10-Q 1 c04925e10vq.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, 2006 [ ] 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 May 1, 2006 is 7,852,077 shares. INDEX
Page Number ------- Part I - Financial Information Item 1. Financial Statements Consolidated Statement of Operations - three months and nine months ended March 31, 2006 and 2005 (Unaudited) 3 Consolidated Balance Sheet - March 31, 2006 (Unaudited) and June 30, 2005 4 - 5 Consolidated Statement of Cash Flows - Nine months ended March 31, 2006 and 2005 (Unaudited) 6 Notes to Consolidated Financial Statements 7 - 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 - 19 Item 3. Quantitative and Qualitative Disclosure about Market Risk 19 Item 4. Controls and Procedures 19 Part II - Other Information Item 6. Exhibits 20 Signature 21
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 Nine months ended March 31, March 31, ------------------------- ------------------------- 2006 2005 2006 2005 ----------- ----------- ----------- ----------- Net sales $14,756,600 $14,328,443 $43,082,670 $41,935,731 Cost of sales 11,352,190 10,596,050 32,130,802 31,383,741 ----------- ----------- ----------- ----------- Gross profit 3,404,410 3,732,393 10,951,868 10,551,990 Selling, general and administrative expenses 2,992,446 3,013,159 9,194,558 8,998,802 ----------- ----------- ----------- ----------- Income from operations 411,964 719,234 1,757,310 1,553,188 Interest expense -- 15,416 -- 118,227 Interest income (9,311) -- (35,986) -- Other, net 8,861 13,791 28,854 32,563 ----------- ----------- ----------- ----------- (450) 29,207 (7,132) 150,790 ----------- ----------- ----------- ----------- Income before provision for income taxes 412,414 690,027 1,764,442 1,402,398 Provision for income taxes 176,257 281,739 745,190 574,423 ----------- ----------- ----------- ----------- Net income $ 236,157 $ 408,288 $ 1,019,252 $ 827,975 =========== =========== =========== =========== Basic earnings per share $ 0.03 $ 0.05 $ 0.13 $ 0.11 =========== =========== =========== =========== Diluted earnings per share $ 0.03 $ 0.05 $ 0.13 $ 0.10 =========== =========== =========== =========== Weighted average shares outstanding - basic 7,849,910 7,821,404 7,837,132 7,819,408 Weighted average shares outstanding - diluted 8,068,817 8,083,671 8,057,166 8,081,925
See accompanying Notes to Consolidated Financial Statements. 3 ALLIED HEALTHCARE PRODUCTS, INC. CONSOLIDATED BALANCE SHEET ASSETS
(Unaudited) March 31, June 30, 2006 2005 ----------- ----------- Current assets: Cash and cash equivalents $ 720,525 $ 317,775 Short-term investments 350,000 -- Accounts receivable, net of allowances of $605,000 and $565,000, respectively 7,797,317 7,215,799 Inventories, net 11,721,973 10,775,550 Other current assets 331,544 168,431 ----------- ----------- Total current assets 20,921,359 18,477,555 ----------- ----------- Property, plant and equipment, net 11,290,754 11,308,866 Goodwill 15,979,830 15,979,830 Other assets, net 327,036 330,969 ----------- ----------- Total assets $48,518,979 $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) March 31, June 30, 2006 2005 ------------ ------------ Current liabilities: Accounts payable $ 3,366,374 $ 2,110,599 Revolving credit facility $ 81,000 -- Deferred income taxes 689,008 711,416 Deferred revenue 465,000 465,000 Other accrued liabilities 3,232,124 2,940,763 ------------ ------------ Total current liabilities 7,833,506 6,227,778 ------------ ------------ Deferred revenue 658,750 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; 10,155,569 shares issued at March 31, 2006 and 10,133,069 shares issued at June 30, 2005: 7,852,077 shares outstanding at March 31, 2006 and 7,829,577 shares outstanding June 30, 2005, respectively 101,556 101,331 Additional paid-in capital 47,254,447 47,109,143 Retained earnings 13,402,148 12,382,896 Less treasury stock, at cost; 2,303,492 shares at March 31, 2006 and June 30, 2005, respectively (20,731,428) (20,731,428) ------------ ------------ Total stockholders' equity 40,026,723 38,861,942 ------------ ------------ Total liabilities and stockholders' equity $ 48,518,979 $ 46,097,220 ============ ============
See accompanying Notes to Consolidated Financial Statements. 5 ALLIED HEALTHCARE PRODUCTS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine months ended March 31, -------------------------- 2006 2005 ----------- ------------ Cash flows from operating activities: Net income $ 1,019,252 $ 827,975 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 865,386 963,054 Stock based compensation 55,064 20,060 Provision for doubtful accounts 95,164 36,106 Deferred income taxes (22,408) -- Changes in operating assets and liabilities: Short-term investments (350,000) -- Accounts receivable (676,682) (314,520) Inventories (946,423) 459,431 Income tax receivable -- 130,548 Other current assets (163,113) (201,815) Accounts payable 1,255,775 214,395 Deferred revenue (348,750) 658,750 Income tax payable -- (51,102) Other accrued liabilities 291,361 233,059 ----------- ------------ Net cash provided by operating activities 1,074,626 2,975,941 ----------- ------------ Cash flows from investing activities: Capital expenditures (843,341) (342,591) ----------- ------------ Net cash used in investing activities (843,341) (342,591) ----------- ------------ Cash flows from financing activities: Payments of long-term debt -- (3,174,646) Borrowings under revolving credit agreement 346,000 44,067,252 Payments under revolving credit agreement (265,000) (43,533,412) Stock options exercised 64,125 -- Excess tax benefit from exercise of stock options 26,340 -- ----------- ------------ Net cash provided by (used in) financing activities 171,465 (2,640,806) ----------- ------------ Net increase (decrease) in cash and equivalents 402,750 (7,456) Cash and cash equivalents at beginning of period 317,775 8,256 ----------- ------------ Cash and cash equivalents at end of period $ 720,525 $ 800 =========== ============
