<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10 - K/A
[x] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (Fee Required)
For the fiscal year ended March 31, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from __________ to __________
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.)
21622 Plummer Street, Chatsworth, CA 91311
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 882-0883
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, $.01 par value
(Title of class)
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 __
Indicate by check mark if disclosures of delinquent filers pursuant to Item
405 of Regulation SK (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
<PAGE> 2
The aggregate market value of the voting shares held by non-affiliates
of the Registrant on June 13, 1997 (based on the average over-the-counter bid
and asked prices of such stock on such date) was $88,288,000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of June 13, 1997:
Common Shares 9,948,000
Portions of the Registrant's definitive Proxy Statement for its
September 9, 1997, Shareholders' meeting ("Proxy Statement") (which Proxy
Statement has not been filed as of the date hereof) are incorporated into Part
III as set forth herein. Portions of the Registrant's Annual Report to
Shareholders for the year ended March 31, 1997 ("Annual Report") are
incorporated into Part II as set forth herein and only such portions of the
Annual Report as are specifically incorporated by reference are thereby made a
part of this Annual Report on Form 10-K.
2
<PAGE> 3
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (3) Exhibits.
13.1 This first amendment to the Annual Report to Shareholders
for the year ended March 31, 1997, is being filed to provide
a corrected copy of the Company's Annual Report to
shareholders. The Annual Report to Shareholders previously
filed contained a typographical error on page 23.
3
<PAGE> 4
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Los
Angeles, State of California, on the 2nd day of July, 1997.
CHAD THERAPEUTICS, INC.
By /S/Charles R. Adams
---------------------------------------------
Charles R. Adams, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/S/Charles R. Adams Chief Executive July 2, 1997
- ----------------------- Officer and Director
Charles R. Adams (Principal Executive
Officer)
/S/Francis R. Fleming President, Chief July 2, 1997
- ----------------------- Operating Officer and
Francis R. Fleming Director
/S/Earl L. Yager Senior Vice President, July 2, 1997
- ----------------------- Chief Financial
Earl L. Yager Officer and Secretary
and Director (Principal
Financial and Accounting
Officer)
/S/David L. Cutter Director July 2, 1997
- -----------------------
David L. Cutter
/S/John C. Boyd Director July 2, 1997
- -----------------------
John C. Boyd
/S/Norman Cooper Director July 2, 1997
- -----------------------
Norman Cooper
/S/Philip Wolfstein Director July 2, 1997
- -----------------------
Philip Wolfstein
</TABLE>
4
<PAGE> 5
Exhibit Index
Exhibit Index Sequentially
Exhibit No. Document Numbered Page
- ----------- ------------- -------------
13.1 Annual Report to Shareholders for
the year ended March 31, 1997
5
<PAGE> 1
EXHIBIT 13.1
[Photograph]
CHAD 1997 Annual Report
THERAPEUTICS
<PAGE> 2
COMPANY OBJECTIVE
(Photograph]
"We will seek to develop and market unique products that perform more
efficiently by reducing costs and improving therapy..."
CHARLES R. ADAMS
2
<PAGE> 3
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA YEARS ENDED MARCH 31,
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Sales $26,161,000 20,359,000 14,518,000 9,470,000 5,805,000
Interest Income 113,000 97,000 50,000 28,000 8,000
Net Earnings 5,035,000 4,310,000 2,606,000 2,053,000 1,237,000
Earnings Per Common Share .49 .42 .26 .20 .12
Net Working Capital 10,985,000 9,219,000 5,172,000 4,176,000 1,943,000
Total Assets 15,861,000 10,778,000 6,371,000 5,075,000 2,635,000
Shareholders' Equity 15,110,000 9,775,000 5,574,000 4,507,000 2,180,000
</TABLE>
No cash dividends have been declared or paid during the periods presented.
TOTAL ASSETS NET EARNINGS PER SHARE
[Graph] [Graph]
SHAREHOLDER'S EQUITY
[Graph]
3
<PAGE> 4
DEAR CHAD SHAREHOLDERS:
It was another good year for CHAD. Again, I am pleased to report to you on our
seventh consecutive year and twenty-eighth consecutive quarter of profitable
growth. The Company continued to work to enhance future growth prospects.
Since the beginning of the Company's successful growth period in fiscal 1990,
sales have multiplied 27.5 times. Earnings before taxes have grown from a loss
of $103,538 to $8,413,000 for fiscal 1997.
The following two charts graphically display the Company's performance for
these years.
The CHAD growth era began soon after the change in June 1989 of Medicare's
method of reimbursement for home oxygen care. Through years of hard work CHAD
was instrumental in effecting this change which reformed and rationalized the
method of reimbursement. These changes encouraged efficiency in the provision
of home oxygen equipment and therapy. As a result, home care dealers now
compete on the basis of the quality and efficiency of their equipment and
service. This new environment created opportunities for CHAD's unique,
cost-savings oxygen conserving products and systems. CHAD continues to provide
the means by which respiratory home care dealers car
[GRAPH]
[PHOTOGRAPH]
CHARLES R. ADAMS
Chairman of the Board and
Chief Executive Officer
4
<PAGE> 5
provide superior service to home oxygen patients. Although a number of factors
(discussed later in this report) converged late in the past year to slow the
Company's rate of growth, the Company still increased domestic sales by 32%
over the prior year.
