-----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, R3mlDnszVlX243Xj/QZnzs8v+4ouUz5+ILSXZQxyNsRV+CYh3/PuV6T9ZF6GYbql J3Xdw04uhKuulCC3wB0mhw== 0000950148-99-002393.txt : 19991115 0000950148-99-002393.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950148-99-002393 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99746734 BUSINESS ADDRESS: STREET 1: 21622 PLUMMER STREET CITY: CHATSWORTH STATE: CA ZIP: 91311 BUSINESS PHONE: 8188820883 MAIL ADDRESS: STREET 1: 21622 PLUMMER STREET CITY: CHATSWORTH STATE: CA ZIP: 91311 10-Q 1 FORM 10-Q (9/30/1999) 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, 1999 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 10,019,368 2 CHAD THERAPEUTICS, INC. Balance Sheets September 30, 1999 and March 31, 1999 ASSETS
September 30, March 31, 1999 1999 ------------- ----------- (Unaudited) Current assets: Cash $ 1,804,000 $ 137,000 Accounts receivable, less allowance for doubtful accounts of $94,000 at September 30, 1999 and $88,000 at March 31, 1999 2,279,000 2,165,000 Inventories (Note 2) 6,353,000 7,642,000 Income taxes refundable 175,000 687,000 Prepaid expenses 272,000 294,000 Deferred income taxes 445,000 445,000 ----------- ----------- Total current assets 11,328,000 11,370,000 Property and equipment, at cost 5,425,000 5,366,000 Less accumulated depreciation 2,484,000 2,086,000 ----------- ----------- Net property and equipment 2,941,000 3,280,000 ----------- ----------- Other assets, net 1,136,000 1,249,000 ----------- ----------- Total assets $15,405,000 $15,899,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 266,000 $ 227,000 Accrued expenses 1,022,000 979,000 ----------- ----------- Total current liabilities 1,288,000 1,206,000 ----------- ----------- Shareholders' equity: Common shares, $.01 par value, authorized 40,000,000 shares; 10,019,000 and 10,012,000 shares issued and outstanding 13,064,000 13,052,000 Retained earnings 1,053,000 1,641,000 ----------- ----------- Total shareholders' equity 14,117,000 14,693,000 ----------- ----------- Total liabilities and shareholders' equity $15,405,000 $15,899,000 =========== ===========
See accompanying notes to financial statements. 3 CHAD THERAPEUTICS, INC. Statements of Operations For the six months ended September 30, 1999 and 1998 (Unaudited)
Six Months Ended September 30 -------------------------------- 1999 1998 ------------ ------------ Net sales $ 7,054,000 $ 8,057,000 Cost of sales 4,625,000 4,603,000 ------------ ------------ Gross profit 2,429,000 3,454,000 Costs and expenses: Selling, general and administrative 2,864,000 2,982,000 Research and development 282,000 322,000 ------------ ------------ Total costs and expenses 3,146,000 3,304,000 ------------ ------------ Operating income (loss) (717,000) 150,000 Other income - interest income, net 7,000 31,000 ------------ ------------ Earnings (loss) before income taxes (710,000) 181,000 Income tax expense (benefit) (122,000) 72,000 ------------ ------------ Net earnings (loss) $ (588,000) $ 109,000 ============ ============ Basic earnings (loss) per share $ (.06) $ .01 ============ ============ Diluted earnings (loss) per share $ (.06) $ .01 ============ ============ Weighted shares outstanding: Basic 10,017,000 10,011,000 Diluted 10,017,000 10,092,000 ============ ============
See accompanying notes to financial statements. 4 CHAD THERAPEUTICS, INC. Statements of Operations For the three months ended September 30, 1999 and 1998 (Unaudited)
Three Months Ended September 30 -------------------------------- 1999 1998 ------------ ------------ Net sales $ 3,416,000 $ 3,860,000 Cost of sales 2,308,000 2,346,000 ------------ ------------ Gross profit 1,108,000 1,514,000 Costs and expenses: Selling, general and administrative 1,445,000 1,411,000 Research and development 127,000 114,000 ------------ ------------ Total costs and expenses 1,572,000 1,525,000 ------------ ------------ Operating income (loss) (464,000) (11,000) Other income - interest income, net 8,000 14,000 ------------ ------------ Earnings (loss) before income taxes (456,000) 3,000 Income tax expense (benefit) (22,000) 1,000 ------------ ------------ Net earnings (loss) $ (434,000) $ 2,000 ============ ============ Basic earnings (loss) per share $ (.04) $ .00 ============ ============ Diluted earnings (loss) per share $ (.04) $ .00 ============ ============ Weighted shares outstanding: Basic 10,019,000 10,012,000 Diluted 10,019,000 10,058,000 ============ ============
See accompanying notes to financial statements. 5 CHAD THERAPEUTICS, INC. Statement of Shareholders' Equity For the six months ended September 30, 1999 (Unaudited)
Common Shares Retained Shares Amount Earnings ----------- ----------- ----------- Balance at March 31, 1999 10,012,000 $13,052,000 $ 1,641,000 Common Shares issued in lieu of cash for directors fees 7,000 12,000 -- Net loss -- -- (588,000) ----------- ----------- ----------- Balance at September 30, 1999 10,019,000 $13,064,000 $ 1,053,000 =========== =========== ===========
See accompanying notes to financial statements. 6 CHAD THERAPEUTICS, INC. Statements of Cash Flows For the six months ended September 30, 1999 and 1998 (Unaudited)
Six Months Ended September 30 ------------------------------ 1999 1998 ----------- ----------- Cash flows from operating activities: Net earnings (loss) $ (588,000) $ 109,000 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 398,000 402,000 Compensation expense related to stock issued 12,000 -- Changes in assets and liabilities: Decrease (increase) in accounts receivable (114,000) (214,000) Decrease (increase) in inventories 1,289,000 (1,840,000) Decrease (increase) in income taxes refundable 512,000 518,000 Decrease (increase) in prepaid expenses 22,000 (12,000) Decrease (increase) in other assets 113,000 89,000 Increase (decrease) in accounts payable 39,000 352,000 Increase (decrease) in accrued expenses 43,000 153,000 ----------- ----------- Net cash provided by (used in) operating activities 1,726,000 (443,000) ----------- ----------- Cash flows from investing activities: Capital expenditures (59,000) (106,000) ----------- ----------- Net cash used in investing activities (59,000) (106,000) ----------- ----------- Cash flows from financing activities: Exercise of stock options -- 24,000 Common shares repurchased -- (69,000) Common shares issued -- 108,000 ----------- ----------- Net cash provided by financing activities -- 63,000 ----------- ----------- Net increase (decrease) in cash 1,667,000 (486,000) Cash beginning of period 137,000 1,579,000 ----------- ----------- Cash end of period $ 1,804,000 $ 1,093,000 =========== ===========
