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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, 1999
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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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 22, 1999, the aggregate market value of the voting stock
held by non-affiliates (4,448,341 shares) of the Registrant was $12,788,980
(based on the closing price, on such date, of $2.875 per share).
As of September 22, 1999, 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 1, 1999 (portion) (Part III)
ALLIED HEALTHCARE PRODUCTS, INC.
INDEX TO FORM 10-K
Page
----
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
Market for Registrant's Common Stock and Related
Item 5. Stockholder Matters . 11
Item 6. Selected Financial Data 12
Management's Discussion and Analysis of Financial
Item 7. Condition and Results of Operations 13
Item 8. Financial Statements and Supplementary Data 27
Changes in and Disagreements with Accountants on
Item 9. Accounting and Financial Disclosure 43
PART III
Item 10. Directors and Executive Officers of the Registrant 44
Item 11. Executive Compensation 44
Security Ownership of Certain Beneficial Owners and
Item 12. Management 44
Item 13. Certain Relationships and Related Transactions 44
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports
on Form 8-K 44
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 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 1999/RECENT EVENTS
The following list includes significant events that are further discussed
in the Management Discussion and Analysis (MDA) section and in the Consolidated
Financial Statements in this Form 10-K:
- August 1998 announcement by the Company to close its B&F facility
in Toledo, Ohio and the consolidation of those operations into St.
Louis, Missouri during the second quarter of fiscal 1999.
- The Company obtained a term loan from LaSalle National Bank in August
1998 and subsequently amended its Foothill Capital loan agreement in
September 1998 to reduce interest costs and fees.
- Product recall of aluminum oxygen regulators in February 1999.
- April 1999 announcement of John D. Weil as Chairman of the Board
of Directors, succeeding the late Dennis W. Sheehan. Also the
appointment of Brent D. Baird as Director of the Company.
- Sale of Hospital Systems, Inc., the Company's headwall division, in
May 1999.
- July 1999 resignation of President, Chief Executive Officer and
Director Uma Nandan Aggarwal and subsequent announcement of his
successor in August 1999, Earl R. Refsland as President, Chief
Executive Officer and Director of the Company.
The Company's principal executive offices are located at 1720 Sublette
Avenue, St. Louis, Missouri 63110, and its telephone number is (314) 771-2400.
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MARKETS AND PRODUCTS
In fiscal 1999, respiratory care products, medical gas equipment and
emergency medical products represented approximately 32%, 54% and 14%
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 O2 cylinders; pressure regulators; Timeter; B&F; Schuco Patients at home
Products nebulizers; portable large volume
compressors; portable suction
equipment and disposable 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
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- Emergency service
mask resuscitators; emergency Tech providers
transport ventilators and oxygen
regulators
Trauma and Patient Handling Spine immobilization products; LSP Emergency service
Products pneumatic anti-shock garments and providers
trauma burn kits
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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, 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.
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
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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 hospital and
sub-acute care facilities. Sales of these products are made through the same
distribution channel as our respiratory care products. The Company believes
that it holds a significant share of the U.S. market in both regulation devices
and suction equipment.
DISPOSABLE CYLINDERS. Disposable oxygen cylinders are designed to provide
oxygen for short periods of time 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.
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, multilators and humidifiers. The emergency medical
products are broken down into two account groups: respiratory/resuscitator
products and trauma patient handling products.
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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, 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.
The Company's autovent transport ventilator 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 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 that is designed for safe immobilization of injury victims and
provides a durable and cost effective means of emergency patient transportation
and extrication. The infant/pediatric immobilization board is durable and scaled
for children. The half back extractor/rescue vest is useful for both suspected
cervical/spinal injuries and for mountain and air rescues. The Company's
pneumatic anti-shock garments are used to treat victims experiencing hypovolemic
shock. Allied's trauma burn kits contain a comprehensive line of products for
the treatment of trauma and burns.
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 39
sales professionals, all of whom are full-time employees of the Company.
The sales force includes 27 medical gas specialists, 5 emergency
specialists and 7 international sales representatives. In addition, a director
of corporate and national accounts is responsible for pursuing business with
large national group purchasing organizations, large homecare national chains
and OEM sales. Five product managers are responsible for the marketing
activities of these product lines.
The 27 medical gas specialists are responsible for sales of all Allied
products with the exception of emergency products within their territory. Sales
of products are accomplished through respiratory care/anesthesia distributors
for the regulation devices, suction equipment, respiratory care/anesthesia
products and disposable cylinders. The homecare products are sold primarily
through our own in house telemarketing and manufacturers rep groups across the
country. Construction products are sold direct to hospital construction
contractors and through distributors.
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
5
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 an area of growth that the
Company has been emphasizing. The Asian situation which has slowed incoming
orders in 1999 has begun to turn around and we are now seeing activity in all
product groupings.
Allied's net sales to foreign markets totaled 18% of the Company's net
sales in fiscal 1999. 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 has resulted in reduced 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.
The Company also invested $1.1 million, in fiscal 1997, for molds and
injection-molding machinery to expand the production capacity and gain
efficiencies in manufacturing of its B&F disposable product line. In August
1999, Allied announced the closing of its Toledo, Ohio facility and subsequent
consolidation of the production of its B&F disposable product line into the St.
Louis facility. This move was completed during the second quarter of fiscal
1999. See further discussion of the closure of the Toledo operation in the
following MDA section of this Form 10-K.
RESEARCH AND DEVELOPMENT
In 1999 the Company expended $1.3 million in research and development
activities. Excluding the divested ventilation products division, research and
development expenditures in 1998 were approximately $1.1 million. The Company
expects to continue to increase its research and development efforts in order to
keep pace with technological advances.
During fiscal 1999, the Company introduced several new products
that resulted from its research and development programs. A new version
of the Connect II gas outlet targeted at the ambulance market was
introduced which can also supply medical gas equipment in operating rooms
as well as headwalls in patient rooms. The new Chemetron Model 3000
medical gas manifold utilizes microprocessor technology to provide a modern
and more reliable means to ensure continuous gas delivery in hospitals.
A new version of the Gomco suction pump utilizes a rotary pump to provide
high flow and vacuum levels in a mobile, stand type housing. Cost reduced
6
versions of oxygen flowmeters and medical gas adapters allow these
products to compete more effectively in the marketplace. In response to
the market shift from aluminum to brass oxygen regulators, the Company
introduced new all brass oxygen regulators. In addition, the Company
has introduced Carbolime, a carbon dioxide absorbent that complements
Baralyme carbon dioxide absorbent currently marketed by the Company.
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.
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 have received ISO 9001 Certification for the St. Louis facility and
certification per the Medical Device Directive (MDD - European) for certain
products in 1998. As such, the Company will be audited by FDA, ISO, and
European auditors for compliance with the Good Manufacturing Practices ("GMP"),
ISO and MDD regulations for medical devices. These regulations require the
7
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.
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. 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 that it believes
are useful to the business and provides the Company with an advantage over its
competitors.
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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.
EMPLOYEES
At June 30, 1999, the Company has 564 full-time employees and 9 part-time
employees. Approximately 333 employees in the Company's principal manufacturing
facility located in St. Louis, Missouri, are covered by a collective bargaining
agreement that expires in May 2000. Approximately 12 employees at the Company's
facility in Stuyvesant Falls, New York are also covered by a collective
bargaining agreement that will expire in 2001. As indicated elsewhere in this
Form 10-K, Allied's facility in Toledo was shut down and the operations
consolidated into St. Louis during the second quarter of fiscal 1999. Also as
indicated in this Form 10-K, the Company's division in Oakland, California was
sold in May 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 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 care
products; emergency
medical products
Stuyvesant Falls, New York 30,000 Owned CO2 absorbent
9
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, Allied's facility in Toledo was shut down and the operations
consolidated into St. Louis during the second quarter of fiscal 1999. Also as
indicated in this Form 10-K, the Company's headwall division in Oakland,
California was sold in May 1999.
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. The Company has voluntarily effectuated the recall of its aluminum
body regulators manufactured under the Life Supports Products, Inc. brand name
in cooperation with the U.S. Food and Drug Administration ("FDA") under Product
Recall No. Z-693/698-9 to conform with the industry wide recommendation to cease
use of aluminum parts in oxygen regulators.
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 22, 1999, there were 257 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 1999 and 1998,
respectively. The Company currently does not pay any dividend on its Common
Stock.
