-----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, WacJt4jAXE2ZKt1JFPup6ae8HBSVUQvM3lLQyu8V1z5c4HtGQoE+h3NjANY+E8VJ nc3xXkK4KCascpsFt1Vr+g== 0000950148-98-002440.txt : 19981113 0000950148-98-002440.hdr.sgml : 19981113 ACCESSION NUMBER: 0000950148-98-002440 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 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: SEC FILE NUMBER: 001-12214 FILM NUMBER: 98744655 BUSINESS ADDRESS: STREET 1: 21622 PLUMMER STREET CITY: CHATSWORTH STATE: CA ZIP: 91311 BUSINESS PHONE: 818-882-0883 MAIL ADDRESS: STREET 1: 21622 PLUMMER STREET 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: September 30, 1998 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 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 10,012,423 2 CHAD THERAPEUTICS, INC. Balance Sheets September 30, 1998 and March 31, 1998 ASSETS
September 30, March 31, 1998 1998 ------------- ------------- (Unaudited) Current assets: Cash $ 1,093,000 $ 1,579,000 Accounts receivable, less allowance for doubtful accounts of $49,000 at September 30, 1998 and $105,000 at March 31, 1998 2,683,000 2,469,000 Inventories (Note 2) 8,973,000 7,133,000 Income taxes refundable 54,000 572,000 Prepaid expenses 261,000 249,000 Deferred income taxes 64,000 64,000 ------------- ------------- Total current assets 13,128,000 12,066,000 Property and equipment, at cost 5,381,000 5,275,000 Less accumulated depreciation 1,712,000 1,310,000 ------------- ------------- Net property and equipment 3,669,000 3,965,000 ------------- ------------- Note receivable from related party 74,000 126,000 Other assets, net 1,242,000 1,279,000 ------------- ------------- Total assets $ 18,113,000 $ 17,436,000 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,082,000 $ 730,000 Accrued expenses 785,000 632,000 ------------- ------------- Total current liabilities 1,867,000 1,362,000 ------------- ------------- Shareholders' equity: Common shares, $.01 par value, authorized 40,000,000 shares; 10,012,000 and 10,008,000 shares issued and outstanding 13,085,000 13,100,000 Retained earnings 3,214,000 3,105,000 ------------- ------------- 16,299,000 16,205,000 Less treasury shares at cost, 13,000 and 19,000 shares (53,000) (131,000) ------------- ------------- Net shareholders' equity 16,246,000 16,074,000 ------------- ------------- Total liabilities and shareholders' equity $ 18,113,000 $ 17,436,000 ============= =============
See accompanying notes to financial statements. 3 CHAD THERAPEUTICS, INC. Statements of Earnings For the six months ended September 30, 1998 and 1997 (Unaudited)
Six Months Ended ------------------------------ 1998 1997 ---------- ---------- Net sales $8,057,000 $9,818,000 Cost of sales 4,603,000 4,619,000 ---------- ---------- Gross profit 3,454,000 5,199,000 Costs and expenses: Selling, general and administrative 2,982,000 3,118,000 Research and development 322,000 323,000 ---------- ---------- Total costs and expenses 3,304,000 3,441,000 ---------- ---------- Operating income 150,000 1,758,000 Other income - interest income 31,000 69,000 ---------- ---------- Earnings before income taxes 181,000 1,827,000 Income taxes 72,000 734,000 ---------- ---------- Net earnings $ 109,000 $1,093,000 ========== ========== Basic earnings per share $ .01 $ .11 ========== ========== Diluted earnings per share $ .01 $ .11 ========== ==========
See accompanying notes to financial statements. 4 CHAD THERAPEUTICS, INC. Statements of Earnings For the three months ended September 30, 1998 and 1997 (Unaudited)
Three Months Ended --------------------------------- 1998 1997 ----------- ----------- Net sales $ 3,860,000 $ 4,390,000 Cost of sales 2,346,000 2,176,000 ----------- ----------- Gross profit 1,514,000 2,214,000 Costs and expenses: Selling, general and administrative 1,411,000 1,581,000 Research and development 114,000 190,000 ----------- ----------- Total costs and expenses 1,525,000 1,771,000 ----------- ----------- Operating income (loss) (11,000) 443,000 Other income - interest income 14,000 42,000 ----------- ----------- Earnings before income taxes 3,000 485,000 Income taxes 1,000 196,000 ----------- ----------- Net earnings $ 2,000 $ 289,000 =========== =========== Basic earnings per share $ .00 $ .03 =========== =========== Diluted earnings per share $ .00 $ .03 =========== ===========
See accompanying notes to financial statements. 5 CHAD THERAPEUTICS, INC. Statement of Shareholders' Equity For the six months ended September 30, 1998 (Unaudited)
