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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One)  OR [  ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from  to Commission file number 1-12214 Chad Therapeutics, Inc.  California
    
    95-3792700(State or other jurisdiction of
    
    (I.R.S. Employerincorporation 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: Name of each exchangeTitle of each class
    
    on which registeredCommon Shares, $.01 par value
    
    American Stock Exchange
 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 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. [  ] 1




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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [  ] No [x] As of September 30, 2003, the last business day of the registrants most
recently completed second fiscal quarter, the approximate aggregate market
value of voting and non-voting common stock held by non-affiliates of the
registrant was $20,086,000 (based upon the last closing price for shares of the
registrants common stock as reported by the American Stock Exchange as of that
date). Shares of common stock held by each officer, director, and holder of 10%
or more of the outstanding common stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes. There were approximately 10,096,000 shares of common stock outstanding as
of June 14, 2004. Certain information required in Part III hereto is incorporated by
reference to the Proxy Statement (Proxy Statement) for the Registrants 2004
Annual Meeting of Shareholders to be filed with the Securities Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this Form 10-K. Portions of the Registrants Annual
Report to Shareholders for the year ended March 31, 2004 (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. 2




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TABLE OF CONTENTS  PART IItem 1. BusinessItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Registrants Common Equity and Stockholder MattersItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7a. Quantitative and Qualitative Disclosures about Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Disagreements on Accounting and Financial DisclosureItem 9A. Controls and ProceduresPART IIIItem 10. Directors and Executive Officers of the RegistrantItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and ManagementItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accountant Fees and ServicesPART IVItem 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-KSIGNATURESEXHIBIT 13.1EXHIBIT 23.1EXHIBIT 28.13Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2    Table of Contents  
 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 of 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 that 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. According to the National Heart, Lung and Blood Institute of the National
Institutes of Health (NIH) between 1980 and 1990 the death rate from COPD
increased by 22 % in the United States and by 1998 had increased another 27%. More recently, the American Lung Association reported that in 2001 there
were 14.1 million Americans suffering from COPD, which is the fourth leading
cause of death in the United States and claimed the lives of over 115,000
people that year. This report also notes that in 2001 the annual cost to the
nation for COPD in health care and indirect costs was estimated to be $32.1
billion. 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,
spent approximately $1.8 billion in 2002 for home oxygen according to a report
by the Centers for Medicare and Medicaid Services Office of Actuary. This
represented a 13% increase over the previous year according to the report. Chronic obstructive pulmonary diseases are also prevalent in other
countries, particularly in some European nations and the Far East 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 over the
next five to ten years. The primary oxygen supply for home patients are concentrators which
concentrate oxygen from the ambient air (85-90%), reservoirs containing liquid
oxygen (10-15%) and cylinders containing compressed gaseous oxygen (less than
1%). 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 3




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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. Currently, Medicare provides a prospective flat fee monthly payment for
home oxygen services based solely on the patients prescribed oxygen
requirement and disregards modality, the type of system in use. In the past,
dealers were reimbursed on the basis of total oxygen delivered by the dealer
with variances based on the modality used and other variables. The prior
procedure tended to encourage waste and inefficiency. Consequently, with the
incentive to operate efficiently, inexpensive concentrators have grown in
popularity because of their low cost and less frequent servicing requirements.
At the same time, interest in oxygen conserving devices which can extend the
life of oxygen supplies and reduce service calls by dealers has heightened.
There is also a separate fixed allowance from Medicare for patients who need to
be mobile and therefore require portable oxygen systems. In November 2003, Congress enacted the Medicare Improvement and
Modernization Act, which will impact reimbursement for home oxygen over the
next several years. The new legislation will result in continued pressure on
homecare providers to reduce the cost of providing home oxygen services. 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 a 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 that are designed to conserve oxygen. The benefits of such
improvements include substantial cost savings for the home care provider, as
well as increased mobility for ambulatory patients who require portable oxygen
supplies. These devices extend the life of oxygen supplies and make possible
more compact and longer lasting portable systems, thereby improving 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. 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. Thus the OXYMIZER device 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 nineteen 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 of the OXYMIZER
devices. The greater efficiency provided by these 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. 4