COMMON STOCK INFORMATION
1999 HIGH LOW 1998 HIGH LOW
- ----------------- ------- ------- ----------------- ------ -------
September quarter $4-3/16 $ 1-3/4 September quarter $7-7/8 $ 6-3/8
December quarter 3 1-1/4 December quarter 8-1/2 7-1/4
March quarter 2 1-1/4 March quarter 8 6-7/16
June quarter 2-3/8 1-9/16 June quarter 6-1/2 4-1/4
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
Year ended June 30, 1999 1998 1997 1996 1995
- ---------------------------------------------------- -------- --------- --------- -------- ---------
STATEMENT OF OPERATIONS DATA
Net sales $72,799 $ 96,467 $118,118 $120,123 $111,639
Cost of sales 55,864 69,110 82,365 80,550 68,430
Gross profit 16,935 27,357 35,753 39,573 43,209
Selling, general and administrative expenses 18,733 23,889 33,910 31,449 24,849
Provision for restructuring and consolidation (1) 758 -- -- -- --
Provision for product recall (2) 1,500 -- -- -- --
Gain on sale of business (3) (27) (12,813) -- -- --
Non-recurring impairment losses (4) -- 9,778 -- -- --
10
Income (loss) from operations (4,029) 6,503 1,843 8,124 18,360
Interest expense 1,926 4,152 7,606 4,474 3,704
Other, net 36 198 186 350 (21)
Income (loss) before provision (benefit) for
income taxes and extraordinary loss (5,991) 2,153 (5,949) 3,300 14,677
Provision (benefit) for income taxes (5) (1,873) 9,019 (1,428) 1,473 5,854
Income (loss) before extraordinary loss (4,118) (6,866) (4,521) 1,827 8,823
Extraordinary loss on early extinguishment of debt,
net of income tax benefit -- 530 -- -- --
Net income (loss) $(4,118) $ (7,396) $ (4,521) $ 1,827 $ 8,823
Basic and diluted earnings (loss) per share (6) $ (0.53) $ (0.95) $ (0.58) $ 0.25 $ 1.45
Weighted average common shares outstanding 7,807 7,805 7,797 7,378 6,067
(In thousands)
June 30, 1999 1998 1997 1996 1995
- ---------------------------------------------------- -------- --------- --------- -------- ---------
BALANCE SHEET DATA
Working capital $22,619 $ 21,308 $ 18,743 $ 38,030 $ 2,810
Total assets 74,275 80,180 126,343 136,760 126,192
Short-term debt 908 3,443 12,891 3,849 34,420
Long-term debt (net of current portion) 16,330 14,972 34,041 49,033 34,602
Stockholders' equity 47,919 52,037 59,365 63,886 38,374
(1) See Note 3 to the June 30, 1999 Consolidated Financial Statements for further discussion.
(2) See Note 4 to the June 30, 1999 Consolidated Financial Statements for further discussion.
(3) See Notes 5 & 6 to the June 30, 1999 Consolidated Financial Statements for further discussion.
(4) See Note 7 to the June 30, 1999 Consolidated Financial Statements for further discussion.
(5) See Note 10 to the June 30, 1999 Consolidated Financial Statements for further discussion of the
Company's 1998 effective tax rate.
(6) See Note 2 to the June 30, 1999 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, 1999. 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.
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 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 1999 were affected by several one
time, unusual items, which are discussed further below. During the second
quarter of fiscal 1999 the Company closed the Toledo, Ohio facility of its
disposable products division and consolidated production of the B&F line of home
care products into its manufacturing facility in St. Louis, Missouri. As a
result of this shutdown the Company recorded a provision for restructuring and
consolidation. The Company also recorded a provision in connection with a
product recall of aluminum oxygen regulators during the third quarter of fiscal
1999. Also, on May 28, 1999 the Company sold the assets of its headwall
products division with the proceeds being used to pay down debt.
11
The results of operations for fiscal 1998 were also affected by several one
time, unusual items. 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 strengthened its balance sheet by reducing debt, reducing intangible
assets, and increasing reserves. For further discussion of these non-recurring
items please refer to the "Notes to Consolidated Financial Statements" section
of this Form 10-K.
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 1999 operating results,
which make meaningful comparisons to prior years more difficult, are summarized
below:
B&F CONSOLIDATION PROVISION
On August 5, 1998 the Company's Board of Directors voted to close the
Toledo facility of its disposable products division and consolidate production
of the B&F line of home care products into its manufacturing facility in St.
Louis, Missouri. This move was announced on August 10, 1998. The move was
substantially completed during the second quarter of fiscal 1999. In connection
with the shutdown of the facility, Allied recorded a provision of approximately
$1.0 million pre-tax, $0.6 million after tax, or $0.07 per share, in the first
quarter of fiscal 1999 to cover the cost of closing the facility. The provision
reflects costs of certain fixed asset impairments, employee severance benefits
and other related exit costs. Subsequently, during the second quarter of
fiscal 1999, the company negotiated and received a $0.2 million cash payment
from the City of Toledo as partial reimbursement for closure costs.
Accordingly, Allied recorded this cash payment, in the second quarter of fiscal
1999, as a reduction to the aforementioned provision resulting in a net charge
of $0.8 million pre-tax, $0.5 million after tax, or $0.06 per share for the
fiscal year ended June 30, 1999.
LSP OXYGEN REGULATOR RECALL
On February 4, 1999, Allied announced a recall of aluminum oxygen
regulators marketed under its Life Support Products label. These products are
used to regulate pressure of bottled oxygen for administration to patients under
emergency situations. Following reports of regulator fires, the Company
instituted a recall in May 1997, under which it provided retrofit kits to
prevent contaminants from entering the regulators. The Company has also been
testing regulator design with the help of the National Aeronautical and Space
Administration's White Sands National Laboratories. While preliminary findings
led the Company to believe the Company's products did not cause those fires,
there is enough concern among the users that the Company, in cooperation with
the U. S. Food and Drug Administration ("FDA"), agreed to institute a voluntary
recall to replace aluminum components in the high pressure chamber of the
regulators with brass components. The FDA has recommended that all regulator
manufacturers cease use of aluminum in regulators. Accordingly, the Company has
now introduced new brass regulators and is also offering a trade-in program to
the existing users. As a result of the recall, the Company recorded a charge of
$1.5 million pre-tax, $0.9 million after tax, or $0.12 per share in the second
quarter of fiscal 1999. As of June 30, 1999 the Company has incurred $0.9
million for costs associated with the recall and has a reserve balance of $0.6
million for future expected costs which management estimates to be appropriate.
SALE OF HEADWALL PRODUCTS DIVISION
On May 28, 1999, the Company sold the assets of Hospital Systems, Inc.
("HSI") to David Miller (former General Manager-Hospital Systems, Inc.) for $0.5
million. The net proceeds of $0.5 million were utilized to repay a portion of
its revolving credit facility. The sale of HSI, located in Oakland, California,
resulted in a gain before taxes for financial reporting purposes of $0.03
million.
12
SUBSEQUENT EVENTS
On July 28, 1999 the Company's President, Chief Executive Officer and
Director Uma Nandan Aggarwal resigned. Subsequently on August 24, 1999 the
Company announced Earl R. Refsland as President, Chief Executive Officer and
Director of the Company. As a result of Mr. Aggarwal's resignation, the Company
is expecting to record a $0.2 million charge to operations in the first quarter
of fiscal year 2000 per terms of a mutually accepted departure agreement.
On September 1, 1999 the Company's credit facility with LaSalle National
Bank was amended. The amendment provides favorable changes to certain debt
covenants.
FISCAL 1999 FOURTH QUARTER RESULTS OF OPERATIONS
Net sales for the three months ended June 30, 1999 were $18.6 million
compared to sales of $19.5 million for the three months ended June 30, 1998.
The $0.9 million decline in sales is comprised of a $1.1 million decline
attributable to sales associated with the divested headwall products division,
while base business sales increased $0.2 million. The net loss for the fourth
quarter of fiscal 1999 was $0.7 million or $0.10 per share compared to $0.3
million or $0.04 per share loss in fiscal 1998. See also the following "Fiscal
1999 Compared to Fiscal 1998" section for a discussion of various other internal
and external factors affecting operations.
Sales of respiratory care products for the fourth quarter of fiscal 1999
were $5.5 million, a decrease of $1.1 million, compared to sales of $6.6 million
in the prior year same period. This decrease is primarily due to continued weak
sales to the home care market, which declined $0.8 million, or 17.5%, during the
fourth quarter of fiscal 1999 versus the same period of fiscal 1998. Sales of
home care products, mainly the company's B&F line, continues to be impacted by
the interruptions caused by the consolidation of the Toledo operations into St.
Louis during the second quarter of fiscal 1999. The Company continues efforts
to improve efficiency and increase stocking levels of the B&F disposable
products through outsourcing arrangements that will increase customer service
levels. Management believes that, in the longer term, these efforts will also
lower manufacturing costs and increase the level of incoming business.
