Results of Operations

The Company manufactures and markets respiratory products, including respiratory care products, medical gas equipment and emergency medical products. Set forth below is certain information with respect to amounts and percentages of net sales attributable to respiratory care products, medical gas equipment and emergency medical products for the fiscal years ended June 30, 2012, 2011, and 2010.

                                  Dollars in thousands
Year ended June 30,                       2012
                                 Net            % of Total
                                Sales           Net Sales
Respiratory care products    $    10,082               23.2 %
Medical gas equipment             24,804               57.1 %
Emergency medical products         8,560               19.7 %
Total                        $    43,446              100.0 %




                                  Dollars in thousands
Year ended June 30,                       2011
                                 Net            % of Total
                                Sales           Net Sales
Respiratory care products    $    10,797               23.1 %
Medical gas equipment             24,950               53.3 %
Emergency medical products        11,036               23.6 %
Total                        $    46,783              100.0 %




                                  Dollars in thousands
                                          2010
Year ended June 30,              Net            % of Total
                                Sales           Net Sales
Respiratory care products    $    11,143               24.2 %
Medical gas equipment             24,623               53.5 %
Emergency medical products        10,268               22.3 %
Total                        $    46,034              100.0 %

The following table sets forth, for the fiscal periods indicated, the percentage of net sales represented by the various income and expense categories reflected in the Company's Statement of Operations.

Year ended June 30,                                    2012           2011          2010

Net sales                                                100.0 %        100.0 %       100.0 %
Cost of sales                                             77.1           76.5          75.9
Gross profit                                              22.9           23.5          24.1

Selling, general and administrative expenses              24.4           22.6          25.8
Income (loss) from operations                             (1.5 )          0.9          (1.7 )
Other, net                                                 0.0           (0.2 )        (0.2 )
Income (loss) before provision for (benefit from)
income taxes                                              (1.5 )          0.7          (1.9 )
Provision for (benefit from) income taxes                 (0.5 )          0.3          (0.6 )
Net income (loss)                                         (1.0 )%         0.4 %        (1.3 )%

Critical Accounting Policies

In preparing financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates estimates and judgments on an ongoing basis, including those related to bad debts, inventory valuations, property, plant and equipment, intangible assets, income taxes, and contingencies and litigation. Estimates and judgments are based on historical experience and on various other factors that may be reasonable under the circumstances. Actual results may differ from these estimates. The following areas are considered to be the Company's most significant accounting policies:

Revenue recognition:

Revenue is recognized for all sales, including sales to agents and distributors, at the time products are shipped and title has transferred, provided that a purchase order has been received or a contract executed, there are not uncertainties regarding customer acceptance, the sales price is fixed and determinable and collectability is reasonably assured. Sales discounts, returns and allowances are included in net sales, and the provision for doubtful accounts is included in selling, general and administrative expenses. Additionally, it is the Company's practice to include revenues generated from freight billed to customers in net sales with corresponding freight expense included in cost of sales in the Statement of Operations. The Company reports sales taxes on sales transactions on a net basis in the Statement of Operations, and therefore does not include sales taxes in revenues or costs.

The sales price is fixed by the Company's acceptance of the buyer's firm purchase order. The sales price is not contingent, or subject to additional discounts. The Company's standard shipment terms are "F.O.B. shipping point" as stated in the Company's Terms and Conditions of Sale. The customer is responsible for obtaining insurance for and bears the risk of loss for product in-transit. Additionally, sales to customers do not include the right to return merchandise without the prior consent of the Company. In those cases where returns are accepted, product must be current and restocking fees must be paid by the respective customer. A provision has been made for estimated sales returns and allowances. These estimates are based on historical analysis of credit memo data and returns.

The Company does not provide installation services for its products. Most products shipped are ready for immediate use by the customer. The Company's in-wall medical system components, central station pumps and compressors, and headwalls do require installation by the customer. These products are typically purchased by a third-party contractor who is ultimately responsible for installation services. Accordingly, the customer purchase order or contract does not require customer acceptance of the installation prior to completion of the sale transaction and revenue recognition. The Company's standard payment terms are net 30 days from the date of shipment, and payment is specifically not subject to customer inspection or acceptance, as stated in the Company's Terms and Conditions of Sale. The buyer becomes obligated to pay the Company at the time of shipment. The Company requires credit applications from its customers and performs credit reviews to determine the creditworthiness of new customers. The Company requires letters of credit, where warranted, for international transactions. The Company also protects its legal rights under mechanics lien laws when selling to contractors.