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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 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 that 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. 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 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 June, 1993, the Company introduced a different version of the OXYMATIC
conserver, the OXYMATIC  2400. This model incorporates substantial
improvements and additional features, including 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. In July, 2000, the Company introduced the first of the OXYMATIC 400 series
of conservers. Additional models were added to this line in January and March
of 2001. This new line of conservers was designed to capitalize on the proven
reliability and efficiency of the Companys previous models. In addition,
features and options were added to create state-of-the-art conservers that
would give homecare providers a wide choice of products to service their
patients individual needs and preferences. These new conservers include a
built-in regulator, expanded flow rates and provide average savings of 5 to 1
over continuous flow oxygen. In November, 2001, the Company introduced the SEQUOIA OXYMATIC line of
conservers. These conservers utilize the same electronic features as the
OXYMATIC 400 series conservers but do not contain a built-in regulator. CYPRESS OXYPneumatic® Conservers. In July, 2002, the Company began
marketing the CYPRESS pneumatic conserver, which allows the Company to compete
in the pneumatic segment of the conserver market for the first time. This
device incorporates no electronic parts, thus eliminating the need for
batteries. It is lightweight, small and allows the use of a standard
single-lumen cannula, unlike many other pneumatic conservers that require
special cannulas. The CYPRESS conserver provides flow rates from one to six
liters per minute and oxygen savings greater than 3:1 over continuous flow
oxygen. 5




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Sales of OXYMATIC electronic and CYPRESS OXYPneumatic conservers accounted
for approximately 77% and 74% of the Companys sales in 2004 and 2003,
respectively. Sales of OXYMATIC electronic conservers accounted for
approximately 60% of the Companys sales in 2002. The OXYMATIC electronic and CYPRESS pneumatic conservers extend the time
the contents of the cylinders will last over continuous flow oxygen. They
provide ambulatory patients with greater mobility and less weight. The Company
believes 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. SAGE Oxygen Therapeutic Device    In May 2004 the Company received
clearance from the FDA to market its new SAGE Oxygen Therapeutic Device. The
SAGE device is the first in a planned family of oxygen therapeutic devices that
use the Companys proprietary technologies to sense a patients movements and
automatically adjust the rate of oxygen delivery to reduce the risk of
desaturation as activity increases. The SAGE device combines the industrys
first truly dynamic, patented delivery technology with the proven oxygen sensor
technology in the Companys OXYMATIC 400 series conserver. As a result, the
device addresses the common problem of oxygen desaturation, which causes a
patient to feel weak and out of breath when activity increases, yet it still
maximizes patient ambulatory capability. 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 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
O2® Delivery System. In January, 1998, the Company began marketing
the TOTAL O2 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. The TOTAL O2 Delivery System was designed to provide home care
dealers with a more cost effective means to provide home oxygen services while
at the same time providing the patients 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 O2 system were adversely affected by several
factors, including the overall home oxygen market climate, as well as start-up
manufacturing and supplier issues. The Company believes it has resolved the
manufacturing and supplier issues. Nonetheless, the Company has still not
achieved the level of sales originally anticipated for this product and now
believes its success will be dependent on the healthcare communitys acceptance
of the technology and willingness to substitute a higher capital acquisition
cost for lower operating costs. No assurances can currently be given regarding
the level of success the Company may achieve with the TOTAL
O2 system. See
Outlook:Issues & Risks  New Product in the Companys Annual Report to
Shareholders. The technology for each of the devices described above has been licensed
from the inventors thereof, with the exception of the CYPRESS OXYPneumatic
conserver, which belongs to the Company. The Company has acquired exclusive
licenses to manufacture and market the OXYMIZER devices, the OXYMATIC
conservers, the OXYCOIL tubing and the TOTAL O2 system. See Licensing and
Related Agreements. Other Products. The Company also offers a variety of ancillary products
that support the principal oxygen conserving products. These include oxygen
cylinders of various sizes and compositions, 6




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regulators, cannulas and
connecting tubing and assorted carrying pouches. In addition, with a field
sales force of
manufacturers representatives and direct sales representatives covering the
entire United States (see Marketing) the Company will utilize this team as
part of a strategy to market and sell additional products that are targeted for
the Companys current customer base, the homecare provider. Products Under Development It is the Companys objective to continuously improve and add to its
oxygen conserving and related products. During the fiscal years ended March 31,
2004 and 2003 the Company entered into contracts with outside vendors to
develop products in the home oxygen market and sleep disorder market. No
assurance can be given that any products developed pursuant to these contracts
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, 2004, the Company expended approximately
$1,292,000 on research and development and has expended approximately
$7,619,000 since its inception in August of 1982. The Company operates in an
industry that 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 $1,570,000 on several projects. The
Company conducts research and development 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 OXYMATIC conserver, thereby
acquiring exclusive rights to manufacture and market such product. 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. Through September 2003, the Inventors
License Agreements provided 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 provided 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. As of September 2003, no further royalty payments
are due. 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 is
issued, 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 Carleton
License Agreement) with the Life Support Division of Carleton (formerly Litton
Life Support) for the TOTAL O2 Delivery 7




