<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: June 30, 1996
Commission file number: 0-11363
CHAD THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
California 95-3792700
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9445 De Soto Avenue, Chatsworth, CA 91311
(Address of principal executive offices) (Zip Code)
(818) 882-0883
(Registrant's telephone number, including area code)
_________________________________________
(Former Address)
(Former name, former address and former fiscal year, if changed since last
report.)
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 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes..X.. No.....
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Shares 9,632,185
<PAGE> 2
CHAD THERAPEUTICS, INC.
Balance Sheets
June 30, 1996 and March 31, 1996
ASSETS
<TABLE>
<CAPTION>
June 30, March 31,
1996 1996
----------- -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 2,379,000 $ 1,809,000
Marketable securities 1,429,000 1,029,000
Accounts receivable, less allowance for
doubtful accounts of $97,000 at
June 30, 1996 and $92,000 at
March 31, 1996 4,470,000 2,872,000
Inventories (Note 2) 4,364,000 4,011,000
Prepaid expenses 557,000 145,000
Deferred income taxes 356,000 356,000
----------- -----------
Total current assets 13,555,000 10,222,000
Property and equipment, at cost 1,097,000 1,074,000
Less accumulated depreciation 575,000 574,000
----------- -----------
Net property and equipment 522,000 500,000
----------- -----------
Other assets, net 229,000 56,000
----------- -----------
Total assets $14,306,000 $10,778,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 866,000 $ 399,000
Accrued expenses 895,000 424,000
Income taxes payable 1,052,000 180,000
----------- -----------
Total current liabilities 2,813,000 1,003,000
----------- -----------
Shareholders' equity:
Common shares, $.01 par value, authorized
40,000,000 shares; 9,632,000 and 9,623,000
shares issued and outstanding 6,847,000 6,791,000
Retained earnings 4,676,000 3,052,000
----------- -----------
11,523,000 9,843,000
Less treasury shares at cost, 2,000 and
5,000 shares (30,000) (68,000)
----------- -----------
Net shareholders' equity 11,493,000 9,775,000
----------- -----------
Total liabilities and shareholders' equity $14,306,000 $10,778,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 3
CHAD THERAPEUTICS, INC.
Statements of Earnings
For the three months ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------
1996 1995
---- ----
<S> <C> <C>
Net sales $7,772,000 $5,283,000
Cost of sales 3,179,000 2,353,000
---------- ----------
Gross profit 4,593,000 2,930,000
Costs and expenses:
Selling, general and administrative 1,639,000 1,340,000
Research and development 275,000 16,000
---------- ----------
Total costs and expenses 1,914,000 1,356,000
---------- ----------
Operating income 2,679,000 1,574,000
Other income - interest income 27,000 15,000
---------- ----------
Earnings before income taxes 2,706,000 1,589,000
Income taxes 1,082,000 634,000
---------- ----------
Net earnings $1,624,000 $ 955,000
========== ==========
Net earnings per share $ .16 $ .10
========== ==========
Weighted average number of common shares
(Note 3) 10,062,000 9,747,000
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 4
CHAD THERAPEUTICS, INC.
Statement of Shareholders' Equity
For the three months ended June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Common Shares Retained Treasury
Shares Amount Earnings Shares
--------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Balance at
March 31, 1996 9,623,000 $6,791,000 $ 3,052,000 $(68,000)
Exercise of stock options 9,000 46,000 - -
Common Shares issued for
purchases under employee
benefit plan - 10,000 - 38,000
Net earnings - - 1,624,000 -
--------- ---------- ---------- --------
Balance at
June 30, 1996 9,632,000 $6,847,000 $4,676,000 $(30,000)
========= ========== ========== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 5
CHAD THERAPEUTICS, INC.
