10-Q 1 c67566e10-q.txt FORM 10-Q FOR PERIOD ENDED DECEMBER 31, 2001 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended December 31, 2001 _____ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Action of 1934 For the transition period from ______________ to ______________ Commission File Number 0-19266 ALLIED HEALTHCARE PRODUCTS, INC. 1720 Sublette Avenue St. Louis, Missouri 63110 314/771-2400 IRS Employment ID 25-1370721 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 twelve months (or for such shorter periods that the registrant was required to file such reports, and (2) has been subject to such filing requirements for the past ninety days. Yes [X] No [ ] The number of shares of common stock outstanding at February 6, 2001 is 7,806,682 shares. INDEX
Page Number Part I - Financial Information Item 1. Financial Statements Consolidated Statement of Operations - three months and six months ended December 31, 2001 and 2000 (Unaudited) 3 Consolidated Balance Sheet - December 31, 2001 (Unaudited) and June 30, 2001 (Unaudited) 4-5 Consolidated Statement of Cash Flows - Six months ended December 31, 2001 and 2000 (Unaudited) 6 Notes to Consolidated Financial Statements 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-14 Item 3. Quantitative and Qualitative Disclosure about Market Risk 14 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K 15 Signature 15
SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Statements contained in this Report, which are not historical facts or information, are "forward-looking statements." Words such as "believe," "expect," "intend," "will," "should," and other expressions that indicate future events and trends identify such forward-looking statements. These forward-looking statements involve risks and uncertainties which could cause the outcome and future results of operations and financial condition to be materially different than stated or anticipated based on the forward-looking statements. Such risks and uncertainties include both general economic risks and uncertainties, risks and uncertainties affecting the demand for and economic factors affecting the delivery of health care services, and specific matters which relate directly to the Company's operations and properties as discussed the Company's annual report on Form 10-K for the year ended June 30, 2001. The Company cautions that any forward-looking statements contained in this report reflects only the belief of the Company or its management at the time the statement was made. Although the Company believes such forward-looking statements are based upon reasonable assumptions, such assumptions may ultimately prove inaccurate or incomplete. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement was made. 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ALLIED HEALTHCARE PRODUCTS, INC. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
Three months ended Six months ended December 31, December 31, -------------------------------- --------------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Net sales $ 15,398,451 $ 16,709,340 $ 29,544,162 $ 31,729,546 Cost of sales 11,771,124 12,533,091 23,086,160 23,947,412 ------------ ------------ ------------ ------------ Gross profit 3,627,327 4,176,249 6,458,002 7,782,134 Selling, general and administrative expenses 3,173,225 3,757,415 6,536,204 7,384,011 ------------ ------------ ------------ ------------ Income/(Loss)from operations 454,102 418,834 (78,202) 398,123 Other expenses: Interest 281,645 417,669 583,238 818,415 Other, net 11,543 16,430 27,790 36,638 ------------ ------------ ------------ ------------ 293,188 434,099 611,028 855,053 ------------ ------------ ------------ ------------ Income/(Loss) before provision/(benefit) for income taxes 160,914 (15,265) (689,230) (456,930) Provision/(benefit) for income taxes 64,367 75,434 (275,691) (19,691) ------------ ------------ ------------ ------------ Net Income/(loss) $ 96,547 $ (90,699) $ (413,539) $ (437,239) ============ ============ ============ ============ Basic and diluted earnings/(loss) per share $ 0.01 $ (0.01) $ (0.05) $ (0.06) ============ ============ ============ ============ Weighted average shares outstanding 7,806,682 7,806,682 7,806,682 7,806,682 Weighted average shares outstanding-diluted 7,953,043 7,806,682 7,806,682 7,806,682
See accompanying Notes to Consolidated Financial Statements. 3 ALLIED HEALTHCARE PRODUCTS, INC. CONSOLIDATED BALANCE SHEET ASSETS (UNAUDITED)
December 31, June 30, 2001 2001 ------------ ----------- Current assets: Cash $ 13,388 $ 20,365 Accounts receivable, net of allowance for doubtful accounts of $619,254 and $605,714, respectively 8,810,993 11,395,224 Inventories, net 17,283,885 17,079,033 Other current assets 616,982 662,049 ----------- ----------- Total current assets 26,725,248 29,156,671 ----------- ----------- Property, plant and equipment, net 10,649,658 10,892,268 Goodwill, net 25,579,830 25,579,830 Other assets, net 290,154 304,385 ----------- ----------- Total assets $63,244,890 $65,933,154 =========== ===========
See accompanying Notes to Consolidated Financial Statements. (CONTINUED) 4 ALLIED HEALTHCARE PRODUCTS, INC. CONSOLIDATED BALANCE SHEET (CONTINUED) LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED)
