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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
(Mark One) Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-19266
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ALLIED HEALTHCARE PRODUCTS, INC.
[EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER]
DELAWARE 25-1370721
(STATE OR OTHER (I.R.S. EMPLOYER
JURISDICTION OF IDENTIFICATION
INCORPORATION OR NO.)
ORGANIZATION)
1720 SUBLETTE AVENUE
ST. LOUIS, MISSOURI 63110
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (314) 771-2400
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock
Preferred Stock
Preferred Stock Purchase Rights
(Title of class)
--------------------
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes. No.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of September 23, 1997, the aggregate market value of the voting stock
held by non-affiliates (5,586,605 shares) of the Registrant was $42,947,026
(based on the closing price, on such date, of $7.6875 per share).
As of September 23, 1997, there were 7,806,682 shares of common stock,
$0.01 par value (the "Common Stock"), outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement dated October 10, 1997 (portion) (Part III)
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ALLIED HEALTHCARE PRODUCTS, INC.
INDEX TO FORM 10-K
PAGE
PART I
Item 1. Business.............................................................1
Item 2. Properties..........................................................11
Item 3. Legal Proceedings...................................................12
Item 4. Submission of Matters to a Vote of Security Holders.................12
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters.................................................12
Item 6. Selected Financial Data.............................................13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................13
Item 8. Financial Statements and Supplementary Data.........................25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................................44
PART III
Item 10. Directors and Executive Officers of the Registrant..................44
Item 11. Executive Compensation..............................................44
Item 12. Security Ownership of Certain Beneficial Owners and
Management..........................................................45
Item 13. Certain Relationships and Related Transactions......................45
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K...........................................................45
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 therapy equipment, medical gas construction equipment
and emergency medical products. The Company believes that it maintains
significant market shares in selected product lines.
Allied offers a broad spectrum of respiratory therapy products for use in
the trauma, hospital, home and sub-acute care settings. The Company's products
are marketed under well-recognized and respected brand names to hospitals,
hospital equipment dealers, hospital construction contractors, home health care
dealers, emergency medical products dealers and others.
Allied's product lines include:
Respiratory Therapy Equipment Medical Gas Equipment
respiratory care/anesthesia medical gas system construction products
home respiratory care medical gas system regulation products
Emergency Medical Products disposable oxygen and specialty gas cylinders
respiratory/resuscitation portable suction equipment
trauma and patient handling products
The Company's principal executive offices are located at 1720 Sublette
Avenue, St. Louis, Missouri 63110, and its telephone number is (314) 771-2400.
1
MARKETS AND PRODUCTS
In fiscal 1997, respiratory therapy equipment, medical gas equipment and
emergency medical products represented approximately 54%, 36% and 10%,
respectively, of the Company's net sales. The Company operates in a single
industry segment and its principal products are described in the following
table:
PRINCIPAL
PRODUCT DESCRIPTION BRAND NAMES PRIMARY USERS
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RESPIRATORY THERAPY EQUIPMENT
Respiratory Care/Anesthesia Ventilators; large Bear; Hospitals
Products volume compressors; Timeter; and
ventilator BiCore sub-acute
calibrators; care
humidifiers, facilities
spirometers and
monitoring systems
Home Respiratory Care Oxygen concentrators; Timeter; Patients at home
Products bottled oxygen B&F;
equipment; pressure Schuco;
regulators; Bear
nebulizers; portable
large volume
compressors; portable
suction equipment and
portable ventilators
MEDICAL GAS EQUIPMENT
Construction Products In-wall medical gas Chemetron; Hospitals
system components; Oxequip and
central station pumps sub-acute
and compressors and care
headwalls facilities
Regulation Devices Flowmeters; vacuum Chemetron; Hospitals
regulators; pressure Oxequip;
regulators and related Timeter
products
Disposable Disposable oxygen and Lif-O-Gen First aid
Cylinders specialty gas cylinders providers and
substance abuse
compliance
personnel
Suction Equipment Portable suction Gomco Hospitals and
equipment and sub-acute care
disposable suction facilities
canisters
EMERGENCY MEDICAL PRODUCTS
Respiratory/Resuscitation Demand resuscitation LSP; Emergency service
Products valves; bag mask Omni-Tech providers
resuscitators;
emergency transport
ventilators and oxygen
products
Trauma and Patient Handling Spine immobilization LSP; Emergency service
Products products; pneumatic Design providers
anti-shock garments Principles
and trauma burn kits
2
RESPIRATORY THERAPY EQUIPMENT
MARKET. Respiratory therapy equipment is used in the treatment of chronic
respiratory and pulmonary disease and temporary respiratory distress. Conditions
treatable with respiratory therapy products include asthma and respiratory
problems associated with AIDS, lung cancer and trauma. The Company believes that
sales of respiratory therapy products will benefit from the aging population,
improved diagnosis, technology advancements and an increased recognition and
treatment of respiratory illnesses. Allied expects that the global home
respiratory care equipment market will continue to be a growth area as cost
containment pressures continue to encourage a shift in the delivery of health
care from the hospital to lower cost alternate site settings, such as the home,
while technology advancements make home treatment of respiratory patients
possible.
Respiratory therapy equipment is used in both hospitals and alternate site
settings. Sales of respiratory care and anesthesia products are made through
distribution channels focusing on hospital and sub-acute care facilities. Sales
of home respiratory therapy products are made through durable medical equipment
dealers, through telemarketing, independent sales representatives, and by
contract sales with national chains.
The Company believes that it holds a significant share of the U.S. market
and selected foreign markets for certain respiratory therapy equipment,
including large volume compressors and ventilator calibrators. The Company also
believes that it has the leading share of the U.S. market for portable suction
equipment and has a significant market presence in other areas, including CO2
absorbent, adult ventilation, bottled oxygen equipment and accessories. Allied
intends to continue to emphasize the marketing and sale of home respiratory care
products.
RESPIRATORY CARE/ANESTHESIA PRODUCTS. The Company manufactures and sells a
broad range of products for use in respiratory care and anesthesia delivery. The
Company markets a full line of critical care ventilators, humidifiers and
monitoring systems to hospitals, sub-acute care facilities and home health care
dealers. Ventilators ease the work of patient breathing while monitoring other
pulmonary functions for the care provider. The Company manufactures ventilators
designed for both infants and adults. In August 1996, the Company received 510k
approval from the United States Food and Drug Administration and introduced the
Bear Cub 750R, a new infant ventilator which utilizes a unique patented "volume
limits" technology which establishes an upper boundary to minimize the potential
risk of overinflation of an infant's lungs.
In addition, the Company manufactures large volume compressors, which are
utilized to power volume ventilators and to convert certain drugs into an
aerosol form for delivery through the upper airways, and ventilator calibrators,
which are used primarily by hospital biomedical departments for testing
ventilators for compliance with manufacturers' specifications. The Company's
ventilator calibrator is referred to in virtually every major ventilator
manufacturer's operating and maintenance manuals.
The Company's other respiratory care/anesthesia products include CO2
absorbent which is used to absorb carbon dioxide in anesthesia machines that
deliver gas through a closed system mask covering the patient's nose and mouth,
oxygen tents, spirometers used to test lung capacity for purposes of detecting
and analyzing lung disease, oxygen timers used to measure oxygen usage and
ultrasonic nebulizers used to convert drugs into a fine mist for delivery to the
lungs.
HOME RESPIRATORY CARE PRODUCTS. Home respiratory care products represent
one of Allied's potential growth areas. Allied's broad line of home respiratory
care products includes oxygen concentrators, bottled oxygen equipment, pressure
regulators, portable large volume compressors, portable suction equipment and
portable ventilators.
Allied's oxygen concentrators, bottled oxygen equipment and pressure
regulators are all used in the delivery of home oxygen therapy. Oxygen
concentrators take air from a room and convert it into approximately 95% pure
oxygen. The Company believes that the market for oxygen concentrators will
experience substantial growth, particularly in markets outside of the United
States. Bottled oxygen equipment includes lightweight aluminum cylinders
containing pure oxygen. This equipment is utilized by mobile patients when they
leave the
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home. Pressure regulators manufactured by the Company, similar to those that
Allied sells in the hospital market, are used on these aluminum cylinders.
Allied's portable large volume compressors are used to provide air to
drive ventilators and to deliver aerosolized drugs in the home. Portable suction
equipment is used in the home by people who have had tracheotomies and have had
tracheal tubes temporarily inserted. Suctioning is used intermittently to keep
the artificial airway clear.
The Company manufactures critical care ventilators and humidifiers which
are sold to patients for use in the home. The Company also offers an extensive
line of plastic disposable medical products, including tubing, humidifiers,
cannulas, oxygen masks, aerosol masks used with nebulizers and ventilator
circuits. In addition, Allied manufactures compressor nebulizers which convert
liquid medicine into airborne particles for application deep into the lungs.
Compressor nebulizers are primarily used by children suffering from asthma,
cystic fibrosis and other breathing disorders.
MEDICAL GAS EQUIPMENT
MARKET. The market for medical gas equipment consists of hospitals and, to
a lesser degree, alternate site settings, as well as durable medical equipment
dealers and other users of portable equipment. Medical gas system construction
products and regulation devices are sold to hospitals and sub-acute care
facilities. Medical gas equipment is used to deliver oxygen, air and suction to
patients for brief or extended periods in settings ranging from intensive-care
facilities in hospitals to restaurants and industrial facilities. The Company's
medical gas equipment product line is subject to severe cost containment
pressures as managed care programs increasingly direct patients to lower cost
alternate site settings. The Company's medical gas products are sold directly to
hospitals, hospital construction contractors and durable medical equipment
dealers. Principal customers for disposable oxygen and specialty gas cylinders
include substance abuse compliance personnel and customers that require oxygen
for infrequent emergencies. Portable suction equipment is sold to health care
facilities and durable medical equipment dealers.
The Company believes that it holds a leading share of the U.S. market for
in-wall components, and that its Chemetron and Oxequip lines are well recognized
by hospital construction contractors. The Company believes that its in-wall
components are installed in more than 3,000 hospitals in the United States. The
Company also believes that it holds a significant share of the U.S. market for
flowmeters, vacuum regulators and pressure regulators and many medical gas
system regulation and portable suction equipment devices. Allied tracks its
market position through a proprietary database developed by management that
registers and tracks hospital construction projects in the U.S. market and
enables the Company to determine pricing trends, volume trends and market shares
for each of Allied's sales territories and for the U.S. market as a whole.
Allied believes that its installed base of equipment in this market will
continue to generate follow-on sales. Since hospitals typically do not have more
than one medical gas system, the manufacturer of the existing installed system
has a competitive advantage in follow-on sales of such products to a hospital in
which its system is installed. Accordingly, the Company's existing installed
equipment generates continued demand from its customers for replacement products
and extensions of existing systems, which constitute a significant percentage of
the Company's total sales of medical gas products. The Company also believes
that most hospital and sub-acute care facility construction spending is for
expansion and 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 to attract patients
and personnel. The Company expects that its installed equipment base will
continue to provide the Company with a significant competitive advantage in the
hospital renovation market.
MEDICAL GAS CONSTRUCTION PRODUCTS. Allied's medical gas system
construction products consist of in-wall medical gas system components, central
station pumps and compressors and headwalls. These products are typically
installed during construction or renovation of a health care facility and are
built in as an integral part of the facility's physical plant. Typically, the
contractor for the facility's construction or renovation purchases medical
4
gas system components from manufacturers and ensures that the design
specifications of the health care facility are met.
Allied's in-wall components, including outlets, manifolds, alarms, ceiling
columns and zone valves, serve a fundamental role in medical gas delivery
systems.
Central station pumps and compressors are individually engineered systems
consisting of compressors, reservoirs, valves and controls designed to drive a
hospital's medical gas and suction systems. Each system is designed specifically
for a given hospital or facility by the Company, which purchases pumps and
compressors from suppliers. The Company's sales of pumps and compressors are
driven, in large part, by its share of the in-wall components market.
Headwalls are prefabricated wall units for installation in patient rooms
and intensive care areas which house medical gas, suction and electrical outlets
and fixtures for monitoring equipment. These prefabricated walls also
incorporate designs for lighting and nurse call systems. Headwalls are built to
customer design specifications and eliminate the need for time-consuming
installation of fixtures and outlets and related piping and wiring directly into
the hospital wall. During fiscal 1995, the Company introduced the Trio headwall,
which includes a detachable face plate that permits a health care provider to
switch among one of three gases, thus providing greater flexibility to a
hospital or sub-acute care facility.
MEDICAL GAS REGULATION DEVICES. The Company's medical gas system
regulation products include flowmeters, vacuum regulators and pressure
regulators, as well as related adapters, fittings and hoses which measure,
regulate, monitor and help transfer medical gases from walled piping or
equipment to patients in hospital rooms, operating theaters or intensive care
areas. The Company's leadership position in the in-wall components market gives
the Company a competitive advantage in marketing medical gas system regulation
devices that are compatible with those components. Hospitals that procure
medical gas system regulation devices from the Company's competitors were
previously required to utilize adapters in order to use Allied's in-wall
components. However, in August 1996, the Company introduced its patented Connect
II universal outlet, the first such outlet to allow a hospital to utilize
medical gas system regulation devices and in-wall components produced by
different manufacturers.
DISPOSABLE OXYGEN AND SPECIALTY GAS CYLINDERS. Disposable oxygen cylinders
are designed to provide oxygen supplies for short periods in emergency
situations. Since they are not subjected to the same pressurization as standard
containers, they are much lighter and less expensive than standard gas
cylinders. The Company markets filled disposable oxygen cylinders through
industrial safety distributors and similar customers, principally to first aid
providers, restaurants, industrial plants and other customers that require
oxygen for infrequent emergencies. The Company also markets disposable cylinders
to specialty gas manufacturers for use by substance abuse compliance personnel.
PORTABLE SUCTION EQUIPMENT AND SUCTION CANISTERS. Portable suction
equipment is typically used when in-wall suction is not available or when
medical protocol specifically requires portable suction. The Company also
manufactures disposable suction canisters, which are clear containers used to
collect the fluids suctioned by in-wall or portable suction systems. The
containers have volume calibrations which allow the medical practitioner to
measure the volume of fluids suctioned.
EMERGENCY MEDICAL PRODUCTS
MARKET. Emergency medical products are used in the treatment of
trauma-induced injuries. The Company's emergency medical products provide
patients resuscitation or ventilation during cardiopulmonary resuscitation or
respiratory distress as well as immobilization and treatment for burns. The
Company believes that the trauma care venue for health care services is
positioned for growth in light of the continuing trend in the health care
industry towards providing health care outside the traditional hospital setting.
The Company also expects that other countries will develop trauma care systems
in the future, although no assurance can be given that
5
such systems will develop or that they will have a favorable impact on the
Company. Sales of emergency medical products are made through specialized
emergency medical products distributors.
The Company believes it is a market share leader with respect to certain
of its emergency medical products, including demand resuscitation valves,
portable resuscitation systems and autovents.
RESPIRATORY/RESUSCITATION PRODUCTS. The Company's respiratory/resuscitation
products include demand resuscitation valves, portable resuscitation systems,
bag masks and related products, emergency transport ventilators, precision
oxygen regulators, minilators and multilators and humidifiers.
Demand resuscitation valves are designed to provide 100% oxygen to
breathing or non-breathing patients. In an emergency situation, the valve can be
used with a mask or tracheotomy tubes and operates from a standard regulated
oxygen system. The Company's portable resuscitation systems provide fast, simple
and effective means of ventilating a non-breathing patient during
cardiopulmonary resuscitation and 100% oxygen to breathing patients on demand
with minimal inspiratory effort. The Company also markets a full line of
disposable and reusable bag mask resuscitators. Bag mask resuscitators are
available in a variety of adult and child-size configurations. Disposable
mouth-to-mask resuscitation systems have the added advantage of reducing the
risk of transmission of communicable diseases.
In 1988 the Company introduced the first domestic line of emergency
transport ventilators, or autovents, which are small and compact in design. The
Company's autovent can meet a variety of needs in different applications ranging
from typical emergency medical situations to more sophisticated air and ground
transport. Each autovent is accompanied by a patient valve which provides for
effective ventilation during cardiopulmonary resuscitation or respiratory
distress. When administration of oxygen is required at the scene of a disaster,
in military field hospitals or in a multiple-victim incident, Allied's
minilators and multilators are capable of providing oxygen to one or a large
number of patients.
To complement the family of respiratory/resuscitation products, the
Company offers a full line of oxygen products accessories. This line of
accessory products includes reusable aspirators, tru-fit masks, disposable
cuffed masks and related accessories.
