10-Q 1 c02185e10vq.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 December 31, 2005 [ ] 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the exchange Act). Yes [ ] No [X] The number of shares of common stock outstanding at February 6, 2006 is 7,844,577 shares. INDEX
Page Number Part I - Financial Information Item 1. Financial Statements Consolidated Statement of Operations - 3 three months and six months ended December 31, 2005 and 2004 (Unaudited) Consolidated Balance Sheet - 4 - 5 December 31, 2005 (Unaudited) and June 30, 2005 Consolidated Statement of Cash Flows - 6 Six months ended December 31, 2005 and 2004 (Unaudited) Notes to Consolidated Financial Statements 7 - 13 Item 2. Management's Discussion and Analysis of 13 - 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 19 Signature 20
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, 2005. 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, -------------------------------- -------------------------------- 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Net sales $13,339,789 $13,667,568 $28,326,070 $27,607,288 Cost of sales 9,766,848 10,254,672 20,778,612 20,787,691 ----------- ----------- ----------- ----------- Gross profit 3,572,941 3,412,896 7,547,458 6,819,597 Selling, general and administrative expenses 3,032,153 3,056,555 6,202,112 5,985,643 ----------- ----------- ----------- ----------- Income from operations 540,788 356,341 1,345,346 833,954 Interest expense - 28,966 - 102,811 Interest income (18,718) - (26,675) - Other, net 8,924 11,410 19,993 18,772 ----------- ----------- ----------- ----------- (9,794) 40,376 (6,682) 121,583 ----------- ----------- ----------- ----------- Income before provision for income taxes 550,582 315,965 1,352,028 712,371 Provision for income taxes 233,328 131,779 568,933 292,684 ----------- ----------- ----------- ----------- Net income $ 317,254 $ 184,186 $ 783,095 $ 419,687 =========== =========== =========== =========== Basic and diluted earnings per share $ 0.04 $ 0.02 $ 0.10 $ 0.05 =========== =========== =========== =========== Weighted average shares 7,832,186 7,818,432 7,830,881 7,818,432 outstanding - basic Weighted average shares outstanding - diluted 8,050,069 8,104,869 8,041,758 8,087,657
See accompanying Notes to Consolidated Financial Statements. 3 ALLIED HEALTHCARE PRODUCTS, INC. CONSOLIDATED BALANCE SHEET ASSETS
(Unaudited) December 31, June 30, 2005 2005 ----------- ----------- Current assets: Cash and cash equivalents $ 717,076 $ 317,775 Short-term investments 1,250,000 - Accounts receivable, net of allowances of $584,212 and $565,000, respectively 6,756,521 7,215,799 Inventories, net 11,337,984 10,775,550 Other current assets 416,375 168,431 ----------- ----------- Total current assets 20,477,956 18,477,555 ----------- ----------- Property, plant and equipment, net 11,249,400 11,308,866 Goodwill 15,979,830 15,979,830 Other assets, net 328,347 330,969 ----------- ----------- Total assets $48,035,533 $46,097,220 =========== ===========
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, 2005 2005 ------------ ------------ Current liabilities: Accounts payable $ 3,234,326 $ 2,110,599 Deferred income taxes 697,094 711,416 Deferred revenue 465,000 465,000 Other accrued liabilities 3,122,985 2,940,763 ------------ ------------ Total current liabilities 7,519,405 6,227,778 ------------ ------------ Deferred revenue 775,000 1,007,500 ------------ ------------ Commitments and contingencies Stockholders' equity: Preferred stock; $0.01 par value; 1,500,000 shares authorized; no shares issued and outstanding - - 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; 10,148,069 shares issued at December 31, 2005 and 10,133,069 shares issued at June 30, 2005: 7,844,577 shares outstanding at December 31, 2005 and 7,829,577 shares outstanding June 30, 2005, respectively 101,481 101,331 Additional paid-in capital 47,205,084 47,109,143 Retained earnings 13,165,991 12,382,896 Less treasury stock, at cost; 2,303,492 shares at December 31, 2005 and June 30, 2005, respectively (20,731,428) (20,731,428) ------------ ------------ Total stockholders' equity 39,741,128 38,861,942 ------------ ------------ Total liabilities and stockholders' equity $ 48,035,533 $ 46,097,220 ============ ============