December 31, June 30, 2001 2001 ------------ ------------ Current liabilities: Accounts payable $ 3,270,201 $ 3,843,092 Current portion of long-term debt 935,979 1,169,044 Other current liabilities 2,466,573 3,462,196 ------------ ------------ Total current liabilities 6,672,753 8,474,332 ------------ ------------ Long-term debt 10,545,935 11,019,081 ------------ ------------ Commitments and contingencies Stockholders' equity: Preferred stock; $.01 par value; 1,500,000 shares authorized; no shares issued and outstanding; which includes Series A preferred stock; $.01 par value; 200,000 shares authorized; no shares issued and outstanding Common stock; $.01 par value; 30,000,000 shares authorized; 7,806,682 shares issued and outstanding at December 31,2001, and June 30, 2001, respectively 101,102 101,102 Additional paid-in capital 47,014,621 47,014,621 Common stock in treasury, at cost (20,731,428) (20,731,428) Retained earnings 19,641,907 20,055,446 ------------ ------------ Total stockholders' equity 46,026,202 46,439,741 ------------ ------------ Total liabilities and stockholders' equity $ 63,244,890 $ 65,933,154 ============ ============
See accompanying Notes to Consolidated Financial Statements 5 ALLIED HEALTHCARE PRODUCTS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Six months ended December 31, --------------------------------- 2001 2000 ------------ ------------ Cash flows from operating activities: Net loss $ (413,539) $ (437,239) Adjustments to reconcile net loss to net cash provided by/(used in) operating activities: Depreciation and amortization 880,362 1,741,507 Changes in operating assets and liabilities: Accounts receivable, net 2,584,231 (2,400,314) Inventories, net (204,852) (96,913) Other current assets 45,067 (199,544) Accounts payable (572,891) 607,446 Income taxes payable/refundable (798,970) (59,691) Other current liabilities (196,653) 387,068 ------------ ------------ Net cash provided by/(used in) operating activities 1,322,755 (457,680) ------------ ------------ Cash flows from investing activities: Capital expenditures (623,521) (78,468) ------------ ------------ Net cash used in investing activities (623,521) (78,468) ------------ ------------ Cash flows from financing activities: Payments of capital lease obligations (249,940) (299,730) Payments of long-term debt (210,338) (202,395) Borrowings under revolving credit agreement 31,787,000 30,340,625 Payments under revolving credit agreement (32,032,933) (29,485,536) ------------ ------------ Net cash (used in)/provided by financing activities (706,211) 352,964 ------------ ------------ Net decrease in cash and equivalents (6,977) (183,184) Cash and equivalents at beginning of period 20,365 568,197 ------------ ------------ Cash and equivalents at end of period $ 13,388 $ 385,013 ============ ============
See accompanying Notes to Consolidated Financial Statements. 6 ALLIED HEALTHCARE PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Unaudited Consolidated Financial Statements The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments considered necessary for a fair presentation, have been included. Operating results for any quarter are not necessarily indicative of the results for any other quarter or for the full year. These statements should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements thereto included in the Company's Form 10-K for the year ended June 30, 2001. Certain amounts in the fiscal 2001 consolidated financial statements have been reclassified to conform with the fiscal 2002 presentation. 2. Inventories Inventories are comprised as follows (Unaudited):
December 31, 2001 June 30, 2001 Work-in progress $ 860,593 $ 801,965 Component Parts 12,139,392 12,018,928 Finished Goods 4,283,900 4,258,140 ----------- ----------- $17,283,885 $17,079,033 =========== ===========
The above amounts are net of a reserve for obsolete and excess inventory of approximately $2.0 million at December 31, 2001 and $2.6 million at June 30, 2001. 3. Earnings per share Basic earnings per share are based on the weighted average number of shares of all common stock outstanding during the period. Diluted earnings per share are based on the sum of the weighted average number of shares of common stock and common stock equivalents outstanding during the year. The number of basic shares outstanding for the three months ended December 31, 2001 and 2000 was 7,806,682. The number of diluted shares outstanding for the three months ended December 31, 2001 and 2000 was 7,953,043, and 7,806,682 shares respectively. The dilutive effect the Company's employee's and director's stock option plans are determined by use of the treasury stock method. 7 4. Oxygen Regulator Recall On February 4, 1999, Allied announced a voluntary recall of aluminum oxygen regulators marketed under its Life Support Products ("LSP") label. These products are used to regulate pressure of bottled oxygen for administration to patients under emergency situations. Following reports of regulator fires, the Company instituted a recall in May 1997, under which it provided retrofit kits to prevent contaminants from entering the regulators. The Company has also been testing regulator design with the help of the National Aeronautical and Space Administration's White Sands National Laboratories. While preliminary findings led the Company to believe the Company's products did not cause those fires, there was enough concern among the users that the Company, in cooperation with the U. S. Food and Drug Administration ("FDA"), agreed to institute a voluntary recall to