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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
(Mark One) Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission File Number 0-19266
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ALLIED HEALTHCARE PRODUCTS, INC.
[EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER]
DELAWARE 25-1370721
(STATE OR OTHER (I.R.S. EMPLOYER
JURISDICTION OF IDENTIFICATION
INCORPORATION OR NO.)
ORGANIZATION)
1720 SUBLETTE AVENUE
ST. LOUIS, MISSOURI 63110
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (314) 771-2400
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each
exchange
TITLE OF EACH ON WHICH
CLASS REGISTERED
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock
Preferred Stock
Preferred Stock Purchase Rights
(Title of class)
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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 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes. X No.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of September 23, 1996, the aggregate market value of the voting stock
held by non-affiliates (6,346,898 shares) of the Registrant was $46,015,010
(based on the closing price, on such date, of $7.25 per share).
As of September 23, 1996, there were 7,796,682 shares of common stock,
$0.01 par value (the "Common Stock"), outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement dated October 4, 1996 (portion)(Part III) Annual Report to
Shareholders for the Year Ended June 30, 1996(portion)(Parts I, II and IV)
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ALLIED HEALTHCARE PRODUCTS, INC.
INDEX TO FORM 10-K
PAGE
PART I
Item 1. Business.........................................................1
Item 2. Properties......................................................15
Item 3. Legal Proceedings...............................................16
Item 4. Submission of Matters to a Vote of Security Holders.............16
PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters.....................................17
Item 6. Selected Financial Data.........................................17
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations......................................................17
Item 8. Financial Statements and Supplementary Data.....................17
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure......................................................17
PART III
Item 10. Directors and Executive Officers of the Registrant..............18
Item 11. Executive Compensation..........................................18
Item 12. Security Ownership of Certain Beneficial
Owners and Management...........................................18
Item 13. Certain Relationships and Related
Transactions....................................................18
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K.........................................19
PART I
ITEM 1. BUSINESS
GENERAL
Allied Healthcare Products, Inc. ("Allied" or the "Company") is a leading
manufacturer of respiratory products used in the health care industry in a wide
range of hospital and alternate site settings, including post-acute care
facilities, home health care and trauma care. The Company's product lines
include respiratory therapy equipment, medical gas equipment and emergency
medical products. The Company believes that it is one of the largest U.S.
manufacturers of respiratory therapy products, with leading market shares in a
number of its principal product lines. As a result of a number of acquisitions
completed within recent years, the Company has diversified its product lines and
expanded its distribution channels. While maintaining its position as a leading
manufacturer in its traditional product lines, the Company has broadened its
focus to emphasize more technologically-advanced respiratory therapy products
for which it anticipates significant growth. Although the Company believes that
these acquisitions will provide opportunity for future growth, integration of
these operations in fiscal 1996 was more difficult and, to date, less successful
than anticipated.
Allied offers a broad spectrum of respiratory therapy products for use in
the trauma, hospital, home and post-acute care settings. The Company's products
are marketed under well-recognized and respected brand names to hospitals,
hospital equipment dealers, hospital construction contractors, home health care
dealers, emergency medical products dealers and others.
Allied's product lines include:
RESPIRATORY THERAPY EQUIPMENT MEDICAL GAS EQUIPMENT
* RESPIRATORY CARE/ANESTHESIA * MEDICAL GAS SYSTEM CONSTRUCTION
PRODUCTS PRODUCTS
* HOME RESPIRATORY CARE * MEDICAL GAS SYSTEM REGULATION
PRODUCTS DEVICES
EMERGENCY MEDICAL PRODUCTS * DISPOSABLE OXYGEN AND SPECIALTY
* RESPIRATORY/RESUSCITATION GAS CYLINDERS
PRODUCTS * PORTABLE SUCTION EQUIPMENT
* TRAUMA AND PATIENT HANDLING
PRODUCTS
The Company's principal executive offices are located at 1720 Sublette
Avenue, St. Louis, Missouri 63110, and its telephone number is (314) 771-2400.
RESPIRATORY PRODUCTS INDUSTRY
The worldwide market for respiratory products is significant and growing
due to an aging population, improved diagnostics, technology advancements and
the increased occurence of respiratory illnesses, such as asthma and respiratory
problems associated with AIDS and lung cancer. In addition, strong demand is
expected in the sectors of the industry serving lower cost venues, such as
post-acute care facilities and home health care. The treatment of respiratory
illnesses in the United States is more advanced than in many other countries
and, as a result, U.S. respiratory therapy manufacturers are well positioned to
compete in international markets.
Although consolidation has begun to occur, the respiratory products
industry remains fragmented, both domestically and internationally, with many
companies focusing on selected niches. The Company believes that the influence
of managed care and the ongoing consolidation of purchasers of respiratory
products, such as hospitals and alternate site providers, will result in further
consolidation among respiratory products suppliers. The Company believes that
such consolidation will generate economies of scale and other operating
efficiencies which will create a competitive advantage for those companies with
broad product lines, especially those companies competing in international
markets. In addition, this consolidation will result in larger buying groups and
national accounts which will increase customers' ability to negotiate prices.
1
Sales of respiratory products continue to be impacted by the ongoing
consolidation of the Company's health care provider customers and the continued
uncertainty in their marketplace caused by the possibility of health care
reform, particularly the possibility of changes in Medicare and Medicaid
financing and health care provider reimbursement rates. In April 1996, Congress
resolved uncertainty with respect to the federal fiscal 1996 budget but deferred
resolution of health care policy issues. The Company is unable to predict the
impact of the federal government's deferral of heath care policy decisions on
the respiratory products industry.
The respiratory products industry can be categorized by the delivery site
of respiratory care. Each setting is subject to different factors which
influence demand for respiratory products. The principal venues are hospitals
and alternate sites including post-acute care facilities, trauma care and home
health care. The respiratory products industry will be affected by the
continuing shift to less expensive alternate site care. As a result of cost
control pressures, sales of respiratory products to alternate site settings are
likely to grow more quickly than sales of products to hospitals.
BUSINESS STRATEGY
Allied's objective is to enhance its position in its core respiratory
therapy and medical gas equipment markets while expanding its product lines to
provide a continuum of respiratory products for use in hospital and alternate
site settings. In addition, the Company continues to shift its emphasis from the
lower growth sectors of the respiratory therapy market, such as medical gas
construction equipment, to higher growth sectors, such as home health care, and
higher technology sectors, such as ventilation monitoring systems through new
product development.
Allied experienced disappointing results during 1996 which were the result
of both external and internal factors. As discussed above, continued
consolidation of health care providers and uncertainty over federal budget
issues relating to Medicare and Medicaid impacted the Company's sales in fiscal
1996. In addition, Allied's recent acquisitions have taken longer to integrate
than originally anticipated. As a result, the Company has refocused its efforts
to develop and initiate strategic programs to return Allied to the historical
level of performance it is capable of achieving. In order to implement its
business strategy, Allied intends to:
RATIONALIZE OPERATIONS TO ACHIEVE EFFICIENCIES. Allied intends to continue
to evaluate opportunities to consolidate acquired operations in order to
eliminate excess capacity, reduce manufacturing, marketing and administrative
overhead costs, and develop and implement financial and operational controls
required for effective cost, inventory and accounts receivable control and
market share advances. In fiscal 1996, Allied consolidated its disposable
medical products operation in Mt. Vernon, Ohio into its facility in Toledo,
Ohio. In August 1996, the Company initiated the consolidation of its ventilation
and patient specialist field sales forces to increase sales coverage and
optimize selling costs. Allied will continue to evaluate additional
rationalization opportunities to achieve efficiencies with respect to both newly
acquired businesses and existing facilities.
EMPHASIZE NEW PRODUCT DEVELOPMENT. The Company plans to enhance its market
position by offering innovative, high quality products with superior technology
coupled with high customer service levels and competitive pricing. The Company
has recently introduced several respiratory therapy products which apply
advanced technologies to improve clinical outcomes or reduce costs, including
the Bear Cub 750R Infant Ventilator and the Smart TriggerTM for its adult
critical care ventilator. The Company has significantly increased its commitment
to internal research and development efforts and increased spending from $2.5
million in fiscal 1995 to $3.3 million in fiscal 1996. Research and development
expenditures in fiscal 1997 are expected to be $3.5 million.