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System. Pursuant to the Carleton
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 Carleton 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 1999, 2000 and subsequent
years, respectively. The Carleton 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 Carleton 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. The Company has also entered into a license a agreement (the Phillips and
Otsap License Agreement) with Robert E. Phillips and Ben A. Otsap for the
SAGE Oxygen Therapeutic Device. Pursuant to the Phillips and Otsap Agreement,
the Licensor grants to the Company an exclusive license (with the right to
grant sublicenses) to manufacture, use and sell such devices in the health care
market. The Phillips and Otsap 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 3% for unit sales up to 1,499 units, 4% for unit
sales from 1,500 to 1,999 units per month, 5% for unit sales from 2,000 to
2,499 units per month and 6% for unit sales of 2,500 or more per month. The
agreement also requires minimum annual royalties of $15,000 in the first year
after FDA clearance is received to market the product and $30,000 per annum
thereafter. The Phillips and Otsap License Agreement continues until the
expiration of the last to expire of any patent covering the related devise or
until the Company ceases uses of the licensed technology. The Licensors may
terminate the Phillips and Otsap License Agreement at an earlier date if the
Company is in arrears for six 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 Pendant device 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. The Company believes
that other injection molding facilities would be available in the event of a
termination of this arrangement. Pursuant to a written agreement, the Company
purchases finished units of the OXYMIZER device from a supplier in Hong Kong.
The Company believes that other injection molding facilities would be available
in the event of a termination of this arrangement. Production of the OXYMATIC 300 series, 2400 and 400 series conservers, the
CYPRESS pneumatic conservers, and the SAGE Oxygen Therapeutic Device are being
handled internally with only a portion of the electronic assembly for
electronic conservers 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. 8




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Production
of the TOTAL O2 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. The Company provides warranties for
certain of its products based on industry standards and accrues for the
estimated expenses associated with those warranties based on the best
information available, primarily historical claims experience. 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 and provide a better quality of care at
less cost. Homecare dealers have reportedly increased their revenues by assembling
small portable systems incorporating the Companys OXYMATIC electronic
conserver or CYPRESS pneumatic 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
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. A large portion of home oxygen patients are covered by Medicare or other
government programs. Since June 1989, home oxygen suppliers have been
reimbursed on a fixed monthly fee basis by Medicare. 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 O2 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 target respiratory care
physicians, nurses and therapists. The Company markets its products directly to home oxygen suppliers
throughout the U.S. The Company currently has a Vice President of Sales &
Marketing, two Regional Vice Presidents of Sales, a manager of sales
administration, an art and media manager, a marketing manager, a customer
relations manager and five 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 a field sales
force of direct sales representatives and independent manufacturers sales
representatives to handle direct selling to customers. This field sales force
is currently comprised of 4 direct sales representatives and 37 manufacturers
sales representatives with coverage throughout the United States. The Company
also utilizes direct mail, trade show attendance, trade advertising and a web
site to 9




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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 institutional settings. As the trend develops to move patients
into home care, opportunities for the Companys products should increase.
Sales of the OXYMATIC conserver in Canada and Japan have become an important
part of the Companys business. Based on industry market research projections,
the Company expects the international market to increase to 150% of the U.S.
potential over the next five to ten years. The Company has entered into exclusive distributorship agreements in
Germany, Japan, Australia and several other countries. The Companys largest
distributor in Germany covers portions of the European Community. The Company
also has non-exclusive distributors in many other countries. Sales outside of the United States subjects 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 over 4,000 dealer and hospital
customers. Based upon information developed from various lists the Company
believes that there are approximately 7,000 to 8,000 home 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 homecare providers,
approximately 48% are represented by three major national chain accounts. One
national chain customer accounted for 27%, 24% and 23% of net sales during
2004, 2003 and 2002, respectively, and one other chain accounted for 14% and
11% of sales in 2004 and 2003, respectively. Financial Information Relating to Foreign and
Domestic Operations and Export Sales 2004
    