The Company does offer limited warranties on its products. The standard warranty period is one year. The Company's cost of providing warranty service for its products for the years ended June 30, 2012, June 30, 2011, and June 30, 2010 was $152,625, $125,369, and $135,032, respectively. The related liability for warranty service amounted to $139,906 and $83,380 at June 30, 2012 and 2011, respectively.

Inventory reserve for obsolete and excess inventory:

Inventory is recorded net of a reserve for obsolete and excess inventory which is determined based on an analysis of inventory items with no usage in the preceding year and for inventory items for which there is greater than two years' usage on hand. This analysis considers those identified inventory items to determine, in management's best estimate, if parts can be used beyond one year, if there are alternate uses or at what values such parts may be disposed for. At June 30, 2012 and 2011, inventory is recorded net of a reserve for obsolete and excess inventory of $1.3 million and $1.4 million, respectively.

Income taxes:

The Company accounts for income taxes under the FASB Accounting Standards Codification ("ASC") Topic 740: "Income Taxes." Under ASC 740, the deferred tax provision is determined using the liability method, whereby deferred tax assets and liabilities are recognized based upon temporary differences between the financial statement and income tax bases of assets and liabilities using presently enacted tax rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Management uses a more likely than not criterion in its assessment and considers all available evidence, both positive and negative, in determining whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is needed. In assessing the need for a valuation allowance the Company first considers the reversals of existing temporary deferred tax liabilities and available tax planning strategies. To the extent these items are not sufficient to cause the realization of deferred tax assets, the Company would then consider the availability of future taxable income to the extent such income is considered likely to occur based on the Company's earnings history, current income trends and projections.

Accounts receivable net of allowances:

Accounts receivable are recorded net of an allowance for doubtful accounts, which is determined based on an analysis of past due accounts including accounts placed with collection agencies, and an allowance for returns and credits, which is based on historical analysis of credit memo data and returns. The Company maintains an allowance for doubtful accounts to reflect the uncollectibility of accounts receivable based on past collection history and specific risks indentified among uncollected accounts. Accounts receivable are charged to the allowance for doubtful accounts when the Company determines that the receivable will not be collected and/or when the account has been referred to a third party collection agency. At June 30, 2012 and 2011, accounts receivable is recorded net of allowances of $300,000.

Valuation of Long-Lived Assets:

The impairment of tangible and intangible assets is assessed when changes in circumstances (such as, but not limited to, a decrease in market value of an asset, current and historical operating losses or a change in business strategy) indicate that their carrying value may not be recoverable. This assessment is based on management's expectations and judgments regarding future business and economic conditions, future market values and disposal costs. Actual results and events could differ significantly from management's estimates. Based upon our most recent analysis, we believe that no impairment exists at June 30, 2012. There can be no assurance that future impairment tests will not result in a charge to net earnings (loss).

Self-insurance:

The Company maintains a self-insurance program for a portion of its health care costs. Self-insurance costs are accrued based upon the aggregate of the liability for reported claims and the estimated liability for claims incurred but not reported. As of June 30, 2012 and 2011, the Company had approximately $190,000 and $229,000, respectively, of accrued liabilities related to health care claims. In order to establish the self-insurance reserves, the Company utilized actuarial estimates of expected claims based on analyses of historical data.

Share Based Compensation:

Allied calculates share based compensation using the Black-Sholes-Merton ("Black-Scholes") option-pricing model, which requires the input of highly subjective assumptions including the expected stock price volatility. For the twelve-month periods ended June 30, 2012, 2011, and 2010, Allied recorded approximately $44,000, $20,000 and $648,000, respectively, in share-based employee compensation. This compensation cost is included in the general and administrative expenses and cost of sales in the accompanying Statements of Operations.

Significant Factors Affecting Past and Future Operating Results

Agreement with Abbott Laboratories:

On August 27, 2004, the Company entered into an agreement with Abbott Laboratories ("Abbott") pursuant to which Allied agreed to cease production of its product BaralymeŽ, and to effect the withdrawal of BaralymeŽ product held by distributors. The agreement permits Allied to pursue the development of a new carbon dioxide absorbent product. BaralymeŽ, a carbon dioxide absorbent product, has been used safely and effectively in connection with inhalation anesthetics since its introduction in the 1920s. In recent years, the number of inhalation anesthetics has increased, giving rise to concerns regarding the use of BaralymeŽ in conjunction with these newer inhalation anesthetics if BaralymeŽ has been allowed, contrary to recommended practice, to become desiccated. The agreement also provides that, for a period of eight years, Allied will not manufacture, distribute, promote, market, sell, commercialize or donate any BaralymeŽ product or similar product based upon potassium hydroxide and will not develop or license any new carbon dioxide absorbent product containing potassium hydroxide.

