10-Q 1 c85021e10vq.txt QUARTERLY REPORT UNITED STATES 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 March 31, 2004 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 ----- ----- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ----- ----- The number of shares of common stock outstanding at April 30, 2004 is 7,818,432 shares. INDEX
Page Number ------- Part I - Financial Information Item 1. Financial Statements Consolidated Statement of Operations - 3 three months and nine months ended March 31, 2004 and 2003 (Unaudited) Consolidated Balance Sheet - 4 - 5 March 31, 2004 (Unaudited) and June 30, 2003 (Audited) Consolidated Statement of Cash Flows - 6 Nine months ended March 31, 2004 and 2003 (Unaudited) Notes to Consolidated Financial Statements (Unaudited) 7 - 12 Item 2. Management's Discussion and Analysis of 12-18 Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosure 18 about Market Risk Item 4. Controls and Procedures 18 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K 19 Signature 19
"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 in the Company's annual report on Form 10-K for the year ended June 30, 2003. 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 Nine months ended March 31, March 31, ------------------------------- ------------------------------- 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Net sales $ 14,956,873 $ 16,443,114 $ 43,841,734 $ 46,536,013 Cost of sales 10,745,206 12,201,779 32,125,005 35,726,306 ------------- ------------- ------------- ------------- Gross profit 4,211,667 4,241,335 11,716,729 10,809,707 Selling, general and administrative expenses 3,054,399 3,423,454 9,568,968 10,171,452 ------------- ------------- ------------- ------------- Income from operations 1,157,268 817,881 2,147,761 638,255 Other expenses: Interest 111,570 209,220 453,285 652,861 Other, net 7,748 9,234 2,066 32,121 ------------- ------------- ------------- ------------- 119,318 218,454 455,351 684,982 ------------- ------------- ------------- ------------- Income/(loss) before provision for income taxes 1,037,950 599,427 1,692,410 (46,727) Provision for income taxes 410,115 234,194 677,595 4,527 ------------- ------------- ------------- ------------- Net income/(loss) $ 627,835 $ 365,233 $ 1,014,815 $ (51,254) ============= ============= ============= ============= Basic and diluted earnings/(loss) per share $ 0.08 $ 0.05 $ 0.13 $ (0.01) ============= ============= ============= ============= Weighted average shares 7,818,432 7,813,932 7,815,748 7,813,932 outstanding - basic Weighted average shares outstanding - diluted 8,005,365 7,909,158 7,957,881 7,956,448
See accompanying Notes to Consolidated Financial Statements. 3 ALLIED HEALTHCARE PRODUCTS, INC. CONSOLIDATED BALANCE SHEET ASSETS (UNAUDITED)
March 31, June 30, 2004 2003 --------------- --------------- Current assets: Cash $ 11,230 $ 12,016 Accounts receivable, net of allowance for doubtful accounts of $484,589 and $475,000, respectively 7,418,561 7,848,977 Inventories, net 11,004,904 12,274,972 Income tax receivable 172,856 392,259 Other current assets 403,007 149,995 --------------- --------------- Total current assets 19,010,558 20,678,219 --------------- --------------- Property, plant and equipment, net 12,131,818 12,630,289 Deferred income taxes 989,710 989,710 Goodwill 15,979,830 15,979,830 Other assets, net 100,283 134,528 --------------- --------------- Total assets $ 48,212,199 $ 50,412,576 =============== ===============
See accompanying Notes to Consolidated Financial Statements. (CONTINUED) 4 ALLIED HEALTHCARE PRODUCTS, INC. CONSOLIDATED BALANCE SHEET (CONTINUED) LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED)
March 31, June 30, 2004 2003 --------------- --------------- Current liabilities: Accounts payable $ 2,753,009 $ 2,192,717 Current portion of long-term debt 1,533,308 5,409,304 Deferred income taxes 412,079 412,079 Other current liabilities 4,153,370 3,218,981 --------------- --------------- Total current liabilities 8,851,766 11,233,081 --------------- --------------- Long-term debt 3,767,453 4,612,320 --------------- --------------- Commitments and contingencies -- -- Stockholders' equity: Preferred stock; $0.01 par value; 1,500,000 shares authorized; no shares issued and outstanding; which includes Series A preferred stock; $0.01 par value; 200,000 shares authorized; no shares issued and outstanding -- -- Common stock; $0.01 par value; 30,000,000 shares authorized; 7,818,432 shares issued and outstanding at March 31, 2004 and 7,813,932 shares issued and outstanding at June 30, 2003, respectively 101,219 101,175 Additional paid-in capital 47,041,492 47,030,549 Common stock in treasury, at cost (20,731,428) (20,731,428) Retained earnings 9,181,697 8,166,879 --------------- --------------- Total stockholders' equity 35,592,980 34,567,175 --------------- --------------- Total liabilities and stockholders' equity $ 48,212,199 $ 50,412,576 =============== ===============
