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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission File Number 0-19266
_______________________________
ALLIED HEALTHCARE PRODUCTS, INC.
[EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER]
DELAWARE 25-1370721
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1720 SUBLETTE AVENUE
ST. LOUIS, MISSOURI 63110
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (314) 771-2400
____________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock
Preferred Stock
Preferred Stock Purchase Rights
(Title of class)
_______________________
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 18, 1998, the aggregate market value of the voting stock
held by non-affiliates (4,565,441 shares) of the Registrant was $11,698,942
(based on the closing price, on such date, of $2.5625 per share).
As of September 18, 1998, there were 7,806,682 shares of common stock,
$0.01 par value (the "Common Stock"), outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement dated October 9, 1998 (portion) (Part III)
ALLIED HEALTHCARE PRODUCTS, INC.
INDEX TO FORM 10-K
PART I
Item 1. Business . 1
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Stock and Related 11
Stockholder Matters
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 43
PART III
Item 10. Directors and Executive Officers of the Registrant . 43
Item 11. Executive Compensation 43
Item 12. Security Ownership of Certain Beneficial Owners and
Management 43
Item 13. Certain Relationships and Related Transactions 43
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 43
PART I
Item 1. Business
GENERAL
Allied Healthcare Products, Inc. ("Allied" or the "Company") manufactures a
variety of respiratory products used in the health care industry in a wide
range of hospital and alternate site settings, including sub-acute care
facilities, home health care and emergency medical care. The Company's product
lines include respiratory care products, medical gas construction equipment and
emergency medical products. The Company believes that it maintains significant
market shares in selected product lines.
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 CARE PRODUCTS
-respiratory care/anesthesia products
-home respiratory care products
MEDICAL GAS EQUIPMENT
-medical gas system construction products
-medical gas system regulation devices
-disposable oxygen and specialty gas cylinders
-portable suction equipment
EMERGENCY MEDICAL PRODUCTS
-respiratory/resuscitation products
-trauma and patient handling products
SIGNIFICANT 1998/RECENT EVENTS
The following list includes significant events which are further discussed
in the Management Discussion and Analysis (MDA) section and in the Consolidated
Financial Statements in this 10-K report:
-Refinancing of bank debt with Foothill Capital Corporation in August 1997
-Sale of Bear Medical and BiCore to ThermoElectron Corporation in October
1997 and use of proceeds to significantly pay down outstanding debt.
-Non-recurring charges during second quarter of fiscal year 1998
principally due to write-down of goodwill.
-Amendment to Foothill agreement in September 1998 to separately finance
the mortgage on the St. Louis facility and to reduce interest costs and
fees.
-August 1998 announcement by the Company to close its B&F facility in
Toledo and consolidation of those operations in St. Louis.
The Company's principal executive offices are located at 1720 Sublette
Avenue, St. Louis, Missouri 63110, and its telephone number is (314) 771-2400.
1
MARKETS AND PRODUCTS
In fiscal 1998, respiratory care products, medical gas equipment and
emergency medical products represented approximately 41%, 47% and 12%
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 CARE PRODUCTS
Respiratory Care/Anesthesia Large volume compressors; ventilator Timeter Hospitals and sub-
Products calibrators; humidifiers and mist tents acute facilities
Home Respiratory Care Oxygen concentrators; O2 cylinders; Timeter; B&F; Patients at home
Products pressure regulators; nebulizers; Schuco
portable large volume compressors;
portable suction equipment and disp.
respiratory products
MEDICAL GAS EQUIPMENT
Construction Products In-wall medical gas system Chemetron; Hospitals and sub-
components; central suction pumps Oxequip; acute facilities
and compressors and headwalls Hospital
Systems
Regulation Devices Flowmeters; vacuum regulators; Chemetron; Hospitals and sub-
pressure regulators and related Oxequip; acute facilities
products Timeter
Disposable Cylinders Disposable oxygen and gas cylinders Lif-O-Gen First aid providers
and specialty gas
distributors
Suction Equipment Portable suction equipment and Gomco; Allied; Hospitals; sub-
disposable suction canisters Schuco acute facilities and
home care
products
EMERGENCY MEDICAL PRODUCTS
Respiratory/Resuscitation Demand resuscitation valves; bag LSP; Omni-Tech Emergency service
mask resuscitators; emergency providers
transport ventilators and oxygen
regulators
Trauma and Patient Handling Spine immobilization products; LSP; Design Emergency service
Products pneumatic anti-shock garments and Principles providers
trauma burn kits
2
RESPIRATORY CARE PRODUCTS
MARKET. Respiratory care products are used in the treatment of acute and
chronic respiratory disorders such as asthma, emphysema, bronchitis and
pneumonia. The Company believes that the sales of respiratory care products
will increase due to the growth in the aging population, increase in acute and
chronic respiratory disorders and improved technology for the early diagnosis
and treatment of these disorders.
Respiratory care products are used in both hospitals and alternate care
settings. Sales of respiratory care products are made through distribution
channels focusing on hospitals and other sub-acute facilities. Sales of home
respiratory care products are made through durable medical equipment dealers
through telemarketing, independent sales representatives, and by contract sales
with national chains. The Company holds a significant share of the U.S. market
and selected foreign markets for certain respiratory care products.
RESPIRATORY CARE/ANESTHESIA PRODUCTS. The Company manufactures and sells a
broad range of products for use in respiratory care and anesthesia delivery.
These products include large volume air compressors, calibration equipment,
humidifiers, croup tents, equipment dryers, CO2 absorbent and a complete line of
respiratory disposable products such as oxygen tubing, face masks, cannulas and
ventilator circuits.
HOME RESPIRATORY CARE PRODUCTS. Home respiratory care products represent
one of Allied's potential growth areas. Allied's broad line of home respiratory
care products include oxygen concentrators, aluminum oxygen cylinders, oxygen
regulators, pneumatic nebulizers, portable suction equipment and the full line
of respiratory disposable products.
MEDICAL GAS EQUIPMENT
MARKET. The market for the medical gas equipment consists of hospitals,
alternate care settings and surgery centers. The medical gas equipment group is
broken down into three separate categories; construction products, regulation
devices and suction equipment, and disposable cylinders.
CONSTRUCTION PRODUCTS. Allied's medical gas system construction products
consist of in-wall medical 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, ceiling
columns and zone valves, serve a fundamental role in medical gas delivery
systems.
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. 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
customer 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 sub-acute care facility.
3
The Company's construction products are sold primarily to hospitals,
alternate care settings and hospital construction contractors. The Company
believes that it holds a major share of the U.S. market for its construction
products, that these products are installed in more than three thousand
hospitals in the United States and 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 follow-on sales of such products
to a hospital in which its systems are installed. The Company believes that
most hospitals and sub-acute care facility construction spending is for
expansion or renovation of existing facilities. Many hospital systems and
individual hospitals undertake major renovations to upgrade their operations to
improve the quality of care they provide, reduce costs and attract patients and
personnel. The Company expects its installed equipment base to continue to
provide the Company with a significant competitive advantage in the hospital
renovation market.
REGULATION DEVICES AND SUCTION EQUIPMENT. 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, operating theaters or intensive care
areas. The Company's leadership position in the in-wall components market
provides 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.
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.
The market for regulation devices and suction equipment is the hospital and
sub-acute care facilities. Sales of these products are made through the same
distribution channel that our respiratory care products go through. The Company
believes that it holds a significant share of the U.S. market in both the
regulation devices and the suction equipment.
DISPOSABLE CYLINDERS. Disposable oxygen cylinders are designed to provide
oxygen supplied 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.
EMERGENCY MEDICAL PRODUCTS
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 towards providing health care outside
the traditional hospital setting. The Company also expects that other countries
will develop trauma care systems in the future, although no assurance can be
given that such systems will 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.
4
The Company believes it is a market share leader with respect to certain of
its emergency medical products, including demand resuscitation systems, bag
masks and related products, emergency transport ventilators, precision oxygen
regulators, minilators and multilators and humidifiers. The emergency medical
products are broken down into two account groups: respiratory/resuscitator
products and trauma patient handling products.
RESPIRATORY/RESUSCITATION PRODUCTS. The Company's
respiratory/resuscitation products include demand resuscitation valves, portable
resuscitation systems, bag masks 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, they can be
used with a mask or tracheotomy tubes and operate 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, which 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.
In 1988 the Company 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 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
backboard which are 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.
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 sales force of 49
sales professionals, all of whom are full-time employees of the Company. The
sales force includes 19 respiratory products/homecare specialists, 17 hospital
construction specialists, 5 emergency specialists and 8 international sales
representatives. In addition, a director of corporate and national accounts is
responsible for pursuing business with large national group purchasing
organizations and large homecare national chains in OEM business. Five product
managers are responsible for the marketing activities of these product lines.
5
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 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 respiratory care products market.
Respiratory products specialists are also responsible for sales into the
homecare market. 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's director of national accounts is 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
Allied's international business represents a growth area which the Company
has been emphasizing. The recent Asian situation has slowed incoming orders
from Korea, Thailand and Taiwan. However, our efforts into China are now
beginning to yield results in the construction products area.
Allied's net sales to foreign markets totaled 25% of the Company's net
sales in fiscal 1998. International sales are made through a network of
doctors, agents and U.S. exporters who distribute the Company's products
throughout the world. Allied has market presence in Canada, Mexico, Central and
South America, Europe, the Middle East and the Far East.
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 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, plastics manufacturing and product assembly.
Allied manufactures small metal components from bar stock in a machine shop
which includes automatic screw machines, horizontal lathes and drill presses.
Additionally, five computer controlled machining centers were purchased and
installed during fiscal 1997 in the Company's St. Louis, Missouri facility.
This $1.5 million investment has substantially modernized 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. The Company makes larger metal components from sheet
metal using computerized punch presses, brake presses and shears. In its
plastics manufacturing processes, the Company utilizes both extrusion and
injection molding. The Company believes that 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.
6
During fiscal 1996 and 1997, manufacturing inefficiencies and capacity
constraints prevented the Company from shipping to the level of demand for
certain products from B&F Medicals' Toledo, Ohio facility. Accordingly, the
Company invested $1.1 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, and to provide significant cost reduction
opportunities, including reduced product material content, labor and utility
costs, while improving overall quality and yields. Allied has recently
announced the consolidation of its Toledo operations into the St. Louis
facility. This move will be completed during the second quarter of fiscal 1999.
The Company anticipates the expected production improvements at Toledo to carry
over to the relocated operations in St. Louis. See further discussion of the
relocation of the Toledo operation in the following MDA section of this Form
10-K.
RESEARCH AND DEVELOPMENT
In 1998 the Company expended $1.7 million in research and development
activities. Of that amount, $0.6 million was utilized by the ventilation
products division, that has since been sold. See further discussion of the sale
of the ventilation products division in the following MDA section of this Form
10-K. Excluding the ventilation products division, research and development
expenditures in 1997 and 1998 were approximately $1.7 million and $1.1 million,
respectively.
The Company has recently increased its research and development efforts in
Order to keep pace with technological advances and expects to continue these
activities into the future.
In the past several months, the Company has introduced several new products
which resulted from its research and development programs. These products
include the new Handi Vac II disposable suction canister that features improved
flow and a new shut off mechanism. The Respical, a second generation ventilator
calibrator, is a modernized version of the RT-200 ventilator calibrator with
improved computer interfacing capabilities. In addition, the Company introduced
into the emergency medical market a CO2 monitor that helps confirm proper
patient intubation, and a new line of bag mask resuscitators, used to revive
nonbreathing patients.
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, 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 the government supply
contracts, or withdrawal of previously approved marketing applications and
criminal prosecution.
The Company is required to file a premarket notification in the form of a
premarket approval ("PMA") with the FDA before it begins marketing a new medical
device that offers new technology that is currently not on the market. The
Company also must file a premarket notification in the form of a 510(k) with the
FDA before it begins marketing a new medical device that utilizes existing
technology for devices that are currently on the market. The 510(k) submission
process is also required when the Company makes a change or modifies an existing
device in a manner that could significantly affect the device's safety or
effectiveness.
7
Compliance with the regulatory approval process in order to market a new or
modified medical device can be uncertain, lengthy and, in some cases, expensive.
There can be no assurance that necessary regulatory approvals will be obtained
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.
The Company manufactures 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. These determinations are very fact specific and the FDA has
stated that, initially, the manufacturer is best qualified to make these
determinations, which should be based on adequate supporting data and
documentation. The FDA however, may disagree with a manufacturer's determination
not to file a 510(k) and require the submission of a new 510(k) notification for
the changed or modified device. Where the 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 the 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 changes or modifications do not
significantly affect the device's safety or effectiveness or make a major change
or modification in the device's intended uses and, accordingly, that submission
of new 510(k) notification to FDA is not required. There can be no assurance,
however, that FDA would agree with the Company's determinations.
In addition, commercial distribution in certain foreign countries is
subject to additional regulatory requirements and receipt of approvals that vary
widely from country to country. The Company believes it is in compliance with
regulatory requirements of the countries in which it sells its products.
The Company's medical device manufacturing facilities are registered with
the FDA, and recently received ISO 9001 Certification for the St. Louis facility
and certification per the Medical Device Directive (MDD - European) for certain
products. As such, the Company will be audited by FDA, ISO, and European
auditors for compliance with the GMP, ISO and MDD regulations for medical
devices. These regulations require the Company to manufacture its products and
maintain its products and documentation in a prescribed manner with respect to
design, manufacturing, testing and control activities. The Company also is
subject to the registration and inspection requirements of state regulatory
agencies.
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, which are
life-supporting or life-sustaining devices used outside of a device user
facility of 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.
8
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. Medical
products shipped to the European Community require CE certification. 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. In
addition, FDA approval may be required under certain circumstances to export
certain medical devices.
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.
