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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10 - K
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required)
For the fiscal year ended March 31, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from __________ to __________
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)
Registrant's telephone number, including area code: (818) 882-0883
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, $.01 par value
(Title of class)
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 [ ]
Indicate by check mark if disclosures of delinquent filers pursuant to Item
405 of Regulation SK (229.405 of this chapter) is
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not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting shares held by non-affiliates
of the Registrant on June 11, 1999 (based on the average over-the-counter bid
and asked prices of such stock on such date) was $17,521,000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of June 11, 1999:
Common Shares 10,012,000
Portions of the Registrant's definitive Proxy Statement for its September
14, 1999, Shareholders' meeting ("Proxy Statement") (which Proxy Statement has
not been filed as of the date hereof) are incorporated into Part III as set
forth herein. Portions of the Registrant's Annual Report to Shareholders for the
year ended March 31, 1999 ("Annual Report") are incorporated into Part II as set
forth herein and only such portions of the Annual Report as are specifically
incorporated by reference are thereby made a part of this Annual Report on Form
10-K.
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PART I
Item 1. Business
Chad Therapeutics, Inc. ("CHAD" or the "Company") was organized in
August, 1982, to develop, produce and market respiratory care devices designed
to improve the efficiency of oxygen delivery systems for both home and hospital
treatment of patients who require supplemental oxygen. The Company introduced
its first respiratory care device in the market in June, 1983, and has
introduced additional respiratory care devices in subsequent years.
Pulmonary Disease and Oxygen Therapy
The Company was organized to pursue the development and marketing of
devices which improve the efficiency of systems used to administer oxygen to
patients requiring supplemental oxygen. These are primarily patients suffering
from chronic obstructive pulmonary diseases.
Chronic obstructive pulmonary diseases (COPD) are progressive,
debilitating conditions that affect millions of Americans, severely limiting
their activities and shortening their lives. Such conditions, which include
chronic bronchitis, emphysema and severe asthma, decrease the capacity of the
lungs to oxygenate the blood. To make up for this deficiency, it is common
medical practice to administer supplemental oxygen, usually on a 24 hours per
day basis in an amount sufficient to increase blood oxygenation to near normal
levels.
A report issued in September, 1981, by the National Heart, Lung and
Blood Institute of the National Institutes of Health (NIH) stated that chronic
obstructive pulmonary diseases were the fastest rising cause of death in the
United States, accounting for approximately 2.5% of all deaths and costing more
than $15 billion a year in health care and lost time and wages. The NIH Report
estimated that in 1981 there were approximately 9 million people in the United
States suffering from chronic bronchitis and emphysema.
More recently, the Epidemiology and Statistics Unit of the American Lung
Association reported that in 1989 there were 14.6 million Americans suffering
from COPD. This report also notes that the death rate from COPD has increased by
28.5 percent in the decade from 1979 to 1989. Some authorities estimate that as
many as 20 million Americans who are now affected by COPD will eventually
require supplemental oxygen.
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Although precise data are not available, various individual and
institutional sources and reports estimate that there are more than 1 million
home care patients receiving supplementary administration of oxygen. Total
dealer revenues for home oxygen therapy were estimated at over $2 billion for
1996. Medicare, which accounts for about 60% of home oxygen dealers' revenues,
expected to spend almost $1.5 billion in 1996 for home oxygen as compared to
$1.4 billion in 1995 according to officials of the Congressional Budget Office.
Market revenues for home oxygen have grown consistently at 8-10% per year for
the past five years. This is due to the increasing number of COPD patients as
well as the move to home care and out of hospitals. Growth in the utilization
rate for home oxygen is projected by the Congressional Budget Office to continue
at a rate averaging approximately 8% per year through 2002.
Chronic obstructive pulmonary diseases are also prevalent in other
countries, particularly in some European nations where the incidence is higher
than in the United States. The potential international market for home oxygen is
expected to grow to 150% of the U.S. market.
The primary oxygen supply for home patients is provided from cylinders
containing compressed gaseous oxygen (5-10% of users), reservoirs containing
liquid oxygen (20-25%) or by means of concentrators which concentrate oxygen
from the ambient air (65-75%).
Standard oxygen delivery systems are characteristically inefficient,
permitting over 67% of the oxygen supply delivered to the patient to be wasted,
primarily because the oxygen is administered steadily to the patient, even while
he is exhaling. Since the normal breathing cycle consists of an exhalation
period which is approximately twice as long as the inhalation period, at least
two-thirds of the oxygen from this continuous flow system is wasted.
Furthermore, it is generally accepted that the oxygen breathed in during the
first one-third of the inhalation period provides most of the oxygenation
benefit to the patient.