TRAUMA AND PATIENT HANDLING PRODUCTS. The Company's trauma and patient
handling products include spine immobilization products, pneumatic anti-shock
garments and trauma burn kits. Spine immobilization products include a back
board which is designed for safe immobilization of injury victims and provides a
durable and cost effective means of emergency patient transportation and
extrication. The infant/pediatric immobilization board is durable and scaled for
children. The half back extractor/rescue vest is useful for both suspected
cervical/spinal injuries and for mountain and air rescues. The Company's
pneumatic anti-shock garments are used to treat victims experiencing hypovolemic
shock. Allied's trauma burn kits contain a comprehensive line of products for
the treatment of trauma and burns.
SALES AND MARKETING
Allied sells its products primarily to respiratory care/anesthesia product
distributors, hospital construction contractors, emergency medical equipment
dealers and directly to hospitals. The Company maintains a domestic direct sales
force of 57 sales professionals, all of whom are full-time employees of the
Company. The sales force includes 34 respiratory products specialists, 18
hospital construction specialists, one home health care specialist, five
emergency medical specialists and two national account representatives. The
Company also utilizes 10 telemarketers to generate sales in the home health care
market.
Respiratory products specialists are responsible for sales of medical gas
system regulation devices, portable suction equipment and respiratory
care/anesthesia products. These products are principally sold to the
approximately 5,700 hospitals in the United States through specialized
respiratory care/anesthesia product distributors. Many of these suppliers have
had experience with the Company's products as hospital respiratory therapists.
The Company hopes to capitalize on its brand name recognition and the
familiarity of its products and
6
their reputations among these former hospital therapists as a means of
increasing its share of the home respiratory care products market.
Respiratory products specialists are also responsible for sales of the
full line of infant and adult critical care ventilators and humidifiers, as well
as related monitoring equipment. These products are principally sold to
hospitals, sub-acute care facilities and to durable medical equipment suppliers.
Recently, Allied completed a consolidation of its patient care and ventilator
specialists sales forces. The Company believes this consolidation will yield
several benefits, which include optimization of selling expenses through
increased sales coverage, broadening product offerings for each sales call,
significantly reducing the geographic territory for each sales specialist and
combining the strength of complementary product lines.
Construction specialists are responsible for sales of medical gas system
construction products, including in-wall components, central station pumps and
compressors and headwalls. Construction specialists work with hospitals,
architects and project management firms, but most frequently sell to mechanical
and electrical contractors for new construction or renovation projects.
Home health care specialists are responsible for sales of home respiratory
care products. These products are sold through durable medical equipment
suppliers, who then rent or sell the products directly to the patient for use in
the home.
Emergency medical specialists are responsible for sales of
respiratory/resuscitation products, trauma and patient handling products. These
products are principally sold to ambulance companies, fire departments and
emergency medical systems volunteer organizations through specialized emergency
medical products distributors.
The Company employs national account representatives who are responsible
for marketing Allied's products to national hospital groups, managed care
organizations and other health care providers and to national chains of durable
medical equipment suppliers through sales efforts at the executive level.
Generally, the national account representatives secure a commitment from the
purchaser to buy a specified quantity of Allied's products over a defined time
period at a discounted price based on volume.
INTERNATIONAL. International sales represent a growth area which the
Company has been emphasizing, as reflected by the 11.9% increase in
international sales from $30.8 million in fiscal 1996 to $34.5 million in fiscal
1997. Allied's net sales to foreign markets totaled approximately 29% of the
Company's total net sales in fiscal 1997. International sales are made through a
network of dealers, agents and U.S. exporters who distribute the Company's
products throughout the world. The Company currently maintains two international
sales offices. Allied has market presence in Canada, Mexico, Central and South
America, Europe, the Middle East and the Far East. Due to acquisitions and
distribution-related improvements, the Company has increased its sales in the
Far East, an area which is expected to show considerable market growth as a
result of anticipated improvements in the health care infrastructure. For
information regarding the Company's export sales by geographic area, see Note 10
of the Notes to Consolidated Financial Statements incorporated by reference
herein.
MANUFACTURING
Allied's manufacturing processes include fabrication, electro-mechanical
assembly operations and plastics manufacturing. A significant part of Allied's
manufacturing operations involves electro-mechanical assembly of proprietary
products and circuit boards and the Company is vertically integrated in most
elements of metal machining and fabrication. Most of Allied's hourly employees
are involved in machining, metal fabrication, plastics manufacturing and product
assembly.
Allied manufactures small metal components from bar stock in a machine
shop which includes automatic screw machines, horizontal lathes and drill
presses. Additionally, five computer controlled machining centers were purchased
and installed during fiscal 1997 in the Company's St. Louis, Missouri facility.
This $1.5 million investment has substantially modernized the Company's metal
machining capabilities and will result in significant opportunities to reduce
product costs from shorter set-up times, elimination of secondary operations in
component
7
manufacturing, reduced inventory levels, reductions in scrap and improvements in
quality. The Company makes larger metal components from sheet metal using
computerized punch presses, brake presses and shears. The Company utilizes
automated welding equipment and an automated paint line in the production of its
disposable oxygen cylinders. In its plastics manufacturing processes, the
Company utilizes both extrusion and injection molding. The Company believes that
its production facilities and equipment are in good condition and sufficient to
meet planned increases in volume over the next few years and that conditions in
local labor markets should permit the implementation of additional shifts and
days operated to meet any future increased production capacity requirements.
Allied's production of its disposable products has been constrained by
outdated molds and injection molding machinery since the acquisition of B&F
Medical Products, Inc. in 1994,. During fiscal 1996 and 1997, manufacturing
inefficiencies and capacity constraints prevented the Company from shipping to
the level of demand for certain products. Accordingly, the Company invested $1.1
million in molds and injection molding machinery to expand the production
capacity and gain efficiencies at its Toledo, Ohio facility. This investment in
enhanced injection molding capabilities is expected to increase production
throughput, and to provide significant cost reduction opportunities, including
reduced product material content, labor and utility costs, while improving
overall quality and yields.
RESEARCH AND DEVELOPMENT
In order to keep pace with technological advancements, the Company has
increased the level of its research and development activities and anticipates a
continuing commitment to research and development in the future. Research and
development expenditures in fiscal 1996 and 1997 were approximately $3.3 million
and $3.7 million, respectively.
Expenditures for research and development activities primarily included
updating current products and developing new respiratory therapy products. The
Company has approximately 40 engineers and technicians working on research and
development projects.
The Company has recently introduced several new products which resulted
from its research and development efforts. These products include the Bear Cub
750R infant ventilator, the Connect II universal medical gas outlet, the Schuco
2000 nebulizer, Chemetron'sTM line of flowmeters, the BearTM 1000 ventilator
with Smart TriggerR and the GomcoTM Opti-Vac. The Bear Cub 750R infant
ventilator utilizes a unique patented volume limit technology which establishes
an upper boundary to minimize the potential risk of over inflation of an
infant's lungs. The Connect II universal medical gas outlet allows the
interfacing of Allied's gas regulation devices into gas systems installed by its
competitors, thus opening new market potential for the Company. The Schuco 2000
home care nebulizer is designed for the treatment of asthmatics, primarily
children, and has lower production costs, an extended warranty and greater ease
of use. The ChemetronTM flowmeter has been redesigned to more effectively
utilize space with the metering knob in front and offers an extended warranty.
The BearTM 1000 adult and pediatric ICU ventilator with Smart-TriggerR provides
a unique mechanism for automatically adjusting pressure and flow thresholds. The
GomcoTM Opti-Vac meets suctioning needs in all health care settings, including
emergency, acute care, sub-acute care and the home.
GOVERNMENT REGULATION
The Company's products and its manufacturing activities are subject to
extensive and rigorous government regulation by federal and state authorities in
the United States and other countries. In the United States, medical devices for
human use are subject to comprehensive review by the United States Food and Drug
Administration (the "FDA"). The Federal Food, Drug, and Cosmetic Act ("FDC
Act"), and other federal statutes and regulations, govern or influence the
research, testing, manufacture, safety, labeling, storage, record keeping,
approval, advertising, and promotion of such products. Noncompliance with
applicable requirements can result in Warning Letters, fines, recall or seizure
of products, injunction, 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
8
Company to enter into government supply contracts, withdrawal of previously
approved marketing applications and criminal prosecution.
The Company is required to file a premarket notification in the form of a
premarket approval ("PMA") with the FDA before it begins marketing a new medical
device that offers new technology that is currently not on the market. The
Company also must file a premarket notification in the form of a 510(k) with the
FDA before it begins marketing a new medical device that utilizes existing
technology for devices that are currently on the market. The 510(k) submission
process is also required when the Company makes a change or modifies an existing
device in a manner that could significantly affect the device's safety or
effectiveness.
Compliance with the regulatory approval process in order to market a new
or modified medical device can be uncertain, lengthy and, in some cases,
expensive. There can be no assurance that necessary regulatory approvals will be
obtained on a timely basis, or at all. Delays in receipt or failure to receive
such approvals, the loss of previously received approvals, or failure to comply
with existing or future regulatory requirements could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company manufacturers and distributes a broad spectrum of respiratory
therapy equipment, emergency medical equipment and medical gas equipment. To
date, all of the Company's FDA clearances have been obtained through the 510(k)
clearance process. These determinations are very fact specific, and the FDA has
stated that, initially, the manufacturer is best qualified to make these
determinations, which should be based on adequate supporting data and
documentation. The FDA, however, may disagree with a manufacturer's
determination not to file a 510(k) and require the submission of a new 510(k)
notification for the changed or modified device. Where the FDA believes that the
change or modification raises significant new questions of safety or
effectiveness, the agency may require a manufacturer to cease distribution of
the device pending clearance of a new 510(k) notification. Certain of the
Company's medical devices have been changed or modified subsequent to 510(k)
marketing clearance of the original device by the FDA. Certain of the Company's
medical devices, which were first marketed prior to May 28, 1976 and, therefore,
grandfathered and exempt from the 510(k) notification process, also have been
subsequently changed or modified. The Company believes that these changes or
modifications do not significantly affect the device's safety or effectiveness
or make a major change or modification in the device's intended uses and,
accordingly, that submission of new 510(k) notification to FDA is not required.
There can be no assurance, however, that FDA would agree with the Company's
determinations.
In addition, commercial distribution in certain foreign countries is
subject to additional regulatory requirements and receipt of approvals that vary
widely from country to country. The Company believes it is in compliance with
regulatory requirements of the countries in which it sells its products.
The Company's medical device manufacturing facilities are registered with
FDA. As such, the Company will be inspected by FDA for compliance with the GMP
regulations for medical devices. This regulation requires that the Company
manufacture its products and maintain documents in a prescribed manner with
respect to manufacturing, testing and control activities. The GMP regulation has
been revised by FDA to include design controls as well. The Company also is
subject to the registration and inspection requirements of state regulatory
agencies.
In July 1997 FDA conducted an inspection at the Riverside, California
facility and issued a Form FDA 483. The Company has taken what it believes to be
the necessary corrective action and has verbally been notified that such actions
are appropriate and satisfactory. The Company does not anticipate any regulatory
imposed delays in manufacturing or shipping as a result of this FDA inspection
and Form FDA 483.
The Medical Device Reporting regulation requires that the Company provide
information to FDA on deaths or serious injuries alleged to have been associated
with the use of its devices, as well as product malfunctions that would likely
cause or contribute to death or serious injury if the malfunction were to recur.
The Medical Device Tracking regulation requires the Company to adopt a method of
device tracking of certain devices, such as ventilators, which are
life-supporting or life-sustaining devices used outside of a device user
facility or which are permanently implantable devices. The regulation requires
that the method adopted by the Company
9
ensures that the tracked device can be traced from the device manufacturer to
the person for whom the device is indicated (i.e., the patient). In addition,
FDA prohibits a company from promoting an approved device for unapproved
applications and reviews a company's labeling for accuracy. Labeling and
promotional activities also are, in certain instances, subject to scrutiny by
the Federal Trade Commission.
There can be no assurance that any required FDA or other governmental
approval will be granted, or, if granted, will not be withdrawn. Governmental
regulation may prevent or substantially delay the marketing of the Company's
proposed products and cause the Company to undertake costly procedures. In
addition, the extent of potentially adverse government regulation that might
arise from future administrative action or legislation cannot be predicted. Any
failure to obtain, or delay in obtaining, such approvals could adversely affect
the Company's ability to market its proposed products.
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. Whether or not
FDA approval has been obtained, approval of a device by a comparable regulatory
authority of a foreign country generally must be obtained prior to the
commencement of marketing in those countries. The time required to obtain such
approvals may be longer or shorter than that required for FDA approval. In
addition, FDA approval may be required under certain circumstances to export
certain medical devices.
The Company also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protections, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that it will not be
required to incur significant cost to comply with such laws and regulations in
the future or that such laws or regulations will not have a materially adverse
effect upon the Company's ability to do business.
THIRD PARTY REIMBURSEMENT
The cost of a majority of medical care in the United States is funded by
the U.S. Government through the Medicare and Medicaid programs and by private
insurance programs, such as corporate health insurance plans. Although the
Company does not receive payments for its products directly from these programs,
home respiratory care providers and durable medical equipment suppliers, who are
the primary customers for several of the Company's products, depend heavily on
payments from Medicare, Medicaid and private insurers as a major source of
revenues. In addition, sales of certain of the Company's products are affected
by the extent of hospital and health care facility construction and renovation
at any given time. The federal government indirectly funds a significant
percentage of such construction and renovation costs through Medicare and
Medicaid reimbursements. In recent years, governmentally imposed limits on
reimbursement of hospitals and other health care providers have impacted
spending for services, consumables and capital goods. In addition, Congress has
deferred resolution of health care policy issues, including the Medicare and
Medicaid programs and whether there should be changes in the eligibility
requirements for participation in such programs or whether they should be
restructured. A material decrease from current reimbursement levels or a
material change in the method or basis of reimbursing health care providers,
especially with respect to capital spending, as well as uncertainty with respect
to the possibility of such changes, are likely to adversely affect future sales
of the Company's products.
PATENTS, TRADEMARKS AND PROPRIETARY TECHNOLOGY
The Company owns and maintains patents on several products which it
believes are useful to the business and provide the Company with an advantage
over its competitors.
The Company owns and maintains U.S. trademark registrations for Chemetron,
Gomco, Oxequip, Lif-O-Gen, Life Support Products, Timeter, Vacutron, Schuco,
Bear, BiCore, Omnitech and Design Principles, its principal trademarks.
Registrations for these trademarks are also owned and maintained in all
countries where such products are sold and such registrations are considered
necessary to preserve the Company's proprietary rights therein.
10
COMPETITION
The Company has different competitors within each of its product lines.
Many of the Company's principal competitors are larger than Allied and the
Company believes that most of these competitors have greater financial and other
resources than the Company. The Company competes primarily on the basis of
price, quality and service. The Company believes that it is well positioned with
respect to product cost, brand recognition, product reliability and customer
service to compete effectively in each of its markets.
EMPLOYEES
At June 30, 1997, the Company had 854 full-time employees and 30 part-time
employees. Approximately 266 employees in the Company's principal manufacturing
facility located in St. Louis, Missouri, are covered by a collective bargaining
agreement. The Company and the union have an agreement in principle as to the
terms and conditions of the collective bargaining agreement and the Company has
prepared a draft of the agreement and submitted it to the union for
ratification. Such agreement will expire in May 2000. An aggregate of
approximately 115 employees at the Company's facilities in Oakland, California,
Toledo, Ohio and Stuyvesant Falls, New York are also covered by collective
bargaining agreements which expire in 1998 for the Oakland and Stuyvesant Falls
facilities and in 2000 for the Toledo Facility.
In June 1997, the Company experienced a 19-day strike at its principal
facility in St. Louis following the expiration of a collective bargaining
agreement. The work stoppage had a material adverse effect on the Company's
business and results of operations for fiscal 1997. The Company believes that
its labor relations are satisfactory.
ENVIRONMENTAL AND SAFETY REGULATION
The Company is subject to federal, state and local environmental laws and
regulations that impose limitations on the discharge of pollutants into the
environment and establish standards for the treatment, storage and disposal of
toxic and hazardous wastes. The Company is also subject to the federal
Occupational Safety and Health Act and similar state statutes. From time to time
the Company has been involved in environmental proceedings involving clean-up of
hazardous waste. There are no such material proceedings currently pending. Costs
of compliance with environmental, health and safety requirements have not been
material to the Company. The Company believes it is in material compliance with
all applicable environmental laws and regulations.
ITEM 2. PROPERTIES
The Company's headquarters are located in St. Louis, Missouri and the
Company maintains manufacturing facilities in Missouri, California, Ohio and New
York. Set forth below is certain information with respect to the Company's
manufacturing facilities.