Statements of Cash Flows
For the three months ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,624,000 $ 955,000
Adjustments to reconcile net earnings to
net cash used in operating activities:
Depreciation and amortization 34,000 24,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable (1,598,000) (891,000)
Decrease (increase) in inventories (353,000) 218,000
Decrease (increase) in income taxes
refundable - 84,000
Decrease (increase) in prepaid expenses (412,000) 8,000
Decrease (increase) in deferred income taxes - 80,000
Decrease (increase) in other assets (173,000) (2,000)
Increase (decrease) in accounts payable 467,000 (155,000)
Increase (decrease) in accrued expenses 471,000 444,000
Increase (decrease) in income taxes payable 872,000 470,000
----------- ----------
Net cash provided by
operating activities 932,000 1,235,000
----------- ----------
Cash flows from investing activities:
Increase in marketable securities (400,000) (396,000)
Capital expenditures (56,000) (66,000)
----------- ----------
Net cash (used in) investing
activities (456,000) (462,000)
----------- ----------
Cash flows from financing activities:
Exercise of stock options 46,000 -
Common Shares repurchased - (392,000)
Common Shares issued 48,000 -
Other - 3,000
----------- ----------
Net cash provided by (used in)
financing activities 94,000 (389,000)
----------- ----------
Net increase in cash 570,000 384,000
Cash beginning of period 1,809,000 1,219,000
----------- ----------
Cash end of period $ 2,379,000 $1,603,000
=========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 6
CHAD THERAPEUTICS, INC.
June 30, 1996
(Unaudited)
1. Interim Reporting
Chad Therapeutics, Inc. (the Company) is in the business of
developing, producing and marketing respiratory care devices designed
to improve the efficiency of oxygen delivery systems for home health
care and hospital treatment of patients suffering from pulmonary
diseases.
In the opinion of management, all adjustments necessary, which are of
a normal and recurring nature, to a fair statement of the results for
the interim periods presented have been made. The interim statements
are condensed and do not include some of the information necessary for
a more complete understanding of the financial data. Accordingly,
your attention is directed to the footnote disclosures found on pages
18, 19, 20 and 21 of the March 31, 1996, Annual Report and
particularly to Note 1 which includes a summary of significant
accounting policies.
2. Inventories
Inventories at June 30, 1996, are summarized as follows:
<TABLE>
<S> <C>
Finished goods $ 737,000
Work-in-Process 1,472,000
Raw materials 2,155,000
----------
$4,364,000
==========
</TABLE>
3. Net Earnings Per Common Share
Net earnings per common share is based on the weighted average number
of shares and common stock equivalents (stock options) outstanding.
The weighted average number of shares for the period ended June 30,
1995, has been restated for the three-for-two stock split distributed
on October 16, 1995.
<PAGE> 7
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 1996
Results of Operations
Sales for the three months ended June 30, 1996, increased $2,489,000 or 47.1%
over the prior year's period. There were no price increases during the periods
presented. The increase in sales relates primarily to increases in domestic
sales of OXYMATIC conservers and OXYLITE complete portable oxygen systems which
are benefiting from the current marketing environment for home oxygen therapy
discussed below.
Sales to foreign distributors represented 10% of total sales for the three
months ended June 30, 1996, as these sales increased at a slightly slower rate
than domestic sales. Currently, management expects a smaller increase in sales
to foreign distributors during the upcoming fiscal year and while these sales
should continue to increase on an annual basis, quarter to quarter sales will
fluctuate depending on the timing of shipments. In addition, all foreign sales
are transacted in dollars, thus quarter to quarter unit sales could be affected
by foreign currency fluctuations.
In June, 1989, a new procedure for payment by Medicare for home oxygen services
became effective which provides a prospective flat fee monthly payment based
solely on the patient's prescribed oxygen requirement. Previously dealers were
reimbursed on the basis of total oxygen delivered and a rental charge which
varied based on the type of system being used and other factors. The prior
procedure tended to encourage waste and inefficiency. Consequently, with the
incentive now to operate efficiently, inexpensive concentrators have grown in
popularity because of low cost and less frequent servicing requirements. At
the same time, interest heightened in oxygen conserving devices which can
extend the life of oxygen supplies and reduce service calls by dealers.
Management believes the new reimbursement procedures have heightened interest
in the cost savings and increased mobility afforded by oxygen conserving
devices such as the Company's products.
In addition, other changes in the health care delivery system - including the
increase in the acceptance and utilization of managed care - has stimulated a
significant consolidation among home oxygen dealers. As major national and
regional home medical equipment chains attempt to secure managed care contracts
and improve their market position, they have expanded their distribution
networks through the acquisition of independent dealers in strategic areas.