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, a 1995 Directors Non-Qualified Stock Option Plan and a 2005 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 325,000 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 nine months ended March 31, 2006 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 Options Granted -- -- Options Exercised (7,500) 2.85 Options Canceled (7,500) 2.85 ------- ------ Balance, March 31, 2006 741,750 $ 2.66 4.1 $2,538,217 Exercisable, March 31, 2006 691,750 $ 2.51 3.7 $2,474,492
On December 14, 2005, options for an aggregate of 5,500 shares were granted as formula options under the 2005 Directors' Plan at $5.63 per share, however such options are void unless the 2005 Directors' Plan is approved by shareholders at or before the 2006 Annual Meeting of Shareholders. Such options are not reflected in the foregoing table and for accounting purposes are not deemed granted prior to receipt of such shareholder approval. 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 nine months ended March 31, 2006, 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 nine months ended March 31, 8 2005, 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 nine months ended March 31, 2006 was approximately $20,000 and $55,000 respectively. Unrecognized shared-based compensation cost related to unvested stock options amounts to approximately $143,000. The cost is expected to be recognized over the next four years. For the three and nine months ended March 31, 2006, 7,500 and 22,500 stock options were exercised with an intrinsic value of $20,850 and $65,850 respectively. Cash received from stock option exercises were $21,375 and $64,125 with tax benefits of $8,340 and $26,340 respectively for those same periods. 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: 9
Three Months Nine Months Ended March 31, Ended March 31, 2005 2005 --------------- --------------- Net income, as reported $ 408,288 $ 827,975 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects $ 12,036 $ 12,036 --------- --------- 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 ($14,221) ($39,700) --------- --------- Pro forma net income $ 406,103 $ 800,311 ========= ========= Earnings per share: Basic-as reported $ 0.05 $ 0.11 --------- --------- Basic-pro forma $ 0.05 $ 0.11 --------- --------- Diluted -as reported $ 0.05 $ 0.10 --------- --------- Diluted -pro forma $ 0.05 $ 0.10 --------- ---------
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 10 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:
March 31, 2006 June 30, 2005 -------------- ------------- Work-in progress $ 1,202,559 $ 561,157 Raw materials and component parts 8,696,171 8,746,226 Finished goods 2,995,799 2,722,020 Reserve for obsolete and excess inventory (1,172,556) (1,253,853) ----------- ----------- $11,721,973 $10,775,550 =========== ===========
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 March 31, 2006 and 2005 was 7,849,910 and 7,821,404 respectively. The number of diluted shares outstanding for the three months ended March 31, 2006 and 2005 was 8,068,817 and 8,083,671 respectively. The number of basic shares outstanding for the nine months ended March 31, 2006 and 2005 was 7,837,132 and 7,819,408 respectively. The number of diluted shares outstanding for the nine months ended March 31, 2006 and 2005 was 8,057,166 and 8,081,925 respectively. 5. Commitments and Contingencies The Company is subject to various investigations, claims and legal proceedings 11 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 7.75% on March 31, 2006. 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 4.98% at March 31, 2006. The Company was in compliance with all of the financial covenants associated with its credit facility at March 31, 2006. At March 31, 2006 the company had $81,000 outstanding against this facility and $9.9 million available to borrow from the line based on collateral requirements. 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 March 31, 2006 no shares have been repurchased under this arrangement. 12 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 Nine Months ended March 31, March 31, ---------------------- ----------------------- 2006 2005 2006 2005 ---------- --------- ---------- ---------- Beginning balance $1,240,000 $ 775,000 $1,472,500 $ -- Payment Received from Abbott Laboratories -- -- -- 1,530,000 Revenue recognized as net sales (116,250) (116,250) (348,750) (871,250) ---------- --------- ---------- ---------- 1,123,750 658,750 1,123,750 658,750 ---------- --------- ---------- ---------- Less - Current portion of deferred revenue (465,000) (465,000) (465,000) (465,000) ---------- --------- ---------- ---------- $ 658,750 $ 193,750 $ 658,750 $ 193,750 ========== ========= ========== ==========