SQUARE OWNED/
FOOTAGE LEASED
LOCATION (APPROXIMATE) ACTIVITIES/PRODUCTS
- --------------------- --------- ------- -----------------------
St. Louis, Missouri 270,000 Owned Headquarters; medical
gas equipment;
respiratory therapy
equipment; emergency
medical products
Riverside, 164,000 Leased Respiratory therapy
California equipment
Toledo, Ohio 56,700 Owned Home health care
products
Stuyvesant Falls, 30,000 Owned CO2 absorbent
New York
Oakland, California 12,500 Leased Headwalls
11
In the event of the expiration, cancellation or termination of a lease
relating to any of the Company's leased properties, the Company anticipates no
significant difficulty in connection with leasing alternate space at reasonable
rates. The Company leases a facility in Mt. Vernon, Ohio, which is currently
unused as its operations were consolidated into the Toledo facility as a second
stage of its plant consolidation strategy for its disposable products
operations. In addition, the Company also owns an additional 16.8 acre parcel of
undeveloped land in Stuyvesant Falls, New York.
ITEM 3. LEGAL PROCEEDINGS
Product liability lawsuits are filed against the Company from time to time
for various injuries alleged to have resulted from defects in the manufacture
and/or design of the Company's products. Several such proceedings are currently
pending, which are not expected to have a material adverse effect on the
Company. The Company maintains comprehensive general liability insurance
coverage which it believes to be adequate for the continued operation of its
business, including coverage of product liability claims.
In addition, from time to time the Company's products may be subject to
product recalls in order to correct design or manufacturing flaws in such
products. To date, no such recalls have been material to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Allied Healthcare Products, Inc. began trading on the NASDAQ National
market under the symbol AHPI on January 14, 1992, following its initial public
offering. As of September 23, 1997, there were 261 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 1997 and 1996,
respectively, and dividends declared per share for each quarter of fiscal 1997
and 1996, respectively.
Common Stock Information Dividends Declared Per
Share
1997 High Low 1997 1996
- ------------------------------------------------------ -----------------------------------------------
September quarter $10 1/4 $6 1/4 September quarter -- $0.07
December quarter 7 3/4 6 3/8 December quarter -- 0.07
March quarter 9 1/4 7 March quarter -- 0.07
June quarter 7 1/8 5 3/8 June quarter -- 0.07
-- $0.28
------ ------
12
1996 High Low
- ------------------------------------------------------
September quarter $18 3/4 $15 1/4
December quarter 19 1/2 15 1/2
March quarter 16 3/4 10 1/2
June quarter 13 1/4 8 7/16
Item 6. Selected Financial Data
In thousands, except per share data)
Year ended June 30,
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
Statement of Operations Data
Net sales $118,118 $120,123 $111,639 $74,129 $61,230
Cost of sales 82,365 80,550 68,430 44,172 36,213
Gross profit 35,753 39,573 43,209 29,957 25,017
Selling, general and administrative expenses 33,910 31,449 24,849 16,824 13,879
Income from operations 1,843 8,124 18,360 13,133 11,138
Interest expense 7,606 4,474 3,704 1,338 210
Other, net 186 350 (21) 1 276
Income before provision for income taxes (5,949) 3,300 14,677 11,794 10,652
Provision for income taxes (1,428) 1,473 5,854 4,539 3,967
Net income $(4,521) $1,827 $8,823 $7,255 $6,685
Earnings per share $(0.58) 0.25 1.45 1.31 0.93
Weighted average common shares outstanding 7,797 7,378 6,067 5,522 7,207
In thousands)
June 30,
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
Balance Sheet Data
Working capital $18,743 $38,030 $2,810 $5,018 $10,527
Total assets 126,343 136,760 126,192 64,593 36,926
Short-term debt 12,891 3,849 34,420 13,108 4,110
Long-term debt (net of current portion) 34,041 49,033 34,602 16,513 10,511
Shareholders' equity 59,365 63,886 38,374 20,034 13,498
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion summarizes the significant factors affecting the
consolidated operating results and financial condition of the Company for the
three fiscal years ended June 30, 1997. 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.
13
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.
From December 1993 through November 1995 the Company completed seven
acquisitions which significantly expanded its product lines. These acquisitions
were each accounted for under the purchase method of accounting and were
financed primarily through bank borrowings, resulting in a large increase in the
Company's debt and interest expense. One acquisition was partially financed
through the issuance of common stock. Results of operations of each acquired
company have been included in Allied's consolidated statement of operations from
the date of acquisition. The purchase price of each acquisition was allocated to
the assets acquired and liabilities assumed, based on their estimated fair value
at the date of acquisition. The excess of purchase price over the estimated fair
value of net assets acquired was, in each instance, recorded as goodwill and is
amortized over 20- or 40-year periods from the date of acquisition. Primarily as
a result of these acquisitions, the Company incurred a total of approximately
$1.5 million in goodwill amortization expense in the fiscal year ended June 30,
1997.
The following table summarizes the seven acquisitions:
(Dollars in millions)
PURCHASE
DATE BUSINESS PRODUCTS PRICE
- ---------------------------------------------------------------------------------------------------------------------
December 1993 Life Support Products, Inc. ("LSP") Emergency medical equipment $15.7
March 1994 Hospital Systems, Inc. ("HSI") Headwall products 2.2
September 1994 B&F Medical Products, Inc. ("B&F") Home health care & respiratory therapy products 21.5
February 1995 Bear Medical Systems, Inc. ("Bear") Critical care ventilators 15.4
May 1995 BiCore Monitoring Systems, Inc. ("BiCore") Monitoring systems & equipment for ventilators 4.7
June 1995 Design Principles, Inc. ("DPI") Emergency medical equipment 0.6
November 1995 Omni-Tech Medical, Inc. ("Omni-Tech") Transport ventilators 1.6
These acquisitions expanded the breadth of products the Company offers and
has strategically placed the Company in the potential high growth markets of
home health care and extended care. The Company believes that the expansion of
product line offerings is particularly important in international markets as the
Company continues to increase its worldwide presence. While the Company
continues to believe that these acquisitions will provide a source of future
growth in sales and earnings, the integration and rationalization of the
acquired businesses are still in progress. The softness experienced in core
domestic markets during fiscal 1996 and in the early part of fiscal 1997
combined with internal disruptions caused by a work stoppage in June 1997 and a
computer conversion in October 1996, both in the St. Louis facility, as well as
ongoing negotiations with the Company's commercial bank syndicate, put pressures
on margins and adversely affected the Company's results of operations in fiscal
1997. In addition, higher interest expense incurred under restructured credit
facilities also adversely affected the Company's results of operations. Progress
made by the Company on its consolidation activities and capital projects during
fiscal 1997 is as follows:
RESPIRATORY PRODUCTS SALESFORCE CONSOLIDATION AND TRAINING
During fiscal 1997, the Company consolidated its 21 patient care
specialists with its 21 ventilator specialists to create a 34 person respiratory
products specialists field sales force. The training required for this
consolidation was completed in November 1996. Benefits expected from this
consolidation include optimization of selling expenses through increased sales
coverage, broadening product offerings for each sales call, significantly
reducing the geographic territory for each sales specialist and leveraging the
strengths of these complementary product lines while enabling the sales
specialists to enhance their relationships with customers.
14
HOME HEALTH CARE SALES
During the third quarter of fiscal 1997, the Company completed the refocus
of its sales efforts for the home health care product line to Durable Medical
Equipment Dealers ("DME's"). Allied increased its inside telemarketing sales
group by six and reduced the field sales force by ten. Expanding the inside
telemarketing sales efforts increases the penetration to the DME's and provides
greater coverage and improved customer response time. Allied invested in updated
catalogues, literature, and other mailings during the third quarter of fiscal
1997 to augment its increased telemarketing focus. Contracts with, and sales to,
national home health care chains of these products continue to be made by the
Company's national account sales force.
INFORMATION SYSTEMS ENHANCEMENTS
The Company made advances in upgrading its information technology
capabilities during fiscal 1997. In October 1996, the Company converted its
corporate offices and its St. Louis manufacturing operations to a new
fully-integrated software system. This computer conversion, which should provide
strategic long-term benefits to the Company, caused short-term disruptions in
manufacturing scheduling and shipping of products which, management believes,
resulted in some permanently lost sales. The tools and capabilities of the new
system have enabled the Company to improve manufacturing planning and
scheduling, enhance forecasting and inventory control, and enhance customer
service by improving the quantity and quality of customer and product
information. The Company also plans to convert its Toledo, Ohio operations to
the new system, and preliminary implementation activities have begun. When fully
implemented, the information technology system enhancements should enable the
Company to realize potential synergies of acquisitions through an efficient
integrated data base, enhanced management reporting systems and consolidation of
certain operational functions.
CAPITAL EXPENDITURE PROJECTS
The Company made significant progress in modernizing two of its primary
manufacturing facilities during fiscal 1997. Through a capital lease, the
Company acquired five computer controlled machining centers for its St. Louis,
Missouri facility and completed the programming and installation process in the
third quarter of fiscal 1997. This $1.5 million investment modernized the
Company's metal machining capabilities and provides significant opportunities to
reduce product costs (from shorter set-up times and elimination of secondary
operations in component manufacturing), inventory levels, and scrap and to
improve quality.
In addition, the Company invested $1.1 million in molds and injection
molding machinery to expand the production capacity and gain efficiencies at its
Toledo, Ohio facility. Manufacturing inefficiencies and capacity constraints
caused by outdated injection molding machinery has prevented the Company from
shipping to the level of demand for certain products. This investment in
enhanced injection molding capabilities is expected to increase annual
production, improve overall quality and provide significant cost reduction
opportunities, arising from reduced product material content and lower labor and
utility costs. Under this investment program, six injection molding machines and
eleven molds have been installed as of June 30, 1997. While the Company has
expended both monetary and human resources on these projects in fiscal 1997 and
intends to continue emphasizing these and other internally-controlled projects,
there can be no assurance that the Company will be successful in implementing
these projects and realizing the anticipated synergies.
FISCAL 1997 FOURTH QUARTER RESULTS OF OPERATIONS
The fiscal 1997 fourth quarter represented a difficult period for the
Company. Results of operations in the fourth quarter of fiscal 1997 were
adversely impacted by a variety of factors. The nineteen day work stoppage at
the Company's St. Louis, Missouri facility in June 1997 resulted in a permanent
loss in sales, margin declines, and plant inefficiencies. Interest expense
increased to $3.4 million in the fourth quarter of fiscal 1997 primarily due to
fees paid to the Company's commercial bank group to obtain waivers for technical
covenant violations and for other matters related to its borrowing agreement.
Finally, based on management's assessment of facts related to or
15
culminating in the fourth quarter of fiscal 1997, the Company increased certain
reserves and recorded other charges to operations during the fourth quarter
which totaled approximately $2.0 million. Included in these charges were certain
adjustments to the carrying value of certain of the Company's inventories of
$1.0 million, an increase to the allowance for doubtful accounts of $0.6
million, $0.3 million for the settlement of a lawsuit related to a
pre-acquisition matter at one of the Company's acquired subsidiaries, and $0.1
million for a new product licensing agreement. As a result of these and various
other factors described below, fourth quarter fiscal 1997 net sales were $30.1
million while the net loss was $3.5 million compared to fourth quarter net sales
of $30.2 million and a net loss of $2.2 million in the prior year.
Sales of respiratory therapy equipment for the fourth quarter were $16.3
million, an increase of $0.7 million, or 4.6%, compared to sales of $15.6
million in the prior year. Sales to the hospital market were up 27.5% in the
fourth quarter of fiscal 1997 compared to the fourth quarter of fiscal 1996.
This increase was primarily due to the strong worldwide market acceptance of
recent technology improvements in both the adult critical care ventilator and
Allied's new infant ventilator. Sales to the home health care market, however,
were down by 19.9% in the fourth quarter of fiscal 1997 compared to the fourth
quarter of fiscal 1996. This decrease in sales was attributable to pricing
pressures in the home health care market, capacity problems in the Toledo
facility and, to a lesser extent, the impact of the St. Louis work stoppage.
Sales of medical gas equipment for the fourth quarter were $10.9 million, a
decline of $0.4 million, or 3.4%, compared to sales of $11.3 million in the
prior year. The work stoppage in St. Louis adversely impacted sales of medical
gas regulation devices and medical gas inwall construction products.
Emergency medical products sales in the fourth quarter of fiscal 1997 of
$2.9 million were $0.3 million, or 11.0%, under sales of $3.2 million in the
comparable prior period. This sales trend is a continuation of the first nine
months of fiscal 1997 as a decline in new orders and production constraints
described in the following section have impacted sales of emergency medical
products.
Gross profit for the fourth quarter of fiscal 1997 was $8.1 million, or
26.8% of net sales, compared to $7.6 million, or 25.1% of net sales in the
fourth quarter of fiscal 1996. Gross profit and gross margin in the fourth
quarter of fiscal 1997 were adversely impacted by the effects of the June 1997
work stoppage at the St. Louis, Missouri facility and the adjustments to the
carrying value of the Company's inventories described above. Gross profit and
gross margin for the fourth quarter of fiscal 1996 were adversely impacted by a
decline in manufacturing volumes in certain product lines, which resulted in the
expensing of a portion of fixed plant overhead costs as period costs.
Selling, general and administrative ("SG&A") expenses were $9.2 million in
the fourth quarter of fiscal 1997, a decrease of $0.1 million compared to SG&A
expenses of $9.3 million in the comparable prior year period. The fiscal 1997
fourth quarter included the previously noted increase to the allowance for
doubtful accounts, lawsuit settlement charge and new product license fee which
aggregated approximately $1.0 million.. In addition, the Company completed
severance payments related to the field salesforce consolidation and made
investments in promotional material for the home health care market during the
fourth quarter of fiscal 1997.
The loss from operations for the fourth quarter of fiscal 1997 was $1.1
million compared to a loss of $1.7 million in the prior year reflecting the
factors described above.
Interest expense for the fourth quarter of fiscal 1997 was $3.4 million,
an increase of $2.3 million over interest expense of $1.1 million in the fourth
quarter of fiscal 1996. Sequentially, interest expense increased in the fourth
quarter of fiscal 1997 to $3.4 million compared to fiscal 1997 third quarter
interest expense of $1.7 million. This increase was directly attributable to the
fees paid to the commercial bank group to obtain waivers for technical covenant
violations at March 31, 1997, fees paid for not obtaining a commitment to reduce
the bank group's indebtedness by $20.0 million by May 15, 1997, fees paid for
professional services related to credit negotiations and related audits, and the
amortization of prepaid loan costs. On August 8, 1997 the Company refinanced its
existing bank debt through a new $46.0 million credit facility with Foothill
Capital Corporation, a division of Norwest Bank, and also obtained $5.0 million
of financing through a private placement debt arrangement. The new financing
agreements are discussed further below.
16
The Company incurred a loss before income taxes of $4.5 million in the
fourth quarter of fiscal 1997 compared to a net loss of $3.2 million in the same
period for the prior year. The Company recorded a tax benefit of $1.0 million in
both the fourth quarter of fiscal 1997 and fiscal 1996 for an effective tax rate
of 22.6% and 31.6% in fiscal 1997 and fiscal 1996 respectively. The fiscal 1997
fourth quarter tax rate was impacted by the continued loss from operations, the
non-deductibility of certain goodwill amortization, and the expected lack of
availability of the Company's foreign sales tax credit. Results of operations in
the fourth quarter of fiscal 1997 were a net loss of $3.5 million, or $0.45 per
share, compared to a net loss of $2.2 million, or $0.30 per share, in the fourth
quarter of fiscal 1996.
RESULTS OF OPERATIONS
Allied manufactures and markets respiratory products, including
respiratory therapy equipment, 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 therapy equipment, medical
gas equipment and emergency medical products for the fiscal years ended June 30,
1997, 1996 and 1995.
(DOLLARS IN THOUSANDS) 1997
YEAR ENDED JUNE 30, --------------------------
NET % OF TOTAL
SALES NET SALES
--------------------------
Respiratory therapy equipment........ $ 63,935 54.1%
Medical gas equipment................ 42,566 36.1%
Emergency medical products........... 11,617 9.8%
-------- ------
Total............................... $118,118 100.0%
-------- ------
(DOLLARS IN THOUSANDS) 1996
YEAR ENDED JUNE 30, ---------------------
NET % OF TOTAL
SALES NET SALES
---------------------
Respiratory therapy equipment............$ 63,889 53.2%
Medical gas equipment.................... 43,084 35.9%
Emergency medical products............... 13,150 10.9%
-------- ------
Total....................................$120,123 100.0%
-------- ------
(DOLLARS IN THOUSANDS) 1995
YEAR ENDED JUNE 30, -----------------------
NET % OF TOTAL
SALES NET SALES
------- ----------
Respiratory therapy equipment............$ 48,421 43.4%
Medical gas equipment.................... 50,397 45.1%
Emergency medical products............... 12,821 11.5%
-------- -------
Total....................................$111,639 100.0%
-------- -------
The following table sets forth, for the fiscal periods indicated, the
percentage of net sales represented by certain items reflected in the Company's
consolidated statement of operations.