See accompanying Notes to Consolidated Financial Statements. 5 ALLIED HEALTHCARE PRODUCTS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Six months ended December 31, ---------------------------------- 2005 2004 ---------- ----------- Cash flows from operating activities: Net income $ 783,095 $ 419,687 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 576,924 647,866 Stock based compensation 35,341 - Provision for doubtful accounts 102,728 6,089 Deferred income taxes (14,322) - Changes in operating assets and liabilities: Short-term investments (1,250,000) - Accounts receivable 356,550 679,188 Inventories (562,434) 489,865 Income tax receivable - 130,548 Other current assets (247,944) (198,437) Accounts payable 1,123,727 (304,166) Deferred revenue (232,500) 775,000 Income tax payable - (295,254) Other accrued liabilities 182,222 117,205 ---------- ----------- Net cash provided by operating activities 853,387 2,467,591 ---------- ----------- Cash flows from investing activities: Capital expenditures (514,836) (129,214) ---------- ----------- Net cash used in investing activities (514,836) (129,214) ---------- ----------- Cash flows from financing activities: Payments of long-term debt - (3,022,331) Borrowings under revolving credit agreement - 30,691,005 Payments under revolving credit agreement - (30,004,909) Stock options exercised 42,750 - Excess tax benefit from exercise of stock options 18,000 - ---------- ----------- Net cash provided by (used in) financing activities 60,750 (2,336,235) ---------- ----------- Net increase in cash and equivalents 399,301 2,142 Cash and cash equivalents at beginning of period 317,775 8,256 ---------- ----------- Cash and cash equivalents at end of period $ 717,076 $ 10,398 ========== ===========
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, 2005. 2. Significant Accounting Policies Stock Options The Company has established a 1991 Employee Non-Qualified Stock Option Plan, a 1994 Employee Stock Option Plan, and a 1999 Incentive Stock Plan (collectively the "Employee Plans"). The Employee Plans provide for the granting of options to the Company's executive officers and key employees to purchase shares of common stock at prices equal to the fair market value of the stock on the date of grant. Options to purchase up to 1,800,000 shares of common stock may be granted under the Employee Plans. Options generally become exercisable ratably over a four year period or one-fourth of the shares covered thereby on each anniversary of the date of grant, commencing on the first or second anniversary of the date granted. The right to exercise the options expires in ten years from the date of grant, or earlier if an option holder ceases to be employed by the Company. In addition, the Company has established a 1991 Directors Non-Qualified Stock Option Plan and a 1995 Directors Non-Qualified Stock Option Plan (collectively the "Directors Plans"). The Directors Plans provide for the granting of options to the Company's directors who are not employees of the Company to purchase shares of common stock at prices equal to the fair market value of the stock on the date of grant. Options to purchase up to 250,000 shares of common stock may be granted under the Directors Plans. Options shall become exercisable with respect to one-fourth of the shares covered thereby on each anniversary of the date of grant, commencing on the second anniversary of the date granted, except for certain options granted under the 1995 Directors Non-Qualified Stock Option Plan which become exercisable with respect to all of the shares covered thereby one year after the grant date. The right to exercise the options expires in ten years from the date of grant, or earlier if an option holder ceases to be a director of the Company. 7 A summary of option activity under the plans for the three and six months ended December 31, 2005 is as follows:
Weighted Average Weighted Remaining Aggregate Average Contractual Intrinsic Shares Exercise Price Term (years) Value ------- -------------- ------------ ---------- Balance, July 1, 2005 741,750 $ 2.64 Options Granted 5,000 4.80 Options Exercised - - Options Canceled (1,000) 6.75 ------- ---------- Balance, September 30, 2005 745,750 $ 2.65 4.4 $2,150,692 Options Granted 30,000 5.25 Options Exercised (15,000) 2.85 Options Canceled (4,000) 18.25 ------- ---------- Balance, December 31, 2005 756,750 $ 2.66 4.4 $2,393,580 Exercisable, December 31, 2005 681,750 $ 2.50 3.9 $2,273,130
On July 1, 2005 the company adopted the provisions of Financial Accounting Standards Board Statement No. 123R, "Share-Based Payment" (Statement 123R), using the modified prospective transition method which does not require prior periods to be restated. Statement 123R sets accounting requirements for "share-based" compensation to employees, including employee stock purchase plans, and requires companies to recognize in the statement of operations the grant-date fair value of the stock options and other equity-based compensation. The fair value of options granted is estimated on the date of grant using the Black-Scholes option-pricing model. For options granted during the six months ended December 31, 2005, the weighted average assumptions utilized in the Black-Scholes option-pricing model included an expected life of 10 years, risk-free interest rate of 4.45%, volatility of 51% and no dividend yield. For options granted during the six months ended December 31, 2004, the assumptions utilized in the Black-Scholes option-pricing model included an expected life of 10 years, risk-free interest rate of 4.20%, volatility of 52% and no dividend yield. Share-based compensation expense included in the statement of operations for the three months and six months ended December 31, 2005 was approximately $17,000 and $35,000 respectively. Unrecognized shared-based compensation cost related to unvested stock options amounts to approximately $163,000. The cost is expected to be recognized over the next four years. 