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, 2000
Commission file number: 0-11363
CHAD THERAPEUTICS, INC.
-----------------------
(Exact name of registrant as specified in its charter)
California 95-3792700
(State of 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 10,044,936
2
CHAD THERAPEUTICS, INC.
Condensed Balance Sheets
December 31, 2000 and March 31, 2000
(Unaudited)
ASSETS
------
December 31, March 31,
2000 2000
------------ ------------
Current Assets:
Cash $ 1,355,000 $ 1,772,000
Accounts receivable, less allowance for
doubtful accounts of $127,000 at
December 31, 2000 and $96,000 at
March 31, 2000 2,044,000 2,003,000
Inventories (Note 2) 4,078,000 5,297,000
Income taxes refundable -- 175,000
Prepaid expenses 330,000 518,000
----------- -----------
Total current assets 7,807,000 9,765,000
Property and equipment, at cost 5,457,000 5,332,000
Less accumulated depreciation 3,328,000 2,731,000
----------- -----------
Net property and equipment 2,129,000 2,601,000
----------- -----------
Contracts receivable - long term portion 220,000 --
Other assets, net 1,200,000 1,217,000
----------- -----------
Total assets $11,356,000 $13,583,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 401,000 $ 314,000
Accrued expenses 998,000 1,062,000
----------- -----------
Total current liabilities 1,399,000 1,376,000
----------- -----------
Shareholders' equity:
Common shares, $.01 par value, authorized
40,000,000 shares; 10,045,000 and
10,035,000 shares issued and outstanding 13,088,000 13,077,000
Accumulated deficit (3,131,000) (870,000)
----------- -----------
Total shareholders' equity 9,957,000 12,207,000
----------- -----------
Total liabilities and shareholders'
equity $11,356,000 $13,583,000
=========== ===========
See accompanying notes to condensed financial statements.
3
CHAD THERAPEUTICS, INC.
Condensed Statements of Operations
For the nine months ended December 31, 2000 and 1999
(Unaudited)
Nine Months Ended
December 31
-----------
2000 1999
---- ----
Net sales $ 8,856,000 $ 10,013,000
Cost of sales 6,881,000 6,669,000
------------ ------------
Gross profit 1,975,000 3,344,000
Costs and expenses:
Selling, general and administrative 3,817,000 4,166,000
Research and development 486,000 380,000
------------ ------------
Total costs and expenses 4,303,000 4,546,000
------------ ------------
Operating income (loss) (2,328,000) (1,202,000)
Other income - interest income, net 67,000 24,000
------------ ------------
Earnings (loss) before income taxes (2,261,000) (1,178,000)
Income tax expense -- 93,000
------------ ------------
Net earnings (loss) $ (2,261,000) $ (1,271,000)
============ ============
Basic earnings (loss) per share $ (.23) $ (.13)
============ ============
Diluted earnings (loss) per share $ (.23) $ (.13)
============ ============
Weighted shares outstanding:
Basic 10,041,000 10,021,000
Diluted 10,041,000 10,021,000
============ ============
See accompanying notes to condensed financial statements.
4
CHAD THERAPEUTICS, INC.
Condensed Statements of Operations
For the three months ended December 31, 2000 and 1999
(Unaudited)
Three Months Ended
December 31
-----------
2000 1999
---- ----
Net sales $ 2,757,000 $ 2,959,000
Cost of sales 2,208,000 2,044,000
------------ ------------
Gross profit 549,000 915,000
Costs and expenses:
Selling, general and administrative 1,268,000 1,302,000
Research and development 165,000 98,000
------------ ------------
Total costs and expenses 1,433,000 1,400,000
------------ ------------
Operating income (loss) (884,000) (485,000)
Other income - interest income, net 28,000 17,000
------------ ------------
Earnings (loss) before income taxes (856,000) (468,000)
Income tax expense -- 215,000
------------ ------------
Net earnings (loss) $ (856,000) $ (683,000)
============ ============
Basic earnings (loss) per share $ (.09) $ (.07)
============ ============
Diluted earnings (loss) per share $ (.09) $ (.07)
============ ============
Weighted shares outstanding:
Basic 10,044,000 10,027,000
Diluted 10,044,000 10,027,000
============ ============
See accompanying notes to condensed financial statements.