In June, 1989, the home oxygen market changed. A new procedure for
payment by Medicare for home oxygen services became effective. This new
procedure provides a prospective flat fee monthly payment based solely on the
patient's prescribed oxygen requirement and disregards modality, the type of
system in use. Prior to that time, dealers were reimbursed on the basis of total
oxygen delivered by the dealer and reimbursement also varied based on the
modality used and other variables. The prior procedure tended to encourage waste
and inefficiency. Consequently, with the incentive
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to operate efficiently, inexpensive concentrators have grown in popularity
because of low cost and less frequent servicing requirements. At the same time
interest heightened in oxygen conserving devices which can extend the life of
oxygen supplies and reduce service calls by dealers.
There is also a separate fixed allowance from Medicare for patients who
need to be mobile and therefore require portable oxygen systems.
In January, 1998, the monthly amount that Medicare now reimburses for
home oxygen was reduced by 25% and an additional 5% reduction was implemented in
January, 1999. While the long term impact of this reduction may be to cause home
care dealers to seek products that provide even greater cost saving
efficiencies, the concerns over the size of these cuts over the past two years
has, in many cases, resulted in the provision of systems to patients that do not
provide truly ambulatory oxygen.
While these cost pressures have intensified, mobility has increased in
importance as the treatment of pulmonary patients has moved away from hospitals
and into home care. Also, leading authorities now state that maintenance and
improvement of the patient's quality of life should be the major objective in
the treatment of COPD. Maintaining quality of life and compliance with
prescribed exercise programs require that the patient be as mobile as possible
and thus increase the demand for portable oxygen equipment.
CHAD's Products
Recognizing the need for more efficient oxygen delivery systems, the
Company has pursued, since its inception, the development and marketing of
devices which are designed to conserve oxygen. The benefits of such improvements
include substantial cost savings and increased mobility for ambulatory patients
who require portable oxygen supplies. These devices extend the life of oxygen
supplies, make possible more compact and longer lasting portable systems and
thereby improve the quality of life for home oxygen patients.
OXYMIZER and OXYMIZER Pendant Oxygen-Conserving Devices. In June, 1983,
the Company began marketing its first product, the OXYMIZER disposable
oxygen-conserving device, a unique, patented, disposable device developed to
provide up to 4 to 1 savings of oxygen when used with any oxygen supply source.
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The OXYMIZER device contains a collapsible reservoir which captures
incoming oxygen delivered during expiration and prevents its waste. The oxygen
captured in this reservoir is then inhaled by the patient during the first
instant of his next inspiration. The OXYMIZER device thus both conserves oxygen
and provides the patient with an extra rich supply of oxygen at the beginning of
the inhalation period when it can be most effectively utilized.
Extensive clinical testing and trials over the past fourteen years have
repeatedly demonstrated that patients using the OXYMIZER device are able to
achieve equivalent blood oxygenation levels while using significantly less
oxygen. There have been more than 32 clinical evaluations from institutions
worldwide, that have confirmed the efficacy and oxygen savings realized by
patients who use the OXYMIZER devices.
The greater efficiency provided by the OXYMIZER devices over standard
oxygen delivery systems also permits home health care patients to achieve
greater mobility by enabling them to use smaller portable cylinders or by
obtaining two to four times the life from standard sized portable cylinders.
For home oxygen dealers the disposable OXYMIZER devices afford the cost
advantages of oxygen conservation without capital investment in expensive
equipment.
In hospitals the OXYMIZER devices are reported to be frequently used for
maintenance of certain patients requiring higher flow levels of oxygen without
having to resort to uncomfortable oxygen masks.
The Company is pursuing a marketing strategy which emphasizes the cost
savings, efficiencies and level of patient comfort associated with the use of
the OXYMIZER devices. See "Marketing" and "Competition".
The OXYMIZER Pendant device is similar to the OXYMIZER device, except
that its reservoir is located in a "pendant" which hangs over the patient's
chest rather than under the nose. The OXYMIZER Pendant has a more traditional
appearance than the OXYMIZER. The Company began marketing the OXYMIZER Pendant
in August, 1984, and to date sales have approximated those achieved by the
OXYMIZER device.
