<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: December 31, 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.)
21622 Plummer Street, Chatsworth, CA 91311
---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(818) 882-0883
--------------
(Registrant's telephone number, including area code)
(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 9,948,460
<PAGE> 2
CHAD THERAPEUTICS, INC.
Balance Sheets
December 31, 1996 and March 31, 1996
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
1996 1996
------------ -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 1,136,000 $ 1,809,000
Marketable securities 1,001,000 1,029,000
Accounts receivable, less allowance for
doubtful accounts of $118,000 at
December 31, 1996, and $92,000 at
March 31, 1996 3,029,000 2,872,000
Inventories (Note 2) 6,050,000 4,011,000
Income taxes refundable 418,000 -
Prepaid expenses 294,000 145,000
Deferred income taxes 356,000 356,000
----------- -----------
Total current assets 12,284,000 10,222,000
Property and equipment, at cost 3,499,000 1,074,000
Less accumulated depreciation 674,000 574,000
----------- -----------
Net property and equipment 2,825,000 500,000
----------- -----------
Other assets, net 698,000 56,000
----------- -----------
Total assets $15,807,000 $10,778,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 719,000 $ 399,000
Accrued expenses 718,000 424,000
Income taxes payable - 180,000
----------- -----------
Total current liabilities 1,437,000 1,003,000
----------- -----------
Shareholders' equity:
Common shares, $.01 par value, authorized
40,000,000 shares; 9,634,000 and 9,623,000
shares issued and outstanding 12,764,000 6,791,000
Retained earnings 1,606,000 3,052,000
----------- -----------
14,370,000 9,843,000
Less treasury shares at cost, 5,000 shares - (68,000)
----------- -----------
Net shareholders' equity 14,370,000 9,775,000
----------- -----------
Total liabilities and shareholders' equity $15,807,000 $10,778,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 3
CHAD THERAPEUTICS, INC.
Statements of Earnings
For the nine months ended December 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
1996 1995
---- ----
<S> <C> <C>
Net sales $21,084,000 $15,188,000
Cost of sales 9,073,000 6,542,000
----------- -----------
Gross profit 12,011,000 8,646,000
Costs and expenses:
Selling, general and administrative 4,183,000 3,782,000
Research and development 697,000 92,000
----------- -----------
Total costs and expenses 4,880,000 3,874,000
----------- -----------
Operating income 7,131,000 4,772,000
Other income - interest income 89,000 75,000
----------- -----------
Earnings before income taxes 7,220,000 4,847,000
Income taxes 2,887,000 1,931,000
----------- -----------
Net earnings $ 4,333,000 $ 2,916,000
=========== ===========
Net earnings per share $ .42 $ .29
=========== ===========
Weighted average number of common shares
(Note 3) 10,388,000 10,204,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 4
CHAD THERAPEUTICS, INC.
Statements of Earnings
For the three months ended December 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------
1996 1995
---- ----
<S> <C> <C>
Net sales $5,955,000 $4,641,000
Cost of sales 2,794,000 2,004,000
---------- ----------
Gross profit 3,161,000 2,637,000
Costs and expenses:
Selling, general and administrative 1,075,000 1,077,000
Research and development 284,000 37,000
---------- ----------
Total costs and expenses 1,359,000 1,114,000
---------- ----------
Operating income 1,802,000 1,523,000
Other income - interest income 27,000 32,000
---------- ----------
Earnings before income taxes 1,829,000 1,555,000
Income taxes 730,000 615,000
---------- ----------
Net earnings $1,099,000 $ 940,000
========== ==========
Net earnings per share $ .11 $ .09
========== ==========
Weighted average number of common shares
(Note 3) 10,396,000 10,322,000
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 5
CHAD THERAPEUTICS, INC.
Statement of Shareholders' Equity
For the nine months ended December 31, 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 38,000 206,000 - -
Common shares retired (2,000) (32,000) - -
Common shares issued for
purchases under employee
benefit plan - 20,000 - 68,000
3% stock dividend 289,000 5,779,000 (5,779,000) -
Net earnings - - 4,333,000 -
--------- ----------- ----------- --------
Balance at
December 31, 1996 9,948,000 $12,764,000 $ 1,606,000 $ -
========= =========== =========== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 6
CHAD THERAPEUTICS, INC.