See accompanying Notes to Consolidated Financial Statements. 5 ALLIED HEALTHCARE PRODUCTS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine months ended March 31, ------------------------------ 2004 2003 ------------ ------------ Cash flows from operating activities: Net income (loss) $ 1,014,815 $ (51,254) Depreciation and amortization 970,169 972,979 Changes in operating assets and liabilities: Accounts receivable, net 430,416 156,297 Inventories, net 1,270,069 620,697 Other current assets (33,609) 570,075 Accounts payable 560,296 (1,110,252) Other accrued liabilities 934,388 101,144 ------------ ------------ Net cash provided by operating activities 5,146,544 1,259,686 ------------ ------------ Cash flows from investing activities: Capital expenditures (437,453) (427,912) ------------ ------------ Net cash used in investing activities (437,453) (427,912) ------------ ------------ Cash flows from financing activities: Payments of capital lease obligations -- (192,426) Payments of long-term debt (844,867) (324,820) Net payments under revolving credit agreement (3,875,997) (307,310) Proceeds from issuance of common stock 10,987 -- ------------ ------------ Net cash used in financing activities (4,709,877) (824,556) ------------ ------------ Net increase (decrease) in cash (786) 7,218 Cash at beginning of period 12,016 800 ------------ ------------ Cash at end of period $ 11,230 $ 8,018 ============ ============
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, 2003. 2. Significant Accounting Policies - Stock Options The Company accounts for employee stock options in accordance with Accounting Principles Board No. (APB) 25, "Accounting for Stock Issued to Employees". Under APB 25, the Company applies the intrinsic value method of accounting. The Company has not recognized compensation expense for options granted because the Company grants options at a price equal to market value at the time of grant. Financial Accounting Standard No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," prescribes the recognition of compensation expense based on the fair value of options determined on the grant date. However, SFAS 123 grants an exception that allows companies currently applying APB 25 to continue using that method. The Company has elected to continue applying the intrinsic value method under APB 25. The fair value of options granted (which is amortized over the option vesting period in determining the pro forma impact) is estimated on the date of grant using the Black-Scholes multiple option-pricing model. The following table shows stock-based compensation expense included in net income/(loss), pro forma stock-based compensation expense, net income/(loss), and earnings per share had the Company elected to record compensation expense based on the fair value of options at the grant date for the three and nine months ended March 31, 2004 and 2003. 7
Three Months Ended Nine Months Ended March 31, March 31, 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Net income/(loss) as reported: $ 627,835 $ 365,233 $ 1,014,815 $ (51,254) Add: Stock-based compensation included in Net income/(loss) as reported -- -- -- -- Deduct: Total Stock-based compensation expense determined under fair value based methods 11,918 52,563 53,326 130,282 ------------ ------------ ------------ ------------ Proforma net income/(loss): $ 615,917 $ 312,670 $ 961,489 $ (181,536) ============ ============ ============ ============ Basic and diluted earnings/(loss) per share: As reported: $ 0.08 $ 0.05 $ 0.13 $ (0.01) Proforma: $ 0.08 $ 0.04 $ 0.12 $ (0.02)
The effects of applying SFAS 123 in this proforma disclosure are not necessarily indicative of future amounts. 3. Inventories Inventories are comprised of the following:
March 31, 2004 June 30, 2003 --------------- --------------- Work-in-progress $ 1,026,913 $ 536,695 Raw materials and component parts 8,962,558 10,577,713 Finished goods 2,963,641 3,484,822 Reserve for obsolete and excess inventory (1,948,208) (2,324,258) --------------- --------------- $ 11,004,904 $ 12,274,972 =============== ===============
4. 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 weighted number of basic shares outstanding for the three months ended March 31, 2004 and 2003 was 7,818,432 and 7,813,932, respectively. The weighted number of diluted shares outstanding for the three months ended March 31, 2004 and 2003 was 8,005,365 and 7,909,158 shares, respectively. The weighted number of basic shares outstanding for the nine months ended March 31, 2004 and 2003 was 7,815,748 and 7,813,932, respectively. The 8 weighted number of diluted shares outstanding for the nine months ended March 31, 2004 and 2003 was 7,957,881 and 7,956,448 shares, respectively. 