5
CHAD THERAPEUTICS, INC.
Condensed Statement of Shareholders' Equity
For the nine months ended December 31, 2000
(Unaudited)
Common Shares Accumulated
Shares Amount Deficit
---------- ----------- ------------
Balance at
March 31, 2000 10,035,000 $13,077,000 $ (870,000)
Common Shares issued in
lieu of cash for directors
fees 10,000 11,000 --
Net loss -- -- (2,261,000)
---------- ----------- -----------
Balance at
December 31, 2000 10,045,000 $13,088,000 $(3,131,000)
========== =========== ===========
See accompanying notes to condensed financial statements.
6
CHAD THERAPEUTICS, INC.
Condensed Statements of Cash Flows
For the nine months ended December 31, 2000 and 1999
(Unaudited)
Nine Months Ended
December 31
-----------
2000 1999
---- ----
Cash flows from operating activities:
Net earnings (loss) $(2,261,000) $(1,271,000)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization of property and
equipment 597,000 597,000
Amortization of intangibles 71,000 69,000
Compensation expense related to stock issued 11,000 19,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable (41,000) 49,000
Decrease (increase) in inventories 1,219,000 1,658,000
Decrease (increase) in income taxes
refundable 175,000 512,000
Decrease (increase) in prepaid expenses 188,000 (108,000)
Decrease (increase) in deferred income taxes -- 215,000
Decrease (increase) in contracts receivable (220,000) --
Decrease (increase) in other assets (54,000) 48,000
Increase (decrease) in accounts payable 87,000 10,000
Increase (decrease) in accrued expenses (64,000) 65,000
----------- -----------
Net cash provided by (used in)
operating activities (292,000) 1,863,000
Cash flows from investing activities:
Capital expenditures (125,000) (70,000)
----------- -----------
Net cash used in investing
Activities (125,000) (70,000)
----------- -----------
Net increase (decrease) in cash (417,000) 1,793,000
Cash beginning of period 1,772,000 137,000
----------- -----------
Cash end of period $ 1,355,000 $ 1,930,000
=========== ===========
See accompanying notes to condensed financial statements.
7
CHAD THERAPEUTICS, INC.
December 31, 2000
-----------------
(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 in the March 31, 2000, Annual
Report and particularly to Note 1 which includes a summary of significant
accounting procedures.
2. Inventories
Inventories in 2000, are summarized as follows:
December 31 March 31
----------- --------
Finished goods $ 890,000 1,783,000
Work-in-process 719,000 654,000
Raw materials 2,469,000 2,860,000
---------- ----------
$4,078,000 5,297,000
========== ==========
3. Earnings (Loss) Per Common Share
Following is a reconciliation of the numerators and denominators used in
the calculation of basic and diluted earnings (loss) per common shares:
Three Months Ended Nine Months Ended
December 31 December 31
2000 1999 2000 1999
---- ---- ---- ----
Basic earnings (loss) per share:
Numerator-net earnings (loss) $ (856,000) $ (683,000) $(2,261,000) $ (1,271,000)
Denominator-weighted average
common shares outstanding 10,044,000 10,027,000 10,041,000 10,021,000
----------- ------------ ----------- ------------
Basic earnings (loss) per share $ (.09) $ (.07) $ (.23) $ (.13)
=========== ============ =========== ============
8
CHAD THERAPEUTICS, INC.