Sales of medical gas equipment for the fourth quarter of fiscal 1999 of
$10.1 million was slightly above sales of $10.0 million in the prior year same
period. The $0.1 million increase in sales is comprised of an increase in base
business sales of $1.2 million, partially offset by a $1.1 million decline in
sales of the now divested headwall products division. Sales of medical gas
construction products increased $1.0 million, or 27.9%, to $4.4 million from
$3.4 million in the prior year. Medical gas suction and regulation device sales
in the fourth quarter of fiscal 1999 of $5.2 million were $0.2 million higher
than in the prior year.
Sales of emergency medical products increased $0.2 million to $3.0 million
in the fourth quarter of fiscal 1999 compared to the fourth quarter of fiscal
1998. This increase is attributable to sales of brass oxygen regulators due to a
trade-in program instituted as a result of the aluminum oxygen regulator recall
as discussed earlier in this MD&A section.
Gross profit for the fourth quarter of fiscal 1999 was $4.2 million, or
22.4% of sales, compared to $4.9 million or 25.0% of net sales in the fourth
quarter of fiscal 1998. Continued manufacturing inefficiencies related to the
consolidation of the B&F disposable products operations into St. Louis
unfavorably impacted gross profit in the fourth quarter of fiscal 1999. See
also the following "Fiscal 1999 compared to Fiscal 1998" section for further
discussion.
Selling, General and Administrative ("SG&A") expenses were $4.5 million in
the fourth quarter of fiscal 1999, a decrease of $0.4 million from the fourth
quarter of fiscal 1998. Various cost containment initiatives over the past
fiscal year, as well as administrative expenses savings due to the shutdown of
the Toledo facility, favorably impacted SG&A expense in the fourth quarter of
fiscal 1999.
The loss from operations for the fourth quarter of fiscal 1999 increased to
$0.3 million compared to less than $0.1 million in the prior year same period
reflecting the factors discussed above.
13
The Company incurred a loss before income taxes of $0.8 million in the
fourth quarter of fiscal 1999 compared to a loss of $0.7 million in the same
period for the prior year. The loss before taxes in the fourth quarter of fiscal
1999, as compared to the same period fiscal 1998, benefited from a $0.1 million
decrease in interest expense. However, the Company recorded a tax benefit of
$0.3 million in the fourth quarter of fiscal 1998 compared to a tax benefit of
less than $0.1 million in the fourth quarter of fiscal 1999. For a further
discussion of the Company's income taxes see the "Notes to Consolidated
Financial Statements" section of this Form 10-K. Results of operations in the
fourth quarter of fiscal 1999 was a net loss of $0.7 million, or $0.10 per
share, compared to a net loss of $0.3 million, or $0.04 per share, in the fourth
quarter of fiscal 1998.
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, 1999, 1998 and
1997.
Year ended June 30, 1999
---------------------
Net % of Total
Sales Net Sales
-------- -----------
Respiratory care products $ 23,273 32.0%
Medical gas equipment 39,194 53.8%
Emergency medical products 10,332 14.2%
-------- -----------
Total $ 72,799 100.0%
======== ===========
Year ended June 30, 1998
---------------------
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%
======== ===========
Year ended June 30, 1997
---------------------
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%
======== ===========
Dollars in thousands
14
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, 1999 1998 1997
- --------------------------------------------------- ------ ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of sales 76.7 71.6 69.7
------ ------ ------
Gross profit 23.3 28.4 30.3
Selling, general and administrative expenses 25.7 24.8 28.7
Provision for restructuring and consolidation 1.0 -- --
Provision for product recall 2.1 -- --
Gain on sale of business (0.0) (13.3) --
Non-recurring impairment losses -- 10.2 --
------ ------ ------
Income (loss) from operations (5.5) 6.7 1.6
Interest expense 2.6 4.3 6.4
Other, net 0.1 0.2 0.2
------ ------ ------
Income (loss) before provision (benefit) for
income taxes and extraordinary loss (8.2) 2.2 (5.0)
Provision (benefit) for income taxes (2.5) 9.3 (1.2)
------ ------ ------
Loss before extraordinary loss (5.7) (7.1) (3.8)
Extraordinary loss on early extinguishment of debt,
net of income tax benefit -- 0.6 --
------
Net loss (5.7)% (7.7)% (3.8)%
====== ====== ======
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales for fiscal 1999 of $72.8 million were $23.7 million, or 24.5%,
less than net sales of $96.5 million in fiscal 1998. Of the $23.7 million
decline, $10.4 million is attributable to fiscal 1998 sales generated by the
ventilation products division prior to its sale in October 1997, $2.7 million is
related to the now divested headwall products division, and $10.6 million
relates to a decline in sales of core products. The decline in sales of core
products reflected various internal and external factors.
Home care product sales, mainly the B&F line, were negatively impacted due
to shipping delays caused by the closure and consolidation of the Company's
Toledo facility into St. Louis. As previously discussed, this facility was
closed during the second quarter of fiscal 1999 and consolidated into St. Louis.
The Company continues its efforts to improve manufacturing efficiencies and
realize cost savings on the B&F product line through selective outsourcing of
labor intensive assembly operations. As discussed earlier management believes
that, in the longer term, these efforts will lower manufacturing costs and
increase the level of incoming business through improved customer service. The
Company also experienced certain production and supply chain problems at its St.
Louis facility that caused delays in delivery times on various products. Most
of these production problems and supply chain issues have now been resolved. In
addition, the Company has continued its efforts to increase margins on certain
distributed products and OEM business by selecting markets and/or customers that
will support more favorable pricing on these products.
Certain external issues have continued to impact the Company's operations,
both in fiscal 1999 and fiscal 1998. The emphasis on cost containment by
healthcare providers has resulted in significant consolidation in the healthcare
environment and pricing pressures for the past several years. Home care sales
have also been adversely affected by reductions in Medicare reimbursements.
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 demands for its products caused by an aging
population, an increase in the occurrence of lung disease, advances in treatment
15
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 $39.2 million in fiscal 1999 were $5.8
million, or 12.9%, below prior year sales of $45.0 million. Of the decline, $2.7
million is related to the now divested headwall products division. Medical gas
system construction sales and medical gas suction and regulation device sales
experienced decreases of 7.7% and 8.2%, respectively, in fiscal 1999 compared to
fiscal 1998. A $0.8 million decrease in aluminum oxygen cylinder sales
contributed to the $3.1 million decrease in base business medical gas equipment
sales. Medical gas construction product sales are affected by large bid orders
on new hospital construction and renovation of medical facilities. Hospital
consolidation has caused a decrease in large bid orders for these products.
Respiratory care product sales in fiscal 1999 of $23.3 million were $16.8
million, or 41.9%, less than sales of $40.1 million in the prior year. Of the
decline, $10.4 million was attributable to revenues generated by the ventilation
products division prior to its sale in October 1997 and $6.4 million relates to
the Company's base respiratory product lines. Sales to the home healthcare
market declined by 26.5%, primarily in the B&F disposable line, due to the
factors 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. Also contributing to the decrease in
respiratory care products is the loss of air compressor OEM business to Bear
Medical following its divestiture.
Emergency medical product sales in fiscal 1999 of $10.3 million were $1.0
million, or 8.7%, less than fiscal 1998 sales of $11.3 million. A decrease in
OEM sales of certain emergency products contributed to most of the decrease.
Business in this market is largely replacement driven and is expected to reflect
the demand for replacement orders in the short term.
International sales, which are included in the product lines discussed
above decreased $10.9 million, or 45.4%, to $13.1 million in fiscal 1999
compared to sales of $24.0 million in fiscal 1998. International sales declined
$6.9 million due to the sale of the ventilation products division, headwall
products sales decreased $1.0 million, while international sales of the base
business decreased by $3.0 million. Export sales to the European Community
were adversely affected by a delay in obtaining CE mark certification on certain
products.
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. Export sales are
affected by international economic conditions and the relative value of foreign
currencies.
Gross profit in fiscal 1999 was $16.9 million, or 23.3% of net sales,
compared to a gross profit of $27.4 million, or 28.4% of net sales in fiscal
1998. Manufacturing inefficiencies and the inability to recognize cost savings,
in a timely manner, from the consolidation of the Toledo operations into St.
Louis impacted gross margins in fiscal 1999. The Company is continuing its
efforts in gaining efficiency in the manufacturing of B&F products in St. Louis
and is also outsourcing the assembly of certain products as previously
discussed. The sale of the ventilation products division adversely impacted
gross profit as a percent of sales in fiscal 1999, as ventilation products
typically have a higher gross profit margin than the Company's base business
products. Continued pricing pressures brought on by the consolidations and cost
containment initiatives of healthcare providers further served to reduce margins
as a percent to net sales.