EXPAND THE COMPANY'S INTERNATIONAL PRESENCE. The Company intends to
strategically expand its direct sales force abroad and expand its relationships
with foreign distributors. Allied's international sales have increased from 18%
of sales in fiscal 1994 to 26% of sales in fiscal 1996. Recent acquisitions have
broadened the Company's product offerings which should enable Allied to compete
more effectively in international markets. The Company believes that expanded
access to international markets will be particularly important as these markets
continue to grow.
2
UPGRADE MANUFACTURING CAPABILITIES. The Company is in the process of
modernizing two of its primary manufacturing facilities. During the last quarter
of fiscal 1996, the Company purchased five computer controlled machining centers
and began the programming and installation process of this machinery in its
St. Louis, Missouri facility. This $1.5 million investment, which should be
fully operational by the end of the fiscal 1997 second quarter, will
substantially modernize the Company's metal machining capabilities and will
result in significant opportunities to reduce product costs as a result of
shorter set-up times, elimination of secondary operations in component
manufacturing, reduced inventory levels, reductions in scrap and improvements in
quality. In addition, the Company will invest $1.8 million in molds and
injection molding machinery to modernize and expand the production capacity and
gain efficiencies at its Toledo, Ohio facility. This investment in enhanced
injection molding capabilities is expected to increase production throughput by
20%, and to provide significant cost reduction opportunities, including reduced
product material content and labor and utility costs, while improving overall
quality. The injection molding machinery project is scheduled to be completed by
the end of the fiscal 1997 second quarter. Finally, during fiscal 1997, the
Company expects to implement a new information technology system in order to
enhance customer service and improve materials management and production
scheduling.
3
MARKETS AND PRODUCTS
In fiscal 1996, respiratory therapy equipment, medical gas equipment and
emergency medical products represented approximately 53%, 36% and 11%,
respectively, of the Company's net sales. The Company operates in a single
industry segment and its principal products are described in the following
table:
PRINCIPAL
PRODUCT DESCRIPTION BRAND NAMES PRIMARY USERS
- ----------------------------- ----------------------------- ------------------------------ ----------------
RESPIRATORY THERAPY EQUIPMENT
Respiratory Care/Anesthesia Ventilators; large volume Bear; Timeter Hospitals and
Products compressors; ventilator calibrators; post-acute care
humidifiers and monitoring facilities
systems
Home Respiratory Oxygen concentrators; bottled Timeter; B&F; Patients at home
Care Products oxygen equipment; pressure Schuco; Bear
regulators; nebulizers;
portable large volume
compressors; portable suction
equipment and portable
ventilators
MEDICAL GAS EQUIPMENT
Construction Products In-wall medical gas system Chemetron; Hospitals and
components; central station Oxequip post-acute care
pumps and compressors and facilities
headwalls
Regulation Devices Flowmeters; vacuum regulators; Chemetron; Hospitals
pressure regulators and related Oxequip;
products Timeter
Disposable Cylinders Disposable oxygen and specialty Lif-O-Gen First aid providers
gas cylinders and substance abuse
compliance personnel
Suction Equipment Portable suction equipment and Gomco Hospitals and
disposable suction canisters post-acute care
facilities
EMERGENCY MEDICAL PRODUCTS
Respiratory/Resuscitation Demand resuscitation valves; LSP; Emergency service
Products portable resuscitation systems; Omni-Tech providers
emergency transport ventilators
and oxygen products
Trauma and Patient Handling Spine immobilization products; LSP Emergency service
Products pneumatic anti-shock garments providers
and trauma burn kits
4
RESPIRATORY THERAPY EQUIPMENT
MARKET. Respiratory therapy equipment is used in the treatment of chronic
respiratory and pulmonary disease and temporary respiratory distress. Conditions
treatable with respiratory therapy products include asthma and respiratory
problems associated with AIDS and lung cancer. The Company believes that sales
of respiratory therapy products will benefit from the treatment of AIDS
patients, the aging population, improved diagnosis, technology advancements and
an increased recognition of respiratory illnesses. Allied expects that the
global home respiratory care equipment market will be a particularly significant
growth area as cost containment pressures continue to encourage a shift in the
delivery of health care from the hospital to lower cost alternate site settings
while technology advancements make home treatment of respiratory patients
possible.
Respiratory therapy equipment is used in both hospitals and alternate site
settings. Sales of respiratory care and anesthesia products are made directly to
hospitals and post-acute care facilities while sales of home respiratory therapy
products are made through durable medical equipment dealers, which are
increasingly national chains.
The Company believes that it holds a significant share of the U.S. market
and selected foreign markets for certain respiratory therapy equipment,
including large volume compressors and ventilator calibrators. The Company also
believes that it has the leading share of the U.S. market for portable suction
equipment and has a significant market presence in other areas, including CO2
absorbent, adult ventilation, bottled oxygen equipment and accessories. Through
its acquisitions of B&F Medical Products, Inc. ("B&F") and Bear Medical Systems,
Inc. ("Bear"), Allied broadened its line of home respiratory care products and
believes that once its expansion of injection molding machinery is completed and
capacity constraints are eliminated, it is well positioned to increase its
penetration of the home health care market. Many durable medical equipment
distributors have had previous experience in the hospital setting and are
therefore familiar with Allied's traditional brands. The Company believes that
the experience of these home health care providers with its products will
provide it with significant sales opportunities in this market.
RESPIRATORY CARE/ANESTHESIA PRODUCTS. The Company manufactures and sells a
broad range of products for use in respiratory care and anesthesia delivery. As
a result of its acquisitions of Bear and BiCore Monitoring Systems, Inc.
("BiCore"), the Company markets a full line of critical care ventilators,
humidifiers and monitoring systems to hospitals, post-acute care facilities and
home health care dealers. Ventilators ease the work of patient breathing while
monitoring other pulmonary functions for the care provider. The Company
manufactures ventilators designed for both infants and adults. In August 1996,
the Company received 510(k) approval from the United States Food and Drug
Administration and introduced the Bear Cub 750R, a new infant ventilator which
utilizes a unique patented "volume limits" technology which establishes an upper
boundary to minimize the potential risk of overinflation of an infant's lungs.
In addition, the Company manufactures large volume compressors, which are
utilized to power volume ventilators and to convert certain drugs into an
aerosol form for delivery through the upper airways, and ventilator calibrators,
which are used primarily by hospital biomedical departments for testing
ventilators for compliance with manufacturers' specifications. The Company's
ventilator calibrator is referred to in virtually every major ventilator
manufacturer's operating and maintenance manuals.
The Company's other respiratory care/anesthesia products include CO2
absorbent which is used to absorb carbon dioxide in anesthesia machines that
deliver gas through a closed system mask covering the patient's nose and mouth,
oxygen tents, spirometers used to test lung capacity for purposes of detecting
and analyzing lung disease, oxygen timers used to measure oxygen usage and
ultrasonic nebulizers used to convert drugs into a fine mist for delivery to the
lungs.
HOME RESPIRATORY CARE PRODUCTS. Home respiratory care products represent
one of Allied's fastest growing businesses. Allied's broad line of home
respiratory care products includes oxygen concentrators, bottled oxygen
equipment, pressure regulators, portable large volume compressors, portable
suction equipment and portable ventilators.
5
Allied's oxygen concentrators, bottled oxygen equipment and pressure
regulators are all used in the delivery of home oxygen therapy. Oxygen
concentrators take air from a room and convert it into approximately 95% pure
oxygen. The Company believes that the market for oxygen concentrators will
experience substantial growth, particularly in markets outside of the United
States. Bottled oxygen equipment includes lightweight aluminum cylinders
containing pure oxygen. This equipment is utilized by mobile patients when they
leave the home. Pressure regulators manufactured by the Company, similar to
those that Allied sells in the hospital market, are used on these aluminum
cylinders.
Allied's portable large volume compressors are used to provide air to
drive ventilators and to deliver aerosolized drugs in the home. Portable suction
equipment is used in the home by people who have had tracheotomies and have had
tracheal tubes temporarily inserted. Suctioning is used intermittently to keep
the artificial airway clear.
The Company manufactures critical care ventilators and humidifiers which
are sold to patients for use in the home. The Company also offers an extensive
line of plastic disposable medical products, including tubing, humidifiers,
cannulas, oxygen masks, aerosol masks used with nebulizers and ventilator
circuits. In addition, Allied manufactures compressor nebulizers which convert
liquid medicine into airborne particles for application deep into the lungs.
