UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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CHAD THERAPEUTICS
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[LOGO]
CHAD
THERAPEUTICS
September 2, 2003
Institutional Shareholder Services Recommends
A Vote "FOR" Chad Management Nominees
We are pleased to report that Institutional Shareholder Services ("ISS"), the
nation's leading independent proxy advisory firm, has recommended a vote for the
management nominees of Chad Therapeutics. ISS held discussions with
representatives from both sides in this proxy contest, including Chad's two
senior officers and dissident Monte McDowell, and its recommendation cited many
of the arguments we had raised in our letters to our shareholders.
To follow the ISS recommendation, shareholders should sign and return the WHITE
proxy card and not return the gold card.
Thank You for Your Support
We appreciate the expressions of support we have received from many of you in
our recent conversations. We regret that you have been deluged with letters and
calls over the past few weeks. Unfortunately, due to the expensive, disruptive
and misleading campaign instigated by Mr. McDowell, we have been forced to spend
a significant amount of time and money setting the record straight for our
shareholders.
We have always been willing to listen to our shareholders, including Mr.
McDowell, and we appreciate your input. We remind you that even after Mr.
McDowell had spoken to our Nominating Committee in June, we sent him a letter
inviting him to continue discussions with us concerning any ideas he may have
for Chad. His answer was this totally unnecessary proxy contest.
This enormous distraction has not stopped us from focusing our efforts on the
real job at hand: building Chad's growth. Unfortunately, in order to bolster his
own campaign, McDowell has made every effort to belittle Chad's achievements
with his own brand of misleading criticism. A review of McDowell's proxy
material shows that he purchased nearly all of his Chad stock within the past
year -after his first proxy contest against Chad - and that his average cost is
approximately $2.11 per share. If he were so disenchanted with Chad during that
first fight, shareholders should question why he bought nearly his entire stake
after that time and is now complaining about matters from years ago.
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Put simply, Chad's turnaround is real. Chad's current growth is real. Chad's
revenue for the past 4 quarters was approximately $20.2 million, a 65 percent
increase over the same period 3 years ago. This becomes an even greater
accomplishment when you consider that we had to make up for $1.5 million in
sales of the Total 02 Delivery System(R) that were lost when McDowell sold his
own business two years ago to another company that didn't use that product. We
believe this is real progress!
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Our New Product Development Programs
Increase Chad's Potential For Greater Growth
Apart from increasing sales of existing products-- including continued growth as
a leader in the conserver market -- an important part of our growth strategy has
been to expand our product lines and improve our existing products through
investment in and development of new technologies. As we indicated in our Annual
Report and first quarter press release, we are making excellent progress in
these areas.
o We are developing additional models of our conserver line to fill specific
requirements in the domestic and international markets.
o We continue to make progress with the development programs related to the
technologies we licensed earlier this year from AirMatrix Technologies and
ACOBA, LLC. These agreements give us access to proprietary sensor
technologies and control software which we are using to expand our
conserver product lines and to develop innovative new products to enhance
our position in the far larger oxygen concentrator market.
o These technologies should also help us to develop potential applications
for the high growth sleep disorder market -in both the diagnostic and
therapeutic segments.
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We urge you one last time to sign and return your Board's WHITE proxy card
today. DO NOT return any gold cards to McDowell.
The Annual meeting is September 9 - only a few days away. If you need assistance
in voting your WHITE proxy, please call our proxy solicitor, Morrow & Co., Inc.
at 800-607-0088. If you have any questions about the issues in this proxy
contest, please call Earl Yager at Chad Therapeutics, 818-882-0883, ext. 223.
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What Does McDowell Bring to the Board?