Selling, General and Administrative ("SG&A") expenses for fiscal 1999 were
$18.7 million, a decrease of $5.2 million over SG&A expenses of $23.9 million in
fiscal 1998. $2.4 million of the decease in SG&A expenses in fiscal 1999 is
attributable to direct expenses associated with the sale of the ventilation
products division. Another $0.6 million decrease is due to administrative cost
savings from the closing of the Toledo facility. The remainder of the decrease
in 1999 SG&A costs can be attributed to cost reduction efforts initiated during
fiscal 1999. As a percentage of net sales, fiscal 1999 SG&A expenses were 25.7%
compared to 24.8% in fiscal 1998. This increase was attributable to lower sales
in fiscal 1999, as discussed above.
16
As discussed previously in the preceding Overview section, financial
results for fiscal 1999 were impacted by certain one-time, unusual transactions
and events which make meaningful comparisons to prior years more difficult.
These specific transactions and events include the following items:
On August 5, 1998 the Company's Board of Directors voted to close its
Toledo, Ohio facility and consolidate production of the B&F line of home
care products into its manufacturing facility in St. Louis, Missouri. In
connection with the shutdown of the facility, Allied recorded a provision
of approximately $1.0 million pre-tax, $0.6 million after tax, or $0.07 per
share, in the first quarter of fiscal 1999 to cover the cost of closing the
facility. The provision reflects costs of certain fixed asset impairments,
employee severance benefits and other related exit costs. Subsequently,
during the second quarter of fiscal 1999, the company negotiated and
received a $0.2 million cash payment from the City of Toledo as partial
reimbursement for closure costs. Accordingly, Allied recorded this cash
payment, in the second quarter of fiscal 1999, as a reduction to the
aforementioned provision resulting in a net charge of $0.8 million pre-tax,
$0.5 million after tax, or $0.06 per share for the fiscal year ended June
30, 1999.
On February 4, 1999, Allied announced a recall of aluminum oxygen
regulators marketed under its Life Support Products label. Following
reports of regulator fires, the Company instituted a recall in May 1997,
under which it provided retrofit kits to prevent contaminants from entering
the regulators. While preliminary findings led the Company to believe the
Company's products did not cause those fires, there is enough concern among
the users that the Company, in cooperation with the U. S. Food and Drug
Administration ("FDA"), agreed to institute a voluntary recall to replace
aluminum components in the high pressure chamber of the regulators with
brass components. The FDA has recommended that all regulator manufacturers
cease use of aluminum in regulators. Accordingly, the Company has now
introduced new brass regulators and is also offering a trade in program to
the existing users. As a result of the recall, the Company recorded a
charge of $1.5 million pre-tax, $0.9 million after tax, or $0.12 per share
in the second quarter of fiscal 1999. As of June 30, 1999 the Company has
incurred $0.9 million for costs associated with the recall and has a
reserve balance of $0.6 million for future expected costs which management
estimates to be appropriate.
On May 28, 1999, the Company sold the assets of Hospital Systems, Inc.
("HSI") to David Miller (former General Manager-Hospital Systems, Inc.) for
$0.5 million. The net proceeds of $0.5 million were utilized to repay a
portion of its revolving credit facility. The sale of HSI, located in
Oakland, California, resulted in a gain before taxes for financial
reporting purposes of $0.03 million.
Loss from operations in fiscal 1999 was $4.0 million compared to income
from operations of $6.5 million in fiscal 1998. Fiscal 1999 loss from
operations includes charges for the unusual items discussed above which have an
unfavorable impact of $2.2 million. Fiscal 1998 income from operations included
a $12.8 million gain on the sale of Bear Medical and $9.8 million of
non-recurring charges mainly for goodwill write-downs attributable to the
revaluation of the carrying value of various businesses. These fiscal 1998
non-recurring items had a favorable impact on operating income of $3.0 million.
Without the impact of the various unusual items for both fiscal 1999 and fiscal
1998, income from operations decreased $5.3 million. Fiscal 1998 operating
income also includes results from the operations of the ventilation products
division for four months prior to its sale in October 1997.
Interest expense decreased $2.3 million or 53.6%, to $1.9 million in fiscal
1999 from $4.2 million in fiscal 1998. Interest expense has been significantly
reduced due to the reduction in debt, which primarily reflected application of
the proceeds from the sale of the ventilation products division in fiscal 1998.
The Company had a loss before taxes of $6.0 million, compared to income
before taxes and extraordinary loss of $2.2 million in fiscal 1998. The Company
recorded an income tax benefit of $1.9 million in fiscal 1999 compared to a
provision for income taxes of $9.0 million in fiscal 1998. As previously
discussed, the gain on the sale of the ventilation products division resulted in
a tax provision of $9.3 million in fiscal 1998. In addition, the non-recurring
17
charge of $9.8 million was principally goodwill, and therefore non-deductible
for income tax purposes. For further discussion of the Company's income tax
calculation please refer to the "Notes to Consolidated Financial Statements"
section included in this Form 10-K.
Net loss in fiscal 1999 was $4.1 million, or $0.53 per diluted share, a
decrease of $3.3 million from the net loss of $7.4 million or $0.95 per diluted
share in fiscal 1998. Net loss in fiscal 1998 included a $0.5 million
extraordinary loss on early extinguishment of debt. 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 7,806,682 in fiscal 1999 compared to 7,805,021 in
fiscal 1998.
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 sale of the ventilation products
division, a decrease in large hospital construction projects and inefficiencies
at the Company's Toledo facility negatively impacted revenues. This facility
was closed during the second quarter of fiscal 1999.
Certain external issues first experienced in fiscal 1996 continued to
impact the Company's operations in fiscal 1998. These matters were described in
the preceding section "Fiscal 1999 Compared to Fiscal 1998.
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 that 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 continued to experience
capacity constraints at the Toledo, Ohio facility, and as previously noted,
consolidated its production to the St. Louis, Missouri facility in the second
quarter of fiscal 1999.
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. 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.
Export sales are affected by international economic conditions and the
relative value of foreign currencies. In 1998, the continued devaluation of
Asian currency and economic downturn reduced international shipments.
18
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.
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 one-time fiscal 1997 expenditures. In fiscal 1997, the Company made
strategic investments in certain SG&A activities and recorded certain one-time
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, unusual transactions
and events which make meaningful comparisons to prior years more difficult.
These specific transactions and events include the following items:
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
19
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 one-time, unusual 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.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The following tables set forth selected information concerning Allied's
financial condition:
Dollars in thousands 1999 1998 1997
- -------------------- ------- ------- -------
Cash $ 587 $ 1,195 $ 988
Working Capital $22,619 $21,308 $18,743
Total Debt $17,238 $18,415 $46,932
Current Ratio 3.30:1 2.67:1 1.57:1
The Company's working capital was $22.6 million at June 30, 1999 compared
to $21.3 million at June 30, 1998. The increase in working capital is primarily
due to the decrease in the current portion of long term debt attributable to
debt refinancing discussed further below. Accounts receivable declined to $12.6
million at June 30, 1999 down $1.6 million from $14.2 million at June 30, 1998.
Accounts receivable as measured in days sales outstanding ("DSO") decreased to
62 DSO from 69 DSO during fiscal 1999 as collection efforts have improved the
average time that is needed to collect from a customer. Inventories declined to
$17.5 million at June 30, 1999, or $0.8 million, from $18.3 million at June 30,
1998. Of this decline, $0.4 million is related to the core business while $0.4
million of decrease is due to the sale of the headwall products division. The
Company continues to focus 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 148 DOH at June 30, 1999 from 129 DOH at June 30,
1998, due to lower sales in the last five months of fiscal year 1999. Accounts
payable decreased to $5.4 million at June 30, 1998, down $0.4 million from June
30, 1998 balance of $5.8 million.
The net increase/(decrease) in cash for the fiscal years ended June 30,
1999, June 30, 1998, and June 30, 1997 was $(0.6) million, $0.2 million, and
$(0.5) million respectively. Net cash provided by (used by) operations was
$(0.2) million, $(5.2) million, and $8.9 million for the same periods. Cash
used by operations for the fiscal year ended June 30, 1999 consisted of a net
loss of $4.1 million, which was offset by $3.8 million in non-cash charges to
operations for amortization and depreciation, restructuring and consolidation of
$0.2 million and product recall of $0.6 million. Changes in working capital and
deferred tax accounts unfavorably impacted cash flow from operations by $0.7
million. Cash provided by investing activities, consisting of $1.4 million from
the proceeds on the sale of the Toledo, Ohio facilities and $0.5 million of
proceeds from the sale of the headwall products division, was used to fund
capital expenditures of $1.1 million and reduce debt. Cash used by operations
for the comparable prior year period 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 also reported a $12.8 million gain on the sale of the
ventilation products division and also recorded non-recurring impairment
20
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. 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.