Compressor nebulizers are primarily used by children suffering from asthma,
cystic fibrosis and other breathing disorders.
MEDICAL GAS EQUIPMENT
MARKET. The market for medical gas equipment consists of hospitals and, to
a lesser degree, alternate site settings, as well as durable medical equipment
dealers and other users of portable equipment. Medical gas system construction
products and regulation devices are sold to hospitals and post-acute care
facilities. Medical gas equipment is used to deliver oxygen, air and suction to
patients for brief or extended periods in settings ranging from intensive-care
facilities in hospitals to restaurants and industrial facilities. The Company's
medical gas equipment product line is subject to severe cost containment
pressures as managed care programs increasingly direct patients to lower cost
alternate site settings. The Company's medical gas products are sold directly to
hospitals, hospital construction contractors and durable medical equipment
dealers. Principal customers for disposable oxygen and specialty gas cylinders
include substance abuse compliance personnel and customers that require oxygen
for infrequent emergencies. Portable suction equipment is sold to health care
facilities and durable medical equipment dealers.
The Company believes that it holds a leading share of the U.S. market for
in-wall components, and that its Chemetron and Oxequip lines are well recognized
by hospital construction contractors. The Company believes that its in-wall
components are installed in more than 3,000 hospitals in the United States. The
Company also believes that it holds a significant share of the U.S. market for
flowmeters, vacuum regulators and pressure regulators and many medical gas
system regulation and portable suction equipment devices. Allied tracks its
market position through a proprietary database developed by management that
registers and tracks hospital construction projects in the U.S. market and
enables the Company to determine pricing trends, volume trends and market shares
for each of Allied's sales territories and for the U.S. market as a whole.
Allied believes that its installed base of equipment in this market will
continue to generate follow-on sales. Since hospitals typically do not have more
than one medical gas system, the manufacturer of the existing installed system
has a competitive advantage in sales of such products to a hospital in which its
system is installed. Accordingly, the Company's existing installed equipment
generates continued demand from its customers for replacement products and
extensions of existing systems, which constitute a significant percentage of the
Company's total sales of medical gas products. The Company also believes that
most hospital and post-acute care facility construction spending is for
expansion and renovation of existing facilities. Many hospital systems and
individual hospitals undertake major renovations to upgrade and rationalize
acquired operations, to improve the quality of care they provide and to attract
patients and personnel. The Company expects that its installed equipment base
will continue to provide the Company with a significant competitive advantage in
the hospital renovation market.
6
MEDICAL GAS SYSTEM CONSTRUCTION PRODUCTS. Allied's medical gas system
construction products consist of in-wall medical gas system components, central
station pumps and compressors and headwalls. These products are typically
installed during construction or renovation of a health care facility and are
built in as an integral part of the facility's physical plant. Typically, the
contractor for the facility's construction or renovation purchases medical gas
system components from manufacturers and ensures that the design specifications
of the health care facility are met.
Allied's in-wall components, including outlets, manifolds, alarms and zone
valves, serve a fundamental role in medical gas delivery systems by regulating
and monitoring the flow of medical gases.
Central station pumps and compressors are individually engineered systems
consisting of compressors, reservoirs, valves and controls designed to drive a
hospital's medical gas and suction systems. Each system is designed specifically
for a given hospital or facility by the Company, which purchases pumps and
compressors from suppliers and subcontracts the actual construction of the
system. The Company's sales of pumps and compressors are driven, in large part,
by its share of the in-wall components market.
Headwalls are prefabricated wall units for installation in patient rooms
and intensive care areas which house medical gas, suction and electrical outlets
and fixtures for monitoring equipment. These prefabricated walls also
incorporate designs for lighting and nurse call systems. Headwalls are built to
design specifications and eliminate the need for time-consuming installation of
fixtures and outlets and related piping and wiring directly into the hospital
wall. During fiscal 1995, the Company introduced the Trio headwall, which
includes a detachable face plate that permits a health care provider to switch
among one of three gases, thus providing greater flexibility to a hospital or
post-acute care facility.
MEDICAL GAS SYSTEM REGULATION DEVICES. The Company's medical gas system
regulation products include flowmeters, vacuum regulators and pressure
regulators, as well as related adapters, fittings and hoses which measure,
regulate, monitor and help transfer medical gases from walled piping or
equipment to patients in hospital rooms or intensive care areas. The Company's
leadership position in the in-wall components market gives the Company a
competitive advantage in marketing medical gas system regulation devices that
are compatible with those components. Hospitals that procure medical gas system
regulation devices from the Company's competitors were previously required to
utilize adapters in order to use Allied's in-wall components. However, in August
1996, the Company introduced its patented Connect II universal outlet, the first
such outlet to allow a hospital to utilize medical gas system regulation devices
and in-wall components produced by different manufacturers.
DISPOSABLE OXYGEN AND SPECIALTY GAS CYLINDERS. Disposable oxygen cylinders
are designed to provide oxygen supplies for short periods in emergency
situations. Since they are not subjected to the same pressurization as standard
containers, they are much lighter and less expensive than standard gas
cylinders. The Company markets filled disposable oxygen cylinders through
industrial safety distributors and similar customers, principally to first aid
providers, restaurants, industrial plants and other customers that require
oxygen for infrequent emergencies. The Company also markets disposable cylinders
to specialty gas manufacturers for use by substance abuse compliance personnel.
PORTABLE SUCTION EQUIPMENT AND SUCTION CANISTERS. Portable suction
equipment is typically used when in-wall suction is not available or when
medical protocol specifically requires portable suction. The Company also
manufactures disposable suction canisters, which are clear containers used to
collect the fluids suctioned by in-wall or portable suction systems. The
containers have volume calibrations which allow the medical practitioner to
measure the volume of fluids suctioned.
7
EMERGENCY MEDICAL PRODUCTS
MARKET. Emergency medical products are used in the treatment of
trauma-induced injuries. The Company's emergency medical products provide
patients resuscitation or ventilation during cardiopulmonary resuscitation or
respiratory distress as well as immobilization and treatment for burns. The
Company believes that the trauma care venue for health care services is
positioned for growth in light of the continuing trend in the health care
industry towards providing health care outside the traditional hospital setting.
The Company also expects that other countries will continue to develop trauma
care systems in the future, although no assurance can be given that such systems
will to continue to develop or that they will have a favorable impact on the
Company. Sales of emergency medical products are made through specialized
emergency medical products distributors.
The Company believes it is a market share leader with respect to certain of
its emergency medical products, including demand resuscitation valves, portable
resuscitation systems and autovents.
RESPIRATORY/RESUSCITATION PRODUCTS. The Company's respiratory/resuscitation
products include demand resuscitation valves, portable resuscitation systems and
related products, emergency transport ventilators, precision oxygen regulators,
minilators and multilators and humidifiers.
Demand resuscitation valves are designed to provide 100% oxygen to
breathing or non-breathing patients. In an emergency situation, the valve can be
used with a mask or tracheotomy tubes and operates from a standard regulated
oxygen system. The Company's portable resuscitation systems provide fast, simple
and effective means of ventilating a non-breathing patient during
cardiopulmonary resuscitation and 100% oxygen to breathing patients on demand
with minimal inspiratory effort. The Company also markets a full line of
disposable and reusable bag mask resuscitators. Bag mask resuscitators are
available in a variety of adult and child-size configurations. Disposable
mouth-to-mask resuscitation systems have the added advantage of reducing the
risk of transmission of communicable diseases.
The Company has introduced the first domestic line of emergency transport
ventilators, or autovents, which are small and compact in design. The Company's
autovent can meet a variety of needs in different applications ranging from
typical emergency medical situations to more sophisticated air and ground
transport. Each autovent is accompanied by a patient valve which provides for
effective ventilation during cardiopulmonary resuscitation or respiratory
distress. When administration of oxygen is required at the scene of a disaster,
in military field hospitals or in a multiple-victim incident, Allied's
minilators and multilators are capable of providing oxygen to one or a large
number of patients.
To enhance its position in the transport ventilation market, the Company
acquired Omni-Tech Medical, Inc. The Omni-Vent Series D, a high-tech transport
ventilator, is a pneumatically powered single circuit, volume-constant, time
cycled and inspirtory flow variable ventilator which is used in demanding
transport environments, including airmobile operations, hyperbaric chambers,
emergency medicine and other transport settings.
