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, 1995
Commission file number: 0-11363
CHAD THERAPEUTICS, INC.
-----------------------
(Exact name of registrant as specified in its charter)
California 95-3792700
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9445 De Soto Avenue, Chatsworth, CA 91311
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(Address of principal executive offices) (Zip Code)
(818) 882-0883
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(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 9,558,415
2
CHAD THERAPEUTICS, INC.
Balance Sheets
September 30, 1995 and March 31, 1995
ASSETS
September 30, March 31,
1995 1995
----------- -----------
(Unaudited)
Current assets:
Cash $ 366,000 $ 1,219,000
Marketable securities 2,223,000 416,000
Accounts receivable, less allowance for
doubtful accounts of $71,000 at
September 30, 1995 and $52,000 at
March 31, 1995 2,878,000 2,126,000
Inventories (Note 2) 2,148,000 1,845,000
Income taxes refundable - 84,000
Prepaid expenses 160,000 125,000
Deferred income taxes 74,000 154,000
---------- ----------
Total current assets 7,849,000 5,969,000
Property and equipment, at cost 946,000 806,000
Less accumulated depreciation 510,000 460,000
---------- ----------
Net property and equipment 436,000 346,000
---------- ----------
Other assets, net 212,000 56,000
---------- ----------
Total assets $ 8,497,000 $ 6,371,000
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 450,000 $ 514,000
Accrued expenses 900,000 283,000
Income taxes payable 186,000 -
---------- ----------
Total current liabilities 1,536,000 797,000
---------- ----------
Shareholders' equity:
Common shares, $.01 par value, authorized
40,000,000 shares; 6,368,000 and 6,413,000
shares issued and outstanding 6,462,000 6,832,000
Retained earnings 718,000 (1,258,000)
---------- ----------
7,180,000 5,574,000
Less treasury shares, at cost, 12,000 shares (219,000) -
---------- ----------
Net shareholders' equity 6,961,000 5,574,000
---------- ----------
Total liabilities and shareholders' equity $ 8,497,000 $ 6,371,000
========== ==========
See accompanying notes to financial statements.
3
CHAD THERAPEUTICS, INC.
Statements of Earnings
For the three months ended September 30, 1995 and 1994
(Unaudited)
Three Months Ended
------------------
1995 1994
---- ----
Net sales $5,264,000 $3,583,000
Cost of sales 2,185,000 1,689,000
--------- ---------
Gross profit 3,079,000 1,894,000
Costs and expenses:
Selling, general and administrative 1,365,000 959,000
Research and development 39,000 14,000
--------- ---------
Total costs and expenses 1,404,000 973,000
--------- ---------
Operating income 1,675,000 921,000
Other income - interest income 28,000 12,000
--------- ---------
Earnings before income taxes 1,703,000 933,000
Income taxes 682,000 327,000
--------- ---------
Net earnings $1,021,000 $ 606,000
========= =========
Net earnings per share $ .10 $ .06
========= =========
Weighted average number of common shares
(Note 3) 9,954,000 9,933,000
========= =========
See accompanying notes to financial statements.
4
CHAD THERAPEUTICS, INC.
Statements of Earnings
For the six months ended September 30, 1995 and 1994
(Unaudited)
Six Months Ended
----------------
1995 1994
---- ----
Net sales $10,547,000 $7,048,000
Cost of sales 4,538,000 3,345,000
---------- ---------
Gross profit 6,009,000 3,703,000
Costs and expenses:
Selling, general and administrative 2,705,000 1,895,000
Research and development 55,000 25,000
---------- ---------
Total costs and expenses 2,760,000 1,920,000
---------- ---------
Operating income 3,249,000 1,783,000
Other income - interest income 43,000 23,000
---------- ---------
Earnings before income taxes 3,292,000 1,806,000
Income taxes 1,316,000 634,000
---------- ---------
Net earnings $ 1,976,000 $1,172,000
========== =========
Net earnings per share $ .20 $ .12
========== =========
Weighted average number of common shares
(Note 3) 9,850,000 9,983,000
========== =========
See accompanying notes to financial statements.
