-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HrATYtuQLSlOb6HqjQmn6aTl6rMhnsS2ZIjkCuK14URbATPirawWr75cxESusmCL 9jFHShM1YbWkaQCzgQyFsw== 0000950148-97-000316.txt : 19970222 0000950148-97-000316.hdr.sgml : 19970222 ACCESSION NUMBER: 0000950148-97-000316 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970212 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHAD THERAPEUTICS INC CENTRAL INDEX KEY: 0000713492 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 953792700 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12214 FILM NUMBER: 97525310 BUSINESS ADDRESS: STREET 1: 9445 DE SOTO AVE CITY: CHATSWORTH STATE: CA ZIP: 91311 BUSINESS PHONE: 8188820883 MAIL ADDRESS: STREET 1: 9445 DE SOTO AVE CITY: CHATSWORTH STATE: CA ZIP: 91311 10-Q 1 FORM 10-Q 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, 1996 Commission file number: 0-11363 CHAD THERAPEUTICS, INC. ----------------------- (Exact name of registrant as specified in its charter) California 95-3792700 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 21622 Plummer Street, Chatsworth, CA 91311 --------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (818) 882-0883 -------------- (Registrant's telephone number, including area code) (Former 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 9,948,460 2 CHAD THERAPEUTICS, INC. Balance Sheets December 31, 1996 and March 31, 1996 ASSETS
December 31, March 31, 1996 1996 ------------ ----------- (Unaudited) Current assets: Cash $ 1,136,000 $ 1,809,000 Marketable securities 1,001,000 1,029,000 Accounts receivable, less allowance for doubtful accounts of $118,000 at December 31, 1996, and $92,000 at March 31, 1996 3,029,000 2,872,000 Inventories (Note 2) 6,050,000 4,011,000 Income taxes refundable 418,000 - Prepaid expenses 294,000 145,000 Deferred income taxes 356,000 356,000 ----------- ----------- Total current assets 12,284,000 10,222,000 Property and equipment, at cost 3,499,000 1,074,000 Less accumulated depreciation 674,000 574,000 ----------- ----------- Net property and equipment 2,825,000 500,000 ----------- ----------- Other assets, net 698,000 56,000 ----------- ----------- Total assets $15,807,000 $10,778,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable $ 719,000 $ 399,000 Accrued expenses 718,000 424,000 Income taxes payable - 180,000 ----------- ----------- Total current liabilities 1,437,000 1,003,000 ----------- ----------- Shareholders' equity: Common shares, $.01 par value, authorized 40,000,000 shares; 9,634,000 and 9,623,000 shares issued and outstanding 12,764,000 6,791,000 Retained earnings 1,606,000 3,052,000 ----------- ----------- 14,370,000 9,843,000 Less treasury shares at cost, 5,000 shares - (68,000) ----------- ----------- Net shareholders' equity 14,370,000 9,775,000 ----------- ----------- Total liabilities and shareholders' equity $15,807,000 $10,778,000 =========== ===========
See accompanying notes to financial statements. 3 CHAD THERAPEUTICS, INC. Statements of Earnings For the nine months ended December 31, 1996 and 1995 (Unaudited)
Nine Months Ended ----------------- 1996 1995 ---- ---- Net sales $21,084,000 $15,188,000 Cost of sales 9,073,000 6,542,000 ----------- ----------- Gross profit 12,011,000 8,646,000 Costs and expenses: Selling, general and administrative 4,183,000 3,782,000 Research and development 697,000 92,000 ----------- ----------- Total costs and expenses 4,880,000 3,874,000 ----------- ----------- Operating income 7,131,000 4,772,000 Other income - interest income 89,000 75,000 ----------- ----------- Earnings before income taxes 7,220,000 4,847,000 Income taxes 2,887,000 1,931,000 ----------- ----------- Net earnings $ 4,333,000 $ 2,916,000 =========== =========== Net earnings per share $ .42 $ .29 =========== =========== Weighted average number of common shares (Note 3) 10,388,000 10,204,000 =========== ===========
See accompanying notes to financial statements. 4 CHAD THERAPEUTICS, INC. Statements of Earnings For the three months ended December 31, 1996 and 1995 (Unaudited)
Three Months Ended ------------------ 1996 1995 ---- ---- Net sales $5,955,000 $4,641,000 Cost of sales 2,794,000 2,004,000 ---------- ---------- Gross profit 3,161,000 2,637,000 Costs and expenses: Selling, general and administrative 1,075,000 1,077,000 Research and development 284,000 37,000 ---------- ---------- Total costs and expenses 1,359,000 1,114,000 ---------- ---------- Operating income 1,802,000 1,523,000 Other income - interest income 27,000 32,000 ---------- ---------- Earnings before income taxes 1,829,000 1,555,000 Income taxes 730,000 615,000 ---------- ---------- Net earnings $1,099,000 $ 940,000 ========== ========== Net earnings per share $ .11 $ .09 ========== ========== Weighted average number of common shares (Note 3) 10,396,000 10,322,000 ========== ==========