To complement the family of respiratory/resuscitation products, the Company
offers a full line of oxygen products accessories. This line of accessory
products includes reusable aspirators, tru-fit masks, disposable cuffed masks
and related accessories.
TRAUMA AND PATIENT HANDLING PRODUCTS. The Company's trauma and patient
handling products include spine immobilization products, pneumatic anti-shock
garments and trauma burn kits. Spine immobilization products include a back
board which is designed for safe immobilization of injury victims and provides a
durable and cost effective means of emergency patient transportation and
extrication. The infant/pediatric immobilization board is durable and scaled for
children. The half back extractor/rescue vest is useful for both suspected
cervical/spinal injuries and for mountain and air rescues. The Company's
pneumatic anti-shock garments are used to treat victims experiencing hypovolemic
shock. Allied's trauma burn kits contain a comprehensive line of products for
the treatment of trauma and burns.
8
SALES AND MARKETING
Allied sells its products primarily to respiratory care/anesthesia product
distributors, hospital construction contractors, emergency medical equipment
dealers and directly to hospitals. The Company maintains a domestic direct sales
force of 70 sales professionals, all of whom are full-time employees of the
Company. The sales force includes 36 respiratory products specialists, 16
hospital construction specialists, 10 home health care specialists, five
emergency medical specialists and three national account representatives. The
Company also utilizes eight telemarketers to generate sales in the home health
care market.
Respiratory products specialists are responsible for sales of medical gas
system regulation devices, portable suction equipment and respiratory
care/anesthesia products. These products are principally sold to the
approximately 5,700 hospitals in the United States through specialized
respiratory care/anesthesia product distributors. Many of these suppliers have
had experience with the Company's products as hospital respiratory therapists.
The Company hopes to capitalize on its brand name recognition and the
familiarity of its products and their reputations among these former hospital
therapists as a means of increasing its share of the home respiratory care
products market.
Respiratory products specialists are also responsible for sales of the full
line of infant and adult critical care ventilators and humidifiers, as well as
related monitoring equipment. These products are principally sold to hospitals,
post-acute care facilities and to durable medical equipment suppliers. In August
1996, Allied consolidated its patient care and ventilator specialists sales
forces to form the respiratory products sales force. The Company believes this
consolidation will yield several benefits, which include decreasing the cost to
the Company of the sales call, increasing the amount of time spent with
customers as opposed to traveling and, most importantly, satisfying the
customer's desire to consolidate purchases and be presented with a larger group
of products in one meeting.
Construction specialists are responsible for sales of medical gas system
construction products, including in-wall components, central station pumps and
compressors and headwalls. Construction specialists work with hospitals,
architects and project management firms, but most frequently sell to mechanical
and electrical contractors for new construction or renovation projects.
Home health care specialists are responsible for sales of home respiratory
care products. These products are sold through durable medical equipment
suppliers, who then rent or sell the products directly to the patient for use in
the home.
Emergency medical specialists are responsible for sales of
respiratory/resuscitation products, trauma and patient handling products. These
products are principally sold to ambulance companies, fire departments and
emergency medical systems volunteer organizations through specialized emergency
medical products distributors.
The Company employs national account representatives who are responsible
for marketing Allied's products to national hospital groups, managed care
organizations and other health care providers and to national chains of durable
medical equipment suppliers through sales efforts at the executive level.
Generally, the national account representatives secure a commitment from the
purchaser to buy a specified quantity of Allied's products over a defined time
period at a discounted price based on volume.
INTERNATIONAL. International sales represent a growth area which the
Company has been emphasizing, as reflected by the 27% increase in international
sales from $24.2 million in fiscal 1995 to $30.8 million in fiscal 1996.
Allied's net sales to foreign markets totaled approximately 26% of the Company's
total net sales in fiscal 1996. International sales are made through a network
of dealers, agents and U.S. exporters who distribute the Company's products
throughout the world. The Company currently maintains five international sales
offices. Allied has market presence in Canada, Mexico, Central and South
America, Europe, the Middle East and the Far East. Due to recent acquisitions
and distribution-related improvements, the Company has increased its sales in
the Far East, an area which is expected to show considerable market growth as a
result of anticipated improvements in the health care infrastructure. In
connection with the acquisition of Bear, the Company expanded its base of
operations throughout Europe and anticipates that, based upon that presence, it
will have the opportunity to
9
continue to increase its market share in Europe, particularly with respect to
ventilation and home health care products. For information regarding the
Company's export sales by geographic area, see Note 10 of the Notes to
Consolidated Financial Statements incorporated by reference herein.
MANUFACTURING
Allied's manufacturing processes include fabrication, electro-mechanical
assembly operations and plastics manufacturing. A significant part of Allied's
manufacturing operations involves electro-mechanical assembly of proprietary
products and circuit boards and the Company is vertically integrated in most
elements of metal machining and fabrication. Most of Allied's hourly employees
are involved in machining, metal fabrication or plastics manufacturing assembly.
Allied manufactures small metal components from bar stock in a machine
shop which includes automatic screw machines, horizontal lathes and drill
presses. The Company makes larger metal components from sheet metal using
computerized punch presses, brake presses and shears. The Company utilizes
automated welding equipment and an automated paint line in the production of its
disposable oxygen cylinders. In its plastics manufacturing processes, the
Company utilizes both extrusion and injection molding. The Company believes
that, with the improvements discussed below, its production facilities and
equipment are in good condition and sufficient to meet planned increases in
volume over the next few years and that conditions in local labor markets should
permit the implementation of additional shifts and days operated to meet any
future increased production capacity requirements.
The Company is in the process of modernizing two of its primary
manufacturing facilities. During the last quarter of fiscal 1996, the Company
purchased five computer controlled machining centers and began the programming
and installation process of this machinery in its St. Louis, Missouri facility.
This $1.5 million investment will substantially modernize the Company's metal
machining capabilities and will result in significant opportunities to reduce
product costs from shorter set-up times, elimination of secondary operations in
component manufacturing, reduced inventory levels, reductions in scrap and
improvements in quality.
Since its acquisition of B&F, Allied's production of its disposable
products has been constrained by outdated molds and injection molding machinery.
During fiscal 1996, manufacturing inefficiencies and capacity constraints
prevented the Company from shipping to the level of demand for certain products.
Accordingly, the Company will invest $2.0 million in molds and injection molding
machinery to expand the production capacity and gain efficiencies at its Toledo,
Ohio facility. This investment in enhanced injection molding capabilities is
expected to increase production throughput by 20%, and to provide significant
cost reduction opportunities, including reduced product material content, labor
and utility costs, while improving overall quality.
Production and inventory control are becoming increasingly important as
durable medical equipment dealers and other Allied customers decrease their
inventory levels and expect same-day or next-day shipment of orders. As a
result, the Company utilizes just-in-time ("JIT") manufacturing at all of its
facilities. JIT manufacturing allows Allied to respond to customer requests more
quickly. JIT processes are expected to result in work-in-process and finished
inventory reductions, space savings, significant reductions in scrap and rework
and corresponding productivity improvements, reduction in throughput time and
increased service levels. Allied also utilizes a quality assurance program as
part of its transition to the principles of KAIZEN or "lean" manufacturing. This
program focuses on training all employees with respect to customer product
specifications and inspection of machines, tools and finished products.
RESEARCH AND DEVELOPMENT
Consistent with its focus on more technologically-advanced products, the
Company has increased the level of its research and development activities and
anticipates committing more resources to research and development in the future.
Research and development expenditures in fiscal 1995 and 1996 were approximately
$2.5 million and $3.3 million, respectively, and are expected to be $3.5 million
in fiscal 1997.
10
Expenditures for research and development activities primarily include
updating current products and developing new respiratory therapy products. The
Company has approximately 40 engineers and technicians working on research and
development projects.