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 renovations costs through Medicare and
Medicaid reimbursements. In recent years, governmentally imposed limits on
reimbursement of hospitals and other health care providers have impacted
spending for services, consumables and capital goods. In addition the Balanced
Budget Act was signed into law in 1997 which reduced reimbursements by 25% for
oxygen and oxygen equipment. An additional 5% reduction will take place in
1999. A material decrease from current reimbursement levels or a material
change in the method or basis of reimbursing health care providers is likely to
adversely affect future sales of the Company's products.
PATENTS, TRADEMARKS AND PROPRIETARY TECHNOLOGY
The Company owns and maintains patents on several products which it
believes are useful to the business and provide the Company with an advantage
over its competitors.
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 countries where such products are sold and such registrations are
considered necessary to preserve the Company's proprietary rights therein.
COMPETITION
The Company has different competitors within each of its product lines.
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 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
9
EMPLOYEES
At June 30, 1998, the Company has 603 full-time employees and 79 part-time
employees. Approximately 215 employees in the Company's principal manufacturing
facility located in St. Louis, Missouri, are covered by a collective bargaining
agreement which expires in May, 2000. An aggregate of approximately 146
employees at the Company's facilities in Oakland, California, Toledo, Ohio and
Stuyvesant Falls, New York are also covered by collective bargaining agreements
which will expire in 2001 for the Oakland and Stuyvesant Falls facilities and in
2000 for the Toledo facility. As indicated elsewhere in this Form 10-K,
Allied's facility in Toledo will be shut down and the operations consolidated
into St. Louis during the second quarter of fiscal 1999.
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 FOOTAGE OWNED/
LOCATION (APPROXIMATE) LEASED ACTIVITIES/PRODUCTS
- - -------------------------- --------------- ------ -------------------------
St. Louis, Missouri 270,000 Owned Headquarters; medical gas
equipment; respiratory
therapy equipment;
emergency medical products
Toledo, Ohio 56,700 Owned Home healthcare products
Stuyvesant Falls, New York 30,000 Owned CO2 absorbent
Oakland, California 12,500 Leased Headwalls
In the event of the expiration, cancellation or termination of a lease
relating to Company's leased property, the Company anticipates no significant
difficulty in connection with leasing alternate space at reasonable rates. The
Company leases a facility in Mt. Vernon, Ohio, which is currently unused as its
operations were consolidated into the Toledo facility as a part 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. As indicated elsewhere in this Form 10-K, the
Company's facility in Toledo will be shut down and the operations consolidated
into St. Louis during the second quarter of fiscal 1999.
10
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
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Allied Healthcare Products, Inc. began trading on the NASDAQ National
market under the symbol AHPI on January 14, 1992, following its initial public
offering. As of September 18, 1998, there were 266 record owners of the
Company's Common Stock. The following tables summarize information with respect
to the high and low closing prices for the Company's Common Stock as listed on
the NASDAQ National market for each quarter of fiscal 1998 and 1997,
respectively. The Company currently does not pay any dividend on its Common
Stock.
COMMON STOCK INFORMATION
1998 HIGH LOW 1997 HIGH LOW
- - ----------------- ------ ------- ----------------- ------- ------
September quarter $7-7/8 $ 6-3/8 September quarter $10-1/4 $6-1/4
December quarter 8-1/2 7-1/4 December quarter 7-3/4 6-3/8
March quarter 8 6-7/16 March quarter 9-1/4 7
June quarter 6-1/2 4-1/4 June quarter 7-1/8 5-3/8
11
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
Year ended June 30, 1998 1997 1996 1995 1994
- - ------------------------------------------------ --------- --------- -------- --------- -------
STATEMENT OF OPERATIONS DATA
Net sales $ 96,467 $118,118 $120,123 $111,639 $74,129
Cost of sales 69,110 82,365 80,550 68,430 44,172
Gross profit 27,357 35,753 39,573 43,209 29,957
Selling, general and administrative expenses 23,889 33,910 31,449 24,849 16,824
Gain on sale of business (1) (12,813) -- -- -- --
Non-recurring impairment losses (2) 9,778 -- -- -- --
Income from operations 6,503 1,843 8,124 18,360 13,133
Interest expense 4,152 7,606 4,474 3,704 1,338
Other, net 198 186 350 (21) 1
Income (loss) before provision (benefit) for
income taxes and extraordinary loss 2,153 (5,949) 3,300 14,677 11,794
Provision (benefit) for income taxes (3) 9,019 (1,428) 1,473 5,854 4,539
Income (loss) before extraordinary loss (6,866) (4,521) 1,827 8,823 7,255
Extraordinary loss on early extinguishment of
debt, net of income tax benefit 530 -- -- -- --
Net income (loss) $ (7,396) $ (4,521) $ 1,827 $ 8,823 $ 7,255
Basic and diluted earnings (loss) per share (4) $ (0.95) $ (0.58) $ 0.25 $ 1.45 $ 1.31
Weighted average common shares outstanding 7,805 7,797 7,378 6,067 5,522
(In thousands)
June 30, 1998 1997 1996 1995 1994
- - ------------------------------------------------ --------- --------- -------- --------- -------
BALANCE SHEET DATA
Working capital $ 21,308 $ 18,743 $ 38,030 $ 2,810 $ 5,018
Total assets 80,180 126,343 136,760 126,192 64,593
Short-term debt 3,443 12,891 3,849 34,420 13,108
Long-term debt (net of current portion) 14,972 34,041 49,033 34,602 16,513
Stockholders' equity 52,037 59,365 63,886 38,374 20,034
(1) See Note 3 to the June 30, 1998 Consolidated Financial Statements for further discussion.
(2) See Note 4 to the June 30, 1998 Consolidated Financial Statements for further discussion.
(3) See Note 7 to the June 30, 1998 Consolidated Financial Statements for further discussion of the
Company's 1998 effective tax rate.
(4) See Note 2 to the June 30, 1998 Consolidated Financial Statements for adoption of FAS 128.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion summarizes the significant factors affecting the
consolidated operating results and financial condition of the Company for the
three fiscal years ended June 30, 1998. This discussion should be read in
conjunction with the consolidated financial statements, notes to the
consolidated financial statements and selected consolidated financial data
included elsewhere herein.
12
Certain statements contained herein are forward-looking statements. Actual
results could differ materially from those anticipated as a result of various
factors, including cyclical and other industry downturns, the effect of currency
devaluations and recessionary conditions in certain Asian markets, the effects
of federal and state legislation on health care reform, including Medicare and
Medicaid financing, the inability to realize the full benefit of recent capital
expenditures or consolidation and rationalization activities, difficulties or
delays in the introduction of new products or disruptions in selling,
manufacturing and/or shipping efforts.
The results of operations for fiscal 1998 were affected by several one
time, non-recurring items, which are discussed further below. On October 31,
1997, the Company sold the assets of its ventilation products division for a
gain. The proceeds from this sale were used to significantly pay down debt and
to provide additional liquidity. The Company also recorded several
non-recurring items and other charges to operations in the second quarter of
fiscal 1998. Such non-recurring items reflect changes in business conditions
resulting from the sale of the ventilation products division and other changes
in market conditions. In addition, reserves for inventories and bad debts were
increased throughout the fiscal year. As a result, the Company has strengthened
its balance sheet by reducing debt, reducing intangible assets, and increasing
reserves. Subsequent to June 30, 1998, the Company has further refinanced its
debt and announced the relocation of its Toledo operation to St. Louis.
The review of and comparability of year to year operating results is
complicated by the sale of the ventilation products division on October 31,
1997. The fiscal 1998 results include ventilation products division operations
for four months in the year ended June 30, 1998, while the fiscal 1997 results
include ventilation products division operations for the full year ended June
30, 1997.
The specific transactions and events impacting 1998 operating results,
which make meaningful comparisons to prior years more difficult, are summarized
below:
SALE OF VENTILATION PRODUCTS DIVISION
On October 31, 1997, the Company sold the assets of Bear Medical Systems,
Inc. ("Bear") and its subsidiary BiCore Monitoring Systems, Inc. ("BiCore"),
collectively referred to as the ventilation products division, to ThermoElectron
Corporation for $36.6 million plus the assumption of certain liabilities. The
net proceeds of $29.5 million, after expenses including federal and state taxes,
were utilized to repay a significant portion of the Company's term notes and to
repay all of its subordinated debt, $15.8 million of which had a coupon rate of
14.0% per annum.
The sale of these assets resulted in a gain before taxes for financial
reporting purposes of $12.8 million, which was recorded in the Company's results
of operations in the second quarter of fiscal 1998. The gain on sale of the
ventilation products division, as a discrete item, resulted in a tax provision
of $9.3 million. The relatively higher effective tax rate on this transaction
reflected the fact that approximately $12.7 million of goodwill associated with
these businesses is not deductible for income tax purposes. The net income
effect of the gain on sale was approximately $3.5 million, or $0.45 per share.
DEBT REDUCTION/REFINANCING
In August 1997, the Company refinanced its existing debt through a $46
million credit facility with Foothill Capital Corporation. In conjunction with
these new credit facilities, Allied placed an additional $5.0 million in
subordinated debt with several related parties to the Company. The Foothill
Credit facility, which was amended in November 1997 to reflect the effects of
the sale of the ventilation products division, has allowed the Company to
improve its liquidity and reduce interest expense in comparison to prior years.
See the following "Financial Condition, Liquidity and Capital Resources" section
for further detail discussion of the Company's debt situation. See the
following "Subsequent Events" section for discussion of further post-June 30,
1998 debt refinancing matters.
During fiscal 1998, the Company reduced its aggregate indebtedness from
$46.9 million at June 30, 1997 to $18.4 million at June 30, 1998. As noted, a
substantial portion of this reduction related to the application of proceeds
from the sale of the ventilation products division on October 31, 1997.
13
Specifically, on November 3, 1997, the Company repaid two term notes totaling
$10.8 million, which had a coupon rate of 14.0% per annum, and significantly
reduced the outstanding balance of its revolving line of credit, and on November
4, 1997 repaid $5.0 million of 14.0% subordinated debt.
NON-RECURRING CHARGES
During the second quarter of fiscal 1998, the Company reevaluated the
carrying value of its various businesses and recorded $9.8 million of
non-recurring charges to reflect the changes in business conditions resulting
from the sale of the ventilation products division and due to other changes in
market conditions discussed below, which culminated during the second quarter of
fiscal 1998. The elements comprising the $9.8 million of non-recurring charges,
which are included in the results of operations for the year ended June 30,
1998, are as follows:
Goodwill writedowns, which were determined pursuant to the Company's
impairment policy as described in Note 2 to the June 30, 1998 financial
statements, totaled $8.9 million for the four following businesses:
$4.4 million associated with the partial goodwill writedown related to the
B&F disposable products business. Continuing weakness in financial results of
the business due to various operational issues, market condition changes in the
home healthcare market including pressures on pricing due to reductions in
Medicare reimbursements and overall weakness in financial results of the
national home healthcare chains caused Allied to reevaluate and adjust the
carrying value of this business.
$2.4 million associated with the writedown of goodwill for Allied's
headwall business which continues to experience weak financial results due to
market conditions.
$1.6 million associated with the writedown of Omni-Tech Medical, Inc.
goodwill. This transportation ventilator business is directly related to the
divested ventilation products division and is not anticipated to contribute to
the ongoing operations of the Company.
$0.5 million associated with the writedown of goodwill for the Design
Principles Inc. backboard business. Increased costs have significantly eroded
the margins of this business necessitating a re-evaluation of the carrying value
of its goodwill.
In addition to the non-cash goodwill write-downs, other non-recurring items
include:
$0.5 million of consulting fees related to a cooperative purchasing study.
$0.4 million for the writedown of leasehold improvements and a reserve for
the remaining lease payments for B&F's Mt. Vernon, Ohio facility which was
closed as part of the Company's rationalization initiatives. The tenant
subletting this facility is operating under Chapter 11 reorganization
protection.
The combined tax impact of these non-recurring charges resulted in a
minimal $0.4 million tax benefit, due to the non-deductibility for tax purposes
of the $8.9 million of goodwill writedowns. The non-recurring charges, as a
discrete item, resulted in a net loss of approximately $9.4 million or $1.21 per
share.
As a result of the writedown of the carrying value of goodwill for certain
businesses described above, the Company expects to reduce its annual
amortization charges by $0.3 million or $0.04 per share.
14
SUBSEQUENT EVENTS
On August 10, 1998, the Company announced its intention to close its
disposable products division in Toledo, Ohio, and relocate the B&F product line
of home care products to its St. Louis manufacturing facility. The Company
anticipates that the move will be completed in the second quarter of fiscal 1999
and that it will generate annual savings of nearly $1 million. In connection
with the shutdown of the facility, the Company will record a one-time, after tax
charge of approximately $0.6 million or $.08 cents per share during the first
quarter of fiscal 1999. A significant portion of the pre-tax costs of
approximately $1 million associated with the shutdown are expected to be paid
prior to January 1, 1999. The Company continues to evaluate its business with
an intent to streamline operations, improve productivity and reduce costs.
Accordingly, the Company may implement other strategic rationalization programs
in the future.
In August 1998, to further lower Allied's effective interest rate, the
Company obtained a $5.0 million mortgage loan on its St. Louis facility and used
the proceeds to pay down its obligations under the Foothill Credit facility.
That facility was also amended in September 1998 to eliminate the term loan
feature and reduce the interest rate on the remaining revolving credit facility.
See the following "Financial Condition, Liquidity, and Capital Resources"
section for further detail discussion.
