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: June 30, 1997
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.)
21622 Plummer Street, 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 9,951,117
2
CHAD THERAPEUTICS, INC.
Balance Sheets
June 30, 1997 and March 31, 1997
ASSETS
June 30, March 31,
1997 1997
----------- -----------
(Unaudited)
Current assets:
Cash $ 3,154,000 $ 2,289,000
Accounts receivable, less allowance for
doubtful accounts of $110,000 at
June 30, 1997 and $107,000 at
March 31, 1997 2,782,000 2,329,000
Inventories (Note 2) 5,134,000 6,063,000
Income taxes refundable - 527,000
Prepaid expenses 508,000 172,000
Deferred income taxes 356,000 356,000
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Total current assets 11,934,000 11,736,000
Property and equipment, at cost 4,084,000 3,844,000
Less accumulated depreciation 840,000 717,000
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Net property and equipment 3,244,000 3,127,000
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Other assets, net 1,297,000 998,000
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Total assets $16,475,000 $15,861,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 172,000 $ 344,000
Accrued expenses 575,000 407,000
Income taxes payable 11,000 -
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Total current liabilities 758,000 751,000
Shareholders' equity:
Common shares, $.01 par value, authorized
40,000,000 shares; 9,951,000 and 9,951,000
shares issued and outstanding 12,820,000 12,834,000
Retained earnings 3,112,000 2,308,000
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15,932,000 15,142,000
Less treasury shares at cost, 30,000 and
3,000 shares (215,000) (32,000)
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Net shareholders' equity 15,717,000 15,110,000
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Total liabilities and shareholders' equity $16,475,000 $15,861,000
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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 June 30, 1997 and 1996
(Unaudited)
Three Months Ended
1997 1996
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Net sales $ 5,428,000 $ 7,772,000
Cost of sales 2,443,000 3,179,000
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Gross profit 2,985,000 4,593,000
Costs and expenses:
Selling, general and administrative 1,537,000 1,639,000
Research and development 133,000 275,000
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Total costs and expenses 1,670,000 1,914,000
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Operating income 1,315,000 2,679,000
Other income - interest income 27,000 27,000
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Earnings before income taxes 1,342,000 2,706,000
Income taxes 538,000 1,082,000
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Net earnings $ 804,000 $ 1,624,000
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Net earnings per share $ .08 $ .16
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Weighted average number of common shares
(Note 3) 10,187,000 10,364,000
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See accompanying notes to financial statements.
4
CHAD THERAPEUTICS, INC.
Statement of Shareholders' Equity
For the three months ended June 30, 1997
(Unaudited)
Common Shares Retained Treasury
Shares Amount Earnings Shares
--------- ------------ ----------- -----------
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 - (14,000) - 70,000
Net earnings - - 804,000 -
--------- ----------- ----------- ----------
Balance at
June 30, 1997 9,951,000 $12,820,000 $ 3,112,000 $ (215,000)
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See accompanying notes to financial statements.
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CHAD THERAPEUTICS, INC.
Statements of Cash Flows
For the three months ended June 30, 1997 and 1996
(Unaudited)
Three Months Ended
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1997 1996
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Cash flows from operating activities:
Net earnings $ 804,000 $ 1,624,000
Adjustments to reconcile net earnings to
net cash used in operating activities:
Depreciation and amortization 123,000 34,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable (453,000) (1,598,000)
Decrease (increase) in inventories 929,000 (353,000)
Decrease (increase) in income taxes
refundable 527,000 -
Decrease (increase) in prepaid expenses (336,000) (412,000)
Decrease (increase) in deferred income taxes - -
Decrease (increase) in other assets (299,000) (173,000)
Increase (decrease) in accounts payable (172,000) 467,000
Increase (decrease) in accrued expenses 168,000 471,000
Increase (decrease) in income taxes payable 11,000 872,000
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Net cash provided by
operating activities 1,302,000 932,000
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Cash flows from investing activities:
Increase in marketable securities - (400,000)
Capital expenditures (240,000) (56,000)
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Net cash used in investing
activities (240,000) (456,000)
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Cash flows from financing activities:
Exercise of stock options - 46,000
Common Shares repurchased (253,000) -
Common Shares issued 56,000 48,000
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Net cash provided by (used in)
financing activities (197,000) 94,000
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Net increase in cash 865,000 570,000
Cash beginning of period 2,289,000 1,809,000
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Cash end of period $3,154,000 $ 2,379,000
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See accompanying notes to financial statements.
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CHAD THERAPEUTICS, INC.
June 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 June 30, 1997, are summarized as follows:
Finished goods $ 705,000
Work-in-process 1,408,000
Raw materials 3,021,000
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$5,134,000
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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.