YEAR ENDED JUNE 30, 1997 1996 1995
- --------------------------------------------------------------------------------------------------
Net sales........................................ 100.0% 100.0% 100.0%
Cost of sales.................................... 69.7 67.1 61.3
----- ------ ------
Gross profit..................................... 30.3 32.9 38.7
Total selling, general and administrative ....... 28.7 26.2 22.3
expenses ----- ----- ----
Income from operations........................... 1.6 6.7 16.4
Interest expense................................. 6.4 3.7 3.3
17
Other expense.................................... 0.2 0.3 --
--- ---- -----
Income (loss) before provision for income taxes.. (5.0) 2.7 13.1
Provision (benefit) for income taxes............. (1.2) 1.2 5.2
Net Income (loss)................................ (3.8%) 1.5% 7.9%
----- ---- -----
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales for fiscal 1997 of $118.1 million were $2.0 million, or 1.7%,
less than net sales of $120.1 million in fiscal 1996. Certain internal and
external factors impacted the Company's sales during fiscal 1997. Included in
the internal operating issues which impacted the Company were the nineteen day
work stoppage in the St. Louis, Missouri facility in June 1997, disruptions to
manufacturing, scheduling and shipping created by the computer conversion in
October 1996, also in the St. Louis facility, capacity constraints at the
Toledo, Ohio facility and changes in the field salesforce. The work stoppage
resulted in permanently lost sales, margin declines, and manufacturing
disruptions during the work stoppage as well as during the pre- and post-work
stoppage periods. In October 1996, the Company converted its St. Louis
manufacturing and corporate office operations to a new, fully-integrated
software system. The computer conversion, which should provide a strategic
long-term benefit to the Company, caused short-term disruptions in manufacturing
and shipping, resulting in lost sales. Management believes that any remaining
issues regarding the computer conversion were substantially resolved by the end
of the third quarter of fiscal 1997 through additional training and program
enhancements. The Toledo facility has been capacity constrained by outdated
injection molding machinery and molds. During fiscal 1997 the Company installed
six new injection mold machines and eleven molds, and the Company is now adding
to its direct labor assembly force in Toledo. Finally, as previously described,
the Company consolidated its respiratory field salesforce and refocused its
sales effort for the home health care product line to inside telemarketing. Each
of these initiatives created short term sales disruptions in addition to the
Company's incurrence of recruiting, training and marketing costs in fiscal 1997.
Certain external issues first experienced in fiscal 1996 continued to
impact the Company's fiscal 1997 operations. The emphasis of healthcare
providers on cost containment has resulted in significant consolidation in the
healthcare environment in recent years. Such consolidation impacted sales as
customers appeared to defer capital purchases as they rationalized their
operations and delayed non-capital purchases as they reduced their consolidated
inventory levels. In addition, the consolidation of healthcare providers
increased the buying power of these customers, which resulted in pricing
pressures.
Finally, the uncertainty over the federal budget, particularly the
possibility of changes in Medicaid and Medicare reimbursement rates, has
impacted sales. Congress has deferred resolution on various health care policy
issues, and the Company is unable to predict the ramifications of this deferral
on future sales. While the Company is unable to predict when these macroeconomic
issues will be resolved, management believes that, over a long-term horizon,
Allied is well positioned to capitalize on the need for its respiratory products
and meet the demands of these products caused by an aging population, an
increase in the occurrence of lung disease, and advances in treatment of other
respiratory illnesses in the home, hospital, and sub-acute care facilities.
New orders, or the pace of incoming business, was strong throughout fiscal
1997. Fiscal 1997 orders of $122.2 million were $5.0 million, or 4.3%, over
orders of $117.2 million in fiscal 1996. While fiscal 1997 orders were impacted
by the work stoppage, computer conversion, and salesforce consolidation
activities, as previously discussed, fiscal 1997 orders exceeded same period
fiscal 1996 orders in all four quarters. The increase in orders appears to have
been driven by an increase in market demand for the Company's core products in
medical gas construction and medical gas equipment as well as the strong
worldwide acceptance of the Company's new ventilation technologies in adult and
infant ventilators.
Medical gas equipment sales of $42.6 million in fiscal 1997 were $0.5
million, or 1.2%, under prior year sales of $43.1 million. Medical gas equipment
sales in fiscal 1997 were adversely impacted by the previously noted June 1997
work stoppage and the effects of the computer conversion. However, market demand
for medical gas equipment sales has been strong, as reflected in new orders for
fiscal 1997 of $45.8 million, which was $4.4 million, or 10.6%, over new orders
in the prior fiscal year. It appears that the consolidation of health care
18
providers may be slowing, and the related rationalization process for facility
protocol and inventory consolidation may be nearing completion. However,
management is unable to predict when the full ramifications of such
consolidation will be felt.
Respiratory therapy equipment sales in fiscal 1997 of $63.9 million were
unchanged from the prior year. Sales to the hospital market increased 11.1% as
sales of ventilation products increased due to the strong world-wide acceptance
of the Smart Trigger technology for the Company's adult critical care ventilator
and technology advances incorporated in the new infant ventilator, the Bear Cub
750(R). In addition, the Company expects to achieve further benefits in the
future from the previously noted combination of its ventilation and patient care
sales forces, which was substantially completed in November 1996. Offsetting the
increase in ventilation product sales was an 11.8% decline in sales of home
health care products. This decline primarily resulted from manufacturing
constraints in the Company's Toledo, Ohio facility, combined with pricing
pressures caused by the ongoing consolidation of home health care dealers.
Concerns over potential reductions in home oxygen therapy reimbursement rates
also continued to impact sales of home health care products in fiscal 1997.
While the Company is unable to predict when these latter two macroeconomic
factors will be resolved, it believes that until there is a resolution of
reimbursement policy issues, current customer purchase patterns are likely to
continue. The previously described installation of new equipment and molds at
the Toledo, Ohio facility have been in accordance with management's
expectations; however, the Company's capacity issues have not fully been
resolved due to direct labor constraints. Management is currently addressing
this constraint through the addition of a third shift. To enhance home health
care product sales, the Company has shifted its sales emphasis to inside
telemarketing sales to increase sales coverage and penetration to DME's, as
previously discussed.
Emergency medical products sales in fiscal 1997 of $11.6 million were $1.5
million, or 11.7%, under sales of $13.1 million in the prior year. This sales
decline was attributable to difficulties the Company had in the relocation of
production of emergency products to the St. Louis, Missouri facility, the impact
of the June 1997 work stoppage and the absence of a large stocking order that
occurred in the prior year. The emergency medical products business has two
elements. One is steady replacement sales and the other element is driven by
events, such as a natural disaster or change in emergency protocol in a
particular country. Management expects sales for the near future to primarily
reflect demand driven by the replacement segment of the business.
The Company continued to increase its presence in world wide markets
during fiscal 1997. International sales, which are included in the product line
sales discussed above, increased $3.7 million, or 11.9%, to $34.5 million in
fiscal 1997 compared to sales of $30.8 million in fiscal 1996. Advances in
medical protocol in various countries throughout the world combined with the
Company's strong international dealer network has enabled the Company to respond
to the increased worldwide demand for respiratory products. In addition, the
strong worldwide market acceptance of the Smart Trigger(R) technology for the
Company's adult critical care ventilator combined with the recent introduction
of the new Bear Cub 750(R) infant ventilator has fueled the growth of
international sales.
Gross profit in fiscal 1997 was $35.8 million, or 30.3% of net sales,
compared to gross profit of $39.6 million, or 32.9% of net sales in fiscal 1996.
The impact of the nineteen day work stoppage and the computer conversion in the
St. Louis, Missouri facility during fiscal 1997 reduced manufacturing output and
margins. In addition, the increase in international sales, which have lower
margins than domestic sales due to the large quantity, bid-based nature of these
sales, combined with pricing pressures brought on by consolidations which
occurred in the Company's customer base, particularly in the hospital and home
health care markets, resulted in reduced margins. In fiscal 1997, as previously
described, the Company recorded certain adjustments to the carrying value of its
inventories in the fourth quarter of approximately $1.0 million. In fiscal 1996,
the Company charged a portion of fixed plant costs as period costs due to a
decline in manufacturing throughput. This fiscal 1996 charge primarily related
to the fourth quarter. The Company anticipates continued pressures on margins
due to the mix of domestic vs. international sales and anticipates continued
pricing pressures from its customer base. In response to margin pressures, the
Company made significant investments in capital expenditures in its St. Louis,
Missouri and Toledo, Ohio facilities which are designed to reduce manufacturing
costs, improve manufacturing cycle times, improve quality and reduce inventory
levels. The Company continues to evaluate its business with an intent to
streamline operations, improve productivity and reduce costs. Accordingly, the
19
Company may implement additional sales force, manufacturing and other strategic
rationalization programs in the future.
Selling, General and Administrative ("SG&A") expenses for fiscal 1997 were
$33.9 million, an increase of $2.5 million over SG&A expenses of $31.4 million
in fiscal 1996. The Company made strategic investments in certain SG&A
activities and recorded certain non-recurring SG&A expenses in fiscal 1997. SG&A
spending included investments in advertising and marketing literature,
investments in information technology, and continued investments in research and
development, all expenditures that potentially could benefit future periods. In
addition, as previously described, the Company completed the recruiting,
training and consolidation of its respiratory products salesforce and incurred
duplicate costs for sales efforts to the DME's in the home health care market
during the transition period of shifting to telemarketing from field sales
representatives. While recruiting and training efforts of the field salesforce
will continue, these expenditures are expected to be less than the relatively
high level of expenditures during fiscal 1997. Fiscal 1997 SG&A expenses also
included the previously noted increase to the allowance for doubtful accounts,
lawsuit settlement charge and new product license fee which aggregated
approximately $1.0 million. Finally, the fiscal 1996 SG&A expenses were affected
by a research grant of $0.3 million which did not repeat in fiscal 1997. As a
percentage of net sales, fiscal 1997 SG&A expenses were 28.7% compared to 26.2%
in fiscal 1996. This increase was attributable to higher SG&A expenses in fiscal
1997, as discussed above, combined with lower sales during the year.
Income from operations in fiscal 1997 of $1.8 million was $6.3 million, or
77.3%, below fiscal 1996 income from operations of $8.1 million. As a percentage
of net sales, income from operations decreased to 1.6% in fiscal 1997 from 6.7%
in fiscal 1996. These decreases were attributable to the factors discussed
above.
Interest expense increased $3.1 million, or 70.0%, to $7.6 million in
fiscal 1997 from $4.5 million in fiscal 1996. The increase in interest expense
in fiscal 1997 consisted of approximately $2.2 million of fees and other
professional costs incurred in connection with the debt amendments, as
previously described, $0.5 million related to increased amortization of prepaid
loan costs, $0.3 million related to increased interest costs for the capital
expenditure projects previously discussed, and $0.1 million, reflecting
increases in effective interest rates which were partially offset by lower
average debt levels. During fiscal 1997 the Company spent significant time and
resources on various matters relating to its debt agreement with a commercial
bank group, including negotiating a debt amendment on September 20, 1996 and
obtaining waivers for technical covenant violations as of December 31, 1996 and
March 31, 1997. The Company was ultimately unable to negotiate a long term
financing arrangement with its commercial bank syndicate. On August 8, 1997,
subsequent to fiscal year end, the Company entered into a $46.0 million credit
facility with Foothill Capital Corporation and obtained $5.0 million in
subordinated debt in a private placement arrangement. The new financing
arrangement, which is expected to lower the Company's interest expense and
provide additional liquidity, is discussed further below.
The Company had a loss before income taxes of $5.9 million, a decrease of
$9.2 million from the income before provision for taxes of $3.3 million in
fiscal 1996. The Company recorded a tax benefit of $1.4 million in fiscal 1997
for an effective tax rate of 24.0%, compared to a provision for income taxes of
$1.4 million in fiscal 1996 and an effective tax rate of 44.6%. The fiscal 1997
effective tax rate was impacted by the loss from operations, the
non-deductibility of certain goodwill amortization, and the expected lack of
availability of the Company's foreign sales tax credit in fiscal 1997.
Net loss in fiscal 1997 was $4.5 million, or $0.58 per share, a decrease
of $6.3 million from net income of $1.8 million or earnings per share of $0.25
in fiscal 1996. The weighted average number of common shares outstanding used in
calculation of per share loss or earnings was 7,796,682 in fiscal 1997 compared
to 7,378,478 in fiscal 1996. The increase in the weighted average number of
common shares reflected the effects of the October 1995 sale of 1,610,000 shares
of common stock in a public offering.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales increased by $8.5 million, or 7.6%, to $120.1 million in fiscal
1996 from $111.6 million in fiscal 1995. The increase in net sales included
$19.9 million in sales as a result of acquisitions partially offset by a
20
decline of $11.5 million in sales of existing products. Numerous external and
internal factors adversely impacted the Company's sales during fiscal 1996.
Certain macro-economic factors first experienced in the second quarter continued
to impact sales throughout the remainder of fiscal 1996, most notably in the
fourth quarter. Political uncertainty over the federal budget, particularly the
possibility of changes in Medicare and Medicaid financing and health care
provider reimbursement rates, adversely impacted customer purchasing decisions.
In late April 1996, Congress resolved the federal fiscal 1996 budget issue, but
deferred resolution of health care policy issues. The on-going consolidation of
health care providers also impacted sales as this activity appears to have
caused customers to delay capital purchases as they rationalized their
operations, and to delay non-capital purchases as they reduced their
consolidated inventory levels. The market softness experienced as a result of
external factors heightened the impact of internal factors on fiscal 1996 sales,
most notably in the fourth quarter.
Internally, the Company experienced disruption in its ventilation product
line field sales force due to the effects of high turnover rates. Due to the
technical nature of selling the ventilation product line, significant efforts
and resources were expended to recruit and train the current field sales force.
In addition, transitioning from distributor sales to a direct field sales force
in certain other product lines, as well as manufacturing capacity issues, also
adversely impacted fiscal 1996 sales. The Company experienced margin pressures
in a number of its product lines due to several factors. These factors included
the significant consolidation of home health care dealers and the resultant
pricing pressures from these customers, the adverse impact of reduced volume on
the cost of manufacturing due to the fixed nature of a significant portion of
the Company's production costs, the impact of manufacturing inefficiencies
experienced at one of the Company's plants, and the higher mix of lower margin
international sales.
Respiratory therapy equipment sales increased $15.5 million, or 31.9%, to
$63.9 million for fiscal 1996, compared to sales of $48.4 million for fiscal
1995. The increase in sales of respiratory therapy products included $19.2
million related to acquisitions, partially offset by a decline of $3.7 million
in sales of existing products. The impact of political uncertainty over the
federal budget reconciliation legislation and a pledge by the Healthcare
Financing Administration, the federal agency that administers Medicare, to
significantly reduce the Medicare home oxygen rental fee rates contributed to
the decline in sales of existing products. Market softness for capital
expenditure products such as critical care ventilators, the consolidation of
home health care dealers, and increased competitive pressure to obtain business
from national accounts put pressure on pricing and margins throughout the last
three quarters of 1996. In addition, manufacturing inefficiencies and capacity
constraints experienced at one of the Company's facilities during fiscal 1996
prevented the Company from shipping to the level of demand for certain products.
Medical gas equipment sales of $43.1 million for fiscal 1996 decreased
$7.3 million, or 14.5%, compared to sales of $50.4 million during fiscal 1995.
Consolidation of health care providers in the acute and post-acute care markets
combined with customer concerns over the outcome of possible capital
reimbursement policy changes adversely impacted fiscal 1996 sales. While the
consolidation of health care providers appears to be slowing, management expects
that sales of medical gas equipment should continue to be adversely impacted
until capital reimbursement policy issues are resolved.
Emergency medical products sales of $13.1 million for fiscal 1996
increased $0.3 million, or 2.6%, compared to sales of $12.8 million during
fiscal 1995. The increase in sales included $0.7 million related to acquisitions
partially offset by a decline of $0.4 million in existing products. The Company
believes the decline in existing emergency medical products sales was
attributable to the timing of orders and shipments. The acquisition of Omni-Tech
in November 1995 had a favorable impact on sales to the U.S. Government, with
$0.4 million in incremental sales during fiscal 1996.
The Company continued to increase its presence in worldwide markets during
fiscal 1996. International sales, which are included in the product line sales
discussed above, increased $6.6 million, or 27.3%, to $30.8 million in fiscal
1996 compared to $24.2 million in fiscal 1995. Acquisitions contributed $8.4
million of the fiscal 1996 increase in international sales which was partially
offset by a decline in sales by $1.8 million of existing products. The decline
in international sales of existing products primarily resulted from fewer new
hospital construction projects in Mexico and other Latin American markets.
21
Gross profit of $39.6 million in fiscal 1996 decreased $3.6 million, or
8.4%, from $43.2 million in fiscal 1995 as a result of sales mix, customer
pricing pressures and manufacturing volume issues. The change in gross profit
resulting from sales mix issues was due to the continued shift in sales to the
home health care market which has lower margins than the construction product
line, which had previously been the Company's primary product group; the
continued increase in international sales, which have lower margins than
domestic sales due to the large quantity, bid-based nature of these sales; and
due to an increase in sales of distributed versus manufactured products during
fiscal 1996. The consolidation of the Company's customer base, particularly in
the hospital and home health care markets, resulted in larger buying groups and
national accounts which increased customers' ability to negotiate prices.