See accompanying notes to financial statements. 7 CHAD THERAPEUTICS, INC. September 30, 1999 (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 10, 11, 12 and 13 of the March 31, 1999, Annual Report and particularly to Note 1 which includes a summary of significant accounting policies. Certain reclassifications have been made to the prior period's balances to conform to the 1999 presentation. 2. Inventories Inventories in 1999, are summarized as follows:
September 30 March 31 ------------ ---------- Finished goods $1,356,000 1,619,000 Work-in-process 1,277,000 1,278,000 Raw materials 3,720,000 4,745,000 ---------- ---------- $6,353,000 7,642,000 ========== ==========
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 ----------------------------- ----------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Basic earnings per share: Numerator-net earnings (loss) $ (434,000) $ 2,000 $ (588,000) $ 109,000 Denominator-common shares outstanding 10,019,000 10,012,000 10,017,000 10,011,000 ------------ ------------ ------------ ------------ Basic earnings (loss) per share $ (.04) $ .00 $ (.06) $ .01 ============ ============ ============ ============ Diluted earnings per share: Numerator-net earnings (loss) $ (434,000) $ 2,000 $ (588,000) $ 109,000 Denominator: Common shares outstanding 10,019,000 10,012,000 10,017,000 10,011,000 Common stock options -- 46,000 -- 81,000 ------------ ------------ ------------ ------------ 10,019,000 10,058,000 10,017,000 10,092,000 ------------ ------------ ------------ ------------ Diluted earnings (loss) per share $ (.04) $ .00 $ (.06) $ .01 ============ ============ ============ ============
8 CHAD THERAPEUTICS, INC. September 30, 1999 (Unaudited) 3. Earnings Per Common Share (cont'd) Options to purchase 1,141,000 and 1,041,000 shares of common stock at prices ranging from $1.00 to $13.47 per share were not included in the computation of diluted earnings per share for the three and six month periods ended September 30, 1999, respectively, because their effect would have been anti-dilutive. 4. Income Taxes Income taxes have been provided for at an effective combined Federal and California rate of approximately 17% and 40% for the periods ended September 30, 1999 and 1998, respectively. The income tax benefit for the six month period ended September 30, 1999, relates primarily to Federal income tax carrybacks. The Company has approximately $300,000 in Federal income tax net operating loss carryforwards generated in the periods ended September 30, 1999, for which the income tax benefit has not been recognized. 5. Geographic Information The Company has one reportable operating segment. Geographic information regarding the Company's sales is as follows:
Three Months Ended Six Months Ended September 30 September 30 ------------------------ ------------------------ 1999 1998 1999 1998 ---------- ---------- ---------- ---------- United States $3,096,000 3,344,000 6,326,000 6,954,000 Germany 3,000 274,000 39,000 573,000 All other countries 317,000 242,000 689,000 530,000 ---------- ---------- ---------- ---------- $3,416,000 3,860,000 7,054,000 8,057,000 ========== ========== ========== ==========
All long-lived assets are located in the United States. Sales of OXYMATIC(R) conservers and OXYLITE(R) systems accounted for 51% and 68% of the Company's sales for the six month periods ended September 30, 1999 and 1998, respectively. 9 CHAD THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations September 30, 1999 Results of Operations Sales for the three and six months ended September 30, 1999, decreased $444,000 (11.5%) and $1,003,000 (12.5%), respectively, from the prior year's periods. While there have been price reductions in 1999 and 1998, the decrease in sales relates primarily to decreases in domestic unit 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 10% and 14% of total sales for the six month periods ended September 30, 1999 and 1998, respectively. Currently, management expects a decrease 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% of the Company's domestic sales for the six months ended both September 30, 1999 and 1998. 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 for dealers to increase revenues 10 CHAD THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations September 30, 1999 Results of Operations (cont'd) 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 adversely affected by several factors. During the three and six month periods ended September 30, 1999 and 1998, sales to national chain accounts as well as independent dealers have been impacted by increased competitive factors and uncertainties regarding the size of cuts in Medicare home oxygen reimbursement which were enacted as part of the Federal budget process during the year ended March 31, 1998. This process was finalized and a 25% cut in home oxygen reimbursement went into effect January, 1998, with an additional 5% cut effective January 1, 1999. 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, including uncertainties as to how home care providers are responding to the 25% and 5% cuts, 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 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, 1998, and realized approximately $1,342,000 and $560,000 in sales during the six month periods ended September 30, 1999 and 1998, respectively. Initial sales of the TOTAL O(2) system have been adversely affected by several factors, including the overall home oxygen market climate as well as start-up manufacturing and related supplier quality issues. The Company has taken a number of steps to resolve the manufacturing and supplier issues. 