December 31, 2000
-----------------
(Unaudited)
3. Earnings (Loss) Per Common Share (cont'd)
Diluted earnings (loss) per share:
Numerator-net earnings (loss) $ (856,000) $ (683,000) $ (2,261,000) $ (1,271,000)
Denominator:
Weighted average common
shares outstanding 10,044,000 10,027,000 10,041,000 10,021,000
Dilutive effect of common
stock options -- -- -- --
------------ ------------ ------------ ------------
10,044,000 10,027,000 10,041,000 10,021,000
------------ ------------ ------------ ------------
Diluted earnings (loss) per share $ (.09) $ (.07) $ (.23) $ (.13)
============ ============ ============ ============
Options to purchase 1,178,000 shares of common stock at prices ranging from
$.88 to $13.47 per share and 1,141,000 shares of common stock at prices
ranging from $1.00 to $13.47 per share were not included in the computation
of diluted earnings (loss) per share for the three and nine months periods
ended December 31, 2000 and 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 8% for the period ended December 31, 1999.
The income tax expense for the nine months period ended December 31, 1999,
relates primarily to Federal income tax carrybacks. No tax benefit has been
recognized in 2001 as management has determined that it is not more likely
than not that net operating loss carryforwards will be realized.
5. Geographic Information
The Company has one reportable operating segment. Geographic information
regarding the Company's sales is as follows:
Three Months Ended Nine Months Ended
December 31 December 31
2000 1999 2000 1999
---- ---- ---- ----
United States $ 2,385,000 $ 2,694,000 $ 7,388,000 $ 9,020,000
Germany 162,000 2,000 429,000 41,000
Japan 112,000 113,000 559,000 362,000
All other countries 98,000 150,000 480,000 590,000
----------- ----------- ----------- -----------
$ 2,757,000 $ 2,959,000 $ 8,856,000 $10,013,000
=========== =========== =========== ===========
All long-lived assets are located in the United States
Sales of OXYMATIC(R) conservers and OXYLITE(R) systems accounted for 41% and
49% of the Company's sales for the nine-month periods ended December 31, 2000
and 1999, respectively.
9
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
December 31, 2000
-----------------
Overview
The Company develops, assembles and markets medical devices that furnish
supplementary oxygen to home health care patients. The Company was a pioneer in
developing oxygen conserving devices that enhance the quality of life for
patients by increasing their mobility and, at the same time, lower operating
costs by achieving significant savings in the amount of oxygen actually required
to properly oxygenate patients. The market for oxygen conserving devices has
been significantly affected during the past several years by increased
competition, consolidation among home oxygen dealers and revisions (and proposed
revisions) in governmental reimbursement policies. All of these factors, as
described more fully below, have contributed to an erosion of the Company's
market share, as devices that are less expensive but which provide lower oxygen
savings (or, in some cases, do not truly provide ambulatory oxygen) have
prospered in this environment. The Company's market share for conservers has
also been affected by the introduction of competing devices that offer features
not available on the OXYMATIC 301.
The TOTAL O2 Delivery System, which combines the benefits of an oxygen
concentrator with a system enabling patients to refill their portable cylinders,
has the potential for improving the Company's performance. Introduced in 1998,
the acceptance of the TOTAL O2 system by home oxygen dealers has been slowed by
several factors discussed below. As a result, the increased sales generated by
the TOTAL O2 system has, to date, failed to make up for lower OXYMATIC 301
sales.
In order to address this situation, the Company has implemented a four-part
strategy:
- Introduction of the OXYMATIC 401 model with improved features, which should
place this oxygen conserver at the forefront of the industry;
- Development of additional oxygen conserver models that will diversify the
product line in order to offer customers a range of oxygen conservation
choices;
- A continued promotional and educational campaign with respect to the
benefits of the TOTAL O2 system, coupled with greater focus on monitoring
the performance of component suppliers; and
- Cost cutting to align the Company's operating expenses more closely with
its revenue profile.
While the Company believes that these measures should enhance its competitive
position and future operating performance, no assurances can be given that these
objectives will be achieved. Management of the Company will continually monitor
the success of these efforts and will attempt to remain flexible in order to
adjust to possible future changes in the market for oxygen conserving devices.
