1
Exhibit 13.1
NET EARNINGS PER SHARE
[GRAPH]
SHAREHOLDERS' EQUITY
[GRAPH]
TOTAL ASSETS
[GRAPH]
SELECTED FINANCIAL DATA
YEARS ENDED MARCH 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- --------- --------- ---------
Net Sales $20,359,000 14,518,000 9,470,000 5,805,000 3,232,000
Interest Income 97,000 50,000 28,000 8,000 7,000
Net Earnings 4,310,000 2,606,000 2,053,000 1,237,000 573,000
Earnings Per Common Share .43 .26 .21 .13 .06
Net Working Capital 9,219,000 5,172,000 4,176,000 1,943,000 701,000
Total Assets 10,778,000 6,371,000 5,075,000 2,635,000 1,197,000
Shareholders' Equity 9,775,000 5,574,000 4,507,000 2,180,000 779,000
No cash dividends have been declared or paid during the periods presented.
CHAD THERAPEUTICS, INC. 3
2
BALANCE SHEETS
- --------------------------------------------------------------------------------
March 31,
-------------------------
ASSETS 1996 1995
----------- -----------
Current Assets:
Cash $ 1,809,000 1,219,000
Marketable securities 1,029,000 416,000
Accounts receivable, less allowance for doubtful
accounts of $92,000 and $52,000 in 1996 and 1995 2,872,000 2,126,000
Inventories (Note 2) 4,011,000 1,845,000
Income taxes refundable (Note 3) - 84,000
Prepaid expenses 145,000 125,000
Deferred income taxes (Note 3) 356,000 154,000
----------- -----------
Total current assets 10,222,000 5,969,000
----------- -----------
Property and equipment, at cost:
Office equipment and furniture 478,000 257,000
Machinery and equipment 192,000 145,000
Tooling 303,000 303,000
Leasehold improvements 101,000 101,000
----------- -----------
1,074,000 806,000
Less accumulated depreciation and amortization 574,000 460,000
----------- -----------
Net property and equipment 500,000 346,000
----------- -----------
Other assets, net 56,000 56,000
----------- -----------
$10,778,000 6,371,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
----------- -----------
Current liabilities:
Accounts payable $399,000 514,000
Accrued expenses 424,000 283,000
income taxes payable (Note 3) 180,000 -
----------- -----------
Total current liabilities 1,003,000 797,000
----------- -----------
Commitments (Note 6)
Shareholders' equity (Note 4):
Common shares
Authorized 40,000,000 shares;
9,623,000 and 9,620,000 shares issued and outstanding 6,791,000 6,832,000
Retained earnings (accumulated deficit) 3,052,000 (1,258,000)
----------- -----------
9,843,000 5,574,000
Less treasury shares at cost, 5,000 shares at March 31, 1 996 (68,000) -
----------- -----------
Net shareholders' equity 9,775,000 5,574,000
----------- -----------
$10,778,000 6,371,000
=========== ===========
See accompanying notes to financial statements.
14 CHAD THERAPEUTICS, INC.
3
STATEMENTS OF EARNINGS
- --------------------------------------------------------------------------------
Years Ended March 31,
---------------------------------------------
1996 1995 1994
----------- ---------- ---------
Net sales $20,359,000 14,518,000 9,470,000
Cost of sales 8,480,000 6,916,000 4,461,000
----------- ---------- ---------
Gross profit 11,879,000 7,602,000 5,009,000
Costs and expenses:
Selling, general and administrative 4,791,000 3,777,000 2,645,000
Research and development 113,000 70,000 11,000
----------- ---------- ---------
Total costs and expenses 4,904,000 3,847,000 2,656,000
----------- ---------- ---------
Operating income 6,975,000 3,755,000 2,353,000
Interest income 97,000 50,000 28,000
----------- ---------- ---------
Earnings before income taxes 7,072,000 3,805,000 2,381,000
Income taxes (Note 3) 2,762,000 1,199,000 328,000
----------- ---------- ---------
Net earnings $ 4,310,000 2,606,000 2,053,000
=========== ========== =========
Net earnings per share $ .43 .26 .21
=========== ========== =========
Weighted average number of common shares
and common share equivalents 9,922,000 9,873,000 9,990,000
=========== ========== =========
See accompanying notes to financial statements.
