FORM 10-K- --------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, DC 20549
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FORM 10-K
(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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year June 30, 2002
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
COMMISSION FILE NUMBER 0-19266
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ALLIED HEALTHCARE PRODUCTS, INC.
[EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER]
DELAWARE 25-1370721
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1720 SUBLETTE AVENUE
ST. LOUIS, MISSOURI 63110
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)[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 63110
ST. LOUIS, MISSOURI (zip code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODECODE:
(314) 771-2400
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
-------------------
TITLE OF EACH CLASS NAME OF EACH EXCHANGE 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[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. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in exchange act rule 12 b-2). Yes. [ ] No. [X]
As of September 26, 2002,25, 2003, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately $15,300,000.$11,895,750.
As of September 26, 2002,25, 2003, there were 7,813,932 shares of common stock,
$0.01 par value (the "Common Stock"), outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement to be dated October 7, 200213, 2003 (portion) (Part III)
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ALLIED HEALTHCARE PRODUCTS, INC.
INDEX TO FORM 10-K
PagePAGE
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PART I
Item 1. Business ..................................................................... 1Business.................................................... 2
Item 2. Properties ................................................................... 10Properties.................................................. 9
Item 3. Legal Proceedings ............................................................Proceedings........................................... 10
Item 4. Submission of Matters to a Vote of Security Holders ..........................Holders......... 10
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters ..........................................................Matters..................................................... 11
Item 6. Selected Financial Data ......................................................Data..................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..........................................Operations................................... 13
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 25
Item 8. Financial Statements and Supplementary Data .................................. 26Data................. 25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .......................................... 48Disclosure.................................... 46
Item 9A. Controls and Procedures..................................... 46
PART III
Item 10. Directors and Executive Officers of the Registrant .......................... 48Registrant.......... 46
Item 11. Executive Compensation ...................................................... 48Compensation...................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and
Management .............. 48Management.................................................. 46
Item 13. Certain Relationships and Related Transactions .............................. 48Transactions.............. 46
Item 14. Principal Account Fees and Services......................... 46
PART IV
Item 14.15. Exhibits, Financial Statement Schedule, and Reports on Form
8-K .............8-K......................................................... 47
Signatures............................................................ 48
1
SAFE HARBOR"HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
Statements contained in this Report, which are not historical facts or
information, are "forward-looking statements." Words such as "believe,"
"expect," "intend," "will," "should," and other expressions that indicate future
events and trends identify such forward-looking statements. These
forward-looking statements involve risks and uncertainties, which could cause
the outcome and future results of operations and financial condition to be
materially different than stated or anticipated based on the forward-looking
statements. Such risks and uncertainties include both general economic risks and
uncertainties, risks and uncertainties affecting the demand for and economic
factors affecting the delivery of health care services, and specific matters
which relate directly to the Company's operations and properties as discussed in
Items 1, 3 and 7 in this Report. The Company cautions that any forward-looking
statements contained in this report reflects only the belief of the Company or
its management at the time the statement was made. Although the Company believes
such forward-looking statements are based upon reasonable assumptions, such
assumptions may ultimately prove inaccurate or incomplete. The Company
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which the statement was made.
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
The Company's principal executive offices are located at 1720 Sublette
Avenue, St. Louis, Missouri 63110, and its telephone number is (314) 771-2400.
12
MARKETS AND PRODUCTS
In fiscal 2003, respiratory care products, medical gas equipment and
emergency medical products represented approximately 27%, 57% and 16%,
respectively, of the Company's net sales. In fiscal 2002, respiratory care
products, medical gas equipment and emergency medical products represented
approximately 28%, 55%, and 17%,
respectively, of the Company's net sales. In fiscal 2001, respiratory care
products, medical gas equipment and emergency medical products represented
approximately 28%, 57%, and 15% 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 BRAND
PRODUCT DESCRIPTION BRAND NAMES PRIMARY USERS
- -------------------------------------- ------------------------------------------ ----------- -------------------- ----------------- -------------------
RESPIRATORY CARE PRODUCTS
Respiratory Care/Anesthesia Large volume compressors; ventilator Timeter Hospitals and
Products ventilator calibrators; sub-acute humidifiers and mist sub-acute
tents facilities
Home Respiratory Care Products O2 cylinders; pressure regulators; Timeter; B&F; Schuco Patients at home
regulators; nebulizers; portable Schuco large volume
compressors; portable suction
equipment and disposable respiratory
products
MEDICAL GAS EQUIPMENT
Construction Products In-wall medical gas system Chemetron; Oxequip Hospitals and
components; central station pumps Oxequip sub-acute
and compressors and headwalls facilities
Regulation Devices Flowmeters; vacuum regulators; Chemetron; Oxequip; Hospitals and
pressure regulators and related Oxequip; Timeter sub-acute
products facilities
Disposable Cylinders Disposable oxygen and gas cylinders Lif-O-Gen First aid
cylinders
providers and
specialty gas
distributors
Suction Equipment Portable suction equipment and Gomco; Allied; Hospitals;Hospitals, sub-
disposable suction canisters Schuco sub-acuteacute facilities
and home carehomecare
products
EMERGENCY MEDICAL PRODUCTS
Respiratory/Resuscitation Demand resuscitation valves; bag LSP; Omni-Tech Emergency service
mask resuscitators; emergency providers
transport ventilators, and oxygen
regulators and SurgeX -- surge
suppressing post valve
Trauma and Patient Handling Spine immobilization products; LSP Emergency service
Products pneumatic anti-shock garments and providers
trauma burn kits
2
RESPIRATORY CARE PRODUCTS
MARKET. Respiratory care products are used in the treatment of acute and
chronic respiratory disorders such as asthma, emphysema, bronchitis and
pneumonia. 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, and by contract sales with national chains.
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, CO2CO(2) absorbent and a complete line
of respiratory disposable products such as oxygen tubing, face
masks,facemasks, 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.
3
MEDICAL GAS EQUIPMENT
MARKET. The market for 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, 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.
The Company's construction products are sold primarily to hospitals,
alternate care settings and hospital construction contractors. The Company
believes that it holds a major share of the U.S. market for its construction
products, that these products are installed in more than three thousand
hospitals in the United States and that its installed base of equipment in this
market will continue to generate follow-on sales. 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.
3
While Allied sold the assets of its headwall manufacturing division,
Hospital Systems, Inc. on May 28, 1999, the Company continues to sell headwall
products in the construction product market. Allied's participation in this
market includes the distribution of headwall components utilized by various
headwall manufacturers, as well as the distribution of complete headwall systems
purchased from outside manufacturers that are utilized in hospital construction
and renovation.
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.
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 includes 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.
4
EMERGENCY MEDICAL PRODUCTS
MARKET. Emergency medical products are used in the treatment of
trauma-induced injuries. The Company's emergency medical products provide
patientspatient 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 to ambulance
companies, fire departments and emergency medical systems volunteer
organizations.
The emergency medical products are broken down into two account groups:categories:
respiratory/resuscitator products and trauma patient handling products.
RESPIRATORY/RESUSCITATION PRODUCTS. The Company's
respiratory/resuscitation products include demand resuscitation valves, portable
resuscitation systems, bag masks and related products, emergency transport
ventilators, precision oxygen regulators, minilators, multilators and
humidifiers.
4
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 product 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 3533
sales professionals, all of whom are full-time employees of the Company.
The sales force includes 2524 medical gas specialists, 43 emergency
specialists and 6 international sales representatives. FourTwo product managers are
responsible for the marketing activities of our product lines.
5
The 2524 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. 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.
5
INTERNATIONAL
Allied's international business represents a potential growth area that the
Company has been pursuing. Allied's net sales to foreign markets totaled 17% of
the Company's net sales in fiscal 2003 and 16% of the Company's net sales in
fiscal 2002 and 21% of the Company's net sales in
fiscal 2001.2002. International sales are made through a network of dealers, 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 and computer controlled machining centers. 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 the conditions in
local labor markets should permit the implementation of additional shifts and
days operated.
RESEARCH AND DEVELOPMENT
Allied's research and development group is responsible for the development
of new products. This group is staffed with mechanical and electrical engineers.
During the 2000 fiscal year this group was segregated from the product support
function to allow the group to focus on the introduction of new products.
During fiscal 20022003 the Company released two new products as a result of
research and development programs. These products include a new portable suction
pump for the international market, and an oxygen conserver. Oxygen conservers
are used to extend the time an oxygen cylinder lasts by delivering gas flow only
when the patient inhales.
The group also developed the SurgeX surge suppressing post
valve. The SurgeX surge suppressing post valve foris used on portable oxygen
cylinders. The SurgeX post valve wascylinders and is designed to reduce the heat created by the recompression of
oxygen released bywhen the post valve which is aopened. This heat is the principle cause of oxygen
regulator fires.
During fiscal 2003 the Company also completed the design of two additional
products. Manufacturing is now preparing to produce these products. These
products will be released during the first half of fiscal 2004.
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.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,
6
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 into
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
6
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,
submission of new 510(k) notification to the FDA is not required. There can be
no assurance, however, that the 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 Medical Device Reporting regulation requires that the Company provide
information to the 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, some of which are permanently implantable devices. The regulation
requires that the method adopted by the Company ensureswill ensure 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, the 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.
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 the FDA, ISO, and
European auditors for compliance with the Good Manufacturing Practices ("GMP"),
the ISO and MDD
7
regulations for medical devices. These regulations require the Company to
manufacture its products and maintain its products and documentation in a
prescribed manner with respect to design, manufacturing, testing and control
activities. The Company also is subject to the registration and inspection
requirements of state regulatory agencies.
7
In March through June 2000, the FDA conducted an inspection of the
Company's St. Louis facility and provided a written report, known as an "FDA
Form 483" or simply a "483," citing FDA observations concerning GMP compliance
and quality control issues applicable to demand valves, emergency ventilators,
circumcision clamps, and regulators. The Company provided a written response to
the FDA and in August 2000, the FDA issued a warning letter and requested that
the Company clarify and supplement its responses to the 483 observations. As a
result, the Company has submitted to the FDA a written supplemental response and
actions to address the FDA concerns. The Company met with the FDA at their
Kansas City field office in March 2001 to discuss the responses and actions.
From October 27, 2001 to November 19, 2001 the FDA conducted a follow-up
inspection to the June 2000 inspection. On January 23, 2002, the FDA released a
copy of the establishment inspection report (EIR) for the October 27, 2001 to
November 19, 2001 inspection and has indicated that the inspection is closed.
The Company intends to continue to conduct business in such a manner as to avert
any FDA action seeking to interrupt or suspend manufacturing or require any
recall or modification of products.
From March 18, 2003 through March 24, 2003, the FDA conducted an inspection
of the Company's St. Louis facility. The inspection did not result in a Form
483. The absence of a FDA form 483 indicates that the FDA observed no GMP
compliance and quality control issues applicable to the Company's Design
Controls of CAPA (Corrective and Preventive Action) systems.
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 is also 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 renovation costs through Medicare and
Medicaid reimbursements. In recent years, governmentally imposed limits on
reimbursement to hospitals and other health care providers have impacted
spending for services, consumables and capital goods. In addition the Balanced
Budget Act of 1997 reduced reimbursements by 25% for oxygen and oxygen
equipment. A
8
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. During fiscal 20022003 the Company applied for one patent, and
was issued one patentcontinues to pursue several patents applied for an oxygen regulator.
8
in prior years.
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. 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, 2002,2003, the Company had approximately 519486 full-time employees.
Approximately 331309 employees in the Company's principal manufacturing facility
located in St. Louis, Missouri, are covered by a collective bargaining agreement
that will expire on May 31, 2003.2006. Approximately 1213 employees at the Company's
facility in Stuyvesant Falls, New York are also covered by a collective
bargaining agreement that will expire on April 15, 2004.
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.
9
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, MissouriMissouri........... 270,000 Owned Headquarters; medical gas
equipment; respiratory care
products; emergency medical
products
Stuyvesant Falls, New YorkYork.... 30,000 Owned CO2CO(2) absorbent
In addition, the Company owns a 16.8-acre parcel of undeveloped land in
Stuyvesant Falls, New York.
9
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 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. The recall is complete and a final
audit of the results thereof was completed on December 22, 2000 by the FDA.
In March through June 2000, the FDA conducted an inspection of the
Company's St. Louis facility and provided a written report, known as an "FDA
Form 483" or simply a "483," citing FDA observations concerning GMP compliance
and quality control issues applicable to demand valves, emergency ventilators,
circumcision clamps, and regulators. The Company provided a written response to
the FDA and in August 2000, the FDA issued a warning letter and requested that
the Company clarify and supplement its responses to the 483 observations. As a
result, the Company submitted to the FDA a written supplemental response and
defined actions to address the FDA concerns. The Company met with the FDA at
their Kansas City field office in March 2001 to discuss the responses and
actions. From October 27, 2001 to November 19, 2001 the FDA conducted a
follow-up inspection to the June 2000 inspection. On January 23, 2002, the FDA
released a copy of the establishment inspection report (EIR) for the October 27,
2001 to November 19, 2001 inspection and has indicated that the inspection is
closed. The Company intends to continue to conduct business in such a manner as
to avert any FDA action seeking to interrupt or suspend manufacturing or require
any recall or modification of products.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
10
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 19, 2002,10, 2003, there were 232221 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 20022003 and 2001,2002,
respectively. The Company currently does not pay any dividend on its Common
Stock.
COMMON STOCK INFORMATION
20022003 HIGH LOW
2001 HIGH LOW- ---- ----- -----
September quarterquarter........................................... $4.74 $3.56
December quarter............................................ $4.10 $2.65
March quarter............................................... $3.09 $2.40
June quarter................................................ $3.70 $2.55
2002
- ------------------------------------------------------------ HIGH LOW
----- -----
September quarter........................................... $3.55 $3.00
September quarter $3.38 $2.69
December quarterquarter............................................ $3.70 $3.25
December quarter $3.25 $2.58
March quarterquarter............................................... $5.10 $3.45
March quarter $3.69 $2.97
June quarterquarter................................................ $5.25 $4.20 June quarter $3.50 $3.10
11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
Year ended JuneYEAR ENDED JUNE 30,
------------------------------------------------
2003 2002 2001 2000 1999
1998
- -------------------------------------------------------------------------------------------------------------------------------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA
Net salessales................................... $60,863 $ 60,415 $ 64,928 $ 65,995 $ 74,666 $ 98,619$64,928 $65,995 $74,666
Cost of salessales............................... 46,809 49,999 48,265 50,511 58,440
72,076
Gross profitprofit................................ 14,054 10,416 16,663 15,484 16,226
26,543
Selling, general and administrative
expensesexpenses.................................. 13,551 12,786 14,573 16,097 18,024
23,074
Provision for restructuring and
consolidation (1)consolidation(1).......................... -- -- -- -- 758
--
Provision for product recall (2)recall(2)............. -- (40) 80 (18) 1,500
--
Gain on sale of business (3)business(3)................. -- -- -- -- (27)
(12,813)
Impairment of goodwill (4)goodwill(4)................... -- 9,600 -- -- --
9,779
Income (loss) from operationsoperations............... 503 (11,930) 2,010 (595) (4,029)
6,503
Interest expenseexpense............................ 831 1,054 1,530 1,664 1,926
4,152
Other, netnet.................................. 41 41 74 149 36 198
Income (loss) before provision (benefit) for
income taxes and extraordinary losstaxes.............................. (369) (13,025) 406 (2,408) (5,991)
2,153
Provision (benefit) for income taxes (5)taxes(5)..... (211) (1,294) 172 (695) (1,873)
9,019
Income (loss) before extraordinary loss (11,731) 234 (1,713) (4,118) (6,866)
Extraordinary loss on early extinguishment of debt,
Net of income tax benefit -- -- -- -- 530
Net income (loss)........................... $ (11,731)(158) $(11,731) $ 234 $ (1,713) $ (4,118) $ (7,396)$(1,713) $(4,118)
Basic and diluted earnings (loss) per
shareshare..................................... $ (0.02) $ (1.50) $ 0.03 $ (0.22) $ (0.53)
$ (0.95)
Basic weighted average common shares
outstandingoutstanding............................... 7,814 7,809 7,807 7,807 7,807 7,805
Diluted weighted average common shares
outstandingoutstanding............................... 7,814 7,809 8,126 7,807 7,807 7,8057,807
(In thousands)
JuneJUNE 30,
-----------------------------------------------
2003 2002 2001 2000 1999
1998
- -------------------------------------------------------------------------------------------------------------------------------- ------- ------- ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA
Working capitalcapital.............................. $ 9,445 $ 9,371 $ 20,682 $ 20,261 $ 22,619 $ 21,308$20,682 $20,261 $22,619
Total assetsassets................................. 50,413 52,870 65,993 67,212 74,275
80,180
Short-term debt (6)debt(6)........................... 5,409 7,985 1,169 1,017 908 3,443
Long-term debt (net of current portion)(6)... 4,612 4,135 11,019 13,056 16,330
14,972
Stockholders' equityequity......................... 34,567 34,725 46,440 46,206 47,919 52,037
- ---------------
(1) Provision for closure of B & F manufacturing facility.
(2) See Note 4 to the June 30, 20022003 Consolidated Financial Statements for
further discussion.
(3) Gain on sale of Hospital Systems, Inc.
in 1999 & Bear Medical Systems,
Inc. in 1998.
(4) Non-recurring impairmentImpairment loss on goodwill recorded during fiscal 2002 and
1998. Seegoodwill.See Note 3 to the June 30, 20022003 Consolidated
Financial Statements for further discussion of non-recurring impairment loss recorded during
fiscal 2002.discussion.
(5) See Note 7 to the June 30, 20022003 Consolidated Financial Statements for
further discussion of the Company's effective tax rate.
(6) See Note 5 to the June 30, 20022003 Consolidated Financial Statements for
further discussion.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
OVERVIEWefforts
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, 2002.2003. 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.herein..