10
CHAD THERAPEUTICS, INC
Management's Discussion and Analysis of
Financial Condition and Results of Operations
December 31, 2000
-----------------
Results of Operations
Sales for the three months ended December 31, 2000 and 1999, decreased $202,000
(6.8%) and $24,000 (0.8%) and decreased $1,157,000 (11.6%) and $1,027,000 (9.3%)
for the nine months periods ended December 31, 2000 and 1999, respectively, from
the prior year's periods. The decrease in sales relates primarily to price
reductions and lower 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. However, during
the three months ended December 31, 2000, unit sales increased 24.4% over the
prior year's period largely as a result of the introduction of the new OXYMATIC
model 401 conserver.
Sales to foreign distributors represented 17% and 10% of total sales for the
nine months ended December 31, 2000 and 1999, respectively. Currently,
management expects an increase in sales to foreign distributors during the
upcoming twelve months and quarter-to-quarter sales may fluctuate depending on
the timing of shipments. All foreign sales are denominated in US dollars.
The current procedures for reimbursement by Medicare for home oxygen services
provide 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 January of 1998 and
1999, the Federal government implemented reimbursement cuts of 25% and 5%,
respectively. These cuts affected homecare providers' purchasing patterns as
they struggled to deal with significant reductions in their revenues.
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 16%, 20% and 21% of the
Company's domestic sales for the nine month periods ended December 31, 2000,
1999 and 1998, respectively. Margins on these sales are generally 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. 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.
11
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
December 31, 2000
-----------------
Results of Operations (cont'd)
As stated above, the Company believes that its revenues during the past two
years have been adversely affected by several factors, including pricing and
competitive products with features not found in the Company's products prior to
the introduction of the OM-400 series conservers discussed below, continuing
industry consolidation and the effects of the cuts in Medicare home oxygen
reimbursement on homecare providers' purchasing patterns. 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 may continue to adversely
affect the Company's revenues from sales of oxygen conserving devices for the
foreseeable future. To combat the erosion in sales of the oxygen conserver
product line, the Company is working on the development of several new products
in this area. The first of these, the OXYMATIC 401 conserver, received 501(k)
clearance from the Food and Drug Administration in June 2000, and shipments of
the new product began in July 2000. The second, the OXYMATIC 411 conserver was
cleared in December 2000, and shipments began in January, 2001. Management
believes the features and improvements in these products may enable the Company
to regain some of the market share lost in the conserver market over the past
three years. No estimate can currently be made regarding the level of success
the Company may achieve with the OXYMATIC 401 and 411 conservers. For
information, which may affect the forward, looking statements made in this
paragraph about the OXYMATIC 401 and 411 conservers, see Outlook: Issues and
Risks - New Products.
Management also believes that, based on its experience in the home oxygen
industry, future revenues may be positively affected by sales of the TOTAL O2
Delivery System. The TOTAL O2 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 this
product from the Food and Drug Administration. The Company began shipping TOTAL
O2 systems in January, 1998, and realized approximately $2,318,000 and
$1,988,000 in sales during the nine-month periods ended December 31, 2000 and
1999, respectively. Initial sales of the TOTAL O2 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 Company believes the sales potential for the new system is significant as
the market size for units is similar to the conserver market and the average
selling price is approximately four times that of the OXYMATIC and OXYLITE
systems. No estimates
12
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
December 31, 2000
-----------------
Results of Operations (cont'd)
can currently be made regarding the level of success the Company may achieve
with the TOTAL O2 system. For information which may affect the outcome of
forward-looking statements made in this paragraph about the TOTAL O2 systems,
see Outlook: Issues and Risks - New Products.
Cost of sales as a percent of net sales increased from 69.1% to 80.1% and
decreased from 87.4% to 69.1% for the three month periods ended December 31,
2000 and 1999, respectively, and increased from 66.6% to 77.7% and from 65.3% to
66.6% for the nine month periods ended December 31, 2000 and 1999, respectively.