OXYMATIC Electronic Oxygen Conservers. The Company began marketing the
OXYMATIC conserver in March, 1986. This product is a small electronic device,
designed for use with portable oxygen systems. The OXYMATIC conserver
electronically senses the optimal
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moment in the breathing cycle for delivery of oxygen and at that moment,
releases a very brief pulse of oxygen to the patient. The OXYMATIC conserver
concentrates the administration of oxygen during the first one-third of the
inhalation phase, when oxygen is most efficiently utilized. Through its optimal
efficiency the OXYMATIC electronic conserver makes possible oxygen savings
ratios of from 4 to 1 up to 12 to 1 depending on the user's breathing rate. In
clinical experience the average saving has been shown to be 7 to 1 - about twice
the efficiency of most competitive products. There have been at least twelve
controlled clinical trials and studies of patient groups using the OXYMATIC
conserver, all of which have confirmed its efficacy and efficiency.
In May, 1995, the Company introduced the new OXYMATIC Model 301 which
replaced the previous model. This new model incorporates improved electronics,
providing a longer battery life and other improvements which make it more user
friendly.
In June, 1993, the Company introduced a different version of the
OXYMATIC conserver, the OXYMATIC - 2400. This model incorporates substantial
improvements and additional features, such as an alarm system, which are
designed to allow it to be used 24 hours a day with both primary and portable
oxygen sources. The OXYMATIC - 2400 conserver affords the same oxygen savings
ratios as the original OXYMATIC conserver.
Sales of OXYMATIC conservers and the OXYLITE systems discussed below
accounted for approximately 72% of the Company's sales in 1999.
OXYLITE Complete Portable Oxygen System. The Company also markets eight
OXYLITE complete portable oxygen systems, each of which is available with either
the OXYMATIC Model 301 conserver or the OXYMATIC - 2400 conserver. These systems
combine the OXYMATIC conserver with small, lightweight oxygen cylinders and
lightweight pressure regulators in an attractive carrying pouch.
The OXYMATIC conserver extends the time the contents of the cylinders
will last by an average of seven times. They provide ambulatory patients with
greater mobility and less weight. These systems offer a superior alternative to
commonly used liquid oxygen systems for mobile patients and are more cost
effective for homecare dealers to supply.
OXYCOIL Coiled Oxygen Tubing. In January, 1986, the Company began
marketing the OXYCOIL coiled oxygen tubing, a device which replaces the standard
supply tubing for the OXYMIZER devices, the OXYMATIC conserver or conventional
nasal cannulas. The OXYCOIL
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tubing is a convenience and safety device which can be used with any oxygen
system to help keep the supply tubing out of the patients' way, thus minimizing
the tripping and tangling problems associated with standard supply tubing.
TOTAL O(2) Delivery System. In January, 1998, the Company began
marketing the TOTAL O(2)(TM) Delivery System. This 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 25% cut in home oxygen reimbursement that went into effect on January
1, 1998, by reducing the monthly cost of servicing patients while at the same
time providing them with a higher quality of service. This can be accomplished
as the home care dealer will no longer be required to make regular monthly
service calls to deliver full portable cylinders and the patient will no longer
be dependent on the dealer for those deliveries to obtain full cylinders.
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 recently to resolve the manufacturing and supplier
issues. The potential for this product is significant as the average selling
price is approximately four times that of the OXYMATIC and OXYLITE systems. No
assurances can currently be given regarding the level of success the Company may
achieve with the TOTAL O(2) system. See Outlook:Issues & Risks - New Product in
the Company's Annual Report to Shareholders.
The technology for each of the devices described above belongs to the
inventors thereof. The Company has acquired exclusive licenses to manufacture
and market the OXYMIZER devices, the OXYMATIC conservers, the OXYCOIL tubing and
the TOTAL O(2) system. See "Licensing and Related Agreements".
Other Products. The Company also offers a variety of ancillary products
which support the principal oxygen conserving products. These include oxygen
cylinders of various sizes and compositions, regulators, cannulas and connecting
tubing and assorted carrying pouches.
Products Under Development
It is the Company's objective to continuously improve and add to its
oxygen conserving and related products. In April, 1996, the Company entered into
an exclusive development contract with an
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outside vendor to develop unique oxygen therapy products. The first product
developed from the project was the TOTAL O2 system. No assurance can be given
that any products developed pursuant to this contract will be successfully
marketed or that the Company will ever derive significant revenues or earnings
from the sale of such products.
Research and Development
For the year ended March 31, 1999, the Company expended approximately
$625,000 on research and development and has expended approximately $3,301,000
since its inception in August, 1982. The Company operates in an industry which
is subject to rapid technological change, and its ability to compete
successfully depends upon, among other things, its ability to stay abreast or
ahead of new technological developments. Accordingly, the Company expects to
expend increasing amounts for the development or acquisition of new products or
the improvement of existing products. In the next fiscal year the Company
expects to spend approximately $525,000 on several projects. The Company
conducts research and development in the electronics area internally and also
utilizes the services of outside firms and consultants for its research and
development activities.