CRITICAL ACCOUNTING POLICIES
In preparing financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The Company evaluates estimates and judgments on an ongoing
basis, including those related to bad debts, inventory valuations, property,
plant and equipment, intangible assets, income taxes, and contingencies and
litigation. Estimates and judgments are based on historical experience and on
various other factors that may be reasonable under the circumstances. Actual
results may differ from these estimates. The following areas are considered to
be the Company's most significant accounting policies:
REVENUE RECOGNITION:
Revenue is recognized for all sales, including sales to agents and
distributors, at the time products are shipped and title has transferred to the
customer, provided that a purchase order has been received or a contract has
been executed, there are no uncertainties regarding customer acceptance, the
sales price has been fixed and determinable and collectibility is deemed
probable. The Company's standard shipping terms are FOB shipping point. Sales
discounts, returns and allowances are included in net sales, and the provision
for doubtful accounts is included in selling, general and administrative
expenses. Additionally, it is the Company's practice to include revenues
generated from freight billed to customers in net sales with corresponding
freight expense included in cost of sales in the consolidated statement of
operations.
INVENTORY RESERVE FOR OBSOLETE AND EXCESS INVENTORY:
Inventory is recorded net of a reserve for obsolete and excess inventory
which is determined based on an analysis of inventory items with no usage in the
preceding year and greater than one year's usage on hand. This analysis
considers those identified inventory items to determine, in management's best
estimate, if parts can be used beyond one year, if there are alternate uses or
at what values such parts may be disposed for. During the fiscal year ended June
30, 2002, the Company implemented this detailed analysis of inventory in
conjunction with its long-term product planning process. This review indicated
that due to changes in product mix, other manufacturing changes to the Company's
products, and declines in sales, a large number of component parts were deemed
to be obsolete, resulting in a $3.2 million charge to increase the Company's
reserve for obsolete and excess inventory. At June 30, 2003 and 2002, inventory
is recorded net of a reserve for obsolete and excess inventory of $2.3 million
and $4.8 million, respectively.
ACCOUNTS RECEIVABLE ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Accounts receivable are recorded net of an allowance for doubtful accounts
which is determined based on an analysis of past due accounts and accounts
placed with collection agencies. At June 30, 2003 and 2002, accounts receivable
is recorded net of an allowance for doubtful accounts of $0.5 million.
13
GOODWILL:
At June 30, 2003 and 2002, the Company has goodwill of $15,979,830,
resulting from the excess of the purchase price over the fair value of net
assets acquired in business combinations. During fiscal 2002, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets", which establishes new accounting and reporting
standards for purchase business combinations and goodwill. As provided by SFAS
No. 142, the Company ceased amortizing goodwill on July 1, 2001. During the
first half of fiscal 2002, the Company performed the transitional impairment
analysis of its goodwill as of the implementation date, following which the
Company concluded that there was no impairment of goodwill at July 1, 2001. The
Company completed the required initial annual impairment review of its goodwill
at June 30, 2002, which due to declining sales and profitability, resulted in a
goodwill impairment loss of $9,600,000.
The Company conducts a formal impairment test of goodwill on an annual
basis and between it's annual tests if an event occurs or circumstances change
that would more likely than not reduce the fair value of the Company below it's
carrying value. The annual impairment test did not indicate a further impairment
of goodwill at June 30,2003.
The results of these annual impairment reviews are highly dependent on
management's projection of future results of the Company and there can be no
assurance that at the time such reviews are completed a material impairment
charge will not be recorded. See Note 3 for additional disclosure.
OVERVIEW OF SIGNIFICANT FACTORS
The Company was not in compliance with certain financial covenants
associated with its credit facility at June 30, 2003. On July 28, 2003, the
Company announced that it failed to generate sufficient EBITDA during the fourth
quarter of fiscal 2003 to meet the cumulative EBITDA requirement for the 2003
year under its credit agreement with LaSalle Bank and that it would enter
negotiations with the bank for a waiver of the default and amended covenants. On
September 26, 2003, the Bank and the Company agreed to a further amendment of
the credit facility (the amended credit facility). Financial covenants in
conjunction with the amended credit facility include a reduction in the required
fixed coverage charge ratio and the elimination of the EBITDA covenant. The Bank
amended the borrowing base to include 80% of eligible accounts receivable plus
the lesser of 50% of eligible inventory or $7.0 million, subject to reserves as
established by the Bank. In addition, the outstanding loans under the amended
credit facility will bear interest at an annual interest rate of 1.00% plus the
Bank's prime rate. In conjunction with these amendments to the Company's credit
facility, the Bank extended the maturity on the Company's term loan on real
estate from August 1, 2003 to April 24, 2005. Amortization on the real estate
term loan shall continue on a five-year schedule with equal monthly payments of
$49,685. The real estate term loan will bear interest at an annual interest rate
of 1.00% plus the Bank's prime rate. The Company also received a waiver from the
Bank for its covenant violations pertaining to its EBITDA covenant, which the
Company was in default of on June 30, 2003.
Also on July 28th, 2003 the Company announced an immediate workforce
reduction of 14 positions from its managerial and administrative staff and 5
positions from it's production group. This reduction, effective immediately in
July, resulted in severance pay of approximately $73,000, which was paid in the
first quarter of fiscal 2004. The reduction is expected to result in annual
pre-tax savings of approximately $900,000 in fiscal 2004, but realization of
such savings will depend on other factors affecting general and administrative
expense levels including medical insurance and product liability insurance
costs.
The results of operations for fiscal 2002 were affected by several unusual
items, which are discussed further below. During the first half of fiscal 2002
the Company transferred production of its B&F line of disposable homecare
products to its St. Louis manufacturing facility. Inefficiencies associated with
the transfer significantly reduced gross margins. As a result of the Company's
annual impairment analysis of goodwill, the Company recorded a $9.6 million
goodwill impairment charge in the fourth quarter of fiscal 2002. The goodwill
impairment charge was primarily attributable to the declining results in the
disposable home care products line. In addition, during the fourth quarter the
Company recorded a pre-tax charge of $3.2 million to increase its reserve for
slow-moving and obsolete inventory. During the fourth quarter of fiscal
14
2002, a detailed review of inventory was performed. This review indicated that
due to changes in product mix, other manufacturing changes to the Company's
products, and declines in sales levels, a large number of component parts were
deemed to be obsolete.
The results of operations for fiscal 2001 were affected by several unusual
items, which are discussed further below. On July 31, 2000, the Company reached
an agreement with District No. 9 of the International Association of Machinist
and Aerospace Workers. The strike had adversely affected shipments, revenue and
income in the first quarter of fiscal 2001. Past due backlog increased while
orders and shipments were missed. Additionally, the Company continued to benefit
from the 15% workforce reduction initiated in the second quarter of fiscal 2000.
Results for fiscal 2001 also benefited from the elimination of the valuation
allowance for $0.3 million in state net operating loss carryforwards. This
valuation allowance was previously established for the carryforwards due to
uncertainty as to their eventual utilization.
The results of operations for fiscal 2000 were affected by several
unusual items, which are discussed further below. In the first quarter of fiscal
2000 the Company recorded a $0.4 million charge for legal costs associated with
defending product liability litigation. In addition, due to the resignation of
the Company's President, Chief Executive Officer and Director, Uma Nandan
Aggarwal on July 28, 1999, the Company recorded a $0.2 million charge for
severance costs. In the second quarter the Company recorded a $0.2 million
charge to operations for severance and related expenses to cover the cost of the
previously announced 15% work force reduction estimated to yield $2.6 million
annualized savings in payroll and benefit costs. In the fourth quarter the
Company was impacted by a labor strike at the Company's St. Louis facility that
was initiated on June 1, 2000 and settled on July 31, 2000. The strike adversely
affected shipments, revenue and income in the quarter. Past due backlog
increased while orders and shipments were missed. Additionally, in the fourth
quarter the Company took a $0.9 million charge to provide for excess and slow
moving inventory purchased in prior years, recorded a $0.2 million charge
related to the resolution of a vendor contract entered into in a prior year, and
recorded an additional $.1 million charge related to product liability legal
expenses.
13
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, 2003, 2002, 2001,
and
2000.2001.
Dollars in thousands
Year ended JuneYEAR ENDED
JUNE 30, 2002
----------------------------------
Net2003
--------------------
NET % of Total
Sales Net Sales
------------- -------------OF TOTAL
SALES NET SALES
------- ----------
DOLLARS IN THOUSANDS
Respiratory care products $ 16,855 27.9%products................................... $16,385 26.9%
Medical gas equipment 33,401 55.3%equipment....................................... 34,497 56.7%
Emergency medical products 10,159 16.8%
------------- -------------
Total $ 60,415products.................................. 9,981 16.4%
------- ------
Total....................................................... $60,863 100.0%
============= ==================== ======
Year ended JuneYEAR ENDED
JUNE 30, 2001
----------------------------------
Net2002
--------------------
NET % of Total
Sales Net Sales
------------- -------------OF TOTAL
SALES NET SALES
------- ----------
Respiratory care products $ 18,042 27.8%products................................... $16,855 27.9%
Medical gas equipment 36,916 56.9%equipment....................................... 33,401 55.3%
Emergency medical products 9,970 15.3%
------------- -------------
Total $ 64,928products.................................. 10,159 16.8%
------- ------
Total....................................................... $60,415 100.0%
============= ==================== ======
Year ended JuneYEAR ENDED
JUNE 30, 2000
----------------------------------
Net2001
--------------------
NET % of Total
Sales Net Sales
------------- -------------OF TOTAL
SALES NET SALES
------- ----------
Respiratory care products $ 19,550 29.6%products................................... $18,042 27.8%
Medical gas equipment 35,406 53.7%equipment....................................... 36,916 56.9%
Emergency medical products 11,039 16.7%
------------- -------------
Total $ 65,995products.................................. 9,970 15.3%
------- ------
Total....................................................... $64,928 100.0%
============= ==================== ======
1415
The following table sets forth, for the fiscal periods indicated, the
percentage of net sales represented by the various income and expense categories
reflected in the Company's consolidated statement of operations.
Year ended JuneYEAR ENDED JUNE 30,
---------------------
2003 2002 2001
2000
- -------------------------------------------------------- ------------- -------------- --------------------- ----- -----
Net salessales................................................... 100.0% 100.0% 100.0%
Cost of salessales............................................... 76.9 82.8 74.3
76.5
------------- -------------- --------------------- ----- -----
Gross profitprofit................................................ 23.1 17.2 25.7 23.5
Selling, general and administrative expensesexpenses................ 22.3 21.1 22.4 24.4
Provision for product recallrecall................................ -- -- 0.1
--
Impairment of goodwillgoodwill...................................... -- 15.9 --
--
------------- -------------- --------------------- ----- -----
Income (loss) from operationsoperations............................... 0.8 (19.8) 3.2
(0.9)
Interest expenseexpense............................................ 1.4 1.7 2.4
2.5
Other, netnet.................................................. 0.0 0.0 0.1
0.2
------------- -------------- --------------------- ----- -----
Income (loss) before provision (benefit) for income taxestaxes... (0.6) (21.5) 0.7 (3.6)
Provision (benefit) for income taxestaxes........................ (0.3) (2.1) 0.3
(1.1)
------------- -------------- --------------------- ----- -----
Net income (loss)........................................... (0.3)% (19.4)% 0.4%
(2.5)%
============= ============== ===================== ===== =====
FISCAL 2003 COMPARED TO FISCAL 2002
Net sales for fiscal 2003 of $60.9 million were $0.5 million, or 0.8% more
than net sales of $60.4 million in fiscal 2002. The $0.5 million increase in
product sales is discussed below.
Respiratory care products sales in fiscal 2003 of $16.4 million were $0.5
million, or 3.0% less than sales of $16.9 million in the prior year. This
decline is the result of domestic market share losses with our B&F disposable
product line. In fiscal 2002 and in prior years, production delays with the
Company's vendor resulted in delayed shipments and customer service issues. The
Company moved production to its St. Louis facility in fiscal 2002 and these
delivery problems are now rectified.
Medical gas equipment sales of $34.5 million in fiscal 2003 were $1.1
million, or 3.3% above prior year levels of $33.4 million. The majority of this
increase came from international business. International business increased by
$0.9 million in fiscal 2003 from 2002 levels. International business is
dependent upon hospital construction projects and the development of medical
facilities in those regions in which the Company operates. Poor economic
conditions in those regions have slowed development and have resulted in lower
shipments to those regions for the preceding two years. Domestically, the
construction market was stronger in fiscal 2003 than in fiscal 2002, resulting
in higher shipments of the Company's products, and contributing to the remaining
increase in medical gas equipment sales.
Emergency medical product sales in fiscal 2003 of $10.0 million were $0.2
million or 2.0% less than fiscal 2002 sales of $10.2 million. This decrease is
attributable to a $0.2 million decrease in international shipments, almost all
attributable to our Japanese market, as we continued to experience negative
impacts of the aluminum oxygen regulator recall.
International sales, which are included in the product lines discussed
above, increased $0.8 million, or 8.2%, to $10.6 million in fiscal 2003 compared
to sales of $9.8 million in fiscal 2002. As discussed above, the Company's
international shipments are dependent on hospital construction projects and the
expansion of medical care in those regions. In fiscal 2003, international
shipments of medical gas equipment did increase by $0.9 million dollars. This
increase was partially offset by $0.1 million decrease in shipments to
international markets of emergency medical products and respiratory care
products. Poor economic conditions, which slow that development, have adversely
affected the Company's sales internationally over the past two years.
Gross profit in fiscal 2003 was $14.1 million, or 23.1% of sales, compared
to a gross profit of $10.4 million, or 17.2% of sales in fiscal 2002. As
discussed in the proceeding Overview section, fiscal 2002 gross profit was
16
adversely affected by a $3.2 million charge to reserve for excess and slow
moving inventory purchased in prior years. During the fourth quarter of fiscal
2002, a detailed review of inventory was performed in conjunction with the
Company's long-term product planning process. This review indicated that due to
changes in product mix, other manufacturing changes to the Company's products,
and declines in sales levels, a large number of component parts were deemed to
be obsolete. In addition, gross profit was adversely affected during fiscal 2002
by inefficiencies related to the transfer of the B&F line of disposable products
to St. Louis. This transfer of production was undertaken to improve customer
service and reduce manufacturing cost. In fiscal 2003 efficiencies in the B&F
line were improved, through automation and management initiatives. In 2003,
these improvements were offset by $0.2 million in higher cost for property and
casualty insurance, and a $0.7 million increase in health benefits. The Company
invested $3.7 million in capital expenditures during fiscal 2002 and $0.5
million in fiscal 2003 for manufacturing equipment, which is expected to further
decrease production costs and improve efficiencies for several product lines.
Selling, General, and Administrative ("SG&A") expenses for fiscal 2003 were
$13.6 million, an increase of $0.8 million over SG&A expenses of $12.8 million
in fiscal 2002. This increase is the result of two main factors. SG&A expenses
increased $0.6 million during fiscal 2003 due to an increase in expense for
property and casualty insurance. This increase is due to both the market
conditions for property and casualty insurance, and the Company's negative
experience resulting from the litigation associated with aluminum oxygen
regulators. An additional $0.2 million increase in SG&A expenses was the result
of increased health insurance expenses. Increases in health insurance cost
resulted from increases in the underlying cost of medical services and
utilization by Company employees.
As discussed in the preceding Overview section, financial results for
fiscal 2002 were adversely impacted by the write down of $9.6 million in
goodwill. During fiscal 2002, the Company adopted SFAS 142, which establishes
new accounting and reporting standards for purchase business combinations and
goodwill. As provided by SFAS 142, the Company ceased amortizing goodwill on
July 1, 2001. During the first half of fiscal 2002, the Company performed the
transitional impairment analysis of its goodwill as of the implementation date,
following which the Company concluded that there was no impairment of goodwill
at July 1, 2001. The Company completed the required annual impairment review of
its goodwill at June 30, 2002, which due to negative events and declining sales
and profitability, resulted in a goodwill impairment charge of $9.6 million. The
Company's fiscal 2003 annual impairment analysis showed that no further goodwill
impairment was required at June 30, 2003.
Interest expense decreased by $0.3 million, or 27.3%, to $0.8 million in
fiscal 2003 from $1.1 million in fiscal 2002. Interest expense has been reduced
due to reductions in debt and a reduction in interest rates.
The Company had a loss of $0.4 million before taxes for fiscal 2003,
compared to a loss of $13.0 million before taxes for fiscal 2002. The Company
recorded an income tax benefit of $0.2 million in fiscal 2003, compared to tax
benefit of $1.3 million in fiscal 2002. The 2002 tax benefit was negatively
impacted due to the non-deductibility of the goodwill impairment charge for
federal income tax purposes. For further discussion of the Company's income
taxes please refer to the "Notes to Consolidated Financial Statements" section
included in this Form 10-K.
Net loss in fiscal 2003 was $0.2 million, or $0.02 per basic and diluted
earnings per share, a decrease of $11.5 million from net loss of $11.7 million,
or $1.50 per basic and diluted earnings per share in fiscal 2002. The weighted
number of shares used in the calculation of the basic diluted earnings per share
was 7,813,932 in fiscal 2003 and 7,809,266 in fiscal 2002.
FISCAL 2002 COMPARED TO FISCAL 2001
Net sales for fiscal 2002 of $60.4 million were $4.5 million, or 6.9% less
than net sales of $64.9 million in fiscal 2001. The $4.5 million decline in
product sales is discussed below.
Respiratory care products sales in fiscal 2002 of $16.9 million were $1.1
million, or 6.1% less than sales of $18.0 million in the prior year. This
decline in sales is the result of market share losses from continued production
delays in the production of our B&F disposable products which resulted in
delayed shipments and
17
other customer service issues. These difficulties have led the Company to move
production of this product to the Company's St. Louis facility during fiscal
2002 to improve service levels and reduce production cost.
Medical gas equipment sales of $33.4 million in fiscal 2002 were $3.5
million, or 9.5% below prior year levels of $36.9 million. The majority of this
decline is due to a drop in international shipments from fiscal 2001 to fiscal
2002. International business is dependent upon hospital construction projects
and the development of medical facilities in those regions in which the Company
operates. Poor economic conditions in those regions have slowed development and
have resulted in lower shipments to those regions.