FISCAL 1998 FOURTH QUARTER RESULTS OF OPERATIONS
During the fourth quarter of 1998, the Company continued to experience
reduced sales. Net sales for the three months ended June 30, 1998 were $19.5
million compared to sales of $30.1 million for the three months ended June 30,
1997. Of the $10.6 million decline in sales, $8.5 million of the decline was
attributable to sales associated with the disposal of the ventilation products
division, while the base business sales declined by $2.1 million or 10.1%. The
net loss for the fourth quarter of 1998 declined to $0.3 million or $0.04 per
share from $3.5 million or $0.45 per share in 1997. In 1997, a number of
factors adversely impacted fourth quarter results. A nineteen day work stoppage
at the Company's St. Louis, Missouri facility in June, 1997 resulted in a
permanent loss in sales, margin declines, and plant inefficiencies. Also, in the
fourth quarter of 1997, the Company increased certain reserves and recorded
other charges to operations which totaled $2.0 million. Included in these
charges were adjustments to the carrying value of certain of the Company's
inventories of $1.0 million, an increase to the allowance for doubtful accounts
of $0.6 million, $0.3 million for the settlement of a lawsuit related to a
pre-acquisition matter at one of the Company's acquired subsidiaries, and $0.1
million for a new product licensing agreement. Interest expense for the fourth
quarter of 1998 was reduced by $2.8 million compared to the fourth quarter of
1997 as a result of the August 1997 debt refinancing and the application of the
proceeds from the sale of the ventilation products division to reduce
outstanding debt. See also the following "Fiscal 1998 Compared to Fiscal 1997"
section for a discussion of various other internal and external factors
affecting operations.
Sales of respiratory care products for the fourth quarter were $6.6
million, a decrease of $8.7 million, compared to sales of $16.3 million in the
prior year period. $8.5 million of this decline was attributable to the sale of
the ventilation products division. Included herein are sales to the homecare
market which declined from $6.0 million during the fourth quarter of fiscal
1997 to $4.3 million during fourth quarter of fiscal 1998, or 28.3% due to
continuing pricing pressures and Company's unwillingness to take marginal
business for aluminum cylinders. Sales of respiratory therapy equipment to the
hospital market increased in the fourth quarter of fiscal 1998 compared to the
fourth quarter of 1997 by $0.5 million or 28.8%. This increase primarily
reflected the effects of lower sales in the fourth quarter of 1997 due to the
work stoppage in the St. Louis facility.
15
Sales of medical gas equipment for the fourth quarter of fiscal 1998 of
$10.0 million were 8.2% under sales of $10.9 million in the prior year period.
Sales of medical gas suction and regulation devices decreased from $5.2 million
in the prior year to $5.0 million in the current fiscal year. Headwall sales,
the smallest segment of medical gas equipment, increased 48.2% over the prior
year sales on the strength of orders booked in prior periods. The largest
decrease in medical gas sales for the quarter related to the sales of medical
gas construction products. Medical gas construction sales in the fourth quarter
of fiscal 1998 of $3.4 million were $1.3 million or 27.1% lower than in the
prior year, primarily due to fewer large hospital construction projects. Sales
of emergency medical products were relatively unchanged from the prior year.
Gross profit for the fourth quarter of fiscal 1998 was $4.9 million, or
25.0% of sales, compared to $8.1 million or 26.8% of net sales in the fourth
quarter of fiscal 1997 due primarily to the divestiture of the higher margin
ventilation products division and continued pricing pressures. See also the
following "Fiscal 1998 compared to Fiscal 1997" section for further discussion.
Selling, General and Administrative ("SG&A") expenses were $4.9 million in
the fourth quarter of 1998, a decrease of $4.3 million from the fourth quarter
of 1997. SG&A decreased from 30.4% in the fourth quarter of fiscal 1997 to
25.2% of sales in the fourth quarter of fiscal 1998 primarily due to the sale of
the ventilation products division. The fourth quarter of 1998 also benefited
from various cost containment initiatives over the past year, including the
elimination of several sales management, sales and marketing, and other
administrative positions. The fiscal 1997 fourth quarter included an increase
to the allowance for doubtful accounts, a lawsuit settlement charge, and a new
product licensing fee which aggregated approximately $1.0 million.
The loss from operations for the fourth quarter of fiscal 1998 was less
than $0.1 million compared to $1.1 million in the prior year reflecting the
factors described above.
Interest expense for the fourth quarter of fiscal 1998 was $0.6 million, a
decrease of $2.8 million from the fourth quarter of fiscal 1997. In 1997, under
the Company's previous credit facility, interest expense included fees paid to
the commercial bank group to obtain waivers for covenant violations at March 31,
1997, fees paid for not obtaining a commitment to reduce the bank groups
indebtedness by $20.0 million by May 15, 1997, fees paid for professional
services related to credit negotiations and related audits and the amortization
of prepaid loan costs. On August 8, 1997, as previously discussed, the Company
refinanced its existing bank debt through a new credit facility with Foothill
Capital Corporation, and a $5.0 million subordinated debt arrangement. The new
financial agreements are discussed further below. In addition, interest expense
was significantly reduced due to the reduction in debt, caused by the sale of
the ventilation products division. At June 30, 1998, commercial debt is $18.4
million, a decrease of $28.5 million from the June 30, 1997 debt level of $46.9
million.
The Company incurred a loss before income taxes of $0.7 million in the
fourth quarter of fiscal 1998 compared to a loss of $4.5 million in the same
period for the prior year. The Company recorded a tax benefit of $0.3 million
in the fourth quarter of fiscal 1998 compared to a tax benefit of $1.0 million
in the fourth quarter of fiscal 1997. Results of operations in the fourth
quarter of fiscal 1998 were a net loss of $0.3 million, or $0.04 per share,
compared to a net loss of $3.5 million, or $0.45 per share, in the fourth
quarter of fiscal 1997.
16
RESULTS OF OPERATIONS
Allied manufactures and markets respiratory products, including respiratory
care products, medical gas equipment and emergency medical products. Set forth
below is certain information with respect to amounts and percentages of net
sales attributable to respiratory care products, medical gas equipment and
emergency medical products for the fiscal years ended June 30, 1998, 1997 and
1996.
1998
(Dollars in thousands) -----------------------
Year ended June 30, Net % of Total
Sales Net Sales
---------- -----------
Respiratory care products $ 40,105 41.6%
Medical gas equipment 45,033 46.7%
Emergency medical products 11,329 11.7%
---------- -----------
Total $ 96,467 100.0%
========== ===========
1997
(Dollars in thousands) -----------------------
Year ended June 30, Net % of Total
Sales Net Sales
---------- -----------
Respiratory care products $ 63,935 54.1%
Medical gas equipment 42,566 36.1%
Emergency medical products 11,617 9.8%
---------- -----------
Total $ 118,118 100.0%
========== ===========
1996
(Dollars in thousands) -----------------------
Year ended June 30, Net % of Total
Sales Net Sales
---------- -----------
Respiratory care products $ 63,889 53.2%
Medical gas equipment 43,084 35.9%
Emergency medical products 13,150 10.9%
---------- -----------
Total $ 120,123 100.0%
========== ===========
The following table sets forth, for the fiscal periods indicated, the
percentage of net sales represented by certain items reflected in the Company's
consolidated statement of operations.
Year ended June 30, 1998 1997 1996
- - ---------------------------------------------------- ------ ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of sales 71.6 69.7 67.1
------ ------ ------
Gross profit 28.4 30.3 32.9
Selling, general and administrative expenses 24.8 28.7 26.2
Gain on sale of business -13.3 -- --
Non-recurring impairment losses 10.2 -- --
------ ------ ------
Income from operations 6.7 1.6 6.7
Interest expense 4.3 6.4 3.7
Other, net 0.2 0.2 0.3
------ ------ ------
17
Income (loss) before provision (benefit) for
income taxes and extraordinary loss 2.2 -5.0 2.7
Provision (benefit) for income taxes 9.3 -1.2 1.2
------ ------ ------
Income (loss) before extraordinary loss -7.1 -3.8 1.5
Extraordinary loss on early extinguishment of debt,
net of income tax benefit 0.6 -- --
------ ------ ------
Net income (loss) -7.7 -3.8 1.5
====== ====== ======
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales for fiscal 1998 of $96.5 million were $21.6 million, or 18.3%,
less than net sales of $118.1 million in fiscal 1997. $19.0 million of this
decline relates to sales associated with the disposal of the ventilation
products division and $2.6 million relates to a decline in sales of core
products. The decline in sales of core products reflected various internal and
external factors.
A large part of this decrease was caused by the Company's insistence for
better margins on sales of distributed products, such as aluminum cylinders. In
addition, sales force disruption caused by the ventilation products division
sale, a decrease in large hospital construction projects and inefficiencies at
the Company's Toledo facility negatively impacted revenues. This facility will
be closed during the second quarter of fiscal 1999.
Certain external issues first experienced in fiscal 1996 have continued to
impact the Company's operations, both in fiscal 1997 and fiscal 1998. The
emphasis of healthcare providers on cost containment has resulted in significant
consolidation in the healthcare environment and pricing pressures in recent
years. Homecare sales have been adversely affected by reductions in Medicare
reimbursements. Asian currency valuations, and economic uncertainty in other
areas, have decreased international orders. New orders, excluding the
ventilation products division, decreased from $92.6 million in fiscal 1997 to
$85.0 million in fiscal 1998, or 8.2%, for the reasons discussed above.
While the Company is unable to predict when these macro-economic issues
will be resolved, management believes that over a long-term horizon, Allied is
well positioned to capitalize on the need for its respiratory products and meet
the demands for these products caused by an aging population, an increase in the
occurrence of lung disease, advances in treatment of other respiratory illnesses
in the home, hospital, and sub-acute care facilities and upgrading of medical
treatment around the world.
Medical gas equipment sales of $45.0 million in fiscal 1998 were $2.4
million, or 5.8%, over prior year sales of $42.6 million. Medical gas system
construction sales, headwall sales, and medical gas suction and regulation
device sales experienced increases of 0.7%, 48.0% and 2.2%, respectively, in
fiscal 1998 compared to fiscal 1997. The increase in sales of these products in
fiscal 1998 primarily related to shipment of orders from backlog which had
accumulated prior to June 30, 1997.
Respiratory care products sales in fiscal 1998 of $40.1 million were $23.8
million, or 37.2%, under sales of $63.9 million in the prior year. Of the
decline, $19.0 million was attributable to the disposal of the ventilation
products division and $4.8 million relates to the Company's remaining product
lines. Sales to the home healthcare market declined by 20.7%, primarily in
distributed products as discussed above. In addition, pricing pressures caused
by the consolidation of home healthcare dealers and continued concern over
potential reductions in Medicare and Medicaid reimbursement rates continued to
impact sales of home healthcare products. The Company has continued to
experience capacity constraints at the Toledo, Ohio facility, and as previously
noted, has announced plans to move its production to the St. Louis, Missouri
facility in the second quarter of fiscal 1999. This is expected to reduce
manufacturing costs while improving available capacity, and customer service.
18
Emergency medical products sales in fiscal 1998 of $11.3 million were $0.3
million, or 2.5%, less than fiscal 1997 sales of $11.6 million. Business in
this market is driven by both replacement business, and the occurrence of
natural disasters. Management expects sales for the near future to primarily
reflect demand driven by the replacement segment of the business. Orders for
emergency medical products in fiscal 1998 of $12.6 million were $0.6 million or
5.5% above orders of $12.0 million in the prior year.
International sales, which are included in the product lines discussed
above decreased $10.5 million, or 30.4%, to $24.0 million in fiscal 1998
compared to sales of $34.5 million in fiscal 1997. International sales
declined $11.3 million due to the sale of the ventilation products division
while international sales of the remaining business increased by $0.8 million.
The Company continues to emphasize the importance of worldwide markets.
Advances in medical protocol in various countries throughout the world combined
with the Company's strong international dealer network have enabled the Company
to respond to increased worldwide demand for medical products. International
sales are affected by international economic conditions and the relative value
of currencies. In 1998 the continued devaluation of Asian currency has reduced
international orders.
Gross profit in fiscal 1998 was $27.4 million, or 28.4% of net sales,
compared to a gross profit of $35.8 million, or 30.3% of net sales in fiscal
1997. The sale of the high margin ventilation products division adversely
impacted gross profit and the gross margin in fiscal 1998 since these products
were part of the Company's business for only four months of fiscal 1998 compared
to the full twelve months in fiscal 1997. Continued pricing pressures brought
on by the consolidations and cost containment initiatives of healthcare
providers and the Company's planned reductions in inventories, which resulted in
reduced manufacturing throughput and lower absorption of plant overhead, further
served to reduce margins as a percent to net sales. Finally, the Company
increased inventory reserves by over $1.0 million in fiscal 1998. In the fourth
quarter of fiscal 1997, the Company recorded certain adjustments, approximating
$1 million, to the carrying value of its inventories.
The Company anticipates continued pressures on margins due to the mix of
domestic versus international sales and anticipates continued pricing pressures
from its customer base.
Selling, General and Administrative ("SG&A") expenses for fiscal 1998 were
$23.9 million, a decrease of $10.0 million over SG&A expenses of $33.9 million
in fiscal 1997. Fiscal 1998 SG&A expenses were lower than the prior year due to
several non-recurring fiscal 1997 expenditures. In fiscal 1997, the Company
made strategic investments in certain SG&A activities and recorded certain
non-recurring SG&A expenses. SG&A spending included investments in advertising
and marketing literature, investments in information technology, and continued
investments in research and development. In addition, the Company completed the
recruiting, training and consolidation of its respiratory products salesforce
and incurred duplicate costs for sales efforts to the Durable Medical Equipment
Dealers (DME) in the home health care market during the transition period of
shifting to telemarketing from field sales representatives. As a percentage of
net sales, fiscal 1998 SG&A expenses were 24.8% compared to 28.7% in fiscal
1997. This decrease was attributable to lower SG&A expenses in fiscal 1998, as
discussed above.
As discussed previously in the preceding Overview section, financial
results for fiscal 1998 were impacted by certain one-time, nonrecurring
transactions and events which make meaningful comparisons to prior years more
difficult. These specific transactions and events include the following items.