FINANCIAL HIGHLIGHTS
Complete financial data can be found in the financial section of this report;
however, some of the highlights of the 1997 fiscal year include the following:
Worldwide Sales Increased 29%
U.S. Sales Increased 32%
Pre-Tax Profit Increased 19%
Total Assets Increased 47%
Shareholders' Equity Increased 47%
Return on shareholders' equity for the past fiscal year was 41 percent.
Operating income for the year was 31.8 percent of sales and sales per CHAD
employee were $330,739, a reflection of the Company's continuing productivity.
Total operating expenses as a percent of sales increased only slightly from
24.1 percent to 24.8 percent even though Research and Development expenses grew
from $113,000 to $910,000. Although substantial funds were expended in
constructing the Company's new headquarters and facilities the Company
continues to finance all growth internally from cash flow and has no long term
debt of any kind.
In its November 4, 1996, issue Forbes magazine again selected CHAD in
fourteenth place on its list of the "200 Best Small Companies" - up from
fifteenth place last year. Only one other company repeated in the top fifteen
from the previous year's listing. This recognition followed CHAD's earlier
recognition in May when the Company obtained nineteenth ranking in Business
Week magazine's annual listing of the "Top 100 Growth Companies". This was the
second year in a row that the Company has been recognized by these two
periodicals. Business Week in the May 26, 1997 issue again recognized CHAD with
a third consecutive year listing in thirty-second place.
THE CHANGING AND CHALLENGING MARKETPLACE
During the past year the health care market continued moving toward further
reform, cost containment and cost reduction. The home care portion of the
market has become an especially attractive segment of the market for cost
reduction pressures. Ironically, much of
[GRAPH]
SALES GROWTH
(X $1,000)
5
<PAGE> 6
- -------------------------------------------------------------------------------
LETTER FROM THE CHAIRMAN
- -------------------------------------------------------------------------------
this attention exists because of rapid growth in home care as it has replaced
more expensive hospital care. There seems no doubt that reimbursement
reductions, some possibly drastic, will be imposed on the home care segment. For
the home oxygen portion, reductions seem certain and the Administration's
draconian threat of 40% reduction for oxygen services, while totally
impractical, is still alive as of this writing. These cost pressures over the
past few years have had several effects on our customers and our business.
1. The rapid increase in managed care has forced home oxygen services providers
to bid for these managed care contracts primarily on a lowest cost basis. In
many cases they supply only the very least expensive means of meeting patient's
oxygen requirements. In many cases this means the cheapest oxygen concentrator
and a large compressed oxygen cylinder for "portability" and in some cases
patients are now personally responsible for exchanging of oxygen cylinders for
refills.
2. Cost pressures have forced dealers into consolidation with major chain
operations that continue acquiring independent operators at a rapid rate. These
large chains have great buying power and force reduced prices from their
contract suppliers. Chains now include approximately eighteen percent of the
home care dealers, and service approximately thirty percent of the home oxygen
patients.
3. Competition has become intense. CHAD's oxygen conserving devices over the
years have represented an excellent tool for dealers to cope with reduced
reimbursement for oxygen services. Naturally, this edge was certain to attract
competition. For several years there have been numerous competitors to the
Company's products but none of them offered the efficiency of the CHAD products.
During the last seven months of the past fiscal year at least three major
companies entered the market with new devices, different technologies and
designs and very strong sales and pricing efforts.
All of these factors have had an impact on the Company's growth. The first two
quarters of the new fiscal year will continue to be difficult and challenging
for the Company as we move through a transition phase. The Company's OXYMATIC
technology and resulting products are now more than ten years old and have
served and will continue to serve the Company well. While it is difficult to
predict the exact timing for the introduction of a new product, management
expects that by the third quarter of the year new proprietary technology could
be adding substantially to our growth.
GROWING A STRONGER CHAD
The Company plans to grow and strengthen during the upcoming fiscal year and,
most likely, for several years to come by:
1. DEVELOPING NEW AND UNIQUE PRODUCTS THAT WILL REDUCE COSTS WHILE MAINTAINING
THERAPEUTIC EFFICACY.
This has been a stated CHAD objective since the Company's founding in
[PHOTOGRAPH]
OSCAR J. SANCHEZ
Vice President
Development and Engineering
6
<PAGE> 7
1982. However, the objective has been difficult to achieve because truly new
and unique products in home respiratory care are very rare. At CHAD we feel
that our future must be built on truly unique products. The Company does not
have or intend to have in the foreseeable future a dedicated outside sales
force with all the attendant costs. This would be essential in the marketing of
products that are only versions or modest improvements of existing products.