Common Shares Retained Treasury Shares Amount Earnings Shares ------------- ------------- ------------- ------------- Balance at March 31, 1998 10,008,000 $ 13,100,000 $ 3,105,000 $ (131,000) Exercise of stock options 4,000 24,000 -- -- Common Shares repurchased -- -- -- (69,000) Common Shares issued for purchases under employee benefit plan -- (39,000) -- 147,000 Net earnings -- -- 109,000 -- ------------- ------------- ------------- ------------- Balance at September 30, 1998 10,012,000 $ 13,085,000 $ 3,214,000 $ (53,000) ============= ============= ============= =============
See accompanying notes to financial statements. 6 CHAD THERAPEUTICS, INC. Statements of Cash Flows For the six months ended September 30, 1998 and 1997 (Unaudited)
Six Months Ended --------------------------------- 1998 1997 ----------- ----------- Cash flows from operating activities: Net earnings $ 109,000 $ 1,093,000 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 402,000 245,000 Compensation expense related to option grants -- 3,000 Changes in assets and liabilities: Decrease (increase) in accounts receivable (214,000) (61,000) Decrease (increase) in inventories (1,840,000) 794,000 Decrease (increase) in income taxes refundable 518,000 527,000 Decrease (increase) in prepaid expenses (12,000) (701,000) Decrease (increase) in deferred income taxes -- -- Decrease (increase) in note receivable from related party 52,000 (125,000) Decrease (increase) in other assets 37,000 (302,000) Increase (decrease) in accounts payable 352,000 238,000 Increase (decrease) in accrued expenses 153,000 220,000 Increase (decrease) in income taxes payable -- 207,000 ----------- ----------- Net cash provided by (used in) operating activities (443,000) 2,138,000 ----------- ----------- Cash flows from investing activities: Capital expenditures (106,000) (500,000) ----------- ----------- Net cash used in investing activities (106,000) (500,000) ----------- ----------- Cash flows from financing activities: Exercise of stock options 24,000 -- Common Shares repurchased (69,000) (253,000) Common Shares issued 108,000 101,000 ----------- ----------- Net cash provided by (used in) financing activities 63,000 (152,000) ----------- ----------- Net increase (decrease) in cash (486,000) 1,486,000 Cash beginning of period 1,579,000 2,289,000 ----------- ----------- Cash end of period $ 1,093,000 $ 3,775,000 =========== ===========
See accompanying notes to financial statements. 7 CHAD THERAPEUTICS, INC. September 30, 1998 (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, 1998, Annual Report and particularly to Note 1 which includes a summary of significant accounting policies. 2. Inventories Inventories at September 30, 1998, are summarized as follows: Finished goods $1,554,000 Work-in-process 1,066,000 Raw materials 6,353,000 ---------- $8,973,000 ==========
3. Earnings Per Common Share Following is a reconciliation of the numerators and denominators used in the calculation of basic and diluted earnings per common shares:
Three Months Ended Six Months Ended September 30 September 30 -------------------------------- -------------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Basic earnings per share: Numerator - net earnings $ 2,000 $ 289,000 $ 109,000 $ 1,093,000 Denominator - common shares outstanding 10,012,000 9,951,000 10,011,000 9,951,000 ----------- ----------- ----------- ----------- Basic earnings per share $ .00 $ .03 $ .01 $ .11 =========== =========== =========== =========== Diluted earnings per share: Numerator - net earnings $ 2,000 $ 289,000 $ 109,000 $ 1,093,000 Denominator: Common shares outstanding 10,012,000 9,951,000 10,011,000 9,951,000 Common stock options 46,000 285,000 81,000 261,000 ----------- ----------- ----------- ----------- 10,058,000 10,236,000 10,092,000 10,212,000 ----------- ----------- ----------- ----------- Diluted earnings per share $ .00 $ .03 $ .01 $ .11 =========== =========== =========== ===========
8 CHAD THERAPEUTICS, INC. September 30, 1998 (Unaudited) 3. Earnings Per Common Share (cont'd) Options to purchase 1,081,000 shares of common stock at prices ranging from $5.00 to $13.471 per share were not included in the computation of diluted earnings per share because the option price was greater than the average market price of the common shares. 4. Comprehensive Income The financial Accounting Standards Board issued Statement No. 130, Reporting Comprehensive Income ("SFAS 130"), in June, 1997. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The Company adopted SFAS No. 130 on April 1, 1998. Comprehensive income is the change in equity of a business enterprise during a period from transactions and all other events and circumstances from nonowner sources. Other comprehensive income includes foreign currency items, minimum pension liability adjustments and unrealized gains and losses on certain investments in debt and equity securities. The Company did not have components of other comprehensive income during the three and six month periods ended September 30, 1998 and 1997. As a result, comprehensive income is the same as the net income for the three and six month periods ended September 30, 1998 and 1997. 