19
On October 31, 1997 the Company sold the assets of Bear Medical Systems,
Inc. ("Bear") and its subsidiary BiCore Monitoring Systems, Inc. ("BiCore") to
ThermoElectron Corporation for $36.6 million plus the assumption of certain
liabilities. The sale of these assets resulted in a gain before taxes for
financial reporting purposes of $12.8 million and a tax provision of $9.3
million, due to non-deductibility of approximately $12.7 million goodwill
associated with these businesses. The net income effect on the gain on sale of
business was approximately $3.5 million or $0.45 per share.
During the second quarter of fiscal 1998, the Company reevaluated the
carrying value of its various businesses and recorded $9.8 million of
non-recurring charges to reflect the changes in business conditions resulting
from the sale of the ventilation products division and due to other changes in
market conditions, which culminated during the second quarter of fiscal 1998.
The elements comprising the $9.8 million of non-recurring charges consist of
goodwill write-downs and other non-recurring items. See the preceding Overview
section for further discussion. These non-recurring charges resulted in a
minimal $0.4 million tax benefit, due to the non-deductibility for tax purposes
of the $8.9 million of goodwill write-downs. The non-recurring charges, as a
discrete item, resulted in a net loss of approximately $9.4 million or $1.21 per
share.
Income from operations in fiscal 1998 of $6.5 million was $4.7 million, or
261%, above fiscal 1997 income from operations of $1.8 million. As a percentage
of net sales, income from operations increased to 6.7% from 1.6% in fiscal 1997,
due to the factors discussed above.
Interest expense decreased $3.5 million or 44.6%, to $4.2 million in fiscal
1998 from $7.6 million in fiscal 1997. In 1997, interest expense included fees
paid to the Company's previous commercial bank group to obtain waivers for
covenant violations, fees paid for not obtaining a commitment to reduce the bank
groups indebtedness by $20.0 million by May 15, 1997, fees paid for professional
services related to credit negotiations and related audits, and the amortization
of prepaid loan costs. On August 8, 1997, as previously discussed, the Company
refinanced its existing bank debt through a new credit facility with Foothill
Capital Corporation, and $5.0 million subordinated debt arrangement. The new
financial agreements are discussed further below. The Company did not incur
fees similar to the prior year in fiscal 1998. In addition, interest expense
was significantly reduced due to the reduction in debt, which primarily
reflected application of the proceeds from the sale of the ventilation products
division. At June 30, 1998, commercial debt is $18.4 million, a decrease of
$28.5 million from the June 30, 1997 debt level of $46.9 million.
The Company had income before taxes of $2.2 million, compared to a loss
before taxes of $5.9 million in fiscal 1997. The Company recorded a provision
for income taxes of $9.0 million for fiscal 1998 for an effective tax rate of
418.9%, compared to a tax benefit of $1.4 million in fiscal 1997 and an
effective rate of 24.0%. As previously discussed, the gain on the sale of the
ventilation products division resulted in a tax provision of $9.3 million. In
addition, the non-recurring charge of $9.8 million was principally goodwill, and
therefore non-deductible for income tax purposes.
Net loss in fiscal 1998 was $7.4 million, or $0.95 per diluted share, an
increase of $2.9 million from net loss of $4.5 million or $0.58 per diluted
share in fiscal 1997. Net loss in fiscal 1998 included a $0.5 million
extraordinary loss on early extinguishment of debt.
Exclusive of the extraordinary items discussed above, the net loss for
fiscal 1998 would have been $2.5 million or $0.32 per diluted share. Earnings
per share amounts are diluted earnings per share, which are substantially the
same as basic earnings per share. The weighted number of shares used in the
calculation of the diluted per share loss was 7,805,021 in fiscal 1998 compared
to 7,796,682 in fiscal 1997.
20
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales for fiscal 1997 of $118.1 million were $2.0 million, or 1.7%,
less than net sales of $120.1 million in fiscal 1996. Certain internal and
external factors impacted the Company's sales during fiscal 1997. Included in
the internal operating issues which impacted the Company were the nineteen day
work stoppage in the St. Louis, Missouri facility in June 1997, disruptions to
manufacturing, scheduling and shipping created by the computer conversion in
October 1996, also in the St. Louis facility, capacity constraints at the
Toledo, Ohio facility and changes in the field sales force. The work stoppage
resulted in permanently lost sales, margin declines, and manufacturing
disruptions during the work stoppage as well as during the pre- and post-work
stoppage periods. In October 1996, the Company converted its St. Louis
manufacturing and corporate office operations to a new, fully-integrated
software system. The Toledo facility has been capacity constrained by outdated
injection molding machinery and molds. During fiscal 1997 the Company installed
six new injection mold machines and eleven molds, and the Company added to its
direct assembly force in Toledo. In addition, the Company consolidated its
respiratory field salesforce with its ventilation sales force and invested in
their joint training. These initiatives created short term sales disruptions in
addition to the Company's occurrence of recruiting, training and marketing costs
in fiscal 1997.
Certain external issues first experienced in fiscal 1996 continued to
impact the Company's fiscal 1997 operations. These matters were described in
the preceding section "Fiscal 1998 Compared to Fiscal 1997."
Medical gas equipment sales of $42.6 million in fiscal 1997 were $0.5
million, or 1.2% , under prior year sales of $43.1 million. Medical gas
equipment sales in fiscal 1997 were adversely impacted by the previously noted
June 1997 work stoppage and the effects of the computer conversion. However,
strong market demand for medical gas equipment generated new orders for fiscal
1997 of $45.8 million, which was $4.4 million, or 10.6% over new orders in the
prior fiscal year.
Respiratory care products sales in fiscal 1997 of $63.9 million were
unchanged from the prior year. Sales to the hospital market increased 11.1% as
sales of ventilation products increased due to the strong world-wide acceptance
of the Company's ventilators. Offsetting this increase in ventilation product
sales was an 11.5% decline in sales of home health care products due to
manufacturing constraints in the Company's Toledo, Ohio facility, combined with
pricing pressures caused by the ongoing consolidation of home health care
dealers.
Emergency medical products sales in fiscal 1997 of $11.6 million were $1.5
million, or 11.7%, under sales of $13.1 million in the prior year. This sales
decline was attributable to difficulties the Company had in the relocation of
production of emergency products to the St. Louis, Missouri facility, the impact
of the June 1997 work stoppage and the absence of a large stocking order that
occurred in the prior year. The emergency medical products business has two
elements. One is steady replacement sales and the other element is driven by
events, such as a natural disaster or change in emergency protocol in a
particular country. Management expects sales for the near future to primarily
reflect demand driven by the replacement segment of the business.
The Company continued to increase its presence in worldwide markets during
fiscal 1997. International sales, which are included in the product line sales
discussed above, increased $3.7 million, or 11.9%, to $34.5 million in fiscal
1997 compared to sales of $30.8 million in fiscal 1996. Advances in medical
protocol in various countries throughout the world combined with the Company's
strong international dealer network has enabled the Company to respond to the
increased worldwide demand for respiratory products. In addition, the strong
worldwide market acceptance of the Company's ventilators has fueled the growth
of international sales. Note that the ventilation products division was sold on
October 31, 1997.
21
Gross profit in fiscal 1997 was $35.8 million, or 30.3% of net sales,
compared to gross profit of $39.6 million, or 32.9% of net sales in fiscal 1996.
The impact of the nineteen day work stoppage and the computer conversion in the
St. Louis, Missouri facility during fiscal 1997 reduced manufacturing output and
margins. In addition, the increase in international sales, which have lower
margins than domestic sales due to the large quantity, bid-based nature of these
sales, combined with pricing pressures brought on by consolidations which
occurred in the Company's customer base, particularly in the hospital and home
health care markets, resulted in reduced margins. In fiscal 1997, as previously
described, the Company recorded certain adjustments to the carrying value of its
inventories in the fourth quarter of approximately $1.0 million. In fiscal
1996, the Company charged a portion of fixed plant costs as period costs due to
a decline in manufacturing throughput. This fiscal 1996 charge primarily
related to the fourth quarter.
Selling, General and Administrative ("SG&A") expenses for fiscal 1997 were
$33.9 million, an increase of $2.5 million over SG&A expenses of $31.4 million
in fiscal 1996. The Company made strategic investments in certain SG&A
activities and recorded certain non-recurring SG&A expenses in fiscal 1997.
SG&A spending included investments in advertising and marketing literature,
investments in information technology, and continued investments in research and
development. In addition, the Company completed the recruiting, training and
consolidation of its respiratory products sales force. Fiscal 1996 SG&A
expenses were affected by a research grant of $0.3 million which did not repeat
in fiscal 1997. SG&A expenses represent 28.7% of sales in fiscal 1997, versus
26.2% in fiscal 1996. The year over year increase was attributable to higher
SG&A expenses in fiscal 1997, as discussed above, combined with lower sales
during the year.
Income from operations in fiscal 1997 of $1.8 million was $6.3 million, or
77.3%, below fiscal 1996 income from operations of $8.1 million. As a
percentage of net sales, income from operations decreased to 1.6% in fiscal 1997
from 6.7% in fiscal 1996.
Interest expense increased $3.1 million, or 70.0%, to $7.6 million in
fiscal 1997 from $4.5 million in fiscal 1996. This increase in interest expense
in fiscal 1997 consisted of approximately $2.2 million of fees and other
professional costs incurred in connection with debt amendments under its credit
facilities, $0.5 million related to increased amortization of prepaid loan
costs, $0.3 million related to increased interest costs for the capital
expenditure projects previously discussed, and $0.1 million, reflecting
increases in effective interest rates which were partially offset by lower
average debt levels. On August 8, 1997, as previously discussed, subsequent to
fiscal year end, the Company entered into a $46.0 million credit facility with
Foothill Capital Corporation and obtained $5.0 million in subordinated debt in a
private placement arrangement.
The Company had a loss before income taxes of $5.9 million, a decrease of
$9.2 million from the income before provision for taxes of $3.3 million in
fiscal 1996. The Company recorded a tax benefit of $1.4 million in fiscal 1997
for an effective tax rate of 24.0%, compared to a provision for income taxes of
$1.4 million in fiscal 1996 and an effective tax rate of 44.6%. The fiscal 1997
effective tax rate was impacted by the loss from operations, the
non-deductibility of certain goodwill amortization, and the expected lack of
availability of the Company's foreign sales tax credit in fiscal 1997.
Net loss in fiscal 1997 was $4.5 million, or $0.58 per diluted share, a
decrease of $6.3 million from net income of $1.8 million or earnings per diluted
share of $0.25 in fiscal 1996. The weighted average number of common shares
outstanding used in calculation of per share loss or earnings was 7,796,682 in
fiscal 1997 compared to 7,378,478 in fiscal 1996. The increase in the weighted
average number of common shares reflected the effects of the October 1995 sale
of 1,610,000 shares of common stock in a public offering.
22
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Dollars in thousands 1998 1997 1996
- - ---------------------- ------- ------- -------
Cash $ 1,195 $ 988 $ 1,489
Working Capital $21,308 $18,743 $38,030
Total Debt $18,415 $46,932 $52,882
Current Ratio 2.67:1 1.57:1 2.69:1
The Company's working capital was $21.3 million at June 30, 1998 compared
to $18.7 million at June 30,1997. Inventories, other current assets, and
accounts payable all decreased as a result of the previously discussed sale of
the ventilation products division. Proceeds from such sale were utilized to
significantly reduce debt during the second quarter of fiscal 1998. Accounts
receivable declined to $14.2 million at June 30, 1998, down $8.9 million from
$23.1 million at June 30, 1997. Of this decrease, $7.2 million is attributable
to the ventilation business while receivables attributable to the Company's core
business declined $1.7 million. Accounts receivable as measured in days sales
outstanding ("DSO") decreased to 69 DSO from 71 DSO in this period. Inventories
declined to $18.3 million at June 30, 1998, or $7.7 million, from $26.0 million
at June 30, 1997. Of this decline, $3.0 million is related to the core
business. The Company has focused on improving the mix of inventories and has
been increasing stocking levels of high volume products while simultaneously
reducing the stocking levels of low volume products. Inventories, as measured
in days on hand ("DOH"), increased to 129 DOH at June 30, 1998 from 124 DOH at
June 30, 1997, due to lower sales in the fourth quarter of fiscal year 1998.
Accounts payable decreased to $5.8 million at June 30, 1998, down $8.2 million
from June 30, 1997 balance of $14.0 million. Of this decline, $1.2 million of
payables related to the ventilation products division. The Company experienced
limited liquidity during fiscal 1997 due to a reduction in borrowing
availability caused by principal payments made on its term loans combined with
the high level of fees paid to the Company's previous commercial bank group.
Consequently, payments to vendors and other obligations were extended. This
situation was alleviated with the completion of debt refinancing on August 8,
1997. The Company is current on all its obligations. The current portion of
long term debt at June 30, 1998 was $3.4 million compared to $12.9 million at
June 30, 1997. The June 30, 1997 current portion of long term debt included
$4.0 million of term notes and $5.0 million of subordinated debt which were due
to mature on February 1, 1998, but were repaid on November 3, 1997 and November
4, 1997, respectively, with proceeds from the sale of the ventilation products
division.
The net increase/(decrease) in cash for the fiscal years ended June 30,
1998, June 30, 1997, and June 30, 1996 was $0.2 million, $(0.5) million, and
$1.3 million respectively. Net cash provided by (used by) operations was $(5.2)
million, $8.9 million, and $2.5 million for the same periods. Cash used by
operations for the fiscal year ended June 30, 1998 consisted of a net loss of
$7.4 million, which was offset by $4.9 million in non-cash charges to operations
for amortization and depreciation, a non-cash loss on refinancing charges of
$0.9 million and changes in working capital and deferred tax accounts of $9.2
million. The Company reported a $12.8 million gain on sale of the ventilation
products division and also recorded non-recurring impairment charges, for which
the non-cash portion is $9.5 million, in the fiscal year ended June 30, 1998.