The Company has recently introduced several new products which are the
result of its research and development efforts. Such products include the Bear
Cub 750R infant ventilator, the Connect II universal medical gas outlet, the
Schuco 2000 nebulizer, Chemetron'sTM line of flowmeters, the BearTM 1000
ventilator with Smart TriggerR and the GomcoTM Opti-Vac. The Bear Cub 750R
infant ventilator utilizes a unique patented volume limit technology which
establishes an upper boundary to minimize the potential risk of over inflation
of an infant's lungs. The Schuco 2000 home care nebulizer is designed for the
treatment of asthmatics, primarily children, and has lower production costs, an
extended warranty and greater ease of use. The ChemetronTM flowmeter has been
redesigned to more effectively utilize space with the metering knob in front and
offers an extended warranty. The BearTM 1000 adult and pediatric ICU ventilator
with Smart-TriggerR provides a unique mechanism for automatically adjusting
pressure and flow thresholds. Finally, the GomcoTM Opti-Vac meets suctioning
needs in all health care settings, including emergency, acute care, sub-acute
care and the home.
GOVERNMENT REGULATION
The Company's products and its manufacturing activities are subject to
extensive and rigorous government regulation by federal and state authorities in
the United States and other countries. In the United States, medical devices for
human use are subject to comprehensive review by the United States Food and Drug
Administration (the "FDA"). The Federal Food, Drug, and Cosmetic Act ("FDC
Act"), and other federal statutes and regulations, govern or influence the
research, testing, manufacture, safety, labeling, storage, record keeping,
approval, advertising, and promotion of such products. Noncompliance with
applicable requirements can result in Warning Letters, fines, recall or seizure
of products, injunction, civil fines, refusal to permit products to be imported
into or exported out of the United States, refusal of the government to clear or
approve marketing applications or to allow the Company to enter into government
supply contracts, withdrawal of previously approved marketing applications and
criminal prosecution.
The Company will be required to file a premarket notification submission
("510(k) notification") or premarket approval ("PMA") application or supplement
with FDA before it begins marketing a new medical device or changes or modifies
an existing device in a manner that could significantly affect the device's
safety or effectiveness or make a major change or modification in the device's
intended use. Commercial distribution in certain foreign countries is subject to
additional regulatory requirements and receipt of approvals that vary from
country to country.
FDA categorizes medical devices into three regulatory classifications
subject to varying degrees of regulatory control. In general, Class I devices
are those whose safety and effectiveness can be reasonably ensured through
general controls (e.g., labeling, premarket notification and adherence to the
good manufacturing practice ("GMP") regulation for medical devices). Class II
devices may be subject to additional regulatory controls, including performance
standards and other special controls such as guidelines, postmarket surveillance
and patient registries. Class III devices, which typically are life-sustaining
or life-supporting and implantable devices, or new devices that have not been
found to be substantially equivalent to a legally marketed predicate device,
require clinical testing to ensure safety and effectiveness and FDA approval
prior to marketing and distribution. FDA also has the authority to require
clinical testing of Class I and Class II devices. Allied currently manufactures
only Class I and Class II devices.
If a medical device manufacturer can establish that a newly developed
device is "substantially equivalent" to a legally marketed Class I or Class II
device, or to a Class III device for which FDA has not called for PMAs, the
manufacturer may seek clearance from FDA to market the device by filing a 510(k)
notification. The 510(k) notification may need to be supported by appropriate
data establishing the claim of substantial equivalence to the satisfaction of
FDA. FDA recently has been requiring a more rigorous demonstration of
substantial equivalence.
11
Following submission of the 510(k) notification, the manufacturer or
distributor may not place the device into commercial distribution until an order
is issued by FDA. No law or regulation specifies the time limit by which FDA
must respond to a 510(k) notification. At this time, FDA typically responds to
the submission of a 510(k) premarket notification within 100 to 120 days. An FDA
order may declare that the device is substantially equivalent to another legally
marketed device and allow the proposed device to be marketed in the United
States. FDA, however, may determine that the proposed device is not
substantially equivalent or requires further information, such as additional
test data, before the agency is able to make a determination regarding
substantial equivalence. Such determination or request for additional
information could delay the Company's market introduction of its products and
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will obtain 510(k) notification clearance within the above time frames, if at
all, for any of the devices for which it may file a 510(k) notification.
If a manufacturer or distributor of medical devices cannot establish that
a proposed device is substantially equivalent, whether or not FDA has made a
determination in response to a 510(k) notification, the manufacturer or
distributor must seek premarket approval of the proposed device through
submission of a PMA application. To date, none of the Company's products have
been subject to PMA applications. A PMA application must be supported by
extensive data, including preclinical and clinical trial data, as well as
extensive literature to prove the safety and efficacy of the device. Upon
receipt, FDA conducts a preliminary review of the PMA to determine whether the
submission is sufficiently complete to permit a substantive review. If
sufficiently complete, the submission is declared fileable by FDA. Under the FDC
Act, FDA has 180 days to review a PMA application, although the review of such
applications more often occurs over a significantly protracted time period, and
generally takes approximately two years or more from the date of filing to
complete.
The PMA process can be expensive, uncertain and lengthy. A number of
devices for which FDA marketing approval has been sought have never been
approved for marketing. There can be no assurance that the Company will be able
to obtain necessary PMA application approval on a timely basis, or at all.
Delays in receipt or failure to receive such approvals, the loss of previously
received approvals, or failure to comply with existing or future regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations.
If human clinical trials of a proposed device are required and the device
presents "significant risk," the manufacturer or distributor of the device will
have to file an Investigational Device Exemption ("IDE") application with FDA
prior to commencing human clinical trials. To date, none of the Company's
products have been subject to IDE applications. The IDE application must be
supported by data, typically including the results of animal and mechanical
testing. If the IDE application is approved, human clinical trials may begin at
the specified investigational sites, and the number of research subjects or
patients included in the clinical trials must be limited to that approved by
FDA. The conduct of preclinical studies must be done in conformity with FDA's
good laboratory practice regulation. Clinical studies must comply with FDA's
regulations for Institutional Review Board ("IRB") approval and informed
consent.
The Company manufacturers and distributes a broad spectrum of respiratory
therapy equipment, emergency medical equipment and medical gas equipment. To
date, all of the Company's FDA clearances have been obtained through the 510(k)
clearance process. FDA's premarket notification regulation requires that agency
clearance of a new 510(k) notification is required before the Company can market
a previously cleared device that has been changed or modified, if the change or
modification could significantly affect the safety or effectiveness of the
device or if there is a major change or modification in the intended use of the
device. These determinations are very fact specific, and FDA has stated that,
initially, the manufacturer is best qualified to make these determinations,
which should be based on adequate supporting data and documentation. FDA,
however, may disagree with a manufacturer's determination and require the
submission of a new 510(k) notification for the changed or modified device.
Where FDA believes that the change or modification raises significant new
questions of safety or effectiveness, the agency may require a manufacturer to
cease distribution of the device pending clearance of a new 510(k) notification.
Certain of the Company's medical devices have been changed or modified
subsequent to 510(k) marketing clearance of the original device by FDA. Certain
of the Company's medical devices, which were first marketed prior to May 28,
1976 and, therefore, grandfathered and exempt from the 510(k) notification
process, also have been subsequently changed or modified. The Company believes
that these
12
changes or modifications do not significantly affect the devices' safety or
effectiveness or make a major change or modification in the devices' intended
uses and, accordingly, that submission of new 510(k) notifications to FDA is not
required. There can be no assurance, however, that FDA would agree with the
Company's determinations.
The Company's medical device manufacturing facilities are registered with
FDA. As such, the Company will be inspected by FDA for compliance with the GMP
regulations for medical devices. This regulation requires that the Company
manufacture its products and maintain documents in a prescribed manner with
respect to manufacturing, testing and control activities. The GMP regulation may
be revised by FDA to include design controls as well. The Company also is
subject to the registration and inspection requirements of state regulatory
agencies.
During fiscal 1996, FDA conducted inspections at Allied's St. Louis,
Missouri, Toledo, Ohio and Stuyvesant Falls, New York facilities. No alleged
violations of the GMP and MDR regulations were identified by FDA. During fiscal
1995, FDA conducted an inspection of the Company's Riverside, California
manufacturing facility and issued a Form FDA 483 and a Warning Letter during
July and August 1995, respectively and a Form FDA 483 in January 1996.
Subsequent to the receipt of these documents, the Company took all necessary
corrective action at the Riverside facility. The Company has been notified by
FDA that all restrictions on 510(k) applications have been lifted.
The Medical Device Reporting regulation requires that the Company provide
information to FDA on deaths or serious injuries alleged to have been associated
with the use of its devices, as well as product malfunctions that would likely
cause or contribute to death or serious injury if the malfunction were to recur.