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 11 CHAD THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations September 30, 1999 Results of Operations (cont'd) 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 60.7% to 67.6% and from 57.1% to 65.6% for the three and six month periods ended September 30, 1999, as compared to the prior year's periods. Both periods 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 improve in the future periods if sales increase. Selling, general and administrative expenditures increased from $1,411,000 to $1,445,000 and decreased from $2,982,000 to $2,864,000 for the three and six month periods ended September 30, 1999 and 1998, respectively. The Company anticipates that recent cost reduction efforts should align staffing and operating expenses more closely with current sales expectations, but will be offset to some extent by commissions to be paid to the Company's new field sales force of manufacturer's representatives. This field sales force has recently been hired and trained, and now provides full coverage in the United States. Historically, the Company has relied entirely on its internal sales personnel and extensive marketing efforts to generate sales. The shift to a field sales force will cause selling, general and administrative expenses to fluctuate more closely with sales volume. Research and development expenses decreased by $40,000 for the six month period ended September 30, 1999, as compared to the prior year's period. Currently, management expects research and development expenditures to total approximately $525,000 in the fiscal year ended March 31, 2000, on projects to enhance and expand the Company's product line. Interest income declined $24,000 for the six month period ended September 30, 1999, as compared to the prior year's period due to the reduction in the Company's cash balances. Financial Condition At September 30, 1999, the Company had cash totaling $1,804,000 or 12% of total assets, as compared to $137,000 (1%) at March 31, 1999. Net working capital increased from $10,164,000 at March 31, 1999 to $10,195,000 at September 30, 1999. Accounts receivable increased $114,000 during the six month period ended September 30, 1999. Future increases or decreases in accounts receivable will generally coincide with sales volume fluctuations and the timing of shipments 12 CHAD THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations September 30, 1999 Financial Condition (cont'd) to foreign customers. During the same period, inventories decreased $1,289,000. This decrease relates primarily to utilization of raw materials purchased in the prior year for the manufacture of the new TOTAL O(2) product line. 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 and income tax refunds should be adequate to meet the Company's present cash requirements. The Company expects capital expenditures during the next twelve months to be approximately $250,000. The Company has not adopted any programs which provide for post employment retirement benefits, however, it has on occasion provided such benefits to individual employees. 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 and upgrading of its internal computer hardware and software and believes that all systems are Year 2000 compliant. The Company has completed the assessment of its third party relationships and, based upon the information available, does not believe there will be any significant disruption in goods or services available. 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 is in the process of developing a contingency plan in the event of various problem scenarios. 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 13 CHAD THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations September 30, 1999 Year 2000 (cont'd) Company's results of operations and financial condition. The Company is unable to quantify any potential adverse impact at this time. 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 Products The Company's future growth in the near term will depend in significant part upon the commercial success of the TOTAL O(2) Delivery System and other new products which are under development. The success of these new products 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 achieved 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 O(2) Delivery System and other new products 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 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. 14 CHAD THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations September 30, 1999 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. Approximately 80% of home oxygen patients are covered by Medicare and other government programs. 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 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. 15 CHAD THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations September 30, 1999 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 and is thus dependent on the reliability and quality of parts supplied by these firms. 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 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. 16 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 11/11/99 /S/ Thomas E. Jones -------------- ------------------------------ Thomas E. Jones Chief Executive Officer Date 11/11/99 /S/ Earl L. Yager -------------- ------------------------------ Earl L. Yager Executive Vice President, Chief Financial Officer and Secretary EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS MAR-31-2000 APR-01-1999 SEP-30-1999 1,804 0 2,279 0 6,353 11,328 5,425 2,484 15,405 1,288 0 0 0 13,064 1,053 15,405 7,054 0 4,625 3,146 0 0 0 (710) (122) 0 0 0 0 (588) (0.06) (0.06)
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