The Company received pre-tax proceeds of $35.4 million on the sale of the
ventilation products division, reduced total debt by a net $28.5 million, and
made capital expenditures of $0.6 million in the fiscal year ended June 30,
1998. Cash provided by operations for the comparable prior year period
consisted of a net loss of $4.5 million which was offset by the non-cash charges
of $5.6 million for depreciation and amortization, as well as cash generated by
changes in working capital accounts and deferred tax accounts, of $7.8 million.
The cash provided by operations for the fiscal year ended June 30, 1997 was used
for net debt reduction of $8.1 million, dividends of $0.5 million and debt
issuance cost of $0.7 million. The adverse results of operations during the
latter half of fiscal 1996 and during fiscal 1997 impacted the Company's
liquidity and the ability of the Company to continue historical levels of fixed
payments. Accordingly, on August 21, 1996 the Company's Board of Directors
voted to suspend quarterly dividends effective immediately subsequent to the
payment of dividends for the fourth quarter of fiscal 1996. In addition, to
improve the liquidity of the Company and to reduce interest expense, on August
8, 1997, the Company refinanced its existing debt.
23
At June 30, 1998 the Company had aggregate indebtedness of $18.4 million,
including $3.4 million of short-term debt and $15.0 million of long-term debt.
At June 30, 1997, the Company had aggregate indebtedness of $46.9 million,
including $12.9 million of short-term debt and $34.0 million of long-term debt.
Throughout fiscal 1996, the Company entered into a series of amendments and
waiver negotiations with its previous bank syndicate. During fiscal 1997, the
Company paid waiver fees totaling approximately $2.2 million for the September
1996 amendment to its credit facilities, to obtain waivers for technical
covenant violations at December 31, 1996 and March 31, 1997 and paid additional
fees of $0.4 million in the first quarter of fiscal 1998. The Company was
unsuccessful in its attempts to negotiate a long-term agreement with its
previous bank syndicate. Accordingly, on August 8, 1997 the Company refinanced
its existing debt through a new $46.0 million credit facility with Foothill
Capital Corporation. The new credit facility, with a blended average interest
rate of 10.2%, was comprised of a $25.0 million three-year revolving line of
credit, three-year term loans of $10.0 million and $7.0 million, respectively,
and a $4.0 million term loan maturing in February 1998. In conjunction with its
new credit facilities, Allied placed an additional $5.0 million in subordinated
debt, with several related parties to the Company maturing in February 1998. In
addition, the Company issued 112,500 warrants at an exercise price of $7.025 per
share, 62,500 of which were issued to subordinated debt holders with the balance
issued to Foothill Capital Corporation. Such warrants are exerciseable at the
option of the holder. The proceeds from the August 8, 1997 refinancing were
used to replace the Company's outstanding debt with the previous commercial bank
syndicate, and to provide additional liquidity. On October 31, 1997 the Company
completed the sale of its ventilation products division. On November 3, 1997
the Company repaid two term notes and a significant portion of its revolving
credit facility to Foothill. On November 4, 1997 the Company repaid its $5.0
million subordinated debt. Amendments to the Foothill credit facility were
completed in the fiscal 1998 third quarter to reflect the impact of the
significant reductions in the Company's outstanding debt and the sale of the
ventilation products division. Available borrowings at June 30, 1998 under the
Foothill credit facility were $6.5 million.
On August 7, 1998, the Company obtained a $5.0 million mortgage loan on its
principal facility in St. Louis, Missouri with LaSalle National Bank. Under
terms of this agreement the Company will make monthly principal and interest
payments, with a balloon payment in 2003. Proceeds of the loan were used to
reduce the obligation under the revolving credit agreement with Foothill Capital
Corporation. The mortgage loan carries a fixed rate of interest of 7.75%,
compared to a current rate of 9.0% under the revolving credit agreement.
On September 8, 1998, the Company's credit facilities with Foothill Capital
Corporation were amended. The Company's existing term loan was eliminated and
replaced with an amended revolving credit facility. As amended, the revolving
credit facility remained at $25.0 million. The interest rate on the facility
has been reduced from the floating reference rate (8.5% at September 8, 1998)
plus 0.50% to the floating reference rate plus 0.25%. The reference rate as
defined in the credit agreement, is the variable rate of interest, per annum,
most recently announced by Norwest Bank Minnesota, National Association, or any
successor thereto, as its "base rate". This amendment also provides the Company
with a rate of LIBOR +2.5%. Amounts outstanding under this revolving credit
facility, which expires on August 8, 2000, totaled $9.5 million at September 8,
1998. At September 8, 1998, $4.5 million was available under the revolving
facility for additional borrowings.
The rates noted above will drop by 0.25% at the end of fiscal 1999 and 2000
if the Company is profitable. In addition, the fees charged to the Company are
also reduced.
In 1998, the Company limited its investment to tooling to improve
production efficiencies and produce higher quality products. The Company
concentrated efforts on maximizing utilization of the machines acquired in
fiscal 1997. These machines included $1.5 million for five computer controlled
machining centers and $1.1 million for six injection molding machines and eleven
molds acquired, in large part through capital leases.
Capital expenditures, net of capital leases, were $0.6 million, $0.1
million and $3.6 million in fiscal 1998, 1997 and 1996, respectively. The
Company completed two separate plant consolidations in fiscal 1996. The
Company's headwall construction manufacturing operation was consolidated into
its Hospital Systems, Inc. operations in Oakland, California, and its disposable
24
medical products operation in Mt. Vernon, Ohio was closed and consolidated into
its Toledo, Ohio facility operation. In addition, the Company acquired $2.6
million of computer equipment and software under capital leases to improve
information technology systems. The Company believes that cash flow from
operations and available borrowings under its credit facilities will be
sufficient to finance fixed payments and planned capital expenditures of
approximately $2.6 million in fiscal 1999.
As of June 30, 1998, the Company had a backlog of $17.4 million compared to
a backlog of $23.9 million at June 30, 1997. The sale of the ventilation
products division reduced the Company's backlog by $3.7 million as compared to
June 30, 1997. The Company's backlog, a significant portion of which is
attributable to the Company's medical gas equipment products, consists of firm
customer purchase orders which may be subject to cancellation by the customer.
The Company's backlog increased in emergency medical products in the fiscal year
ended June 30, 1998. The increase was more than offset by a decline in backlog
for medical gas equipment products. Orders for medical gas construction
products are subject to major swings from year to year depending on hospital
construction. The Company booked more such orders in fiscal 1997 than in fiscal
1998.
Inflation has not had a material effect on the Company's business or
results of operations. The Company makes its foreign sales in dollars and,
accordingly, sales proceeds are not affected by exchange rate fluctuations,
although the effect on its customers does impact the pace of incoming orders.
SEASONALITY AND QUARTERLY RESULTS
In past fiscal years, the Company has experienced seasonal increases in net
sales during its second and third fiscal quarter (October 1 through March 31)
which, in turn, affected net income. Such seasonal variations were likely
attributable to an increase in hospital equipment purchases at the beginning of
each calendar year (which coincides with many hospitals' fiscal years) and an
increase in the severity of influenza during winter months. As the Company has
expanded its sales into the home health care, emergency medical and
international markets, these seasonal variations have diminished, but have not
disappeared.
The following table sets forth selected operating results for the eight
quarters ended June 30, 1998. The information for each of these quarters is
unaudited, but includes all normal recurring adjustments which the Company
considers necessary for a fair presentation thereof. These operating results,
however, are not necessarily indicative of results for any future period.
Further, operating results may fluctuate as a result of the timing of orders,
the Company's product and customer mix, the introduction of new products by the
Company and its competitors, and overall trends in the health care industry and
the economy. While these patterns have an impact on the Company's quarterly
operations, the Company is unable to predict the extent of this impact in any
particular period.
(Dollars In thousands,
except per share data) June 30, March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
Three months ended 1998 1998 1997 1997 1997 1997 1996 1996
- - ------------------------------ ---------- ---------- ---------- ----------- ---------- ----------- ---------- -----------
Net sales $ 19,476 $ 22,785 $ 24,033 $ 30,173 $ 30,129 $ 30,466 $ 28,389 $ 29,134
Gross profit 4,878 6,507 6,743 9,229 8,063 9,725 8,725 9,240
Income (loss) from operations (29) 1,100 3,455 1,977 (1,091) 1,582 491 862
Net income (loss) (315) 241 (6,684) (638) (3,485) (302) (557) (177)
Basic and diluted earnings (0.04) 0.03 (0.86) (0.08) (0.45) (0.04) (0.07) (0.02)
(loss) per share
25
ACCOUNTING PRONOUNCEMENTS
In June 1997 the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (FAS 131), which is effective for the Company in fiscal
1999. FAS 131 requires that companies report certain information if specific
requirements are met about the Company's operating segments including
information about services, geographic areas of operation, and major customers.
The Company is reviewing the applicability of FAS 131 on its future reporting
requirements.
YEAR 2000
The Company utilizes software and related computer technologies essential
to its operations. The Company has established a plan, utilizing internal
resources, to assess the potential impact of the year 2000 on the Company's
systems and operations and to implement solutions to address this issue. In
October 1996, the Company converted its corporate offices and its manufacturing
operation to a new fully-integrated software system. The Company plans to
install the most recent version of this software, which the vendor has certified
as year 2000 compliant, in June, 1999. The Company expects that all critical
systems will be year 2000 compliant by June 1999. The cost of upgrading to a
year 2000 compliant version of the existing system is not expected to be
significant. The Company is dependent on various third parties, to conduct its
business operations. The Company does not anticipate that the failure of
mission critical third parties to achieve year 2000 compliance would have a
material effect on the Company's operations. However, there can be no assurance
that the Company will not experience unanticipated costs and/or business
interruptions due to year 2000 problems in its internal systems, or that such
costs and/or interruptions will not have a material adverse effect on the
Company's consolidated results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Allied Healthcare Products, Inc.
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of changes in stockholders'
equity, and of cash flows present fairly, in all material respects, the
financial position of Allied Healthcare Products, Inc. and its subsidiaries at
June 30, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
St. Louis, Missouri
August 7, 1998, except for Note 14 which is
as of September 8, 1998
26
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended June 30, 1998 1997 1996
- - ---------------------------------------------------- ------------- ------------- ------------
Net sales $ 96,466,860 $118,117,518 $120,122,502
------------- ------------- ------------
Cost of sales 69,110,274 82,364,405 80,549,685
Gross profit 27,356,586 35,753,113 39,572,817
Selling, general and administrative expenses 23,888,131 33,909,510 31,449,306
Gain on sale of business (12,812,927) -- --
Non-recurring impairment losses 9,778,259 -- --
------------- ------------- ------------
Income from operations 6,503,123 1,843,603 8,123,511
------------- ------------- ------------
Other expenses:
Interest expense 4,151,986 7,606,129 4,474,316
Other, net 198,329 186,291 349,445
------------- ------------- ------------
4,350,315 7,792,420 4,823,761
------------- ------------- ------------
Income (loss) before provision (benefit) for
income taxes and extraordinary loss 2,152,808 (5,948,817) 3,299,750
Provision (benefit) for income taxes 9,018,488 (1,427,716) 1,473,156
------------- ------------- ------------
Income (loss) before extraordinary loss (6,865,680) (4,521,101) 1,826,594
Extraordinary loss on early extinguishment of debt,
net of income tax benefit of $373,191 530,632 -- --
------------- ------------- ------------
Net income (loss) $ (7,396,312) $ (4,521,101) $ 1,826,594
============= ============= ============
Basic and diluted earnings (loss) per share:
Earnings (loss) before extraordinary loss $ (0.88) $ (0.58) $ 0.25
Extraordinary loss $ (0.07) -- --
------------- ------------- ------------
Earnings (loss) per share $ (0.95) $ (0.58) $ 0.25
============= ============= ============
See accompanying Notes to Consolidated Financial Statements
27
CONSOLIDATED BALANCE SHEET
June 30, 1998 1997
- - ------------------------------------------------------------ ------------- -------------
ASSETS
Current assets:
Cash $ 1,194,813 $ 988,436
Accounts receivable, net of allowance for doubtful
accounts of $1,035,833 and $1,225,326, respectively 14,227,314 23,093,037
Inventories 18,341,340 26,052,991
Other current assets 273,832 1,544,811
------------- -------------
Total current assets 34,037,299 51,679,275
------------- -------------
Property, plant and equipment, net 17,525,906 20,848,870
Goodwill, net 28,026,064 50,763,511
Deferred tax asset-noncurrent, net -- 1,665,069
Other assets, net 590,933 1,386,291
------------- -------------
Total assets $ 80,180,202 $126,343,016
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,807,349 $ 14,048,235
Current portion of long-term debt 3,442,797 12,890,772
Other accrued liabilities 3,479,215 5,997,670
------------- -------------
Total current liabilities 12,729,361 32,936,677
------------- -------------
Long-term debt 14,971,775 34,041,300
Deferred tax liability-noncurrent, net 441,589 --
Commitments and contingencies (Notes 5 and 12)
Stockholders' equity:
Preferred stock; $.01 par value; 1,500,000 shares
authorized; no shares issued and outstanding
Series A preferred stock; $.01 par value; 200,000 shares
authorized; no shares issued and outstanding
Common stock; $.01 par value; 30,000,000 shares
authorized; 7,806,682 and 7,796,682 shares issued and
outstanding at June 30, 1998 and 1997, respectively 101,102 101,002
Additional paid-in capital 47,014,621 46,945,971
Retained earnings 25,653,182 33,049,494
Common stock in treasury, at cost (20,731,428) (20,731,428)
------------- -------------
Total stockholders' equity 52,037,477 59,365,039
------------- -------------
Total liabilities and stockholders' equity $ 80,180,202 $126,343,016
============= =============
See accompanying Notes to Consolidated Financial Statements
28
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Additional
Preferred Common paid-in Retained Treasury
stock stock capital earnings Stock
----------- -------- ----------- ------------ -------------
Balance, June 30, 1995 $ - $ 84,890 $21,206,090 $37,814,360 $(20,731,428)
Issuance of common stock -- 16,112 25,739,881 -- --
Dividends declared --
($.28 per common share) -- -- -- (2,070,359) --
Net income for the year ended -- -- -- --
June 30, 1996 -- -- -- 1,826,594 --
----------- -------- ----------- ------------ -------------
Balance, June 30, 1996 -- 101,002 46,945,971 37,570,595 (20,731,428)
Net loss for the year ended
June 30, 1997 -- -- -- (4,521,101) --
----------- -------- ----------- ------------ -------------
Balance, June 30, 1997 -- 101,002 46,945,971 33,049,494 (20,731,428)
Issuance of common stock -- 100 68,650 -- --
Net loss for the year ended
June 30, 1998 -- -- -- (7,396,312) --
----------- -------- ----------- ------------ -------------
Balance, June 30, 1998 $ - $101,102 $47,014,621 $25,653,182 $(20,731,428)
=========== ======== =========== ============ =============
See accompanying Notes to Consolidated Financial Statements
29
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended June 30, 1998 1997 1996
- - --------------------------------------------------------------------- -------------- ------------- -------------
Cash flows from operating activities:
Net income (loss) $ (7,396,312) $ (4,521,101) $ 1,826,594
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities,
excluding the effects of acquisitions:
Depreciation and amortization 4,881,890 5,572,188 3,954,989
Gain on sale of Bear Medical (12,812,927) -- --
Loss on refinancing of long-term debt 903,823 -- --
Noncash portion of non-recurring impairment losses 9,496,452 -- --
Decrease in accounts receivable, net 2,887,344 2,871,621 1,702,297
Decrease (increase) in inventories 2,412,551 1,993,499 (4,156,653)
Decrease (increase) in income taxes receivable -- 2,285,224 (2,285,224)
Decrease in other current assets 696,056 1,168,686 2,276,486
Increase (decrease) in accounts payable (6,671,539) 943,936 3,191,348
Increase (decrease) in other accrued liabilities (1,688,283) 1,027,393 (4,325,109)
Increase (decrease) in deferred income taxes - noncurrent 2,106,658 (2,451,982) 315,892
-------------- ------------- -------------
Net cash provided by (used in) operating activities (5,184,287) 8,889,464 2,500,620
Cash flows from investing activities:
Capital expenditures, net (644,080) (58,610) (3,649,284)
Acquisition of Omni-Tech - Net of cash acquired -- -- (1,557,000)
Proceeds on sale of Bear Medical - Net of disposal costs 35,362,286 -- --
-------------- ------------- -------------
Net cash provided by (used in) investing activities 34,718,206 (58,610) (5,206,284)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 26,000,000 5,000,000 16,600,000
Payment of long-term debt (37,267,757) (4,662,785) (63,192,220)
Borrowings under revolving credit agreement 128,862,400 27,365,170 56,100,000
Payments under revolving credit agreement (146,033,153) (35,810,605) (28,100,000)
Proceeds from issuance of common stock 68,750 -- 25,755,993
Debt issuance costs (957,782) (677,563) (1,186,351)
Dividends paid on common stock -- (545,768) (1,957,577)
-------------- ------------- -------------
Net cash provided by (used in) financing activities (29,327,542) (9,331,551) 4,019,845
Net increase (decrease) in cash and equivalents 206,377 (500,697) 1,314,181
Cash and equivalents at beginning of period 988,436 1,489,133 174,952
-------------- ------------- -------------
Cash and equivalents at end of period $ 1,194,813 $ 988,436 $ 1,489,133
============== ============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 5,256,981 $ 6,614,365 $ 4,142,070
Income taxes $ 5,380,817 $ 138,339 $ 2,587,091
Supplemental schedule of noncash investing and financing activities:
Equipment acquired through capital leases -- $ 2,157,967 $ 2,452,565
See accompanying Notes to Consolidated Financial Statements
30
ALLIED HEALTHCARE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Allied Healthcare Products, Inc. (the Company or Allied) is a 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
care products, medical gas equipment and emergency medical products. See Note
3 regarding sale of the Company's ventilation products division on October 31,
1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by Allied are described below.