See accompanying notes to financial statements. 5 CHAD THERAPEUTICS, INC. Statement of Shareholders' Equity For the nine months ended December 31, 1996 (Unaudited)
Common Shares Retained Treasury Shares Amount Earnings Shares --------- ---------- ------------ -------- Balance at March 31, 1996 9,623,000 $ 6,791,000 $ 3,052,000 $(68,000) Exercise of stock options 38,000 206,000 - - Common shares retired (2,000) (32,000) - - Common shares issued for purchases under employee benefit plan - 20,000 - 68,000 3% stock dividend 289,000 5,779,000 (5,779,000) - Net earnings - - 4,333,000 - --------- ----------- ----------- -------- Balance at December 31, 1996 9,948,000 $12,764,000 $ 1,606,000 $ - ========= =========== =========== ========
See accompanying notes to financial statements. 6 CHAD THERAPEUTICS, INC. Statements of Cash Flows For the nine months ended December 31, 1996 and 1995 (Unaudited)
Nine Months Ended ----------------- 1996 1995 ---- ---- Cash flows from operating activities: Net earnings $ 4,333,000 $ 2,916,000 Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation and amortization 133,000 79,000 Changes in assets and liabilities: Decrease (increase) in accounts receivable (157,000) (679,000) Decrease (increase) in inventories (2,039,000) (1,636,000) Decrease (increase) in income taxes refundable (418,000) (70,000) Decrease (increase) in prepaid expenses (149,000) (17,000) Decrease (increase) in deferred income taxes - 80,000 Decrease (increase) in other assets (642,000) (154,000) Increase (decrease) in accounts payable 320,000 42,000 Increase (decrease) in accrued expenses 294,000 488,000 Increase (decrease) in income taxes payable (180,000) - ----------- ----------- Net cash provided by operating activities 1,495,000 1,049,000 ----------- ----------- Cash flows from investing activities: Decrease (increase) in marketable securities 28,000 (1,240,000) Capital expenditures (2,458,000) (219,000) ----------- ----------- Net cash (used in) investing activities (2,430,000) (1,459,000) ----------- ----------- Cash flows from financing activities: Exercise of stock options 206,000 60,000 Common shares repurchased (32,000) (620,000) Common shares issued 88,000 40,000 Other - 3,000 ----------- ----------- Net cash provided by (used in) financing activities 262,000 (517,000) ----------- ----------- Net increase (decrease) in cash (673,000) (927,000) Cash beginning of period 1,809,000 1,219,000 ----------- ----------- Cash end of period $ 1,136,000 $ 292,000 =========== ===========
See accompanying notes to financial statements. 7 CHAD THERAPEUTICS, INC. December 31, 1996 (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 18, 19, 20 and 21 of the March 31, 1996, Annual Report and particularly to Note 1 which includes a summary of significant accounting policies. 2. Inventories Inventories at December 31, 1996, are summarized as follows: Finished goods $ 940,000 Work-in-Process 1,407,000 Raw materials 3,703,000 ---------- $6,050,000 ==========
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 December 31, 1995, have been restated for the 3% stock dividend distributed on October 15, 1996. 8 CHAD THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations December 31, 1996 Results of Operations Sales for the three and nine months ended December 31, 1996, increased $1,314,000 and $5,896,000 or 28.3% and 38.8%, 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 13% and 10% of total sales for the nine month periods ended December 31, 1996 and 1995, respectively, as these sales increased at a 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. Three major national chains presently account for approximately 34% of the Company's domestic sales. This percentage is approximately equal to these chains total market share in the home oxygen business. 