5
CHAD THERAPEUTICS, INC.
Statement of Shareholders' Equity
For the six months ended September 30, 1995
(Unaudited)
Common Shares
--------------------- Retained Treasury
Shares Amount Earnings Shares
--------- ---------- ----------- --------
Balance at
March 31, 1995 6,413,000 $6,832,000 $(1,258,000) $ -
Common Shares repurchased (48,000) (392,000) - -
Common Shares repurchased
at cost - - - (228,000)
Common Shares issued for
purchase under employee
benefit plan - 1,000 - 9,000
Exercise of stock options 3,000 18,000 - -
Other - 3,000 - -
Net earnings - - 1,976,000 -
--------- --------- ---------- --------
Balance at
September 30, 1995 6,368,000 $6,462,000 $ 718,000 $(219,000)
========= ========= ========== ========
See accompanying notes to financial statements.
6
CHAD THERAPEUTICS, INC.
Statements of Cash Flows
For the six months ended September 30, 1995 and 1994
(Unaudited)
Six Months Ended
----------------
1995 1994
---- ----
Cash flows from operating activities:
Net earnings $ 1,976,000 $ 1,172,000
Adjustments to reconcile net earnings to
net cash used in operating activities:
Depreciation and amortization 50,000 40,000
Changes in assets and liabilities:
Decrease (increase) in marketable securities (1,807,000) -
Decrease (increase) in accounts receivable (752,000) (491,000)
Decrease (increase) in inventories (303,000) 84,000
Decrease (increase) in income taxes
refundable 84,000 (42,000)
Decrease (increase) in prepaid expenses (35,000) (41,000)
Decrease (increase) in deferred income taxes 80,000 -
Decrease (increase) in other assets (156,000) (27,000)
Increase (decrease) in accounts payable (64,000) 89,000
Increase (decrease) in accrued expenses 617,000 132,000
Increase (decrease) in income taxes payable 186,000 (5,000)
---------- ----------
Net cash provided by (used in)
operating activities (124,000) 911,000
---------- ----------
Cash flows from investing activities-capital
expenditures (140,000) (72,000)
---------- ----------
Cash flows from financing activities:
Exercise of stock options 18,000 -
Common shares repurchased (620,000) (1,424,000)
Common shares issued 10,000 47,000
Other 3,000 -
---------- ----------
Net cash provided by financing
activities (589,000) (1,377,000)
---------- ----------
Net increase (decrease) in cash (853,000) (538,000)
Cash beginning of period 1,219,000 2,031,000
---------- ----------
Cash end of period $ 366,000 $ 1,493,000
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ - $ -
Income Taxes 965,000 682,000
========== ==========
Supplemental schedule of noncash investing
and financing activities:
Tax benefit from exercise of non-qualified
stock options $ - $ -
========== ==========
See accompanying notes to financial statements.
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CHAD THERAPEUTICS, INC.
September 30, 1995
(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
12, 13 and 14 of the March 31, 1995, Annual Report and particularly to
Note 1 which includes a summary of significant accounting policies.
2. Inventories
Inventories at September 30, 1995, are summarized as follows:
Finished goods $ 473,000
Work-in-Process 872,000
Raw materials 803,000
---------
$2,148,000
=========
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.
The weighted average number of shares for the periods ended September
30, 1995, has been restated for the 3 for 2 stock split paid on
October 16, 1995.
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CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 1995
Results of Operations
Sales for the three and six months ended September 30, 1995, increased
$1,681,000 and $3,499,000 or 46.9% and 49.7%, respectively, over the
prior year's periods. There were no price increases during the period
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 13.8% and 14.7% of total
sales for the periods ended September 30, 1995 and 1994, respectively,
as these sales increased at a slightly slower rate than domestic
sales. Currently, management expects sales to foreign distributors
during the upcoming fiscal year to increase on an annual basis;
however, quarter to quarter sales will fluctuate depending on the
timing of shipments. In addition, all foreign sales are transacted in
dollars, thus quarter to quarter unit sales could be affected by
foreign currency fluctuations.