Emergency medical product sales in fiscal 2002 of $10.2 million were $0.2
million, or 2.0% higher than fiscal 2001 sales of $10.0 million. Domestically,
Emergencyemergency medical product sales increased by approximately $0.5 million,
primarily on the strength of orders from the Defense Department following
September 11th. The domestic increase was offset by a $0.3 million decrease in
international shipments, almost all attributable to our Japanese market, as we
continued to experience negative impacts of the oxygen regulator recall.
International sales, which are included in the product lines discussed
above, decreased $3.9 million, or 28.5%, to $9.8 million in fiscal 2002 compared
to sales of $13.7 million in fiscal 2001. International sales declined in every
region of the world. As discussed above, the Company's international shipments
are dependent on hospital construction projects and the expansion of medical
care in those regions. Poor economic conditions, which slowsslow that development,
have adversely affected the Company's sales internationally.
15
Gross profit in fiscal 2002 was $10.4 million, or 17.2% of sales, compared
to a gross profit of $16.7 million, or 25.7% of sales in fiscal 2001. As
discussed in the proceeding Overview section, fiscal 2002 gross profit was
adversely effectedaffected by a $3.2 million charge to write offreserve for excess and slow
moving inventory purchased in prior years. During the fourth quarter of fiscal
2002, a detailed review of inventory was performed in conjunction with the
Company's long-term product planning process. This review indicated that due to
changes in product mix, other manufacturing changes to the Company's products,
and declines in sales levels, a large number of component parts were deemed to
be obsolete. In addition, gross profit was adversely effectedaffected during fiscal 2002
by inefficiencies related to the transfer of the B&F line of disposable products
to St. Louis. This transfer of production was undertaken to improve customer
service and reduce manufacturing cost. The Company is continuing its efforts to
improve efficiencies. The Company invested $3.7 million in capital expenditures
during fiscal 2002 for manufacturing equipment, which is expected to decrease
production costs and improve efficiencies for several product lines.
Selling, General, and Administrative ("SG&A") expenses for fiscal 2002 were
$12.8 million, a decrease of $1.8 million over SG&A expenses of $14.6 million in
fiscal 2001. This decrease is the result of several factors. First, the adoption
of Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill
and Other Intangible Assets" in fiscal 2002 resulted in the elimination of
approximately $0.8 million of goodwill amortization for the Company's fiscal
2002 year. SG&A expenses also decreased during fiscal 2002 due to an
approximately $0.7 million decrease in selling expenses resulting from decreases
in sales commissions, reduced travel expenses, and the elimination of expenses
associated with an independent sales representative group. An additional $0.3
million reduction in SG&A expenses was the result of computer equipment and
software which became fully amortized during fiscal 2002.
As discussed in the proceedingpreceding Overview section, financial results for
fiscal 2002 were adversely impacted by the write down of $9.6 million in
goodwill. During fiscal 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No.SFAS 142, "Goodwill and Other Intangible Assets", which establishes
new accounting and reporting standards for purchase business combinations and
goodwill. As provided by SFAS 142, the Company ceased amortizing goodwill on
July 1, 2001. During the first half of fiscal 2002, the Company performed the
transitional impairment analysis of its goodwill as of the implementation date,
following which the Company concluded that there was no impairment of goodwill
at July 1, 2001. The Company recently completed the required annual impairment review of
its goodwill at June 30, 2002, which due to
recent negative events and declining sales
and profitability, resulted in a goodwill impairment charge of $9.6 million.
Interest expense decreased by $0.4 million, or 26.7%, to $1.1 million in
fiscal 2002 from $1.5 million in fiscal 2001. Interest expense has been reduced
due to reductions in debt and a reduction in interest rates.
18
The Company had a loss of $13.0 million before taxes for fiscal 2002,
compared to income before taxes of $0.4 million in fiscal 2001. The Company
recorded an income tax benefit of $1.3 million in fiscal 2002, compared to tax
expense of $0.2 million in fiscal 2001. The 2002 tax benefit was negatively
impacted due to the non-deductibility of the goodwill impairment charge for
federal income tax purposes. Results for fiscal 2001 benefited from the release
of a valuation analysis forreserves of $0.3 million in state net operating loss
carryforwards.million. This valuation allowance was previously
established for the
carryforwardsstate net operating loss carry forwards due to uncertainty as to
their eventual utilization. For further discussion of the Company's income taxes
please refer to the "Notes to Consolidated Financial Statements" section
included in this Form 10-K.
Net loss in fiscal 2002 was $11.7 million, or $1.50 per basic and diluted
earnings per share, a decrease of $11.9 million from net income of $0.2 million,
or $0.03 per basic and diluted earnings per share in fiscal 2001. 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 earnings per share was 7,809,266 in fiscal 2002 and
8,125,699 in fiscal 2001.
16
FISCAL 2001 COMPARED TO FISCAL 2000
Net sales for fiscal 2001 of $65.0 million were $1.0 million, or 1.6%
less than net sales of $66.0 million in fiscal 2000. The $1.0 million decline in
product sales is discussed below.
Respiratory care product sales in fiscal 2001 of $18.0 million were
$1.6 million, or 8.2%, less than sales of $19.6 million in the prior year. The
majority of this decline can be attributed to the delays we have experienced in
our B & F disposable production.
Medical gas equipment sales of $37.0 million in fiscal 2001 were $1.6
million, or 4.5%, above prior year sales of $35.4 million. Medical gas equipment
sales experienced a $2.0 million increase resulting from growth achieved with
our vacuum regulator line. The intermittent mini-vacutron was introduced in the
second half of fiscal 2000. It was the final unit needed to complete the full
offering for the mini-vacutron line. This increase is offset by a $0.5 million
decline in construction products resulting from the continued decline in the
hospital construction market.
Emergency medical product sales in fiscal 2001 of $10.0 million were
$1.0 million, or 9.1%, less than fiscal 2000 sales of $11.0 million. The decline
in emergency medical product sales is a result of higher sales of oxygen
regulators during fiscal 2000 as a result of a trade-in program offered in
connection with the LSP regulator recall. These sales did not recur in fiscal
2001.
International sales, which are included in the product lines discussed
above increased $1.1 million, or 11.3%, to $13.7 million in fiscal 2001 compared
to sales of $12.6 million in fiscal 2000. Export sales are affected by
international economic conditions and the relative value of foreign currencies.
Gross profit in fiscal 2001 was $16.7 million, or 25.7% of net sales,
compared to a gross profit of $15.5 million, or 23.5% of net sales in fiscal
2000. Fiscal 2000 gross profit was adversely effected by a $0.9 million charge
to write off excess and slow moving inventory purchased in prior years, and a
$0.2 million charge related to the resolution of a vendor contract entered into
in a prior year.
Selling, General and Administrative ("SG&A") expenses for fiscal 2001
were $14.6 million, a decrease of $1.5 million over SG&A expenses of $16.1
million in fiscal 2000. The decrease in fiscal 2001 SG&A costs can be attributed
to cost reduction efforts initiated during the second quarter of fiscal 2000,
primarily the 15% salary staff reduction. As a percentage of net sales, fiscal
2001 SG&A expenses were 22.4% compared to 24.4% in fiscal 2000.
Interest expense decreased $0.2 million, or 10.5%, to $1.5 million in
fiscal 2001 from $1.7 million in fiscal 2000. Interest expense has been reduced
principally due to a reduction in interest rates.
The Company had income before taxes of $0.4 million in fiscal 2001,
compared to a loss before taxes of $2.4 million in fiscal 2000. The Company
recorded income tax expense of $0.2 million in fiscal 2001 compared to a benefit
for income taxes of $0.7 million in fiscal 2000. The fiscal 2001 income tax
provision benefited from the release of the valuation allowance for $0.3 million
in state net operating loss carryforwards. This valuation allowance was
previously established for the carryforwards due to uncertainty as to their
eventual utilization. For further discussion of the Company's income taxes
please refer to the "Notes to Consolidated Financial Statements" section
included in this Form 10-K.
Net income in fiscal 2001 was $0.2 million, or $0.03 per diluted share,
an improvement of $1.9 million from the net loss of $1.7 million, or $0.22 per
diluted share, in fiscal 2000. 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 8,125,699 in fiscal 2001 and 7,806,682 in fiscal 2000.
17
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information concerning Allied's
financial condition at June 30:
Dollars in thousandsDOLLARS IN THOUSANDS 2003 2002 2001
2000- -------------------- ---- ---- ----------- ------- -------
Cash and& cash equivalentsequivalents................................. $ 12 $ 1 $ 20
$568
Working Capital $9,371Capital......................................... $ 9,445 $ 9,371 $20,682
$20,261
Total DebtDebt.............................................. $10,022 $12,121 $12,188
$14,073
Current RatioRatio........................................... 1.48:1 1.67:1 3.44:1 3.55:1
The Company's working capital was $9.5 million at June 30, 2003 compared to
$9.4 million at June 30, 2002. Inventory declined by $0.9 million as a result of
the Company's inventory reduction programs. Accounts receivable decreased to
$7.8 million at June 30, 2003, down $1.0 million from $8.8 million at June 30,
2002. This decrease in accounts receivable is a result of improvements in
collection performance. Accounts receivable as measured in days sales
outstanding ("DSO") decreased to 48 DSO from 51 DSO at June 30, 2002. Income
taxes receivable was reduced by $0.4 million as the Company received a federal
tax refund resulting from the carry back of the fiscal 2002 loss of $0.8 million
which was offset by the $0.4 million receivable established for the carry back
of the fiscal 2003 loss. The current deferred income tax asset was reduced by
$0.7 million and the current deferred tax liability was increased by $0.4
million. The net change in current deferred income taxes, $1.1 million, is a
result of the disposal of slow-moving and obsolete inventory during fiscal 2003
which had been reserved during fiscal 2002. The disposal of inventory generated
net operating loss carry forwards which are presented as long-term deferred tax
assets at June 30, 2003. Accrued liabilities increased by $0.3 million,
reflecting the timing of customer orders and payments. The working capital
reductions are partially offset by the following changes in working capital
during fiscal 2003. Accounts payable decreased by $1.2 million during fiscal
2003, as a result of decreased purchases during the fourth quarter of the fiscal
year from the Company's inventory reduction programs. The current portion of
long-term debt decreased by $2.6 million reflecting the reduction in the
Company's revolver debt.
The Company's working capital was $9.4 million at June 30, 2002 compared to
$20.7 million at June 30, 2001. The decrease in working capital is primarily due
to the classification of $7.1 million of revolving debt as a current liability
in fiscal 2002. Due to provisions in the Company's new credit agreement which
require a lock-box agreement whereby remittances from the Company's customers
automatically reduce the debt outstanding and the inclusion of a subjective
"material adverse effect" clause in the agreement, the Company is required to
classify amounts outstanding under its revolving debt as a current liability.
Inventory declined by $3.9 million, primarily as a result of a $3.2 million
increase to the Company's reserve for slow-moving and obsolete inventory. During
the fourth quarter of fiscal 2002, the Company implemented a detailed review of
inventory. This review indicated that due to changes in product mix, other
manufacturing changes to the Company's products, and declines in sales levels, a
large number of components were deemed to be obsolete. Inventory reduction
programs did result in an additional $0.7 million reduction in inventory.
Accounts
19
receivable decreased to $8.5$8.8 million at June 30, 2002, down $2.9$2.6 million from
$11.4 million at June 30, 2001. This decrease in accounts receivable is a result
of decreased sales and an improvement in collection performance. Accounts
receivable as measured in days sales outstanding ("DSO")DSO decreased to 51 DSO at June 30, 2002 from 65 DSO
at June 30, 2001. Customer deposits increased by $0.3 million during the year.
These working capital reductions are partially offset by the following changes
in working capital
improvements during fiscal 2002. Operating losses generated in fiscal 2002
led to a $0.7 million income tax receivable at June 30, 2002, representing the
federal income tax receivable resulting from the carry back of the fiscal 2002
loss, excluding the impact of the impairment of goodwill. Accounts payable
decreased to $3.4 million at June 30, 2002, down $0.4 million from $3.8 million
at June 30, 2001. Accrued liabilities decreased by $0.7 million due to decreases
in accrued income tax.
The Company's working capital was $20.7 million atnet increase in cash for the fiscal years ended June 30, 2001
compared to $20.3 million at June 30, 2000. Accounts receivable increased to
$11.4 million at June 30, 2001, up $0.9 million from $10.5 million at June 30,
2000. The increase in accounts receivable is a result of increased sales in the
fourth quarter of fiscal 2001 compared to the fourth quarter of fiscal 2000.
Accounts receivable as measured in DSO decreased to 65 DSO at June 30, 2001 from
68 DSO at June 30, 2000, as collection efforts have improved the average time
that is needed to collect from a customer. Collection efforts at the end of
fiscal 2000 were hampered by the temporary reassignment of the collection staff
to production and shipping assignments during the work stoppage by the union
work force at the St. Louis production facility. Inventories increased to $17.1
million at June 30, 2001 from $16.7 million at June 30, 2000. Programs and
policies were implemented during fiscal 2001 to reduce inventories, however, the
effect of these programs have not been realized at June 30, 2001. Accounts
payable decreased to $3.8 million at June 30, 2001, down $0.3 million from $4.1
million at June 30, 2000. Accrued liabilities increased by $0.6 million due to
increases in accrued income tax and accrued compensation expense.2003 was $0.01
million. The net decrease in cash for the fiscal years ended June 30, 2002, 2001, and
20002001 was $0.02 million, $0.5 million, and $0.02$0.5 million, respectively. Net cash provided by
operating activities was $2.6 million, $3.8 million, $2.1 million, and $3.4$2.1 million for the
same periods.
18
Cash flows provided by operating activities for the fiscal year ended June
30, 2003 consisted of a net loss $0.2 million, which was offset by $1.2 million
in non-cash charges to operations for amortization and depreciation. Changes in
working capital and deferred tax accounts favorably impacted cash flow from
operations by $1.6 million. Cash flow was used to reduce debt and capital lease
obligations by $2.1 million and make capital expenditures of $0.5 million.
Cash flows provided by operating activities for the fiscal year ended June
30, 2002 consisted of a net loss of $11.7 million, which was offset by $1.4
million in non-cash charges to operations for amortization and depreciation. The
net loss was also offset by a $9.6 million non-cash charge to operations for the
impairment of goodwill. Changes in the provision for product recall resulted in
a $0.1 million reduction. Changes in working capital and deferred tax accounts
favorably impacted cash flow from operations by $4.7 million. Cash flow was used
to reduce debt and capital lease obligations by $0.1 million and make capital
expenditures of $3.7 million.
Cash flows provided by operating activities for the fiscal year ended June
30, 2001 consisted of a net income of $0.2 million, and $3.0 million in non-cash
charges to operations for amortization and depreciation. Changes in working
capital and deferred tax accounts unfavorably impacted cash flow from operations
by $1.1 million. Cash flow was used to reduce debt and capital lease obligations
by $1.9 million and make capital expenditures of $0.8 million.
Cash flows provided by operating activities for the fiscal year endedAt June 30, 2000 consisted of a net loss of $1.7 million, which was offset by $3.3
million in non-cash charges to operations for amortization and depreciation. The
provision for product recall was reduced and used $0.4 million. Changes in
working capital and deferred tax accounts favorably impacted cash flow from
operations by $2.2 million. Cash flow was used to reduce debt and2003 the Company had aggregate indebtedness, including capital
lease obligations, by $3.2of $10.0 million, including $7.9 million of short-term debt
and make capital expenditures$2.1 million of $0.3 million.long-term debt. At June 30, 2002 the Company had aggregate
indebtedness including capital lease obligations of $12.1 million, including
$8.0 million of short-term debt and $4.1 million of long-term debt.
At June 30, 2001 the Company
had aggregate indebtedness including capital lease obligations of $12.2 million,
including $1.2 million of short-term debt and $11.0 million of long-term debt.
On August 7, 1998, the Company obtained aborrowed approximately $5.0 million mortgagefrom a
bank. The real estate term loan on
its principal facility inis collateralized by the Company's St. Louis
Missouri with LaSalle National Bank
Association (the "Bank"). Under terms of this agreement the Company makesfacility. The real estate term loan requires monthly principal and interest
payments of $0.06 million, with a balloonfinal payment inof all principal and interest
remaining unpaid due at maturity on August 1, 2003. Interest is fixed at 7.75%
annum. Proceeds offrom the loanborrowing were used to reduce the obligation under the revolving
credit agreement with Foothill Capital Corporation.pay down existing debt, which
bore a higher interest rate. The mortgage loan carries a
fixed rate of interest of 7.75%, compared to the then current rate of 9.0% under
the revolving credit agreement.
On September 8, 1998, the Company's credit facilities with Foothill
Capital Corporation (Foothill) were amended. The Company's existing term loan was eliminatedamended on March 24 and replaced with an amended revolving credit facility. As
amended,September
1, 1999 resulting in changes to certain debt covenants for which the revolving credit facility remained at $25.0 million. The interest
rate on the facilityCompany was
reduced from the floating reference rate (6.75%in compliance at June 30, 2001) plus 0.50%2003 and 2002. The term loan was further amended
subsequent to the floating reference rate plus 0.25%. The reference
rate as defined in the credit agreement, was 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 provided the Company
with a rate of LIBOR +2.5%. Amounts outstanding under this revolving credit
facility, which expiresyear end on January 6, 2003, totaled $7.5 million at June 30,
2001. At June 30, 2001, $5.0 million was available under the revolving facilitySeptember 26, 2003. See Note 15 for additional
borrowings based on working capital requirements under the terms
of the agreement.information.
On April 24, 2002, the Company entered into a new credit facility
arrangement with theLaSalle Bank resulting in the payoff of all amounts due
Foothill.National Association (the "Bank"). The new credit
facility provides for total borrowings up to $19.0 million; consisting of up to
$15.0 million through a revolving credit facility and up to $4.0 million under a
term loan. The term loan may be drawn against for capital expenditures during
the first six months of the term of the credit facility. Repayment of the term
loan begins on October 24, 2002, with principal and interest due in equal
monthly installments over five years (subject to payment in full at the maturity
of the credit facility if that facility is not renewed or extended). The new
credit facility is collateralized by substantially all of the assets of the
Company. The maturity date of the new facility is April 24, 2005.