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 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 March 31, 2006 $184,000 has been received, and $87,000 is receivable, as a result of product development activities. For the three and nine months ended March 31, 2006; $87,000 and $271,000 have been included in Net Sales, respectively. For the three and nine months ended March 31, 2006; $87,000 and $271,000 have been included in Cost of Sales, respectively. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED MARCH 31, 2005. Allied had net sales of $14.8 million for the three months ended March 31, 2006, up $0.5 million, or 3.5%, from net sales of $14.3 million in the prior year same quarter. The overall sales increase is primarily due to the timing of customer purchase order releases and Company shipping performance. Sales for the three months ended March 31, 2006 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 March 31, 2006 also include $87,000 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 March 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). Income from the agreement will continue to 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 up 6.8% from the prior year, while international business, which represented 16.1% of third quarter sales, was down 13.1%. International orders are down 6.6% on a year-to-date basis. The Company believes that the decrease in international sales and orders is a result of order timing, and is not reflective of a loss of market share. Gross profit for the three months ended March 31, 2006 was $3.4 million, or 23.0% of net sales, compared to $3.7 million, or 25.9% of net sales, for the three months ended March 31, 2005. The reduction in gross margins from the prior year period is primarily due to approximately $0.2 million in higher employee benefit cost from increased medical payments for the three months ended March 31, 2006 than for the three months ended March 31, 2005. Cost of sales for the three months ended March 31, 2006 14 also included $87,000 as a result of product development of a new carbon dioxide absorption product. Selling, general and administrative expenses for the three months ended March 31, 2006 and 2005 were $3.0 million. Salaries and wages increased by $0.1 million from the prior year as a result of scheduled increases. There have not been changes to staffing levels from the prior year. Medical cost increased by approximately $67,000 over the prior year. These increases were offset by decreases in other spending including $0.1 million in legal fees, $37,000 in insurance cost, and $37,000 in bad debt expense. Income from operations was $0.4 million for the three months ended March 31, 2006 compared to $0.7 million for the three months ended March 31, 2005. Interest income was $9,311 for the three months ended March 31, 2006 compared to interest expense of $15,416 for the three months ended March 31, 2005. Allied had income before provision for income taxes in the third quarter of fiscal 2006 of $0.4 million, compared to income before provision for income taxes in the third quarter of fiscal 2005 of $0.7 million. The Company recorded a tax provision of $0.2 million for the three-month period ended March 31, 2006, versus a tax provision of $0.3 million for the three-month period ended March 31, 2005. In fiscal 2006, the net income for the third quarter was $0.2 million or $0.03 per basic and diluted share compared to net income of $0.4 million or $0.05 per basic and diluted share for the third quarter of fiscal 2005. The weighted average number of common shares outstanding, used in the calculation of basic earnings per share for the third quarters of fiscal 2006 and 2005 were 7,849,910 and 7,821,404 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 2006 and fiscal 2005 were 8,068,817 and 8,083,671 shares, respectively. NINE MONTHS ENDED MARCH 31, 2006 COMPARED TO NINE MONTHS ENDED MARCH 31, 2005. Allied had net sales of $43.1 million for the nine months ended March 31, 2006, up $1.2 million, or 2.9%, from net sales of $41.9 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. Purchase order releases were higher than in the first nine months of the prior year. Purchase order release lead times depend on the scheduling practices of the individual customers. Sales for the nine months ended March 31, 2006 include $348,750 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 nine months ended March 31, 2006 also include $271,000 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 15 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 $271,500 during the nine months ended March 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 nine months ended March 31, 2005 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 up 0.9% from the prior year, while international business, which represented 17.8% of the first nine months of sales, was up 11.9%. Orders for the nine months ended March 31, 2006 were down 7.1% from orders for the same period of the prior year. Domestic demand for the Company's Emergency Products has continued to be slightly stronger than in prior years. However, demand for the Company's respiratory care products and medical gas equipment is lower than in the prior year. The Company believes that the market for construction products, included in medical gas equipment, is weaker than in the prior year. 