The policies utilized by the Company in the preparation of the financial
statements conform to generally accepted accounting principles, and require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual amounts
could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
and balances are eliminated.
REVENUE RECOGNITION
Revenue from the sale of the Company's products is recognized upon shipment
to the customer. Costs and related expenses to manufacture the Company's
products are recorded as cost of sales when the related revenue is recognized.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less when acquired
to be cash equivalents. Book cash overdrafts on the Company's disbursement
accounts totaling $2,012,427 and $3,867,477 at June 30, 1998 and 1997,
respectively, are included in accounts payable.
CONCENTRATIONS OF CREDIT RISK
At June 30, 1998 and 1997, the Company's trade receivables are comprised as
follows:
1998 1997
----- -----
Medical equipment distributors 71% 74%
Construction contractors 25% 16%
Health care institutions 4% 10%
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains reserves for
potential credit losses and historically such losses have been within
management's expectations. At June 30, 1998 the Company believes that it has no
significant concentration of credit risk.
31
INVENTORIES
Inventories are stated at the lower of cost, determined using the last-in,
first-out (LIFO) method, or market. If the first-in, first-out (FIFO) method
(which approximates replacement cost) had been used in determining cost,
inventories would have been $2,066,220 and $511,626 higher at June 30, 1998 and
1997, respectively. Inventories include the cost of materials, direct labor and
manufacturing overhead.
Inventory amounts are net of a reserve for obsolete and excess inventory of
$2,189,000 and $1,689,000 at June 30, 1998 and 1997, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is carried at cost and is depreciated using
the straight-line method over the estimated useful lives of the assets which
range from 3 to 36 years. Properties held under capital leases are recorded at
the present value of the non-cancelable lease payments over the term of the
lease and are amortized over the shorter of the lease term or the estimated
useful lives of the assets. Expenditures for repairs, maintenance and renewals
are charged to income as incurred. Expenditures which improve an asset or
extend its estimated useful life are capitalized. When properties are retired
or otherwise disposed of, the related cost and accumulated depreciation are
removed from the accounts and any gain or loss is included in income.
GOODWILL
The excess of the purchase price over the fair value of net assets acquired
in business combinations is capitalized and amortized on a straight-line basis
over the estimated period benefited, not to exceed 40 years. The amortization
period for all acquisitions to date ranges from 20 to 40 years. Amortization
expense for the years ended June 30, 1998, 1997 and 1996 was $1,077,959,
$1,473,164, and $1,446,756 respectively. Accumulated amortization at June 30,
1998 and 1997 was $5,499,276 and $5,347,843 respectively. The carrying value of
goodwill is assessed for recoverability by management based on an analysis of
future expected cash flows from the underlying operations of the Company. See
Note 4 regarding goodwill impairment and related non-recurring charges recorded
in the second quarter of the year ended June 30, 1998. Management believes that
there has been no further impairment at June 30, 1998 to the remaining carrying
value of goodwill.
OTHER ASSETS
Other assets are primarily comprised of debt issuance costs. Such costs
are being amortized on a straight-line basis over the life of the related
obligations.
INCOME TAXES
The Company files a consolidated federal income tax return which includes
its wholly-owned subsidiaries. The Company accounts for income taxes under
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (FAS 109). Under FAS 109, the deferred tax provision is determined using
the liability method, whereby deferred tax assets and liabilities are recognized
based upon temporary differences between the financial statement and income tax
bases of assets and liabilities using presently enacted tax rates.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to income in the year incurred
and are included in selling, general and administrative expenses. Research and
development expense for the years ended June 30, 1998, 1997 and 1996 was
$1,688,071, $3,684,702 and $3,255,067, respectively.
32
EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of shares
of common stock outstanding during the year. Diluted earnings per share are
based on weighted averaged number of shares of common stock and common stock
equivalents outstanding during the year. The number of basic and diluted shares
outstanding for the years ended June 30, 1998, 1997 and 1996 was 7,805,021,
7,796,682 and 7,378,478 shares, respectively. Options under the Company's
employee's and director's stock option plans are not included as common stock
equivalents for earnings per share purposes since they did not have material
dilutive effect.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128), which
requires public entities to present both basic and diluted earnings per share
amounts on the face of their financial statements, replacing the former
calculations of primary and fully diluted earnings per share. The Company
adopted FAS 128 effective with its fiscal 1998 second quarter. All prior period
earnings per share amounts have been restated. The adoption of FAS 128 did not
have a material effect on current or previously reported earnings per common
share.
EMPLOYEE STOCK-BASED COMPENSATION
The Company accounts for employee stock options and variable stock awards
in accordance with Accounting Principles Board No. 25, "Accounting for Stock
Issued to Employees" (APB 25). Under APB 25, the Company applies the intrinsic
value method of accounting. For employee stock options accounted for using the
intrinsic value method, no compensation expense is recognized because the
options are granted with an exercise price equal to the market value of the
stock on the date of grant. For variable stock awards accounted for using the
intrinsic value method, compensation cost is estimated and recorded each period
from the date of grant to the measurement date based on the market value of the
stock at the end of each period.
During fiscal 1996, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123), became effective for the
Company. FAS 123 prescribes the recognition of compensation expense based on
the fair value of options or stock awards determined on the date of grant.
However, FAS 123 allows companies to continue to apply the valuation methods set
forth in APB 25. For companies that continue to apply the valuation methods set
forth in APB 25, FAS 123 mandates certain pro forma disclosures as if the fair
value method had been utilized. See Note 9 for additional discussion.
3. SALE OF BEAR VENTILATION PRODUCTS DIVISION
On October 31, 1997, the Company sold the assets of Bear Medical Systems,
Inc. (Bear) and its subsidiary BiCore Monitoring Systems, Inc. (BiCore) to
Thermo-Electron Corporation for $36.6 million, plus the assumption of certain
liabilities. The net proceeds of $29.5 million, after expenses, including
federal and state taxes paid, were utilized to repay a significant portion of
its term notes and to repay all of its subordinated debt. The sale of the Bear
ventilation products division resulted in a gain before taxes for financial
reporting purposes of $12.8 million. This gain, as a discrete item, resulted in
a tax provision of $9.3 million. The relatively higher effective tax rate on
this transaction resulted because approximately $12.7 million of goodwill
associated with these businesses was not deductible for income tax purposes.
Had the divestiture occurred on July 1, 1997, consolidated pro forma net
sales, net loss and loss per share for the year ended June 30, 1998 would have
been $86.0 million, $(12.1) million and $(1.55), respectively.
33
The unaudited pro forma information is based on assumptions deemed
appropriate by Allied Healthcare Products, Inc. and is not intended to reflect
what the Company's net sales, net loss, or loss per share would have been had
the sale occurred on July 1, 1997 or to project the Company's results of
operations for the future.
4. GOODWILL IMPAIRMENT
In the second quarter of fiscal 1998, the Company reevaluated the carrying
value of its various businesses and recorded $9.8 million of non-recurring
charges to reflect the changes in business conditions resulting from the sale of
the ventilation product division and due to other changes in market conditions
discussed below, which culminated during the second quarter of fiscal 1998.
Goodwill writedowns, which were determined pursuant to the Company's
impairment policy as described in Note 2, approximating $8.9 million, were
comprised of the following:
$4.4 million associated with the partial goodwill writedown related to the
B&F disposable products business. Continuing weakness in financial results of
the business due to various continuing operational issues, market condition
changes in the home healthcare market including pressures on pricing, and
overall weakness in financial results of the national home healthcare chains
caused Allied to reevaluate and adjust the carrying value of this business.
$2.4 million associated with the writedown of goodwill for Allied's
headwall business which continues to experience weakness in financial results
due to market conditions.
$1.6 million associated with the writedown of Omni-Tech Medical, Inc.
goodwill. This transportation ventilator business is directly related to the
divested Bear ventilation products division and is not anticipated to contribute
to the ongoing operations of the Company.
$0.5 million associated with the write-down of goodwill for the Design
Principles Inc. backboard business. Increased costs have significantly eroded
the margins of this business necessitating a reevaluation of the carrying value
of its goodwill.
Management believes that there has been no further impairment at June 30,
1998 to the remaining carrying value of goodwill.
In addition to the non-cash goodwill write-downs, the other non-recurring
items include:
$0.5 million of consulting fees related to a cooperative purchasing study.
$0.4 million for the writedown of leasehold improvements and a reserve for
the remaining lease payments for B&F's Mt. Vernon, Ohio facility which was
closed as part of the Company's rationalization initiatives. The tenant
subletting this facility is operating under Chapter 11 reorganization
protection.
34
5. FINANCING
Long-term debt consisted of the following at June 30, 1998 and 1997:
UNSUBORDINATED DEBT
Notes payable to bank or other financial lending institution, secured
by virtually all assets of the Company
Term Loan - principal due in varying monthly maturities
ranging from $150,000 to $1,541,667 with remaining balances
due August 8, 2000 $ 5,800,000
Revolving credit facility - aggregate revolving commitment of
25,000,000; principal due at Maturity on August 8, 2000 9,383,812
Term Loan Payable to Bank - Paid in 1998 $ 5,000,000
Term Loan Payable to Bank - Paid in 1998 9,750,000
Revolving credit facility - Paid in 1998 26,554,565
Acquisition Term Loan to Bank - Paid in 1998 1,344,000
Other 45,840 62,690
------------ -------------
15,229,652 42,711,255
------------ -------------
SUBORDINATED DEBT
Industrial Development Revenue Bonds - principal due in annual
installments of $250,000 through March 1, 2000; $255,000 at
maturity on March 1, 2001; interest payable monthly at
variable rate (4.6% at June 30, 1998) 755,000 955,000
Capital lease obligations 2,429,920 3,265,817
------------ -------------
3,184,920 4,220,817
------------ -------------
18,414,572 46,932,072
Less-Current portion of long-term debt, including $478,382 and
676,357 of capital lease obligations at June 30, 1998 and June 30,
1997 respectively. (3,442,797) (12,890,772)
------------ -------------
$14,971,775 $ 34,041,300
============ =============
On August 8, 1997, the Company refinanced its existing credit facility with
a financial institution. The new credit agreement provided for borrowings of
$25 million under a revolving credit facility and $21 million under three term
loan facilities, including $4 million due in February 1998. In conjunction with
the new Credit Agreement, Allied placed an additional $5.0 million in
subordinated debt due in February 1998 with certain shareholders of the Company.