At June 30, 1999 the Company had aggregate indebtedness of $17.2 million,
including $0.9 million of short-term debt and $16.3 million of long-term debt.
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.
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. In
fiscal 1998, amendments to the Foothill credit facility were completed 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 carried a fixed rate of interest of 7.75%,
compared to the then current rate of 9.0% under the revolving credit agreement.
In fiscal 1999, an amendment to the LaSalle credit facility was completed in the
third quarter and reflected a change to the debt covenant. On September 1, 1999
a subsequent amendment to the LaSalle credit facility was completed which also
changed certain debt covenants.
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 Wells Fargo Bank, 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. The rates noted above will drop by 0.25% at the end of fiscal 1999 and
21
2000 if the Company is profitable. In addition, the fees charged to the Company
are also reduced. An amendment to the Foothill credit facility was completed in
the fourth quarter fiscal 1999. The amendments extended the favorable rate
reduction based upon profitability to 2001 and 2002. Fees charged to the Company
were reduced along with favorable debt covenant changes and the maturity date
was extended until January 6, 2003. At June 30, 1999, $5.5 million was available
under the revolving facility for additional borrowings.
Capital expenditures, net of capital leases, were $1.1 million, $0.6
million and $0.1 million in fiscal 1999, 1998 and 1997, respectively. During
fiscal 1999 the Company invested $0.4 million for the consolidation of the
Toledo, Ohio operation into its St. Louis, Missouri facility as previously
discussed. In addition, $0.2 million was invested for upgrading computer
equipment, $0.2 million for additional capacity of the computer controlled
machining centers and $0.3 million for tooling. 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 $1.6 million in fiscal 2000.
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.
The following table sets forth selected operating results for the eight
quarters ended June 30, 1999. 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.
June 30, March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
Three months ended, 1999 1999 1998 1998 1998 1998 1997 1997
- ------------------------------ ---------- ----------- ---------- ----------- ---------- ---------- ---------- -----------
Net sales $ 18,621 $ 19,227 $ 17,092 $ 17,859 $ 19,476 $ 22,785 $ 24,033 $ 30,173
Gross profit 4,165 4,940 3,423 4,407 4,878 6,507 6,743 9,229
Income (loss) from operations (323) 339 (2,601) (1,444) (29) 1,100 3,455 1,977
Net income (loss) (738) (189) (1,912) (1,279) (315) 241 (6,684) (638)
Basic and diluted earnings (0.10) (0.02) (0.25) (0.16) (0.04) 0.03 (0.86) (0.08)
(loss) per share
Dollars in thousands, except per share data
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 has adopted FAS 131 for fiscal 1999 and has determined that it
operates in a single segment. Please see Note 17 of the "Notes to Consolidated
Financial Statements" section of this Form 10-K for further discussion.
22
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 changeover to 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 date
methodology of this software is not sensitive to year 2000 problems. However,
the Company is in the process of implementing testing procedures to insure year
2000 readiness. System modifications or reprogramming have been minor in
nature. The Company has also analyzed other internal computerized processes,
including, but not limited to, manufacturing, engineering, personal computer
network, and other facility management systems for potential year 2000 issues.
Systems identified as being impacted by the changeover to the year 2000 are
being modified or replaced. The Company estimates that the year 2000 conversion
effort is over 80% complete and expects all critical systems will be year 2000
compliant by November 1999.
The Company has not separately distinguished between costs incurred
specifically to assure year 2000 compliance and normal expenditures needed to
maintain or upgrade existing systems to current technology levels. The Company
believes that any such costs expended were not material. The Company does not
expect to incur any significant costs on the remaining year 2000 compliance
efforts.
The Company is dependent on various third parties to conduct its business
operations. These third parties are customers and vendors of raw material and
components used in the production process. The Company's revenues are not
dependent upon any single or any few number of customers. The Company employs a
large number of vendors, without concentration of critical vendors. The Company
believes that vendors could be replaced if they fail to meet the Company's
demand for components. None of the Company's products or components of Company
products use date sensitive technology. Therefore, the Company believes that
third party risk involving the changeover to year 2000 is relatively small.
However, while reasonable actions are being taken to mitigate the risk of
unanticipated costs and/or business interruptions due to year 2000 problems in
its internal systems, or those of its vendors, there can be no assurance that
the Company will not experience any costs and/or disruptions from any other
external year 2000 failures. The magnitude of any such costs and/or disruptions
and the possible impact on the Company's consolidated results of operations, is
unpredictable. In addition, while efforts to date have focused on mitigating
year 2000 problems, the Company plans to evaluate the reasonable potential risks
to determine the extent of contingency planning and resources that are
appropriate.
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 sheets 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, 1999 and 1998, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 1999, 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.
23
/s/ PricewaterhouseCoopers LLP
St. Louis, Missouri
August 11, 1999, except for Note 18, which is
as of September 1, 1999
24
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended June 30, 1999 1998 1997
- --------------------------------------------------- ------------ ------------- -------------
Net sales $72,799,372 $ 96,466,860 $118,117,518
Cost of sales 55,864,554 69,110,274 82,364,405
------------ ------------- -------------
Gross profit 16,934,818 27,356,586 35,753,113
Selling, general and administrative expenses 18,733,227 23,888,131 33,909,510
Provision for restructuring and consolidation 758,467 -- --
Provision for product recall 1,500,000 -- --
Gain on sale of business (27,246) (12,812,927) --
Non-recurring impairment losses -- 9,778,259 --
------------ ------------- -------------
Income (loss) from operations (4,029,630) 6,503,123 1,843,603
------------ ------------- -------------
Other expenses:
Interest expense 1,925,757 4,151,986 7,606,129
Other, net 35,984 198,329 186,291
------------ ------------- -------------
1,961,741 4,350,315 7,792,420
------------ ------------- -------------
Income (loss) before provision (benefit) for
income taxes and extraordinary loss (5,991,371) 2,152,808 (5,948,817)
Provision (benefit) for income taxes (1,872,976) 9,018,488 (1,427,716)
------------ ------------- -------------
Loss before extraordinary loss (4,118,395) (6,865,680) (4,521,101)
Extraordinary loss on early extinguishment of debt,
net of income tax benefit of $373,191 -- 530,632 --
------------ ------------- -------------
Net loss $(4,118,395) $ (7,396,312) $ (4,521,101)
============ ============= =============
Basic and diluted loss per share:
Loss before extraordinary loss $ (0.53) $ (0.88) $ (0.58)
Extraordinary loss -- (0.07) --
------------ ------------- -------------
Loss per share $ (0.53) $ (0.95) $ (0.58)
============ ============= =============
See accompanying Notes to Consolidated Financial Statements
25
CONSOLIDATED BALANCE SHEET
June 30, 1999 1998
- ------------------------------------------------------------ ------------- -------------
ASSETS
Current assets:
Cash $ 587,457 $ 1,194,813
Accounts receivable, net of allowance for doubtful
accounts of $834,883 and $1,035,833, respectively 12,601,165 14,227,314
Inventories 17,499,822 18,341,340
Income taxes receivable 1,635,866 --
Other current assets 138,360 273,832
------------- -------------
Total current assets 32,462,670 34,037,299
------------- -------------
Property, plant and equipment, net 14,287,037 17,525,906
Goodwill, net 27,210,653 28,026,064
Other assets, net 314,828 590,933
------------- -------------
Total assets $ 74,275,188 $ 80,180,202
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,434,303 $ 5,807,349
Current portion of long-term debt 907,649 3,442,797
Accrual for product recall 594,725 --
Other accrued liabilities 2,906,636 3,479,215
------------- -------------
Total current liabilities 9,843,313 12,729,361
------------- -------------
Long-term debt 16,330,185 14,971,775
Deferred tax liability-noncurrent 182,608 441,589
Commitments and contingencies (Notes 9 and 15)
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 shares issued and
outstanding at June 30, 1999 and 1998 101,102 101,102
Additional paid-in capital 47,014,621 47,014,621
Retained earnings 21,534,787 25,653,182
Common stock in treasury, at cost (20,731,428) (20,731,428)
------------- -------------
Total stockholders' equity 47,919,082 52,037,477
------------- -------------
Total liabilities and stockholders' equity $ 74,275,188 $ 80,180,202
============= =============
See accompanying Notes to Consolidated Financial Statements
26
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Additional
Preferred Common paid-in Retained Treasury
Stock stock capital earnings stock
---------- -------- ----------- ------------ -------------
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)
Net loss for the year ended
June 30, 1999 -- -- -- (4,118,395) --
---------- -------- ----------- ------------ -------------
