<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: September 30, 1997
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 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 9,951,117
<PAGE> 2
CHAD THERAPEUTICS, INC.
Balance Sheets
September 30, 1997 and March 31, 1997
ASSETS
<TABLE>
<CAPTION>
September 30, March 31,
1997 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 3,775,000 $ 2,289,000
Accounts receivable, less allowance for
doubtful accounts of $110,000 at
September 30, 1997, and $107,000 at
March 31, 1997 2,390,000 2,329,000
Inventories (Note 2) 5,269,000 6,063,000
Income taxes refundable - 527,000
Prepaid expenses 873,000 172,000
Deferred income taxes 356,000 356,000
------------- -------------
Total current assets 12,663,000 11,736,000
Property and equipment, at cost 4,344,000 3,844,000
Less accumulated depreciation 962,000 717,000
------------- -------------
Net property and equipment 3,382,000 3,127,000
------------- -------------
Notes receivable 125,000 -
------------- -------------
Other assets, net 1,300,000 998,000
------------- -------------
Total assets $ 17,470,000 $ 15,861,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 582,000 $ 344,000
Accrued expenses 627,000 407,000
Income taxes payable 207,000 -
------------- -------------
Total current liabilities 1,416,000 751,000
------------- -------------
Shareholders' equity:
Common shares, $.01 par value, authorized
40,000,000 shares; 9,951,000 and 9,951,000
shares issued and outstanding 12,827,000 12,834,000
Retained earnings 3,401,000 2,308,000
------------- -------------
16,228,000 15,142,000
Less treasury shares at cost, 25,000 and
3,000 shares (174,000) (32,000)
------------- -------------
Net shareholders' equity 16,054,000 15,110,000
------------- -------------
Total liabilities and shareholders' equity $ 17,470,000 $ 15,861,000
============= =============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 3
CHAD THERAPEUTICS, INC.
Statements of Earnings
For the six months ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net sales $ 9,818,000 $15,129,000
Cost of sales 4,619,000 6,279,000
----------- -----------
Gross profit 5,199,000 8,850,000
Costs and expenses:
Selling, general and administrative 3,118,000 3,108,000
Research and development 323,000 413,000
----------- -----------
Total costs and expenses 3,441,000 3,521,000
----------- -----------
Operating income 1,758,000 5,329,000
Other income - interest income 69,000 62,000
----------- -----------
Earnings before income taxes 1,827,000 5,391,000
Income taxes 734,000 2,157,000
----------- -----------
Net earnings $ 1,093,000 $ 3,234,000
=========== ===========
Net earnings per share $ .11 $ .31
=========== ===========
Weighted average number of common shares
(Note 3) 10,212,000 10,384,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 4
CHAD THERAPEUTICS, INC.
Statements of Earnings
For the three months ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net sales $ 4,390,000 $ 7,357,000
Cost of sales 2,176,000 3,100,000
----------- -----------
Gross profit 2,214,000 4,257,000
Costs and expenses:
Selling, general and administrative 1,581,000 1,469,000
Research and development 190,000 138,000
----------- -----------
Total costs and expenses 1,771,000 1,607,000
----------- -----------
Operating income 443,000 2,650,000
Other income - interest income 42,000 35,000
----------- -----------
Earnings before income taxes 485,000 2,685,000
Income taxes 196,000 1,075,000
----------- -----------
Net earnings $ 289,000 $ 1,610,000
=========== ===========
Net earnings per share $ .03 $ .15
=========== ===========
Weighted average number of common shares
(Note 3) 10,236,000 10,403,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 5
CHAD THERAPEUTICS, INC.
Statement of Shareholders' Equity
For the six months ended September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Common Shares Retained Treasury
Shares Amount Earnings Shares
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at
March 31, 1997 9,951,000 $ 12,834,000 $ 2,308,000 $ (32,000)
Common shares repurchased - - - (253,000)
Common shares issued for
purchases under employee
benefit plan - (10,000) - 111,000
Compensation expense related
to option grants - 3,000 - -
Net earnings - - 1,093,000 -
------------ ------------ ------------ ------------
Balance at
September 30, 1997 9,951,000 $ 12,827,000 $ 3,401,000 $ (174,000)
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 6
CHAD THERAPEUTICS, INC.