Management believes that the Company's next product, which is now in the hands
of the Food and Drug Administration, is not only new and unique but represents
a revolution in home oxygen therapy and may well be the most significant
advance in a decade. Management has chosen not to reveal full details of the
TOTAL O(2)(TM) until the FDA has responded to our application. However, current
expectations are that this product should be marketed in the fall of this year.
This product is very much in keeping with our growth objective.
Although CHAD's expenditures for Research and Development have been relatively
small, the Company hopes to soon begin work on additional products with our
development partner, Litton Life Support Systems. This has been a very
effective and productive relationship. Additionally, the Internal Development
and Engineering effort has been reorganized under Oscar Sanchez as Vice
President. Mr. Sanchez is an original CHAD employee and formerly served as Vice
President Manufacturing. Several projects are currently in development for the
medium range including an improved OXYMATIC conserver and a new and even more
efficient electronic conserver. The Company is also investigating two
completely new technologies that could produce new lines of products in the
respiratory field.
2. CONTINUING TO EARN OUR CUSTOMERS LOYALTY BY BEING THEIR PARTNER, HELPING
THEM GROW THEIR BUSINESS AND PROVIDING PRODUCTS THAT IMPROVE THE QUALITY OF
LIFE FOR THEIR PATIENTS.
CHAD has grown in the past by working closely with our customers to meet their
needs and helping them to remain profitable even with decreasing revenues as a
result of diminishing reimbursement. CHAD believes that we can grow only as we
provide cost saving, user friendly products that satisfy patients,
professionals and home care dealers alike.
3. EXPANDING INTERNATIONALLY THROUGH REORGANIZATION OF OUR EFFORTS AND MAKING
INTERNATIONAL SALES A MUCH LARGER PERCENTAGE OF OUR BUSINESS BY FISCAL YEAR
2000.
The Company will begin re-evaluating our international structure this summer
with the objective of having a stronger infrastructure in place and operating
in time for an effective international launch of the TOTAL O(2)(TM) product by
the next fiscal year.
The Company's international growth until now has been hampered by a single
product line and only a few capable distributors in the respiratory care field.
Further, home respiratory care is a reality in only the most developed
countries. Management and our consultants believe that CHAD's new product may
well open up entirely new markets to home respiratory care due to its
revolutionary concept and technology.
7
<PAGE> 8
IMPROVING PRODUCTIVITY
The Company has continually improved productivity and the past year was a
landmark. In the Fall of 1996 CHAD moved into new larger and more efficiently
organized facilities with the very latest in modern production and testing
capability. This major move was accomplished without disruption in service to
our customers. We are very proud of the quality of our operations and our
employees.
The cost of making our products has continued to decline with the
internalization of our production. While we presently have room for considerable
growth in the production of the existing product lines, we believe that
additional manufacturing and warehousing space and possibly remote distribution
facilities may be necessary with the success of the TOTAL O(2)(TM) product line.
Mr. Alfonso Del Toro joined CHAD as Manufacturing Manager in January 1997. Mr.
Del Toro came to CHAD after fourteen years of medical products manufacturing
management. He received his degree in Engineering from The Cd. Guzman Institute
of Technology in Jalisco, Mexico and earned his Masters degree from Purdue
University in Indiana. He will continue to improve our productivity on the
existing product line while directing the efforts toward production of new
products.
OUTLOOK FOR FUTURE
This is a challenging time for everyone at CHAD as we work through the current
competitive wars and try to ready ourselves for the next phase. As anyone who
has visited CHAD and knows the people would expect, they are undaunted. This
experience will make everyone better - battle hardened and experienced. Morale
is high and everyone at CHAD is looking forward to the coming year.
On behalf of CHAD's management and the Board of Directors, thank you once
[PHOTOGRAPH]
ALFONSO DEL TORO
Manufacturing Manager
8
<PAGE> 9
[Photograph]
CHAD SENIOR MANAGEMENT
From Left to Right: Francis R. Fleming, President and Chief Operating Officer;
Charles R. Adams, Chief Executive Officer; and Earl L. Yager,
Senior Vice President, Chief Financial Officer and Secretary.
again for your loyalty, confidence and continued support. Once again I promise
that we will do our very best.