CHAD THERAPEUTICS, INC. 15
4
STATEMENTS OF SHAREHOLDERS" EQUITY
- -------------------------------------------------------------------------------
For the years ended March 31, 1996, 1995 and 1994
RETAINED
COMMON SHARES (NOTE 4) EARNINGS
----------------------------- (ACCUMULATED
SHARES AMOUNT DEFICIT) TREASURY SHARES
--------- ----------- ------------ ---------------
Balance at March 31, 1993 8,924,000 $ 5,021,000 $(2,841,000) $ -
3% Stock Dividend 267,000 552,000 (552,000) -
Common Shares Repurchased At Cost - - - (70,000)
Common Shares Issued For Purchases
Under Employee Benefit Plan (Note 4) - 46,000 - 42,000
Exercise of Stock Options 247,000 98,000 - -
Tax Benefit From Exercise of
Non-Qualified Stock Options (Note 4) - 158,000 - -
Net Earnings - - 2,053,000 -
--------- ----------- ----------- ---------
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 4) - 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 4) - 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 4) - - - 160,000
Exercise of Stock Options 74,000 187,000 - -
Tax Benefit From Exercise of
Non-Qualified Stock Options (Note 4) - 164,000 - -
Net Earnings - - 4,310,000 -
--------- ----------- ----------- ---------
Balance at March 31, 1996 9,623,000 $ 6,791,000 $ 3,052,000 $ (68,000)
========= =========== =========== =========
See accompanying notes to financial statements.
16 CHAD THERAPEUTICS, INC.
5
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
YEARS ENDED March 31,
------------------------------------------
1996 1995 1994
----------- ---------- ----------
Cash flows from operating activities:
Net earnings $ 4,310,000 2,606,000 2,053,000
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 114,000 88,000 67,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable (746,000) (696,000) (435,000)
Decrease (increase) in inventories (2,166,000) (685,000) (754,000)
Decrease (increase) in income taxes refundable 84,000 (27,000) (57,000)
Decrease (increase) in prepaid expenses (20,000) (59,000) 17,000
Decrease (increase) in deferred income taxes (202,000) (154,000) --
Decrease (increase) in other assets -- (21,000) (5,000)
Increase (decrease) in accounts payable (115,000) 230,000 135,000
Increase (decrease) in accrued expenses 141,000 5,000 47,000
Increase (decrease) in income taxes payable 344,000 35,000 89,000
----------- ---------- ----------
Net cash provided by operating activities 1,744,000 1,322,000 1,157,000
----------- ---------- ----------
Cash flows from investing activities:
Increase in marketable securities (613,000) (416,000) --
Capital expenditures (268,000) (138,000) (156,000)
----------- ---------- ----------
Net cash (used in) investing activities (881,000) (554,000) (156,000)
----------- ---------- ----------
Cash flows from financing activities:
Exercise of stock options 187,000 23,000 98,000
Common shares purchased (620,000) (1,675,000) (70,000)
Common shares issued 160,000 72,000 88,000
----------- ---------- ----------
Net cash provided by (used in) financing activities (273,000) (1,580,000) 116,000
----------- ---------- ----------
Net increase (decrease) in cash 590,000 (812,000) 1,117,000
Cash beginning of year 1,219,000 2,031,000 914,000
----------- ---------- ----------
Cash end of year $ 1,809,000 1,219,000 2,031,000
=========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $ 2,535,000 1,342,000 296,000
=========== ========== ==========
Supplemental schedule of noncash investing and financing activities:
Tax benefit from exercise of nonqualified stock options $ 164,000 41,000 158,000
=========== ========== ==========
See accompanying notes to financial statements.