Both periods have been affected by decreased sales volume and the corresponding
impact of fixed overhead costs on units produced, price competition and the
lower gross profit margin on the TOTAL O2 system.
Selling, general and administrative expenditures decreased from $1,302,000 to
$1,268,000 and from $4,166,000 to 3,817,000 for the three and nine month periods
ended December 31, 2000 and 1999, respectively, compared to the respective three
and nine month periods of the prior year. The Company's recent cost reduction
efforts, including reductions in personnel, should align staffing and operating
expenses more closely with current sales expectations, but will be offset to
some extent by commissions paid to the Company's field sales force of
manufacturer's representatives. Research and development expenses increased by
$67,000 and $106,000 for the three and nine month periods ended December 31,
2000 and 1999, as compared to the prior year's periods. Currently, management
expects research and development expenditures to total approximately $700,000 in
the fiscal year ended March 31, 2001, on projects to enhance and expand the
Company's product line. Interest income increased $43,000 for the nine-month
period ended December 31, 2000, as compared to the prior year due to the
increase in the Company's cash balances in 2000.
At December 31, 2000, the Company had fully utilized its net operating loss
carrybacks and had approximately $3,360,000 and $1,690,000 in Federal and
California net operating loss carryforwards, respectively. As a result of
valuation allowances placed on the net operating loss carryforwards and deferred
tax assets, these net operating loss carryforwards and deferred tax assets will
be available to offset future income tax expense when and if the Company
generates taxable income.
Financial Condition
At December 31, 2000, the Company had cash totaling $1,355,000 or 12% of total
assets, as compared to $1,772,000 (13% of total assets) at March 31, 2000. Net
working capital decreased from $8,389,000 at March 31, 2000 to $6,408,000 at
December 31, 2000.
13
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
December 31, 2000
-----------------
Financial Condition (cont'd)
Accounts receivable increased $41,000 during the period ended December 31, 2000,
due to the increase in foreign sales. Future increases or decreases in account
receivable will generally coincide with sales volume fluctuations and the timing
of shipments to foreign customers. During the same period, inventories decreased
$1,219,000. This decrease relates primarily to utilization of raw materials
purchased in the prior year for the manufacture of the TOTAL O2 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. Currently, inventory balances are generally at or
above safety stock levels.
Management believes cash balances and funds derived from operations should be
adequate to meet the Company's cash requirements for the next twelve months
given the recent recovery of market share for oxygen conservers. If operations
do not continue to improve, the Company may need to seek other sources of
working capital. The Company expects capital expenditures during the next twelve
months to be approximately $150,000.
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.
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.
14
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
December 31, 2000
-----------------
New Products
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 OXYMATIC 401
and 411 conservers and other new products which are under development. The
success of these new products will depend upon the health care community's
perception of such products capabilities, clinical efficacy and benefit to
patients and obtaining timely regulatory approval. 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 O2
Delivery System, the OXYMATIC 401 and 411 conservers 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 accounted for 16% of the
Company's domestic sales during the nine-month period ended December 31, 2000.
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 in the early 1990's 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 with features not
currently found in the Company's products but 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
15
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
December 31, 2000
-----------------
Rapid Technological Change (cont'd)
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. Because of the
uncertain state of 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 future 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 protecting its intellectual property rights
including, 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 or claims that the Company's products
infringe the patent rights of others could have an adverse impact upon the
Company's business.
Product 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 product 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.
16
CHAD THERAPEUTICS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
December 31, 2000
-----------------
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.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101, as amended, summarizes certain of the SEC's views of applying
generally accepted accounting principles to revenue recognition in financial
statements. At this time, we do not expect the adoption of SAB 101 to have a
material effect on our operations or financial position. We are required to
adopt SAB 101 in the fourth quarter of fiscal 2001.
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.
17
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 2/09/01 /s/ Thomas E. Jones
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Thomas E. Jones
Chief Executive Officer
Date 2/09/01 /s/ Earl L. Yager
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Earl L. Yager
Chief Operating Officer,
Chief Financial Officer and
Secretary