Licensing and Related Agreements
The Company has entered into license agreements (the "Inventors License
Agreements") with Brian L. Tiep, M.D., Robert E. Phillips and Ben A. Otsap, the
inventors of the OXYMIZER device (the "Inventors"), with respect to that device
and each of the additional oxygen conserving devices developed by them. At the
present time, the Company has licensed the OXYMIZER device, the OXYMIZER Pendant
device and the OXYMATIC conserver, thereby acquiring exclusive rights to
manufacture and market such products.
Pursuant to the Inventors License Agreements, the Inventors grant to the
Company an exclusive license (with the right to grant sublicenses) to
manufacture, use and sell such device. The Inventors License Agreements provide
that the Company pay royalties to the Inventors on the net proceeds of sales of
the device covered by the agreement at the rate of 6% on amounts up to $10
million and 3% on amounts of $10 million or more. The Inventors License
Agreements also provide that the Company pay minimum advance royalties for each
license year in the amount of $10,000 for each year. The advance payments are to
be applied toward royalties payable for the corresponding license year, and any
amounts paid by the Company under one agreement (except those on the OXYMIZER
device), in excess of the minimum, may be applied by the Company
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against the minimum payable under any other such agreement. The Company is
obligated to prosecute and defend, at its own expense, any infringement suits
related to manufacture or sale of each device covered by any such agreement.
Each Inventors License Agreement continues until the expiration of the
last to expire of any patent covering the related device or, if no patent
issues, for 17 years. The Inventors may terminate the Inventors License
Agreements at an earlier date if the Company is in arrears for 60 days on any
royalty payment or if the Company defaults in performing any other term of the
agreement and fails to cure such default within 60 days.
The Company has also entered into a license agreement (the "Litton
License Agreement") with the Life Support Division of Litton Systems, Inc. for
the TOTAL O(2) Delivery System.
Pursuant to the Litton License Agreement, the Licensor grants to the
Company an exclusive license (with the right to grant sublicenses) to
manufacture, use and sell such device in the health care market. The Litton
License Agreement provides that the Company pay royalties to the Licensor on the
net proceeds of sales of the device covered by the agreement at the rate of 4%
and requires minimum annual royalties of $100,000, $300,000 and $500,000 in the
third, fourth and sebsequent years, respectively. The Litton License Agreement
continues until the expiration of the last to expire of any patent covering the
related device or until the Company ceases uses of the licensed technology. The
Licensors may terminate the Litton License Agreement at an earlier date if the
Company is in arrears for 30 days on any royalty payment or if the Company
defaults in performing any other material obligation of the agreement and fails
to cure such default within 30 days.
Manufacturing and Sources of Supply
The Company tests and packages its products in its own facility. Some
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. All outside manufacturing is conducted under the
supervision and control of the Company and with tooling provided by the Company.
Pursuant to an oral agreement, the Company purchases semi-finished units
of the OXYMIZER and OXYMIZER Pendant devices from a supplier in Southern
California. Final assembly and packaging are completed at the Company's
facilities. The Company does not contemplate entering into a formal written
agreement for these units. This arrangement is terminable at will by either
party.
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The Company believes that other injection molding facilities would be available
in the event of a termination of this arrangement.
Production of the OXYMATIC Model 301 and 2400 is being handled
internally with only a portion of electronic assembly being subcontracted
outside the Company. The Company is currently subcontracting with two electronic
assembly facilities and believes that other facilities would be available in the
event of an interruption of supply from the existing facilities.
Pursuant to oral agreements, the Company purchases components for its
OXYLITE systems (other than the OXYMATIC conserver) from several suppliers.
These arrangements are terminable at will and the Company believes other
suppliers would be available in the event of termination of these arrangements.
Production of the TOTAL O(2) system is being handled internally with a
number of subassemblies being subcontracted outside the Company. The Company
believes that there are alternate sources of supply for these subassemblies,
including internal manufacturing as production quantities increase.
The Company is not aware of any shortages of materials necessary for the
manufacture of its products. The Company provides customers the right to return
merchandise for credit and requires payment within a time frame consistent with
industry standards.
Marketing
The Company's products are designed to reduce the cost of health care
while maintaining or enhancing the therapeutic benefits to the patient, and
improving the user's quality of life. The Company's marketing efforts have
focused primarily on providing home oxygen suppliers with products that they can
utilize to increase their revenues, while reducing their costs.