1920
The revolving credit facility provides for a borrowing base of 80% of
eligible accounts receivable plus the lesser of 50% of eligible inventory or
$8.0 million, subject to reserves as established by the Bank. At June 30, 2002,
$4.82003,
$8.0 million was available under the revolving credit facility for additional
borrowingsborrowings. The new credit facility calls for a 0.25% commitment fee payable
quarterly based on working capital requirements under the termsaverage daily unused portion of the agreement.revolving credit
facility. The revolving credit facility also provides for a commitment guaranty
of up to $5.0 million for letters of credit and requires a per annum fee of
1.50% on outstanding letters of credit. At June 30, 2003 and 2002, the Company
had no letters of credit outstanding. Any outstanding letters of credit
decreases the amount available for borrowing under the revolving credit
facility.
The entire credit facility accrues interest at the floating reference rate,
which is the greater of the Bank's prime rate (plus 0.25% if the Company's fixed
charge coverage ratio falls below 1.25 to 1.00) or the Federal Funds rate plus
0.5%. The floating reference rate was 4.00% at June 30, 2003 and 4.75% at June
30, 2002.2002, respectively. The credit facility also provides the Company with a
rate of LIBOR plus 2.25%, at the Company's option. The optional LIBOR rate may
increase or decrease from LIBOR plus 2.00% to LIBOR plus 2.50% based on the
Company's fixed charge coverage ratio. The 90-day LIBOR rate was 1.90% at June
30, 2002. At June 30, 2002, $5.6 million of the revolving credit facility was
subject to the LIBOR provision. At June 30, 2003, none of the revolving credit
facility is subject to the LIBOR provision. The Company also has the option to
swap the interest rate applicable to the term loan for a fixed rate.
On September 26, 2002, the Bank further amended the Company's credit
facility (the amended credit facility). Under the terms of the amended credit
facility, the interest rate on each loan outstanding at an Event of Default, as
defined in the amended credit facility, will bear interest at the rate of 2.00%
per annum in excess of the interest rate otherwise payable thereon and interest
payments will be payable on demand. The Bank amended various financial covenants
in conjunction with the amended credit facility to include a quarterly fixed
coverage charge ratio and EBITDA ratio through June 30, 2003, which are adjusted
to measurement on an annual basis beginning on July 1, 2003. In addition, the
outstanding loans under the amended credit facility will bear interest at an
annual interest rate of 0.75% plus the Bank's prime rate and the Company shall
not have the option to elect a LIBOR rate of interest for its outstanding
borrowings. The Company's per annum fee on any outstanding letters of credit
under the amended credit facility will be 2.50%. The borrowing period under the
term loan for capital expenditures, which will represent 80% of the purchase
price of the related equipment, has been extended to eight months from the date
of the original credit facility. Additionally, the terms of the amended credit
facility restrict the payment of dividends on the Company's common stock.
The new credit facility requires a lockbox arrangement, which providesprovide for all
receipts to be swept daily to reduce borrowings outstanding under the credit
facility. This arrangement, combined with the existence of a Material Adverse
Effect (MAE) clause in the new credit facility, this arrangement causescause the revolving credit
facility to be classified as a current liability, per guidance in the FASB's
Emerging Issues Task Force StatementIssue 95-22, "Balance Sheet Classification of
Borrowings Outstanding under Revolving Credit Agreements that Include Both a
Subjective Acceleration Clause and a Lock-Box Arrangement"(EITF 95-22).Arrangement." However, the Company
does not expect to repay, or be required to repay, within one year, the balance
of the revolving credit facility classified as a current liability. The MAE
clause, which is a typical requirement in commercial credit agreements, allows
the lender to require the loan to become due if it determines there has been a
material adverse effect on the Company's operations, business, properties,
assets, liabilities, condition or prospects. The classification of the revolving
credit facility as a current liability is a result only of the combination of
the two aforementioned factors: the lockbox arrangement and the MAE clause.
However, the revolving credit facility does not expire or have a maturity date
within one year, but rather has a final expiration date of April 25, 2005.
Additionally, the Bank has not notified the Company of any indication of a MAE
at June 30, 2002.2003.
Under the terms of the newamended credit facility, the Company is required to
be in compliance with certain financial covenants pertaining to stockholders'
equity, capital expenditures and net income. At June 30, 2002,2003, the Company was
in violation of its EBITDA (net income after taxes, plus interest expense,
income tax expense, and depreciation and amortization) covenant and its fixed
charge coverage ratio covenant, which were
waived by the bank in a letter dated on September 25, 2002.26, 2003. On September 26,
2003, the Bank further amended the Company's credit facility (the amended credit
facility). The Bank amended various financial covenants in conjunction with the
amended credit facility including a reduction in the required fixed coverage
charge ratio and the elimination of the
21
EBITDA covenant. The Bank amended the borrowing base to include 80% of eligible
accounts receivable plus the lesser of 50% of eligible inventory or $7.0
million, subject to reserves as established by the Bank. In addition, the
outstanding loans under the amended credit facility will bear interest at an
annual interest rate of 1.00% plus the Bank's prime rate. In conjunction with
these amendments to the Company's credit facility, the Bank extended the
maturity on the Company's term loan on real estate from August 1, 2003 to April
24, 2005. Amortization on the real estate term loan shall continue on a
five-year schedule with equal monthly payments of $49,685. The real estate term
loan will bear interest at an annual interest rate of 1.00% plus the Bank's
prime rate. The Company also received a waiver from the Bank for its covenant
violations pertaining to its EBITDA covenant, which the Company was in default
of on June 30, 2003. Additionally, the terms of the new credit facility restrict
the Company from the payment of dividends on any class of its stock.
Proceeds of $8.0 million received under the new credit facility were
utilized to repay the entire amount outstanding under the Company's previous
revolving credit facility. The previous credit facility which was thereby terminated.
20
The following table summarizes the Company's cash obligations at June 30,
2002:2003:
Payments Due by Period
Less thanPAYMENT DUE BY PERIOD
---------------------------------------
LESS THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 4-5 After 5
Contractual Obligations Total 1 year years years YearsYEARS
- --------------------------------------------------------------------------------------------------------------------------------------- ----------- ---------- ------------
Long-Term Debt $11,928,137 $645,778 $11,282,359 (1)Debt................................ $10,021,624 $1,205,476 $ -- $ --8,816,148(1)
Capital Lease Obligations 192,425 192,425Obligations..................... -- -- --
Operating Leases 466,603 248,705 173,457 44,441Leases.............................. 633,319 247,047 386,272
Unconditional Purchase Obligations -- --Obligations............ -- -- --
Other Long-Term ObligationsObligations................... -- -- --
-- ------------- ---------- ------------
Total Contractual Cash Obligations -- -- -- -- --Obligations............ $10,654,943 $1,452,523 $ 9,202,420
=========== ========== ============
- ---------------
(1) Assumes the Company's revolving credit agreement currently classified as a
current liability subject to the provisions of EITF 95-22 will be paid at
maturity.
Capital expenditures, net of capital leases, were $0.5 million, $3.7
million $0.8
million and $0.3$0.8 million in fiscal 2003, 2002, 2001, and 2000,2001, respectively. The
Company believes that cash flows from operations and available borrowings under
its credit facilities will be sufficient to finance fixed payments and planned
capital expenditures of $1.0 million in 2003.2004. Cash flows from operations may be
negatively impacted by decreases in sales, market conditions, and adverse
changes in working capital.
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 moderate seasonal
increases in net sales during its second and third fiscal quarters (October 1
through March 31) which in turn have 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.
22
The following table sets forth selected operating results for the eight
quarters ended June 30, 2002.2003. 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.
21
Dollars in thousands, except per share data
JuneTHREE MONTHS ENDED,
-----------------------------------------------------------------------------------------
JUNE 30, MarchMARCH 31, Dec.DEC. 31, Sept.SEPT. 30, JuneJUNE 30, MarchMARCH 31, Dec.DEC. 31, Sept.SEPT. 30,
Three months ended,2003 2003 2002 2002 2002 2002 2001 2001
2001 2001 2000 2000
- --------------------------------------------------------------------------------------------------------------------------------------- --------- -------- --------- -------- --------- -------- ---------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
Net salessales................. $14,327 $16,443 $14,852 $15,241 $15,683 $15,188 $15,398 $14,146
$16,556 $16,643 $16,709 $15,020
Gross profitprofit.............. 3,244 4,241 3,385 3,184 567 3,391 3,627 2,831
4,705 4,175 4,176 3,607
Income (loss) from
operationsoperations.............. (135) 818 (40) (140) (12,177) 325 454 (532)
1,014 598 418 (20)
Net income (loss)......... (106) 365 (176) (240) (11,347) 29 97 (510)
631 40 (90) (347)
Basic and diluted earnings
(1.44) -- 0.01 (0.07) 0.08 0.01 (0.01) (0.04)
(loss) per shareshare........ (0.01) 0.05 (0.02) (0.03) (1.44) -- 0.01 (0.07)
The results for the fourth quarter were effected by several unusual
items. As a result of the Company's annual impairment analysis of goodwill, the
Company recorded a $9.6 million goodwill impairment charge in the fourth quarter
of fiscal 2002. The goodwill impairment charge was primarily attributable to the
declining results in the disposable home care products line. In addition, during
the fourth quarter the Company recorded a pre-tax charge of $3.2 million to
increase its reserve for slow-moving and obsolete inventory. During the fourth
quarter of fiscal 2002, a detailed review of inventory was performed. This
review indicated that due to changes in product mix, other manufacturing changes
to the Company's products, and declines in sales levels, a large number of
component parts were deemed to be obsolete.
LITIGATION AND CONTINGENCIES
The Company becomes, from time to time, a party to personal injury
litigation arising out of incidents involving the use of its products. More
specifically, there have been a number of lawsuits filed against the Company
alleging that its aluminum oxygen pressure regulator, marketed under its Life
Support Products label, has caused fires that have led to personal injury. The
Company believes, based on preliminary findings, that its products did not cause
the fires. The Company intends to defend these claims in cooperation with its
insurers. Based on the progression of certain cases the Company recorded
additional charges to operations during fiscal 2001 for amounts estimated to be
payable by the Company under its self-insurance retention for legal costs
associated with defending these claims. The Company believes that any potential
judgments resulting from these claims over its self-insured retention will be
covered by the Company's product liability insurance.
In March through June 2000, the FDA conducted an inspection of the
Company's St. Louis facility and provided a written report, known as an "FDA
Form 483" or simply a "483," citing FDA observations concerning GMP compliance
and quality control issues applicable to demand valves, emergency ventilators,
circumcision clamps, and regulators. The Company provided a written response to
the FDA and in August 2000, the FDA issued a warning letter and requested that
the Company clarify and supplement its responses to the 483 observations. As a
result, the Company submitted to the FDA a written supplemental response and
defined actions to address the FDA concerns. The Company met with the FDA at
their Kansas City field office in March 2001 to discuss the responses and
actions. From October 27, 2001 to November 19, 2001 the FDA conducted a
follow-up inspection to the June 2000 inspection. On January 23, 2002, the FDA
released a copy of the establishment inspection report (EIR) for the October 27,
2001 to November 19, 2001 inspection and has indicated that the inspection is
closed. The Company intends to continue to conduct business in such a manner as
to avert any FDA action seeking to interrupt or suspend manufacturing or require
any recall or modification of products.
LSP OXYGEN REGULATOR RECALL
On February 4, 1999, Allied announced a voluntary 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 the voluntary recall in May 1997, under which it provided retrofit
kits to prevent 22
contaminants from entering the regulators. The Company has also
been testing regulator design with the help of the National
23
Aeronautical and Space Administration's White Sands National Laboratories. While
findings led the Company to believe the Company's products did not cause those
fires, there was 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
introduced new brass regulators and also offered a trade-in program to 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. The recall is complete and a final audit of the results thereof was
completed on December 22, 2000 by the FDA.
As of June 30, 2002 the Company has incurred $1.5 million
for costs associated with the recall and considers expenditures associated with
the recall to be complete.
CRITICAL ACCOUNTING POLICIES:
In preparing financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. The Company evaluates estimates and judgments on an
ongoing basis, including those related to bad debts, inventory valuations,
property, plant and equipment, intangible assets, income taxes, and
contingencies and litigation. Estimates and judgments are based on historical
experience and on various other factors that may be reasonable under the
circumstances. Actual results may differ from these estimates. The following
areas are considered to be the Company's most significant accounting policies:
Revenue recognition:
Revenue is recognized for all sales, including sales to agents and
distributors, at the time products are shipped and title has transferred to the
customer, provided that a purchase order has been received or a contract has
been executed, there are no uncertainties regarding customer acceptance, the
sales price has been fixed and determinable and collectibility is deemed
probable. The Company's standard shipping terms are FOB shipping point. Sales
discounts, returns and allowances are included in net sales, and the provision
for doubtful accounts is included in selling, general and administrative
expenses. Additionally, it is the Company's practice to include revenues
generated from freight billed to customers in net sales with corresponding
freight expense included in cost of sales in the consolidated statement of
operations.
Inventory reserve for obsolete and excess inventory:
Inventory is recorded net of a reserve for obsolete and excess
inventory which is determined based on an analysis of inventory items with no
usage in the preceding year and greater than one year's usage on hand. This
analysis considers those identified inventory items to determine, in
management's best estimate, if parts can be used beyond one year, if there are
alternate uses or at what values such parts can be disposed for. During the
fiscal year ended June 30, 2002, the Company implemented this detailed analysis
of inventory in conjunction with its long-term product planning process. This
review indicated that due to changes in product mix, other manufacturing changes
to the Company's products, and declines in sales, a large number of component
parts were deemed to be obsolete, resulting in a $3.2 million charge to increase
the Company's reserve for obsolete and excess inventory. At June 30, 2002 and
2001, inventory is recorded net of a reserve for obsolete and excess inventory
of $4.8 million and $2.6 million, respectively.
Accounts receivable allowance for doubtful accounts:
Accounts receivable are recorded net of an allowance for doubtful
accounts which is determined based on an analysis of past due accounts and
accounts placed with collection agencies. At June 30, 2002 and 2001, accounts
receivable is recorded net of an allowance for doubtful accounts of $0.5 million
and $0.6 million, respectively.
23
Goodwill:
At June 30, 2002 and 2001, the Company has goodwill of $15.6 million
and $25.6 million, resulting form the excess purchase price over the fair value
of net assets acquired in business combinations. During fiscal 2002, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets", which establishes new accounting and reporting
standards for purchase business combinations and goodwill. As provided by SFAS
142, the Company ceased amortizing goodwill on July 1, 2001. During the first
half of fiscal 2002, the Company performed a transitional impairment analysis of
its goodwill as of the implementation date, following which the Company
concluded that there was no impairment of goodwill at July 1, 2001. The Company
recently completed the required annual impairment review of its goodwill at June
30, 2002, which resulted in a goodwill impairment loss of $9.6 million. The
Company intends to perform an impairment review upon the completion of each
fiscal year. The results of these annual impairment reviews are highly dependent
on managements' projection of future results of the Company and there can be no
assurance that at the time such reviews are completed a material impairment
charge will not be recorded.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141 (SFAS 141), "Business Combinations" and Statement of Financial
Accounting Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets."
SFAS 141 requires that business combinations initiated subsequent to June 30,
2001, must be accounted for by using the purchase method of accounting. SFAS 142
supersedes Accounting Principles Board (APB) Opinion No. 17, "Intangible
Assets," however, the new statement will carry forward provisions in APB Opinion
No. 17 related to internally developed intangible assets. SFAS 142 requires that
companies discontinue the amortization of goodwill. Early adoption of SFAS 142
was allowed for those companies with fiscal years beginning after March 15,
2001. The Company adopted and applied SFAS 142 as of July 1, 2001, the beginning
of fiscal 2002. SFAS 142 further requires companies to test goodwill and other
indefinite lived intangible assets on an annual basis for impairment.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived
Assets", which supersedes Statement of Financial Accounting Standards No. 121
(SFAS 121), "Accounting for the Impairment of Long-Lived Assets to be Disposed
Of" and the accounting and reporting provisions of APB No. 30, "Reporting the
Results of Operations--ReportingOperations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a business. SFAS 144 provides a single
accounting model for long-lived assets to be disposed of. Although retaining
many of the fundamental recognition and measurement provisions of SFAS 121, the
new rules change the criteria to be met to classify an asset as held-for-sale.
The new rules also broaden the criteria regarding classification of a
discontinued operation. The Company is required to adoptadopted the provisions of SFAS 144 effective
July 1, 2002. Adoption of SFAS 144 isdid not expected to have a
material impact on the Company's results of operations, financial position or
cash flows.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145 (SFAS 145), "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," that supercedes
previous guidance for the reporting of gains and losses from extinguishment of
debt and accounting for leases, among other things. SFAS 145 requires that only
gains and losses from the extinguishment of debt that meet the requirements for
classification as "Extraordinary Items," as prescribed in Accounting Principles
Board Opinion No. 30, should be disclosed as such in the financial statements.
Previous guidance required all gains and losses from the extinguishment of debt
to be classified as "Extraordinary Items." This portion of SFAS 145 is effective
for fiscal years beginning after May 15, 2002, with restatement of prior periods
required. In addition, SFAS 145 amends Statement of Financial Accounting
Standards No. 13 (SFAS 13), "Accounting for Leases," as it relates to accounting
by a lessee for certain lease modifications. Under SFAS 13, if a capital lease
is modified in such a way that the change gives rise to a new agreement
classified as an operating lease, the assets and obligation are removed, a gain
or loss is recognized and the new lease is accounted for as an operating lease.
Under
24
SFAS 145, capital leases that are modified so the resulting lease agreement is
classified as an operating lease are to be accounted for under the
sale-leaseback provisions of Statement of Financial Accounting Standards No. 98
(SFAS 98), "Accounting for Leases." These provisions of SFAS 145 are effective
for transactions occurring after May 15, 2002. SFAS 145 will be applied as
required. Adoption of SFAS 145 is not expected to have a material impact on the
Company's results of operations, financial position or cash flows.