The Company used the funds provided by the new credit agreements to extinguish
amounts outstanding under the revolving credit facility and term loans with its
existing commercial bank.
35
In connection with the sale of the Bear ventilation products division in
October 1997, the Company repaid two term notes including $4 million due in
February 1998, a portion of the third term note, a significant portion of its
revolving credit facility and the subordinated note with certain shareholders in
the amount of $5.0 million.
The revolving credit facility provides for borrowings of up to the lesser
of $25,000,000 or the borrowing base, less any outstanding letter of credit
obligations. The borrowing base is defined by the Credit Agreement as (a) 85%
of eligible domestic receivables plus (b) 85% of eligible foreign receivables
not to exceed $8,000,000 plus (c) 45% of eligible inventories not to exceed
$10,000,000. Such amounts are reduced by various reserves as defined in the
Credit Agreement. The revolving credit facility bears interest at the floating
Reference Rate (8.5% at June 30, 1998) plus 0.50% and is payable monthly. The
Reference Rate, as defined in the Credit Agreement, is the variable rate of
interest, per annum, most recently announced by Norwest Bank Minnesota, National
Association, or any successor thereto, as its "base rate". The Credit Agreement
requires an underutilization fee of 0.25% per annum, payable monthly, on any
unused portion of the revolving credit facility. Amounts outstanding under this
revolving credit facility, which expires on August 8, 2000, totaled $9,383,812
at June 30, 1998. At June 30, 1998, $6.5 million was available under the
revolving credit facility for additional borrowings.
The Credit Agreement provided term loan facilities in the amounts of
$10,000,000 (Term Loan A), $7,000,000 (Term Loan B), and $4,000,000 (Term Loan
C), respectively. Term Loan A was partially paid down with proceeds from the
aforementioned sale of Bear and is due in varying monthly maturities ranging
from $150,000 to $1,541,667, commencing October 1, 1997 with final payment due
on August 8, 2000. As discussed above, term loans B and C were fully repaid in
connection with the sale of the Bear ventilation products division.
The Credit Agreement also provides for the issuance of letters of credit on
behalf of the Company in amounts up to $3,000,000 in the aggregate. The Company
is required to pay a fee of 1.0% per annum on the outstanding balance.
The above described agreements contain restrictions and requirements,
including limitations on capital expenditures, new indebtedness, and dividend
payments, and the achievement of certain earning levels and the maintenance of
minimum net worth, among others, for which the Company was in compliance at June
30, 1998.
Aggregate maturities of long-term debt, excluding capital leases, for each
of the fiscal years subsequent to June 30, 1998 are as follows:
REVOLVING INDUSTRIAL
CREDIT FACILITY DEVELOPMENT
TERM A REVENUE BONDS OTHER TOTAL
1999 $ 2,700,000 - $250,000 $13,021 $ 2,963,021
2000 3,000,000 - 250,000 16,575 3,266,575
2001 100,000 $ 9,383,812 255,000 16,244 9,755,056
- - ---- ---------------- -------------- -------- ------- -----------
$ 5,800,000 $ 9,383,812 $755,000 $45,840 $15,984,652
- - ---- ---------------- -------------- -------- ------- -----------
Debt issuance costs approximating $700,000 were incurred in the August 1997
refinancing and are being deferred and amortized over the term of the new Credit
Agreement. Unamortized costs incurred in conjunction with the original credit
facilities with the Company's previous bank syndicate totaled $980,000. These
costs, net of applicable income tax benefits of $392,000, were written off
during the first quarter of fiscal 1998 and were accounted for as an
extraordinary loss.
Subsequent to June 30, 1998, the Company obtained mortgage financing on its
St. Louis facility and further amended its credit facilities. See Note 14 for
further detail discussion.
36
6. LEASE COMMITMENTS
The Company leases certain of its electronic data processing equipment
under non-cancelable lease agreements. These agreements extend for a period of
up to 60 months and contain purchase or renewal options on a month-to-month
basis. The leases are reflected in the consolidated financial statements as
capitalized leases in accordance with the requirements of Statement of Financial
Accounting Standards No. 13 (FAS 13), "Accounting for Leases". In addition, the
Company leases certain manufacturing facilities under noncancelable operating
leases. These leases are reflected in the consolidated financial statements as
operating leases in accordance with FAS 13.
Minimum lease payments under long-term capital leases and the operating
leases at June 30, 1998 are as follows:
CAPITAL OPERATING
LEASES LEASES
----------- ----------
1999 $ 832,567 $ 114,120
2000 762,533 69,120
2001 762,533 57,600
2002 803,432
-----------
Total minimum lease payments $3,161,065 $ 240,840
==========
Less amount representing interest (731,145)
-----------
Present value of net minimum lease payments,
including current portion of $478,382 $2,429,920
===========
Rental expense incurred on the operating leases in fiscal 1998, 1997 and
1996 totaled $381,024, $686,168, and $881,318, respectively.
7. INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
1998 1997 1996
---------- ------------ ----------
Current Payable:
Federal $4,249,382 $ 40,240
State 1,957,403 -
---------- ----------
Total Current 6,206,785 40,240
---------- ----------
Deferred:
Federal 2,451,228 $(1,214,731) 1,271,979
State 360,475 (212,985) 214,937
---------- ----------
Total Deferred 2,811,703 (1,427,716) 1,432,916
---------- ------------ ----------
$9,018,488 $(1,427,716) $1,473,156
========== ============ ==========
37
Income taxes were 418.9% (24.0)% and 44.6% of pre-tax earnings (losses) in
1998, 1997 and 1996, respectively. A reconciliation of income taxes, with the
amounts computed at the statutory federal rate follows:
1998 1997 1996
------------ ------------ -----------
Computed tax at federal statutory rate $ 731,955 $(2,022,597) $1,121,915
State income taxes, net of federal tax benefit 1,611,155 (160,989) 169,770
Non deductible goodwill 7,925,827 491,854 482,876
Other, net (1,250,449) 264,016 (301,405)
------------ ------------ -----------
Total $ 9,018,488 $(1,427,716) $1,473,156
============ ============ ===========
At June 30, 1998 At June 30, 1997
Deferred Deferred Tax Deferred Deferred Tax
Tax Assets Liabilities Tax Assets Liabilities
------------ ------------- ------------ -------------
Current:
Bad Debts $ 403,975 $ 479,175
Accrued Liabilities 103,369 635,160
Inventory $ 876,444 $ 698,390
Other 80,000
------------ ------------- ------------ -------------
507,344 876,444 1,114,335 778,390
------------ ------------- ------------ -------------
Non Current:
Depreciation 65,685 319,066
Other property basis 399,611 451,918
Intangible assets 363,331 438,678
Net operating loss carryforward 2,703,228
Other -- 14,233 -- 383,133
------------ ------------- ------------ -------------
363,331 479,529 3,141,906 1,154,117
------------ ------------- ------------ -------------
Valuation allowance (325,391) -- (322,720) --
------------ ------------- ------------ -------------
Total deferred taxes $ 545,284 $ 1,355,973 $ 3,933,521 $ 1,932,507
============ ============= ============ =============
At June 30, 1997, the Company had approximately $2,703,228 of net operating
loss carryforwards available to offset future regular taxable income. Such
carryforwards and the net operating losses generated through October 31, 1997
were fully utilized to offset the gain on the sale of the ventilation products
division.
8. RETIREMENT PLAN
The Company offered several retirement savings plans under Section 401(k)
of the Internal Revenue Code to certain eligible salaried employees. Each
employee may elect to enter a written salary deferral agreement under which a
portion of such employee's pre-tax earnings may be contributed to the plan.
38
During the fiscal years ended June 30, 1998, 1997 and 1996, the Company
made contributions of $464,227, $601,338 and $535,017, respectively.
9. SHAREHOLDERS EQUITY
On October 4, 1995, the Company completed the sale of 1,610,000 shares of
its common stock in a public offering which yielded net proceeds to the Company
of $25.7 million. The proceeds were used to reduce debt and to provide
financing for future growth.
The Company has established a 1991 Employee Non-Qualified Stock Option Plan
as well as a 1994 Employee Stock Option Plan (Employee Plans). The Employee
Plans provide for the granting of options to the Company's executive officers
and key employees to purchase shares of common stock at prices equal to the fair
market value of the stock on the date of grant. Options to purchase up to
800,000 shares of common stock may be granted under the Employee Plans. Options
currently outstanding entitle the holders to purchase common stock at prices
ranging between $6.75 and $16.13, subject to adjustment. Options shall become
exercisable with respect to one-fourth of the shares covered thereby on each
anniversary of the date of grant, commencing on the second anniversary of the
date granted, except certain options granted under the 1994 Employee Stock
Option Plan which become exercisable when the fair market value of common stock
exceeds required levels. The right to exercise the options expires in ten
years, from the date of grant, or earlier if an option holder ceases to be
employed by the Company.
In addition, the Company has established a 1991 Directors Non-Qualified
Stock Option Plan and a 1995 Directors Non-Qualified Stock Option Plan
(Directors Plans). The Directors Plan provides for the granting of options to
the Company's Directors who are not employees of the Company to purchase shares
of common stock at prices equal to the fair market value of the stock on the
date of grant. Options to purchase up to 250,000 shares of common stock may be
granted under the Directors Plans. Options currently outstanding entitle the
holders to purchase common stock at prices ranging between $7.00 and $18.25,
subject to adjustment. Options shall become exercisable with respect to
one-fourth of the shares covered thereby on each anniversary of the date of
grant, commencing on the second anniversary of the date granted, except for
certain options granted under the 1995 Directors Non-Qualified Stock Option Plan
which become exercisable with respect to all of the shares covered thereby six
months after the grant date. The right to exercise the options expires in ten
years from the date of grant, or earlier if an option holder ceases to be a
Director of the Company.
A summary of stock option transactions in 1998, 1997 and 1996,
respectively, pursuant to the Employee Plans and the Directors Plans follows:
Summary of Stock Options
------------------------
Average Shares Subject
Price To Option
-------- ---------------
June 30, 1995 $ 13.36 388,000
Options Granted 17.58 63,500
Options Exercised 8.00 (1,174)
Options Canceled 15.96 (36,726)
---------------
June 30, 1996 $ 13.79 413,600
---------------
Exercisable at June 30, 1996 118,875
===============
June 30, 1996 $ 13.79 413,600
Options Granted 6.90 358,000
Options Exercised -0- -0-
Options Canceled 11.47 (177,100)
---------------
June 30, 1997 $ 9.22 594,500
---------------
39
Exercisable at June 30, 1997 163,700
===============
June 30, 1997 9.22 594,500
Options Granted 7.63 173,500
Options Exercised 6.88 (10,000)
Options Canceled 11.23 (132,550)
June 30, 1998 $ 8.39 625,450
Exercisable at June 30, 1998 160,138
===============
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," requires companies to measure employee stock
compensation plans based on the fair value method of accounting. However, the
Statement allows the alternative of continued use of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," with pro-forma
disclosure of net income and earnings per share determined as if the fair value
based method had been applied in measuring compensation cost. The Company
adopted the new standard in the fiscal year ending June 30, 1997, and elected
the continued use of APB Opinion No. 25. Pro forma disclosures have not been
provided, as the effect on fiscal year 1998, 1997 and 1996 net earnings was
immaterial.
In conjunction with the refinancing, 62,500 warrants were issued to the
holders of the subordinated notes payable and 50,000 warrants were issued to the
commercial lender providing the revolving credit facilities and the term loan
facilities. Each warrant entitles the holder to purchase one share of common
stock at $7.025 per share through August 7, 2002.