Statements of Cash Flows
For the six months ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,093,000 $ 3,234,000
Adjustments to reconcile net earnings to
net cash used in operating activities:
Depreciation and amortization 245,000 69,000
Compensation expense related to option grants 3,000 -
Changes in assets and liabilities:
Decrease (increase) in accounts receivable (61,000) (1,073,000)
Decrease (increase) in inventories 794,000 (1,488,000)
Decrease (increase) in income taxes
refundable 527,000 (93,000)
Decrease (increase) in prepaid expenses (701,000) (101,000)
Decrease (increase) in other assets (302,000) (423,000)
Increase (decrease) in accounts payable 238,000 107,000
Increase (decrease) in accrued expenses 220,000 493,000
Increase (decrease) in income taxes payable 207,000 (180,000)
----------- -----------
Net cash provided by
operating activities 2,263,000 545,000
----------- -----------
Cash flows from investing activities:
Increase in marketable securities - (471,000)
Capital expenditures (500,000) (1,416,000)
----------- -----------
Net cash (used in) investing
activities (500,000) (1,887,000)
----------- -----------
Cash flows from financing activities:
Exercise of stock options - 65,000
Common shares repurchased (253,000) -
Common shares issued 101,000 85,000
Notes receivable issued (130,000) -
Collections on notes receivable 5,000 -
----------- -----------
Net cash provided by (used in)
financing activities (277,000) 150,000
----------- -----------
Net increase (decrease) in cash 1,486,000 (1,192,000)
Cash beginning of period 2,289,000 1,809,000
----------- -----------
Cash end of period $ 3,775,000 $ 617,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 7
CHAD THERAPEUTICS, INC.
September 30, 1997
(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 14, 15, 16 and 17
of the March 31, 1997, Annual Report and particularly to Note 1 which
includes a summary of significant accounting policies.
2. Inventories
Inventories at September 30, 1997, are summarized as follows:
Finished goods $ 849,000
Work-in-Process 1,011,000
Raw materials 3,409,000
----------
$5,269,000
==========
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.
<PAGE> 8
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 1997
Results of Operations
Sales for the three and six months ended September 30, 1997, decreased
$2,967,000 and $5,311,000 or 40.3% and 35.1%, respectively, over the prior
year's periods. There were no price increases during the periods presented. The
decrease in sales relates primarily to decreases in domestic sales of OXYMATIC
conservers and OXYLITE complete portable oxygen systems which are being affected
by the current marketing environment for home oxygen therapy discussed below.
Sales to foreign distributors represented 10% and 11% of total sales for the six
month periods ended September 30, 1997 and 1996, respectively. 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.
The current procedure for reimbursement by Medicare for home oxygen services
provides a prospective flat fee monthly payment based solely on the patient's
prescribed oxygen requirement. Under this system, 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 these reimbursement procedures have heightened
interest in the cost savings and improved 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.
Three major national chains presently account for approxi mately 25% of the
Company's domestic sales. 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.
<PAGE> 9
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 1997
Results of Operations (continued)
The Company believes that its revenues at the end of fiscal 1997 and during the
six months ended September 30, 1997, were affected by several factors. During
the six months ended September 30, 1997, sales to national chain accounts
decreased as programs to convert patients to more acceptable ambulatory 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 reim bursement which were being discussed as part
of the Federal budget process. This process has now been finalized and a 25% cut
in home oxygen reimbursement will go into effect January, 1998. The effects of
managed care and concerns over the severity of reimbursement cuts has, in many
cases, resulted in the provision of systems to patients that do not provide
truly ambulatory oxygen. Management believes these factors will continue to
adversly affect the Company's revenues at least until the quarter ended December
31, 1997. Management also believes future revenues may be positively affected by
sales of a new product, the TOTAL O2TM Delivery System. The TOTAL O2 system
provides stationary oxygen for patients at home while safely and efficiently
filling portable oxygen cylinders for ambulation. The Company recently announced
the presentation of the TOTAL O2 system at the Medtrade Show and is currently
awaiting clearance to sell the new product from the Food and Drug
Administration. No estimate can currently be made regarding the level of success
the Company may achieve with the TOTAL O2 system.
Cost of sales as a percent of net sales increased from 42.1% to 49.6% and from
41.5% to 47.1%, respectively, for the three and six months ended September 30,
1997, as compared to the prior year's periods. The current periods have been
affected by higher fixed overhead costs associated with the Company's move to
new facilities in October, 1996, and decreased sales volume. In addition, the
three months ended September 30, 1997, have been affected by start-up costs
associated with preparations to manufacture the TOTAL O2 system. Management
believes the cost per unit should remain at or near current levels in future
periods.