/s/ CHARLES R. ADAMS
Charles R. Adams
Chairman of the Board of Directors
and Chief Executive Officer
9
<PAGE> 10
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------
ASSETS 1997 1996
----------- ----------
<S> <C> <C>
Current assets: $ 2,289,000 1,809,000
Cash -- 1,029,000
Marketable securities
Accounts receivable, less allowance for doubtful accounts of
$107,000 and $92,000 in 1997 and 1996 2,329,000 2,872,000
Inventories (Note 2) 6,063,000 4,011,000
Income taxes refundable (Note 3) 527,000 --
Prepaid expenses 172,000 145,000
Deferred income taxes (Note 3) 356,000 356,000
----------- ----------
Total current assets 11,736,000 10,222,000
----------- ----------
Property and equipment, at cost:
Office equipment and furniture 1,265,000 478,000
Machinery and equipment 634,000 192,000
Tooling 305,000 303,000
Leasehold improvements 1,640,000 101,000
----------- ----------
3,844,000 1,074,000
Less accumulated depreciation and amortization 717,000 574,000
----------- ----------
Net property and equipment 3,127,000 500,000
----------- ----------
Other assets, net (Note 4) 998,000 56,000
----------- ----------
$15,861,000 10,778,000
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
----------- ----------
Current liabilities:
Accounts payable $ 344,000 399,000
Accrued expenses 407,000 424,000
Income taxes payable (Note 3) -- 180,000
----------- ----------
Total current liabilities 751,000 1,003,000
----------- ----------
Commitments (Note 7)
Shareholders' equity (Note 5):
Common shares
Authorized 40,000,000 shares;
9,951,000 and 9,623,000 shares issued 12,834,000 6,791,000
Retained earnings 2,308,000 3,052,000
----------- ----------
15,142,000 9,843,000
Less treasury shares at cost, 3,000 and 5,000 shares in 1997 and 1996 (32,000) (68,000)
----------- ----------
Net shareholders' equity 15,110,000 9,775,000
----------- ----------
$15,861,000 10,778,000
=========== ==========
</TABLE>
See accompanying notes to financial statements.
10
<PAGE> 11
STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Net sales $26,161,000 20,359,000 14,518,000
Cost of sales 11,356,000 8,480,000 6,916,000
----------- ---------- ----------
Gross profit 14,805,000 11,879,000 7,602,000
Costs and expenses:
Selling, general and administrative 5,595,000 4,791,000 3,777,000
Research and development 910,000 113,000 70,000
----------- ---------- ----------
Total costs and expenses 6,505,000 4,904,000 3,847,000
----------- ---------- ----------
Operating income 8,300,000 6,975,000 3,755,000
Interest income 113,000 97,000 50,000
----------- ---------- ----------
Earnings before income taxes 8,413,000 7,072,000 3,805,000
Income taxes (Note 3) 3,378,000 2,762,000 1,199,000
----------- ---------- ----------
Net earnings $ 5,035,000 4,310,000 2,606,000
=========== ========== ==========
Net earnings per share $ .49 .42 .26
=========== ========== ==========
Weighted average number of common shares
and common share equivalents 10,373,000 10,220,000 10,169,000
=========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
11
<PAGE> 12
STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
RETAINED
COMMON SHARES (NOTE 4) EARNINGS
------------------------- (ACCUMULATED TREASURY
SHARES AMOUNT DEFICIT) SHARES
--------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Balance at March 31, 1994 9,438,000 $ 5,875,000 $(1,340,000) $ (28,000)
Common Shares Issued For Purchases
Under Employee Benefit Plan (Note 5) -- 44,000 -- 28,000
Common Shares Repurchased and Retired (307,000) (1,675,000) -- --
5% Stock Dividend 459,000 2,524,000 (2,524,000) --
Exercise of Stock Options 30,000 23,000 -- --
Tax Benefit From Exercise of
Non-Qualified Stock Options (Note 5) -- 41,000 -- --
Net Earnings -- -- 2,606,000 --
--------- ------------ ----------- ---------
Balance at March 31, 1995 9,620,000 6,832,000 (1,258,000) --
Common Shares Repurchased and Retired (71,000) (392,000) -- --
Common Shares Repurchased At Cost -- -- -- (228,000)
Common Shares Issued For Purchases
Under Employee Benefit Plan (Note 5) -- -- -- 160,000
Exercise of Stock Options 74,000 187,000 -- --
Tax Benefit From Exercise of
Non-Qualified Stock Options (Note 5) -- 164,000 -- --
Net Earnings -- -- 4,310,000 --
--------- ------------ ----------- ---------
Balance at March 31, 1996 9,623,000 6,791,000 3,052,000 (68,000)
Common Shares Repurchased At Cost -- -- -- (183,000)
Common Shares Issued For Purchases
Under Employee Benefit Plan (Note 5) -- 5,000 -- 219,000
3% Stock Dividend 289,000 5,779,000 (5,779,000) --
Exercise of Stock Options 41,000 216,000 -- --
Common Shares Tendered and Retired
For Stock Option Exercise (2,000) (32,000) -- --
Tax Benefit From Exercise of
Non-Qualified Stock Options (Note 5) -- 75,000 -- --
Net Earnings -- -- 5,035,000 --
--------- ------------ ----------- ---------
Balance at March 31, 1997 9,951,000 $ 12,834,000 $ 2,308,000 $ (32,000)
========= ============ =========== =========
</TABLE>
See accompanying notes to financial statements.