    2003
    
    2002Sales (thousands):United States
    
    $
    20,498
    
    
    
    18,639
    
    
    
    17,904Canada
    
    
    303
    
    
    
    307
    
    
    
    265Japan
    
    
    238
    
    
    
    207
    
    
    
    240Germany
    
    
    44
    
    
    
    46
    
    
    
    289All other countries
    
    
    458
    
    
    
    342
    
    
    
    308Total
    
    $
    21,541
    
    
    
    19,541
    
    
    
    19,006
 All identifiable assets are located in the United States. At March 31, 2004, the Company had no backlog of orders for any of its
products. The Company presently endeavors to maintain sufficient inventory to
ship all of its products immediately upon receipt of orders. The Company
believes that maintaining such levels of inventory is necessary to meet the
requirements of its customers. 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 10




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in the past were targeted primarily to a specific
segment of the market  liquid oxygen usage. Several companies, including
Caire Inc. and Puritan Bennett market small (3.4 to 5.5 lbs.) portable liquid
oxygen systems incorporating simple oxygen conserving devices which double the
useful life of these systems. Some of these companies have substantially
greater marketing and financial resources than the Company. However, these
units are more expensive than systems utilizing the OXYMATIC conservers 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 conservers in direct
competition with the Companys OXYMATIC electronic and CYPRESS pneumatic
conservers. Some of these conservers only provide 2:1 to 3:1 savings ratios.
As a result, these units while weighing about the same as the OXYMATIC
conserver provide only 1/3 or 1/2 as much ambulation time. 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. In addition, some of these competitors had
introduced conservers with features not found in the Companys products prior
to the introduction of the OXYMATIC 400 series conservers. While the
reliability and superior conservation of the OXYMATIC conservers partially
offset these advantages, some of these companies have attained market share at
the Companys expense. The Company does not know the level of sales achieved
by these companies. There are several other types of portable oxygen systems which compete
with the Companys OXYMATIC conservers but do not utilize oxygen conserving
devices. Aluminum and steel oxygen cylinders with continuous flow regulators
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 their lower unit price advantage.
The OXYMATIC electronic and CYPRESS pneumatic conservers allow 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 that weigh 3.4 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 7.3 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. In addition, the patient must remain within
range of the base unit for refilling, unlike with the OXYLITE systems with
which a patient can take as many cylinders as needed to provide the amount of
time necessary to be away from their base unit. The Company is aware of one combination oxygen concentrator and refilling
station being marketed by Invacare in competition with the TOTAL
O2 system.
This system is larger and heavier and does not contain some of the integrated
features found in the TOTAL O2 system. The Company does not know the level of
sales achieved by Invacare for this system. 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 11




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OXYMATIC conserver, the
CYPRESS OXYPneumatic conserver, the TOTAL O2 Delivery
System, and the SAGE Oxygen Therapeutic Device. 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. 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. Through patent searches, contacts in the industry and representations and
indemnities received from licensors and development partners, the Company seeks
to ensure that its products do not infringe on the intellectual property rights
claimed by others. However, interpretation of the scope and validity of
existing patent rights may differ, and no assurance can be given that the
Company products will in all cases not infringe on the rights of others.
Moreover, any dispute regarding potential infringement may require substantial
management and financial resources to defend. The Company has obtained U.S. registration for the trademarks OXYMIZER,
OXYMATIC, OXYPneumatic, CHAD,
OXYCOIL, and TOTAL O2. 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, CYPRESS, TOTAL
O2, and
SAGE 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 that 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 that 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 12




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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 will render it misbranded under the Food and Drug Act. All manufacturers of medical devices must register with the FDA and 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 and is ISO 9001
certified. 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 CYPRESS OXYPneumatic conserver, the
OXYCOIL, the TOTAL O2 Delivery System, and the SAGE Oxygen Therapeutic Device;
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 CYPRESS OXYPneumatic, the OXYCOIL, the TOTAL O2 Delivery System,
and the SAGE Oxygen Therapeutic Device as Class II devices. Employees As of June 25, 2004, CHAD had 117 full-time employees and 1 part-time
employee. Sixty-two of the Companys employees are engaged in manufacturing
and the remaining 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 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 $32,000 pursuant to a lease expiring in
June, 2008. 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 it
deems customary in the industry for protection of the Company against potential
product liability claims. Although the Company believes its 13