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 (SFAS 146), "Accounting for Costs Associated with Exit or Disposal
Activities" which addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost
was recognized at the date of an entity's commitment to an exit plan. The
provisions of SFAS 146 are effective for exit or disposal activities initiated
after December 31, 2002. Adoption of SFAS 146 has not had a material impact on
the Company's results of operations, financial position or cash flows.
In November 2002, the FASB issued Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". This interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The Company does not have any commitments that are within the scope
of FIN No. 45.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 (SFAS 148), "Accounting for Stock-Based Compensation --
Transition and Disclosure -- an amendment of FAS 123," which provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. Additionally, SFAS
148 amends the disclosure requirements of Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The provisions of SFAS 148 are
effective for financial statements issued for fiscal years ending after December
15, 2002 and for financial reports containing condensed financial statements for
interim periods beginning after December 15, 2002. Adoption of SFAS 148 did not
have a material impact on the Company's results of operations, financial
position or cash flows.
24
In January 2003, the FASB released FIN No. 46, "Consolidation of Variable
Interest Entities -- an Interpretation of ARB No. 51". The Interpretation
clarifies issues regarding the consolidation of entities which may have features
that make it unclear whether consolidation or equity method accounting is
appropriate. FIN 46 is generally effective in 2003. The Company is evaluating
FIN 46 to determine any potential impact on its financial reporting, but does
not anticipate any impact.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 (SFAS 150), "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity." SFAS 150 provides guidance on
distinguishing between liability and equity instruments and accounting for
instruments that have characteristics of both. SFAS 150 requires specific types
of freestanding financial instruments to be classified as liabilities including
mandatory redeemable financial instruments, obligations to repurchase the
issuer's equity shares by transferring assets and certain obligations to issue a
variable number of shares. The provisions of SFAS 150 are effective for
financial instruments entered into or modified after May 31, 2003. For all other
instruments, SFAS 150 is effective July 1, 2003. Adoption of SFAS 150 is not
expected to have a material impact on the Company's results of operations,
financial position or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At June 30, 2002,2003, the Company had $11.9$10.0 million in debt outstanding,
excluding capital leases, of which $3.5$3.1 million is a term loan with a fixed
interest rate of 7.75%. The remaining balance represents amounts outstanding
under the Company's revolving credit facility of $7.2$4.2 million and the Company's
capital expenditure loan for $1.2$2.7 million. The revolving credit facility and
capital expenditure loan bear an interest rate using the commercial bank's
"floating reference rate" or LIBOR as the basis, as defined in the loan
agreement, and therefore is subject to additional expense should there be an
increase in market interest rates. With respect to the Company's fixed-rate debt
outstanding at June 30, 2002,2003, a 10% increase in interest rates would have
resulted in approximately $0.02 million decrease in the market value of the debt
and a 10% decrease in interest rates would have resulted in approximately $0.02
increase in the fair value of the debt with respect to the Company's
variable-debt.
The Company had no holdings of derivative financial or commodity
instruments at June 30, 2002.2003. Allied Healthcare Products has international
sales, however these sales are denominated in U.S. dollars, mitigating foreign
exchange rate fluctuation risk.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following described consolidated financial statements of Allied
Healthcare Products, Inc. are included in response to this item:
Report of Independent Accountants.Auditors.
Consolidated Statement of Operations for the fiscal years ended June
30, 2003, 2002 2001 and 2000.2001.
Consolidated Balance Sheet for the fiscal years ended June 30, 20022003
and 2001.2002.
Consolidated Statement of Changes in Stockholders' Equity for the
fiscal years ended June 30, 2003, 2002 2001 and 2000.2001.
Consolidated Statement of Cash Flows for the fiscal years ended June
30, 2003, 2002 2001 and 2000.2001.
Notes to Consolidated Financial Statements.
Schedule of Valuation and Qualifying Accounts and Reserves for the
years ended June 30, 2003, 2002 2001, and 2000.2001.
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
2625
REPORT OF INDEPENDENT ACCOUNTANTS
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Allied Healthcare Products, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Allied Healthcare Products, Inc. and its subsidiaries at June 30,
20022003 and 2001,2002, and the results of their operations and their cash flows for each
of the three years in the period ended June 30, 2002,2003, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, 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 our opinion.
As discussed in Note 2 of the consolidated financial statements, the
Company changed its method of accounting for goodwill in 2002 to conform with
Statement of Financial Accounting Standards No. 142.
/s/ PRICEWATERHOUSECOOPERS LLP
- ---------------------------------------------------------
PricewaterhouseCoopers LLP
St. Louis, Missouri
September 26, 2002
272003
26
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended JuneYEAR ENDED JUNE 30,
----------------------------------------
2003 2002 2001
2000
- --------------------------------------------------------------------------------------------------------------------------------------------- ------------ -----------
Net salessales............................................ $60,863,358 $ 60,414,884 $ 64,927,678 $ 65,994,968$64,927,678
Cost of salessales........................................ 46,809,726 49,998,428 48,265,110
50,510,411
----------------------- --------------------- --------------------------------- ------------ -----------
Gross profitprofit......................................... 14,053,632 10,416,456 16,662,568 15,484,557
Selling, general and administrative expensesexpenses......... 13,550,592 12,786,409 14,572,963 16,096,687
Provision for product recallrecall......................... -- (39,567) 79,303
(17,600)
Impairment of goodwillgoodwill............................... -- 9,600,000 --
--
----------------------- --------------------- --------------------------------- ------------ -----------
Income (loss) from operationsoperations........................ 503,040 (11,930,386) 2,010,302
(594,530)
----------------------- --------------------- --------------------------------- ------------ -----------
Other expenses:
Interest expenseexpense................................... 830,838 1,054,092 1,530,481
1,664,477
Other, netnet......................................... 41,135 40,950 73,793
149,433
----------------------- --------------------- --------------------------------- ------------ -----------
871,973 1,095,042 1,604,274
1,813,910
----------------------- --------------------- --------------------------------- ------------ -----------
Income (loss) before provision (benefit) for income
taxestaxes.............................................. (368,933) (13,025,428) 406,028 (2,408,440)
Provision (benefit) for income taxestaxes................. (211,374) (1,294,420) 171,892
(694,963)
----------------------- --------------------- --------------------------------- ------------ -----------
Net income (loss).................................... $ (11,731,008)(157,559) $(11,731,008) $ 234,136
$ (1,713,477)
======================= ===================== ================================= ============ ===========
Basic and diluted income (loss) per share:
Income (loss) per shareshare............................ $ (0.02) $ (1.50) $ 0.03
$ (0.22)
======================= ===================== ================================= ============ ===========
Weighted average shares outstanding - Basic-- Basic......... 7,813,932 7,809,266 7,806,682
7,806,682
----------------------- --------------------- --------------------------------- ------------ -----------
Weighted average shares outstanding - Diluted-- Diluted....... 7,813,932 7,809,266 8,125,699
7,806,682
----------------------- --------------------- --------------------------------- ------------ -----------
See accompanying Notes to Consolidated Financial Statements
2827
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
JuneJUNE 30,
---------------------------
2003 2002
2001
- -------------------------------------------------------------------------------------------------------------------- ------------
ASSETS
Current assets:
Cash and cash equivalentsequivalents................................. $ 80012,016 $ 20,365800
Accounts receivable, net of allowance for doubtful
accounts of $475,000 and $450,000, and $605,714, respectively 8,524,187 11,395,224respectively........ 7,848,977 8,788,020
Inventories, netnet.......................................... 12,274,972 13,200,921 17,079,033
Deferred income taxestaxes..................................... -- 745,910 369,453
Income tax receivablereceivable..................................... 392,259 745,895 --
Other current assetsassets...................................... 149,995 163,510
292,596
---------------- ---------------------------- ------------
Total current assets 23,381,223 29,156,671
---------------- ----------------assets................................. 20,678,219 23,645,056
------------ ------------
Property, plant and equipment, netnet........................ 12,630,289 13,228,157 10,892,268
Deferred income taxestaxes..................................... 989,710 100,492
197,008
GoodwillGoodwill.................................................. 15,979,830 25,579,83015,979,830
Other assets, netnet......................................... 134,528 180,536
107,377
---------------- ---------------------------- ------------
Total assets $52,870,238 $65,933,154
================ ================assets......................................... $ 50,412,576 $ 53,134,071
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payablepayable.......................................... $ 3,426,8022,192,717 $ 3,843,0923,426,802
Current portion of long-term debtdebt......................... 5,409,304 7,985,406
1,169,044
Accrual for product recallDeferred income taxes..................................... 412,079 -- 146,181
Other accrued liabilities 2,598,140 3,316,015
---------------- ----------------liabilities................................. 3,218,981 2,861,973
------------ ------------
Total current liabilities 14,010,348 8,474,332
---------------- ----------------liabilities............................ 11,233,081 14,274,181
------------ ------------
Long-term debtdebt.............................................. 4,612,320 4,135,156
11,019,081------------ ------------
Commitments and contingencies (Notes( Notes 6 and 13)12)............. -- --
Stockholders' equity:
Preferred stock; $0.01 par value; 1,500,000 shares
authorized; no shares issued and outstandingoutstanding........... -- --
Series A preferred stock; $0.01 par value; 200,000 shares
authorized; no shares issued and outstandingoutstanding........... -- --
Common stock; $0.01 par value; 30,000,000 shares
authorized; 7,813,932 and 7,806,682 shares issued and outstanding at
June 30, 20022003 and 20012002................................. 101,175 101,102101,175
Additional paid-in capitalcapital................................ 47,030,549 47,014,62147,030,549
Retained earningsearnings......................................... 8,166,879 8,324,438 20,055,446
Common stock in treasury, at costcost......................... (20,731,428) (20,731,428)
---------------- ---------------------------- ------------
Total stockholders' equityequity........................... 34,567,175 34,724,734
46,439,741
---------------- ---------------------------- ------------
Total liabilities and stockholders' equity $52,870,238 $65,933,154
================ ================equity........... $ 50,412,576 $ 53,134,071
============ ============
See accompanying Notes to Consolidated Financial Statements
28
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
ADDITIONAL
PREFERRED COMMON PAID-IN RETAINED
STOCK STOCK CAPITAL EARNINGS TREASURY STOCK TOTAL
--------- -------- ----------- ------------ -------------- ------------
Balance, June 30,
2000.................. $-- $101,102 $47,014,621 $ 19,821,310 $(20,731,428) $ 46,205,605
Net income for the year
ended June 30, 2001... -- -- -- 234,136 -- 234,136
-- -------- ----------- ------------ ------------ ------------
Balance, June 30,
2001.................. -- 101,102 47,014,621 20,055,446 (20,731,428) 46,439,741
Issuance of common
stock................. -- 73 15,928 -- -- 16,001
Net loss for the year
ended June 30, 2002... -- -- -- (11,731,008) -- (11,731,008)
-- -------- ----------- ------------ ------------ ------------
Balance, June 30,
2002.................. -- 101,175 47,030,549 8,324,438 (20,731,428) 34,724,734
Net loss for the year
ended June 30, 2003... -- -- -- (157,559) -- (157,559)
-- -------- ----------- ------------ ------------ ------------
Balance, June 30,
2003.................. $-- $101,175 $47,030,549 $ 8,166,879 $(20,731,428) $ 34,567,175
== ======== =========== ============ ============ ============
See accompanying Notes to Consolidated Financial Statements
29
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Additional
Preferred Common paid-in Retained Treasury
Stock stock capital Earnings stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 $ -- $101,102 $47,014,621 $ 21,534,787 $(20,731,428) $47,919,082
Net loss for the year ended
June 30, 2000 -- -- -- (1,713,477) -- (1,713,477)
---------------- -------------- ----------------- ---------------- --------------------------------
Balance, June 30, 2000 -- 101,102 47,014,621 19,821,310 (20,731,428) 46,205,605
Net income for the year ended
June 30, 2001 -- -- -- 234,136 -- 234,136
---------------- -------------- ----------------- ---------------- --------------------------------
Balance, June 30, 2001 -- 101,102 47,014,621 20,055,446 (20,731,428) 46,439,741
Issuance of common stock -- 73 15,928 -- -- 16,001
Net loss for the year ended
June 30, 2002 -- -- -- (11,731,008) -- (11,731,008)
---------------- -------------- ----------------- ---------------- --------------------------------
Balance, June 30, 2002 $ -- $101,175 $47,030,549 $8,324,438 $(20,731,428) $ 34,724,734
================ ============== ================= ================ =============== ==============
See accompanying Notes to Consolidated Financial Statements
30
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended JuneYEAR ENDED JUNE 30,
------------------------------------------
2003 2002 2001
2000
- ------------------------------------------------------------------------------------------------------------------------------------------- ------------ ------------
Cash flows from operating activities:
Net income (loss)................................ $ (11,731,008)(157,559) $(11,731,008) $ 234,136 $ (1,713,477)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortizationamortization............... 1,168,326 1,389,254 2,954,090
3,332,350
Impairment of goodwillgoodwill...................... -- 9,600,000 -- --
Provision for product recallrecall................ -- (39,567) 79,303
(17,600)
Deferred income taxestaxes....................... 268,771 (279,941) (356,668) (645,048)
Changes in operating assets and liabilities:
Accounts receivable, netnet................. 939,043 2,871,037 (852,960)
2,058,901
Inventories, netnet......................... 925,949 3,878,112 (336,855)
757,644
Income tax receivablereceivable.................... 353,636 (745,895) --
1,635,866
Other current assetsassets..................... 13,515 129,086 65,811
(220,047)
Accounts payablepayable......................... (1,234,085) (416,290) (212,647) (1,378,564)
Accrual for product recallrecall............... -- (106,614) (118,363)
(391,884)
Other accrued liabilitiesliabilities................ 357,008 (717,875) 631,992
30,034
----------------- ------------------ ------------------------------ ------------ ------------
Net cash provided by operating activitiesactivities..... 2,634,604 3,830,299 2,087,839
3,448,175------------ ------------ ------------
Cash flows from investing activities:
Capital expendituresexpenditures............................. (524,450) (3,698,060) (751,205)
(298,040)
----------------- ------------------ ------------------------------ ------------ ------------
Net cash used in investing activitiesactivities......... (524,450) (3,698,060) (751,205)
(298,040)------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debtdebt......... 1,799,966 1,246,325 -- --
Proceeds from issuance of common stockstock........... -- 16,001 --
Payment of long-term debtdebt........................ (763,104) (415,440) (413,313) (367,206)
Payment of capital lease obligationsobligations............. (192,425) (552,146) (565,751) (569,679)
Borrowings under revolving credit agreementsagreements..... 63,069,229 64,209,225 63,807,625 69,661,053
Payments under revolving credit agreementsagreements....... (66,012,604) (64,555,527) (64,713,027)
(71,893,563)
Debt issuance costscosts.............................. -- (100,242) --
--
----------------- ------------------ ------------------------------ ------------ ------------
Net cash used in financing activitiesactivities......... (2,098,938) (151,804) (1,884,466)
(3,169,395)------------ ------------ ------------
Net decreaseincrease (decrease) in cash and equivalentsequivalents.... 11,216 (19,565) (547,832) (19,260)
Cash and equivalents at beginning of yearyear.......... 800 20,365 568,197
587,457
----------------- ------------------ ------------------------------ ------------ ------------
Cash and equivalents at end of yearyear................ $ 12,016 $ 800 $ 20,365
$ 568,197
================= ================== ============================== ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $1,116,711Interest...................................... $ 830,838 $ 1,116,711 $ 1,431,750
Income taxes.................................. $ 1,662,150
Income taxes9,375 $ 658,780 $ 154,892 $ 252,869
See accompanying Notes to Consolidated Financial Statements
3130
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by Allied are described below.
USE OF ESTIMATES
The policies utilized by the Company in the preparation of the consolidated
financial statements conform to accounting principles generally accepted in the
United States of America, and require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the consolidated 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
intercompany balances are eliminated.
RECLASSIFICATIONS
Certain financial statement amounts have been reclassified to conform withto
the current year presentation.
REVENUE RECOGNITION
Revenue is recognized for all sales, including sales to agents and
distributors, at the time products are shipped and title has transferred to the
customer, provided that a purchase order has been received or a contract has
been executed, there are no uncertainties regarding customer acceptance, the
sales price is fixed and determinable and collectibility is deemed probable. The
Company's standard shipping terms are FOB shipping point. Sales discounts,
returns and allowances are included in net sales, and the provision for doubtful
accounts is included in selling, general and administrative expenses.
Additionally, it is the Company's practice to include revenues generated from
freight billed to customers in net sales with corresponding freight expense
included in cost of sales in the consolidated statement of operations.
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 $1,348,309$523,955 and $1,053,134$1,348,309 at June 30, 20022003 and 2001,2002,
respectively, are included in accounts payable.
FOREIGN CURRENCY TRANSACTIONS
Allied has international sales which are denominated in U.S. dollars, the
functional currency for these transactions.
3231
ALLIED HEALTHCARE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 20022003 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 method (which
approximates replacement cost) had been used in determining cost, inventories
would have been $692,128$421,902 and $758,770$692,128 higher at June 30, 20022003 and 2001,2002,
respectively. Changes in the LIFO reserve are included in cost of sales. Cost of
sales were reduced by $66,642$270,226 and $84,000$66,642 in fiscal 20022003 and 2001,2002,
respectively, as a result of LIFO liquidations. Costs in inventory include raw
materials, direct labor and manufacturing overhead.
Inventory is recorded net of a reserve for obsolete and excess inventory
which is determined based on an analysis of inventory items with no usage in the
preceding year and greater than one year's usage on hand. At June
30, 2002 and 2001 theThe reserve for
obsolete and excess inventory was $2,324,258 and $4,812,074 at June 30, 2003 and
$2,572,967,2002, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and are depreciated
using the straight-line method over the estimated useful lives of the assets,
which range from 35 to 35 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
At June 30, 20022003 and 2001,2002, the Company has goodwill of $15,979,830, and
$25,579,830,
resulting from the excess of the purchase price over the fair value of net
assets acquired in business combinations. During fiscal 2002, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets", which establishes new accounting and reporting
standards for purchase business combinations and goodwill. As provided by SFAS
No. 142, the Company ceased amortizing goodwill on July 1, 2001. During the
first half of fiscal 2002, the Company performed the transitional impairment
analysis of its goodwill as of the implementation date, following which the
Company concluded that there was no impairment of goodwill at July 1, 2001. The
Company recently completed the required initial annual impairment review of its goodwill
at June 30, 2002, which due to recent negative events and declining sales and profitability, resulted in a
goodwill impairment loss of $9,600,000.