replace aluminum components in the high pressure chamber of the regulators with brass components. The FDA has recommended that all regulator manufacturers cease use of aluminum in regulators. Accordingly, the Company introduced new brass regulators and also offered a trade-in program to the existing users. As a result of the recall, the Company recorded a charge of $1.5 million pre-tax, $0.9 million after tax, or $0.12 per share in the second quarter of fiscal 1999. The original regulator recall provision included estimated costs of $1.3 million for aluminum regulator retrofitting and replacement, as well as $0.2 million for certain communications and legal costs expected to be incurred by the Company under the terms of the recall. A reconciliation of activity with respect to the Company's regulator program for the six months ended December 31, 2001 is as follows: Balance, June 30, 2001 $146,181 Provision for recall -- Costs incurred related to product retrofitting and replacement 11,140 -------- Balance, December 31, 2001 $135,041 ========
The Company has incurred various legal expenses related to other claims associated with the LSP oxygen regulators. Accordingly, the Company recorded an additional provision for product liability litigation during fiscal 2001 for amounts estimated to be payable by the Company under its self-insurance retention for legal costs associated with defending these claims. These amounts were included along with other legal expenses of the Company as selling, general and administrative expenses during fiscal 2001. At December 31, 2001, the Company has a separate product liability litigation accrual of $0.2 million for legal expense associated to the LSP regulator recall. The Company received notification from the FDA that the recall was completed in December 2000. The Company continues to experience minor expenditures relative to the recall and expects these expenditures to be substantially completed during fiscal 2002. 8 5. Commitments and Contingencies The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. In March through June 2000, the FDA conducted an inspection of the Company's St. Louis facility and provided a written report, known as an "FDA Form 483" or simply a "483," citing FDA observations concerning Good Manufacturing Practices ("GMP") compliance and quality control issues applicable to demand valves, emergency ventilators, circumcision clamps, and regulators. The Company provided a written response to the FDA and in August 2000, the FDA issued a warning letter and requested that the Company clarify and supplement its responses to the 483 observations. As a result, the Company has submitted to the FDA a written supplemental response and is in the process of implementing actions to address the FDA concerns. The Company met with the FDA at their Kansas City field office in March 2001 to discuss the responses and actions. From October 27, 2001 to November 19, 2001 the FDA conducted a follow-up inspection to the June 2000 inspection. On January 23, 2002, the FDA released a copy of the establishment inspection report (EIR) for the October 27, 2001 to November 19, 2001 inspection and has indicated that the inspection is closed. The Company intends to continue to conduct business in such a manner so as to avert any FDA action seeking to interrupt or suspend manufacturing or require any recall or modification of products. The Company has recognized the costs and associated liabilities only for those investigations, claims and legal proceedings for which, in its view, it is probable that liabilities have been incurred and the related amounts are estimable. Based upon information currently available, management believes that existing accrued liabilities are sufficient and that it is not reasonably possible at this time to believe that any additional liabilities will result from the resolution of these matters that would have a material adverse effect on the Company's consolidated results of operations, financial position or cash flows. 6. Goodwill and Other Intangible Assets - Adoption of Statement 142 For the fiscal year ending June 30, 2002, the Company has adopted Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets" which establishes new accounting and reporting standards for purchase business combinations and goodwill. As provided by SFAS 142, the Company ceased amortizing goodwill on July 1, 2001. The Company is presently completing its transitional goodwill impairment analysis which it expects to complete during its fourth quarter ended June 30, 2002. The Company does not anticipate an impairment loss will be recognized. The following table reflects the adoption of SFAS 142 as of July 1, 2000, for comparative purposes. 9
Three months ended Six months ended December 31, December 31, ------------------------ ------------------------- (Unaudited) 2001 2000 2001 2000 -------- -------- -------- -------- (000's except for per share amounts) Reported net income/(loss) $ 97 $ (91) $ (414) $ (437) Add back: Goodwill amortization -- 204 -- 408 -------- -------- -------- -------- Adjusted net income/(loss) $ 97 $ 113 $ (414) ($ 29) Basic and diluted earnings/(loss) per share: Reported net income/(loss) $ 0.01 $ (0.05) $ (0.06) $ (0.01) Goodwill amortization -- $ 0.03 -- $ 0.06 -------- -------- -------- -------- Adjusted earnings/(loss) per share $ 0.01 $ 0.02 $ (0.05) $ 0.00 ======== ======== ======== ========