5. Income Taxes Income taxes have been provided for at an effective combined Federal and California rate of approximately 40% for all periods presented. 9 CHAD THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations September 30, 1998 Results of Operations Sales for the three and six months ended September 30, 1998, decreased $530,000 and $1,761,000 or 12.1% and 17.9%, respectively, from the prior year's periods. There were no price changes during 1997. While there have been limited price reductions in 1998, the decrease in sales relates primarily to decreases in domestic unit sales in 1998 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 14% and 10% of total sales for the six month periods ended September 30, 1998 and 1997, respectively. Currently, management expects an increase in sales to foreign distributors during the upcoming fiscal year and quarter to quarter sales will fluctuate depending on the timing of shipments. In addition, all foreign sales are transacted in US dollars, thus annual 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, such as the Company's products, which can extend the life of oxygen supplies and reduce service calls by dealers, thereby providing improved mobility for the patient and cost savings for dealers. 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 accounted for approximately 21% and 25% of the Company's domestic sales for the six month periods ended September 30, 1998 and 1997, respectively. Margins on these sales may be somewhat lower due to quantity pricing. In some instances consolidation has resulted in reduced purchases as the former independent provider complies with the chain's purchasing policies. 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 10 CHAD THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations September 30, 1998 Results of Operations (cont'd) 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. The Company believes that its revenues during the past two years have been affected by several factors. During the year ended March 31, 1998, management believes sales to national chain accounts decreased as programs to convert patients to more acceptable ambulatory systems in the previous year did not recur. In addition, during the periods ended September 30, 1998 and 1997, 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 were being discussed as part of the Federal budget process. This process has now been finalized and a 25% cut in home oxygen reimbursement went into effect January, 1998. The effects of managed care and concerns over the severity of reim- bursement cuts has, in many cases, resulted in the provision of systems to patients that do not provide truly ambulatory oxygen. Management believes these factors, including uncertainties as to how home care providers will respond to the 25% cut, may continue to adversely affect the Company's revenues from sales of oxygen conserving devices for the foreseeable future. Management also believes future revenues may be positively affected by sales of a new product, the TOTAL O(2)(TM) Delivery System. The TOTAL O(2) system provides stationary oxygen for patients at home, portable oxygen including an oxygen conserving device for ambulation and a safe and efficient mechanism for filling portable oxygen cylinders. This should provide home care dealers with a means to deal with the reimbursement cuts discussed above by reducing their monthly cost of servicing patients while at the same time providing a higher quality of service by maximizing ambulatory capability. The Company received clearance in November, 1997, to sell the new product from the Food and Drug Administration. The Company began shipping TOTAL O(2) systems in January and realized approximately $342,000 in sales during the quarter ended September 30, 1998. The rate of increase in TOTAL O(2) system sales has been slowed by several factors, including the overall home oxygen market climate as well as start-up manufacturing and related supplier quality issues. Although no assurances can be given, the Company now believes the manufacturing 11 CHAD THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations September 30, 1998 Results of Operations (cont'd) and supplier issues will be substantially resolved by December 31, 1998. The sales potential for the new system is significant as the average selling price is approximately four times that of the OXYMATIC and OXYLITE systems. No estimate can