The Company intends to performconducts a formal impairment test of goodwill on an annual
basis and between annual test if an event occurs or circumstances change that
would more likely than not reduce the fair value of the Company below it's
carrying value. The annual impairment review upon the completiontest did not indicate a further impairment
of each fiscal year.goodwill at June 30, 2003.
32
ALLIED HEALTHCARE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The results of these annual impairment reviews are highly dependent on
management's projection of future results of the Company and there can be no
assurance that at the time such reviews are completed a material impairment
charge will not be recorded. See Note 3 for additional disclosure.
OTHER ASSETS
Other assets are primarily comprised of debt issuance costs. These costs
are amortized using the effective interest rate method over the life of the
related obligations.
33
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates impairment of long-lived assets under the provisions
of StatementSFAS No. 144, "Accounting for the Impairment or Disposal of Financial Accounting StandardsLong-Lived
Assets", which superseded SFAS No. 121, ("SFAS 121"), "Accounting for the Impairment of
Long-Lived Assets to be Disposed Of. "Of" and the accounting and reporting provisions
of APB No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", for the disposal of a business. SFAS 121 requires thatNo. 144
provides a single accounting model for long-lived assets and identifiable intangible assets to be disposed of and
reviewed for impairment whenever events or changes in circumstances indicated
that the carrying amount of the assets may not be recoverable. Under SFAS 121,No.
144, if the sum of the expected future cash flows (undiscounted and without
interest charges) of the long-lived assets is less than the carrying amount of
such assets, an impairment loss will be recognized. No impairment losses of
long-lived assets or identifiable intangibles were recorded by the Company for
fiscal years ended June 30, 20022003 and 2001.
In August 2001, the FASB issued Statement of Financial Accounting
Standard No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets", which supersedes Statement of Financial Accounting Standards
No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets to be
Disposed Of" and the accounting and reporting provisions of APB No. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", for the disposal of a business. SFAS 144 provides a
single accounting model for long-lived assets to be disposed of. Although
retaining many of the fundamental recognition and measurement provisions of SFAS
121, the new rules change the criteria to be met to classify an asset as
held-for-sale. The new rules also broaden the criteria regarding classification
of a discontinued operation. The Company is required to adopt the provisions of
SFAS 144 effective July 1, 2002. Adoption of SFAS 144 is not expected to have a
material impact on the Company's results of operations, financial position or
cash flows.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts receivable,
accounts payable and debt. The carrying amounts for cash, accounts receivable
and accounts payable approximate their fair value due to the short maturity of
these instruments. The fair value of long-term debt, excluding capital leases,
was $12.0$10.0 million and $11.5$12.0 million at June 30, 20022003 and 2001,2002, respectively, and
the related carrying amounts were $11.9$10.0 million and $11.4$11.9 million, respectively.
The Company estimated the fair value of its long-term, fixed-rate debt using a
discounted cash flow analysis based on the Company's current borrowing rates for
debt with similar maturities.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting StandardsSFAS No. 109, "Accounting for
Income Taxes" ("SFAS 109"). Under SFAS No. 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.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred and are included in
selling, general and administrative expenses. Research and development expenses
for the years ended June 30, 2003, 2002 and 2001 were $577,278, $622,793 and
2000 were
$622,793, $592,815, and $726,315, 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 the sum of the weighted averaged number of shares of common stock and
common stock equivalents outstanding during the year. The weighted
33
ALLIED HEALTHCARE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
average number of basic shares outstanding for the years ended June 30, 2003,
2002 and 2001 and
2000 was 7,813,932, 7,809,266, 7,806,682, and 7,806,682 shares, respectively. The
weighted average number of diluted shares outstanding for the years ended June
30, 2003, 2002 and 2001 was 7,813,932, 7,809,266, and 2000 was 7,809,266, 8,125,699 and
34
7,806,682 shares,
respectively. The dilutive effect of Company's employee's and director's stock
option plans are determined by use of the treasury stock method. Employee and
director stock option plans are not included as common stock equivalents for
earnings per share purposes in fiscal 20022003 and 20002002 as the impact on the number
of shares outstanding would have been anti-dilutive.
EMPLOYEE STOCK-BASED COMPENSATION
The Company accounts for employee stock options and variable stock awards
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and its related interpretations. 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.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") prescribes the recognition of
compensation expense based on the fair value of options or stock awards
determined on the date of grant. Companies that elect to account for stock-based
compensation plans in accordance with APB 25 are required to make certain pro
forma disclosures as if the fair value method had been utilized. See Note 9The fair value
of options granted (which is amortized over the option vesting period in
determining the pro forma impact) is estimated on the date of grant using the
Black-Scholes multiple option-pricing model. For options granted during the
fiscal years ended June 30, 2003, 2002 and 2001, the assumptions utilized in the
Black-Scholes multiple option-pricing model included expected option life of 10
years, risk-free interest rates ranging from 2.65% to 5.00%, volatility ranging
from 46% to 49% and no dividend yield. The following table shows stock-based
compensation expense included in net income and pro forma stock-based
compensation expense, net income/(loss) and earnings per share had we elected to
record compensation expense based on the fair value of options at the grant date
for additional disclosure.the fiscal years ended June 30, 2003, 2002, and 2001. (In thousands, except
per share data)
2003 2002 2001
------ -------- -----
Stock-based compensation
As reported............................................. $ -- $ -- $ --
Pro forma............................................... 157 194 189
Net income (loss)
As reported............................................. $ (158) $(11,731) $ 234
Pro forma............................................... $ (315) (11,925) 45
Basic earnings (loss) per share
As reported............................................. $(0.02) $ (1.50) $0.03
Pro forma............................................... $(0.04) $ (1.53) $0.01
NEW ACCOUNTING STANDARDS
In April 2002,August 2001, the FASB issued Statement of Financial Accounting Standards
No. 145144 (SFAS 145)144), "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," that supercedes
previous guidance"Accounting for the reportingImpairment or Disposal of gains and losses from extinguishment of
debt and accounting for leases, among other things. SFAS 145 requires that only
gains and losses from the extinguishment of debt that meet the requirements for
classification as "Extraordinary Items," as prescribed in Accounting Principles
Board Opinion No. 30, should be disclosed as such in the financial statements.
Previous guidance required all gains and losses from the extinguishment of debt
to be classified as "Extraordinary Items." This portion of SFAS 145 is effective
for fiscal years beginning after May 15, 2002, with restatement of prior periods
required. In addition, SFAS 145 amendsLong-Lived
Assets", which supersedes Statement of Financial Accounting Standards No. 13121
(SFAS 13)121), "Accounting for Leases," as it relatesthe Impairment of Long-Lived Assets to accounting
by a lessee for certain lease modifications. Under SFAS 13, if a capital lease
is modified in such a way that the change gives rise to a new agreement
classified as an operating lease, the asset and obligations are removed, a gain
or loss is recognizedbe Disposed
Of" and the new lease is accountedaccounting and reporting provisions of APB No. 30, "Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for as an operating lease.
Underthe disposal of a business. SFAS 145, capital leases that are modified so the resulting lease
agreement is classified as an operating lease are144 provides a single
34
ALLIED HEALTHCARE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounting model for long-lived assets to be accounted for underdisposed of. Although retaining
many of the sale-leaseback provisions of Statement of Financial Accounting Standards No. 98
(SFAS 98), "Accounting for Leases." Thesefundamental recognition and measurement provisions of SFAS 145 are121, the
new rules change the criteria to be met to classify an asset as held-for-sale.
The new rules also broaden the criteria regarding classification of a
discontinued operation. The Company is required to adopted the provisions of
SFAS 144 effective for transactions occurring after May 15,July 1, 2002. Adoption of SFAS 145 is144 did not
expected to have a material
impact on the Company's results of operations, financial position or cash flows.
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 (SFAS 146), "Accounting for Costs Associated with Exit or Disposal
Activities" which addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost
was recognized at the date of an entity's commitment to an exit plan. The
provisions of SFAS 146 are effective for exit or disposal activities initiated
after December 31, 2002. Adoption of SFAS 146 has not had a material impact on
the Company's results of operations, financial position or cash flows.
In November 2002, the FASB issued Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". This interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The Company does not have any commitments that are within the scope
of FIN No. 45.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 (SFAS 148), "Accounting for Stock-Based Compensation --
Transition and Disclosure -- an amendment of FAS 123," which provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. Additionally, SFAS
148 amends the disclosure requirements of Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The provisions of SFAS 148 are
effective for financial statements issued for fiscal years ending after December
15, 2002 and for financial reports containing condensed financial statements for
interim periods beginning after December 15, 2002. Adoption of SFAS 148 did not
have a material impact on the Company's results of operations, financial
position or cash flows.
In January 2003, the FASB released FIN No. 46, "Consolidation of Variable
Interest Entities -- an Interpretation of ARB No. 51". The Interpretation
clarifies issues regarding the consolidation of entities which may have features
that make it unclear whether consolidation or equity method accounting is
appropriate. FIN 46 is generally effective in 2003. The Company is evaluating
FIN 46 to determine any potential impact on its financial reporting, but does
not anticipate any impact.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 (SFAS 150), "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity." SFAS 150 provides guidance on
distinguishing between liability and equity instruments and accounting for
instruments that have characteristics of both. SFAS 150 requires specific types
of freestanding financial instruments to be classified as liabilities including
mandatory redeemable financial instruments, obligations to repurchase the
issuer's equity shares by transferring assets and certain obligations to issue a
variable number of shares. The provisions of SFAS 150 are effective for
financial instruments entered into or modified after May 31, 2003. For all other
instruments, SFAS 150 is effective July 1, 2003. Adoption of SFAS 150 is not
expected to have a material impact on the Company's results of operations,
financial position or cash flows.
35
ALLIED HEALTHCARE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. GOODWILL
For the fiscal year ending June 30, 2002, the Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets" which establishes new accounting and
reporting standards for purchase business combinations and goodwill. As provided
by SFAS No. 142, the Company ceased amortizing goodwill on July
35
1, 2001. The
following table summarizes the effect of adoption of SFAS No. 142 on net
income/(loss) and earnings/(loss) per share.
For the year ended JuneFOR THE YEAR ENDED JUNE 30,
-------------------------------------
2003 2002 2001
2000
-------------- ----------- -------------------- ------------ ----------
Reported net income / (loss)................... $(157,559) $(11,731,008) $ (11,731,008) $ 234,136 $(1,713,477)
Add back: Goodwill amortizationamortization................ -- -- 815,411
815,411
-------------- ----------- -------------------- ------------ ----------
Adjusted net income / (loss) $ (11,731,008) $ 1,049,547 $ (898,066)
BASIC AND DILUTED EARNINGS / (LOSS) PER
SHARE:................... $(157,559) $(11,731,008) $1,049,547
Basic and diluted earnings/(loss) per share:
Reported net earnings / (loss) per shareshare....... $ (0.02) $ (1.50) $ 0.03
$ (0.22)
Goodwill amortization per shareshare................ -- -- 0.10
0.10
-------------- ----------- -------------------- ------------ ----------
Adjusted earnings/ (loss) per shareshare............ $ (0.02) $ (1.50) $ 0.13
$ (0.12)
-------------- ----------- -----------
Summarized goodwill activity for fiscal 2002 is as follows:
Goodwill at June 30, 2001 $ 25,579,830
Impairment charge (9,600,000)
------------
Goodwill at June 30, 2002 $ 15,979,830========= ============ ==========
As required by SFAS 142, the Company completed its transitional goodwill
impairment analysis as of July 1, 2001, for which it concluded that the carrying
value of its goodwill was not impaired. The fair value of the Company utilized
in the transitional goodwill impairment analysis was estimated using a
discounted cash flow approach incorporating the Company's fiscal 2002 plan.
The Company completed its initial annual goodwill impairment test during
the fourth quarter of the fiscal year ended June 30, 2002. Due to operating
inefficiencies, a general slow down in orders, and delivery issues, which led to
a drop in market share, operating profits and cash flows were lower than
expected during fiscal 2002. Based on that trend, management revised its
earnings forecast for fiscal 2003. During the fourth quarter of the fiscal year
ended June 30, 2002, the Company recognized a goodwill impairment loss of
$9,600,000. The annual impairment test did not indicate a further impairment of
goodwill at June 30, 2003. The fair value of the Company was estimated using a
discounted cash flow approach incorporating its most recent business plan
forecasts in the performance of its annual analysis of goodwill impairment.
4. LSP OXYGEN REGULATOR RECALL
On February 4, 1999, Allied announced a voluntary recall of aluminum oxygen
regulators marketed under its Life Support Products ("LSP") 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 was 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
introduced new brass regulators and also offered 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. The original provision for regulator recall included
estimated costs of $1.3 million for 36
aluminum regulator retrofitting and
replacement, as well as $0.2 million for certain communications and legal costs
expected to be incurred by the Company under the terms of the recall.
36
ALLIED HEALTHCARE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of activity with respect to the Company's product recall
is as follows:
2002 2001 2000 1999
----------- ----------- ----------- ------------------- -------- -------- ----------
Balance, beginning of year $ 146,181 $ 185,241 $ 594,725year....................... $146,181 $185,241 $594,725 $ --
Provision for recall establishedestablished................. -- -- -- 1,500,000
Addition to provision for recallrecall................. -- 79,303 300,000 --
Reduction to provision for recallrecall................ (39,567) -- (317,600) --
Costs incurred related to product retrofitting
and replacementreplacement................................ (106,614) (118,363) (391,884) (905,275)
----------- ----------- ----------- ------------------- -------- -------- ----------
Balance, end of yearyear............................. $ -- $ 146,181 $ 185,241$146,181 $185,241 $ 594,725
=========== =========== =========== =================== ======== ======== ==========
During the first quarter of fiscal 2000, the Company recorded an additional
provision of $0.3 million relative to the regulator recall. The addition
represented a provision for additional aluminum regulator inventory not
identified as part of the original $1.5 million estimate. The $0.3 million
reduction to the provision in fiscal 2000 represented the subsequent disposal of
the aluminum regulator inventory on a basis more favorable than originally
estimated. During fiscal 2001, the Company recorded an additional provision of
$0.1 million for the estimated additional cost to be incurred for product
retrofitting and replacement. During fiscal 2002, the provision was reduced by
$0.04 million, as the recall iswas considered complete at June 30, 2002.
The Company has incurred various legal expenses related to claims
associated with the LSP regulator recall. Accordingly, the Company recorded an
additional provision for product liability litigation during fiscal 2001 for
amounts estimated to be payable by the Company under its self-insurance
retention for legal costs associated with defending these claims. These amounts
are included along with other legal expenses of the Company as selling, general
and administrative expenses. AtIn addition to the product recall retrofitting
reserve discussed above, at June 30, 2002,2003, the Company has a litigation cost
accrual balance of $0.1 million for legal expense associated to the LSP
regulator recall.
The Company received notification from the FDA that the recall was
complete in December 2000. As of June 30, 2002 the Company has incurred $1.5
million for costs associated with the recall and considers expenditures
associated with the recall to be complete.
37
ALLIED HEALTHCARE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. FINANCING
Long-term debt consisted of the following at June 30,:30:
2003 2002
2001
------------ ----------------------- -----------
UNSUBORDINATED DEBT
Notes payable to bank or other financial lending institution
Term loan on real estate -- principal of $49,772 due in varying monthly maturities
ranging from $27,714 to $40,518
with remaining balance due August 1, 20032003................. $ 3,534,6093,076,135 $ 3,950,0493,534,609
Revolving credit facility -- aggregate revolving commitment
of $15,000,000; principal due at maturity on April 24,
20052005...................................................... 4,203,828 7,147,203 --
Revolving credit facility -- aggregate revolving commitment of
$25,000,000; repaid during fiscal 2002 -- 7,493,505
Term loan on capital expenditures -- principal of $50,772
due over 60 monthsmonthly with remaining balance due on April 24,
20052005...................................................... 2,741,661 1,246,325
--
------------ ----------------------- -----------
10,021,624 11,928,137
11,443,554
------------ ------------=========== ===========
SUBORDINATED DEBT
Capital lease obligationsobligations................................... -- 192,425
744,571
------------ ----------------------- -----------
10,021,624 12,120,562 12,188,125
Less -- Current portion of long-term debt, including
$192,425 and $744,571 of capital lease obligations at June 30, 2002 and June 30,
2001, respectively2002.... (5,409,304) (7,985,406)
(1,169,044)
------------ ----------------------- -----------
$ 4,612,320 $ 4,135,156
$ 11,019,081
============ ======================= ===========
On August 7, 1998, the Company borrowed approximately $5.0 million from a
bank. The real estate term loan is collateralized by the Company's St. Louis
facility. The real estate term 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 term loan was amended on March 24 and September
1, 1999 resulting in changes to certain debt covenants for which the Company was
in compliance at June 30, 2002 and 2001.
On September 8, 1998, the Company's revolving credit facility with a
bank was amended. As amended, the revolving credit facility provides for
borrowings up to $25.0 million. The revolving credit facility provided a
borrowing base of the lesser of 85% of eligible accounts receivable or $8.0
million plus the lesser of 45% of eligible inventory or $10.0 million, adjusted
as deemed appropriate by the bank. At June 30, 2001 $5.0 million was available
under the revolving credit facility for additional borrowings. The revolving
credit facility accrued interest at the floating reference rate (6.75% at June
30, 2001) plus 0.25%, as defined in the agreement. The amended revolving credit
facility also provided the Company with a rate of LIBOR + 2.50%. At June 30,
2001 no portion of the revolving credit facility was subject to the LIBOR
provision. The amended revolving credit facility was collateralized by
substantially all of the assets of the company. On June 28, 1999, the Company's
credit facilities with a bank were further amended. The amendment provided for
favorable interest rate reduction, based upon annual profitability, for fiscal
years 20012003 and 2002. The amendment also extended the maturity dateterm loan was further amended
subsequent to January 6,
2003 along with a favorable change to certain debt covenantsyear end on September 26, 2003. See Note 15 for which the
Company was in compliance at June 30, 2001.