The Medical Device Tracking regulation requires the Company to adopt a method of
device tracking of certain devices, such as ventilators and oxygen
concentrators, which are life-supporting or life-sustaining devices used outside
of a device user facility or which are permanently implantable devices. The
regulation requires that the method adopted by the Company ensures that the
tracked device can be traced from the device manufacturer to the person for whom
the device is indicated (i.e., the patient). In addition, FDA prohibits a
company from promoting an approved device for unapproved applications and
reviews a company's labeling for accuracy. Labeling and promotional activities
also are, in certain instances, subject to scrutiny by the Federal Trade
Commission.
There can be no assurance that any required FDA or other governmental
approval will be granted, or, if granted, will not be withdrawn. Governmental
regulation may prevent or substantially delay the marketing of the Company's
proposed products and cause the Company to undertake costly procedures. In
addition, the extent of potentially adverse government regulation that might
arise from future administrative action or legislation cannot be predicted. Any
failure to obtain, or delay in obtaining, such approvals could adversely affect
the Company's ability to market its proposed products.
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. Whether or not
FDA approval has been obtained, approval of a device by a comparable regulatory
authority of a foreign country generally must be obtained prior to the
commencement of marketing in those countries. The time required to obtain such
approvals may be longer or shorter than that required for FDA approval.
No FDA approval is required to export a device that is legally marketed in
the United States by the exporting company, or for a device that is eligible for
marketing clearance by FDA through the 510(k) premarket notification process.
Permission from FDA is required, however, to export an unapproved Class III
medical device for which a PMA is required for marketing in the United States,
unless the device has been approved for marketing in Australia, Canada, Israel,
Japan, New Zealand, Switzerland, South Africa, the European Union or a country
in the European Economic Area. FDA must determine that exportation of the device
is not contrary to public health and safety and has the approval of the country
to which it is intended for export. FDA approval also is required to export an
investigational device to a country other than one of those listed in the
proceeding sentence, unless the device is the subject of an FDA-approved IDE and
will be marketed or used in clinical trials in the importing country for the
same intended use, or the manufacturer has been informed by at least two IRBs in
the United States that the device is a non-significant risk device and the
device will be marketed or used for clinical trials in the importing county for
the same intended use. In order to obtain FDA approval, a company must provide
the agency
13
with documentation from the medical device regulatory authority of the country
in which the purchaser is located, stating that the sale of the device is not in
violation of the country's medical device laws. There can be no assurance that
the Company will obtain any required approval by FDA or the country to which a
device is intended for export.
The Company also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protections, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that it will not be
required to incur significant cost to comply with such laws and regulations in
the future or that such laws or regulations will not have a materially adverse
effect upon the Company's ability to do business.
THIRD PARTY REIMBURSEMENT
The cost of a majority of medical care in the United States is funded by
the U.S. Government through the Medicare and Medicaid programs and by private
insurance programs, such as corporate health insurance plans. Although the
Company does not receive payments for its products directly from these programs,
home respiratory care providers and durable medical equipment suppliers, who are
the primary customers for several of the Company's products, depend heavily on
payments from Medicare, Medicaid and private insurers as a major source of
revenues. In addition, sales of certain of the Company's products are affected
by the extent of hospital and health care facility construction and renovation
at any given time. The federal government indirectly funds a significant
percentage of such construction and renovation costs through Medicare and
Medicaid reimbursements. In recent years, governmentally imposed limits on
reimbursement of hospitals and other health care providers have impacted
negatively spending for services, consumables and capital goods. In addition,
Congress has deferred resolution of health care policy issues, including the
Medicare and Medicaid programs and whether there should be changes in the
eligibility requirements for participation in such programs or whether they
should be restructured. Restructuring of Medicare and Medicaid most likely will
be considered again by Congress in 1997. A material decrease from current
reimbursement levels or a material change in the method or basis of reimbursing
health care providers, especially with respect to capital spending, as well as
uncertainty with respect to the possibility of such changes, are likely to
adversely affect future sales of the Company's products.
PATENTS, TRADEMARKS AND PROPRIETARY TECHNOLOGY
The Company has recently expanded the number of products it manufactures
which are subject to patents and has applied for several patents for new product
developments. Allied holds patents on the Bear Cub 750R infant ventilator, the
Connect II universal gas outlet, the Trio headwall and certain ventilator
components which it believes to be material to its business. The Company expects
that as it shifts its focus to the higher technology portion of the respiratory
products industry, new patents obtained through its research and development
efforts and acquisitions will be increasingly material to the Company's
business.
The Company owns and maintains U.S. trademark registrations for Chemetron,
Gomco, Oxequip, Lif-O-Gen, Life Support Products, Timeter, Vacutron and Schuco,
its principal trademarks. Registrations for these trademarks are also owned and
maintained in all countries where such products are sold and such registrations
are considered necessary to preserve the Company's proprietary rights therein.
COMPETITION
Allied competes in the markets for respiratory products. The Company has
different competitors within each of its product lines. The Company's principal
competitors include: Nellcor Puritan-Bennett Corporation; DeVilbiss Health Care,
Inc., a subsidiary of Sunrise Medical Inc.; Healthdyne Technologies, Inc.; Bird
Medical Technologies, Inc., a subsidiary of Thermo Election Corp.; Invacare
Corporation; Medaes Inc., Ohmeda, a division of BOC Group plc; Hill-Rom Company,
Inc., a subsidiary of Hillenbrand Industries, Inc.; Laerdal Medical Corporation;
Ambu, Inc.; Impact Instrumentation, Inc. and Ferno-Washington, Inc. Many of the
Company's principal competitors are larger than Allied and the Company believes
that most of these competitors have greater financial and other resources than
the Company. The Company competes primarily on the basis of price, quality
14
and service. The Company believes that it is well positioned with respect to
product cost, brand recognition, product reliability and customer service to
compete effectively in each of its markets.
EMPLOYEES
At June 30, 1996, the Company had 814 full-time employees and 143
part-time employees. Approximately 265 employees in the Company's principal
manufacturing facility located in St. Louis, Missouri, are covered by a
collective bargaining agreement which expires in May 1997. An aggregate of
approximately 115 employees at the Company's facilities in Oakland, California,
Toledo, Ohio and Stuyvesant Falls, New York are also covered by collective
bargaining agreements which expire in 1997 and 1998. The Company has not
experienced a strike or work stoppage during the past five years, and believes
that its labor relations are good.
ENVIRONMENTAL AND SAFETY REGULATION
The Company is subject to federal, state and local environmental laws and
regulations that impose limitations on the discharge of pollutants into the
environment and establish standards for the treatment, storage and disposal of
toxic and hazardous wastes. The Company is also subject to the federal
Occupational Safety and Health Act and similar state statutes. From time to time
the Company has been involved in environmental proceedings involving clean-up of
hazardous waste. There are no such material proceedings currently pending. Costs
of compliance with environmental, health and safety requirements have not been
material to the Company. The Company believes it is in material compliance with
all applicable environmental laws and regulations.
ITEM 2. PROPERTIES
The Company's headquarters are located in St. Louis, Missouri and the
Company maintains manufacturing facilities in Missouri, California, Ohio and New
York. Set forth below is certain information with respect to the Company's
manufacturing facilities.
SQUARE OWNED/
FOOTAGE LEASED
LOCATION (APPROXIMATE) ACTIVITIES/PRODUCTS
- --------------------- --------- ------- -----------------------
St. Louis, Missouri 270,000 Owned Headquarters; medical
gas equipment;
respiratory therapy
equipment; emergency
medical products
Riverside, 164,000 Leased Respiratory therapy
California equipment
Toledo, Ohio 56,700 Owned Home health care
products
Stuyvesant Falls, 30,000 Owned CO2 absorbent
New York
Oakland, California 12,500 Leased Headwalls
In the event of the expiration, cancellation or termination of a lease
relating to any of the Company's leased properties, the Company anticipates no
significant difficulty in connection with leasing alternate space at reasonable
rates. The Company leases facilities in Mt. Vernon, Ohio, which it subleased in
fiscal 1996 as a second stage of its plant consolidation strategy for its
disposable products operations. In addition, the Company also owns an additional
16.8 acre parcel of undeveloped land in Stuyvesant Falls, New York.