Selling, general and administrative expenditures increased from $1,469,000 to
$1,581,000 and from $3,108,000 to $3,118,000 for the three and six months ended
September 30, 1996 and 1997, respectively; however these expenses in creased as
a percentage of net sales from 20% to 36% and from 20.5% to 31.8%, respectively,
due to the decrease in sales volume and costs associated with preparing to bring
the Company's new TOTAL O2 system product to market. Research and development
expenses decreased by $90,000 for the six months ended September 30, 1997, as
compared to the prior year's period. Currently, management expects research and
development costs to total approximately $950,000 in the
<PAGE> 10
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 1997
fiscal year ended March 31, 1998, on projects to enhance and expand the
Company's product line. Research and development expenses totaled $910,000 for
the year ended March 31, 1997.
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 40.0% in
1997 and 39.1% in 1996.
Financial Condition
At September 30, 1997, the Company had cash totaling $3,775,000 or 22% of total
assets, as compared to $2,289,000 (14%) at March 31, 1997. Net working capital
increased from $10,985,000 at March 31, 1997, to $11,247,000 at September 30,
1997. Accounts receivable increased $61,000 during the period ended September
30, 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 decreased $794,000. 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 six month period
ended September 30, 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 transactions. During the six months ended September 30,
1997, the Company purchased approximately 35,000 shares at a cost of $253,000,
however, the number of shares which may be purchased under these programs in the
future can not be predicted at this time. The Company does not provide post
employment retirement benefits.
Newly Issued Accounting Standards
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
<PAGE> 11
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 1997
Newly Issued Accounting Standards (continued)
ending after December 15, 1997. The Company will adopt FAS in the third quarter
of 1998. FAS 128 requires the pre sentation 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.
The Financial Accounting Standards Board issued Statement No. 130, "Reporting
Comprehensive Income" ("FAS 130"), in June 1997. FAS 130 establishes standards
for reporting and display of comprehensive income and its components in
financial statements. FAS 130 is effective for both interim and annual periods
beginning after December 15, 1997. The Company will adopt FAS 130 in the first
quarter of the fiscal year ending March 31, 1999. Management believes that the
adoption of FAS 130 will not have a material impact on the Company's financial
position or results of operations.
The Financial Accounting Standards Board issued Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("FAS 131"), in June
1997. FAS 131 establishes standards for the way public business enter prises are
to report information about operating segments in annual financial statements
and requires enterprises to report selected information about operating segments
in interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. It replaces the "industry segment" concept of FAS No. 14,
"Financial Reporting for Segments of a Business Enterprise", with a "management
approach" concept as to basis for identi fying reportable segments. FAS 131 is
effective for financial statements for periods beginning after December 15,
1997. The Company will adopt FAS 131 in the annual financial statements of the
fiscal year ending March 31, 1999. Management believes the adoption of FAS 131
will not have a material impact on the Company's financial position or results
of operations.
Outlook: Issues & Risks
This quarterly 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 uncer
tainties 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:
<PAGE> 12
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 1997
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 25% 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 technolo gical 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 dis cussed 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 meaningful at this time to predict the
effect on the business of the Company if any of these proposals is enacted.
<PAGE> 13
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 1997
Potential Changes in Administration of Health Care (con't)
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 marketed by the Company do not
receive patent protection, competitors may be able to manufacture and market
substan tially 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 poten tial 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.
<PAGE> 14
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 1997
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 perfor mance may be listed
from time to time in the reports filed by the Company with the Securities and
Exchange Commission.
<PAGE> 15
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 11/14/97 /S/ Charles R. Adams
---------------- ----------------------------------------
Charles R. Adams
Chief Executive Officer
Date 11/14/97 /S/ Earl L. Yager
---------------- ----------------------------------------
Earl L. Yager
Senior Vice President, Chief
Financial Officer and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,775
<SECURITIES> 0
<RECEIVABLES> 2,390
<ALLOWANCES> 0
<INVENTORY> 5,269
<CURRENT-ASSETS> 12,663
<PP&E> 4,344
<DEPRECIATION> 362
<TOTAL-ASSETS> 17,470
<CURRENT-LIABILITIES> 1,416
<BONDS> 0
12,827
0
<COMMON> 0
<OTHER-SE> 3,227
<TOTAL-LIABILITY-AND-EQUITY> 17,470
<SALES> 9,818
<TOTAL-REVENUES> 0
<CGS> 4,619
<TOTAL-COSTS> 3,441
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,827
<INCOME-TAX> 734
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,093
<EPS-PRIMARY> .11
<EPS-DILUTED> 0
</TABLE>