Accordingly, these pricing pressures had an adverse impact on gross profit
margins. In addition, the decline in existing product sales resulted in a
decline in manufacturing volume in the Company's plants, particularly in the
fourth quarter of fiscal 1996. As a result, a portion of fixed plant overhead
costs was expensed as period costs, which adversely impacted margins. As a
percentage of net sales, gross profit was 32.9% and 38.7% in fiscal 1996 and
fiscal 1995, respectively.
SG&A expenses for fiscal 1996 increased $6.6 million, or 26.6%, to $31.4
million in fiscal 1996 from $24.8 million in fiscal 1995. SG&A expenses
increased $6.4 million as a result of acquisitions, most notably increased
selling expenses for the demonstration-based, direct sales-intensive critical
care ventilation product line, increased research and development costs for the
critical care ventilation products, which include development of the new Smart
Trigger and Bear Cub 750 infant ventilator, and increased amortization expense
attributable to the recent acquisitions. As described previously, base period
SG&A expenses increased $0.4 million as the Company invested in additional
training activities for the field sales force, technology upgrades in its
information systems, and other strategic research and development projects. As a
percentage of net sales, SG&A expenses increased to 26.2% in fiscal 1996
compared to 22.3% in fiscal 1995. This increase was attributable to the combined
factors of a decline in sales of existing products and the strategic investments
in training, technology and new products.
Income from operations in fiscal 1996 of $8.1 million was $10.2 million,
or 55.8%, below fiscal 1995 income from operations of $18.4 million. As a
percentage of net sales, income from operations decreased to 6.7% from 16.4% in
fiscal 1996. This decrease was attributable to reduced sales of existing
products, reduced gross margins, and the increase in SG&A expenses discussed
above.
Other expenses increased $1.1 million, or 31.0%, to $4.8 million in fiscal
1996 from $3.7 million in fiscal 1995. Interest expense increased $0.8 million,
or 20.7%, to $4.5 million in fiscal 1996 from $3.7 million in fiscal 1995.
Interest expense increased $1.4 million due to increased debt required to
finance recent acquisitions, offset almost entirely by a reduction in interest
charges resulting from the reduction of existing bank debt as a consequence of
the equity offering completed in October 1995. The additional debt required to
finance working capital, capital expenditures and other operations accounted for
the $0.8 million net increase in interest expense in fiscal 1996. The effective
interest rate was 7.5% and 7.7% in fiscal 1996 and fiscal 1995, respectively.
Income before provision for income taxes decreased $11.4 million, or
77.5%, to $3.3 million in fiscal 1996 from $14.7 million in the prior year. The
Company's fiscal 1996 effective tax rate was 44.6% compared to 39.9% in fiscal
1995. This increase in the effective tax rate was primarily attributable to the
amortization of non-tax deductible acquisition goodwill, which has an increasing
impact on the effective tax rate as pre-tax income decreases.
Net income in fiscal 1996 was $1.8 million, a decrease of $7.0 million, or
79.3% , from $8.8 million in fiscal 1995. Earnings per share decreased to $0.25
in fiscal 1996 from $1.45 in fiscal 1995, or 82.7%. The weighted average number
of common shares outstanding used in the calculation of earnings per share was
7,378,478 in fiscal 1996 compared to 6,066,588 in fiscal 1995. The increase in
the weighted average number of common shares was the result of the October 1995
sale of 1,610,000 shares of common stock and the September 1994 issuance of
640,000 shares of common stock in connection with the acquisition of B&F.
22
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information concerning Allied's
financial condition:
(Dollars in thousands)
June 30, 1997 1996 1995
- ----------------------------------------------------
Cash $ 988 $ 1,489 $ 175
Working capital 18,743 38,030 2,810
Total debt 46,932 52,882 69,022
Current ratio 1.57:1 2.69:1 1.05:1
The Company's working capital was $18.7 million at June 30, 1997 compared
to $38.0 million at June 30, 1996, a decrease of $19.3 million. Accounts
receivables, inventories, and current assets all decreased during fiscal 1997,
while accounts payable, other liabilities and the current portion of long-term
debt all increased during fiscal 1997. Accounts receivable decreased to $23.1
million at June 30, 1997 from $26.0 million at June 30, 1996. The $2.9 million
decrease in accounts receivable was due to the decline in days sales outstanding
("DSO") by three days to 71 DSO at June 30, 1997, combined with the decline in
sales late in the fourth quarter of fiscal 1997 resulting from the work stoppage
in St. Louis. Inventories were $26.1 million at June 30, 1997, a decrease of
$1.9 million from $28.0 million at June 30, 1996. During fiscal 1997, the
Company focused on reducing manufacturing cycle times through modernization of
its plants and improvements in its manufacturing processes in order to better
manage investments in inventories. Inventories, as measured in Days on Hand
("DOH"), declined by twelve days during fiscal 1997 to 128 DOH at June 30, 1997
compared to 140 DOH in the prior year. In addition, the Company made modest
improvements in the mix of its inventories by increasing the safety stock levels
of high volume products, for which customers require shortened delivery times,
and reducing the stocking status of lower volume products. The Company plans to
continue these inventory-related initiatives in fiscal 1998. Accounts payable of
$14.0 million and other accrued liabilities of $6.0 million as of June 30, 1997
increased $0.9 million and $0.5 million, respectively, during fiscal 1997. The
Company experienced limited liquidity during fiscal 1997 due to a reduction in
borrowing availability related to the principal payments made on its term loans
combined with the high level of fees paid to the Company's commercial bank
group, as previously discussed. Consequently, payments to vendors and other
obligations were extended, causing some disruption in deliveries and services.
The Company's limited liquidity situation was alleviated with the completion of
its new credit arrangement in August 1997 which is discussed further below. The
current portion of long term debt was $12.9 million at June 30, 1997 compared to
$3.8 million in the prior year. This increase reflects the terms of the new
credit facility with Foothill Capital Corporation which includes a $4.0 million
term loan and the placement of $5.0 million in subordinated debt, both of which
mature in February 1998. The new financing arrangements are discussed further
below.
Net cash increase/(decrease) was ($0.5) million, $1.3 million, and ($1.2)
million in fiscal 1997, 1996, and 1995 respectively. Net cash provided from
(used by) operations was $8.9 million, $2.5 million, and ($0.3) million for the
same periods. Cash flow from operations in fiscal 1997 consisted of a net loss
of $4.5 million offset by the non-cash charges to operations of $5.6 million for
depreciation and amortization, as well as $7.8 million in cash generated from
changes in working capital accounts other than the current portion of long term
debt. The cash provided by operations was offset by a net reduction in debt of
$8.1 million, debt issuance costs of $0.7 million, and dividend payments of $0.5
million, resulting in a net decrease in cash of $0.5 million in fiscal 1997. The
adverse effect on results of operations has impacted the Company's liquidity and
the ability of the Company to continue historical levels of fixed payments.
Accordingly, on August 21, 1996 the Company's Board of Directors voted to
suspend quarterly dividends effective immediately subsequent to the payment of
dividends for the fourth quarter of fiscal 1996. In addition, on August 8, 1997,
subsequent to fiscal year end, the Company refinanced its existing credit
facilities to reset its fixed debt payments and to provide the Company with
additional liquidity. The refinancing is further discussed below. Besides cash
flows from operations, the Company is considering various alternatives to meet
its debt service requirements in fiscal 1998. Such debt service requirements
include an aggregate of $9.0 million in debt which matures in February, 1998, as
described further below. These alternatives include replacement of such maturing
debt with long-term financing, if available, and an asset sale.
23
At June 30, 1997, the Company had aggregate indebtedness of $46.9 million,
including $12.9 million of short-term debt and $34.0 million of long-term debt.
Aggregate indebtedness at June 30, 1996 was $52.9 million, including $3.9
million of short-term debt and $49.0 million of long-term debt. On October 13,
1995, the Company entered into credit facilities with a commercial bank
syndicate with a final maturity in 2000. The secured credit facilities included
a $40.0 million revolving credit facility and term loans of $15.0 million and
$70.0 million, or aggregate credit facilities of $125.0 million. In September
1996, the Company's credit facilities were amended such that the $68.4 million
unused portion of the $70.0 million acquisition term loan facility was no longer
available. Additionally, amendments were made to the Company's credit facilities
to reset certain covenants, to temporarily increase advance rates on the
revolving credit facility borrowing base and to enter into an additional $5.0
million term loan, leaving credit facilities totalling $60.0 million. All credit
facilities' maturity dates were reset to July 31, 1998. During fiscal 1997, the
Company paid fees of approximately $2.2 million for the September 1996 debt
amendment, to obtain waivers for technical covenant violations at December 31,
1996 and March 31, 1997 and for related matters. The Company was ultimately
unable to negotiate a long-term agreement with its commercial bank syndicate.
Accordingly, on August 8, 1997, subsequent to fiscal year end, the Company
refinanced its existing debt through a new $46.0 million credit facility with
Foothill Capital Corporation, a division of Norwest Bank. The new credit
facility, with a blended average interest rate of 10.2%, is comprised of a $25.0
million three-year revolving line of credit, three-year term loans of $10.0
million and $7.0 million, respectively, and a $4.0 million loan maturing in
February 1998. In conjunction with the new financing agreement, Allied placed an
additional $5.0 million in subordinated debt financing, which matures in
February 1998, with several related parties to the Company. In addition, the
Company issued 112,500 warrants at an exercise price of $7.025 per share, 62,500
of which are being issued to the holders of the subordinated debt and the
balance to Foothill Capital Corporation. The proceeds from the new financing
were used to repay the Company's outstanding debt with the commercial bank
syndicate, and to provide additional liquidity. At August 8, 1997, approximately
$4.1 million was available under the revolving line of credit for additional
borrowings. The new credit facility is expected to reduce the Company's interest
expense in future periods and provide additional liquidity, and reflects
technical covenants which are consistent with the Company's current financial
projections.
Capital expenditures, net of capital leases, were $0.1 million, $3.6
million, and $6.3 million in fiscal 1997, 1996, and 1995, respectively. Assets
acquired under capital leases in fiscal 1997 totaled $1.6 million and will
modernize the Company's St. Louis and Toledo operations, as previously
discussed. Fiscal 1996 capital expenditures included strategic investments in a
new machining center for the Company's St. Louis, Missouri facility, the
purchase of machinery and molds to increase capacity at its Toledo, Ohio
facility and other normal recurring replacements of machinery and equipment.
Fiscal 1995 capital expenditures included an addition to the Company's
manufacturing facility in St. Louis. The Company completed two separate plant
consolidations in fiscal 1996. The Company's headwall construction manufacturing
operation was consolidated into its HSI operations in Oakland, California, and
its disposable medical products operation in Mt. Vernon, Ohio was closed and
consolidated into its Toledo, Ohio facility operations. In addition, the Company
acquired, $2.6 million of computer equipment and software under capital leases
to improve information technology systems. The Company anticipates the
consolidations and investment in capital expenditures will reduce manufacturing
costs, improve manufacturing cycle times and yields, and provide additional
capacity.
The Company reduced its reserves which were recorded in connection with
the previously discussed acquisitions by $1.2 million in fiscal 1997 and $2.0
million in fiscal 1996. These reductions are primarily related to cash payments
for various costs directly attributable to these acquisitions, including
severance, facility rationalization and related matters, and legal, accounting
and consulting fees. The remaining acquisition reserves of approximately $0.9
million at June 30, 1997 are expected to be liquidated primarily over the next
year.
As of June 30, 1997, the Company had a backlog of $23.9 million compared
to a $21.0 million backlog as of June 30, 1996. The Company's backlog, a
significant portion of which is attributable to the Company's medical gas system
construction products and its ventilation products, consists of firm customer
purchase orders which are
24
subject to cancellation by the customer upon notification. Allied's policy is to
recognize backlog orders only when they become shippable. The Company's backlog
has increased in medical gas construction systems products, headwall
construction products, emergency medical products and ventilation products from
year to year.
Inflation has not had a material effect on the Company's business or
results of operations.
SEASONALITY AND QUARTERLY RESULTS
In past fiscal years, the Company has experienced seasonal increases in
net sales during its second and third fiscal quarters (October 1 through March
31) which, in turn, affected net income. Such seasonal variations were likely
attributable to an increase in hospital equipment purchases at the beginning of
each calendar year (which coincides with many hospitals' fiscal years) and an
increase in the severity of influenza during winter months. As the Company has
expanded its sales into the home health care, emergency medical and
international markets, these seasonal variations have diminished, but have not
disappeared.
The following table sets forth selected operating results for the eight
quarters ended June 30, 1997. The information for each of these quarters is
unaudited, but includes all normal recurring adjustments which the Company
considers necessary for a fair presentation thereof. These operating results,
however, are not necessarily indicative of results for any future period.
Further, operating results may fluctuate as a result of the timing of orders,
the Company's product and customer mix, the introduction of new products by the
Company and its competitors, and overall trends in the health care industry and
the economy. While these patterns have an impact on the Company's quarterly
operations, the Company is unable to predict the extent of this impact in any
particular period.
(Dollars in thousands,
except per share data) June March Dec. Sept. June March Dec. Sept.
Three months ended 30, 31, 31, 30, 30, 31, 31, 30,
1997 1997 1996 1996 1996 1995 1995 1995
- ------------------------------------------------------------------------------------------------------------
Net sales $30,129 $30,466 $28,389 $29,134 $30,161 $30,334 $28,439 $31,189
Gross profit 8,063 9,725 8,725 9,240 7,574 9,772 9,889 12,338
Income (loss) from operations (1,091) 1,582 491 862 (1,765) 2,461 2,705 4,723
Net income (loss) (3,485) (302) (556) (177) (2,159) 978 1,012 1,996
Earnings (loss) per share (0.45) (0.04) (0.07) (0.02) (0.30) 0.12 0.11 0.32
NEW ACCOUNTING STANDARD
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128), which
requires public entities to present both basic and diluted earnings per share
amounts on the face of their financial statements, replacing the former
calculations of primary and fully diluted earnings per share. The Company will
adopt FAS 128 effective with its fiscal 1998 second quarter, and anticipates
that, when adopted, FAS 128 will not have a material effect on its reported
earnings per common share.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Allied Healthcare Products, Inc.