15
ITEM 3. LEGAL PROCEEDINGS
Product liability lawsuits are filed against the Company from time to time
for various injuries alleged to have resulted from defects in the manufacture
and/or design of the Company's products. Several such proceedings are currently
pending, which are not expected to have a material adverse effect on the
Company. The Company maintains comprehensive general liability insurance
coverage which it believes to be adequate for the continued operation of its
business, including coverage of product liability claims.
In addition, from time to time the Company's products may be subject to
product recalls in order to correct design or manufacturing flaws in such
products. To date, no such recalls have been material to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The information required by this item is set forth under the caption
"Common Stock Information" appearing on page 29 of the Company's 1996 Annual
Report to Shareholders (the "Annual Report"), which information is incorporated
herein by reference thereto.
As of September 23, 1996, there were 244 record owners of the Company's
Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is set forth under the caption
"Income Statement Data" and "Balance Sheet Data" appearing on page 29 of the
Annual Report, which information is incorporated herein by reference thereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing on pages 10 through 16 of the Annual Report, which
information is incorporated herein by reference thereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this item are
presented under Item 14 and incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A definitive proxy statement is expected to be filed with the Securities
and Exchange Commission on or about October 4, 1996. The information required by
this item is set forth under the caption "Election of Directors" on pages 2
through 4, under the caption "Executive Officers" on page 7 under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance" on page 18 of the
definitive proxy statement, which information is incorporated herein by
reference thereto.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption
"Executive Compensation" on pages 8 through 14 of the definitive proxy
statement, which information is incorporated herein by reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" on pages 4
through 6 of the definitive proxy statement, which information is incorporated
herein by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the caption
"Certain Transactions" on page 15 of the definitive proxy statement, which
information is incorporated herein by reference thereto.
18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and its
subsidiaries, included on pages 17 to 28 in the Annual Report are incorporated
herein by reference:
Consolidated Statement of Income for the years
ended June 30, 1996, 1995 and 1994
Consolidated Balance Sheet at June 30, 1996 and 1995
Consolidated Statement of Changes in Shareholders' Equity
for the years ended June 30, 1996, 1995 and 1994
Consolidated Statement of Cash Flows for the years ended
June 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Accountants
2. FINANCIAL STATEMENT SCHEDULES
Report of Independent Accountants on Financial Statement Schedule
Valuation and Qualifying Accounts and Reserves for the Years
Ended June 30, 1996, 1995 and 1994
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
3. EXHIBITS
The exhibits listed on the accompanying Index to Exhibits are filed as
part of this Report.
4. REPORTS ON FORM 8-K
None.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /S/ BARRY F.BAKER
________________________________
Barry F. Baker
Vice President-Finance and Chief
Financial Officer
Dated: September 27, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on September 27, 1996.
SIGNATURES TITLE
* Chairman of the Board
_____________________________
Dennis W. Sheehan
* President, Chief Executive Officer and
_____________________________ Director (Principal Executive Officer)
James C. Janning
/S/ BARRY F. BAKER Vice President-Finance and Chief
_____________________________ Financial Officer (Principal Financial
Barry F. Baker Officer and Principal Accounting Officer)
*
_____________________________ Director
David A. Gee
*
_____________________________ Director
Samuel A. Hamacher
*
_____________________________ Director
Robert E. Lefton
*
_____________________________ Director
Donald E. Nickelson
*
_____________________________ Director
William A. Peck
*By: /S/ BARRY F. BAKER
_____________________________
Barry F. Baker
Attorney-in-Fact
- ----------
*Such signature has been affixed pursuant to the following Power of Attorney.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints each of James C. Janning and Barry F. Baker as
his true and lawful attorney-in-fact and agent, each with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign the 1996 Annual Report on Form 10-K of Allied Healthcare
Products, Inc., and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto each said attorney-in-fact and agent full power and authority to
do and perform each and every act and thing requisite as fully to all intents
and purposes as he might or could do in person, and ratifying and confirming all
that said attorney-in-fact and agent or his substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
Allied Healthcare Products, Inc.
Our audits of the consolidated financial statements referred to in our
report dated August 21, 1996, except as to Note 14, which is as of September 20,
1996, appearing in the 1996 Annual Report to Shareholders of Allied Healthcare
Products, Inc. (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the Financial Statement Schedule listed in item 14(2) of this Form
10-K. In our opinion, this Financial Statement Schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PRICE WATERHOUSE LLP
St. Louis, Missouri
August 21, 1996
S-1
ALLIED HEALTHCARE PRODUCTS, INC.
RULE 12-09 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEAR ENDED JUNE 30, 1996
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------------------------------------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING COSTS AND - ACCOUNTS DEDUCTIONS BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DESCRIBE -- DESCRIBE END OF PERIOD
- -------------------------------------------------------------------------------------
Reserve For
Doubtful
Accounts ($590,459) ($107,871) $275,814(1)
($422,516)
Inventory
Allowance
For
Obsolescence ($4,349,467)
and Excess
Quantities $83,700
$2,453,225(2) ($1,812,542)
- ------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30, 1995
Reserve For
Doubtful
Accounts
($320,000) $124,205 ($394,664)(3) ($590,459)
Inventory
Allowance
For
Obsolescence
and Excess ($812,389) ($469,664) ($4,006,742) (($4,349,467)
Quantities
- ------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30, 1994
Reserve For
Doubtful
Accounts ($245,446) $54,636 ($129,190)(5) ($320,000)
Inventory
Allowance
For
Obsolescence
and Excess ($485,000) ($148,384) $179,005(6) ($812,389)
Quantities
- --------------------------------------------------------------------------------
(1) Decrease due to bad debt write-offs, bad debt recoveries and changes in
estimate. Offsetting increase of $80,000 due to the acquisition of Omni-Tech
Medical, Inc.
(2) Decrease due to inventory disposed of and changes in estimate.
Offsetting increase of $105,470 due to the acquisition of Omni-Tech Medical,
Inc.
(3) $404,993 due to the acquisition of B&F Medical Products, Inc., Bear
Medical Systems, Inc. and BiCore Monitoring Systems, Inc. Offsetting
decrease due to bad debt write-offs, bad debt recoveries and changes in
estimate.
(4) $5,369,689 due to the acquisition of B&F Medical Products, Inc., Bear
Medical Systems, Inc. and BiCore Monitoring Systems, Inc. Offsetting
decrease due to inventory determined to be obsolete and disposed of and
changes in estimate.
(5) $50,488 due to the acquisition of Life Support Products, Inc. and
Hospital Systems, Inc. Remainder due to Bad debt write-offs, bad debt
recoveries and changes in estimate.
(6) $294,393 due to the acquisition of Life Support Products, Inc. and
Hospital Systems, Inc. Remainder due to inventory determined to be obsolete
and disposed of and changes in estimate.
S-2
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
No. Description Page
2.1 Agreement and Plan of Merger, dated as of August 4, 1994, by and among
Allied Healthcare Products, Inc., BFM Acquisition Corporation, B&F
Medical Products, Inc., and the major stockholders listed therein
(filed as Item 7(d) to the Current Report on Form 8-K, filed with the
Commission on September 16, 1994, as amended on November 4, 1994, and
incorporated herein by reference)
2.2 Stock Purchase Agreement, dated as of February 10, 1995, by and among
Allied Healthcare Products, Inc., Selwood, Inc., and BTR Dunlop, Inc.
(filed as Item 7 (c) to the Current Report on Form 8-K filed with the
Commission on February 24, 1995, as amended on April 24, 1995, and
incorporated herein by reference)
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(filed as Exhibit 3(1) to the Company's Registration Statement on Form
S-1, as amended, Registration No. 33-40128, filed with the Commission
on May 8, 1991 (the "Registration Statement") and incorporated herein
by reference) 3.2 Certificate of Designations, Preferences and Rights
of Series A Preferred Stock of Allied Healthcare Products, Inc. dated
August 21, 1996
3.2 Certificate of Designations, Preferences and Rights of Series A
Preferred Stock of Allied Healthcare Products, Inc. dated August 21,
1996.