12
<PAGE> 13
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH
YEARS ENDED MARCH 31,
------------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 5,035,000 4,310,000 2,606,000
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 280,000 114,000 88,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 543,000 (746,000) (696,000)
Decrease (increase) in inventories (2,052,000) (2,166,000) (685,000)
Decrease (increase) in income taxes refundable (527,000) 84,000 (27,000)
Decrease (increase) in prepaid expenses (27,000) (20,000) (59,000)
Decrease (increase) in deferred income taxes -- (202,000) (154,000)
Decrease (increase) in other assets (942,000) -- (21,000)
Increase (decrease) in accounts payable (55,000) (115,000) 230,000
Increase (decrease) in accrued expenses (17,000) 141,000 5,000
Increase (decrease) in income taxes payable (105,000) 344,000 35,000
----------- ---------- ----------
Net cash provided by operating activities 2,133,000 1,744,000 1,322,000
----------- ---------- ----------
Cash flows from investing activities:
Decrease (increase) in marketable securities 1,029,000 (613,000) (416,000)
Capital expenditures (2,912,000) (268,000) (138,000)
Dispositions of property and equipment 5,000 -- --
----------- ---------- ----------
Net cash (used in) investing activities (1,878,000) (881,000) (554,000)
----------- ---------- ----------
Cash flows from financing activities:
Exercise of stock options 216,000 187,000 23,000
Common shares purchased (183,000) (620,000) (1,675,000)
Common shares issued 224,000 160,000 72,000
Common shares tendered and retired (32,000) -- --
----------- ---------- ----------
Net cash provided by (used in) financing activities 225,000 (273,000) (1,580,000)
----------- ---------- ----------
Net increase (decrease) in cash 480,000 590,000 (812,000)
Cash beginning of year 1,809,000 1,219,000 2,031,000
----------- ---------- ----------
Cash end of year $ 2,289,000 1,809,000 1,219,000
=========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $ 4,010,000 2,535,000 1,342,000
=========== ========== ==========
Supplemental schedule of noncash investing
and financing activities:
Common stock issued as payment of dividend $ 5,799,000 -- 2,524,000
Tax benefit from exercise of non-qualified stock options $ 75,000 164,000 41,000
=========== ========== ==========
</TABLE>
13
<PAGE> 14
N O T E S T O F I N A N C E
MARCH 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carry amounts of financial instruments approximate fair value as of
March 31, 1997. The carrying amounts related to cash, accounts receivable,
other current assets, accounts payable and accrued expenses approximate fair
value due to the relatively short maturity of such instruments.
INVENTORIES
Inventories are valued at lower of cost (first-in, first-out) or market.
DEPRECIATION
Depreciation of property and equipment is provided using straight-line methods
based on the estimated useful lives of the related assets as follows:
Office Equipment and Furniture 5-10 Years
Machinery and Equipment 5-10 Years
Tooling 3-7 Years
Amortization of leasehold improvement is over the life of the related lease or
asset, whichever is shorter.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the balance sheet date and the reporting
of revenues and expenses during the periods to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment of merchandise.
NET EARNINGS PER COMMON SHARE
The net earnings per common share is based upon the weighted average number of
shares and common stock equivalents outstanding during the period. All of the
share, per share and weighted average number of shares have been retroactively
adjusted for a three-for-two stock split distributed on October 16, 1995, to
all shareholders of record on October 2, 1995. In addition, the weighted average
number of shares has been adjusted for a 5% stock dividend paid on October 21,
1994, to shareholders of record on October 7, 1994, which resulted in the
issuance of 459,000 new shares and a 3% stock dividend paid on October 15, 1996,
to shareholders of record on October 1, 1996, which resulted in the issuance of
289,000 new shares.
RESEARCH AND DEVELOPMENT COSTS
The Company charges all research and development costs to expense when
incurred.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in
14
<PAGE> 15
the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enacted date.
MAJOR CUSTOMER
The Company had sales to one major customer which accounted for approximately
18% of net sales during the year ended March 31, 1997. No one customer exceeded
10% of net sales during 1996 or 1995.
MARKETABLE SECURITIES
The Company classifies its investments, comprised principally of highly liquid
debt instruments with maturities greater than 90 days, as available-for-sale
securities. Available-for-sale securities are reported at fair values, which
approximates cost and the related unrealized gain or loss is included in
shareholders' equity.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's balances to conform
to the 1996 presentation.
STOCK OPTION PLAN
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 elected to continue to measure
compensation costs under APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and to comply with the pro forma disclosure requirements of
Statement No. 123 and thus, Statement No. 123 had no effect on the Company's
financial statements.