5. New Accounting Standards In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived Assets" which supercedes Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions of Accounting Principles Bulletin No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a business. SFAS 144 provides a single accounting model for long-lived assets to be disposed of. Although retaining many of the fundamental recognition and measurement provisions of SFAS 121, the new rules change the criteria to be met to classify an asset as held-for-sale. The new rules also broaden the criteria regarding classification of a discontinued operation. The Company was required to adopt the provisions of SFAS 144 effective July 1, 2002. Adoption of SFAS 144 did not have a material impact on the Company's results of operations, financial position or cash flows. In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146 (SFAS 146), "Accounting for Costs Associated with Exit or Disposal Activities" which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activities initiated after December 31, 2002. Adoption of SFAS 146 did not have a material impact on the Company's results of operations, financial position or cash flows. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (SFAS 148), "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FAS 123," which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, SFAS 148 amends the disclosure requirements of Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS 148 are effective for financial statements issued for fiscal years 9 ending after December 15, 2002 and for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. Adoption of SFAS 148 did not have a material impact on the Company's results of operations, financial position or cash flows. In November 2002, the FASB issued Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". This interpretation elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. At March 31, 2004, the Company does not have any commitments that are within the scope of FIN No. 45. In January 2003, the FASB released FIN No. 46, "Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51". The Interpretation clarifies issues regarding the consolidation of entities which may have features that make it unclear whether consolidation or equity method accounting is appropriate. Adoption of FIN 46 did not have a material impact on the Company's results of operations, financial position or cash flows. In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (SFAS 150), "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS 150 provides guidance on distinguishing between liability and equity instruments and accounting for instruments that have characteristics of both. SFAS 150 requires specific types of freestanding financial instruments to be classified as liabilities including mandatory redeemable financial instruments, obligations to repurchase the issuer's equity shares by transferring assets and certain obligations to issue a variable number of shares. The provisions of SFAS 150 are effective for financial instruments entered into or modified after May 31, 2003. Adoption of SFAS 150 did not have a material impact on the Company's results of operations, financial position or cash flows. 6. 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. 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. 10 7. Financing Agreement Amendment On April 24, 2002, the Company entered into a new credit facility arrangement with LaSalle Bank National Association (the Bank). The credit facility provides for total borrowings up to $19.0 million; consisting of $15.0 million through a revolving credit facility and up to $4.0 million under a term loan for capital equipment. On September 26, 2003, the Bank further amended the Company's credit facility (the amended credit facility). The Bank amended various financial covenants in conjunction with the amended credit facility including a reduction in the required fixed coverage charge ratio and the elimination of the EBITDA covenant. The Bank amended the borrowing base to include 80% of eligible accounts receivable plus the lesser of 50% of eligible inventory or $7.0 million, subject to reserves as established by the Bank. In addition, the outstanding loans under the amended credit facility bears interest at an annual interest rate of 1.00% plus the Bank's prime rate. In conjunction with these amendments to the Company's credit facility, the Bank extended the maturity on the Company's term loan on real estate from August 1, 2003 to April 24, 2005. Amortization on the real estate term loan continues on a five-year schedule with equal monthly payments of $49,685. The real estate term loan bears interest at an annual interest rate of 1.00% plus the Bank's prime rate. The Company also received a waiver from the Bank for its covenant violations pertaining to its EBITDA covenant, which the Company was in default of on June 30, 2003. At March 31, 2004, the Company was in compliance with its financial covenants under the amended credit facility. Although the Company was in compliance with its financial covenants under the amended credit facility at March 31, 2004, the ability of the Company to remain in compliance