Homecare dealers have reportedly increased their revenues by using the
Company's OXYLITE complete portable oxygen systems or by locally assembling
small portable systems incorporating the Company's OXYMATIC conserver as a
vehicle to attract new and additional patients to their business. The Company
believes these lightweight, long-lasting portable systems have both high
professional and patient acceptance which allows the supplier promoting these
products to attract new and additional customers. The Company has been advised
that medical professionals, who frequently refer patients to specific home
oxygen suppliers, find that these systems assist patients in more easily
complying with
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prescribed exercise programs and help them to achieve the therapeutic benefits
of maintaining a lifestyle as normal as possible. Patients, most of whom are
free to select their oxygen supplier, are reportedly receptive to changing
suppliers in order to obtain equipment that will allow them to travel and
maintain their quality of life.
Approximately 80% of all home oxygen patients are covered by Medicare
and other government programs. Since June 1989, home oxygen suppliers have been
reimbursed by Medicare on a fixed monthly fee basis. The monthly reimbursement
amount does not vary, as in the past, with either the type of oxygen delivery
equipment provided or the amount of oxygen supplied. Since monthly per patient
revenues are fixed, home oxygen suppliers can only increase their per patient
profitability by reducing costs. The Company's oxygen conserving products and
TOTAL O(2) Delivery System allow these suppliers to decrease their costs while
providing their patients with improved therapeutic benefits and quality of life.
While the home respiratory care dealer remains the primary focus of the
Company's marketing efforts, this focus has been augmented by a major effort to
increase professional awareness. Promotional programs were initiated which
targeted respiratory care physicians, nurses and therapists. A Medical Advisory
Committee was formed composed of nine physicians who are among the world's
leading respiratory authorities.
The Company markets its products directly to home oxygen suppliers
throughout the U.S. The Company currently has a Director of Sales & Marketing, a
marketing assistant, a National Sales Manager and six in-house sales and
customer service representatives who are in regular and frequent proactive
telephone sales contact with customers and potential customers. In addition, the
Company has recently developed a field sales force of independent manufacturers
sales representatives to handle direct selling to customers. This field sales
force is currently comprised of 40 individuals with coverage throughout the
United States. The Company also utilizes direct mail, trade show attendance, and
trade advertising to promote the benefits of its products to home care dealers.
Additionally, the Company actively seeks to increase professional awareness of
its products through professional advertising and participation in professional
meetings.
Home oxygen therapy markets outside the United States are, in most
cases, at a much earlier stage of development. In many countries, these patients
are cared for in domiciliary settings. As the trend develops to move patients
into home care, opportunities for the Company's products should increase. Sales
of
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the OXYMATIC conserver in Europe, Canada and Japan have become an important part
of the Company's business. Based on industry market research projections, the
Company expects the market potential to increase to 150% of the U.S. potential.
The Company has entered into exclusive distributorship agreements in
Germany, Canada, Japan, and Australia. The Company's largest distributor in
Germany covers portions of the European Community, however, reimbursement
pressures in Germany may limit growth during the upcoming year. The Company also
has non-exclusive distributors in many other countries.
Sales outside of the United States will subject the Company to certain
risks, including those involving political and economic factors, interruption of
shipments of products, currency fluctuations and devaluations and governmental
restrictions and regulations.
Customers, Backlog and Orders
The Company presently has an active list of approximately 4,400 dealer
and hospital customers. Based upon information developed from various lists the
Company believes that there are approximately 7,000 to 8,000 oxygen dealers and
3,000 general hospitals in the United States which are potential customers or
customer sources for the Company. Of these 7,000 to 8,000 home oxygen dealers,
approximately 30% are represented by three major national chain accounts. One
such national account accounted for 11% and 18% of the Company's revenues in
1998 and 1997, respectively. No one customer exceeded 10% of net sales in 1999.
Financial Information Relating to Foreign and
Domestic Operations and Export Sales
1999 1998 1997
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Sales (thousands):
United States $12,350 14,866 23,567
Germany 642 632 1,146
All other countries 1,072 1,095 1,448
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Total $14,064 16,593 26,161
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All identifiable assets are located in the United States.
At March 31, 1999, the Company had no backlog of orders for any of its
products. The Company presently intends to maintain a large enough inventory to
ship all of its products immediately upon receipt of orders. The Company
believes that such an inventory is necessary to meet the requirements of its
customers.
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Competition
The Company is aware of several demand valve, electronically controlled
devices currently being marketed. Of these devices, those that have been the
principal competitors of the OXYMATIC conserver in the past were targeted
primarily to a specific segment of the market - liquid oxygen usage. Several
companies, including Invacare, Nellcor/Puritan Bennett and Sunrise/De Vilbiss,
market small (5.5 lbs.) portable liquid oxygen systems incorporating simple
oxygen conserving devices which double the useful life of these systems.