Balance, June 30, 1999 $ - $101,102 $47,014,621 $21,534,787 $(20,731,428)
========== ======== =========== ============ =============
See accompanying Notes to Consolidated Financial Statements
27
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended June 30, 1999 1998 1997
- --------------------------------------------------------------------- ------------- -------------- -------------
Cash flows from operating activities:
Net loss $ (4,118,395) $ (7,396,312) $ (4,521,101)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities,
excluding the effects of acquisitions:
Depreciation and amortization 3,781,063 4,881,890 5,572,188
Provision for restructuring and consolidation 217,926 -- --
Provision for product recall 594,725 -- --
Gain on sale of Hospital Systems, Inc. (27,246) -- --
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 1,626,149 2,887,344 2,871,621
Decrease in inventories 407,134 2,412,551 1,993,499
Decrease (increase) in income taxes receivable (1,635,866) -- 2,285,224
Decrease in other current assets 133,307 696,056 1,168,686
Increase (decrease) in accounts payable (373,046) (6,671,539) 943,936
Increase (decrease) in other accrued liabilities (572,440) (1,688,283) 1,027,393
Increase (decrease) in deferred income taxes - noncurrent (258,981) 2,106,658 (2,451,982)
------------- -------------- -------------
Net cash provided by (used in) operating activities (225,670) (5,184,287) 8,889,464
Cash flows from investing activities:
Capital expenditures, net (1,061,309) (644,080) (58,610)
Proceeds on sale of Toledo, Ohio facilities 1,393,287 -- --
Proceeds on sale of Hospital Systems, Inc. - Net of disposal costs 495,178 -- --
Proceeds on sale of Bear Medical - Net of disposal costs -- 35,362,286 --
------------- -------------- -------------
Net cash provided by (used in) investing activities 827,156 34,718,206 (58,610)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 5,000,000 26,000,000 5,000,000
Payment of long-term debt (7,411,458) (37,267,757) (4,662,785)
Borrowings under revolving credit agreement 88,063,847 128,862,400 27,365,170
Payments under revolving credit agreement (86,829,127) (146,033,153) (35,810,605)
Proceeds from issuance of common stock -- 68,750 --
Debt issuance costs (32,104) (957,782) (677,563)
Dividends paid on common stock -- -- (545,768)
------------- -------------- -------------
Net cash used in financing activities (1,208,842) (29,327,542) (9,331,551)
Net increase (decrease) in cash and equivalents (607,356) 206,377 (500,697)
Cash and equivalents at beginning of period 1,194,813 988,436 1,489,133
------------- -------------- -------------
Cash and equivalents at end of period $ 587,457 $ 1,194,813 $ 988,436
============= ============== =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,046,103 $ 5,256,981 $ 6,614,365
Income taxes $ 541,756 $ 5,380,817 $ 138,339
Supplemental schedule of noncash investing and financing activities:
Equipment acquired through capital leases -- -- $ 2,157,967
See accompanying Notes to Consolidated Financial Statements
28
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 5
regarding sale of the Company's architectural products division on May 28, 1999.
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 $1,247,188 and $2,012,427 at June 30, 1999 and 1998,
respectively, are included in accounts payable.
CONCENTRATIONS OF CREDIT RISK
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. The Company's customers can be grouped into three
main categories: medical equipment distributors, construction contractors and
health care institutions. At June 30, 1999 the Company believes that it has no
significant concentration of credit risk.
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 $2,411,909 and $2,066,220 higher at June 30, 1999
and 1998, 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
$1,936,402 and $2,189,000 at June 30, 1999 and 1998, respectively.
29
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, 1999, 1998 and 1997 was $816,411,
$1,077,959, and $1,473,164 respectively. Accumulated amortization at June 30,
1999 and 1998 was $6,315,687 and $5,499,276 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 7 regarding goodwill impairment and related non-recurring charges recorded
in the second quarter of the fiscal year ended June 30, 1998. Management
believes that there has been no further impairment at June 30, 1999 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 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, 1999, 1998 and 1997 was
$1,315,593, $1,688,071 and $3,684,702, respectively.
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, 1999, 1998 and 1997 was 7,806,682,
7,805,021, and 7,796,682 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 a 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
30
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 12 for additional discussion.
3. B&F CONSOLIDATION PROVISION
On August 5, 1998 the Company's Board of Directors voted to close the
Toledo facility of its disposable products division and consolidate production
of the B&F line of home care products into its manufacturing facility in St.
Louis, Missouri. This move was announced on August 10, 1998. The move was
substantially completed during the second quarter of fiscal 1999. In connection
with the shutdown of the facility, Allied recorded a provision of approximately
$1.0 million pre-tax, $0.6 million after tax, or $0.07 per share, in the first
quarter of fiscal 1999 to cover the cost of closing the facility. The provision
reflects costs of certain fixed asset impairments, employee severance benefits
and other related exit costs. Subsequently, during the second quarter of
fiscal 1999, the company negotiated and received a $0.2 million cash payment
from the City of Toledo as partial reimbursement for closure costs.
Accordingly, Allied recorded this cash payment, in the second quarter of fiscal
1999, as a reduction to the aforementioned provision resulting in a net charge
of $0.8 million pre-tax, $0.5 million after tax, or $0.06 per share for the
fiscal year ended June 30, 1999.
4. LSP OXYGEN REGULATOR RECALL
On February 4, 1999, Allied announced a recall of aluminum oxygen
regulators marketed under its Life Support Products label. These products are
used to regulate pressure of bottled oxygen for administration to patients under
emergency situations. Following reports of regulator fires, the Company
instituted a recall in May 1997, under which it provided retrofit kits to
prevent contaminants from entering the regulators. The Company has also been
testing regulator design with the help of the National Aeronautical and Space
Administration's White Sands National Laboratories. While preliminary findings
led the Company to believe the Company's products did not cause those fires,
there is enough concern among the users that the Company, in cooperation with
the U. S. Food and Drug Administration ("FDA"), agreed to institute a voluntary
recall to replace aluminum components in the high pressure chamber of the
regulators with brass components. The FDA has recommended that all regulator
manufacturers cease use of aluminum in regulators. Accordingly, the Company has
now introduced new brass regulators and is also offering a trade-in program to
the existing users. As a result of the recall, the Company recorded a charge of
$1.5 million pre-tax, $0.9 million after tax, or $0.12 per share in the second
quarter of fiscal 1999.
31
A reconciliation of activity with respect to the Company's product recall is as
follows:
Provision, December 31, 1998 $1,500,000
Product costs for retrofitting and replacement (784,831)
Administrative costs incurred (120,444)
-----------
Ending Balance, June 30, 1999 $ 594,725
===========
5. SALE OF HEADWALL PRODUCTS DIVISION
On May 28, 1999, the Company sold the assets of Hospital Systems, Inc.
("HSI") to David Miller (former General Manager-Hospital Systems, Inc.) for $0.5
million. The net proceeds of $0.5 million were utilized to repay a portion of
its revolving credit facility. The sale of HSI, located in Oakland, California,
resulted in a gain before taxes for financial reporting purposes of $0.03
million.
Had the divestiture occurred on July 1, 1998, consolidated pro forma net
sales, net loss, and loss per share for the year ended June 30, 1999 would have
been $69.6 million, $(4.3) million and $(0.55), respectively.
6. 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"),
collectively referred to as the ventilation products division, 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
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.
7. 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.
32
$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,
1999 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.
8. FINANCING
Long-term debt consisted of the following at June 30, 1999 and 1998:
1999 1998
------------ ------------
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 $27,714 to $40,518
with remaining balance due August 1, 2003 $ 4,714,669
Revolving credit facility - aggregate revolving commitment
of $25,000,000; principal due at maturity on January 6, 2003 10,618,532 $ 9,383,812
5,800,000
Term loan payable to financial institution - paid in fiscal 1998
Other 32,819 45,840
------------ ------------
15,366,020 15,229,652
------------ ------------
SUBORDINATED DEBT
Capital lease obligations 1,871,814 2,429,920
Industrial Development Revenue Bonds - paid in fiscal 1999 755,000
1,871,814 3,184,920
------------ ------------
17,237,834 18,414,572
Less-Current portion of long-term debt, including $523,523 and
$676,357 of capital lease obligations at June 30, 1999 and June
30, 1998 respectively (907,649) (3,442,797)
------------ ------------
$16,330,185 $14,971,775
============ ============
On August 7, 1998, the Company borrowed approximately $5.0 million from
LaSalle National Bank. 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 $0.06 million, with a final payment of all principal and
interest remaining unpaid due at maturity on August 1, 2003. Interest is fixed
at 7.75% 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,
and for which the Company was in compliance at June 30, 1999.