10. EXPORT SALES
Export sales for the years ended June 30, 1998, 1997 and 1996 are comprised
as follows (in thousands):
1998 1997 1996
------- ------- -------
Europe $ 5,700 $ 9,300 $ 7,500
Canada 1,900 2,600 2,300
Latin America 5,900 6,300 5,600
Middle East 1,600 3,200 2,900
Far East 6,000 9,400 9,000
Other 2,900 3,700 3,500
------- ------- -------
$24,000 $34,500 $30,800
======= ======= =======
11. SUPPLEMENTAL BALANCE SHEET INFORMATION
June 30,
----------------------------
1998 1997
------------- -------------
INVENTORIES
Work in Progress $ 2,424,041 $ 2,726,585
Component parts 14,820,526 18,679,482
Finished goods 1,096,773 4,646,924
------------- -------------
$ 18,341,340 $ 26,052,991
============= =============
PROPERTY, PLANT AND EQUIPMENT
Machinery and equipment $ 13,836,067 $ 14,880,513
Buildings 13,442,979 13,508,251
Land and land improvements 989,516 989,516
Property held under capital leases 5,220,926 5,382,529
------------- -------------
Total property, plant and equipment at cost $ 33,489,488 $ 34,760,809
40
Less accumulated depreciation and amortization,
including $2,551,105 and $1,610,867 respectively,
related to property held under capital leases (15,963,582) (13,911,939)
------------- -------------
$ 17,525,906 $ 20,848,870
============= =============
OTHER ACCRUED LIABILITIES
Accrued compensation expense $ 1,295,354 $ 2,215,548
Acquisition reserve 948,639
Accrued interest expense 219,015 1,324,010
Accrued income tax 942,036 376,910
Other 1,022,810 1,132,563
------------- -------------
$ 3,479,215 $ 5,997,670
============= =============
12. COMMITMENTS AND CONTINGENCIES
From time to time, the Company becomes party to various claims and legal
actions arising during the ordinary course of business. Management believes
that the Company's costs and any potential judgments resulting from such claims
and actions would be covered by the Company's product liability insurance,
except for deductible limits and self-insured retention. The Company intends to
defend such claims and actions in cooperation with its insurers. It is
management's opinion that, in any event, their outcome would not have a material
effect on the Company's financial position, cash flows or results of operations.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for fiscal 1998 and 1997 appears below
(all amounts in thousands except per share data):
Net Sales
-------------------
1998 1997
-------- ---------
First Quarter $30,173 $ 29,134
Second Quarter 24,033 28,389
Third Quarter 22,785 30,466
Fourth Quarter 19,476 30,129
-------- ---------
Total Year $96,467 $118,118
======== =========
Gross Profit
------------------
1998 1997
-------- ---------
First Quarter $ 9,229 $ 9,240
Second Quarter 6,743 8,725
Third Quarter 6,507 9,725
41
Fourth Quarter 4,878 8,063
-------- ---------
Total Year $27,357 $ 35,753
======== =========
Net Income (Loss)
--------------------
1998 1997
-------- ---------
First Quarter (638) $ (177)
Second Quarter (6,684) (557)
Third Quarter 241 (302)
Fourth Quarter (315) (3,485)
-------- ---------
Total Year $(7,396) $ (4,521)
======== =========
Earnings (Loss) Per Share
--------------------------
1998 1997
-------- ---------
First Quarter $ (.08) $ (.02)
Second Quarter (.86) (.07)
Third Quarter .03 (.04)
Fourth Quarter (.04) (.45)
-------- ---------
Total Year $ (.95) $ (.58)
======== =========
14. SUBSEQUENT EVENTS
On August 5, 1998 the Company's board of directors voted to close its
disposable products division (DPD) located in Toledo, Ohio and relocate
production of the B&F line of home care products to its manufacturing facility
in St. Louis, Missouri. The move is expected to be completed during the second
quarter of fiscal 1999 and is expected to generate annual savings of nearly $1.0
million. In connection with the shutdown of the facility, Allied will record a
one-time, after tax charge of approximately $0.6 million or $.08 per share
during the first quarter fiscal 1999. Pre-tax costs of approximately $1.0
million are expected to be paid by January 1, 1999.
On August 7, 1998, the Company borrowed approximately $5.0 million from a
financial institution. The borrowing was secured by a first security interest
in the Company's St. Louis facility. The loan requires monthly principal and
interest payments of $60,005, with a final payment of all principal and interest
remaining unpaid due at maturity on August 1, 2003. Interest is fixed at 7.75%
per annum. Proceeds from the borrowing were used to pay down existing debt,
which bore a higher interest rate. The loan agreement includes certain debt
covenants which the Company must comply with over the term of the loan.
On September 8, 1998, the Company's credit facilities with Foothill Capital
Corporation were amended. The Company's existing term loan was eliminated and
replaced with an amended revolving credit facility. As amended, the revolving
credit facility remains at $25.0 million. The interest rate on the facility has
been reduced from the floating reference rate (8.5% at September 8, 1998) plus
0.50% to the floating reference rate plus 0.25%. The reference rate as defined
42
in the credit agreement, is the variable rate of interest, per annum, most
recently announced by Norwest Bank Minnesota, National Association, or any
successor thereto, as its "base rate". Amounts outstanding under this revolving
credit facility, which expires on August 8, 2000, totaled $9.5 million at
September 8, 1998. At September 8, 1998, $4.5 million was available under the
revolving facility for additional borrowings.
This amendment also provides the Company with a rate of LIBOR +2.5%. This
rate will drop by 0.25% at the end of fiscal 1999 and 2000 if the Company is
profitable. In addition, the fees charged to the Company are also reduced.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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 9, 1998. 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 8 and 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 9 through 15 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 5
through 7 of the definitive proxy statement, which information is incorporated
herein by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
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 are included in response to Item 8:
Consolidated Statement of Operations for the years ended
June 30, 1998, 1997 and 1996
Consolidated Balance Sheet at June 30, 1998 and 1997
Consolidated Statement of Changes in Stockholders' Equity
for the years ended June 30, 1998, 1997 and 1996
Consolidated Statement of Cash Flows for the years ended June 30,
1998, 1997 and 1996
43
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, 1998, 1997 and 1996
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
Form 8-K dated as of October 7, 1997 (announcing that the Company had
entered into a definitive agreement with Thermo-Electron Corporation
regarding the sale of substantially all of the assets of the Company's
ventilation products division).
Form 8-K dated as of October 31, 1997 (reporting the disposition of
substantially all of the assets of the Company's ventilation products
division).
44
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/ Uma Nandan Aggarwal
-----------------------------------------
Uma Nandan Aggarwal
President and Chief Executive Officer
Dated : September 24, 1998
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 24, 1998.
SIGNATURES TITLE
*
- - --------------------
Dennis W. Sheehan Chairman of the Board
/s/ Uma N. Aggarwal
- - --------------------
Uma N. Aggarwal President, Chief Executive Officer and Director
(principal Executive Officer)
*
- - --------------------
David A. Gee Director
*
- - --------------------
Robert E. Lefton Director
*
- - --------------------
William A. Peck Director
*
- - --------------------
John D. Weil Director
*
- - --------------------
James B. Hickey, Jr. Director
45
* By: /s/ Uma Nandan Aggarwal
--------------------------
Uma Nandan Aggarwal
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 Uma N. Aggarwal 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 1998
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.
46
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 7, 1998, except for Note 14 which is as of September 8, 1998,
appearing in the 1998 Annual Report to Shareholders of Allied Healthcare
Products, Inc. on Form 10-K (which report and consolidated financial statements
are included herein) 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.
PricewaterhouseCoopers LLP
St. Louis, Missouri
August 7, 1998, except for Note 14,
which is as of September 8, 1998
S-1
ALLIED HEALTHCARE PRODUCTS, INC.
RULE 12-09 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- - -------------------------------- -------------- -------------- ----------------- -------------- ----------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS OTHER ACCOUNTS - DEDUCTIONS - BALANCE AT END
DESCRIPTION PERIOD AND EXPENSES DESCRIBE DESCRIBE OF PERIOD
- - -------------------------------- -------------- -------------- ----------------- -------------- ----------------
FOR THE YEAR ENDED JUNE 30, 1998
Reserve For
Doubtful Accounts $ (1,225,326) $ (264,165) $ 453,658 (1) $ (1,035,833)
Inventory Allowance
For Obsolescence
and Excess Quantities $ (1,689,000) (1,112,000) $ 612,000 (2) $ (2,189,000)
- - -------------------------------- -------------- -------------- ----------------- -------------- ----------------
FOR THE YEAR ENDED JUNE 30, 1997
Reserve For
Doubtful Accounts $ (422,517) $ (1,058,999) $ 256,190 (3) $ (1,225,326)
Inventory Allowance
For Obsolescence
and Excess Quantities $ (1,812,542) $ (154,357) $ 277,899 (4) $ (1,689,000)
- - -------------------------------- -------------- -------------- ----------------- -------------- ----------------
FOR THE YEAR ENDED JUNE 30, 1996
Reserve For
Doubtful Accounts $ (590,459) $ (107,871) $ 275,813 (5) $ (422,517)
Inventory Allowance
For Obsolescence
and Excess Quantities $ (4,349,467) $ 83,700 $2,453,225 (6) $ (1,812,542)
- - -------------------------------- -------------- -------------- ----------------- -------------- ----------------
(1) Decrease due to bad debt write-offs, bad debt recoveries and changes in estimate. Additional decrease of
$129,814 due to the sale of Bear Medical Systems, Inc.
(2) Decrease of $612,000 due to the sale of Bear Medical Systems, Inc.
(3) Decrease due to bad debt write-offs, bad debt recoveries and changes in estimate.
(4) Decrease due to inventory disposed of and changes in estimate.
(5) 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.
(6) Decrease due to inventory disposed of and changes in estimate. Offsetting increase of $105,470 due to the
acquisition of Omni-Tech Medical, Inc.
S-2
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- - ------- -----------------------------------------------------------------------------------------------
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 By-Laws of the Registrant (filed as Exhibit 3(2) to the Registration Statement and incorporated
herein by reference)
4.1 Certificate of Designations, Preferences and Rights of Series A Preferred Stock of Allied
Healthcare Products, Inc. dated August 21, 1996 (filed with the Commission as Exhibit 4(1) to
the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997 (the "1997
Form 10-K") and incorporated herein by reference)
10.1 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)
10.2 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)
10.3 Employee Stock Purchase Plan
10.4 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)
10.5 Allied Healthcare Products, Inc. 1995 Directors Non-Qualified Stock Option Plan (filed with
the Commission as Exhibit 10(25) 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)
10.6 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)
10.7 Consulting and Severance Agreement dated as of September 1, 1996 between Allied Healthcare
Products, Inc. and David V. LaRusso (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, 1996 (the "1996
Form 10-K") and incorporated herein by reference)
10.8 Allied Healthcare Products, Inc. Amended 1994 Employee Stock Option Plan (filed with the
Commission as Exhibit 10(28) to the 1996 Form 10-K and incorporated herein by reference)
10.9 Employment Agreement dated November 19, 1996 by and between Allied Healthcare Products,
Inc. and Uma N. Aggarwal (filed as Exhibit 10(1) to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1996 and incorporated herein by reference)
10.10 Option Agreement dated November 19, 1996 by and between Allied Healthcare Products, Inc.
and Uma N. Aggarwal (filed as Exhibit 10(2) to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1996 and incorporated herein by reference)
EXHIBIT
NO. DESCRIPTION
- - ------- -----------------------------------------------------------------------------------------------
10.11 Option Agreement dated November 19, 1996 between Allied Healthcare Products, Inc. and
Uma N. Aggarwal (filed as Exhibit 10(3) to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1996 and incorporated herein by reference)
10.12 Letter Agreement dated December 16, 1997 between Allied Healthcare Products, Inc. and Barry
F. Baker (filed as Exhibit 10(4) to the Company's Quarterly Report on Form 10-Q for the
Quarter ended December 31, 1996 and incorporated herein by reference)
10.13 Letter Agreement dated December 16, 1997 between Allied Healthcare Products, Inc. and
Gabriel S. Kohn (filed as Exhibit 10(5) to the Company's Quarterly Report on Form 10-Q for
The quarter ended December 31, 1996 and incorporated herein by reference.)
10.14 Letter Agreement dated December 16, 1997 between Allied Healthcare Products, Inc. and
David A. Grabowski (filed as Exhibit 10(6) to the Company's Quarterly Report for the quarter
ended December 31, 1996 and incorporated herein by reference)
10.15 Loan and Security Agreement, dated as of August 7, 1997 by and among Allied Healthcare
Products, Inc., B&F Medical Products, Inc., Bear Medical Systems, Inc., Hospital Systems, Inc.,
Life Support Products, Inc., and BiCore Monitoring Systems, Inc., as Borrowers, and Foothill
Capital Corporation (filed with the Commission as Exhibit 10(31) to the 1997 Form 10-K and
incorporated herein by reference)
10.16 Warrant dated August 7, 1997 issued by Allied Healthcare Products, Inc. in favor of
Woodbourne Partners, L.P. (filed with the Commission as Exhibit 10(36) to the 1997 Form 10-K
and incorporated herein by reference)
10.17 Warrant dated August 7, 1997 issued by Allied Healthcare Products, Inc. in favor of Donald E.
Nickelson (filed with the Commission as Exhibit 10(37) to the 1997 Form 10-K and
Incorporated herein by reference)
10.18 Warrant dated August 7, 1997 issued by Allied Healthcare Products, Inc. in favor of Dennis W.
Sheehan (filed with the Commission as Exhibit 10(38) to the 1997 form 10-K and incorporated
herein by reference)
10.19 Agreement effective as of June 1, 1997 between Allied Healthcare Products, Inc. and District
No. 9 International Association of Machinists and Aerospace Workers (filed with the
Commission as Exhibit 10(39) to the 1997 Form 10-K and incorporated herein by reference)
10.20 Agreement dated June 10, 1998 between Hospital Systems, Inc. and Local Union No. 2131 of
the International Brotherhood of Electrical Workers covering the period from May 1, 1998 to
April 30, 2001
10.21 Full-Time Employment Policy Agreement dated July 3, 1997 between B&F Medical Products,
Inc. and B&F Employee Committee (filed with the Commission as Exhibit 10(41) to the 1997
Form 10-K and incorporated herein by reference)
10.22 Asset Purchase Agreement by and between BM Acquisition Corp., ThermoElectron
Corporation, Bear Medical Systems, Inc. BiCore Monitoring Systems, Inc., Allied Healthcare
Products AG, Bear Medical Systems Foreign Sales Corporation and Allied Healthcare Products,
Inc. (filed with the Commission as Exhibit 2.1 to the Form 8-K filed on November 14, 1997 and
Incorporated herein by reference)
EXHIBIT
NO. DESCRIPTION
- - ------- -----------------------------------------------------------------------------------------------
10.23 Amendment Number One to Loan and Security Agreement dated as of March 3, 1998 among
Allied Healthcare Products, Inc., B&F Medical Products, Inc., Hospital Systems, Inc. and Life
Support Products, Inc. as Borrowers, and Foothill Capital Corporation (filed with the
Commission as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
Ended March 31, 1998 and incorporated herein by reference)
10.24 Loan and Security Agreement, dated as of August 7, 1998 by and between Allied Healthcare
Products, Inc. and LaSalle National Bank.
10.25 Amendment Number Two to Loan and Security Agreement dated as of September 10, 1998
among Allied Healthcare Products, Inc., B&F Medical Products, Inc. , Hospital Systems, Inc.
and Life Support Products, Inc. as Borrowers, and Foothill Capital Corporation.
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of PricewaterhouseCoopers, LLP
24 Powers of Attorney
27 Financial Data Schedule