(2) INVENTORIES
At March 31, 1997 and 1996, inventories consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Finished goods $1,228,000 787,000
Work in process 1,454,000 1,532,000
Raw materials and supplies 3,381,000 1,692,000
---------- ---------
$6,063,000 4,011,000
---------- ----------
</TABLE>
(3) INCOME TAXES
The provision for income taxes for fiscal 1997, 1996 and 1995 consists of the
following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Current:
Federal $2,609,000 2,288,000 967,000
State 769,000 676,000 345,000
---------- --------- ---------
3,378,000 2,964,000 1,312,000
Deferred:
Federal (10,000) (181,000) (122,000)
State 10,000 (21,000) 9,000
---------- --------- ---------
-- (202,000) (113,000)
---------- --------- ---------
Total $3,378,000 2,762,000 1,199,000
========== ========= =========
</TABLE>
A reconciliation of the difference between the Company's provision for income
taxes and the statutory income taxes for the years ended March 31, 1997, 1996
and 1995, respectively, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Statutory tax expense $2,860,000 2,404,000 1,294,000
Benefit of net carry
forward position -- -- (243,000)
State income tax 514,000 432,000 234,000
Warranty and other 4,000 (74,000) (86,000)
---------- --------- ---------
$3,378,000 2,762,000 1,199,000
========== ========= =========
</TABLE>
15
<PAGE> 16
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets at March 31, 1997 and 1996 are presented as follows:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
State income taxes $265,000 222,000
Other 91,000 134,000
-------- -------
Total gross deferred
tax assets 356,000 356,000
Less valuation allowance -- --
-------- -------
Net deferred tax assets $356,000 356,000
======== =======
</TABLE>
(4) OTHER ASSETS
Other assets includes $950,000 paid in 1997 for a license on a new product. The
license fee will be amortized beginning in 1988 using the straight-line method
over the life of the related patents, 17 years.
(5) SHAREHOLDERS' EQUITY
In 1997 and 1995 the Company purchased its own stock for purposes of funding
contributions to the Company's 401(k) plan. Periodically as common shares are
sold to the plan, the difference between the cost and fair market value at the
date of transfer is credited to shareholders' equity ($5,000 in 1997 and
$44,000 in 1995).
The Company has an incentive stock option plan (the Plan) for key employees as
defined under Section 422(A) of the Internal Revenue Code. The Plan as amended,
provides that 1,509,000 common shares be reserved for issuance under the Plan,
which expires on September 10, 2004. In addition, the Plan provides that
non-qualified options can be granted to directors and independent contractors of
the Company. Transactions involving the stock option plan are summarized as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTION OPTION PRICE
SHARES AMOUNT PER SHARE
------- ---------- ---------
<S> <C> <C> <C>
Incentive Options:
Outstanding - March 31, 1994 126,000 $ 246,000 1.95
Granted 397,000 2,308,000 5.81
Exercised (11,000) (18,000) 1.64
------- ---------- -----
Outstanding - March 31, 1995 512,000 2,536,000 4.95
Granted 134,000 1,520,000 11.34
Exercised (38,000) (89,000) 2.34
------- ---------- -----
Outstanding - March 31, 1996 608,000 3,967,000 6.53
Cancelled (15,000) (117,000) 7.80
Granted -- -- --
Exercised (27,000) (153,000) 5.67
------- ---------- -----
Outstanding - March 31, 1997 566,000 $3,697,000 6.53
======= ========== =====
Exercisable - March 31, 1997 264,000 $1,384,000 5.24
======= ========== =====
Non-qualified Options:
Outstanding - March 31, 1994 164,000 $ 450,000 2.74
Granted 15,000 18,000 5.06
Exercised (19,000) (5,000) .26
------- ---------- -----
Outstanding - March 31, 1995 160,000 526,000 3.29
Granted 62,000 775,000 12.50
Exercised (39,000) (98,000) 2.51
------- ---------- -----
Outstanding - March 31, 1996 183,000 1,203,000 6.57
Cancelled (3,000) (11,000) 3.93
Granted 16,000 139,000 9.25
Exercised (14,000) (64,000) 4.57
------- ---------- -----
Outstanding - March 31, 1997 182,000 $1,267,000 6.96
======= ========== =====
Exercisable - March 31, 1997 127,000 $ 693,000 5.46
======= ========== =====
</TABLE>
At March 31, 1997, the range of exercise prices and weighted average remaining
contractual life of outstanding options was $1.68 to $13.47 and 7.5 years,
respectively.
Incentive and non-qualified options were granted at prices not less than 100%
of fair market value at dates of grant. Options under the plan become
exercisable on the anniversary of the
16
<PAGE> 17
grant date on a prorata basis over a defined period and expire 10 years after
the date of grant. To the extent the Company derived a tax benefit from options
exercised by employees, such benefit is credited to Common Stock when realized
on the Company's income tax returns.