8 For the three and six months ended December 31, 2005, 15,000 stock options were exercised with an intrinsic value of $45,000. Cash received from stock option exercises was $42,750 with a tax benefit of $18,000. Prior to July 1, 2005, the Company accounted 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 did not recognize compensation expense at the grant date for options granted because the Company grants options at a price equal to the market value at the time of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation for periods presented prior to the Company's adoption of Statement 123R:
Three Months Six Months Ended December 31, Ended December 31, 2004 2004 ------------------ ------------------ Net income, as reported $ 184,186 $ 419,687 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects - - ---------- ------------- Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards granted since July 1, 1995, net of related tax effects ($ 13,424) ($ 25,479) ---------- -------------- Pro forma net income $ 170,762 $ 394,208 ========== ============== Earnings per share: Basic-as reported $ 0.02 $ 0.05 ---------- ------------- Basic-pro forma $ 0.02 $ 0.05 ---------- ------------- Diluted-as reported $ 0.02 $ 0.05 ---------- ------------- Diluted-pro forma $ 0.02 $ 0.05 ---------- -------------
9 Short-term Investments The Company classifies its short-term investments as trading securities under the requirements of Statement of Financial Accounting Standards No. 115 ("SFAS No. 115"), "Accounting for Certain Investments in Debt and Equity Securities". SFAS No. 115 considers trading securities as securities that are bought with the intention of being sold in the near term for the general purpose of realizing profits. The Company's short-term investments consist of auction rate securities with auction reset periods of less than twelve months. Trading securities are recorded at fair market value and gains and losses are reflected in "Interest income" in the accompanying Consolidated Statement of Operations. 3. Inventories In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." SFAS No. 151 requires the allocation of fixed production overhead costs be based on the normal capacity of the production facilities and unallocated overhead costs recognized as an expense in the period incurred. In addition, other items such as abnormal freight, handling costs and wasted materials require treatment as current period charges rather than a portion of the inventory cost. SFAS No. 151 is effective for inventory costs incurred during periods beginning after June 15, 2005. The Company treats wasted material, abnormal freight and unallocated overhead cost as current period charges. The adoption of SFAS No. 151 had no effect on the Company's results of operations, financial position or cash flows. Inventories are comprised as follows:
December 31, 2005 June 30, 2005 ----------------- ------------- Work-in progress $ 920,766 $ 561,157 Raw materials and component parts 9,035,053 8,746,226 Finished goods 2,635,149 2,722,020 Reserve for obsolete and excess inventory (1,252,984) (1,253,853) ----------------- ------------- $ 11,337,984 $ 10,775,550 ================= =============
10 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 number of basic shares outstanding for the three months ended December 31, 2005 and 2004 was 7,832,186 and 7,818,432 respectively. The number of diluted shares outstanding for the three months ended December 31, 2005 and 2004 was 8,050,069 and 8,104,869 respectively. The number of basic shares outstanding for the six months ended December 31, 2005 and 2004 was 7,830,881 and 7,818,432 respectively. The number of diluted shares outstanding for the six months ended December 31, 2005 and 2004 was 8,041,758 and 8,087,657 respectively. 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. 