The Company's products, which allow homecare dealers to provide cost efficient
home oxygen therapy, are ideally suited for use in a managed care environment
and as a tool for dealers to increase revenues and profits. To ensure
continued awareness of the benefits of the Company's products by chain
headquarters personnel, a proactive marketing and communication program is in
effect with all of the major national
<PAGE> 8
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 1996
Results of Operations (continued)
chains. Management believes that the consolidation activity being experienced
in the home oxygen business is temporary and should have no material adverse
effects on the Company's growth.
Cost of sales as a percent of net sales decreased from 44.5% to 40.9% for the
three months ended June 30, 1996, as compared to the prior year's period. The
current period has benefitted from decreased production costs associated with
bringing certain manufacturing operations in house. Management believes the
cost per unit should remain at or near current levels in future periods as
efficiencies of in house manufacturing have mostly been realized.
Selling, general and administrative expenditures decreased as a percentage of
net sales for the three months ended June 30, 1996, from 25.4% to 21.1%, as
compared to the prior year's period, as the rate of growth in sales exceeded
the increased costs associated with such growth. Research and development
expenses increased by $259,000 for the three months ended June 30, 1996, as
compared to the prior year's period. Currently, management expects research
and development expenditures to total approximately $500,000 in the fiscal year
ended March 31, 1997, on projects to enhance and expand the Company's product
line.
At March 31, 1995, the Company had fully utilized its net operating loss
carryforwards for Federal income tax purposes and other tax credit
carryforwards. Future years will therefore be fully taxed and management
estimates that the combined Federal and California income tax rates will be
approximately 40%, as compared to 39.1% in 1996 and 31.5% in 1995.
Financial Condition
At June 30, 1996, the Company had cash and marketable securities totaling
$3,808,000 or 27% of total assets, as compared to $2,838,000 (26%) at March 31,
1996. Net working capital increased from $9,219,000 at March 31, 1996, to
$10,742,000 at June 30, 1996. Accounts receivable increased $1,598,000 during
the period ended June 30, 1996, which related to the increase in sales
activity. Future increases or decreases in accounts receivable will generally
coincide with sales volume fluctuations and the timing of shipments to foreign
customers. During the same period, inventories increased $353,000. The Company
attempts to maintain sufficient inventories to meet its customer needs as
orders are received. Thus, future inventory and related accounts payable
levels will be impacted by the ability of the Company to maintain its safety
stock levels.
<PAGE> 9
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 1996
Financial Condition (continued)
If safety stock levels drop below target amounts then inventories in subsequent
periods will increase more rapidly as inventory balances are replenished.
Management believes funds derived from operations should be adequate to meet
the Company's present cash requirements. The Company expects capital
expenditures during the next twelve months to be approximately $1,200,000,
primarily related to the costs associated with moving to new facilities in the
fall of 1996. On June 30, 1994, the Company announced that the Board of
Directors had authorized stock repurchases of its common shares in privately
negotiated transactions for a minimum of 10,000 shares. Also, the Company may
make additional stock repurchases pursuant to the Board of Directors
authorization. The Company does not provide post employment retirement
benefits.
Newly Issued Accounting Standards
In March, 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-lives Assets and for Long-lived Assets
to be Disposed Of," was issued. This statement provides guidelines for
recognition of impairment losses related to long-term assets and is effective
for fiscal years beginning after December 15, 1995. The adoption of this new
standard did not have a material effect on the Company's financial statements.
In October, 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("Statement No. 123"), was issued.
This statement encourages, but does not require, a fair value based method of
accounting for employee stock options and will be effective for fiscal years
beginning after December 15, 1995. The Company will continue to measure
compensation costs under APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and will comply with the pro forma disclosure requirements of
Statement No. 123 in its annual financial statements.
Outlook: Issues & Risks
From time to time, the Company may make forward-looking statements regarding
its anticipated future performance or prospects. All such forward-looking
statements are subject to certain inherent risks and uncertainties. Among the
factors that could cause actual results to differ materially are the following:
Dependence Upon a Single Product Line
Although the Company currently markets a number of products, these products
comprise a single product line for patients
<PAGE> 10
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 1996
Dependence Upon a Single Product Line (continued)
requiring supplementary oxygen. The Company's future performance is thus
dependent upon developments affecting this segment of the health care market
and the Company's ability to remain competitive within this market sector.