10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Allied manufactures and markets medical gas equipment, respiratory care products, and emergency medical products. THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2000. Allied had net sales of $15.4 million for the three months ended December 31, 2001, down $1.3 million, or 7.9%, from net sales of $16.7 million in the prior year same quarter. The lower level of sales is the result of lower order levels over the last two quarters. Order levels have been lower both domestically and internationally. Poor international economies and a strong dollar have contributed to a shortfall in international orders, but the Company believes that much of the shortfall is due to timing in the international market. Domestically, there has been a softer market for durable medical products than in the prior year. Gross profit for the three months ended December 31, 2001 was $3.6 million, or 23.6% of net sales compared to $4.2 million, or 25.0% of net sales for the three months ended December 31, 2000. The decrease in gross profit as a percent of sales is primarily attributable to the lower sales volumes in the second quarter of fiscal 2002. The lower level of sales results in less effective utilization of the Company's manufacturing capacity, and the fixed expenses associated with that capacity. Selling, General and Administrative expenses for the three months ended December 31, 2001 were $3.2 million, a net decrease of $0.6 million, or 15.6%, from $3.8 million for the three months ended December 31, 2000. This decrease is attributable to a decrease in amortization of goodwill arising from the Company's adoption of Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." Selling, General, and Administrative expenses were lower in the three month period ended December 31, 2001 due to the consolidation of sales efforts. Selling, General, and Administrative expenses were also lower, in comparison to the prior year, as a result of a reduction in lease amortization on the Company's computer systems. Additionally, the Company has continued its cost reduction efforts to further reduce Selling, General, and Administrative cost. 11 Income from operations was $0.5 million for the three months ended December 31, 2001 compared to $0.4 million for the three months ended December 30, 2000. Interest expense was $0.3 million for the three months ended December 31, 2001 compared to $0.4 million for the three months ended December 31, 2000. Allied had income before provision for income taxes in the second quarter of fiscal 2002 of $160,914 compared to a loss before benefit for income taxes of $15,265 for the second quarter of fiscal 2001. The Company recorded a tax provision of $64,367 and $75,434 for the three-month periods ended December 31, 2001 and 2000, respectively. In fiscal 2002, the net income for the second quarter was $96,547, or $0.01 per basic and diluted share compared to a net loss of $90,569, or ($0.01) per basic and diluted share, for the second quarter of fiscal 2001. The weighted average number of common shares outstanding used in the calculation of basic earnings per share for the second quarters of fiscal 2002 and fiscal 2001 was 7,806,682. The weighted average number of common shares outstanding used in the calculation of diluted earnings per share for the second quarters of fiscal 2002 and fiscal 2001 was 7,953,043 and 7,806,682 shares, respectively. SIX MONTHS ENDED DECEMBER 31, 2001 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2000. Allied had net sales of $29.5 million for the six months ended December 31, 2001, down $2.2 million, or 6.9%, from net sales of $31.7 million in the prior year first six months. The decline is primarily due to a decrease in orders in the first and second quarters of fiscal 2002 versus prior periods. Poor international economies and a strong dollar have contributed to a shortfall in international orders, but the Company believes that much of the shortfall is due to timing in the international market. Domestically, there has been a softer market for durable medical equipment than in the prior year. Gross profit for the six months ended December 31, 2001 was $6.5 million, or 21.9% of net sales compared to $7.8 million, or 24.5% of net sales for the six months ended December 31, 2001. This is primarily due to the lower level of sales for the six months ended December 31, 2001. The lower level of sales results in less effective utilization of the Company's manufacturing capacity, and the fixed expenses associated with that capacity. The Company is continuing to review operations to improve productivity and lower manufacturing and product costs. 