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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 Market Risk The Company has no significant exposure to market risk sensitive
instruments or contracts. 
 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. 
 Item 9A. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures.An evaluation as of
the end of the period covered by this report was carried out under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, of the
effectiveness of our disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) and Rule 15d 15(e) promulgated under the
Securities Exchange Act of 1934, as amended (the Exchange Act). Based on
their evaluation, our principal executive officer and principal financial
officer concluded that our disclosure controls and procedures are effective to
ensure that we record, process, summarize, and report information required to
be disclosed by us in our reports filed under the Securities Exchange Act
within the time periods specified by the Securities and Exchange Commissions
rules and forms. 14




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(b) Changes in Internal Control Over Financial Reporting.There have not
been any changes in the Companys internal control over financial reporting
during our fourth fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting. 
 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. 
 Item 14. Principal Accountant Fees and Services The information required herein is hereby incorporated by reference to the
information appearing under the caption Proposal 2: Ratification of
Appointment of Independent Accountants in the Companys definitive Proxy
Statement to be filed with the Securities and Exchange Commission. 
 PART IV 
 Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) (1) Financial Statements. Included in Part II of this Report: Report of Independent Registered Public Accounting Firm Balance Sheets  March 31, 2004 and 2003 Statements of Operations  Years ended March 31, 2004, 2003 and 2002. Statements of Shareholders Equity  Years ended March 31, 2004, 2003 and
2002. Statements of Cash Flows  Years ended March 31, 2004, 2003 and 2002. Notes to Financial Statements. 15




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(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* 10.5   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.)* 10.20   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 O2 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, 2004. 23.1   Consent of Independent Registered Public Accounting Firm 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 O2 Delivery System as a Class 2 device******* 28.9   Letter from the FDA authorizing the Company to market the OXYMATIC
411 conserver as a Class 2 device******** 28.10   Letter from the FDA authorizing the Company to market the OXYMATIC
401A and 411A conservers as a Class 2 devices******** 28.11   Letter from the FDA authorizing the Company to market the TOTAL 02
Post Valve 16




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Cylinders********* 28.12   Letter from the FDA authorizing the Company to market the CYPRESS
OXYPneumatic conserver********** 28.13   Letter from the FDA authorizing the Company to market the SAGE
Oxygen Therapeutic Device 31.1   Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 31.2   Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (b) Reports on Form 8-K  None filed. (c) Index to Exhibits. (d) Financial Statement Schedules  None   * 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.******** Previously filed as an exhibit to the Registrants Annual Report on
Form 10-K for the year ended March 31, 2001.********* Previously filed as an exhibit to the Registrants Annual Report on
Form 10-K for the year ended March 31, 2002.********** Previously filed as an exhibit to the Registrants Annual Report on
Form 10-K for the year ended March 31, 2003. 17




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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 20th day of June, 2004. CHAD THERAPEUTICS, INC.By
    /s/
    Earl L. YagerEarl L. Yager, 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

Thomas E. Jones
    
    Chairman, and Director
(Principal Executive Officer)
    
    June 25, 2004/s/ Earl L. Yager

Earl L. Yager
    
    Chief Executive Officer, President,
and Secretary and Director
(Principal Financial and Accounting Officer)
    
    June 25, 2004/s/ Tracy A. Kern
    
    Chief Financial Officer
    
    June 25, 2004Tracy A. Kern/s/ Kathleen M. Fisher
    
    Director
    
    June 25, 2004Kathleen M. Fisher/s/ John C. Boyd
    
    Director
    
    June 25, 2004John C. Boyd/s/ Norman Cooper
    
    Director
    
    June 25, 2004Norman Cooper/s/ Philip Wolfstein
    
    Director
    
    June 25, 2004Philip Wolfstein/s/ James M. Brophy
    
    Director
    
    June 25, 2004James M. Brophy
 18




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Exhibit Index Exhibit IndexExhibit No.
    
    Document13.1
    
    Annual Report to Shareholders for the year ended March 31, 2004.23.1
    
    Consent of Independent Accountant28.13
    
    Letter from the FDA authorizing the Company to market the SAGE Oxygen Therapeutic Device31.1
    
    Certification of the Chief
Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 200231.2
    
    Certification of the Chief
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 200232.1
    
    Certification of Chief Executive
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 19