38
The revolving credit facility also provided for a commitment guarantee
up to a maximum of $3.0 million for letters of credit and required a per annum
fee of 0.75% on unused letters of credit. At June 30, 2001 and 2000, the Company
had no letters of credit outstanding.additional
information.
On April 24, 2002, the Company entered into a new credit facility
arrangement with LaSalle Bank National Association (the "Bank"). The new credit
facility provides for total borrowings up to $19.0 million; consisting of up to
$15.0 million through a revolving credit facility and up to $4.0 million under a
term loan. The term loan may be drawn against for capital expenditures during
the first six months of the term of the credit facility. Repayment of the term
loan begins on October 24, 2002, with principal and interest due in equal
monthly installments over five years (subject to payment in full at the maturity
of the credit facility if that facility is not renewed or extended). The new
credit facility is collateralized by substantially all of the assets of the
Company. The maturity date of the new facility is April 24, 2005.
The revolving credit facility provides for a borrowing base of 80% of
eligible accounts receivable plus the lesser of 50% of eligible inventory or
$8.0 million, subject to reserves as established by the Bank. At June 30, 2002,
$4.82003,
$8.0 million was available under the revolving credit facility for additional
borrowings. The new credit facility calls for a 0.25% commitment fee payable
quarterly based on the average daily unused portion of the revolving credit
facility. The revolving credit facility also provides for a commitment guaranty
of up to $5.0 million for letters of credit and requires a per annum fee of
1.50% on outstanding letters of credit. At June 30, 2003 and 2002, the Company
had no letters of credit outstanding. Any outstanding letters of credit
decreases the amount available for borrowing under the revolving credit
facility.
38
ALLIED HEALTHCARE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The entire credit facility accrues interest at the floating reference rate,
which is the greater of the Bank's prime rate (plus 0.25% if the Company's fixed
charge coverage ratio falls below 1.25 to 1.00) or the Federal Funds rate plus
0.5%. The floating reference rate was 4.00% at June 30, 2003 and 4.75% at June
30, 2002.2002, respectively. The credit facility also provides the Company with a
rate of LIBOR plus 2.25%, at the Company's option. The optional LIBOR rate may
increase or decrease from LIBOR plus 2.00% to LIBOR plus 2.50% based on the
Company's fixed charge coverage ratio. The 90 day90-day LIBOR rate was 1.90% at June
30, 2002. At June 30, 2002, $5.6 million of the revolving credit facility was
subject to the LIBOR provision. At June 30, 2003, none of the revolving credit
facility is subject to the LIBOR provision. The Company also has the option to
swap the interest rate applicable to the term loan for a fixed rate.
On September 26, 2002, the Bank further amended the Company's credit
facility (the amended credit facility). Under the terms of the amended credit
facility, the interest rate on each loan outstanding at an Event of Default, as
defined in the amended credit facility, will bear interest at the rate of 2.00%
per annum in excess of the interest rate otherwise payable thereon and interest
payments will be payable on demand. The Bank amended various financial covenants
in conjunction with the amended credit facility to include a quarterly fixed
coverage charge ratio and EBITDA ratio through June 30, 2003, which are adjusted
to measurement on an annual basis beginning on July 1, 2003. In addition, the
outstanding loans under the amended credit facility bear interest at an annual
interest rate of 0.75% plus the Bank's prime rate and the Company no longer has
the option to elect a LIBOR rate of interest for its outstanding borrowings. The
Company's per annum fee on any outstanding letters of credit under the amended
credit facility is 2.50%. The borrowing period under the term loan for capital
expenditures, which will represent 80% of the purchase price of the related
equipment, was extended to eight months from the date of the original credit
facility. Additionally, the terms of the amended credit facility restrict the
payment of dividends on the Company's common stock.
The new credit facility requires lockbox arrangement, which provide for all
receipts to be swept daily to reduce borrowings outstanding under the credit
facility. This arrangement, combined with the existence of a Material Adverse
Effect (MAE) clause in the new credit facility, cause the revolving credit
facility to be classified as a current liability, per guidance in the FASB's
Emerging Issues Task Force Issue 95-22, "Balance Sheet Classification of
Borrowings Outstanding under Revolving Credit Agreements that Include Both a
Subjective Acceleration Clause and a Lock-Box Arrangement." However, the Company
does not expect to repay, or be required to repay, within one year, the balance
of the revolving credit facility classified as a current liability. The MAE
clause, which is a typical requirement in commercial credit agreements, allows
the lender to require the loan to become due if it determines there has been a
material adverse effect on the Company's operations, business, properties,
assets, liabilities, condition or prospects. The classification of the revolving
credit facility as a current liability is a result only of the combination of
the two aforementioned factors: the lockbox arrangement and the MAE clause.
However, the revolving credit facility does not expire or have a maturity date
within one year, but rather has a final expiration date of April 25, 2005.
Additionally, the Bank has not notified the Company of any indication of a MAE
at June 30, 2002.2003.
Under the terms of the newamended credit facility, the Company is required to
be in compliance with certain financial covenants pertaining to stockholders'
equity, capital expenditures and net income. At June 30, 2002,2003, the Company was
in violation of its EBITDA (net income after taxes, plus interest expense,
income tax expense, and depreciation and amortization) covenant and its fixed
charge coverage ratio covenant, which were
waived by the bank in a letter dated on September 25, 2002.26, 2003. See Note 15 for
further discussion. Additionally, the terms of the new credit facility restrict
the Company from the payment of dividends on any class of its stock.
39
Proceeds of $8.0 million received under the new credit facility were
utilized to repay the entire amount outstanding under the Company's previous
revolving credit facility. The previous credit facility was thereby terminated.
Aggregate maturities of long-term debt, excluding capital leases, for each
of the threetwo fiscal years subsequent to June 30, 20022003 are as follows, assuming
that the Company's bank does not claim a MAE with
39
ALLIED HEALTHCARE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respect to the revolving credit facility. While the revolving credit facility is
classified as a current liability, it is not expected to mature until 2005.
Fiscal Revolving Real Estate Capital Expenditure
Year Credit Facility Term Loan Term Loan TotalFISCAL REVOLVING REAL ESTATE CAPITAL EXPENDITURE
YEAR CREDIT FACILITY TERM LOAN TERM LOAN TOTAL
- ------ --------------- ----------- ------------------- -----------
20032004.......................... $ -- $ 458,829596,218 $ 186,949609,258 $ 645,778
2004 -- 3,075,780 249,265 3,325,045
2005 7,147,203 -- 810,111 7,957,3141,205,476
2005.......................... 4,203,828 2,479,917 2,132,403 8,816,148
---------- ---------- ---------- -----------
----------- ----------- -----------
$ 7,147,203 $ 3,534,609 $ 1,246,325 $11,928,137
=========== =========== ===========$4,203,828 $3,076,135 $2,741,661 $10,021,624
========== ========== ========== ===========
6. LEASE COMMITMENTS
The Company leases certain of its manufacturing equipment under
non-cancelable lease agreements. These agreements extend for a period of 12
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 ("SFAS 13"), "Accounting for Leases". In addition, the Company
leases certain office equipment under non-cancelable operating
leases.lease agreements. Minimum lease payments under long-term capital leases and operating leases at June 30, 20022003
are as follows:
Capital Operating
Fiscal Year Leases LeasesOPERATING
FISCAL YEAR LEASES
- ----------- --------- ---------
2003 $ 198,839 $ 248,705
20042004........................................................ $247,047
2005........................................................ 180,068
2006........................................................ 122,799
2007........................................................ 83,405
2008........................................................ --
136,990
2005 -- 36,467
2006 -- 28,068
2007 -- 16,373
--------- -----------------
Total minimum lease payments 198,839 $ 466,603
--------- =========
Less amount representing interest (6,414)
---------
Present value of future net minimum lease payments, including
current portion of $192,425 $ 192,425
=========payments................................ $633,319
========
Rental expense incurred on operating leases in fiscal 2003, 2002, and 2001
totaled $378,665, $489,154 and 2000 totaled $489,154, $658,426, and $678,888, respectively.
40
7. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
2003 2002 2001
2000--------- ----------- ----------- --------------------
Current:
FederalFederal........................................ $(480,145) $(1,014,479) $ 528,560
$ (49,915)
StateState.......................................... -- -- --
--------- ----------- ----------- --------------------
Total currentcurrent.................................. (480,145) (1,014,479) 528,560
(49,915)--------- ----------- ----------- --------------------
Deferred:
FederalFederal........................................ 310,145 (124,267) (110,410)
(561,137)
StateState.......................................... (41,374) (155,674) (246,258)
(83,911)--------- ----------- ----------- --------------------
Total deferreddeferred................................. 268,771 (279,941) (356,668)
(645,048)--------- ----------- ----------- --------------------
$(211,374) $(1,294,420) $ 171,892
$ (694,963)========= =========== =========== ====================
Income taxes were 9.9%57.3%, 42.3%9.9%, and 28.9%42.3% of pre-tax earnings (losses) in
2003, 2002, 2001, and 2000,2001, respectively. The Company reversed $0.3 million in
deferred tax valuation allowances during fiscal 2001 pursuant to the Company's
reassessment of the underlying deferred tax assets and determination that it is
40
ALLIED HEALTHCARE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
more likely than not that the deferred tax assets will be fully utilized. A
reconciliation of income taxes, with the amounts computed at the statutory
federal rate is as follows:
2003 2002 2001
2000--------- ----------- ----------- -------------------
Computed tax at federal statutory raterate............ $(125,437) $(4,428,646) $ 138,050 $ (818,869)$138,050
State income taxes, net of federal tax benefitbenefit.... (78,072) (88,959) 43,779
(55,381)
Non deductible goodwillgoodwill........................... -- 3,264,000 277,240 277,240
Change in valuation allowanceallowance..................... -- -- (325,391)
--
Other, netnet........................................ (7,865) (40,815) 38,214
(97,953)--------- ----------- ----------- -----------
Total--------
Total............................................. $(211,374) $(1,294,420) $ 171,892 $ (694,963)$171,892
========= =========== =========== ===================
The deferred tax assets and deferred tax liabilities recorded on the
balance sheet as of June 30, 20022003 and 20012002 are as follows:
2003 2002
2001
---- ----
Deferred Deferred Tax Deferred Deferred Tax
Tax Assets Liabilities Tax Assets Liabilities
------------------------------------- ---------------------------
DEFERRED TAX DEFERRED TAX DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES ASSETS LIABILITIES
------------ ---------------------- ------------ ------------
Current:
Bad debtsdebts......................... $ 185,250 $ -- $ 175,500 $ --
$ 236,228 $Accrued liabilities............... 331,469 --
Accrued liabilities 319,868 --
328,817Inventory......................... -- Inventory928,798 192,042 -- -- 646,275
Other property basis 58,500 -- 450,683 --
---------- ------------ ---------- ------------
745,910 -- 1,015,728 646,275
---------- ------------ ---------- ------------
Non Current:
Depreciation -- 131,295 107,753 --
Other property basisbasis.............. -- -- 58,500 --
---------- ---------- ---------- --------
516,719 928,798 745,910 --
---------- ---------- ---------- --------
Non Current:
Depreciation...................... -- 51,927 -- 131,295
Other property basis.............. -- 103,041 -- 125,116
Intangible assets................. 89,293 -- 147,192
Intangible assets 158,480 -- 176,737 --
Net operating loss carryforwardcarryforward... 1,132,820 -- 302,059 --
170,998Other............................. -- Other77,435 -- 103,636
-- 111,288
---------- ------------ ---------- ---------------------- --------
1,222,113 232,403 460,539 360,047
455,488 258,480
---------- ------------ ---------- ------------
---------- ------------ ---------- --------------------
Total deferred taxestaxes................ $1,738,832 $1,161,201 $1,206,449 $ 360,047 $1,471,216 $ 904,755$360,047
========== ============ ========== ====================== ========
41
The Company has approximately $1.9 million of United States federal
operating loss carryforwards, which will expire in the year 2023 if not utilized
prior to that time.
8. RETIREMENT PLAN
The Company offers a retirement savings plan 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, 2003, 2002 2001 and 2000,2001, the Company
made contributions of $254,673, $252,997, $234,472, and $296,134,$234,472, respectively.
9. STOCKHOLDERS' EQUITY
The Company has established a 1991 Employee Non-Qualified Stock Option
Plan, a 1994 Employee Stock Option Plan, and a 1999 Incentive Stock Plan
(collectively the "Employee Plans"). The Employee
41
ALLIED HEALTHCARE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
1,800,000 shares of common stock may be granted under the Employee Plans.
Options generally become exercisable ratably over a four year period or
one-fourth of the shares covered thereby on each anniversary of the date of
grant, commencing on the first or 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 the 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
(collectively the "Directors Plans"). The Directors Plans provide 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 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.
42
A summary of stock option transactions in 2003, 2002 2001 and 2000,2001,
respectively, pursuant to the Employee Plans and the Directors Plans is as
follows:
Weighted Average Shares Subject
Price To Option
---------------------- ------------------WEIGHTED AVERAGE SHARES SUBJECT
PRICE TO OPTION
---------------- --------------
June 30, 1999 $7.13 529,7502000........................................... $3.50 767,750
Options granted 2.00 567,500Granted....................................... 3.17 95,500
Options exercisedExercised..................................... -- --
Options canceled 7.89 (329,500)
------------------Canceled...................................... 3.04 (67,850)
-------
June 30, 20002001........................................... $3.50 767,750
------------------795,400
-------
Exercisable at June 30, 2000 227,000
==================2001............................ 369,025
=======
June 30, 20002001........................................... $3.50 767,750795,400
Options granted 3.17 95,500Granted....................................... 3.40 35,500
Options exercised --Exercised..................................... 2.21 (7,250)
Options canceled 3.04 (67,850)
------------------Canceled...................................... 6.43 (27,350)
-------
June 30, 2001 $3.50 795,400
------------------2002........................................... $3.41 796,300
-------
Exercisable at June 30, 2001 369,025
==================2002............................ 525,675
=======
June 30, 2001 $3.50 795,4002002........................................... $3.41 796,300
Options granted 3.40 35,500Granted....................................... 2.66 65,500
Options exercised 2.21 (7,250)Exercised..................................... -- --
Options canceled 6.43 (27,350)
------------------Canceled...................................... 7.11 (90,700)
-------
June 30, 2002 $3.41 796,300
------------------2003........................................... $2.91 771,100
-------
Exercisable at June 30, 2002 525,675
==================2003............................ 630,475
=======
42
ALLIED HEALTHCARE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides additional information for options outstanding
and exercisable at June 30, 2002.2003.
OPTIONS OUTSTANDING
Weighted Average Weighted Average
Range of Prices Number Remaining Life Exercise PriceWEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF PRICES NUMBER REMAINING LIFE EXERCISE PRICE
- -------------------- ----------------- ---------------------- ------------------------------------ ------- ---------------- ----------------
$1.00-1.99.................................. 14,250 5.8 years $ 1.00-1.99 14,250 6.8 years $1.88
2.001.88
2.00........................................ 542,000 7.36.3 years 2.00
2.01-6.99 126,500 8.22.01-6.99................................... 154,000 8.3 years 3.81
7.00-7.99 66,000 5.43.26
7.00-7.99................................... 40,000 4.4 years 7.50
8.00-18.50 47,550 2.87.37
8.00-18.50.................................. 20,850 1.2 years 13.16
-----------------
$1.00-18.50 796,300 7.016.10
-------
$1.00-18.50................................. 771,100 6.4 years $3.41$ 2.91
OPTIONS EXERCISABLE
Weighted Average
Range of Prices Number Exercise PriceWEIGHTED AVERAGE
RANGE OF PRICES NUMBER EXERCISE PRICE
- -------------------- ----------------- ----------------------
$ 1.00-1.99 6,750 $1.88
2.00 372,625 2.00
2.01-6.99 46,000 4.58
7.00-7.99 52,750 7.48
8.00-18.50 47,550 13.16
-----------------
$1.00-18.50 525,675 $ 3.79
43
The Company has elected to follow the provisions prescribed by APB 25
and its related interpretations, for financial reporting purposes, whereby the
difference between the exercise price and the fair value at the date of grant is
recognized as compensation expense.
The Company has elected to follow the disclosure provisions of SFAS No,
123. Accordingly, no compensation expense has been recognized for the plans
under the provisions of SFAS No. 123. Had compensation cost for the plans been
determined based upon the fair value at the grant date for employee awards under
the Plan consistent with the methodology prescribed under SFAS No. 123, the
Company's net loss would have been increased or decreased, respectively, to the
following pro forma amount (in thousands, except per share).
2002 2001 2000--------------- ------- ---------------- ------------------ -------------------
Reported net income/( loss) $(11,731) $234 $(1,713)
Pro forma net income/(loss) $(11,925) $45 $(1,918)
Basic and diluted earnings per share - as reported $(1.50) $0.03 $(0.22)
Basic and diluted earnings per share - pro forma $(1.53) $0.01 $(0.25)$1.00-1.99.................................. 10,500 $ 1.88
2.00........................................ 508,125 2.00
2.01-6.99................................... 51,000 3.94
7.00-7.99................................... 40,000 7.37
8.00-18.50.................................. 20,850 16.10
-------
$1.00-18.50................................. 630,475 $ 2.96
TheSee Note 2 for discussion of accounting for stock awards, and related fair
value of options granted, which is amortized to expense over
the option vesting period in determining theand pro forma impact, has been
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions:
2002 2001 2000
---------------- ------------------ -------------------
Expected life of option 10 years 10 years 10 years
Risk-free interest rate 4.87% 5.00% 5.90%
Expected volatility 47% 49% 50%
Expected dividend yield 0% 0% 0%
The weighted-average fair value of options granted during fiscal 2002, 2001 and
2000 determined using the Black-Scholes options pricing model is as follows:
2002 2001 2000
---------------- ------------------ -------------------
Per share value $2.22 $2.20 $1.38
Aggregate value (in thousands) $79 $210 $780
44
income disclosures.