33
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 (8.00% at June 30, 1999) 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 Wells Fargo Bank, National Association, or any successor
thereto, as its "base rate". This amendment also provides the Company with a
rate of LIBOR + 2.50%. Interest rates on the reference rate and LIBOR will drop
by 0.25% at the end of fiscal 2000 if the Company is profitable. In addition,
the fees charged to the Company were reduced along with certain debt covenants
for which the Company was in compliance at June 30, 1999.
On March 3, 1999, the Company purchased the remaining $505,000 of its
outstanding Missouri Industrial Revenue Bonds. The bonds, which bore a variable
interest rate, had a final maturity date of April 1, 2001 and were repaid early
using borrowings from the Company's revolving credit facility.
On March 24, 1999, the Company's credit facility with LaSalle National Bank
was amended. The amendment provided for favorable changes to certain debt
covenants.
On June 28, 1999, the Company's credit facilities with Foothill Capital
Corporation were amended. The amendment provides for favorable interest rate
reduction, based upon annual profitability, for fiscal years 2001 and 2002. The
amendment also extended the maturity date to January 6, 2003 along with a
favorable change to certain debt covenants.
Aggregate maturities of long-term debt, excluding capital leases, for each
of the fiscal years subsequent to June 30, 1999 are as follows:
Fiscal Revolving
Year Credit Facility Term Other Total
- ---- ---------------- ----------- ----------- ----------
2000 $ 367,551 $ 16,575 $ 384,126
2001 397,070 16,244 413,314
2002 428,959 428,959
2003 $10,618,532 463,411 11,081,943
2004 3,057,678 3,057,678
----------- ----------
$10,618,532 $ 4,714,669 $ 32,819 $15,366,020
=========== =========== =========== ==========
9. LEASE COMMITMENTS
The Company leases certain of its electronic data processing and
manufacturing 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 office equipment under
noncancelable operating leases. These leases are reflected in the consolidated
financial statements as operating leases in accordance with FAS 13.
34
Minimum lease payments under long-term capital leases and the operating
leases at June 30, 1999 are as follows:
Capital Operating
Leases Leases
----------- ----------
2000 $ 737,250 $ 145,090
2001 737,250 53,340
2002 779,851 53,340
2003 -- 53,340
2004 -- 44,450
----------- ----------
Total minimum lease payments 2,254,351 $ 349,560
==========
Less amount representing interest (382,537)
-----------
Present value of net minimum lease payments, including
current portion of $523,523 $1,871,814
===========
Rental expense incurred on the operating leases in fiscal 1999, 1998 and
1997 totaled $118,990, $381,024, and $686,168, respectively.
10. INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
1999 1998 1997
------------ ---------- ------------
Current Payable:
Federal $(1,497,541) $4,249,382 --
State -- 1,957,403 --
------------ ---------- ------------
Total Current (1,497,541) 6,206,785 --
------------ ---------- ------------
Deferred:
Federal (113,472) 2,451,228 $(1,214,731)
State (261,963) 360,475 (212,985)
------------ ---------- ------------
Total Deferred (375,435) 2,811,703 (1,427,716)
------------ ---------- ------------
$(1,872,976) $9,018,488 $(1,427,716)
============ ========== ============
Income taxes were 31.3%, 418.9%, and (24.0)% of pre-tax earnings (losses)
in 1999, 1998 and 1997, respectively. A reconciliation of income taxes, with
the amounts computed at the statutory federal rate follows:
1999 1998 1997
------------ ------------ ------------
Computed tax at federal statutory rate $(2,037,066) $ 731,955 $(2,022,597)
State income taxes, net of federal tax benefit (172,876) 1,611,155 (160,989)
Non deductible goodwill 277,240 7,925,827 491,854
Other, net 59,726 (1,250,449) 264,016
------------ ------------ ------------
Total $(1,872,976) $ 9,018,488 $(1,427,716)
============ ============ ============
The increase in the dollar amount of reconciling items during fiscal year
1998 relates to the effect of the sale of the Bear ventilation products
division. The increase in the income tax provision was primarily attributable
to the non-deductible portion of goodwill associated with the sale, and the
effect of state income taxes associated with the transaction.
35
The deferred tax assets and deferred tax liabilities recorded on the
balance sheet as of June 30, 1999 and 1998 are as follows:
At June 30, 1999 At June 30, 1998
--------------------------- ---------------------------
Deferred Deferred Tax Deferred Deferred Tax
Tax Assets Liabilities Tax Assets Liabilities
------------ ------------- ------------ -------------
Current:
Bad debts $ 325,604 -- $ 403,975 --
Accrued liabilities 347,903 -- 103,369 --
Inventory -- $ 926,154 -- $ 876,444
------------ ------------- ------------ -------------
673,507 926,154 507,344 876,444
------------ ------------- ------------ -------------
Non Current:
Depreciation -- 52,629 -- 65,685
Other property basis -- 10,857 -- 399,611
Intangible assets 380,762 -- 363,331 --
Net operating loss carryforward 264,274 -- -- --
Other -- 438,767 -- 14,233
------------ ------------- ------------ -------------
645,036 502,253 363,331 479,529
------------ ------------- ------------ -------------
Valuation allowance (325,391) -- (325,391) --
------------ ------------- ------------ -------------
Total deferred taxes $ 993,152 $ 1,428,407 $ 545,284 $ 1,355,973
============ ============= ============ =============
11. 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.
During the fiscal years ended June 30, 1999, 1998 and 1997, the Company
made contributions of $359,087, $464,227 and $601,338, respectively.
12. SHAREHOLDERS EQUITY
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 $1.88 and $16.00, 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 $1.88 and $18.25,
36
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 one
year 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 1999, 1998 and 1997,
respectively, pursuant to the Employee Plans and the Directors Plans follows:
Summary of Stock Options
-------------------------
Average Shares Subject
Price To Option
-------- ---------------
June 30, 1996 $ 13.79 413,600
Options Granted 6.90 358,000
Options Exercised -- --
Options Canceled 11.47 (177,100)
---------------
June 30, 1997 $ 9.22 594,500
---------------
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
===============
June 30, 1998 $ 8.39 625,450
Options Granted 1.97 54,000
Options Exercised -- --
Options Canceled 10.54 (149,700)
---------------
June 30, 1999 $ 7.13 529,750
---------------
Exercisable at June 30, 1999 148,500
===============
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 1999, 1998 and 1997 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.
37
13. EXPORT SALES
Export sales for the years ended June 30, 1999, 1998 and 1997 are comprised
as follows (in thousands):
1999 1998 1997
------- ------- -------
Europe $ 2,500 $ 5,700 $ 9,300
Canada 1,800 1,900 2,600
Latin America 3,400 5,900 6,300
Middle East 1,200 1,600 3,200
Far East 2,600 6,000 9,400
Other 1,600 2,900 3,700
------- ------- -------
$13,100 $24,000 $34,500
======= ======= =======
14. SUPPLEMENTAL BALANCE SHEET INFORMATION
June 30,
1999 1998
------------- -------------
INVENTORIES
Work in progress $ 779,027 $ 2,424,041
Component parts 13,848,272 14,820,526
Finished goods 2,872,523 1,096,773
------------- -------------
$ 17,499,822 $ 18,341,340
============= =============
PROPERTY, PLANT AND EQUIPMENT
Machinery and equipment $ 14,905,236 $ 13,836,067
Buildings 11,644,429 13,442,979
Land and land improvements 934,216 989,516
Property held under capital leases 4,518,761 5,220,926
------------- -------------
Total property, plant and equipment at cost 32,002,642 33,489,488
Less accumulated depreciation and amortization,
including $2,741,859 and $2,551,105 respectively,
related to property held under capital leases (17,715,605) (15,963,582)
------------- -------------
$ 14,287,037 $ 17,525,906
============= =============
OTHER ACCRUED LIABILITIES
Accrued compensation expense $ 1,211,251 $ 1,295,354
Accrued interest expense 98,669 219,015
Accrued income tax 985,711 942,036
Other 611,005 1,022,810
------------- -------------
$ 2,906,636 $ 3,479,215
============= =============
15. 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
38
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.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for fiscal 1999 and 1998 appears below
(all amounts in thousands except per share data):
Net Sales
------------------
1999 1998
-------- --------
First Quarter $17,859 $30,173
Second Quarter 17,092 24,033
Third Quarter 19,227 22,785
Fourth Quarter 18,621 19,476
-------- --------
Total Year $72,799 $96,467
======== ========
Gross Profit
------------------
1999 1998
-------- --------
First Quarter $ 4,407 $ 9,229
Second Quarter 3,423 6,743
Third Quarter 4,940 6,507
Fourth Quarter 4,165 4,878
-------- --------
Total Year $16,935 $27,357
======== ========
Net Income (Loss)
------------------
1999 1998
-------- --------
First Quarter (1,279) (638)
Second Quarter (1,912) (6,684)
Third Quarter (189) 241
Fourth Quarter (738) (315)
-------- --------
Total Year $(4,118) $(7,396)
======== ========
39
Earnings (Loss) Per Share
------------------
1999 1998
-------- --------
First Quarter $ (.16) $ (.08)
Second Quarter (.25) (.86)
Third Quarter (.02) .03
Fourth Quarter (.10) (.04)
-------- --------
Total Year $ (.53) $ (.95)
======== ========
17. SEGMENT INFORMATION
The Company operates in one segment consisting of the manufacturing,
marketing and distribution of a variety of respiratory products used in the
health care industry to hospitals, hospital equipment dealers, hospital
construction contractors, home health care dealers and emergency medical product
dealers. The Company's product lines include respiratory care products, medical
gas equipment and emergency medical products. The Company does not have any one
single customer that represents more than 10 percent of total sales.