3.3 By-Laws of the Registrant (filed as Exhibit 3(2) to the Registration
Statement and incorporated herein by reference)
10.1 Lease Agreement, dated June 30, 1988, between Luke D. Wenger and
Shirley A. Wenger and Timeter Instrument Corporation (filed as Exhibit
10(14) to the Registration Statement and incorporated herein by
reference)
10.2 NCG Trademark License Agreement, dated April 16, 1982, between
Liquid Air Corporation and Allied Healthcare Products, Inc. (filed as
Exhibit 10(24) to the Registration Statement and incorporated herein
by reference)
10.3 Allied Healthcare Products, Inc. 1991 Directors Non-Qualified Stock
Option Plan (filed as Exhibit 10(25) to the Registration Statement and
incorporated herein by reference)
10.4 Allied Healthcare Products, Inc. 1991 Employee Non-Qualified Stock
Option Plan (filed as Exhibit 10(26) to the Registration Statement and
incorporated herein by reference)
10.5 Amended and Restated Registration Rights Agreement dated November 8,
1991 among Allied Healthcare Products, Inc., Harbour Group
Investments, L.P., Earl R. Refsland and Robert L. Ricks (filed as
Exhibit 10(41) to the Registration Statement and incorporated herein
by reference)
Sequentially
Exhibit Numbered
No. Description Page
10.6 Employee Stock Purchase Plan (filed with the Commission as Exhibit
10(45) to the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1992 (the "1992 Form 10-K") and incorporated herein by
reference)
10.7 Amendment to Allied Healthcare Products, Inc. 1991 Directors Non-
Qualified Stock Option Plan dated September 14, 1992 (filed as Exhibit
10(46) to the 1992 Form 10-K and incorporated herein by reference)
10.8 First Amendment to Lease Agreement, dated January 24, 1992, between
Luke D. Wenger and Shirley A. Wenger and Timeter Instrument
Corporation (filed as Exhibit 10(32) to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1993 and incorporated
herein by reference)
10.9 Operations Consulting and Advisory Services Agreement dated January
26, 1994 between Harbour Group Ltd. and Allied Healthcare Products,
Inc. (filed with the Commission as Exhibit 10(33) to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1994
(the "1994 Form 10-K") and incorporated herein by reference)
10.10 Corporate Development Consulting and Advisory Services Agreement
dated January 26, 1994 between Harbour Group Industries, Inc. and
Allied Healthcare Products, Inc. (filed with the Commission as Exhibit
10(34) to the 1994 Form 10-K and incorporated herein by reference)
10.11 Allied Healthcare Products, Inc. 1994 Employee Stock Option Plan
(filed with the Commission as Exhibit 10(39) to the 1994 Form 10-K and
incorporated herein by reference)
10.12 Memorandum of Agreement dated June 1, 1994 covering June 1, 1994 - May
31, 1997 between Allied Healthcare Products, Inc. and District No. 9,
International Association of Machinist and Aerospace Workers (filed
with the Commission as Exhibit 10(40) to the 1994 Form 10-K and
incorporated herein by reference)
10.13 Letter Agreement dated August 4, 1994 between Harbour Group, Ltd.
and Allied Healthcare Products, Inc. (filed with the Commission as
Exhibit 10(42) to the 1994 Form 10-K and incorporated herein by
reference)
10.14 Lease dated as of November 4, 1993 between Essup Part and B&F Medical
Products, Inc. (filed with the Commission as Exhibit 10(43) to the
1994 Form 10-K and incorporated herein by reference)
10.15 Union Labor Agreement dated May 9, 1994 covering July 1, 1994 - June
30, 1997 between B&F Medical Products, Inc. and B&F Employee Committee
(filed with the Commission as Exhibit 10(44) to the 1994 Form 10-K and
incorporated herein by reference)
10.16 Commercial Lease and Deposit Receipt between Hospital Systems, Inc.
and 5301 Adeline Associates, a California Limited Partnership (filed
with the Commission as Exhibit 10(47) to the 1994 Form 10-K and
incorporated herein by reference)
Sequentially
Exhibit Numbered
No. Description Page
10.17 1994-1997 Agreement dated June 24, 1994 covering May 1, 1994 - April
30, 1997 between Hospital Systems, Inc. and Electrical Workers Union,
Local 2131 (filed with the Commission as Exhibit 10(48) to the 1994
Form 10-K and incorporated herein by reference)
10.18 Lease dated as of December 27, 1982 by and between B.M.S./Riverside
Limited Partnership and Intermed Holdings, Inc., as amended (filed
with the Commission as Exhibit 10(31) to the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1995 (the "1995 Form
10-K") and incorporated herein by reference)
10.19 Allied Healthcare Products, Inc. 1995 Directors Non-Qualified Stock
Option Plan (filed with the Commission as Exhibit 10(25) to the 1995
Form 10-K and incorporated herein by reference) 10.20 Assignment of
Lease dated October 3, 1988 by Intermed Holdings, Inc. to Bear Medical
Systems, Inc. (filed with the Commission as Exhibit 10(32) to the 1995
Form 10-K and incorporated herein by reference)
10.21 Warehouse Lease dated December 7, 1990 by and between Mineola/Hemmer,
L.P. and Bear Medical Systems, Inc. (filed with the Commission as
Exhibit 10(33) to the 1995 Form 10-K and incorporated herein by
reference)
10.22 Agreement and Plan of Merger dated May 31, 1995 by and among Bear
Medical Systems, Inc., BMS Acquisition Corporation and BiCore
Monitoring Systems, Inc. (filed with the Commission as Exhibit 10(34)
to the 1995 Form 10-K and incorporated herein by reference)
10.23 Memorandum of Agreement dated April 19, 1995 covering April 16, 1995 -
April 15, 1998 between Allied Healthcare Products, Inc., Chemetron
Medical Division and International Chemical Workers Union, Local No.
626 (filed with the Commission as Exhibit 10(35) to the 1995 Form 10-K
and incorporated herein by reference)
10.24 Second Amended and Restated Loan and Reimbursement Agreement
dated as of February 10, 1995 provided by The Boatmen's National Bank
of St. Louis and The Daiwa Bank, Ltd. to Allied Healthcare Products,
Inc., Life Support Products, Inc., B&F Medical Products, Inc.,
Hospital Systems, Inc. and Bear Medical Systems, Inc. (the "Restated
Loan Agreement") (filed with the Commission as Exhibit 10(36) to the
1995 Form 10-K and incorporated herein by reference)
10.25 Amendment No. 1, dated as of June 7, 1995, to the Restated Loan
Agreement (filed with the Commission as Exhibit 10(37) to the 1995
Form 10-K and incorporated herein by reference)
10.26 Amended and Restated Credit Facilities Agreement dated October 13,
1995 by and among Allied Healthcare Products, Inc. and its
subsidiaries and The Boatman's National Bank of St. Louis as agent
(filed with the Commission as Exhibit 1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995 and
incorporated herein by reference)
Sequentially
Exhibit Numbered
No. Description Page
10.27 Underwriting Agreement dated September 28, 1995 by and among Allied
Healthcare Products, Inc., and Cowen & Company, Dillon, Read & Co.
Inc. and A.G. Edwards & Sons, Inc., as representatives of the
underwriters (filed as Exhibit 2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995 and incorporated
herein by reference)
10.28 Allied Healthcare Products, Inc. Amendment to 1994 Employee Stock
Option Plan
10.29 Amendment Number One to Amended and Restated Credit Facilities
Agreement dated April 19, 1996 among The Boatmen's National Bank of
St. Louis, as Agent, and The Boatmen's National Bank of St. Louis and
the other lenders listed on the signature pages thereof, as Lenders,
and Allied Healthcare Products, Inc., and the other borrowers listed
on the signature pages thereof, as Borrowers
10.30 Amendment Number Two to Amended and Restated Credit Facilities
Agreement dated September 23, 1996 among The Boatmen's National Bank
of St. Louis, as Agent, and The Boatmen's National Bank of St. Louis
and the other lenders listed on the signature pages thereof, as
Lenders, and Allied Healthcare Products, Inc., and the other borrowers
listed on the signature pages thereof, as Borrowers
10.31 Consulting and Severance Agreement dated as of September 1, 1996 by
and between Allied Healthcare Products, Inc. and David V. LaRusso
10.32 Rights Agreement dated August 21, 1996 by and between Allied
Healthcare Products, Inc. and Boatmen's Trust Company, as Rights Agent
(filed with the Commission as Exhibit (2) to the Company's Current
Report on Form 8-K dated August 7, 1996 and incorporated herein by
reference)
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Price Waterhouse LLP
24 Powers of Attorney