The Company applies Accounting Principles Board Opinion No. 25 in accounting
for its plan. Accordingly, no compensation expense has been recognized for its
stock options in the accompanying financial statements. Had compensation cost
for awards under the Company's stock option plan been determined based upon the
fair value at the grant date prescribed under Statement of Financial Accounting
Standards No. 123, the Company's net earnings in 1997, 1996 and 1995 would have
been reduced by approximately $351,000, $239,000 and $18,000 respectively, and
net earnings per share would have been reduced by $.03, $.02 and $.00 per share
in 1997, 1996 and 1995, respectively. The weighted average fair value of options
granted during 1997, 1996 and 1995 is estimated at $2.83, $5.69 and $4.41
respectively. The fair value of options granted during each period was estimated
using the Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 5.9% 6.2% 6.8%
Forfeiture rate 2.0% 2.0% 2.0%
Dividend yield .0 .0 .0
Volatility 45% 45% 45%
Expected life (years) 5% 5% 5%
</TABLE>
(6) EMPLOYEE BENEFIT PLAN
In December, 1992, the Company adopted a defined contribution profit sharing
plan, including features under Section 401(k) of the Internal Revenue Code. The
purpose of the plan is to provide an incentive for employees to make regular
savings for their retirement. Company contributions to the profit sharing plan
are discretionary and are determined by the Board of Directors.
The Company has accrued and paid $96,000, $71,000, and $48,000 of the plan
contributions during 1997, 1996 and 1995, respectively.
(7) COMMITMENTS
The Company is currently leasing its administrative and plan facilities and
certain office equipment under noncancellable operating leases which expire
through June, 2003.
The Company's minimum annual rental commitments under these leases are as
follows:
<TABLE>
<S> <C>
1998 $ 354,000
1999 362,000
2000 348,000
2001 341,000
2002 354,000
Thereafter 461,000
----------
TOTAL: $2,220,000
==========
</TABLE>
Rent expense amounted to $417,000, $239,000, and $192,000 for the years ended
March 31, 1997, 1996 and 1995, respectively.
(8) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents summarized unaudited quarterly financial data for
1997 and 1996:
<TABLE>
<CAPTION>
Gross Net Net Earnings
Revenue Profit Earnings Per Share
----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
1997
- ----
First Quarter $ 7,772,000 $ 4,593,000 $1,624,000 $0.16
Second Quarter 7,357,000 4,257,000 1,610,000 0.15
Third Quarter 5,955,000 3,161,000 1,099,000 0.11
Fourth Quarter 5,077,000 2,794,000 702,000 0.07
----------- ----------- ---------- -----
Year $26,161,000 $14,805,000 $5,035,000 $0.49
=========== =========== ========== =====
1996
- ----
First Quarter $ 5,283,000 $ 2,930,000 $ 995,000 $0.10
Second Quarter 5,264,000 3,079,000 1,021,000 0.10
Third Quarter 4,641,000 2,637,000 940,000 0.09
Fourth Quarter 5,171,000 3,233,000 1,394,000 0.13
----------- ----------- ---------- -----
Year $20,359,000 $11,879,000 $4,310,000 $0.42
=========== =========== ========== =====
</TABLE>
17
<PAGE> 18
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
Chad Therapeutics, Inc.
We have audited the accompanying balance sheets of Chad Therapeutics, Inc. as
of March 31, 1997 and 1996 and the related statements of earnings,
shareholders' equity and cash flows for the three years ended March 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Chad Therapeutics, Inc. as of
March 31, 1997 and 1996 and the results of its operations and its cash flows
for the three years ended March 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
May 10, 1997
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales for the years ended March 31, 1997 and 1996, increased $5,802,000 and
$5,841,000 or 28.5% and 40.2%, respectively, over the prior year's periods.
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 9.9% and 12.4% of total sales for the
years ended March 31, 1997 and 1996, respectively, as these sales increased at
a 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 - have 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. In
1997, three major national chains accounted for approximately 31% of the
Company's domestic sales. This percentage is approximately equal to these
chains' total market share in the home oxygen business. Margins on these sales
may be somewhat lower due to quantity pricing. 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 chains.
The Company believes that its rate of growth at the end of fiscal 1997 was
adversely affected by several factors. During the quarter ended March 31, 1997,
sales to national chain accounts decreased as programs to convert patients to
more cost efficient systems in the previous year's quarter did not recur. In
addition, sales to national chain accounts as well as independent dealers have
also been impacted by increased competitive factors and uncertainties regarding
the size of potential cuts in Medicare home oxygen reimbursement which are being
discussed as part of the Federal budget process. Management believes these
factors will continue to affect the Company's rate of sales growth and level of
profitability for at least the first half of the year ending March 31, 1998.
Cost of sales as a percent of net sales increased from 41.7% to 43.4% and
decreased from 47.6% to 41.7%, respectively, for the years ended March 31, 1997
and 1996, as compared to the prior year's periods. The cur-
19
<PAGE> 20
rent year has been affected by higher fixed overhead costs related to the
Company's move to new facilities in October. The decrease in cost of sales
percentage in the prior year related to decreased production costs related to
bringing certain manufacturing operations in house. Management believes gross
margins may decline in the near future due to increased competition.
Selling, general and administrative expenditures decreased as a percentage of
net sales for the years ended March 31, 1997 and 1996, from 23.5% to 21.4% and
from 26.0% to 23.5%, respectively, as compared to the prior year's periods, as
the rate of growth in sales exceeded the increased costs associated with such
growth. Research and development expenses increased by $797,000 and $43,000 for
the years ended March 31, 1997 and 1996, respectively, as compared to the prior
year's periods. Currently, management expects research and development
expenditures to total approximately $950,000 in the fiscal year ending March
31, 1998, 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 40.1% in 1997, 39.1% in 1996 and 31.5% in
1995.
