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CHAD Managers Beat Out Dissidents in Proxy Battle

CHAD Managers Beat Out Dissidents in Proxy Battle Corporate Focus by MICHAEL HART, Staff Reporter No matter how you cut it, CHAD Therapeutics Inc. is not a Hewlett-Packard Co. or a Compaq Computer. The Chatsworth oxygen system maker has a market cap in the area of $28 million, a stock price of $2.85 and earnings of $178,000 in the last quarter not exactly corporate takeover material. Nevertheless, a battle for control of two seats on its board of directors that has been waged over the past two months has seen accusations of fraud and malfeasance bounce back and forth between CHAD management and a group calling itself The Committee to Restore CHAD Shareholder Value, by way of no less than 19 SEC filings since early August. The reason for all the interest in CHAD? “That would be pure speculation on my part,” said CHAD COO Earl Yager, “which I’d rather not comment on publicly.” The dissident group of stockholders, which holds less than 8 percent of the company’s shares and is headed by a Missouri real estate developer named David Johnson, did not return calls to the Business Journal. However, it reported in SEC filings that its members were “dissatisfied with CHAD’s poor historical financial performance” and the fact its stock price had dropped from an all-time high of $20.62 in 1996 to its current value. CHAD has acknowledged problems in the past but, as Yager said, “We’re executing a turnaround plan that (CEO) Tom Jones implemented when he came on board in 1998.” In fact, the company saw a 54-percent increase in sales in the fiscal year that ended March 31, from $12.2 million in revenue in 2001 to $18.7 million in 2002. Net income in the quarter ending June 30 was $178,000 on $5.0 million in sales, compared to $13,000 on $4.8 million in sales in the same quarter a year earlier. “That’s the point,” Yager said. “We haven’t been able to figure this out.” Shareholders, however, may have been able to. Although official results of the board election held Sept. 11 had not been announced by an outside firm, the following day Yager said it was clear that the management slate had an overwhelming majority of votes. Business for the company that manufactures portable oxygen systems primarily for the home health care market does seem to have improved. Like many companies in the medical device sector, CHAD was hit hard by cuts in Medicare reimbursements that were part of a federal Balanced Budget Act of 1997. Net income of $5 million on sales of $26.2 million that year fell dramatically to net income of $800,000 on sales of $16.6 million in 1998. Then in early 2001, CHAD introduced the OXYMATIC 400 series of oxygen conservers, which gives patients the means to refill oxygen tanks on their own, resulting in reduced costs for suppliers and increased sales for CHAD. “So we’ve recaptured a lot of our old market share,” Yager said. What’s more, analyst Craig P. Pratesi with Standard & Poor’s added that sales could increase 15 to 20 percent in the next year. Robert M. Gold, also with Standard & Poor’s, said “We are selectively bullish regarding the medical device sector,” particularly with niche-oriented companies like CHAD. Company officials also point out that the company is debt-free and that the stock price has risen from a low of 50 cents a share in December 2000. The dissidents, however, believe that, given that 43-percent increase in sales over the past year, the stock price should have increased by even more. The dissident group also pointed out in filings that it believes distribution channels and sales territories need to be reviewed and that research and development needs to be restructured to get new products to market quicker. Finally, the group questioned the level of Jones’ compensation and temporary relocation reimbursements that they say continued for four years after the CEO joined the company in 1998. In return, the company wrote stockholders telling them of federal civil jury findings of fraud and breach of fiduciary duty against Johnson. Institutional Shareholder Services, an independent proxy advisory firm that offers recommendations on how to vote in board elections, recommended on Aug. 14 that CHAD stockholders “withhold votes from Thomas Jones.” However, it changed its mind on Sept. 4 and recommended voting for the management slate, noting “the company’s fiscal 2002 sales results belie any suggestion that the company’s revenue growth is a real cause of concern.”

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