CHAD THERAPEUTICS, INC. 17
6
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(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 carrying amounts of financial instruments approximate fair value as of
March 31, 1996. 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 improvements is over the life of the related lease.
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 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 two-for-one stock split distributed on October 15, 1993, to all
shareholders of record on October 1, 1993 and 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 3% stock dividend paid on April 14, 1993, to all shareholders of record on
March 31, 1993, which resulted in the issuance of 178,406 new shares and a 5%
stock dividend paid on October 21, 1994, to shareholders of record on October
7, 1994, which resulted in the issuance of 306,017 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
18 CHAD THERAPEUTICS, INC.
7
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 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 export sales to one Western European distributor which
accounted for approximately 5%, 5% and 7% of net sales during the years ended
March 31, 1996, 1995 and 1994, respectively.
MARKETABLE SECURITIES
The Company adopted Statement of Financial Accounting Standards No. 115 (SFAS
115), "Accounting for Certain Investments in Debt and Equity Securities," on
April 1, 1994. SFAS 115 requires investments to be classified in one of three
categories: held-to-maturity securities, available-for-sale securities, and
trading 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.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's balances to
conform to the 1996 presentation.
NEWLY ISSUED ACCOUNTING STANDARDS
In March, 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-lived 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. Company management does
not believe that the adoption of this new standard will 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. While the Company is still evaluating
Statement No. 123, it currently expects to elect 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. If the Company makes this election, Statement No. 123 will
have no effect on the Company's financial statements.
(2) INVENTORIES
At March 31, 1996 and 1995, inventories consisted of the following:
1996 1995
Finished goods $ 787,000 555,000
Work in process 1,532,000 572,000
Raw materials
and supplies 1,692,000 718,000
---------- ---------
$4,011,000 1,845,000
========== =========
CHAD THERAPEUTICS, INC. 19
8
(3) INCOME TAXES
The provision for income taxes for fiscal 1996, 1995 and 1994 consists of the
following:
1996 1995 1994
---------- --------- -------
Current:
Federal $2,288,000 967,000 115,000
State 676,000 345,000 163,000
---------- --------- -------
2,964,000 1,312,000 278,000
Deferred:
Federal (181,000) (122,000) 44,000
State (21,000) 9,000 6,000
---------- --------- -------
(202,000) (113,000) 50,000
---------- --------- -------
Total $2,762,000 1,199,000 328,000
========== ========= =======
A reconciliation of the difference between the Company's provision for income
taxes and the statutory income tax for the years ended March 31, 1996, 1995 and
1994, respectively, is as follows:
1996 1995 1994
---------- --------- --------
Statutory tax
expense $2,404,000 1,294,000 810,000
Benefit of net
carryforward
position -- (243,000) (641,000)
State income tax 432,000 234,000 108,000
Warranty and other (74,000) (86,000) 51,000
---------- --------- --------
$2,762,000 1,199,000 328,000
========== ========= ========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets at March 31, 1996 and 1995 are presented below:
1996 1995
-------- -------
State income taxes 222,000 117,000
Other 134,000 37,000
Total gross deferred tax assets 356,000 154,000
-------- -------
Less valuation allowance -- --
-------- -------
Net deferred tax assets $356,000 154,000
======== =======
(4) SHAREHOLDERS' EQUITY
In 1995 and 1994 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 ($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 1,465,000 common shares be reserved for issuance under
the Plan, which expires on September 10, 2004. In addition, the Plan provides
that nonqualified options can be granted to directors and independent
contractors of the Company. Transactions involving the stock option plan are
summarized as follows:
20 CHAD THERAPEUTICS, INC.
9
OPTION OPTION PRICE
SHARES AMOUNT PER SHARE
-------- ---------- ------------
Incentive Options:
------------------
Outstanding -
March 31, 1993 229,000 $231,000 .077-1.888
Granted 8,000 34,000 4.286
Exercised (115,000) (19,000) .077- .193
-------- ---------- ------------
Outstanding -
March 31, 1994 122,000 246,000 1.734-4.286
Granted 386,000 2,308,000 5.238-6.167
Exercised (11,000) (18,000) 1.734
-------- ---------- ------------
Outstanding -
March 31, 1995 497,000 6,000 1.734- 6.167
Granted 130,000 1,520,000 5.833-13.875
Exercised (37,000) (89,000) 1.888-5.238
-------- ---------- ------------
Outstanding -
March 31, 1996 590,000 $3,967,000 1.734-13.875
======== ========== ============
Exercisable -
March 31, 1996 162,000 $ 681,000 1.734-6.167
======== ========== ============
Nonqualified Options:
---------------------
Outstanding -
March 31, 1993 209,000 $ 146,000 .077-1.888
Granted 82,000 383,000 4.047
Exercised (132,000) (79,000) .077-1.888
-------- ---------- ------------
Outstanding -
March 31, 1994 159,000 450,000 .193-4.047
Granted 15,000 81,000 5.333
Exercised (19,000) (5,000) .193
-------- ---------- ------------
Outstanding -
March 31, 1995 155,000 526,000 .193-5.333
Granted 60,000 775,000 12.917
Exercised (37,000) (98,000) .193-4.048
-------- ---------- ------------
Outstanding -
March 31, 1996 178,000 $1,203,000 1.888-12.917
======== ========== ============
Exercisable -
March 31, 1996 85,000 $ 279,000 1.888-5.333
======== ========== ============
Incentive and nonqualified 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 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.
(5) 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 $71,000, $48,000, and $41,000 of the plan
contributions during 1996, 1995 and 1994, respectively.
(6) COMMITMENTS
The Company is currently leasing its administrative and plant 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:
1997 $125,000
1998 305,000
1999 325,000
2000 328,000
2001 341,000
Thereafter 816,000
----------
TOTAL: $2,240,000
==========
Rent expense amounted to $239,000, $192,000, and $171,000 for the years ended
March 31, 1996, 1995 and 1994, respectively.
(7) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents summarized unaudited quarterly financial data for
1996 and 1995:
GROSS NET NET EARNINGS
REVENUE PROFIT EARNINGS PER SHARE
----------- ----------- ---------- ------------
1996
----
First Quarter $ 5,283,000 $2,930,000 $ 955,000 $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 0.14
----------- ----------- ---------- -----
Year $20,359,000 $11,879,000 $4,310,000 $0.43
=========== =========== ========== =====
1995
----
First Quarter $3,465,000 $1,809,000 $ 566,000 $0.05
Second Quarter 3,583,000 1,893,000 606,000 0.06
Third Quarter 3,667,000 1,946,000 649,000 0.07
Fourth Quarter 3,803,000 1,954,000 785,000 0.08
----------- ----------- ---------- -----
Year $14,518,000 $7,602,000 $2,606,000 $0.26
=========== =========== ========== =====
CHAD THERAPEUTICS, INC. 21
10
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, 1996 and 1995 and the related statements of earnings,
shareholders' equity and cash flows the three years ended March 31, 1996.
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, 1996 and 1995 and the results of its operations and its cash flows
for the three years ended March 31, 1996, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
May 22, 1996
22 CHAD THERAPEUTICS, INC.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales for the years ended March 31, 1996 and 1995, increased $5,841,000 and
$5,048,000 or 40.2% and 53.3%, 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 12.4% and 12.9% of total sales for
the years ended March 31, 1996 and 1995, respectively, as these sales increased
at a slightly 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. The
Company's products, which allow homecare dealers to provide cost efficient home
oxygen therapy, are well 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 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 47.6% to 41.7% and
increased from 47.1% to 47.6%, respectively, for the years ended March 31, 1996
and 1995, as compared to the prior year's periods. The current year has been
benefitted from decreased production costs associated with bringing certain
manufacturing operations in house. The increase in cost of sales percentage in
the prior year resulted from the start up costs associated with this process.