currently be made regarding the level of success the Company may achieve with the TOTAL O(2) system. For information which may affect the outcome of forward looking statements made in this paragraph see Outlook: Issues and Risks - New Product. Cost of sales as a percent of net sales increased from 49.6% to 60.8% and from 47.1% to 57.1%, respectively, for the three and six month periods ended September 30, 1998, as compared to the prior year's periods. Both periods have been affected by higher fixed overhead costs associated with the Company's move to new facilities in October, 1996. In addition, the periods ended September 30, 1998, have been affected by decreased sales volume and start-up costs associated with the manufacture of the TOTAL O(2) system. Management believes the gross margins should remain at or decline slightly from current levels in the future periods as TOTAL O(2) system sales increase. Selling, general and administrative expenditures decreased slightly from $1,581,000 to $1,411,000 and from $3,118,000 to $2,982,000 for the three and six month periods ended September 30, 1998, respectively. The Company does not anticipate a decrease in these expenses in the coming years. Research and development expenses decreased by $1,000 for the six months ended September 30, 1998, as compared to the prior year's period. Currently, management expects research and development expenditures to total approximately $800,000 in the fiscal year ended March 31, 1999, on projects to enhance and expand the Company's product line. Financial Condition At September 30, 1998, the Company had cash totaling $1,093,000 or 6% of total assets, as compared to $1,579,000 (9%) at March 31, 1998. Net working capital increased from $10,704,000 at March 31, 1998, to $11,261,000 at September 30, 1998. Accounts receivable increased $214,000 during the period ended September 30, 1998. 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 $1,840,000. This increase relates primarily to raw materials purchased for the manufacture of the new TOTAL O(2) product line. The Company attempts to maintain 12 CHAD THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations September 30, 1998 Financial Condition (cont'd) 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. However, should the Company need additional funds on a short term basis it has entered into an agreement with its bank to provide a line of credit for up to $2,000,000 which funds the Company intends to use, if necessary, for expansion of the TOTAL O(2) product line and for working capital purposes. The Company expects capital expenditures during the next twelve months to be approximately $750,000. 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 September 30, 1998, 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 Company purchased approximately 15,000 and 35,000 shares at a cost of $69,000 and $253,000 during the six month periods ended September 30, 1998 and 1997, respectively, 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. Year 2000 Management has initiated an enterprise-wide program to prepare the Company's computer systems and applications for the year 2000 and to ensure Year 2000 compliance by its customers and suppliers. The Company's products do not contain embedded chips that are date sensitive and thus they are not at risk for Year 2000 issues. The Company has completed the assessment of its internal computer hardware and software and plans to have all systems Year 2000 compliant by December 31, 1998. The Company is in the assessment stage for its third party relationships and plans to have this phase completed by December 31, 1998. 13 CHAD THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations September 30, 1998 Year 2000 (cont'd) At that time, any third parties representing a material risk to the Company who do not appear to be moving towards Year 2000 compliance should be identified and the Company will attempt to secure back up suppliers wherever possible. The Company expects to incur internal staff costs as well as consulting and other expenses related to infrastructure and facilities enhancements necessary to prepare the systems for the year 2000. The cost of testing and conversion of system applications is not expected to be material. A significant proportion of these costs are not likely to be incremental costs to the Company, but rather will represent the redeployment of existing information technology resources. The Company has not yet developed a contingency plan in the event of various problem scenarios, but will assess the need to develop such a plan based on the outcome of its survey of major customers and suppliers. If the Company is unsuccessful or if remediation