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CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 1997
Results of Operations
Sales for the three months ended June 30, 1997, decreased $2,344,000 or
30.2% from the prior year's period. 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 8.7% and 10.0% of total sales for
the periods ended June 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 increased
mobility afforded by oxygen conserving devices such as the Company's
products.
In addition, other changes in the health care delivery system - including
the increase in the acceptance and utilization of managed care - have
stimulated a significant consolidation among home oxygen dealers. As major
national and regional home medical equipment chains attempt to secure
managed care contracts and improve their market position, they have
expanded their distribution networks through the acquisition of independent
dealers in strategic areas. Three major national chains presently account
for approxi mately 23% 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.
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CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 1997
Results of Operations (continued)
The Company believes that its revenues at the end of fiscal 1997 and during
the quarter ended June 30, 1997, was affected by several factors. During
the quarter ended June 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 reimbursement which are being
discussed as part of the Federal budget process. 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
affect the Company's revenues for at least the first half of the year ended
March 31, 1998.
Cost of sales as a percent of net sales increased from 40.9% to 45.0% for
the period ended June 30, 1997, as compared to the prior year's period. The
current period has been affected by higher fixed overhead costs associated
with the Company's move to new facilities in October 1996, and decreased
sales volume. Management believes the cost per unit should remain at or
near current levels in future periods.
Selling, general and administrative expenditures decreased from $1,639,000
to $1,537,000 for the periods ended June 30, 1996 and 1997, respectively;
however, these expenses increased as a percentage of net sales from 21.1%
to 28.3% due to the decrease in sales volume. Research and develop ment
expenses decreased by $142,000 for the period ended June 30, 1997, as
compared to the prior year's period. Currently, management expects research
and development expenditures to total approximately $950,000 in the fiscal
year ended March 31, 1998, on projects to enhance and expand the Company's
product line. Research and development expenditures totaled $910,000 for
the year ended March 31, 1997.
The Company has 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 June 30, 1997, the Company had cash totaling $3,154,000 or 19% of total
assets, as compared to $2,289,000 (15%) at March 31, 1997. Net working
capital increased from
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CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 1997
Financial Condition (continued)
$10,985,000 at March 31, 1997, to $11,176,000 at June 30, 1997. Accounts
receivable increased $453,000 during the period ended June 30, 1997, which
related to an increase in sales from the quarter ended March 31, 1997.
Future in creases 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 $929,000.
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 period ended June 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 period ended June 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 ending after December 31, 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.
10
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 1997
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 uncertainties 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:
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
23% of the Company's domestic sales. Future sales may be increasingly
dependent on a limited number of customers which may have an impact on
margins due to quantity pricing.
Competition
Chad's success over the past several years has drawn new competition to vie
for a share of the home oxygen market. These new competitors include both
small and very large companies. The Company believes the quality of its
products and its established reputation will continue to be a competitive
advantage; however, no assurance can be given that increased competition in
the home oxygen market will not have an adverse affect on the Company's
operations.
Rapid Technological Change
The health care industry is characterized by rapid technological change.
The Company's products may become obsolete as a result of new developments.
The Company's ability to remain competitive will depend to a large extent
upon its ability to anticipate and stay abreast of new technological
developments related to oxygen therapy. The Company has limited internal
research and development capabilities.
11
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 1997
Rapid Technological Change (continued)
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 meaningful 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 marketed by the
Company do not receive patent protection, competitors may be able to
manufacture and market substantially similar products. Such competition
could have an adverse impact upon the Company's business.
Products Liability
The nature of the Company's business subjects it to potential legal
actions asserting that the Company is liable for damages for product
liability claims. Although the Company maintains products liability
insurance in an amount which it believes to be customary in the industry,
there is no assurance that this insurance will be sufficient to cover the
costs of defense or judgments which might be entered against the Company.
The type and frequency of these claims could have an adverse impact on the
Company's results of operations and financial position.
12
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 1997
Availability of Third Party Component Products
The Company tests and packages its products in its own facility. Some of
its other manufacturing processes are conducted by other firms and the
Company expects to continue using outside firms for certain manufacturing
processes for the foreseeable future. The Company's agreements with its
suppliers are terminable at will or by notice. The Company believes that
other suppliers would be available in the event of termination of these
arrangements. No assurance can be given, however, that the Company will not
suffer a material disruption in the supply of its products.
Accounting Standards
Accounting standards promulgated by the Financial Accounting Standards
Board change periodically. Changes in such standards may have an impact on
the Company's future reported earnings and financial position.
Additional Risk Factors
Additional factors which might affect the Company's performance may be
listed from time to time in the reports filed by the Company with the
Securities and Exchange Commission.
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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 08/14/97 /S/ Charles R. Adams
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Charles R. Adams
Chief Executive Officer
Date 08/14/97 /S/ Earl L. Yager
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Earl L. Yager
Senior Vice President, Chief
Financial Officer and Secretary