12 Selling, General and Administrative expenses for the six months ended December 31, 2001 were $6.5 million, a net decrease of $0.8 million, or 11.5%, from $7.4 million for the six months ended December 31, 2000. Approximately $0.4 million of this decrease is attributable to a decrease in amortization of goodwill arising from the Company's adoption of Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." Selling, General, and Administrative expenses were lower in the six month period ended December 31, 2001 due to the consolidation of sales efforts. Selling, General, and Administrative expenses were also lower , in comparison to the prior year, as a result of a reduction in lease amortization on the Company's computer systems. Additionally, the Company has continued its cost reduction efforts to further reduce Selling, General, and Administrative cost. Loss from operations was $0.1 million for the six months ended December 31, 2001 compared to income from operations $0.4 million for the six months ended December 31, 2000. Interest expense was $0.6 million for the six months ended December 31, 2001 compared to $0.8 million for the six months ended December 31, 2000. Allied had a loss before benefit for income taxes in the first six months of fiscal 2002 of $0.7 million compared to a loss before benefit for income taxes of $0.5 million for the first six months of fiscal 2001. The Company recorded a tax benefit of $0.3 million and $19,691 for the six month periods ended December 31, 2001 and 2000, respectively. In fiscal 2002, the net loss for the first six months was $0.4 million, or $0.05 per basic and diluted share compared to a net loss of $0.4 million, or $0.06 per basic and diluted share, for the first six months of fiscal 2001. The weighted average number of common shares outstanding used in the calculation of basic and diluted earnings per share for the first six months of fiscal 2002 and fiscal 2001 was 7,806,682 . LIQUIDITY AND CAPITAL RESOURCES The Company believes that available resources and anticipated cash flows from operations are sufficient to meet operating requirements in the coming year. Working capital decreased to $20.1 million at December 30, 2001 compared to $20.7 million at June 30, 2001. The decrease was primarily due to a decrease in accounts receivable, offset by decreases in accounts payable and other accrued liabilities. The Company has plans to make capital expenditures of approximately $4.0 million during the six months ended June 30, 2001. The Company intends to finance these capital expenditures with a new debt facility which is currently being negotiated. The Company maintains a $25 million revolving credit facility. At December 31, 2001, $7.2 million was outstanding against this facility and $3.7 million was available to borrow based on collateral requirements. Inflation has not had a material effect on the Company's business or results of operations. 13 LITIGATION AND CONTINGENCIES The Company becomes, from time to time, a party to personal injury litigation arising out of incidents involving the use of its products. More specifically there have been a number of lawsuits filed against the Company alleging that its aluminum oxygen pressure regulator, marketed under its Life Support Products label, has caused fires that have led to personal injury. The Company believes, based on preliminary findings, that its products did not cause the fires. The Company intends to defend these claims in cooperation with its insurers. Based on the progression of certain cases, the Company recorded additional charges to operations during fiscal 2001 for amounts estimated to be payable by the Company under its self-insurance retention for legal costs associated with defending these claims. The Company believes that any potential judgments resulting from these claims over its self-insured retention will be covered by the Company's product liability insurance. In March through June 2000, the FDA conducted an inspection of the Company's St. Louis facility and provided a written report, known as an "FDA Form 483" or simply a "483" citing FDA observations concerning GMP compliance and quality control issues applicable to demand valves, emergency ventilators, circumcision clamps, and regulators. The Company provided a written response to the FDA and in August 2000, the FDA issued a warning letter and requested that the Company clarify and supplement its responses to the 483 observations. As a result, the Company has submitted to the FDA a written supplemental response and is in the process of implementing actions to address the FDA concerns. The Company met with the FDA at their Kansas City field office in March 2001 to discuss the responses and actions. From October 27, 2001 to November 19, 2001 the FDA conducted a follow-up inspection to the June 2000 inspection. On January 23, 2002, the FDA released a copy of the establishment inspection report (EIR) for the October 27, 2001 to November 19, 2001 inspection and has indicated that the inspection is closed. The company intends to continue to conduct business in such a manner so as to avert any FDA action seeking to interrupt or suspend manufacturing or require any recall or modification of products. Item 3. Quantitative and Qualitative Disclosure about Market Risk At December 31, 2001, the Company had $10.9 million in debt outstanding, of which $3.7 million is a term loan with a fixed interest rate of 7.75%. The remaining balance of $7.2 million represents amounts outstanding under the Company's revolving credit facility. The revolving credit facility bears an interest rate using the commercial bank's "floating reference rate" or LIBOR as the basis, as defined in the loan agreement, and therefore is subject to additional expense should there be an increase in market interest rates. 14 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K None Exhibits: None SIGNATURE Pursuant to the requirements 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. /s/ Earl R. Refsland --------------------------------------------- Earl R. Refsland President and Chief Executive Officer Date: February 14, 2002 15