Although these units allow longer ambulation and/or reduce the weight of
portable liquid oxygen, they are heavier than the smallest OXYLITE system and
provide less ambulatory time due to the greater efficiency of the OXYMATIC
conserver, which provides at least double the oxygen savings of these
conservers. Also these units are more expensive than OXYLITE systems and still
require the supplier to make frequent and costly oxygen deliveries. The Company
does not know the levels of sales achieved by the companies marketing these
systems.
Several of these competitors are now marketing combinations of
conservers, regulators and small cylinders in direct competition with the
Company's OXYLITE systems. Many of these products utilize conservers that
provide 2:1 to 3:1 savings ratios. As a result, these units while weighing about
the same as similar OXYLITE systems provide only 1/3 or 1/2 of the ambulation
time provided by OXYLITE systems. In addition, the Company is aware of two
companies marketing oxygen conserving devices which claim similar oxygen savings
ratios as the OXYMATIC conserver. The Company believes that some of these
competitors have been able to offer their oxygen conservers as part of a bundle
of products with perceived pricing advantages over the Company's products;
however, the Company believes the established reputation of its products for
efficiency and reliability help offset these advantages. The Company does not
know the level of sales achieved by these companies, although some have attained
market share at the Company's expense.
There are several other types of portable oxygen systems which compete
with the Company's OXYLITE systems but do not utilize oxygen conserving devices.
Aluminum and steel oxygen cylinders with continuous flow are utilized by some
oxygen suppliers as portable systems. Although they do provide users with some
portability, their size and bulk limits their use by patients who need or want
to be truly ambulatory. The most commonly used of these cylinders is
approximately three feet high, weighs over 20 lbs., and provides an average
patient with less than 5 hours of oxygen. These systems are enjoying some level
of success due to
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their lower unit price advantage. The OXYMATIC conserver, which provides an
average oxygen savings of 7 to 1, allows the use of smaller, lighter cylinders
and thus provides greater mobility.
Until the availability of OXYLITE systems and the previously cited
changes in Medicare oxygen reimbursement, liquid oxygen was the modality of
choice for truly mobile users. Portable liquid oxygen systems which weigh 8 to
10 lbs., provide an average patient with 6 to 8 hours of oxygen, compared to the
smallest OXYLITE system which weighs 4.5 lbs. and provides an average patient
with 10.5 hours of oxygen. These systems are more costly than OXYLITE systems
and require frequent and expensive (often weekly) deliveries of bulk liquid
oxygen to the patient's home. Although many oxygen suppliers continue to use and
re-use existing inventories of liquid oxygen equipment to service ambulatory
patients, purchases of new liquid oxygen equipment by home care dealers is
decreasing.
Patents and Trademarks
The Company regards the products that it develops or licenses and its
manufacturing processes as proprietary and relies on a combination of patents,
trademarks, trade secret laws and confidentiality agreements to protect its
rights in its products. U.S. patents have been issued covering the original
OXYMIZER device, the OXYMIZER Pendant device, the OXYMATIC conserver and the
TOTAL O(2) Delivery System. A number of foreign patent applications pertaining
to the Company's activities have also been issued.
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 products developed for it 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.
There can be no assurance that patents, domestic or foreign, will be
obtained with respect to the Company's products, or that, if issued, they will
provide substantial protection or be of commercial benefit to the Company. In
addition, the patent laws of foreign countries may differ from those of the
United States as to the patentability of the Company's products and processes
and, accordingly, the degree of protection afforded by foreign patents may be
more or less than in the United States.
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In the United States, although a patent has a statutory presumption of
validity, the issuance of a patent is not conclusive as to such validity or as
to the enforceable scope of its claims therein. The validity and enforceability
of a patent can be attacked by litigation after its issuance by the U.S. Patent
and Trademark Office. If the outcome of such litigation is adverse to the owner
of the patent in that the patent is held to be invalid, other parties may then
use the invention covered by the patent. Accordingly, there can be no assurance
that patents with respect to the Company's products, if issued, will afford
protection against competitors with similar products, nor can there be any
assurance that the patents will not be infringed upon or designed around by
others.
The Company has obtained U.S. registration for the trademarks
"OXYMIZER", "OXYMATIC", "CHAD" and "OXYCOIL" and has filed an application for
the trademark "TOTAL O(2)". A series of foreign applications to register the
trademark "OXYMIZER" in a number of countries of commercial interest to the
Company have been filed.