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 nine months ended March 31, 2006 was $11.0 million, or 25.5% of net sales, compared to $10.6 million, or 25.3% of net sales, for the nine months ended March 31, 2005. Cost of sales for the nine months ended March 31, 2006 includes $271,000 as a result of product development of a new carbon dioxide absorption product. Cost of sales for the nine months ended March 31, 2005 includes $0.6 million in cost incurred in connection with the withdrawal of Baralyme(R). Gross margins for the nine months ended March 31, 2006 have been adversely impacted by higher payments for employee medical expense. Employee medical expense included in Cost of sales during the nine months ended March 31, 2006 was $0.3 million higher than for the same period during the prior year. As discussed below, employee medical expenses included in Selling, general, and administrative expenses was $0.1 million higher for the nine months ended March 31, 2006 than for the same period during the prior year. In total, medical expenses for the nine-month period increased approximately $0.4 million under the self-insured portion of the benefit over the previous year, approximately $0.3 million during the third quarter. During fiscal 2006 the Company's medical cost per employee have grown at an annual rate of 21% over the prior year, higher than the historical rate of increase of approximately 9%. The Company believes that the increase during the three and nine months ended March 31, 2006 is primarily due to a higher than normal number of claims 16 requiring significant medical attention. The Company believes that medical cost will return to patterns which reflect market trends for the cost of health care. Selling, general and administrative expenses for the nine months ended March 31, 2006 were $9.2 million, a net increase of $0.2 million, or 2.2%, from $9.0 million for the nine months ended March 31, 2005. The increase includes an approximately $0.2 million increase in salaries and wages as a result of scheduled increases. There have not been changes in staffing levels over the prior year. Selling, general and administrative expenses have also increased as a result of approximately $0.1 million increase in medical benefits over the prior year, and an approximately $0.1 million increase in recruiting and relocation cost. These increases in expense have been partially offset by decreases in other Selling, general, and administrative expenses including decreases in the cost of the Company's property and product liability insurance programs, and legal expenses. Cost for insurance for the nine months ended March 31, 2006 was $0.1 million lower than in the prior year. Legal expense is approximately $0.1 million lower than in the prior year. Income from operations was $1.8 million for the nine months ended March 31, 2006 compared to $1.6 million for the nine months ended March 31, 2005. Interest income was $35,986 for the nine months ended March 31, 2006 compared to interest expense of $118,227 for the nine months ended March 31, 2005. Allied had income before provision for income taxes for the first nine months of fiscal 2006 of $1.8 million, compared to income before provision for income taxes for the first nine months of fiscal 2005 of $1.4 million. The Company recorded a tax provision of $0.7 million for the nine month period ended March 31, 2006, versus a tax provision of $0.6 million for the nine month period ended March 31, 2005. In fiscal 2006, the net income for the first nine months was $1.0 million or $0.13 per basic and diluted share compared to net income of $0.8 million or $0.11 per basic and $0.10 per diluted share for the first nine months of fiscal 2005. The weighted average number of common shares outstanding, used in the calculation of basic earnings per share for the first nine months of fiscal 2006 and 2005 were 7,837,132 and 7,819,408 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 2006 and fiscal 2005 were 8,057,166 and 8,081,925 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. Working capital was $13.1 million at March 31, 2006 compared to $12.2 million at June 30, 2005. This is primarily due to a $0.4 million increase in cash, a $0.4 million increase in short-term investments, a $0.6 million increase in accounts receivable, a $0.9 million increase in inventories and a $0.2 million increase in other current assets. These changes have been offset by a $1.3 million increase in accounts payable and a $0.4 million increase in other accrued liabilities. 17 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 March 31, 2006 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 7.75% on March 31, 2006. 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 4.98% at March 31, 2006. The Company was in compliance with all of the financial covenants associated with its credit facility at March 31, 2006. At March 31, 2006 the company had $81,000 outstanding against this facility and $9.9 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. At March 31, 2006, the Company had $81,000 in bank debt. Based on the Company's current 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 18 covered by the Company's product liability insurance. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK At March 31, 2006, the Company had $81,000 in 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 March 31, 2006. 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 March 31, 2006, 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 March 31, 2006. (b) There has been no change in our internal controls over financial reporting during the quarter ended March 31, 2006, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 19 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 May 3, 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. 20 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: May 3, 2006 21