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, 1995
Commission file number: 0-11363
CHAD THERAPEUTICS, INC.
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(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)
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(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 9,575,290
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CHAD THERAPEUTICS, INC.
Balance Sheets
December 31, 1995 and March 31, 1995
ASSETS
December 31, March 31,
1995 1995
----------- ---------
(Unaudited)
Current assets:
Cash $ 292,000 $ 1,219,000
Marketable securities 1,656,000 416,000
Accounts receivable, less allowance for
doubtful accounts of $82,000 at
December 31, 1995 and $52,000 at
March 31, 1995 2,805,000 2,126,000
Inventories (Note 2) 3,481,000 1,845,000
Income taxes refundable 154,000 84,000
Prepaid expenses 142,000 125,000
Deferred income taxes 74,000 154,000
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Total current assets 8,604,000 5,969,000
Property and equipment, at cost 1,025,000 806,000
Less accumulated depreciation 539,000 460,000
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Net property and equipment 486,000 346,000
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Other assets, net 210,000 56,000
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Total assets $9,300,000 $ 6,371,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 556,000 $ 514,000
Accrued expenses 771,000 283,000
Income taxes payable - -
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Total current liabilities 1,327,000 797,000
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Shareholders' equity:
Common shares, $.01 par value, authorized
40,000,000 shares; 9,566,000 and 6,413,000
shares issued and outstanding 6,509,000 6,832,000
Retained earnings 1,658,000 (1,258,000)
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8,167,000 5,574,000
Less treasury shares, at cost, 12,000 shares (194,000) -
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Net shareholders' equity 7,973,000 5,574,000
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Total liabilities and shareholders' equity $9,300,000 $ 6,371,000
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See accompanying notes to financial statements.
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CHAD THERAPEUTICS, INC.
Statements of Earnings
For the three months ended December 31, 1995 and 1994
(Unaudited)
Three Months Ended
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1995 1994
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Net sales $ 4,641,000 $3,667,000
Cost of sales 2,004,000 1,721,000
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Gross profit 2,637,000 1,946,000
Costs and expenses:
Selling, general and administrative 1,077,000 951,000
Research and development 37,000 5,000
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Total costs and expenses 1,114,000 956,000
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Operating income 1,523,000 990,000
Other income - interest income 32,000 12,000
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Earnings before income taxes 1,555,000 1,002,000
Income taxes 615,000 353,000
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Net earnings $ 940,000 $ 649,000
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Net earnings per share $ .09 $ .07
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Weighted average number of common shares
(Note 3) 10,050,000 9,784,000
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See accompanying notes to financial statements.
4
CHAD THERAPEUTICS, INC.
Statements of Earnings
For the nine months ended December 31, 1995 and 1994
(Unaudited)
Nine Months Ended
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1995 1994
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Net sales $15,188,000 $10,715,000
Cost of sales 6,542,000 5,066,000
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Gross profit 8,646,000 5,649,000
Costs and expenses:
Selling, general and administrative 3,782,000 2,846,000
Research and development 92,000 30,000
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Total costs and expenses 3,874,000 2,876,000
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Operating income 4,772,000 2,773,000
Other income - interest income 75,000 35,000
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Earnings before income taxes 4,847,000 2,808,000
Income taxes 1,931,000 987,000
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Net earnings $ 2,916,000 $ 1,821,000
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Net earnings per share $ .29 $ .18
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Weighted average number of common shares
(Note 3) 9,987,000 9,914,000
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See accompanying notes to financial statements.
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CHAD THERAPEUTICS, INC.
Statement of Shareholders' Equity
For the nine months ended December 31, 1995
(Unaudited)
Common Shares Retained Treasury
Shares Amount Earnings Shares
--------- ---------- ----------- ---------
Balance at
March 31, 1995 9,619,000 $6,832,000 $(1,258,000) $ -
Common Shares repurchased (71,000) (392,000) - -
Common Shares repurchased
at cost - - - (228,000)
Common Shares issued for
purchase under employee
benefit plan - 6,000 - 34,000
Exercise of stock options 18,000 60,000 - -
Other - 3,000 - -
Net earnings - - 2,916,000 -
--------- ---------- ----------- ---------
Balance at
December 31, 1995 9,566,000 $6,509,000 $ 1,658,000 $(194,000)
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See accompanying notes to financial statements.