In consideration of the foregoing, Abbott agreed to pay Allied an aggregate of $5,250,000 of which $1,530,000 was paid on September 30, 2004 and the remainder payable in four equal annual installments of $930,000 due on July 1, 2005 through July 1, 2008. The last installment due on July 1, 2008 was received by Allied on June 19, 2008.

The payments received from Abbott are being recognized into income, as net sales, over the eight-year term of the agreement. Allied has no further obligations under this agreement which would require the Company to repay these amounts or otherwise impact this accounting treatment. During the fiscal years ended June 30, 2012, 2011, and 2010, $688,200 was recognized into income as net sales in each year.

A reconciliation of deferred revenue resulting from the agreement with Abbott, with the amounts received under the agreement, and amounts recognized as net sales for fiscal years 2012 and 2011 is as follows:

                                                Twelve Months ended
                                                      June 30,
                                                2012           2011

Beginning balance                            $  802,900     $ 1,491,100

Revenue recognized as net sales                (688,200 )      (688,200 )

                                                114,700         802,900
Less - Current portion of deferred revenue     (114,700 )      (688,200 )
                                             $        0     $   114,700

In 2004, Allied's sales of BaralymeŽ were approximately $2.0 million and contributed approximately $0.6 million in pre-tax earnings and cash flow from operations. The majority of the $5,250,000 Allied has received from Abbott will be recognized into income over the eight-year term of the agreement. The net cash flow realized by Allied under the agreement with Abbott is substantially equivalent to the net cash flow Allied would have expected to realize from continued manufacture and sales of BaralymeŽ during the initial five years of the period. As discussed below, the agreement with Abbott expired in August 2012 and the Company will not recognize further income from the agreement after such expiration. In 2013 there will be $573,500 less income recognized than in 2012 and in 2014 there will be $688,200 less income recognized than in 2012.

Medical Devices:

Beginning January 1, 2013, the Healthcare Reform Acts will impose a tax to be paid by medical device manufacturers equal to 2.3% of the sale price of medical devices. We believe that many of our products will be subject to this tax based on proposed rules. At this time we cannot predict what amount of this additional cost, if any, we will be able to pass on to our customers.

Fiscal 2012 Compared to Fiscal 2011

The Company had a loss of $0.7 million before taxes for fiscal 2012, compared to income of $0.4 million before taxes for fiscal 2011. The Company recorded an income tax benefit of $0.2 million in fiscal 2012, compared to an income tax provision of $0.2 million in fiscal 2011.

For further discussion of the Company's income tax calculation please refer to Note 5 of the "Notes to Financial Statements" included in this Form 10-K.

Net sales for fiscal 2012 of $43.4 million were $3.4 million or 7.3% less than net sales of $46.8 million in fiscal 2011. Domestically, sales decreased by $3.8 million dollars. Internationally, sales increased by $0.4 million. International business is dependent upon hospital construction projects, and the development of medical facilities in those regions in which the Company operates. Domestic sales for fiscal 2012 include approximately $0.7 million for the recognition into sales of payments resultingfrom the agreement with Abbott, as discussed below. For 2011, domestic sales included approximately $0.7 million for the recognition into sales of payments resulting from the agreement with Abbott as well.

The Company continues to believe that the purchase of equipment and durable goods and the purchase of equipment by hospitals and municipalities have been cut to meet budgets and conserve cash. In addition, the Company believes that uncertainties surrounding the implementation of comprehensive healthcare legislation has had some negative impact on sales. Orders for the Company's products for the year ended June 30, 2012 of $41.5 million were $3.3 million or 7.4% lower than orders for the year ended June 30, 2011 of $44.8 million. Customer purchase order releases for the year ended June 30, 2012 of $41.1 million were $3.9 million or 8.7% lower than customer purchase order releases of $45.0 million from the prior fiscal year.