FINANCIAL CONDITION
At March 31, 1997, the Company had cash and marketable securities totaling
$2,289,000 or 14% of total assets, as compared to $2,838,000 (26%) at March 31,
1996. Approximately $2,900,000 has been expended during the year ended March
31, 1997, for capital expenditures associated with the construction of the
Company's new corporate headquarters and related additions. Net working capital
increased from $9,219,000 at March 31, 1996 to $10,985,000 at March 31, 1997.
Accounts receivable decreased $543,000 during the period ended March 31, 1997,
which related to a decrease in sales to international customers during the
quarter ended March 31, 1997. 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 $2,052,000. 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. 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 does not have any
established external sources of funds. The Company expects capital expenditures
during the next twelve months to be approximately $1,250,000. 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. While the Company made no stock repurchases during
the year ended March 31, 1997, the Company may make additional stock
repurchases pursuant to the Board of Directors authorization in the future. In
addition, the Board has authorized the Company to purchase shares of the
Company's common stock in open market transaction. During the year ended March
31, 1997, the Company purchased approximately 15,000 shares at a cost of
$183,000, however, the number of shares which may be purchased under these
programs in the future can be predicted at this time. 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
20
<PAGE> 21
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 is 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 complied with the pro forma disclosure requirements of Statement
No. 123 in its annual financial statements.
The Financial Accounting Standards Board issued Statement No. 128, "Earnings
per Share" ("FAS 128"), in February 1997. FAS 128 is effective for both interim
and annual periods ending after December 15, 1997. The Company will adopt FAS
128 in the third quarter of 1998. FAS 128 requires the presentation of
"Basic" earnings per share which represents income available to common
shareholders divided by the weighted average number of common shares
outstanding for the period. A dual presentation of "Diluted" earnings per share
will also be required. The Diluted presentation is similar to the current
presentation of all prior-period earnings per share data presented. Management
believes the adoption of FAS 128 will not have a material impact on the
Company's financial position or results of operations.
OUTLOOK: ISSUES & RISKS
This annual report contains forward-looking statements which reflect the
Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties which may cause actual operating results to differ materially
from currently anticipated results. 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 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.
CONSOLIDATION OF HOME CARE INDUSTRY
The home health care industry is undergoing significant consolidation. As a
result, the market for the Company's products is increasingly influenced by
major national chains. Three major national chains presently account for 31% of
the Company's domestic sales. Future sales may be increasingly dependent on a
limited number of customers which may have an impact on margins due to
quantity pricing.
COMPETITION
Chad's success over the past several years has drawn new competition to vie
for a share of the home oxygen market. These new competitors include both small
and very large companies. The Company believes the quality of its products and
its established reputation will continue to be a competitive advantage;
however, no assurance can be given that increased competition in the home
oxygen market will not have an adverse affect on the Company's product pricing
and operations.
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
21
<PAGE> 22
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.
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.
22
<PAGE> 23
COMMON STOCK PRICE RANGE
The Company's Common Shares were traded on NASDAQ from its initial public
offering on July 20, 1983 through February 10, 1987, under the NASDAQ symbol
3CTHU. From February 10, 1987 to August 3, 1993, the Company's Common Shares
were not part of the automated quotations system. Beginning August 3, 1993, the
company's common shares were traded on the American Stock Exchange Emerging
Company Marketplace and on June 6, 1994, the Company's shares moved to the
primary list of the American Stock Exchange with the symbol CTU. The following
table sets forth, for the periods indicated, the range of high and low closing
bid prices of the Company's Common Shares, as furnished by the National
Quotation Bureau, Incorporated and high and low closing prices as furnished by
the American Stock Exchange. Prices have been adjusted to reflect a 2 for 1
split distributed October 15, 1993, and a 3 for 2 split distributed on October
16, 1995.
QUARTER ENDED HIGH LOW
- --------------------------- ---- ---
June 30, 1995 11-1/8 5-7/16
September 30, 1995 15 9-1/2
December 31, 1995 16 11-3/8
March 31, 1996 15-1/8 11
June 30, 1996 19-1/8 12-1/2
September 30, 1996 19-7/8 15-1/4
December 31, 1996 20-5/8 14-1/8
March 31, 1997 16 10-5/8
Prices prior to August 3, 1993, represent quotations between dealers without
adjustment for retail markups, markdown or commissions and may not represent
actual transactions. As of June 16, 1997, there were approximately 328
shareholders of record of the Company's common stock. No cash dividends have
been paid on the common stock.
SEC FORM 10-K
A copy of the Company's annual report to the Securities and Exchange Commission
on Form 10-K is available without charge upon written request to:
Senior Vice President
Chad Therapeutics, Inc.
21622 Plummer Street
Chatsworth, CA 91311
23