with these ratios for the remainder of the current fiscal year depends on the cumulative operating results and related fixed charges, and is subject to achieving satisfactory revenue and expense levels sufficient to enable the Company to meet heightened performance standards. At March 31, 2004, the Company realized a Fixed Charge Coverage Ratio, as defined, of approximately 1.4 to 1.0 based on the prior twelve months. During the year ending June 30, 2004, the Company must realize a Fixed Charge Coverage Ratio of at least .75 to 1.0, as defined in the amended credit agreement. In addition, the outstanding loans under the amended credit facility bear interest at an annual interest rate at the Bank's prime rate plus 1.00% and the Company no longer has an option to elect a LIBOR rate of interest for its outstanding borrowings. The Company's per annum fee on any outstanding letters of credit under the amended credit facility is 2.50%. Under the terms of the amended credit facility, the interest rate on each loan outstanding at an Event of Default, as defined in the amended credit facility, bears interest at the rate of 2.00% per annum in excess of the interest rate otherwise payable thereon and both principal and interest would become payable on demand. The Company's credit facility requires a lockbox arrangement, which provides for all receipts to be swept daily to reduce borrowings outstanding under the credit facility. This arrangement, combined with the existence of a Material Adverse Effect (MAE) 11 clause in the new credit facility, cause the revolving credit facility to be classified as a current liability, per guidance in the FASB's EITF Issue No. 95-22, "Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement." However, the Company does not expect to repay, or be required to repay, within one year, the balance of the revolving credit facility classified as a current liability. The MAE clause, which is a typical requirement in commercial credit agreements, allows the lender to require the loan to become due if it determines there has been a material adverse effect on the Company's operations, business, properties, assets, liabilities, condition or prospects. The classification of the revolving credit facility as a current liability is a result only of the combination of the two aforementioned factors: the lockbox arrangement and the MAE clause. However, the revolving credit facility does not expire or have a maturity date within one year, but rather has a final expiration date of April 25, 2005. Additionally, the Bank has not notified the Company of any indication of a MAE at March 31, 2004. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003. Allied had net sales of $15.0 million for the three months ended March 31, 2004, down $1.4 million, or 9.0%, from net sales of $16.4 million in the prior year same quarter. Demand was lower in the third quarter of fiscal 2004 than in the prior year for the Company's products. The effect of lower sales on gross profit was offset during the quarter by improved gross profit performance. Gross profit for the three months ended March 31, 2004 was $4.2 million, or 28.2% of net sales, compared to $4.2 million, or 25.8% of net sales, for the three months ended March 31, 2003. The improvement in gross margins is primarily attributable to reduced operations cost resulting from the Company's cost reduction efforts, including automation of certain manufacturing processes, and greater control over manufacturing overhead expenditures. Manufacturing overhead has been reduced for personnel and non-personnel costs. Selling, general and administrative expenses for the three months ended March 31, 2004 were $3.1 million, a decrease of $0.4 million, or 10.8%, from $3.4 million for the three months ended March 31, 2003. The decrease is primarily the result of $0.3 million in lower personnel cost and $0.1 million in lower insurance cost. Income from operations was $1.2 million for the three months ended March 31, 2004 compared to $0.8 million income from operations for the three months ended March 31, 2003. Interest expense was $0.1 million for the three months ended March 31, 2004, 12 down from $0.2 million for the three months ended March 31, 2003. Allied had income before provision for income taxes in the third quarter of fiscal 2004 of $1.0 million, compared to an income before provision for income taxes of $0.6 million, for the third quarter of fiscal 2003. The Company recorded a tax provision of $0.4 million for the three-month period ended March 31, 2004 versus a tax provision of $0.2 million recorded for the three-month period ended March 31, 2003. In fiscal 2004, the net income for the third quarter was $0.6 million or $0.08 per basic and diluted share compared to a net income of $0.4 million or $0.05 per basic and diluted share for the third quarter of fiscal 2003. The weighted average number of common shares outstanding used in the calculation of basic earnings