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of changes in stockholders'
equity, and of cash flows present fairly, in all material respects, the
25
financial position of Allied Healthcare Products, Inc. and its subsidiaries at
June 30, 1997 and 1996, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 1997, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
St. Louis, Missouri
August 13, 1997
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended June 30,
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
Net Sales $118,117,518 $120,122,502 $111,638,712
Cost of sales 82,364,405 80,549,685 68,430,068
------------------ -------------------- --------------
Gross Profit 35,753,113 39,572,817 43,208,644
Selling, general and administrative expenses 33,909,510 31,449,306 24,848,486
------------------ -------------------- --------------
Income from operations 1,843,603 8,123,511 18,360,158
------------------ -------------------- --------------
Other expenses:
Interest expense 7,606,129 4,474,316 3,703,954
Other, net 186,291 349,445 (20,595)
------------------ -------------------- --------------
7,792,420 4,823,761 3,683,359
------------------ -------------------- --------------
Income (loss) before provision (benefit) for income (5,948,817) 3,299,750 14,676,799
taxes
Provisions (benefit) for income taxes (1,427,716) 1,473,156 5,853,735
------------------ -------------------- --------------
Net income (loss) ($4,521,101) $1,826,594 $8,823,064
================== ==================== ==============
Earnings (loss) per share ($0.58) $0.25 $1.45
See accompanying Notes to Consolidated Financial
Statements
26
CONSOLIDATED BALANCE SHEET
June 30, 1997 1996
- ----------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 988,436 $ 1,489,133
Accounts receivable, net of allowance for doubtful accounts
of $1,225,326 and $422,517, respectively
23,093,037 25,964,658
Inventories 26,052,991 28,046,490
Income taxes receivable -- 2,285,224
Other current assets 1,544,811 2,713,497
---------- ----------
Total current assets 51,679,275 60,499,002
---------- ----------
Property, plant and equipment, net 20,848,870 21,968,504
Goodwill, net 50,763,511 52,821,411
Deferred tax asset-noncurrent 1,665,069 --
Other assets, net 1,386,291 1,471,541
---------- ----------
Total assets $126,343,016 $136,760,458
=========== ===========
27
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $14,048,235 $13,104,299
Current portion of long-term debt 12,890,772 3,848,780
Other accrued liabilities 5,997,670 5,516,045
---------- ----------
Total current liabilities 32,936,677 22,469,124
---------- ----------
Long-term debt 34,041,300 49,033,545
Deferred tax liabilities-noncurrent -- 1,371,649
Commitments and contingencies (Notes 5 and 12)
Stockholders' equity:
Preferred stock; $.01 par value; 1,500,000 shares
authorized;
no shares issued and outstanding
Series A preferred stock; $.01 par value; 200,000 shares
authorized; no shares issued and outstanding
Common stock; $.01 par value; 30,000,000 shares authorized;
7,796,682 shares issued and outstanding at June 30, 1997
and 1996, respectively
101,002 101,002
Additional paid-in capital 46,945,971 46,945,971
Retained earnings 33,049,494 37,570,595
Common stock in treasury, at cost (20,731,428) (20,731,428)
------------ ------------
Total stockholders' equity 59,365,039 63,886,140
---------- ----------
Total liabilities and stockholders' equity $126,343,016 $136,760,458
=========== ===========
See accompanying Notes to Consolidated Financial Statements
28
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
Additional Stock
Preferred Common paid-in subscriptions Retained Treasury
stock stock capital receivable earnings stock
- -------------------------------------------------------------------------------------------------------------
Balance, June 30, 1994 $-- $78,275 $10,097,696 $(70,627) $30,659,721 $(20,731,428)
Issuance of common stock -- 6,615 10,168,570 -- -- --
Tax benefits relating to employee
stock options
-- -- 939,824 -- -- --
Payments on stock subscriptions
receivable
-- -- -- 70,627 -- --
Dividends declared
($.28 per common share)
-- -- -- -- (1,668,425) --
Net income for the year ended
June 30, 1995
-- -- -- -- 8,823,064 --
----- ------- ----------- --------- ---------- ------------
Balance, June 30, 1995 -- 84,890 21,206,090 -- 37,814,360 (20,731,428)
Issuance of common stock -- 16,112 25,739,881 -- -- --
Dividends declared
($.28 per common share)
-- -- -- -- (2,070,359) --
Net income for the year ended
June 30, 1996
-- -- -- -- 1,826,594 --
----- ------- ----------- --------- ---------- ------------
Balance, June 30, 1996 -- 101,002 46,945,971 -- 37,570,595 (20,731,428)
Net loss for the year ended
June 30, 1997
-- -- -- -- (4,521,101) --
----- ------- ----------- --------- ---------- ------------
Balance, June 30, 1997 $-- $101,002 $46,945,971 $-- $33,049,494 $(20,731,428)
----- ------- ----------- --------- ---------- ------------
See accompanying Notes to Consolidated Financial Statements
29
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended June 30, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $(4,521,101) $ 1,826,594 $8,823,064
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities,
excluding the effects of acquisitions:
Depreciation and amortization 5,572,188 3,954,989 2,897,708
Tax benefits relating to employee stock options -- -- 939,824
Decrease (increase) in accounts receivable, net 2,871,621 1,702,297 (4,230,876)
Decrease (increase) in inventories 1,993,499 (4,156,653) (3,325,328)
Decrease (increase) in income taxes receivable 2,285,224 (2,285,224) --
Decrease in other current assets 1,168,686 2,276,486 1,871,659
Increase (decrease) in accounts payable 943,936 3,191,348 (223,020)
Increase (decrease) in other accrued liabilities 1,027,393 (4,325,109) (7,096,196)
Increase (decrease) in deferred income taxes - noncurrent (2,451,982) 315,892 1,309
----------- ----------- -----------
Net cash provided by (used in) operating activities 8,889,464 2,500,620 (341,856)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures, net (58,610) (3,649,284) (6,279,387)
Acquisition of B&F - Net of cash acquired -- -- (11,208,000)
Acquisition of Bear - Net of cash acquired -- -- (15,191,193)
Acquisition of BiCore - Net of cash acquired -- -- (4,699,102)
Acquisition of DPI - Net of cash acquired -- -- (600,000)
Acquisition of Omni-Tech - Net of cash acquired -- (1,557,000) --
Acquisition of operating rights and licenses -- -- (100,000)
----------- ----------- -----------
Net cash used in investing activities (58,610) (5,206,284) (38,077,682)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 5,000,000 16,600,000 61,750,000
Payment of long-term debt (4,662,785) (63,192,220) (26,515,878)
Borrowings under revolving credit agreement 27,365,170 56,100,000 26,088,000
Payments under revolving credit agreement (35,810,605) (28,100,000) (22,798,000)
Proceeds from issuance of common stock -- 25,755,993 171,985
30
Debt issuance costs (677,563) (1,186,351) --
Dividends paid on common stock (545,768) (1,957,577) (1,566,729)
Proceeds from payments on stock subscriptions receivable -- -- 70,627
----------- ----------- -----------
Net cash provided by (used in) financing activities (9,331,551) 4,019,845 37,200,005
----------- ----------- -----------
Net increase (decrease) in cash and equivalents (500,697) 1,314,181 (1,219,533)
Cash and equivalents at beginning of period 1,489,133 174,952 1,394,485
----------- ----------- -----------
Cash and equivalents at end of period $ 988,436 $ 1,489,133 $ 174,952
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 6,614,365 $ 4,142,070 $ 3,964,112
Income taxes $ 138,339 $ 2,587,091 $ 1,082,290
Supplemental schedule of noncash investing and financing
activities:
Equipment acquired through capital leases $ 2,157,967 $ 2,452,565 --
Issuance of common stock in the acquisition of
B&F Medical Products, Inc.
-- -- $10,003,200
See accompanying Notes to Consolidated Financial Statements
31
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 sub-acute care facilities, home
health care and trauma care. The Company's product lines include respiratory
therapy equipment, medical gas equipment and emergency medical products.
2. ACQUISITIONS
The following table summarizes certain information regarding the Company's
acquisitions during the previous three years:
(Dollars in millions)
DATE BUSINESS PRODUCTS Purchase Price
- ------------------------------------------------------------------------------------------------------------------------------------
December 1993 Life Support Products, Inc. ("LSP") Emergency medical equipment $15.7
March 1994 Hospital Systems, Inc. ("HSI") Headwall products 2.2
September 1994 B&F Medical Products, Inc. ("B&F") Home health care & respiratory therapy products 21.5
February 1995 Bear Medical Systems, Inc. ("Bear") Critical care ventilators 15.4
May 1995 BiCore Monitoring Systems, Inc. ("BiCore") Monitoring systems & equipment for ventilators 4.7
June 1995 Design Principles,Inc. ("DPI") Emergency medical equipment 0.6
November 1995 Omni-Tech Medical, Inc. ("Omni-Tech") Transport ventilators 1.6
The above acquisitions were each accounted for under the purchase method
of accounting. Such acquisitions were primarily financed through bank
borrowings, except B&F which included the issuance of 640,000 shares of Allied
common stock. The purchase price of each acquisition has been allocated to the
assets acquired and liabilities assumed, based on their estimated fair values at
the date of acquisition. The excess of purchase price over the estimated fair
value of net assets acquired is recorded as goodwill. Results of operations of
each acquired Company have been included in Allied's consolidated statement of
operations from the date of acquisition.
The following table sets forth pro forma information for Allied as if each
of the previously discussed acquisitions had taken place on July 1, 1994. This
information is unaudited and does not purport to represent actual revenue, net
income and earnings per share had the acquisitions actually occurred on July 1,
1994.
Pro Forma Information (unaudited)
YEAR ENDED JUNE 30 (000'S)
---------------------------------
1996 1995
---- ----
Net sales $ 120,324 $ 133,873
Net income $ 1,951 $ 8,902
Earnings per share $ .26 $ 1.44
Weighted average shares outstanding 7,378,478 6,177,054
32
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by Allied are described
below. The policies utilized by the Company in the preparation of the financial
statements conform to generally accepted accounting principles, and require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual amounts could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and
balances are eliminated.
REVENUE RECOGNITION
Revenue from the sale of the Company's products is recognized upon
shipment to the customer. Costs and related expenses to manufacture the
Company's products are recorded as cost of sales when the related revenue is
recognized.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less when acquired
to be cash equivalents. Book cash overdrafts on the Company's disbursement
accounts totaling $3,867,477 and $1,270,385 at June 30, 1997 and 1996,
respectively, are included in accounts payable.
CONCENTRATIONS OF CREDIT RISK
At June 30, 1997 and 1996, the Company's trade receivables are comprised
as follows:
1997 1996
---- ----
Medical equipment distributors..................... 74% 75%
Construction contractors........................... 16% 15%
Health care institutions........................... 10% 10%
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains reserves for
potential credit losses and historically such losses have been within
management's expectations. At June 30, 1997 the Company had no significant
concentrations of credit risk.
INVENTORIES
Inventories are stated at the lower of cost, determined using the last-in,
first-out (LIFO) method, or market. If the first-in, first-out (FIFO) method
(which approximates replacement cost) had been used in determining cost,
inventories would have been $511,626 and $253,996 higher at June 30, 1997 and
1996, respectively. Inventories include the cost of materials, direct labor and
manufacturing overhead.
Inventory amounts are net of a reserve for obsolete and excess inventory
of $1,689,000 and $1,812,542 at June 30, 1997 and 1996, respectively.
33
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is carried at cost and is depreciated using
the straight-line method over the estimated useful lives of the assets which
range from 3 to 36 years. Properties held under capital leases are recorded at
the present value of the non-cancelable lease payments over the term of the
lease and are amortized over the shorter of the lease term or the estimated
useful lives of the assets. Expenditures for repairs, maintenance and renewals
are charged to income as incurred. Expenditures which improve an asset or extend
its estimated useful life are capitalized. When properties are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the accounts and any gain or loss is included in income.
GOODWILL
The excess of the purchase price over the fair value of net assets
acquired in business combinations is capitalized and amortized on a
straight-line basis over the estimated period benefited, not to exceed 40 years.
The amortization period for all acquisitions to date range from 20 to 40 years.
Amortization expense for the years ended June 30, 1997, 1996 and 1995 was
$1,473,164, $1,446,756, and $1,065,733 respectively. Accumulated amortization at
June 30, 1997 and 1996 was $5,347,843 and $3,874,679 respectively. The carrying
value of goodwill is assessed for recoverability by management based on an
analysis of future expected cash flows from the underlying operations of the
Company. Management believes that there has been no impairment at June 30, 1997.
OTHER ASSETS
Other assets are primarily comprised of debt issuance costs. Such costs
are being amortized on a straight-line basis over the life of the related
obligations.
INCOME TAXES
The Company files a consolidated federal income tax return which includes
its wholly-owned subsidiaries. The Company accounts for income taxes under
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (FAS 109). Under FAS 109, the deferred tax provision is determined using
the liability method, whereby deferred tax assets and liabilities are recognized
based upon temporary differences between the financial statement and income tax
basis of assets and liabilities using presently enacted tax rates.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to income in the year incurred
and are included in selling, general and administrative expenses. Research and
development expense for the years ended June 30, 1997, 1996 and 1995 was
$3,684,702, $3,255,067 and $2,486,622, respectively.
EARNINGS PER SHARE
Earnings per share is computed by dividing net income available to common
stockholders by the weighted average number of shares and share equivalents
outstanding during the period, as adjusted for stock splits. The weighted
average number of shares outstanding for the years ended June 30, 1997, 1996 and
1995 was 7,796,682, 7,378,478 and 6,066,588 shares, respectively. Options under
the Company's employee's and director's stock option plans are not included as
common stock equivalents for earnings per share purposes since they did not have
a material dilutive effect.
34
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128), which
requires public entities to present both basic and diluted earnings per share
amounts on the face of their financial statements, replacing the former
calculations of primary and fully diluted earnings per share. The Company will
adopt FAS 128 effective with its fiscal 1998 second quarter, and anticipates
that, when adopted, FAS 128 will not have a material effect on its reported
earnings per common share.
EMPLOYEE STOCK-BASED COMPENSATION
The Company accounts for employee stock options and variable stock awards
in accordance with Accounting Principles Board No. 25, "Accounting for Stock
Issued to Employees" (APB 25). Under APB 25, the Company applies the intrinsic
value method of accounting. For employee stock options accounted for using the
intrinsic value method, no compensation expense is recognized because the
options are granted with an exercise price equal to the market value of the
stock on the date of grant. For variable stock awards accounted for using the
intrinsic value method, compensation cost is estimated and recorded each period
from the date of grant to the measurement date based on the market value of the
stock at the end of each period.
During fiscal 1996, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Basic Compensation" (FAS 123), became effective for the
Company. FAS 123 prescribes the recognition of compensation expense based on the
fair value of options or stock awards determined on the date of grant. However,
FAS 123 allows companies to continue to apply the valuation methods set forth in
APB 25. For companies that continue to apply the valuation methods set forth in
APB 25, FAS 123 mandates certain pro forma disclosures as if the fair value
method had been utilized. See Note 9 for additional discussion.
4. FINANCING
Long-term debt consisted of the following at June 30, 1997 and 1996:
UNSUBORDINATED DEBT 1997 1996
---- ----
Notes payable to bank under a term loan, revolving credit facility and an
acquisition term, secured by virtually all assets of the Company:
Term Loan - principal due at maturity on July 31, 1998.......................$5,000,000 --
Term Loan -- principal due in quarterly installments of $750,000
through June 30, 1998 with remaining balance due July 31, 1998............... 9,750,000 $12,750,000
Revolving credit facility -- aggregate revolving commitment of
$40,000,000; principal due at maturity on July 31, 1998.....................26,554,565 35,000,000
Acquisition Term Loan - principal due in quarterly installments of
$64,000 through June 30, 1998 with remaining balance due on July 31, 1998.......1,344,000 1,600,000
Other.......................................................................... 62,690 76,135
------- ------
42,711,255 49,426,135
---------- ----------
35
SUBORDINATED DEBT
Industrial Development Revenue Bonds -- principal due in annual
installments of $200,000 through March 1, 1998; $250,000 through
March 1, 2000; $255,000 at maturity on March 1, 2001; interest payable
monthly at variable rates (4.6% at June 30, 1997)............................... 955,000 1,155,000
Capital lease obligations....................................................... 3,265,817 2,301,190
---------- ---------
4,220,817 3,456,190
---------- ----------
46,932,072 52,882,325
Less--Current portion of long-term debt, including
$676,357 and $635,336 of capital lease obligations..............................(12,890,772) (3,848,780)
------------ -----------
$34,041,300 49,033,545
============ ===========
On September 20, 1996, the Company amended its existing credit facilities
with its commercial bank syndicate . The credit agreement, as amended, provided
for borrowings of $21,600,000 under term loans, and $40,000,000 under a
revolving loan, subject to certain limitations based on eligible accounts
receivable, eligible inventory and outstanding letters of credit. Such loans
bear interest at the London Interbank Offered Rate (LIBOR) or at a base rate
plus a specified percentage as set forth within the loan agreement. The interest
rate under each option is determined by the Company's ratio of total
indebtedness to cash flow. As of June 30, 1997, interest on the facilities
ranged from approximately 8.75% to 11.5%.
The revolving agreement requires a commitment fee of 0.25% to 0.37% per
annum, depending on the Company's ratio of total indebtedness to cash flow,
payable quarterly on the unused portions of the loans.
The credit facilities contain restrictions and requirements, including
limitations on capital expenditures, new indebtedness (including lease
agreements) and the maintenance of certain minimum operating cash flow and net
worth levels, among others. At June 30, 1997, the Company was in violation of
certain of these covenants for which waivers have been received through August
15, 1997.
On August 8, 1997, the Company refinanced amounts outstanding under the
term loans and revolving credit facility with its commercial bank syndicate as
further discussed in Note 14. Current maturities of long-term obligations at
June 30, 1997 are classified based upon the payment terms of this new credit
agreement.
The book value of long-term debt at June 30, 1997 approximates fair value.
5. LEASE COMMITMENTS
The Company leases certain of its electronic data processing equipment
under non-cancelable lease agreements. These agreements extend for a period of
up to 60 months and contain purchase or renewal options on a month-to-month
basis. The leases are reflected in the consolidated financial statements as
capitalized leases in accordance with the requirements of Statement of Financial
Accounting Standards No. 13 (FAS 13), "Accounting for Leases". In addition, the
Company leases certain manufacturing facilities under noncancelable operating
leases. These leases are reflected in the consolidated financial statements as
operating leases in accordance with FAS 13.
36
Minimum lease payments under long-term capital leases and the operating
leases at June 30, 1997 are as follows:
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
1998.................................. $ 1,100,481 $ 869,832
1999.................................. 866,629 446,976
2000.................................. 772,657 69,120
2001.................................. 762,412 57,600
2002.................................. 803,432 --
---------- ----------
Total minimum lease payments.......... $ 4,305,611 $1,443,528
==========
Less amount representing interest..... (1,039,795)
-----------
Present value of net minimum lease
payments, including current portion of
$676,357.............................. $ 3,265,816
==========
Rental expense incurred on the operating leases in fiscal 1997, 1996 and 1995
totaled $686,168, $881,318, and $558,190, respectively.
6. INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
1997 1996 1995
---- ---- ----
Current Payable:
Federal................................. $ -- $ 40,240 $3,335,097
State................................... -- -- 488,608
Total Current............................. -- 40,240 3,823,705
Deferred:
Federal................................. (1,214,731) 1,217,979 1,767,979
State................................... (212,985) 214,937 262,051
--------- ------- -------
Total Deferred (1,427,716) 1,432,916 2,030,030
----------- --------- ---------
$(1,427,716) $1,473,156 $5,853,135
============ ========== ==========
Income taxes were (24.0%), 44.6% and 39.9% of pre-tax earnings (losses) in
1997, 1996 and 1995, respectively. A reconciliation of income taxes, with the
amounts computed at the statutory federal rate follows:
1997 1996 1995
---- ---- ----
Computed tax at federal statutory rate..............$(2,022,597) $1,121,915 $5,036,880
State income taxes, net of federal tax benefit...... (160,989) 169,770 498,653
Goodwill............................................ 491,854 482,876 366,010
Other, net.......................................... 264,016 (301,405) (47,868)
------- --------- --------
Total...............................................$(1,427,716) $1,473,156 $ 5,853,735
============ ========== ==========
37
The deferred tax assets and deferred tax liabilities recorded on the
balance sheet as of June 30, 1997 and 1996 are as follows:
AT JUNE 30, 1997 AT JUNE 30, 1996
----------------- ----------------
Deferred Deferred Deferred Deferred
TAX ASSETS TAX LIABILITIES TAX ASSETS TAX LIABILITIES
---------- --------------- ---------- ---------------
Current:
Bad Debts......................... $479,175 -- $165,933 --
Accrued Liabilities............... 635,160 -- 990,360 --
Inventory......................... -- $698,390 -- $731,879
Net operating loss carryforward... -- -- 698,377 --
Other............................. -- 80,000 237,420 --
--------- ------ ------- --------
1,114,335 778,390 2,092,090 731,879
--------- ------- --------- --------
Non Current:
Depreciation...................... -- 319,066 -- 411,969
Other property basis.............. -- 451,918 -- 449,083
Intangible assets................. 438,678 -- 118,250 --
Net operating loss carryforward...2,703,228 -- -- --
Other 383,133 -- -- 306,127
--------- --------- ------- -------
3,141,906 1,154,117 118,250 1,167,179
--------- --------- ------- ---------
Valuation allowance...............(322,720) -- (322,720) --
---------- --------- ---------- ----------
Total deferred taxes..............$3,933,521 $1,932,507 $1,887,620 $1,899,058
========== ========== ========== ==========
At June 30, 1997, the Company had $2,703,228 of net operating loss
carryforwards available to offset future regular taxable income. Such
carryforwards, which may provide future tax benefits, expire as follows:
$698,377 in 2011 and $2,004,851 in 2012.
Management believes the Company will obtain the full benefit of net
operating loss carryforwards on the basis of its evaluation of the Company's
anticipated profitability over the period of years that the net operating losses
can be utilized. There can be no assurance that the Company will generate any
specific level of continuing earnings.
7. RETIREMENT PLAN
The Company offered several retirement savings plans under Section 401(k)
of the Internal Revenue Code to certain eligible salaried employees. Each
employee may elect to enter a written salary deferral agreement under which a
portion of such employee's pre-tax earnings may be contributed to the plan.
During the fiscal years ended June 30, 1997, 1996 and 1995 the Company
made contributions of $601,338, $535,017 and $439,427, respectively.
8. RELATED PARTIES
In 1994, Allied entered into an agreement with entities controlled by a
significant shareholder of the Company for such entities to provide certain
corporate development, consulting and advisory services to the Company. Charges
under this agreement for direct management and administrative services provided
to the Company for the years ended June 30, 1996 and 1995 were $180,821 and
$138,693, respectively. Charges under this agreement for the year ended June 30,
1997 were not material to the Company's consolidated financial statements.
Payments under this agreement in fiscal 1995 also included $408,310 for
corporate development
38
services provided in connection with the B&F, Bear and BiCore acquisitions.
Such agreement was canceled in 1997.
9. SHAREHOLDERS' EQUITY
On October 4, 1995, the Company completed the sale of 1,610,000 shares of
its common stock in a public offering which yielded net proceeds to the Company
of $25.7 million. The proceeds were used to reduce debt and to provide financing
for future growth. As of June 30, 1997, the number of outstanding shares is
7,796,682.
The Company has established a 1991 Employee Non-Qualified Stock Option
Plan as well as a 1994 Employee Stock Option Plan (Employee Plans). The Employee
Plans provide for the granting of options to the Company's executive officers
and key employees to purchase shares of common stock at prices equal to the fair
market value of the stock on the date of grant. Options to purchase up to
800,000 shares of common stock may be granted under the Employee Plans. Options
currently outstanding entitle the holders to purchase common stock at prices
ranging between $6.75 and $18.25, subject to adjustment. Options shall become
exercisable with respect to one-fourth of the shares covered thereby on each
anniversary of the date of grant, commencing on the second anniversary of the
date granted, except certain options granted under the 1994 Employee Stock
Option Plan which become exercisable when the fair market value of common stock
exceeds required levels. The right to exercise the options expires in ten years,
from the date of grant, or earlier if an option holder ceases to be employed by
the Company.
In addition, the Company has established a 1991 Directors Non-Qualified
Stock Option Plan and a 1995 Directors Non-Qualified Stock Option Plan
(Directors Plans). The Directors 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 currently outstanding entitle the
holders to purchase common stock at prices ranging between $7.13 and $18.25,
subject to adjustment. Options shall generally 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. The right to
exercise the options expires in ten years from the date of grant, or earlier if
an option holder ceases to be a Director of the Company.
A summary of stock option transactions in 1997 and 1996, respectively,
pursuant to the Employee Plans and the Directors Plans follows:
SUMMARY OF STOCK OPTIONS
Shares Subject
AVERAGE PRICE TO OPTION
------------- -------------
June 30, 1995 $13.36 388,000
Options Granted 17.58 63,500
Options Exercised 8 (1,174)
Options Canceled 15.96 (36,726)
--------
June 30, 1996 $13.79 413,600
-------
Exercisable at June 30, 1996 118,875
=======
June 30, 1996 $13.79 413,600
Options Granted 6.9 358,000
Options Exercised -- --
Options Canceled 11.47 (177,100)
--------
June 30, 1997 $ 9.22 594,500
-------
Exercisable at June 30, 1997 163,700
=======
39
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," requires companies to measure employee stock
compensation plans based on the fair value method of accounting. However, the
Statement allows the alternative of continued use of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," with pro forma
disclosure of net income and earnings per share determined as if the fair value
based method had been applied in measuring compensation cost. The Company
adopted the new standard in the fiscal year ending June 30, 1997, and elected
the continued use of APB Opinion No. 25. Pro forma disclosure has not been
provided, as the effect on fiscal year 1997 and 1996 net earnings was
immaterial.
10. EXPORT SALES
Export sales for the years ended June 30, 1997, 1996 and 1995 are
comprised as follows (in thousands):
1997 1996 1995
---- ---- ----
Europe $ 9,300 $ 7,500 $ 5,100
Canada 2,600 2,300 2,900
Latin American 6,300 5,600 4,600
Middle East 3,200 2,900 2,100
Far East 9,400 9,000 7,200
Other 3,700 3,500 2,300
------- ------- -------
$34,500 $30,800 $24,200
======= ======= =======
11. SUPPLEMENTAL BALANCE SHEET INFORMATION
June 30,
1997 1996
---- ----
INVENTORIES
Work in Progress $ 2,726,585 $ 2,563,773
Component parts 18,679,482 18,607,893
Finished goods 4,646,924 6,874,824
------------ ------------
$ 26,052,991 $ 28,046,490
============ ============
PROPERTY, PLANT AND EQUIPMENT
Machinery and equipment $14,880,513 $ 15,167,835
Buildings 13,508,251 13,476,157
Land and land improvements 989,516 989,516
Property held under capital leases 5,382,529 3,224,563
----------- ------------
Total property, plant and equipment at cost $34,760,809 $32,858,071
40
Less accumulated depreciation and
amortization,
including $1,610,867 and $447,306, respectively,
related to property held under capital leases (13,911,939) (10,889,567)
------------ ------------
$ 20,848,870 $ 21,968,504
============ ============
OTHER ACCRUED LIABILITIES
Accrued compensation expense $ 2,215,548 $ 1,777,669
Acquisition reserves 948,639 2,192,758
Accrued interest expense 1,324,010 332,246
Accrued income tax 376,910 --
Other 1,132,563 1,213,372
------------ ------------
$ 5,997,670 $ 5,516,045
=========== ===========
The Company reduced its reserves recorded in connection with the
acquisitions discussed in Note 2 by approximately $1.2 million, net, in fiscal
1997 and $2.0 million, net, in fiscal 1996. These reductions primarily related
to cash payments of various costs directly attributable to these acquisitions,
including severance, facility rationalization and related matters and consulting
fees. The remaining acquisition reserves of approximately $950,000 at June 30,
1997 are expected to be liquidated over the next year.
12. COMMITMENTS AND CONTINGENCIES
From time to time, the Company becomes party to various claims and legal
actions arising during the ordinary course of business. Management believes that
the Company's costs and any potential judgments resulting from such claims and
actions would be covered by the Company's product liability insurance, except
for deductible limits and self-insured retention. The Company intends to defend
such claims and actions in cooperation with its insurers. It is management's
opinion that, in any event, their outcome would not have a material effect on
the Company's financial position or results of operations.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for fiscal 1997 and 1996 appears below
(all amounts in thousands except per share data):
NET SALES
---------
1997 1996
---- ----
First Quarter $ 29,134 $ 31,189
Second Quarter 28,389 28,439
Third Quarter 30,466 30,334
Fourth Quarter 30,129 30,161
-------- --------
Total Year $118,118 $120,123
======== ========
41
GROSS PROFIT
------------
1997 1996
---- ----
First Quarter $ 9,240 $ 12,338
Second Quarter 8,725 9,889
Third Quarter 9,725 9,772
Fourth Quarter 8,063 7,574
--------- ---------
Total Year $ 35,753 $ 39,573
========= =========
NET INCOME (LOSS)
-----------------
1997 1996
---- ----
First Quarter $ (177.3) $ 1,995.8
Second Quarter (556.4) 1,011.7
Third Quarter (302.3) 977.8
Fourth Quarter (3,485.1) (2,158.7)
--------- ---------
Total Year $(4,521.1) $ 1,826.6
========== =========
EARNINGS (LOSS) PER SHARE
-------------------------
1997 1996
---- ----
First Quarter $ (.02) $ .32
Second Quarter (.07) .11
Third Quarter (.04) .12
Fourth Quarter (.45) .(30)
--------- ------
Total Year $ (.58) $ .25
========= ======
Results of operations in the fourth quarter of fiscal 1997 were adversely
impacted by a variety of factors. The macroeconomic factors discussed below
relative to the fourth quarter of 1996 continued in 1997. The nineteen day work
stoppage at the Company's St. Louis, Missouri facility in June 1997 resulted in
a permanent loss in sales, margin declines, and plant inefficiencies. Interest
expense increased to $3.3 million in the fourth quarter of fiscal 1997 primarily
due to fees paid to the Company's commercial bank group to obtain waivers for
technical covenant violations and for other matters related to its borrowing
agreement. Finally, based on management's assessment of facts related to or
culminating in the fourth quarter of fiscal 1997, the Company increased certain
reserves and recorded other charges to operations during the fourth quarter
which totaled approximately $2.0 million. Included in these charges were certain
adjustments to the carrying value of the Company's inventories of $1.0 million,
an increase to the allowance for doubtful accounts of $0.6 million, $0.3 million
for the settlement of a lawsuit related to a pre-acquisition matter at one of
the Company's acquired subsidiaries and $0.1 million for a new product licensing
agreement. As a result, fourth quarter fiscal 1997 net sales were $30.1 million
while the net loss was $3.5 million compared to fourth quarter net sales of
$30.2 million and a net loss of $2.2 million in the prior year.
The fiscal 1996 fourth quarter results of operations were adversely
impacted by numerous factors. Core domestic markets, which had experienced
softness since the second quarter of fiscal 1996, continued to be adversely
impacted by numerous external and internal factors. The ongoing consolidation of
the Company's health care provider customers and the continued uncertainty in
their marketplace caused by health care reform adversely impacted operating
results. In addition, the integration of the Company's recent complementary
acquisitions has
42
been more difficult than anticipated and had particularly negative ramifications
on the fourth quarter of fiscal 1996. During the fourth quarter of fiscal 1996,
the Company made significant investments in financial and human resources to
position itself to realize the potential synergies of these acquisitions.
Specifically, during the fourth quarter, the Company significantly invested in
recruiting and training its ventilation product line field sales force which had
experienced high turnover levels. Further, the decline in manufacturing volumes
in certain product lines in the fourth quarter of fiscal 1996 resulted in the
expensing of a portion of fixed plant overhead costs as period costs, further
adversely impacting margins and operating results. As a result of these factors,
fourth quarter fiscal 1996 net sales were $30.2 million while the net loss was
$2.2 million compared to fourth quarter sales of $33.8 million and net income of
$2.8 million in the fourth quarter of fiscal 1995.
14. SUBSEQUENT EVENT
REFINANCING
On August 8, 1997, the Company entered into a new credit agreement with a
commercial lender (the Credit Agreement) which provides borrowings of $25
million under a revolving credit facility and $21 million under three term loan
facilities. In conjunction with the new Credit Agreement, Allied placed an
additional $5.0 million in subordinated debt financing with certain shareholders
of the Company. The Company used the funds provided by the new credit agreements
to extinguish amounts outstanding under the revolving credit facility and term
loans with its existing commercial bank syndicate which were described
previously in Note 4.
The revolving credit facility provides for borrowings of up to the lesser
of $25,000,000 or the borrowing base, less any outstanding letter of credit
obligations. The borrowing base is defined by the Credit Agreement as (a) 85% of
eligible domestic receivables plus (b) 85% of eligible foreign receivables not
to exceed $8,000,000 plus (c) 45% of eligible inventories not to exceed
$10,000,000. Such amounts are reduced by various reserves as defined in the
Credit Agreement. The revolving credit facility bears interest at the floating
Reference Rate (8.5% at August 8, 1997) plus 0.50% and is payable monthly. The
Reference Rate, as defined in the Credit Agreement, is the variable rate of
interest, per annum, most recently announced by Norwest Bank Minnesota, National
Association, or any successor thereto, as its "base rate". The Credit Agreement
requires an underutilization fee of 0.25% per annum, payable monthly, on any
unused portion of the revolving credit facility. Amounts outstanding under this
revolving credit facility, which expires on August 8, 2000, totaled $18,989,066
at August 8, 1997. At August 8, 1997, $4,138,141 was available under the
revolving credit facility for additional borrowings.
The Credit Agreement provides term loan facilities in the amounts of
$10,000,000 (Term Loan A), $7,000,000 (Term Loan B), and $4,000,000 (Term Loan
C), respectively. Term Loan A is due in varying monthly maturities ranging from
$104,167 to $1,541,667, commencing October 1, 1997 with final payment due on
August 8, 2000. Term Loan B is due in varying monthly maturities ranging from
$229,167 to $354,167, commencing October 1, 1997 with final payment due on
September 1, 1999. Term Loan C is due on February 8, 1998, or earlier as
specified in the Credit Agreement. Interest accrues on Term Loan A at the
floating Reference Rate plus 0.50% and on Term Loans B and C at 14% per annum.
Interest is payable monthly on all term loan facilities.
The Credit Agreement also provides for the issuance of letters of credit
on behalf of the Company in amounts up to $3,000,000 in the aggregate. The
Company is required to pay a fee of 1.0% per annum on the outstanding balance.
The Company entered into a Note Purchase Agreement in conjunction with the
August 8, 1997 refinancing for the issuance of a $5,000,000 subordinated note
payable to certain shareholders of the Company due February 7, 1998. The note
payable is subordinated to the Credit Agreement with a commercial lender and
bears interest at a rate of 14% per annum, payable monthly.
The above described agreements contain restrictions and requirements,
including limitations on capital expenditures, new indebtedness, and dividend
payments, and the achievement of certain earning levels and the maintenance of
minimum net worth, among others.
43
Aggregate maturities of long-term debt, excluding capital leases, for each
of the fiscal years subsequent to June 30, 1997 are as follows:
Industrial
Revolving Development
Credit Subordinated Revenue
Term A Term B Term C Facility Debt Bonds Other Total
-------- ---------- ---------- --------- ------------ ---------- -------- -----------
1998 $937,500 $2,062,500 $4,000,000 -- $5,000,000 $200,000 $14,415 $12,214,415
1999 1,250,000 3,875,000 -- -- -- 250,000 15,457 5,390,457
2000 5,187,500 1,062,500 -- -- -- 250,000 16,575 6,516,575
2001 2,625,000 -- -- 18,989,066 -- 255,000 16,244 21,885,310
----------- ---------- ---------- ----------- ---------- -------- ------- -----------
$10,000,000 $7,000,000 $4,000,000 $18,989,066 $5,000,000 $955,000 $62,691 $46,006,757
========== ========== ========== =========== ========== ======== ======= ===========
In addition to the above payments, certain additional principal reductions
may be required under the Company's Term Loan B based on annual excess cash
flows, as defined in the Credit Agreement.