Respiratory care product sales, which include homecare products in 2012 were $10.1 million, which is $0.7 million, or 6.5% lower than sales of $10.8 million in the prior year As in 2011, sales for the year ended June 30, 2012 included $0.7 million for the recognition into sales of payments resulting from the agreement with Abbott Laboratories to cease production and distribution of BaralymeŽ. The agreement with Abbott Laboratories expired in August of 2012, therefore for fiscal year 2013 a total of only $0.1 million will be recognized into sales as a result of the agreement with Abbott Laboratories.

Allied continues to sell CarbolimeŽ, a carbon dioxide absorbent with a different formulation than BaralymeŽ, as well as LitholymeŽ, a new premium carbon dioxide absorbent. For the year ended June 30, 2012 the Company had carbon dioxide absorbent sales of CarbolimeŽ and LitholymeŽ of $1.7 million dollars, compared with $1.7 million for the year ended June 30, 2011.

Medical gas equipment sales, which include construction products, of $24.8 million in fiscal 2012 were approximately $0.2 million, or 0.8% lower than prior year levels of $25.0 million. Internationally, sales of medical gas equipment in fiscal 2012 were approximately $1.0 million higher than in the prior year. Domestically, sales of medical gas equipment in fiscal 2012 were $1.2 million lower than in the prior year. The Company believes that the timing of orders by distributors between years contributed to this decrease in sales. In addition, prior year sales included significant sales from large hospital projects which did not repeat in 2012.

Emergency medical product sales in fiscal 2012 of $8.6 million were $2.4 million or 21.8% lower than fiscal 2011 sales of $11.0 million. International sales of emergency medical products decreased by $0.6 million from the prior year while domestic sales decreased by $1.9 million. The Company believes that the decrease in domestic emergency sales is primarily the result of a drop in federal government demand from prior year levels. Government demand fluctuates from year to year and the Company believes that drop is not indicative of a decrease in market share. The Company also believes that domestic demand for these products, which are normally largely consumed by local agencies, continues to be impacted by economic conditions as states and municipalities continued to struggle with decreased tax revenues.

International sales, which are included in the product lines discussed above, increased $0.5 million, or 5.5%, to $9.6 million in fiscal 2012 compared to sales of $9.1 million in fiscal 2011. As discussed above, the Company's international shipments are dependent on hospital construction projects and the expansion of medical care in those regions. In fiscal 2012, international shipments of medical gas equipment, including construction products, increased by $1.0 million dollars, and sales of respiratory care products increased by approximately $0.1 million. These increases were partially offset by a $0.6 million decrease in the sale of emergency products. The Company believes that international sales continue to be negatively impacted by worldwide business conditions. However, the Company has reorganized its international sales force and now believes it has improved its ability to take advantage of international opportunities.

Gross profit in fiscal 2012 was $10.0 million, or 22.9% of sales, compared to a gross profit of $11.0 million, or 23.5% of sales in fiscal 2011. Gross profit was negatively impacted by the decrease in sales and production during the period. Lower sales and production result in lower utilization of fixed overhead expenses. Gross profit during this period was favorably impacted compared to the prior year by an approximately $0.3 million decrease in direct startup cost the Company incurred at its Stuyvesant Falls facility in 2012 and 2011. During 2011 gross profit was negatively impacted by approximately $0.7 million in shipping, additional product cost, and other startup cost the Company incurred at its Stuyvesant Falls facility for the production of its carbon dioxide absorbent product lines. The Company believes that the production issues and the resulting cost at the Stuyvesant Falls facility to meet current levels of demand for carbon dioxide absorbent products are now complete. Higher commodity prices have led to higher costs for certain raw materials including brass and plastic resins during 2012. These higher costs for raw materials have been largely offset by cost reductions on other purchased components, and cost improvement programs in our principal manufacturing facility in St. Louis. The Company continues to review the cost of production and seek opportunities to lower those costs.

The Company invested $2.2 million in capital expenditures in fiscal 2012 compared to $0.3 million in fiscal 2011 for manufacturing equipment, plant maintenance, and computer systems, which continue to decrease production costs and improve efficiencies for several product lines. The Company continues to control cost and actively pursue methods to reduce its costs through automation and process changes.

Selling, General, and Administrative ("SG&A") expenses for fiscal 2012 were unchanged from fiscal 2011 at $10.6 million. Sales commissions decreased by approximately $0.3 million as a result to changes in commission plans, lower sales levels, and open positions due to attrition. This cost decreases were partially offset by a $0.2 million increase in legal expense due to now completed legal proceedings with Armstrong Medical, and a $0.1 million increase in Research and Development direct charges.