Statements of Cash Flows
For the nine months ended December 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 4,333,000 $ 2,916,000
Adjustments to reconcile net earnings to
net cash used in operating activities:
Depreciation and amortization 133,000 79,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable (157,000) (679,000)
Decrease (increase) in inventories (2,039,000) (1,636,000)
Decrease (increase) in income taxes
refundable (418,000) (70,000)
Decrease (increase) in prepaid expenses (149,000) (17,000)
Decrease (increase) in deferred income taxes - 80,000
Decrease (increase) in other assets (642,000) (154,000)
Increase (decrease) in accounts payable 320,000 42,000
Increase (decrease) in accrued expenses 294,000 488,000
Increase (decrease) in income taxes payable (180,000) -
----------- -----------
Net cash provided by
operating activities 1,495,000 1,049,000
----------- -----------
Cash flows from investing activities:
Decrease (increase) in marketable securities 28,000 (1,240,000)
Capital expenditures (2,458,000) (219,000)
----------- -----------
Net cash (used in) investing
activities (2,430,000) (1,459,000)
----------- -----------
Cash flows from financing activities:
Exercise of stock options 206,000 60,000
Common shares repurchased (32,000) (620,000)
Common shares issued 88,000 40,000
Other - 3,000
----------- -----------
Net cash provided by (used in)
financing activities 262,000 (517,000)
----------- -----------
Net increase (decrease) in cash (673,000) (927,000)
Cash beginning of period 1,809,000 1,219,000
----------- -----------
Cash end of period $ 1,136,000 $ 292,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 7
CHAD THERAPEUTICS, INC.
December 31, 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 December 31, 1996, are summarized as follows:
<TABLE>
<S> <C>
Finished goods $ 940,000
Work-in-Process 1,407,000
Raw materials 3,703,000
----------
$6,050,000
==========
</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 periods ended December 31, 1995,
have been restated for the 3% stock dividend distributed on October 15,
1996.
<PAGE> 8
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
December 31, 1996
Results of Operations
Sales for the three and nine months ended December 31, 1996, increased
$1,314,000 and $5,896,000 or 28.3% and 38.8%, 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 13% and 10% of total sales for the
nine month periods ended December 31, 1996 and 1995, 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.
Three major national chains presently account for approximately 34% 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
<PAGE> 9
Management's Discussion and Analysis of
Financial Condition and Results of Operations
December 31, 1996
Results of Operations (continued)
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 for the third quarter reflects a
seasonal trend which has manifested itself as the Company expands its
operations. Sales have tended to grow at a more moderate rate during the
winter months. The 28% rate of growth for this past quarter approximates the
27% growth in sales for the third quarter of last year as compared to the prior
year's third quarter. Also affecting dollar sales growth was a change in the
Company's product sales mix.
Cost of sales as a percent of net sales were 46.9% and 43.1% for the three
months ended December 31, 1996 and 1995, respectively, and 43.1% to 43% for the
nine months ended December 31, 1996 and 1995, respectively. The current period
has been affected by decreased productivity related to the Company's move to
new facilities in October. Management believes the cost per unit should return
to historical levels in future periods.
Selling, general and administrative expenditures decreased as a percentage of
net sales for the three and nine months ended December 31, 1996, from 23.2% to
18.1% and from 24.9% to 19.8%, 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 $247,000 and
$605,000 for the three and nine months ended December 31, 1996, respectively,
as compared to the prior year's periods. Currently, management expects
research and development expenditures to total approximately $800,000 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 December 31, 1996, the Company had cash and marketable securities totaling
$2,137,000 or 14% of total assets, as compared to $2,838,000 (26%) at March 31,
1996. Approximately, $2,400,000 has been expended through December 31, 1996,
for capital expenditures associated with the construction of the Company's new
corporate headquarters. Net working
<PAGE> 10
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
December 31, 1996
Financial Condition (continued)
capital increased from $9,219,000 at March 31, 1996, to $10,847,000 at December
31, 1996. Accounts receivable increased $157,000 during the period ended
December 31, 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 $2,039,000. 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 $750,000,
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. While the Company made
no stock repurchases during the nine month period ended December 31, 1996, 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
transactions. The number of shares which may be purchased under these programs
can not 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 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
<PAGE> 11
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
December 31, 1996
Newly Issued Accounting Standards (continued)
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 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 34%
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 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 internal research and
development capabilities. Historically, the Company has contracted with
outside parties to develop new products. Some of the Company's
<PAGE> 12
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
December 31, 1996
Rapid Technological Change (continued)
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.
<PAGE> 13
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
December 31, 1996
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> 14
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 2/12/97 /s/ Charles R. Adams
-------------------- ----------------------------------
Charles R. Adams
Chief Executive Officer
Date 2/12/97 /s/ Earl L. Yager
-------------------- ----------------------------------
Earl L. Yager
Senior Vice President, Chief
Financial Officer and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1,000
<CASH> 1,136
<SECURITIES> 1,001
<RECEIVABLES> 3,029
<ALLOWANCES> 0
<INVENTORY> 6,050
<CURRENT-ASSETS> 12,284
<PP&E> 3,499
<DEPRECIATION> 674
<TOTAL-ASSETS> 15,807
<CURRENT-LIABILITIES> 1,437
<BONDS> 0
0
0
<COMMON> 12,764
<OTHER-SE> 1,606
<TOTAL-LIABILITY-AND-EQUITY> 15,807
<SALES> 21,084
<TOTAL-REVENUES> 0
<CGS> 9,073
<TOTAL-COSTS> 4,880
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,220
<INCOME-TAX> 2,887
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,333
<EPS-PRIMARY> .42
<EPS-DILUTED> 0
</TABLE>