Debt issuance costs approximating $700,000 were incurred in the
refinancing and are being deferred and amortized over the term of the Credit
Agreement. Unamortized costs incurred in conjunction with the original credit
facilities with the bank syndicate totaled $980,000. These costs, net of
applicable income tax benefits of $392,000, were written off during the first
quarter of fiscal 1998 and accounted for as an extraordinary loss.
COMMON STOCK WARRANTS
In conjunction with the refinancing, 62,500 warrants were issued to the
holders of the subordinated note payable and 50,000 warrants were issued to the
commercial lender providing the revolving credit facilities and the term loan
facilities. Each warrant entitles the holder to purchase one share of common
stock at $7.025 per share through August 7, 2002.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A definitive proxy statement is expected to be filed with the Securities
and Exchange Commission on or about October 10, 1997. The information required
by this item is set forth under the caption "Election of Directors" on pages 2
through 4, under the caption "Executive Officers" on page 7 and under the
caption "Section 16(a) Beneficial Ownership Reporting Compliance" on page 17 of
the definitive proxy statement, which information is incorporated herein by
reference thereto.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption
"Executive Compensation" on pages 9 through 16 of the definitive proxy
statement, which information is incorporated herein by reference thereto.
44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" on pages 5
through 7 of the definitive proxy statement, which information is incorporated
herein by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the caption
"Certain Transactions" on page 17 of the definitive proxy statement, which
information is incorporated herein by reference thereto.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and its
subsidiaries are included in response to Item 8:
Consolidated Statement of Operations for the years
ended June 30, 1997, 1996 and 1995
Consolidated Balance Sheet at June 30, 1997 and 1996
Consolidated Statement of Changes in Stockholders' Equity
for the years ended June 30, 1997, 1996 and 1995
Consolidated Statement of Cash Flows for the years ended June 30, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
Report of Independent Accountants
2. FINANCIAL STATEMENT SCHEDULES
Report of Independent Accountants on Financial Statement Schedule
Valuation and Qualifying Accounts and Reserves for the Years
Ended June 30, 1997, 1996 and 1995
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
45
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.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ALLIED HEALTHCARE PRODUCTS, INC.
By: /S/ BARRY F. BAKER
-------------------------------------
Barry F. Baker
Vice President-Finance and Chief
Financial Officer
Dated: September 26, 1997
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 25, 1997.
SIGNATURES TITLE
---------- -----
*
-----------------
Dennis W. Sheehan Chairman of the Board
*
-----------------
Uma N. Aggarwal President, Chief Executive Officer and
Director (Principal Executive Officer)
/s/ Barry F. Baker Vice President-Finance and Chief
----------------- Financial Officer (Principal Financial
Barry F. Baker Officer and Principal Accounting Officer)
* Director
------------------
David A. Gee
* Director
------------------
Samuel A. Hamacher
* Director
------------------
James C. Janning
* Director
------------------
Robert E. Lefton
Director
*
-------------------
Donald E. Nickelson
* Director
-------------------
William A. Peck
* Director
-------------------
John D. Weil
47
*By: /S/ BARRY F. BAKER
-------------------
Barry F. Baker
Attorney-in-Fact
- ----------
*Such signature has been affixed pursuant to the following Power of Attorney.
48
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature
appears below constitutes and appoints each of Uma N. Aggarwal and Barry F.
Baker as his true and lawful attorney-in-fact and agent, each with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign the 1997 Annual Report on Form 10-K of Allied Healthcare
Products, Inc., and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto each said attorney-in-fact and agent full power and authority to
do and perform each and every act and thing requisite as fully to all intents
and purposes as he might or could do in person, and ratifying and confirming all
that said attorney-in-fact and agent or his substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
49
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
Allied Healthcare Products, Inc.
Our audits of the consolidated financial statements referred to in our
report dated August 13, 1997, appearing in the 1997 Annual Report to
Shareholders of Allied Healthcare Products, Inc. on Form 10-K (which report and
consolidated financial statements are included herein) also included an audit of
the Financial Statement Schedule listed in item 14(2) of this Form 10-K. In our
opinion, this Financial Statement Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PRICE WATERHOUSE LLP
St. Louis, Missouri
August 13, 1997
S-1
ALLIED HEALTHCARE PRODUCTS, INC.
RULE 12-09 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------- -------------------------
BALANCE AT CHARGED TO
BEGINNING OTHER
OF PERIOD CHARGED TO ACCOUNTS- DEDUCTIONS- BALANCE AT
COSTS AND DESCRIBE DESCRIBE END OF
DESCRIPTION EXPENSES PERIOD
- ---------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30, 1997
Reserve For
Doubtful
Accounts ($422,517) ($1,058,999) $256,190(1) ($1,225,326)
Inventory
Allowance
For
Obsolescence
and Excess
Quantities ($1,812,542) ($154,357) $277,899(2) ($1,689,000)
- ---------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30, 1996
Reserve For
Doubtful
Accounts ($590,459) ($107,871) $275,813(3) ($422,517)
Inventory
Allowance
For
Obsolescence
and Excess
Quantities ($4,349,467) $83,700 $2,453,225(4) ($1,812,542)
- ---------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30, 1995
Reserve For
Doubtful
Accounts ($320,000) $124,205 ($394,664)(5) ($590,459)
Inventory
Allowance
For
Obsolescence
and Excess
Quantities ($812,389) $469,664 ($4,006,742)(6) ($4,349,467)
- ---------------------------------------------------------------------------
(1) Decrease due to bad debt write-offs, bad debt recoveries and changes in
estimate.
(2) Decrease due to inventory disposed of and changes in estimate.
(3) Decrease due to bad debt write-offs, bad debt recoveries and changes in
estimate. Offsetting increase of $80,000 due to the acquisition of Omni-Tech
Medical, Inc.
(4) Decrease due to inventory disposed of and changes in estimate. Offsetting
increase of $105,470 due to the acquisition of Omni-Tech Medical, Inc.
(5) Increase of $404,993 due to the acquisition of B&F Medical Products, Inc.,
Bear Medical Systems, Inc. and BiCore Monitoring Systems, Inc. Offsetting
decrease due to bad debt write-offs, bad debt recoveries and changes in
estimate.
(6) Increase of $5,369,689 due to the acquisition of B&F Medical Products, Inc.,
Bear Medical Systems, Inc. and BiCore Monitoring Systems, Inc. Offsetting
decrease due to inventory disposed of and changes in estimate.
S-2
INDEX TO EXHIBITS
Exhibit
NO. DESCRIPTION
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(filed as Exhibit 3(1) to the Company's Registration Statement on Form
S-1, as amended, Registration No. 33-40128, filed with the Commission
on May 8, 1991 (the "Registration Statement") and incorporated herein
by reference)
3.2 By-Laws of the Registrant (filed as Exhibit 3(2) to the
Registration Statement and incorporated herein by reference)
4.1 Certificate of Designations, Preferences and Rights of Series A
Preferred Stock of Allied Healthcare Products, Inc. dated August 21,
1996
10.1 Lease Agreement, dated June 30, 1988, between Luke D. Wenger and
Shirley A. Wenger and Timeter Instrument Corporation (filed as Exhibit
10(14) to the Registration Statement and incorporated herein by
reference)
10.2 NCG Trademark License Agreement, dated April 16, 1982, between
Liquid Air Corporation and Allied Healthcare Products, Inc. (filed as
Exhibit 10(24) to the Registration Statement and incorporated herein
by reference)
10.3 Allied Healthcare Products, Inc. 1991 Directors Non-Qualified
Stock Option Plan (filed as Exhibit 10(25) to the Registration
Statement and incorporated herein by reference)
10.4 Allied Healthcare Products, Inc. 1991 Employee Non-Qualified
Stock Option Plan (filed as Exhibit 10(26) to the Registration
Statement and incorporated herein by reference)
10.6 Employee Stock Purchase Plan (filed with the Commission as Exhibit
10(45) to the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1992 (the "1992 Form 10-K") and incorporated herein by
reference)
10.7 Amendment to Allied Healthcare Products, Inc. 1991 Directors
Non-Qualified Stock Option Plan dated September 14, 1992 (filed as
Exhibit 10(46) to the 1992 Form 10-K and incorporated herein
by reference)
10.8 First Amendment to Lease Agreement, dated January 24, 1992, between
Luke D. Wenger and Shirley A. Wenger and Timeter Instrument
Corporation (filed as Exhibit 10(32) to the 1993 Form 10-K and
incorporated herein by reference)
10.9 Allied Healthcare Products, Inc. 1994 Employee Stock Option Plan
(filed with the Commission as Exhibit 10(39) to the 1994 Form
10-K and incorporated herein by reference)
10.10 Allied Healthcare Products, Inc. 1995 Directors Non-Qualified Stock
Option Plan (filed with the Commissioner as Exhibit 10(25) to the
Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1995 (the "1995 Form 10-K") and incorporated herein by reference)
10.11 Lease dated as of November 4, 1993 between Essup Part and B&F Medical
Products, Inc. (filed with the Commission as Exhibit 10(43) to the
1994 Form 10-K and incorporated herein by reference)
10.12 Commercial Lease and Deposit Receipt between Hospital Systems,
Inc. and 5301 Adeline Associates, a California Limited Partnership
(filed with the Commission as Exhibit 10(47) to the 1994 Form 10-K
and incorporated herein by reference)
10.13 Lease dated as of December 27, 1982 by and between B.M.S./Riverside
Limited Partnership and Intermed Holdings, Inc., as amended (filed
with the Commission as Exhibit 10(31) to the 1995 Form 10-K and
incorporated herein by reference)
10.14 Assignment of Lease dated October 3, 1988 by Intermed Holdings, Inc.
to Bear Medical Systems, Inc. (filed with the Commission as Exhibit
10(32) to the 1995 Form 10-K and incorporated herein by reference)
10.15 Warehouse Lease dated December 7, 1990 by and between Mineola/Hemmer,
L.P. and Bear Medical Systems, Inc. (filed with the Commission
as Exhibit 10(33) to the 1995 Form 10-K and incorporated herein by
reference)
10.16 Memorandum of Agreement dated April 19, 1995 covering April 16, 1995 -
April 15, 1998 between Allied Healthcare Products, Inc., Chemetron
Medical Division and International Chemical Workers Union, Local No.
626 (filed with the Commission as Exhibit 10(35) to the 1995 Form 10-K
and incorporated herein by reference)
10.17 Consulting and Severance Agreement dated as of September 1, 1996
between Allied Healthcare Products, Inc. and David V. LaRusso (filed
with the Commissioner as Exhibit 10(31) to the Company's Annual Report
on Form 10-K (the "1996 Form 10-K") and incorporated herein by
reference)
10.18 Amended and Restated Credit Facilities Agreement dated October 13,
1995 by and among Allied Healthcare Products, Inc. and its
subsidiaries and The Boatman's National Bank of St. Louis as agent
(filed with the Commission as Exhibit 1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995 and
incorporated herein by reference)
10.19 Underwriting Agreement dated September 28, 1995 by and among Allied
Healthcare Products, Inc., and Cowen & Company, Dillon, Read & Co.
Inc. and A.G. Edwards & Sons, Inc., as representatives of the
underwriters (filed as Exhibit 2 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1995 and incorporated
herein by reference)
10.20 Allied Healthcare Products, Inc. Amended 1994 Employee Stock Option
Plan (filed with the Commissioner as Exhibit 10(28) to the 1996
Form 10-K and incorporated herein by reference)
10.21 Amendment Number One to Amended and Restated Credit Facilities
Agreement dated April 19, 1996 among The Boatmen's National Bank of
St. Louis, as Agent, and The Boatmen's National Bank of St. Louis and
the other lenders listed on the signature pages thereof, as Lenders,
and Allied Healthcare Products, Inc., and the other borrowers listed
on the signature pages thereof, as Borrowers (filed with the
Commission as Exhibit 10(29) to the 1996 Form 10-K and incorporated
herein by reference)
10.22 Amendment Number Two to Amended and Restated Credit Facilities
Agreement dated September 23,1996 among The Boatmen's National bank of
St. Louis, as Agent, and The Boatmen's National Bank of St. Louis and
the other lenders listed on the signature pages thereof, as Lenders,
and Allied Healthcare Products, Inc., and the other borrowers listed
on the signature pages thereof, as Borrowers (filed with the
Commission as Exhibit 10(30) to the 1996 Form 10-K and incorporated
herein by reference)
10.23 Rights Agreement, dated August 21, 1996 by and between Allied
Healthcare Products, Inc. and Boatmen's Trust Company, as Rights
Agreement (filed with the Commission as an Exhibit to the Company's
Current Report on Form 8-K dated August 7, 1995 and incorporated
herein by reference)
10.24 Employment Agreement dated November 19, 1996 by and between Allied
Healthcare Products, Inc. and Uma N. Aggarwal (filed as Exhibit 10(1)
to the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996 and incorporated herein by reference)
10.25 Option Agreement dated November 19, 1996 between Allied Healthcare
Products, Inc. and Uma N. Aggarwal (Filed as Exhibit 10(2) to the
Company's Quarterly Report on Form 10-Q for the quarter ended December
31, 1996 and incorporated herein by reference)
10.26 Option Agreement dated November 19, 1996 between Allied Healthcare
Products, Inc. and Uma N. Aggarwal (filed as Exhibit 10(3)
to the Company's Quarterly Report on Form 10-Q for the quater ended
December 31, 1996 and incorporated herein by reference)
10.27 Letter Agreement dated December 16, 1997 between Allied Healthcare
Products, Inc. and Barry F. Baker (filed as Exhibit 10(4) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996 and incorporated herein by reference)
10.28 Letter Agreement dated December 16, 1997 Allied Healthcare Products,
Inc. and Gabriel S. Kohn (filed as Exhibit 10(5) to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31,
1996 and incorporated herein by reference)
10.29 Letter Agreement dated December 16, 1997 between Allied Healthcare
Products, Inc. and David A. Grabowski (filed as Exhibit 10(6) to the
Company's Quarterly Report for the quarter ending December 31,
1996 and incorporated herein by reference)
10.30 May 14, 1997 Waiver and Agreement dated May 14, 1997 by and among
Allied Healthcare Products, Inc., Life Support Products, Inc., B & F
Medical Products, Inc., Hospital Systems, Inc., Bear Medical Systems,
Inc. and BiCore Monitoring Systems, Inc., as Borrowers, The Boatmen's'
National Bank of St. Louis, individually and as Agent under the Loan
Agreement and of the other lenders listed on the signature pages
thereof.
10.31 Loan and Security Agreement, dated as of August 7, 1997 by and among
Allied Healthcare Products, Inc., B & F Medical Products, Inc., Bear
Medical Systems, Inc., Hospital Systems, Inc., Life Support Products
Inc., and BiCore Monitoring Systems, Inc., as Borrowers, and Foothill
Capital Corporation
10.32 Note Purchase Agreement, dated August 7, 1997 by and among Allied
Healthcare Products, Inc., B & F Medical Products, Inc., Bear Medical
Systems, Inc., Hospital Systems, Inc., Life Support Products, Inc.,
BiCore Monitoring Systems, Inc. and the Purchasers named therein
10.33 Promissory Note dated August 7, 1997 issued by Allied Healthcare
Products, Inc. and purchased by Woodbourne Partners, L.P.
10.34 Promissory Note dated August 7, 1997 issued by Allied Healthcare
Products, Inc. and purchased by Donald E. Nickelson
10.35 Promissory Note dated August 7, 1997 issued by Allied Healthcare
Products, Inc. and purchased by Dennis W. Sheehan
10.36 Warrant dated August 7, 1997 issued by Allied Healthcare Products,
Inc. in favor of Woodbourne Partners, L.P.
10.37 Warrant dated August 7, 1997 issued by Allied Healthcare Products,
Inc. in favor of Donald E. Nickelson
10.38 Warrant dated August 7, 1997 issued by Allied Healthcare Products,
Inc. in favor of Dennis W. Sheehan
10.39 Agreement effective as of June 1, 1997 between Allied Healthcare
Products, Inc. and District No. 9 International Association of
Machinists and Aerospace Workers
10.40 Agreement dated September 4, 1997 between Hospital Systems,
Inc. and Local Union No. 2131 of the International Brotherhood of
Electrical Workers covering the period from May 1, 1997 to
April 30, 1998
10.41 Full-Time Employment Policy Agreement dated July 3, 1997 between B&F
Medical Products, Inc. and B&F Employee Committee
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Price Waterhouse LLP
24 Powers of Attorney
27 Financial Data Schedule