Governmental Regulation
The commercialization of the OXYMIZER, OXYMATIC and TOTAL O2 devices is
subject to the Federal Food, Drug and Cosmetic Act (the "Food and Drug Act") and
to regulations issued thereunder. The Company anticipates that commercialization
of other devices which it intends to market will also be subject to the Food and
Drug Act. The Food and Drug Act is administered by the FDA, which has authority
to regulate the marketing, manufacturing, labeling, packaging and distribution
of products subject to the Food and Drug Act. In addition, there are
requirements under other federal laws and under state, local and foreign
statutes which may apply to the manufacture and marketing of the Company's
products. The Medical Device Amendments of 1976 to the Food and Drug Act (the
"Amendments") and the Safe Medical Device Act of 1990 significantly extended the
authority of the FDA to regulate the commercialization of medical devices. The
Amendments established three classifications of medical devices: Class I, Class
II and Class III. With respect to all three classes, the general provisions of
the Food and Drug Act prohibit adulteration and misbranding. A medical device
may be adulterated if the device is or could be adversely affected by its
methods of manufacture, storage or packaging. A medical device may be misbranded
if its labeling is false or misleading or if its labeling does not contain
specific information required by law applicable to such type of device. In
addition, failure to register a medical device covered under the Food and Drug
Act with the FDA will render it misbranded under the Food and Drug Act.
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All manufacturers of medical devices must register with the FDA and,
with their initial registration, list all medical devices produced by them. This
listing must be updated annually. In addition, prior to commercial distribution
of additional devices, the manufacturer must file with the FDA and receive
approval prior to the commencement of such commercial distribution, a notice
setting forth certain information about the device, including the classification
into which the manufacturer believes it falls.
Class I devices are subject only to the general controls concerning
adulteration, misbranding, good manufacturing practices, record keeping and
reporting requirements. Class II devices must, in addition, comply with
performance standards as promulgated by the FDA.
The Company has registered with the Bureau of Medical Devices of the FDA
as a Medical Device Establishment and with the Department of Health Services of
the State of California as a Medical Device Manufacturer. In addition, the
Company has developed procedures to comply with FDA standards concerning good
manufacturing practices, record keeping and reporting.
The Company has filed notification submissions pursuant to Section
510(k) of the Food and Drug Act of its intent to market the OXYMIZER, the
OXYMIZER Pendant, the OXYMATIC conserver, the OXYCOIL and the TOTAL O(2)
Delivery System; it has been granted permission by the FDA to market the
OXYMIZER and the OXYMIZER Pendant as Class I devices. Permission has been
granted to market the OXYMATIC, the OXYCOIL and TOTAL O(2) Delivery System as
Class II devices.
Employees
As of June 11, 1999, CHAD had 78 full-time and no part-time employees.
Fifty-three of the Company's employees are engaged in manufacturing and the
remainder are engaged in marketing, sales, administration and management. None
of the Company's employees are represented by unions; the Company believes its
employee relations are satisfactory. The Company will employ additional
personnel in all phases of its activities as required by the growth in its
activities. The number of additional personnel will be dependent on sales levels
of individual products.
Item 2. Properties.
The Company's principal offices and manufacturing facilities are
situated in premises located in Chatsworth, California and consist of
approximately 55,500 square feet, at a monthly rental fee of $24,500 pursuant to
a lease expiring in June, 2003.
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Management believes this facility should adequately handle the Company's needs
for the foreseeable future. The Company does not own any real property and does
not anticipate acquiring any in the foreseeable future.
Item 3. Legal Proceedings.
The Company becomes involved in legal proceedings in the ordinary course
of business. The Company maintains product liability insurance in an amount
deemed customary in the industry for protection of the Company against potential
product liability claims. Although the Company believes its product liability
insurance is sufficient and no pending legal proceeding poses a material threat,
no assurance can be given that pending or future proceedings will not have a
material impact on the Company's financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Stockholder
Matters.
The information required herein is hereby incorporated by reference to
the information contained under the caption "Corporate Data" in the Company's
Annual Report.
Item 6. Selected Financial Data.
The information required herein is hereby incorporated by reference to
the information contained under the caption "Selected Financial Data" in the
Company's Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information required herein is hereby incorporated by reference to
the information contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's
Annual Report.
Item 7a. Quantitative and Qualitative Disclosures about Risk
The Company has no significant risks in this area.
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Item 8. Financial Statements and Supplementary Data.
The information required herein is hereby incorporated by reference to
the Financial Statements and the Notes thereto contained in the Company's Annual
Report.
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required herein is hereby incorporated by reference to
the information appearing under the captions "Election of Directors" and
"Executive Officers" in the Company's definitive Proxy Statement to be filed
with the Securities and Exchange Commission.
Item 11. Executive Compensation.