efforts with key suppliers or customers are unsuccessful in dealing with Year 2000 problems, there may be a material adverse impact on the Company's results and financial condition. The Company is unable to quantify any potential adverse impact at this time. Newly Issued Accounting Standards The Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income" ("FAS 130") in June, 1997. FAS 130 establishes standards for reporting and display of comprehensive income and its components in financial statements. FAS 130 is effective for both interim and annual periods beginning after December 15, 1997. The Company had adopted FAS 130 in the quarter ended June 30, 1998. The adoption of FAS 130 did not have a material impact on the Company's financial position or results of operations. The Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131") in June, 1997. FAS 131 establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires enterprises to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. It replaces the "industry segment" concept of FAS No. 14 CHAD THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations September 30, 1998 Newly Issued Accounting Standards (cont'd) 14, "Financial Reporting for Segments of a Business Enterprise", with a "management approach" concept as to basis for identifying reportable segments. FAS 131 is effective for financial statements for periods beginning after December 15, 1997. The Company will adopt FAS 131 in the annual financial statements of the fiscal year ending March 31, 1999. Management believes the adoption of FAS 131 will not have a material impact on the Company's financial position or results of operations. 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. New Product The Company's future growth in the near term will depend in significant part upon the commercial success of the TOTAL O2 Delivery System. The success of this new product will depend upon the health care community's perception of the system's capabilities, clinical efficacy and benefit to patients, as well as timely resolution of manufacturing and supplier issues. In addition, prospective sales will be impacted by the degree of acceptance it achieves among home oxygen dealers and patients requiring supplementary oxygen. As with the introduction of any new product, the Company's ability to successfully promote the TOTAL O2 Delivery System cannot be assessed at this time. Consolidation of Home Care Industry The home health care industry is undergoing significant consolidation. As a result, the market for the Company's 15 CHAD THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations September 30, 1998 Consolidation of Home Care Industry (cont'd) products is increasingly influenced by major national chains. Three major national chains presently account for 21% 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. While the Company believes the quality of its products and its established reputation will continue to be a competitive advantage, some competitors have successfully introduced lower priced products which do not provide oxygen conserving capabilities comparable to the Company's products. No assurance can be given that increased competition in the home oxygen market will not continue to 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 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 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 16 CHAD THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations September 30, 1998 Potential Changes in Administration of Health Care (cont'd) has reduced Medicare spending. It cannot yet be predicted how changes in reimbursement levels will affect the home oxygen industry and there can be no assurance that such changes 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. 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. 17 CHAD THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations September 30, 1998 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 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. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHAD THERAPEUTICS, INC. (Registrant) Date 11/12/98 /S/ Thomas E. Jones --------------- --------------------------------------- Thomas E. Jones Chief Executive Officer Date 11/12/98 /S/ Earl L. Yager --------------- --------------------------------------- Earl L. Yager Senior Vice President, Chief Financial Officer and Secretary EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS MAR-31-1999 APR-01-1998 SEP-30-1998 1,093 0 2,683 0 8,973 13,128 5,381 1,712 18,113 1,867 0 0 0 13,085 3,161 18,113 8,057 0 4,603 3,304 0 0 0 181 72 0 0 0 0 109 .01 .01
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