Interest income in fiscal 2012 was approximately $27,000 compared to interest income of $33,000 in fiscal 2011.

Net loss in fiscal 2012 was $0.4 million or $0.05 per basic and diluted earnings per share, down from a net income of $0.2 million, or $0.03 per basic and diluted earnings per share in fiscal 2011. In 2012, the weighted number of shares used in the calculation of basic earnings per share was 8,124,386, and the number of shares used in diluted earnings per share was 8,124,386. In 2011, the weighted number of shares used in the calculation of basic earnings per share was 8,107,313, and the number of shares used in diluted earnings per share was 8,124,957.

Fiscal 2011 Compared to Fiscal 2010

The Company had income of $0.4 million before taxes for fiscal 2011, compared to a loss of $0.9 million before taxes for fiscal 2010. The Company recorded an income tax provision of $0.2 million in fiscal 2011, compared to an income tax benefit of $0.3 million in fiscal 2010.

For further discussion of the Company's income tax calculation please refer to Note 5 of the "Notes to Financial Statements" included in this Form 10-K.

Net sales for fiscal 2011 of $46.8 million were $0.8 million or 1.7% more than net sales of $46.0 million in fiscal 2010. Domestically, sales increased by $0.3 million dollars. Internationally, sales increased by $0.5 million. International business is dependent upon hospital construction projects, and the development of medical facilities in those regions in which the Company operates. Domestic sales for fiscal 2011 include approximately $0.7 million for the recognition into sales of payments resulting from the agreement with Abbott Laboratories, as discussed below. For 2010, domestic sales included approximately $0.7 million for the recognition into sales of payments resulting from the agreement with Abbott Laboratories, as well.

The Company believes that it saw only limited improvement in demand in 2011 following the decreases seen in net sales resulting from the worldwide recession beginning in 2009. By and large, the Company's products are considered durable goods. The Company continues to believe that the purchase of equipment and durable goods and the purchase of equipment by hospitals and municipalities have been cut to meet budgets and conserve cash. Orders for the Company's products for the year ended June 30, 2011 of $44.8 million were $0.1 million or 0.2% lower than orders for the year ended June 30, 2010 of $44.9 million. Customer purchase order releases for the year ended June 30, 2011 of $45.0 million were $1.0 million or 2.3% higher than customer purchase order releases of $44.0 million from the prior fiscal year.

As in 2010, sales for the year ended June 30, 2011 included $0.7 million for the recognition into sales of payments resulting from the agreement with Abbott Laboratories to cease production and distribution of BaralymeŽ.

Allied continues to sell CarbolimeŽ, a carbon dioxide absorbent with a different formulation than BaralymeŽ. For the year ended June 30, 2011 the Company had carbon dioxide absorbent sales of CarbolimeŽ of $1.6 million dollars, compared with $1.7 million for the year ended June 30, 2010. Allied has introduced a new premium carbon dioxide absorbent, LitholymeŽ, with a new formulation. Sales of Litholyme for 2011 were approximately $0.1 million. There were no sales of LitholymeŽ for the year ended June 30, 2010.

Respiratory care products sales in fiscal 2011 of $10.8 million were $0.3 million, or 2.7% lower than sales of $11.1 million in the prior year. Included in the sales for respiratory care products is approximately $0.7 million in sales revenue recognized resulting from the agreement to cease the production and distribution of BaralymeŽ, the same amount as in the prior year.

Medical gas equipment sales, which include construction products, of $25.0 million in fiscal 2011 were approximately $0.4 million, or 1.6% higher than prior year levels of $24.6 million. Internationally, sales of medical gas equipment in fiscal 2011 were approximately $0.5 million higher than in the prior year. Domestically, sales of medical gas equipment in fiscal 2011 were $0.2 million lower than in the prior year.

Emergency medical product sales in fiscal 2011 of $11.0 million were $0.7 million or 6.8% higher than fiscal 2010 sales of $10.3 million. International sales of emergency medical products increased by $0.1 million from the prior year while domestic sales increased by $0.6 million. These sales levels reflect higher orders for the Company's Emergency Products. The Company believes that demand for these products, which are largely consumed by local agencies, continues to be impacted by economic conditions as states and municipalities continued to struggle with decreased tax revenues.

International sales, which are included in the product lines discussed above, increased $0.5 million, or 5.8%, to $9.1 million in fiscal 2011 compared to sales of $8.6 million in fiscal 2010. As discussed above, the Company's . . .