per share for the third quarters of fiscal 2004 and 2003 was 7,818,432 and 7,813,932 shares, respectively. The weighted average number of common shares outstanding used in the calculation of diluted earnings per share for the third quarters of fiscal 2004 and fiscal 2003 was 8,005,365 and 7,909,158 shares, respectively. NINE MONTHS ENDED MARCH 31, 2004 COMPARED TO NINE MONTHS ENDED MARCH 31, 2003. Allied had net sales of $43.8 million for the nine months ended March 31, 2004, down $2.7 million, or 5.8%, from net sales of $46.5 million in the prior year same period. Sales in the first nine months of fiscal 2004 have been unfavorably impacted by decreased activity in the medical gas equipment markets. This is reflected by lower orders and shipments in this market than in the prior year. Demand was also down for the Company's respiratory care products and emergency medical products for the first nine months than in the prior year. Gross profit for the nine months ended March 31, 2004 was $11.7 million, or 26.7% of net sales, compared to $10.8 million, or 23.2% of net sales, for the nine months ended March 31, 2003. The improvement in gross margins is the result of reduced operations cost resulting from the Company's cost reduction efforts, including automation of certain manufacturing processes. These improvements offset the decrease in gross margins attributable to lower sales volumes. In addition, gross profit improved $0.2 million as a result of a distribution representing the Company's membership interest in the liquidation of the General American Mutual Holding Company, the Company's health care benefit provider. The Company is continuing to review, automate, and further improve operations to improve productivity and lower manufacturing and product cost. Selling, general and administrative expenses for the nine months ended March 31, 2004 were $9.6 million, a decrease of $0.6 million, or 5.9%, from $10.2 million for the nine months ended March 31, 2003. The decrease is primarily the result of reduced $0.5 million in reduced personnel cost and $0.3 million in reduced insurance cost. These savings were partially offset by an additional $0.2 million in legal fees in fiscal 2004. On July 28th, 2003 the Company announced a workforce reduction of 14 positions from its managerial and administrative staff and 5 positions from its production group. 13 This reduction resulted in severance pay of approximately $73,000, which was paid in the first quarter of fiscal 2004. These payments are reflected in selling, general, and administrative expenses for the nine months ended March 31, 2004. Income from operations was $2.1 million for the nine months ended March 31, 2004 compared to a $0.6 million income from operations for the nine months ended March 31, 2003. Interest expense was $0.5 million for the nine months ended March 31, 2004, down from $0.7 million for the nine months ended March 31, 2003. Allied had income before provision for income taxes in the first nine months of fiscal 2004 of $1.7 million, compared to a loss before benefit for income taxes of $46,727, for the first nine months of fiscal 2003. The Company recorded a tax provision of $0.7 million for the nine-month period ended March 31, 2004 versus a tax provision of $4,527 recorded for the nine-month period ended March 31, 2003. In fiscal 2004, the net income for the first nine months was $1.0 million, or $0.13 per basic and diluted share compared to a net loss of $0.1 million or $0.01 loss per basic and diluted share for the first nine months of fiscal 2003. The weighted average number of common shares outstanding used in the calculation of basic earnings per share for the first nine months of fiscal 2004 and 2003 was 7,815,748 and 7,813,932 shares, respectively. The weighted average number of common shares outstanding used in the calculation of diluted earnings per share for the first nine months of fiscal 2004 and fiscal 2003 was 7,957,881 and 7,956,448 shares, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company believes that available resources and anticipated cash flows from operations are sufficient to meet operating requirements in the next 12 months. Working capital increased to $10.2 million at March 31, 2004 compared to $9.4 million at June 30, 2003. This is primarily due to a $3.9 million reduction in the current portion of long-term debt and $0.3 million increase in other current assets as a result of insurance payments. These changes have been offset by a $0.6 million increase in accounts payable, a $0.9 million increase in accrued liabilities, a $0.4 million decrease in accounts receivable, a $0.2 million decrease in income tax receivable, and a $1.3 million decrease in inventory. The decrease in inventory is a result of improved inventory control procedures during the last year. On April 24, 2002, the Company entered into a new credit facility arrangement with LaSalle Bank National Association (the "Bank"). The new credit facility