Management believes the cost per unit should remain at or near current levels
in future periods as efficiencies of in house manufacturing have mostly been
realized.
Selling, general and administrative expenditures decreased as a percentage of
net sales for the years ended March 31, 1996 and 1995, from 26.0% to 23.5% and
from 27.9% to 26.0%, 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 $43,000 and $59,000 for
the years ended March 31, 1996 and 1995, respectively, as compared to the prior
year's periods. Currently, management expects research and development
expenditures to increase by approximately $500,000 in the upcoming fiscal year
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.
CHAD THERAPEUTICS, INC. 23
12
FINANCIAL CONDITION
At March 31, 1996, the Company had cash and marketable securities totaling
$2,838,000 or 26% 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 fiscal 1996, 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 18,000 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
$9,219,000 at March 31, 1996, in spite of the amounts utilized in the
aforementioned stock purchases. Accounts receivable increased $746,000 during
the period ended March 31, 1996, which related to increase in the 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 $2,166,000. 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 expects capital expenditures during the next twelve
months to be approximately $1,200,000, primarily related to the costs
associated with moving to new facilities in 1997. Also, the Company may make
additional stock repurchases pursuant to the Board of Directors authorization.
The Company does not provide post employment retirement benefits.
NEWLY ISSUED ACCOUNTING STANDARDS
In March, 1995, Statement of Financial Accounting Standards N. 121, "Accounting
for the Impairment of Long-lived 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. Company management does not believe
that the adoption of this new standard will 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. While the Company is still evaluating
Statement No. 123, it currently expects to elect 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. If the Company makes this election, Statement 123 will have
no impact on the Company's consolidated 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.
Rapid Technological Change
The health care industry is characterized by rapid technological
24 CHAD THERAPEUTICS, INC.
13
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 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 claims 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 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 risk factors may be listed from time to time in the reports filed by
the Company with the Securities and Exchange Commission.
CHAD THERAPEUTICS, INC. 25
14
OFFICERS
CHARLES R. ADAMS
Chief Executive Officer
FRANCIS R. FLEMING
President and
Chief Operating Officer
EARL L. YAGER
Senior Vice President,
Chief Financial Officer and Secretary
OSCAR J. SANCHEZ
Vice President, Manufacturing
LOUIE GORYOKA
Vice President, Quality Assurance
and Regulatory Affairs
DIRECTORS
CHARLES R. ADAMS
Chairman and Chief Executive Officer
Chad Therapeutics, Inc.
FRANCIS R. FLEMING
President
Chad Therapeutics, Inc.
EARL L. YAGER
Senior Vice President
Chad Therapeutics, Inc.
DAVID L. CUTTER
Retired Chairman Of The Board
Cutter Laboratories, Inc.
NORMAN COOPER
Retired Chairman
Kallir, Philips, Ross, Inc.
JOHN C. BOYD
Retired
PHILIP T. WOLFSTEIN
President
Wolfstein International, Inc.
CORPORATE DATA
CORPORATE HEADQUARTERS
9445 De Soto Avenue
Chatsworth, CA 91311
(818) 882-0883
LEGAL COUNSEL
Graham & James LLP
AUDITORS
KPMG Peat Marwick LLP
Los Angeles, California
TRANSFER AGENT AND REGISTRAR
American Stock Transfer Company
40 Wall Street
New York, NY 10005
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 I
split distributed October 15, 1993, and a 3 for 2 split distributed on October
16, 1995.
QUARTER ENDED HIGH LOW
-
June 30, 1994 6 4-1/8
September 30, 1994 6 5-1/16
December 31, 1994 5-1/2 4-1/2
March 31, 1995 6-5/8 4-5/8
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
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 17, 1996, there were approximately 318
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.
9445 De Soto Avenue
Chatsworth, CA 91311
26 CHAD THERAPEUTICS, INC.