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. Financing On September 1, 2005, the Bank and the Company agreed to an amendment of the credit facility. In conjunction with the amendment to the Company's credit facility, the Bank extended the maturity on the Company's revolving credit facility from April 24, 2007 to September 1, 2008. The entire credit facility continues to accrue interest at the Bank's prime rate. The prime rate was 7.25% on December 31, 2005. The interest rate on prime rate loans may increase from prime to prime plus 0.75% if the ratio of the Company's funded debt to EBITDA exceeds 2.5. The amended credit facility also provides the Company with a rate of LIBOR plus 1.75%, at the Company's option. The optional LIBOR rate may increase from LIBOR plus 1.75% to LIBOR plus 2.75% based on the Company's fixed charge coverage ratio. The 90-day LIBOR rate was 4.53% at December 31, 2005. At December 31, 2005 the Company had no aggregate indebtedness, including capital lease obligations, short-term debt and long-term debt. 11 The Company was in compliance with all of the financial covenants associated with its credit facility at December 31, 2005. 7. Stock Repurchase Arrangement On August 25, 2005, the Board of Directors authorized repurchases of shares of the Company's common stock pursuant to open market transactions in accordance with Rule 10b-18 under the Securities Exchange Act or in privately negotiated block transactions. The authorization permits repurchases from time to time until June 30, 2007 at the discretion of the Chairman of the Board or the President and Chief Executive Officer. The authorization permits up to $1.0 million to be applied to such repurchases. No specific number of shares are sought in connection with the authorization. The Company received the consent of the Bank for this authorized repurchase. As of December 31, 2005 no shares have been repurchased under this arrangement. 8. Baralyme(R) Agreement A reconciliation of deferred revenue resulting from the agreement with Abbott Laboratories ("Abbott"), with the amounts received under the agreement, and amounts recognized as net sales is as follows:
Three Months ended Six Months ended December 31, December 31, --------------------------- --------------------------- 2005 2004 2005 2004 ----------- --------- ------------ ----------- Beginning balance $ 1,356,250 $ 891,250 $ 1,472,500 $ - Payment Received from Abbott Laboratories - - - 1,530,000 Revenue recognized as net sales (116,250) (116,250) (232,500) (755,000) ----------- --------- ------------ ----------- 1,240,000 775,000 1,240,000 775,000 ----------- --------- ------------ ----------- Less - Current portion of deferred revenue (465,000) (465,000) (465,000) (465,000) ----------- --------- ------------ ----------- $775,000 $310,000 $775,000 $310,000 =========== ========= ============ ===========
During the first quarter of fiscal 2005, the Company recorded a charge to cost of sales of $600,000. This charge included $216,000 for severance payments and fringe benefits for the 12 bargaining unit employees. The charge included $200,000 for the value of Baralyme(R) inventory in stock at the time of the withdrawal, and associated 12 disposal cost. The charge also included $184,000 for replacement of Baralyme(R) inventory which was returned by our customers as a result of the withdrawal. The Company has replaced Baralyme(R) returned by its customers with Carbolime(R), a carbon dioxide absorption product which continues to be offered for sale by Allied. In addition to the provisions of the agreement relating to the withdrawal of the Baralyme(R) product, Abbott has agreed to pay Allied up to $2,150,000 in product development costs to pursue development of a new carbon dioxide absorption product for use in connection with inhalation anesthetics that does not contain potassium hydroxide and does not produce a significant exothermic reaction with currently available inhalation agents. As of December 31, 2005 no amounts have been received, and $184,000 is receivable, as a result of product development activities. For the three and six months ended December 31, 2005; $110,000 and $184,000 have been included in Net Sales, respectively. For the three and six months ended December 31, 2005; $110,000 and $184,000 have been included in Cost of Sales, respectively. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 2005 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2004. Allied had net sales of $13.3 million for the three months ended December 31, 2005, down $0.4 million, or 2.9%, from net sales of $13.7 million in the prior year same quarter. Sales for the three months ended December 31, 2005 include $116,250 for the recognition into income of payments resulting from the agreement with Abbott Laboratories to cease the production and distribution of Baralyme(R). Sales for the three months ended December 31, 2005 also include $110,000 as a result of product development activities to pursue development of a new carbon dioxide absorption product. The agreement with Abbott provides for Abbott to pay Allied up to $2,150,000 in product development cost to pursue development of a new carbon dioxide absorption product for use in connection with inhalation anesthetics that does not contain potassium hydroxide and does not produce