provides -for total borrowings up to $19.0 million; consisting of up to $15.0 million through a revolving credit facility and up to $4.0 million under a term loan. On September 26, 2003, the Bank further amended the Company's credit facility (the amended credit facility). The Bank amended various financial covenants in conjunction with the amended credit facility including a reduction in the required fixed coverage charge ratio and the elimination of the EBITDA covenant. The Bank amended 14 the borrowing base to include 80% of eligible accounts receivable plus the lesser of 50% of eligible inventory or $7.0 million, subject to reserves as established by the Bank. In addition, the outstanding loans under the amended credit facility bears interest at an annual interest rate of 1.00% plus the Bank's prime rate. In conjunction with these amendments to the Company's credit facility, the Bank extended the maturity on the Company's term loan on real estate from August 1, 2003 to April 24, 2005. Amortization on the real estate term loan continues on a five-year schedule with equal monthly payments of $49,685. The real estate term loan bears interest at an annual interest rate of 1.00% plus the Bank's prime rate. The Company also received a waiver from the Bank for its covenant violations pertaining to its EBITDA covenant, which the Company was in default of on June 30, 2003. At March 31, 2004, the Company was in compliance with its financial covenants under the amended credit facility. Although the Company was in compliance with its financial covenants under the amended credit facility at March 31, 2004, the ability of the Company to remain in compliance with these ratios for the remainder of the current fiscal year depends on the cumulative operating results and related fixed charges, and is subject to achieving satisfactory revenue and expense levels sufficient to enable the Company to meet heightened performance standards. At March 31, 2004, the Company realized a Fixed Charge Coverage Ratio, as defined, of approximately 1.4 to 1.0 based on the prior twelve months. During the year ending June 30, 2004, the Company must realize a Fixed Charge Coverage Ratio of at least .75 to 1.0, as defined in the amended credit agreement. The Company's credit facility requires lockbox arrangement, which provide for all receipts to be swept daily to reduce borrowings outstanding under the credit facility. This arrangement, combined with the existence of a Material Adverse Effect (MAE) clause in the new credit facility, cause the revolving credit facility to be classified as a current liability, per guidance in the FASB's Emerging Issues Task Force Issue 95-22, "Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement." However, the Company does not expect to repay, or be required to repay, within one year, the balance of the revolving credit facility classified as a current liability. The MAE clause, which is a typical requirement in commercial credit agreements, allows the lender to require the loan to become due if it determines there has been a material adverse effect on the Company's operations, business, properties, assets, liabilities, condition or prospects. The classification of the revolving credit facility as a current liability is a result only of the combination of the two aforementioned factors: the lockbox arrangement and the MAE clause. However, the revolving credit facility does not expire or have a maturity date within one year, but rather has a final expiration date of April 25, 2005. Additionally, the Bank has not notified the Company of any indication of a MAE at March 31, 2004. At March 31, 2004, the company had $0.3 million outstanding against this facility and $9.4 million available to borrow from the line based on collateral requirements. 15 Inflation has not had a material effect on the Company's business or results of operations. RECENTLY ISSUED ACCOUNTING STANDARDS In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived Assets", which supersedes Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions of APB No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a business. SFAS 144 provides a single accounting model for long-lived assets to be disposed of. Although retaining many of the fundamental recognition and measurement provisions of SFAS 121, the new rules change the criteria to be met to classify an asset as held-for-sale. The new rules also broaden the criteria regarding classification of a discontinued operation. The Company was required to adopt the provisions of SFAS 144 effective July 1, 2002. Adoption of SFAS 144 did not have a material impact on the Company's results of operations, financial position or cash flows. In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146 (SFAS 146), "Accounting for Costs Associated with Exit or Disposal Activities" which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activities initiated after December 31, 2002. Adoption of SFAS 146 has not had a material impact on the Company's results of operations, financial position or cash flows. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (SFAS 148), "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FAS 123," which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, SFAS 148 amends the disclosure requirements of Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS 148 are effective for financial statements issued for fiscal years ending after December 15, 2002 and for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. Adoption of SFAS 16 148 did not have a material impact on the Company's results of operations, financial position or cash flows. In November 2002, the FASB issued Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". This interpretation elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. At March 31, 2004, the Company does not have any commitments that are within the scope of FIN No. 45. In January 2003, the FASB released FIN No. 46, "Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51". The Interpretation clarifies issues regarding the consolidation of entities which may have features that make it unclear whether consolidation or equity method accounting is appropriate. Adoption of FIN 46 did not have a material impact on the Company's results of operations, financial position or cash flows. In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (SFAS 150), "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS 150 provides guidance on distinguishing between liability and equity instruments and accounting for instruments that have characteristics of both. SFAS 150 requires specific types of freestanding financial instruments to be classified as liabilities including mandatory redeemable financial instruments, obligations to repurchase the issuer's equity shares by transferring assets and certain obligations to issue a variable number of shares. The provisions of SFAS 150 are effective for financial instruments entered into or modified after May 31, 2003. Adoption of SFAS 150 did not have a material impact on the Company's results of operations, financial position or cash flows. 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 has recorded an additional $0.1 million charge to operations evenly throughout both fiscal 2004 and 2003 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 judgements resulting from these claims over its self-insured 17 retention will be covered by the Company's product liability insurance. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK At March 31, 2004, the Company had $5.3 million in debt outstanding. This balance represents amounts outstanding under the Company's revolving credit facility of $0.3 million, the Company's real estate loan for $2.7 million, and the Company's capital expenditure loan for $2.3 million. The revolving credit facility, the capital expenditure loan, and the real estate loan bear an interest rate using the commercial bank's "floating reference rate" 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. The Company had no holdings of derivative financial or commodity instruments at March 31, 2004. Allied Healthcare Products has international sales, however these sales are denominated in U.S. dollars, mitigating foreign exchange rate fluctuation risk. ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures The Company, under the supervision, and with the participation, of its management, including its principal executive officer and principal financial officer, performed an evaluation of the Company's disclosure controls and procedures, as contemplated by Securities Exchange Act Rule 13a-15, as of March 31, 2004. Based on that evaluation, the Company's principal executive officer and principal financial officer concluded that such disclosure controls and procedures are effective to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to them, particularly during the period for which the periodic reports are being prepared. Changes in Internal Controls No significant changes were made in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation performed pursuant to Securities Exchange Act Rule 13a-15 referred to above. Part II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a). 31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a). 18 32.1 Certification by Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002. 32.2 Certification by Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002. 99.1 Press Release dated April 30, 2004, announcing earnings for the quarter and nine months ended March 31, 2004. b) Reports on Form 8-K: For an event occurring on February 25, 2004, the Registrant filed a Form 8-K announcing that Judy T. Graves had been elected to its board of directors expanding the size of the board to six members. 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/ Daniel C. Dunn ----------------------------------- Daniel C. Dunn Chief Financial Officer Date: April 30, 2004 19