of fiscal 2004. The
weighted average number of common shares outstanding used in the calculation of
basic earnings per share for the third quarters of fiscal 2005 and 2004 was
7,821,404 and 7,818,432 shares, respectively. The weighted average number of
common shares outstanding used in the calculation of diluted earnings per share
for the third quarters of fiscal 2005 and fiscal 2004 was 8,083,671 and
8,005,365 shares, respectively.
NINE MONTHS ENDED MARCH 31, 2005 COMPARED TO NINE MONTHS ENDED MARCH 31, 2004.
Allied had net sales of $41.9 million for the nine months ended March 31,
2005, down $1.9 million, or 4.3%, from net sales of $43.8 million in the prior
year same period. The overall sales decrease is primarily due to the timing of
customer purchase order releases. Sales were also impacted by approximately $0.5
million due to capacity constraints which negatively impacted production and
shipments. The Company believes these constraints will be remedied in the fourth
quarter of the fiscal year.
Sales for the nine months ended March 31, 2005 include $271,250 for the
recognition into sales 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 nine months ended March 31, 2005 the
Company had carbon dioxide absorbent sales, including Baralyme(R) and
Carbolime(R), of $1.2 million dollars, compared with $1.5 million for the nine
months ended March 31, 2004. Sales for the nine months ended March 31, 2005 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.
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Orders for the Company's products for the nine months ended March 31, 2005
were level with orders for the nine months ended March 31, 2004. However,
customer purchase order releases were approximately $2.9 million lower than in
the prior year. Purchase order release lead times depend on the scheduling
practices of the individual customers, and do vary over time.
Orders for the Company's Emergency Products are higher than in the prior
year. The Company believes that orders for these products have been favorably
impacted by Federal Homeland Security funding for emergency responders. In
addition, 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 continues to believe that the market for construction
products remains weaker than in the prior year. In addition, the demand for
respiratory care products continues to be adversely affected by increased
foreign competition. The Company is continuing its active efforts to further
reduce the cost to produce its products.
Gross profit for the nine months ended March 31, 2005 was $10.6 million,
or 25.2% of net sales, down from $11.7 million, or 26.7% of net sales, for the
nine months ended March 31, 2004. The change in gross profit percentage is
primarily the result of two factors. Cost of sales for the nine months ended
March 31, 2005 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 nine months ended March 31, 2004 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 nine months ended
March 31, 2005 were $9.0 million, a net decrease of $0.6 million, or 6.3%, from
$9.6 million for the nine months ended March 31, 2004. This decrease includes an
approximately $0.3 million decrease in compensation expense and fringe benefits
resulting from staff reductions in the prior year. Insurance costs are
approximately $0.2 million lower than in the prior year as a result of lower
negotiated insurance rates on product liability insurance. In addition, bad debt
expense is 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 nine months
ended March 31, 2004.
Income from operations was $1.6 million for the nine months ended March
31, 2005 compared to $2.1 million income from operations for the nine months
ended March 31, 2004. Interest expense was $0.1 million for the nine months
ended March 31, 2005, down from $0.5 million for the nine months ended March 31,
2004. The decrease in interest cost is the result of lower debt levels in the
current year than in prior years.
17
Allied had income before provision for income taxes in the first nine months of
fiscal 2005 of $1.4 million, compared to $1.7 million, for the first nine months
of fiscal 2004. The Company recorded a tax provision of $0.6 million for the
nine-month period ended March 31, 2005 compared to a tax provision of $0.7
million for the nine-month period ended March 31, 2004.
In fiscal 2005, the net income for the first nine months was $0.8 million,
or $0.11 per basic and $0.10 per diluted share compared to net income of $1.0
million or $0.13 per basic and diluted share for the first nine months of fiscal
2004. The weighted average number of common shares outstanding used in the
calculation of basic earnings per share for the first nine months of fiscal 2005
and 2004 was 7,819,408 and 7,815,748 shares, respectively. The weighted average
number of common shares outstanding used in the calculation of diluted earnings
per share for the first nine months of fiscal 2005 and fiscal 2004 was 8,081,925
and 7,957,881 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 $10.3 million at March 31, 2005 compared to
$11.0 million at June 30, 2004. This is primarily due to a $0.5 million
reduction in inventories, a $0.1 million reduction in income tax receivable, a
$0.2 million increase in accounts payable, a $0.2 million increase in other
accrued 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 $0.3 million increase in
accounts receivable, $0.2 million increase in other current assets, and a $0.3
million decrease in current portion of long-term debt.
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 5.75% on March 31, 2005. 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
18
LIBOR rate was 3.12% at March 31, 2005. 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 March 31, 2005, the Company was in compliance with its financial
covenants under the amended credit facility. Although the Company was in
compliance with its financial covenants under the amended credit facility at
March 31, 2005, 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 March 31, 2005, the Company realized a
Fixed Charge Coverage Ratio, as defined, of approximately 2.03 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 March 31, 2005.
At March 31, 2005, the company had $0.6 million outstanding against this
facility and $9.3 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
19
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 March 31, 2005, the Company had $1.0 million in debt outstanding. This
balance includes an amount outstanding under the Company's capital expenditure
loan for $0.4 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.
The Company had no holdings of derivative financial or commodity
instruments at March 31, 2005. 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 March 31, 2005, 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
20
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 March 31, 2005.
(b) There has been no change in our internal controls over financial
reporting during the quarter ended March 31, 2005, that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
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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 May 2, 2005 announcing third quarter earnings.
22
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: May 2, 2005
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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 May 2, 2005 announcing third quarter earnings.