The information required herein is hereby incorporated by reference to
the information appearing under the caption "Compensation of Directors and
Executive Officers" in the Company's definitive Proxy Statement to be filed with
the Securities and Exchange Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required herein is hereby incorporated by reference to
the information appearing under the caption "Voting Securities and Principal
Holders Thereof" in the Company's definitive Proxy Statement to be filed with
the Securities and Exchange Commission.
Item 13. Certain Relationships and Related Transactions.
None.
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.
(a) (1) Financial Statements.
Included in Part II of this Report:
Independent Auditors' Report
Balance Sheets -- March 31, 1999 and 1998
Statements of Operations -- Years ended March 31, 1999, 1998
and 1997.
Statements of Shareholders' Equity -- Years ended March 31,
1999, 1998 and 1997.
Statements of Cash Flows -- Years ended March 31, 1999, 1998
and 1997.
Notes to Financial Statements.
(a) (2) Financial Statement Schedules.
See Notes to Financial Statements.
(3) Exhibits.
3.1 Articles of Incorporation of the Registrant, as amended*****
3.2 Bylaws of the Registrant, as amended*
10.3 OXYMIZER License Agreement, as amended, with Robert E.
Phillips, Brian L. Tiep, M.D. and Ben A. Otsap*
10.5 Pulser System License Agreement, as amended, with Robert E.
Phillips, Brian L. Tiep, M.D. and Ben A. Otsap. (The Pulser
System is now called the OXYMATIC.)*
10.7 OXYMIZER Pendant License Agreement, as amended, with Robert
E. Phillips, Brian L. Tiep, M.D. and Ben A. Otsap*
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10.20 OXYCOIL tubing License Agreement with Mary Smart (licensed
under the name Respi-Coil).***
10.23 Summary plan description for Chad Therapeutics, Inc.
Employee Savings and Retirement Plan****
10.24 1994 Stock Option Plan******
10.25 Lease on real property at 21622 Plummer Street, Chatsworth,
California******
10.26 TOTAL O(2) Delivery System License Agreement, as amended,
with the Life Support Division of Litton Industries,
Inc.*******
13.1 Annual Report to Shareholders for the year ended March 31,
1998.
23.1 Consent of Independent Accountant
28.1 Letter from the FDA authorizing the Company to market the
OXYMIZER oxygen conserving device as a Class 1 device.*
28.2 Letter from the FDA authorizing the Company to market the
OXYMIZER Pendant oxygen conserving device as a Class 1
device.**
28.5 Letter from the FDA authorizing the Company to market the
OXYMATIC electronic oxygen conserver as a Class 2 device.***
28.6 Letter from the FDA authorizing the Company to market the
OXYCOIL coiled oxygen tubing as a Class 2 device.***
28.7 Letter from the FDA authorizing the Company to market the
TOTAL O(2) Delivery System as a Class 2 device*******
(b) Reports on Form 8-K - None filed.
(c) Index to Exhibits.
(d) Financial Statement Schedules - None
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- --------------
* Previously filed as an Exhibit to the Registrants' Registration
Statement on Form S-18, File No. 2-83926.
** Previously filed as an Exhibit to the Registrants' Annual Report on Form
10-K for the year ended March 31, 1984.
*** Previously filed as an Exhibit to the Registrants' Annual Report on Form
10-K for the year ended March 31, 1986.
**** Previously filed as an Exhibit to the Registrants' Annual Report on Form
10-K for the year ended March 31, 1993.
***** Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended March 31, 1994.
****** Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended March 31, 1996.
******* Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended March 31, 1998.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Los
Angeles, State of California, on the 23rd day of June, 1999.
CHAD THERAPEUTICS, INC.
By /s/Thomas E. Jones
----------------------------------------
Thomas E. Jones, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/Thomas E. Jones Chief Executive Officer, June 23, 1999
- --------------------- President and Director
Thomas E. Jones (Principal Executive Officer)
/s/Earl L. Yager Executive Vice President, June 23, 1999
- --------------------- Chief Financial Officer
Earl L. Yager and Secretary and Director
(Principal Financial and
Accounting Officer)
Chairman Emeritus June 23, 1999
- ---------------------
Charles R. Adams
/s/David L. Cutter Director June 23, 1999
- ---------------------
David L. Cutter
/s/John C. Boyd Director June 23, 1999
- ---------------------
John C. Boyd
/s/Norman Cooper Director June 23, 1999
- ---------------------
Norman Cooper
/s/Philip Wolfstein Director June 23, 1999
- ---------------------
Philip Wolfstein
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Exhibit Index
Exhibit Index Sequentially
Exhibit No. Document Numbered Page
- ----------- -------- -------------
13.1 Annual Report to Shareholders for the year ended March 31, 1999
23.1 Consent of Independent Accountant
24