a significant exothermic reaction with currently available inhalation agents. The Company ceased the sale of Baralyme(R) on August 27th, 2004. Sales for the three months ended December 31, 2004 include $116,250 for the recognition into income of payments resulting from the agreement with Abbott Laboratories to cease the production and distribution of Baralyme(R). Income from the agreement will continue to 13 be recognized over eight years, the term of the agreement, at $38,750 per month. Allied continues to sell Carbolime(R), a carbon dioxide absorbent with a different formulation than Baralyme(R). Domestic sales were down 9.1% from the prior year, while international business, which represented 23.2% of second quarter sales, was up 3.0%. Demand for the Company's Emergency Products has continued to be stronger than in prior years. The Company believes that demand for these products has been favorably impacted by Federal Homeland Security funding for emergency responders, as well as the reorganization of the sales force for Emergency Products. This increase in demand for the quarter ended December 31, 2005, has been offset by decreased demand for the Company's respiratory care products and medical gas equipment during the period. Respiratory Care Products include the Company's line of homecare products. The Company continues to invest in personnel and systems to recapture market share in this market. In addition, the Company continues to emphasize measures to reduce the cost of its products. Gross profit for the three months ended December 31, 2005 was $3.6 million, or 26.8% of net sales, compared to $3.4 million, or 25.0% of net sales, for the three months ended December 31, 2004. Cost of sales for the three months ended December 31, 2005 also included $110,000 as a result of product development of a new carbon dioxide absorption product. The improvement in gross margins from the prior year period is due to approximately $0.1 million lower manufacturing overhead spending for the three months ended December 31, 2005 than for the three months ended December 31, 2004, and higher absorption rates for fixed cost due to higher production levels in fiscal 2006. Selling, general and administrative expenses for the three months ended December 31, 2005 were $3.0 million, a net decrease of $0.1 million, or 3.2%, from $3.1 million for the three months ended December 31, 2004. This decrease includes a $66,000 decrease in the Company insurance program, a $33,000 decrease in telephone expense, and a $21,000 decrease in maintenance cost. These decreases were largely offset by an approximately $97,000 increase in recruiting and relocation for employee replacements. There have not been changes in staffing levels from the prior year. Income from operations was $0.5 million for the three months ended December 31, 2005 compared to $0.4 million for the three months ended December 31, 2004. Interest income was $18,718 for the three months ended December 31, 2005 compared to interest expense of $28,966 for the three months ended December 31, 2004. Allied had income before provision for income taxes in the second quarter of fiscal 2006 of $0.6 million, compared to income before provision for income taxes in the second quarter of fiscal 2005 of $0.3 million. The Company recorded a tax provision of $0.2 million for the three-month period ended December 31, 2005, versus a tax provision of $0.1 million for the three-month period ended December 31, 2004. In fiscal 2006, the net income for the second quarter was $0.3 million or $0.04 per basic and diluted share compared to net income of $0.2 million or $0.02 per basic and diluted share for the second quarter of fiscal 2005. The weighted average number of 14 common shares outstanding, used in the calculation of basic earnings per share for the second quarters of fiscal 2006 and 2005 were 7,832,186 and 7,818,432 shares respectively. The weighted average number of common shares outstanding used in the calculation of diluted earnings per share for the second quarters of fiscal 2006 and fiscal 2005 were 8,050,069 and 8,104,869 shares, respectively. SIX MONTHS ENDED DECEMBER 31, 2005 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2004. Allied had net sales of $28.3 million for the six months ended December 31, 2005, up $0.7 million, or 2.5%, from net sales of $27.6 million in the prior year same period. The overall sales increase is primarily due to the timing of customer purchase order releases and Company shipping performance. Sales for the six months ended December 31, 2005 include $232,500 for the recognition into income of payments resulting from the agreement with Abbott Laboratories to cease the production and distribution of Baralyme(R). Sales for the six months ended December 31, 2005 also include $184,000 as a result of product development activities to pursue