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 9 Management's Discussion and Analysis of Financial Condition and Results of Operations December 31, 1996 Results of Operations (continued) 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. The Company believes that its rate of growth for the third quarter reflects a seasonal trend which has manifested itself as the Company expands its operations. Sales have tended to grow at a more moderate rate during the winter months. The 28% rate of growth for this past quarter approximates the 27% growth in sales for the third quarter of last year as compared to the prior year's third quarter. Also affecting dollar sales growth was a change in the Company's product sales mix. Cost of sales as a percent of net sales were 46.9% and 43.1% for the three months ended December 31, 1996 and 1995, respectively, and 43.1% to 43% for the nine months ended December 31, 1996 and 1995, respectively. The current period has been affected by decreased productivity related to the Company's move to new facilities in October. Management believes the cost per unit should return to historical levels in future periods. Selling, general and administrative expenditures decreased as a percentage of net sales for the three and nine months ended December 31, 1996, from 23.2% to 18.1% and from 24.9% to 19.8%, 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 $247,000 and $605,000 for the three and nine months ended December 31, 1996, respectively, as compared to the prior year's periods. Currently, management expects research and development expenditures to total approximately $800,000 in the fiscal year ended March 31, 1997, 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. Financial Condition At December 31, 1996, the Company had cash and marketable securities totaling $2,137,000 or 14% of total assets, as compared to $2,838,000 (26%) at March 31, 1996. Approximately, $2,400,000 has been expended through December 31, 1996, for capital expenditures associated with the construction of the Company's new corporate headquarters. Net working 10 CHAD THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations December 31, 1996 Financial Condition (continued) capital increased from $9,219,000 at March 31, 1996, to $10,847,000 at December 31, 1996. Accounts receivable increased $157,000 during the period ended December 31, 1996, which related to the increase in 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 $2,039,000. 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 $750,000, primarily related to the costs associated with moving to new facilities in the fall of 1996. 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 nine month period ended December 31, 1996, 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. The number of shares which may be purchased under these programs can not be predicted at this time. The Company does not provide post employment retirement benefits. Newly Issued Accounting Standards In March, 1995, Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-lives 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. The adoption of this new standard did not 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. The Company will continue to measure compensation costs under APB Opinion No. 25, "Accounting for Stock Issued to Employees" and will comply 11 CHAD THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations December 31, 1996 Newly Issued Accounting Standards (continued) with the pro forma disclosure requirements of Statement No.123 in its annual 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. 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 34% 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. Historically, the Company has contracted with outside parties to develop new products. Some of the Company's 12 CHAD THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations December 31, 1996 Rapid Technological Change (continued) 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 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. 13 CHAD THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations December 31, 1996 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. 14 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 2/12/97 /s/ Charles R. Adams -------------------- ---------------------------------- Charles R. Adams Chief Executive Officer Date 2/12/97 /s/ Earl L. Yager -------------------- ---------------------------------- Earl L. Yager Senior Vice President, Chief Financial Officer and Secretary EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 9-MOS MAR-31-1997 APR-01-1996 DEC-31-1996 1,000 1,136 1,001 3,029 0 6,050 12,284 3,499 674 15,807 1,437 0 0 0 12,764 1,606 15,807 21,084 0 9,073 4,880 0 0 0 7,220 2,887 0 0 0 0 4,333 .42 0
-----END PRIVACY-ENHANCED MESSAGE-----