In June, 1989, a new procedure for payment by Medicare for home oxygen
services became effective which provides a prospective flat fee
monthly payment based solely on the patient's prescribed oxygen
requirement. Previously dealers were reimbursed on the basis of total
oxygen delivered and a rental charge which varied based on the type of
system being used and other factors. The prior procedure tended to
encourage waste and inefficiency. Consequently, with the incentive
now to operate efficiently, inexpensive concentrators have grown in
popularity because of low cost and less frequent servicing
requirements. At the same time, interest heightened in oxygen
conserving devices which can extend the life of oxygen supplies and
reduce service calls by dealers. Management believes the new
reimbursement procedures have heightened interest in the cost savings
and increased mobility afforded by oxygen conserving devices such as
the Company's products.
In addition, other changes in the health care delivery system -
including the increase in the acceptance and utilization of managed
care - has stimulated a significant consolidation among home oxygen
dealers. As major national and regional home medical equipment chains
attempt to secure managed care contracts and improve their market
position, they have expanded their distribution networks through the
acquisition of independent dealers in strategic areas. The Company's
products, which allow homecare dealers to provide cost efficient home
oxygen therapy, are ideally suited for use in a managed care
environment and as a tool for dealers to increase revenues and
profits. To ensure continued awareness of the benefits of the
Company's products by chain headquarters personnel, a proactive
marketing and communications program has been initiated with all of
the major
9
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 1995
Results of Operations (continued)
national chains. Management believes that the consolidation activity
being experienced in the home oxygen business is temporary and should
have no adverse effects on the Company's growth.
Cost of sales as a percent of net sales decreased from 47.1% to 41.5%
and from 47.5% to 43.0%, respectively, for the three and six month
periods ended September 30, 1995, as compared to the prior year's
periods. The current period has been affected by decreased production
costs associated with bringing certain manufacturing operations in
house. Management believes the cost per unit should continue to
decline in future periods as efficiencies of in house manufacturing
are assimilated in production.
Selling, general and administrative expenditures decreased as a
percentage of net sales for the three and six months periods ended
September 30, 1995, as compared to the prior year's periods, from
26.8% to 25.9% and from 26.9% to 25.7%, respectively, as the rate of
growth in sales exceeded the increased costs associated with such
growth. Research and development expenses increased in 1995.
Management expects to spend increasing amounts in the upcoming year on
research and development to enhance and expand the Company's product
line if appropriate products can be identified.
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 31.5% in 1995.
Financial Condition
At September 30, 1995, the Company had cash and marketable securities
totaling $2,589,000 or 31% of total assets, as compared to $1,635,000
(26%) at March 31, 1995. 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. In the current period, under this plan the Company has used
$392,000 in cash to purchase 48,000 common shares at $8.25 per share,
which shares have been retired. In addition, in the current period
the Company purchased approximately 12,000 shares of its own stock at
a cost of $228,000 for purposes of funding contributions to the
Company's 401(k) plan. Net working capital increased from $5,172,000
at March 31, 1995, to $6,313,000 at September 30, 1995, in spite of
the amounts utilized in the aforementioned stock purchases. Accounts
receivable increased $752,000 during the period ended September 30,
1995, which related to increase in the sales activity. Future
increases or decreases in accounts receivable will generally
coincide
10
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 1995
Financial Condition (continued)
with sales volume fluctuations and the timing of shipments to foreign
customers. During the same period, inventories increased $303,000.
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.
While historically the Company had relied upon the proceeds derived
from the sale of securities to finance its operations, management
believes funds derived from operations should be adequate to meet the
Company's present cash requirements. The Company does not anticipate
any material capital expenditures during the next twelve months.
However, the Company may make additional stock repurchases pursuant to
the Board of Directors authorization. The Company does not provide
post employment retirement benefits.
11
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 11/01/95 /S/ Charles R. Adams
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Charles R. Adams
Chief Executive Officer
Date 11/01/95 /S/ Earl L. Yager
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Earl L. Yager
Senior Vice President, Chief
Financial Officer and Secretary