STOCKHOLDER RIGHTS PLAN
The Board of Directors adopted a Stockholder Rights Plan in 1996 that would
permit stockholders to purchase common stock at prices substantially below
market value under certain change-in-control scenarios. At June 30, 2001 ,2003, no
common stock has been purchased under this plan.
10. EXPORT SALES
Export sales for the years ended June 30, 2003, 2002, 2001, and 20002001 are
approximately as follows (in thousands):
2003 2002 2001
2000
------------- ------------- ------------------- ------ -------
EuropeEurope................................................... $ 1,200 $1,400 $1,500 $2,100
Canada$ 1,500
Canada................................................... 1,100 1,300 1,500
1,800
Latin AmericaAmerica............................................ 3,600 2,900 3,200
3,900
Middle EastEast.............................................. 800 1,100 1,200
1,300
Far EastEast................................................. 2,900 2,300 4,200
2,600
OtherOther.................................................... 900 800 2,100
900
------------- ------------- ------------------- ------ -------
$10,500 $9,800 $13,700
$12,600
============= ============= =================== ====== =======
4543
ALLIED HEALTHCARE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SUPPLEMENTAL BALANCE SHEET INFORMATION
JuneJUNE 30,
-------------------------
2003 2002
2001
--------------------- ------------------------------- -----------
INVENTORIES
Work in progressprogress......................................... $ 536,695 $ 541,855
$ 922,781
Component partsparts.......................................... 10,577,713 13,176,743
13,829,587
Finished goodsgoods........................................... 3,484,822 4,294,397 4,899,632
Reserve for obsolete and excess inventoryinventory................ (2,324,258) (4,812,074)
(2,572,967)
--------------------- --------------------
$ 13,200,921 $ 17,079,033
===================== ====================
Estimated
Useful Life
(years)----------- -----------
$12,274,972 $13,200,921
=========== ===========
ESTIMATED
USEFUL LIFE
(YEARS)
-----------
PROPERTY, PLANT AND EQUIPMENT
Machinery and equipmentequipment..................... 5-10 $19,161,575 $15,670,224
Buildings$ 19,545,408 $ 19,161,575
Buildings................................... 28-35 11,935,298 11,928,68611,935,298
Land and land improvementsimprovements.................. 5-7 934,216 934,216
Property held under capital leases 5 -- 4,518,761
--------------------- -------------------------------- ------------
Total property, plant and equipment at
costcost..................................... 32,414,922 32,031,089 33,051,887
Less accumulated depreciation and
amortization,
including $0 and $4,260,952, respectively,
related to property held under capital leasesamortization............................. (19,784,633) (18,802,932)
(22,159,619)
--------------------- --------------------
$13,228,157 $10,892,268
===================== ====================------------ ------------
$ 12,630,289 $ 13,228,157
============ ============
OTHER ACCRUED LIABILITIES
Accrued compensation expense $1,301,203 $1,114,128expense................ $ 1,416,554 $ 1,301,203
Accrued interest expenseexpense.................... 27,459 26,849 89,468
Accrued income taxtax.......................... 821,187 830,503
1,621,785
OtherCustomer deposits........................... 590,368 263,833
Other....................................... 363,413 439,585
490,634
--------------------- --------------------
$2,598,140 $3,316,015
===================== ====================------------ ------------
$ 3,218,981 $ 2,861,973
============ ============
12. COMMITMENTS AND CONTINGENCIES
The Company is subject to various investigations, claims and legal
proceedings covering a wide range of matters that arise in the ordinary course
of its business activities. In March through June 2000, the FDA conducted an
inspection of the Company's St. Louis facility and provided a written report,
known as an "FDA Form 483" or simply a "483,""483", citing FDA observations concerning
GMP compliance and quality control issues applicable to demand valves, emergency
ventilators, circumcision clamps, and regulators. The Company provided a written
response to the FDA and in August 2000, the FDA issued a warning letter and
requested that the Company clarify and supplement its responses to the 483
observations. As a result, the Company submitted to the FDA a written
supplemental response and defined actions to address the FDA concerns. The
Company met with the FDA at their Kansas City field office in March 2001 to
discuss the responses and actions. From October 27, 2001 to November 19, 2001
the FDA conducted a follow-up inspection to the June 2000 inspection. On January
23, 2002, the FDA released a copy of the establishment report (EIR) for the
October 27, 2001 to November 19, 2001 inspection and has indicated that the
inspection is closed. The Company intends to continue to conduct business in
such a manner as to avert any FDA action seeking to interrupt or suspend
manufacturing or require any recall or modification of products.
4644
ALLIED HEALTHCARE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has recognized the costs and associated liabilities only for
those investigations, claims and legal proceedings for which, in its view, it is
probable that liabilities have been incurred and the related amounts are
estimable. Based upon information currently available, management believes that
existing accrued liabilities are sufficient and that it is not reasonably
possible at this time that any additional liabilities will result from the
resolution of these matters that would have a material adverse effect on the
Company's consolidated results of operations, financial position, or cash flows.
13. 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.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for fiscal 20022003 and 20012002 appears below
(all amounts in thousands, except per share data):
JuneTHREE MONTHS ENDED,
-----------------------------------------------------------------------------------------
JUNE 30, MarchMARCH 31, Dec.DEC. 31, Sept.SEPT. 30, JuneJUNE 30, MarchMARCH 31, Dec.DEC. 31, Sept.SEPT. 30,
Three months ended,2003 2003 2002 2002 2002 2002 2001 2001
2001 2001 2000 2000
- ---------------------------------------------------------------------------------------------------------------------------------- --------- -------- --------- -------- --------- -------- ---------
Net sales $ 15,683sales................. $14,327 $16,443 $14,852 $15,241 $15,683 $15,188 $15,398 $ 14,146 $ 16,556 $ 16,643 $16,709 $ 15,020$14,146
Gross profitprofit.............. 3,244 4,241 3,385 3,184 567 3,391 3,627 2,831
4,705 4,175 4,176 3,607
Income (loss) from
operationsoperations.............. (135) 818 (40) (140) (12,177) 325 454 (532)
1,014 598 418 (20)
Net income (loss)......... (106) 365 (176) (240) (11,347) 29 97 (510)
631 40 (90) (347)
Basic and diluted earnings
$ (1.44) $ 0.00 $ 0.01 $ (0.07) $ 0.08 $ 0.01 $ (0.01) $ (0.04)
(loss) per shareshare........ (0.01) 0.05 (0.02) (0.03) (1.44) -- 0.01 (0.07)
15. SUBSEQUENT EVENTS
On September 25, 2002, the Company received a waiver from the Bank for
its covenant violations pertaining to its fixed charge ratio and the earnings
before interest, taxes, depreciation, and amortization ratio (EBITDA), which the
Company was in default of on June 30, 2002.
On September 26, 2002,2003, the Bank further amended the Company's credit
facility (the amended credit facility). Under the terms of the amended credit
facility, the interest rate on each loan outstanding at an Event of Default, as
defined in the amended credit facility, will bear interest at the rate of 2.00%
per annum in excess of the interest rate otherwise payable thereon and interest
payments will be payable on demand. The Bank amended various financial
covenants in conjunction with the amended credit facility to includeincluding a quarterlyreduction
in the required fixed coverage charge ratio and the elimination of the EBITDA
ratio through June 30, 2003, which are adjustedcovenant. The Bank amended the borrowing base to measurement on an annual basis beginning on July 1, 2003.include 80% of eligible
accounts receivable plus the lesser of 50% of eligible inventory or $7.0
million, subject to reserves as established by the Bank. In addition, the
outstanding loans under the amended credit facility will bear interest at an
annual interest rate of 0.75%1.00% plus the Bank's prime rate. In conjunction with
these amendments to the Company's credit facility, the Bank extended the
maturity on the Company's term loan on real estate from August 1, 2003 to April
24, 2005. Amortization on the real estate term loan shall continue on a
five-year schedule with equal monthly payments of $49,685. The real estate term
loan will bear interest at an annual interest rate andof 1.00% plus the Bank's
prime rate. The Company also received a waiver from the Bank for its covenant
violations pertaining to its EBITDA covenant, which the Company shall
not havewas in default
of on June 30, 2003.
On July 28th, 2003 the option to elect a LIBOR rateCompany announced an immediate workforce reduction
of interest for its outstanding
borrowings. The Company's per annum fee on any outstanding letters14 positions from it's managerial and administrative staff and 5 positions
from it's production group. This reduction, effective immediately in July,
resulted in severance pay of credit
underapproximately $73,000, which was paid in the amended credit facility will be 2.50%. The borrowing period under the
term loan for capital expenditures, which will represent 80%first
quarter of the purchase
price of the related equipment, has been extended to eight months from the date
of the original credit facility.
47fiscal 2004.
45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this Report, management of the
Company, with the participation of the Company's President and principal
executive officer and the Company's Vice President-Finance and principal
financial officer, evaluated the effectiveness of the Company's "disclosure
controls and procedures" as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934. Based on that evaluation, these officers concluded that,
as of June 27, 2003, the Company's disclosure controls and procedures were
effective to provide reasonable assurance that information required to be
disclosed in the Company's periodic filings under the Securities Exchange Act of
1934 is accumulated and communicated to the Company's management, including
those officers, to allow timely decisions regarding required disclosure.
During the period covered by this Report, there were no changes in the
Company's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
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 7, 2002.13, 2003. The information required
by this item is set forth under the caption "Election of Directors", under the
caption "Executive Officers", and under the caption Section 16(a) Beneficial
Ownership Reporting Compliance in 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" in the definitive proxy statement, which information is
incorporated herein by reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
definitive proxy statement, which information is incorporated herein by
reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information by this item will appear in the section entitled "Audit
Fees" included in the Company's definitive Proxy Statement to be filed on or
about October 13, 2003, relating to the 2003 Annual Meeting of Shareowners, and
such information is incorporated herein by reference.
46
PART IV
ITEM 14.15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, 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,
2003, 2002, 2001, and 20002001
Consolidated Balance Sheet at June 30, 20022003 and 20012002
Consolidated Statement of Changes in Stockholders' Equity for the
years ended June 30, 2003, 2002 2001 and 20002001
Consolidated Statement of Cash Flows for the years ended June 30,
2003, 2002 2001 and 20002001
Notes to Consolidated Financial Statements
Report of Independent Accountants
48
Auditors
2. FINANCIAL STATEMENT SCHEDULE
Valuation and Qualifying Accounts and Reserves for the Years Ended
June 30, 2003, 2002 2001 and 20002001
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
3. EXHIBITS
The exhibits listed on the accompanying Index to Exhibits are filed as part
of this Report.
4. REPORTS ON FORM 8-K
None
49On May 20, 2003, the Registrant filed a report on Form 8-K providing
Regulation FD disclosure with respect to its press release dated May 13, 2003,
releasing third quarter results.
On July 28, 2003, the Registrant filed a report on Form 8-K with respect to
its press release dated July 28, 2003, disclosing its failure to meet, as of
June 30, 2003, applicable EBITDA requirements under its loan agreement with
LaSalle Bank and also relating to its reduction in management and administrative
staff.
47
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/ EarlEARL R. Refsland
----------------------------------------------REFSLAND
--------------------------------------
Earl R. Refsland
President and Chief Executive Officer
/S/ Daniel/s/ DANIEL C. Dunn
----------------------------------------------DUNN
--------------------------------------
Daniel C. Dunn
Vice President, Chief Financial
Officer, and Secretary
Dated :Dated: September 27, 20022003
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, 2002.2003.
SIGNATURES TITLE
---------- -----
* Chairman of the Board
- -----------------------------------------------------------------------
John D. Weil
* President, Chief Executive Officer and Director
(Principal- -------------------------------------- (principal Executive Officer)
- ---------------------------------
Earl R. Refsland
* Director
- -----------------------------------------------------------------------
William A. Peck
* Director
- -----------------------------------------------------------------------
Brent D. Baird
* Director
- -----------------------------------------------------------------------
James B. Hickey, Jr.
Director
* By: /s/ Earl R. Refsland*By: /s/ EARL R. REFSLAND
------------------------------
Earl R. Refsland
Attorney-in-Fact
- ------------
* Such signature has been affixed pursuant to the following Power of Attorney.
50
CERTIFICATIONS
I, Earl R. Refsland, President and Chief Executive Officer of Allied Healthcare
Products, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Allied Healthcare
Products, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
Date: September 30, 2002
s/ Earl R. Refsland
- -------------------
Earl R. Refsland,
President and Chief Executive Officer
I, Daniel C. Dunn, Vice President-Finance and Chief Financial Officer of Allied
Healthcare Products, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Allied Healthcare
Products, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
Date: September 30, 2002
s/ Daniel C. Dunn
- -----------------
Daniel C. Dunn,
Vice President-Finance and Chief Financial Officer
48
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 CHARGED TOOTHER
BEGINNING OF COSTS OTHERAND ACCOUNTS --- DEDUCTIONS --- BALANCE AT END
DESCRIPTION PERIOD AND EXPENSES DESCRIBE DESCRIBE OF PERIOD
- ----------------------------------------------------------------------------------------------------------------------------------------- ------------ ------------ ---------------- ------------- --------------
FOR THE YEAR ENDED JUNE
30, 20022003
Reserve For Doubtful
Accounts $(605,714) $(171,412) $327,126 (1) $($450,000)Accounts.............. $ (450,000) $ (36,569) $ 11,569(1) (475,000)
Inventory Allowance For
Obsolescence And
Excess QuantitiesQuantities..... $(4,812,074) $2,487,816(2) $(2,324,258)
----------- ----------- -------- ---------- -----------
FOR THE YEAR ENDED JUNE
30, 2002
Reserve For Doubtful
Accounts.............. $ (605,714) $ (171,412) $ 327,126(1) $ (450,000)
Inventory Allowance For
Obsolescence And
Excess Quantities..... $(2,572,967) $(3,216,916) $977,809 (2)$ 977,809(2) $(4,812,074)
- ------------------------------------------------------------------------------------------------------------------------------------------- ----------- -------- ---------- -----------
FOR THE YEAR ENDED JUNE
30, 2001
Reserve For Doubtful
Accounts $(882,874) $(259,997) $537,157 (1) $(605,714)Accounts.............. $ (882,874) $ (259,997) $ 537,157(1) $ (605,714)
Inventory Allowance For
Obsolescence And
Excess QuantitiesQuantities..... $(2,894,610) $(149,000) $470,643 (2)$ (149,000) $ 470,643(2) $(2,572,967)
- --------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30, 2000
Reserve For
Doubtful Accounts $(834,883) $(68,667) $20,676 (1) $(882,874)
Inventory Allowance
For Obsolescence
And Excess Quantities $(1,936,402) $(958,208) -- $(2,894,610)
- ------------------------------------------------------------------------------------------------------------------------------------------- ----------- -------- ---------- -----------
- ---------------
(1) Decrease due to bad debt write-offs and recoveries.
(2) Decrease due to disposal of obsolete inventory.
S-1
INDEX TO EXHIBITS
EXHIBIT NO. DescriptionDESCRIPTION
- --- ----------- -----------
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, 19971995 (the "1997"1995 Form
10-K") and incorporated herein by reference)
10.1 NCG Trademark License Agreement, dated April 16, 1982, between Liquid Air Corporation and10.6 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.Amended 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)10(28) 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)
10.12 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 Woodbourne Partners, L.P.Donald E. Nickelson (filed with
the Commission as Exhibit 10(36)10(37) to the 1997 Form 10-K and
incorporated herein by reference)
10.1310.14 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)
S-2
10.22 Form of Indemnification Agreement with officers and
directors (filed with the Commission as exhibitExhibit 10.22 to the
2001 form2002 Form 10-K and incorporated herein by reference).
10.25 Employment Agreement dated August 24, 1999 by and between
Allied Healthcare Products, Inc. and Earl Refsland (filed
with the Commission as Exhibit 10(25) to the 1999 Form 10-K
and incorporated herein by reference)
10.26 Allied Healthcare Products, Inc. 1999 Incentive Stock Plan
(filed with the Commission as Exhibit 10(26) to the 1999
Form 10-K and incorporated herein by reference)
10.28 Agreement between Allied Healthcare Products, Inc. Medical
Products Division and District No. 9 International
Association of Machinists and Aerospace Workers dated August
1, 2000 through May 31, 2003 (filed with the Commission as
exhibit 10.29Exhibit 10.28 to the 2000 form 10-K and
incorporated herein by reference)2002 Form 10-K)
10.29 Letter Agreement dated July 2, 2001 between Allied
Healthcare Products, Inc. and Daniel C. Dunn (filed with the
Commission as exhibitExhibit 10.29 to the 2001 form 10-K and incorporated
herein by reference)2002 Form 10-K)
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.30 Loan and security agreement dated April 24, 2002 between the
Company and LaSalle Bank National Association, including
form of notes (filed with the Commission as exhibitExhibit 10.1 to
quarterly reportthe Quarterly Report on formForm 10-Q forfiled May 15, 2002)
10.30.1 Amendment to Loan and security agreement dated September
26,2002 (filed with the quarter ended March 31, 2002Commission as an exhibit to Current
Report on Form 8-K on October 1, 2002)
10.30.2 Amendment to Loan and incorporated herein
by reference)security agreement dated September 26,
2003 (filed herewith)
21 Subsidiaries of the Registrant (filed with the Commission as
exhibitExhibit 21 to the 2000 form 10-K
and incorporated herein by reference)Form 10-K)
23 Consent of PricewaterhouseCoopers LLP (filed herewith)
24 PowersForm of Power of Attorney 99.1-- (filed herewith)
31.1 Certification under Section 906 of Sarbanes-Oxley by Chief Executive Officer 99.2(filed herewith)
31.2 Certification under Section 906 of Chief Financial Officer (filed herewith)
32.1 Sarbanes-Oxley byCertification of Chief Executive Officer
(provided herewith)*
32.2 Sarbanes-Oxley Certification of Chief Financial Officer
(provided herewith)*
99.1 Press Release announcing 2003 earnings (provided herewith)*
S-3- ---------------
* Notwithstanding any incorporation of this Annual Report on Form 10-K in any
other filing by the Registrant, Exhibits designated with an asterisk (*) shall
not be deemed incorporated by reference to any other filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934 unless
specifically otherwise set forth therein.