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CHAD THERAPEUTICS, INC.
Statements of Cash Flows
For the nine months ended December 31, 1995 and 1994
(Unaudited)
Nine Months Ended
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1995 1994
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Cash flows from operating activities:
Net earnings $ 2,916,000 $ 1,821,000
Adjustments to reconcile net earnings to
net cash used in operating activities:
Depreciation and amortization 79,000 63,000
Changes in assets and liabilities:
Decrease (increase) in marketable securities (1,240,000) -
Decrease (increase) in accounts receivable (679,000) (515,000)
Decrease (increase) in inventories (1,636,000) (295,000)
Decrease (increase) in income taxes
refundable (70,000) (57,000)
Decrease (increase) in prepaid expenses (17,000) (48,000)
Decrease (increase) in deferred income taxes 80,000 -
Decrease (increase) in other assets (154,000) (21,000)
Increase (decrease) in accounts payable 42,000 262,000
Increase (decrease) in accrued expenses 488,000 138,000
Increase (decrease) in income taxes
payable - (6,000)
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Net cash provided by (used in)
operating activities (191,000) 1,342,000
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Cash flows from investing activities-capital
expenditures (219,000) (119,000)
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Cash flows from financing activities:
Exercise of stock options 60,000 -
Common shares repurchased (620,000) (1,424,000)
Common shares issued 40,000 65,000
Other 3,000 -
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Net cash used in financing
activities (517,000) (1,359,000)
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Net increase (decrease) in cash (927,000) (136,000)
Cash beginning of period 1,219,000 2,031,000
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Cash end of period $ 292,000 $ 1,895,000
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Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ - $ -
Income Taxes 2,005,000 1,050,000
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Supplemental schedule of noncash investing
and financing activities:
Tax benefit from exercise of non-qualified
stock options $ - $ -
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See accompanying notes to financial statements.
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CHAD THERAPEUTICS, INC.
December 31, 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 December 31, 1995, are summarized as follows:
Finished goods $ 980,000
Work-in-Process 1,199,000
Raw materials 1,302,000
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$3,481,000
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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, 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
December 31, 1995
Results of Operations
Sales for the three and nine months ended December 31, 1995, increased $974,000
and $4,473,000 or 26.6% and 41.8%, 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 13.1% of total sales for the
periods ended December 31, 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 concentra tors 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
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CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
December 31, 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 Com pany's growth.
Cost of sales as a percent of net sales decreased from 46.9% to 43.2% and from
47.3% to 43.1%, respectively, for the three and nine months periods ended
December 31, 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 nine months periods ended December 31, 1995, as
compared to the prior year's periods, from 25.9% to 23.2% and from 26.6% to
24.9%, 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 December 31, 1995, the Company had cash and marketable securities totaling
$1,948,000 or 21% 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 71,000 common shares at
$5.50 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
$7,277,000 at December 31, 1995, in spite of the amounts utilized in the
aforementioned stock purchases. Accounts receivable increased $679,000 during
the period ended December 31, 1995, which related to increase in the sales
activity. Future increases or decreases in accounts receivable will generally
coincide
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CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
December 31, 1995
Financial Condition (continued)
with sales volume fluctuations and the timing of shipments to foreign customers.
During the same period, inventories increased $1,636,000. 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 bene fits.
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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.
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(Registrant)
Date 02/05/96 /S/ Charles R. Adams
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Charles R. Adams
Chief Executive Officer
Date 02/05/96 /S/ Earl L. Yager
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Earl L. Yager
Senior Vice President, Chief
Financial Officer and Secretary