development of a new carbon dioxide absorption product. The agreement with Abbott provides for Abbott to pay Allied up to $2,150,000 in product development cost to pursue development of a new carbon dioxide absorption product for use in connection with inhalation anesthetics that does not contain potassium hydroxide and does not produce a significant exothermic reaction with currently available inhalation agents. The Company ceased the sale of Baralyme(R) on August 27th, 2004 upon completion of the agreement with Abbott, and recognized income of $232,500 during the six months ended December 31, 2005. Income from the agreement will continue to be recognized over eight years, the term of the agreement, at $38,750 per month. Additionally, sales for the six months ended December 31, 2004 included recognition as sales of a one-time $600,000 payment from Abbott Laboratories for cost incurred in connection with the withdrawal of Baralyme(R) from the market, the disposal of such product, and severance payments payable to 12 manufacturing employees. Allied continues to sell Carbolime(R), a carbon dioxide absorbent with a different formulation than Baralyme(R). Domestic sales were down 2.0% from the prior year, while international business, which represented 19.0% of the first six months of sales, was up 28.2%. Orders for the six months ended December 31, 2005 were down 3.3% from orders for the same period of the prior year. However, purchase order releases were only slightly lower than in the first six months of the prior year. Purchase order release lead times depend on the 15 scheduling practices of the individual customers. With improved shipping performance and releases, total sales increased 2.5% over prior year levels during the first six months. Gross profit for the six months ended December 31, 2005 was $7.5 million, or 26.7% of net sales, compared to $6.8 million, or 24.6% of net sales, for the six months ended December 31, 2004. Cost of sales for the six months ended December 31, 2005 includes $184,000 as a result of product development of a new carbon dioxide absorption product. Cost of sales for the six months ended December 31, 2004 includes $0.6 million in cost incurred in connection with the withdrawal of Baralyme(R). The improvement in gross margins from the prior year period is also attributable to higher absorption rates for fixed cost due to the higher sales in fiscal 2006, and manufacturing overhead spending which is unchanged from the prior year same period. The Company is continuing its active efforts to further reduce the cost to produce its products. Selling, general and administrative expenses for the six months ended December 31, 2005 were $6.2 million, a net increase of $0.2 million, or 3.3%, from $6.0 million for the six months ended December 31, 2004. The increase includes an approximately $0.1 million increase in salaries and wages as a result of scheduled increases and an approximately $0.1 million increase in recruiting and relocation cost. There have not been changes in staffing levels over the prior year. This increase in expense also includes an approximately $0.1 million increase in computer consulting and development expenses. These increases have been partially offset by decreases in the Company's insurance cost. Income from operations was $1.3 million for the six months ended December 31, 2005 compared to $0.8 million for the six months ended December 31, 2004. Interest income was $26,675 for the six months ended December 31, 2005 compared to interest expense of $102,811 for the six months ended December 31, 2004. Allied had income before provision for income taxes for the first six months of fiscal 2006 of $1.4 million, compared to income before provision for income taxes for the first six months of fiscal 2005 of $0.7 million. The Company recorded a tax provision of $0.6 million for the six-month period ended December 31, 2005, versus a tax provision of $0.3 million for the six-month period ended December 31, 2004. In fiscal 2006, the net income for the first six months was $0.8 million or $0.10 per basic and diluted share compared to net income of $0.4 million or $0.05 per basic and diluted share for the first six months of fiscal 2005. The weighted average number of common shares outstanding, used in the calculation of basic earnings per share for the first six months of fiscal 2006 and 2005 were 7,830,881 and 7,818,432 shares, respectively. The weighted average number of common shares outstanding used in the calculation of diluted earnings per share for the first six months of fiscal 2006 and fiscal 2005 were 8,041,758 and 8,087,657 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 coming year. 16 Working capital was $13.0 million at December 31, 2005 compared to $12.2 million at June 30, 2005. This is primarily due to a $0.4 million increase in cash, a $1.3 million increase in short-term investments, a $0.6 million increase in inventories and a $0.2 million increase in other current assets. These changes have been offset by a $0.5 million decrease in accounts receivable, a $1.1 million increase in accounts payable and a $0.2 million increase in other accrued liabilities. On August 25, 2005, the Board of Directors authorized repurchases of shares of the Company's common stock pursuant to open market transactions in accordance with Rule 10b-18 under the Securities Exchange Act or in privately negotiated block transactions. The authorization permits repurchases from time to time until June 30, 2007 at the discretion of the Chairman of the Board or the President and Chief Executive Officer. The authorization permits up to $1.0 million to be applied to such repurchases. No specific number of shares are sought in connection with the authorization. The Company received the consent of the Bank for this authorized repurchase. As of December 31, 2005 no shares have been repurchased under this arrangement. On September 1, 2005, the Bank and the Company agreed to an amendment of the credit facility. In conjunction with the amendment to the Company's credit facility, the Bank extended the maturity on the Company's revolving credit facility from April 24, 2007 to September 1, 2008. The entire credit facility continues to accrue interest at the Bank's prime rate. The prime rate was 7.25% on December 31, 2005. The interest rate on prime rate loans may increase from prime to prime plus 0.75% if the ratio of the Company's funded debt to EBITDA exceeds 2.5. The amended credit facility also provides the Company with a rate of LIBOR plus 1.75%, at the Company's option. The optional LIBOR rate may increase from LIBOR plus 1.75% to LIBOR plus 2.75% based on the Company's fixed charge coverage ratio. The 90-day LIBOR rate was 4.53% at December 31, 2005. At December 31, 2005 the Company had no aggregate indebtedness, including capital lease obligations, short-term debt and long-term debt. The Company was in compliance with all of the financial covenants associated with its credit facility at December 31, 2005. At December 31, 2005 the company had no balance outstanding against this facility and $9.1 million available to borrow from the line based on collateral requirements. In the event that economic conditions were to severely worsen for a protracted period of time, we believe that our borrowing capacity under our credit facilities will provide sufficient financial flexibility. The Company would have options available to ensure liquidity in addition to increased borrowing. Capital expenditures which are budgeted at $0.7 million for the fiscal year ended June 30, 2006, could be postponed. At December 31, 2005, the Company had no bank debt. Based on the Company's current 17 level of debt, and performance, debt would bear interest at the Bank's prime rate. The Company's agreement with the Bank does include provisions for higher interest rates at higher debt levels and different levels of Company performance. Inflation has not had a material effect on the Company's business or results of operations. 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. 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK At December 31, 2005, the Company did not have any debt outstanding. 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. The Company had no holdings of derivative financial or commodity instruments at December 31, 2005. 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 (a) As of December 31, 2005, 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. Based on that evaluation, the Company's principal executive officer and principal financial officer concluded that such disclosure controls and procedures were effective as of December 31, 2005. (b) There has been no change in our internal controls over financial reporting during the quarter ended December 31, 2005, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 18 Part II. OTHER INFORMATION ITEM 6. EXHIBITS (a) Exhibits: 31.1 Certification of Chief Executive Officer (filed herewith) 31.2 Certification of Chief Financial Officer (filed herewith) 32.1 Sarbanes-Oxley Certification of Chief Executive Officer (furnished herewith)* 32.2 Sarbanes-Oxley Certification of Chief Financial Officer (furnished herewith)* 99.1 Press Release dated February 6, 2006 announcing second quarter earnings* ---------- * Notwithstanding any incorporation of this Quarterly Report on Form 10-Q in any other filing by the Registrant, Exhibits furnished herewith and designated with an asterisk (*) shall not be deemed incorporated by reference to any other filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 unless specifically otherwise set forth therein. 19 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: February 6, 2006 20