18. SUBSEQUENT EVENTS
On July 28, 1999 the Company's President, Chief Executive Officer and
Director Uma Nandan Aggarwal resigned. Subsequently on August 24, 1999 the
Company announced Earl R. Refsland as President, Chief Executive Officer and
Director of the Company. As a result of Mr. Aggarwal's resignation, the Company
is expecting to record a $0.2 million charge to operations in the first quarter
of fiscal year 2000 per terms of a mutually accepted separation agreement.
On September 1, 1999 the Company's credit facility with LaSalle National
Bank was amended. The amendment provides favorable changes to certain debt
covenants.
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 1, 1999. The information required
by this item is set forth under the caption "Election of Directors" on pages 2
through 3, under the caption "Executive Officers" on page 11 and under the
caption Section 16(a) Beneficial Ownership Reporting Compliance on page 21 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 12 through 13 of the definitive proxy
statement, which information is incorporated herein by reference thereto.
40
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 7
through 8 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, 1999, 1998 and 1997
Consolidated Balance Sheet at June 30, 1999 and 1998
Consolidated Statement of Changes in Stockholders' Equity
for the years ended June 30, 1999, 1998 and 1997
Consolidated Statement of Cash Flows for the years ended June 30,
1999, 1998 and 1997
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, 1999, 1998 and 1997
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 February 4, 1999 (announcing the recall of all oxygen
regulators sold under the Life Supports Products brand to replace aluminum
components in the unit's high-pressure chambers with brass components).
Form 8-K dated as of April 2, 1999 (announcing the naming of a new member of the
board of directors, Mr. Brent D. Baird, and announcing that current director,
John D. Weil, has been named the new chairman of the board of directors).
41
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/ Earl R. Refsland
--------------------
Earl R. Refsland
President and Chief Executive Officer
Dated : September 27, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on September 27, 1999.
SIGNATURES TITLE
* Chairman of the Board
- ---------------------------------------
John D. Weil
* President, Chief Executive Officer
- --------------------------------------- and Director (principal Executive
Earl R. Refsland Officer)
* Director
- ---------------------------------------
David A. Gee
*
- ---------------------------------------
Robert E. Lefton Director
*
- ---------------------------------------
William A. Peck Director
*
- ---------------------------------------
Brent D. Baird Director
*
- ---------------------------------------
James B. Hickey, Jr. Director
42
* By: /s/ Earl R. Refsland
-----------------------
Earl R. Refsland
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 Earl R. Refsland 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 1999 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.
43
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 11, 1999, except for Note 18, which is as of September 1, 1999,
appearing in the 1999 Annual Report to Shareholders of Allied Healthcare
Products, Inc. (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the Financial Statement Schedule listed in item 14(a)(2) of this Form
10-K. In our opinion, this Financial Statement Schedule presents fairly, in all
material aspects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
St. Louis, Missouri
August 11, 1999, except for Note 18,
Which is as of September 1, 1999
ALLIED HEALTHCARE PRODUCTS, INC.
RULE 12-09 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------- ------------ ------------------------ --------- ------------
CHARGED TO
BALANCE AT CHARGED TO ACCOUNTS
BEGINNING OF COSTS OTHER - DEDUCTIONS - BALANCE AT END
DESCRIPTION PERIOD AND EXPENSES DESCRIBE DESCRIBE OF PERIOD
- -------------------------------- ------------ -------------- -------- --------- ------------
FOR THE YEAR ENDED JUNE 30, 1999
Reserve For
Doubtful Accounts $(1,035,833) $ (175,496) $ 376,446 (1) $ (834,883)
Inventory Allowance
For Obsolescence
And Excess Quantities $(2,189,000) $ (200,000) $ 452,598 (2) $(1,936,402)
- ------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30, 1998
Reserve For
Doubtful Accounts $(1,225,326) $ (264,165) $ 453,658 (3) $(1,035,833)
Inventory Allowance
For Obsolescence
And Excess Quantities $(1,689,000) $ (1,112,000) $ 612,000 (4) $(2,189,000)
- ------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30, 1997
Reserve For
Doubtful Accounts $ (422,517) $ (1,058,999) $ 256,190 (1) $(1,225,326)
Inventory Allowance
For Obsolescence
And Excess Quantities $(1,812,542) $ (154,357) $ 277,899 (5) $(1,689,000)
- ------------------------------------------------------------------------------------------------------
(1) Decrease due to bad debt write-offs, bad debt recoveries and changes in estimate.
(2) Decrease due to inventory disposed of and changes in estimate. Additional decrease of
$228,928 due to the sale of Hospital Systems, Inc.
(3) 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.
(4) Increase due to changes in estimate. Offsetting decrease of $612,000 due to the sale of Bear
Medical Systems, Inc.
(5) Decrease due to inventory disposed of and changes in estimate.
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 (filed as Exhibit 10(3) to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998 (the "1998 Form 10-K") and incorporated by
reference)
10.4 Allied Healthcare Products, Inc. 1994 Employee Stock Option Plan (filed with the Commission
as Exhibit 10(39) to the Company's Annual Report on Form 10-K for the year ended June 30,
1994 (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 Allied Healthcare Products, Inc. Amended 1994 Employee Stock Option Plan (filed with the
Commission as Exhibit 10(28) 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)
10.7 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)
10.8 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
- ------------- ------------------------------------------------------------------------------------------------
10.9 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)
10.10 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)
10.11 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)
10.12 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)
10.13 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)
10.14 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)
10.15 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)
10.16 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)
10.17 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)
10.18 Loan and Security Agreement, dated as of August 7, 1998 by and between Allied Healthcare
Products, Inc. and LaSalle National Bank (filed with the Commission as Exhibit 10(24) to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1998 (the "1998
Form 10-K") and incorporated herein by reference)
EXHIBIT
NO. DESCRIPTION
- ------------- ------------------------------------------------------------------------------------------------
10.19 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 (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, 1998 (the "1998 Form 10-K") and incorporated herein by reference)
10.20 Letter Agreement dated February 11, 1999 between Allied Healthcare Products, Inc. and
Gabriel S. Kohn
10.21 Letter Agreement dated February 11, 1999 between Allied Healthcare Products, Inc. and David
A. Grabowski
10.22 Letter Agreement dated March 16, 1999 between Allied Healthcare Products, Inc. and Thomas
A. Jenuleson
10.23 Amendment Number One to Amended and Restated Loan and Security Agreement dated as of
June 28, 1999 among Allied Healthcare Products, Inc., B&F Medical Products, Inc. and Life
Support Products, Inc. as Borrowers, and Foothill Capital Corporation
10.24 Asset Purchase Agreement dated May 28, 1999 by and between Allied Healthcare Products,
Inc. and Hospital Systems, Inc. and David Miller
10.25 Employment Agreement dated August 24, 1999 by and between Allied Healthcare Products,
Inc. and Earl Refsland
10.26 Allied Healthcare Products, Inc. 1999 Incentive Stock Plan
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of PricewaterhouseCoopers, LLP
24 Powers of Attorney
27 Financial Data Schedule