Rapid Technological Change
The health care industry is characterized by rapid technological change. The
Company's products may become obsolete as a result of new developments. The
Company's ability to remain competitive will depend to a large extent upon its
ability to anticipate and stay abreast of new technological developments
related to oxygen therapy. The Company has limited internal research and
development capabilities. Historically, the Company has contracted with
outside parties to develop new products. Some of the Company's competitors
have substantially greater funds and facilities to pursue research and
development of new products and technologies for oxygen therapy.
Potential Changes in Administration of Health Care
A number of bills proposing to regulate, control or alter the method of
financing health care costs have been discussed and certain of such bills have
been introduced in Congress and various state legislatures. There are wide
variations among these bills and proposals. Because of the uncertain state of
the health care proposals, it is not possible at this time to predict the
effect on the business of the Company if any of these proposals is enacted.
Federal law has altered the payment rates available to providers of Medicare
services in various ways during the last several years. Congress has passed
legislation which would reduce Medicare spending. Some of the savings are to
come from increases in premiums to cover part of the Medicare program cost. It
cannot be predicted, however, what prospective payment system rates or rule
changes will be made to determine how rates will be affected. There can be no
assurance that a change in Medicare reimbursement rates will not have an
adverse effect on the Company's business.
Patents and Trademarks
The Company pursues a policy of obtaining patents for appropriate inventions
related to products marketed or manufactured by the Company. The Company
considers the patentability of its products to be significant to the success of
the Company. To the extent that the products to be marketed by the Company do
not receive patent protection, competitors may be able to manufacture and
market substantially similar products. Such competition could have an adverse
impact upon the Company's business.
<PAGE> 11
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 1996
Products Liability
The nature of the Company's business subjects it to potential legal actions
asserting that the Company is liable for damages for product liability claims.
Although the Company maintains products liability insurance in an amount which
it believes to be customary in the industry, there is no assurance that this
insurance will be sufficient to cover the costs of defense or judgments which
might be entered against the Company. The type and frequency of these claims
could have an adverse impact on the Company's results of operations and
financial position.
Availability of Third Party Component Products
The Company tests and packages its products in its own facility. Some of its
other manufacturing processes are conducted by other firms and the Company
expects to continue using outside firms for certain manufacturing processes for
the foreseeable future. The Company's agreements with its suppliers are
terminable at will or by notice. The Company believes that other suppliers
would be available in the event of termination of these arrangements. No
assurance can be given, however, that the Company will not suffer a material
disruption in the supply of its products.
Accounting Standards
Accounting standards promulgated by the Financial Accounting Standards Board
change periodically. Changes in such standards may have an impact on the
Company's future reported earnings and financial position.
Additional Risk Factors
Additional factors which might affect the Company's performance may be listed
from time to time in the reports filed by the Company with the Securities and
Exchange Commission.
<PAGE> 12
SIGNATURES
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.
CHAD THERAPEUTICS, INC.
-------------------------
(Registrant)
Date 08/05/96 /S/ Charles R. Adams
------------------------- -------------------------
Charles R. Adams
Chief Executive Officer
Date 08/05/96 /S/ Earl L. Yager
------------------------- -------------------------
Earl L. Yager
Senior Vice President, Chief
Financial Officer and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,379
<SECURITIES> 1,429
<RECEIVABLES> 4,470
<ALLOWANCES> 0
<INVENTORY> 4,364
<CURRENT-ASSETS> 13,555
<PP&E> 1,097
<DEPRECIATION> 575
<TOTAL-ASSETS> 14,306
<CURRENT-LIABILITIES> 2,813
<BONDS> 0
0
0
<COMMON> 6,847
<OTHER-SE> 4,646
<TOTAL-LIABILITY-AND-EQUITY> 14,306
<SALES> 7,772
<TOTAL-REVENUES> 0
<CGS> 3,179
<TOTAL-COSTS> 1,914
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,706
<INCOME-TAX> 1,082
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,624
<EPS-PRIMARY> .16
<EPS-DILUTED> 0
</TABLE>