Disruption - McDowell's dismissive, threatening attitude toward our Nominating
Committee, his two proxy contests instigated against Chad, his lawsuit against a
leading Chad customer--all point toward a person for whom disruption is
"business as usual." That approach could have a significant negative impact on
the successful functioning of our board and on the morale of our work force as
well. McDowell's disruption has cost Chad nearly $300,000 in proxy contest
expenses over the past two years. It is noteworthy that after he had stated
three weeks ago in his proxy statement that he may seek reimbursement for his
own expenses, now at the last minute, he has changed his position to claim he
won't seek reimbursement. We believe McDowell is getting the message that Chad
shareholders are not happy with the expense and disruption he has caused your
Company!
Potential Conflict of Interest - McDowell has not refuted the point we have made
that, should he gain a seat on the board of Chad, he would have two separate
relationships with a major customer of ours, one through his own company and one
through Chad. Furthermore, we do not know at this time if there are, or will be,
other customers of ours with whom McDowell also has separate
relationships--thereby giving rise to additional potential conflicts.
Potential Damage to Relationship with Major Customer - Despite his protests,
McDowell cannot guarantee you that his lawsuit against a major Chad customer
won't harm our relationship with that customer if McDowell joins our board. Our
customer is free to order or not order from Chad as it chooses and McDowell's
membership on the board may not be perceived as friendly by that customer.
According to McDowell, his own relationship with this customer is "contractual"
which apparently differs in that our customer is free to walk away from Chad if
it wishes.
Ties to Last Year's Dissidents - Although last year's dissident group has
claimed to have formally disbanded, McDowell remains associated with at least
three of the four other participants, including David L. Johnson, who himself is
a significant Chad shareholder. Last year this group caused us significant
expense and disruption. More than 80 percent of McDowell's Chad stock was
purchased from Johnson last October.
Poor Corporate Governance Record - The one public company that McDowell has
indicated any experience with was run by a close associate of his - David L.
Johnson. McDowell sat on the board that recommended an entrenching bylaw
allowing Johnson to purchase up to 19.6% of that company's stock, and reducing
the limit for all other holders to 7.6%. Furthermore, McDowell has been in other
business relationships with Johnson while on the board and audit committee; has
had attendance problems as a trustee and problems with filing timely SEC forms
regarding purchases of stock. It was also admitted to us that he did not
personally complete his own questionnaire that was submitted to our Nominating
Committee.
Questionable Marketing Expertise For Chad's Customer Base - McDowell's claim to
marketing expertise for Chad's products stems from the fact that he had
distributed the Total O2 Delivery System(R) to individuals - most of whom were
already patients in his home healthcare company. In our opinion McDowell's sales
to individual patients who were in essence, a retail, captive audience, does not
translate into the ability to market our products to Chad's direct customers
which are mainly large corporations and other distributors that buy our products
in quantity - not individuals.
Lack of knowledge McDowell's misstatements in his early proxy materials
about Chad's manufacturing process displayed an alarming lack of knowledge
for someone who claims he has expertise with those products. Manufacturing
is Chad's business. McDowell has not indicated any experience in
manufacturing. We believe it is strange for someone who claims he can
market our products not to have knowledge of our cost-competitiveness and
the manufacturing processes involved.
An Ill-Conceived Marketing Plan So what does McDowell's self-proclaimed
marketing expertise bring to Chad? The only concrete "plan" McDowell has
presented is what we consider to be a high-risk "gamble the company"
suggestion to convert our entire sales force into a team of direct
representatives, which would cost Chad approximately $5 million annually.
As we have already told you, Chad had already initiated the use of direct
reps in the past year in certain strategic territories and will seek to
expand this plan so long as in can be done in a profitable and
cost-effective manner. McDowell's irresponsible suggestion to make a
complete transition all at once is risky and potentially disastrous, since
there are many situations in our business in which the added cost of
direct reps will outweigh any potential increase in sales.
McDowell the Victim?
McDowell, in his complaints about "personal attacks," is attempting to spin the
problems that he, himself, has created into a claim that he is a victim. The
scenario goes like this:
McDowell instigates two disruptive proxy contests;
McDowell makes misleading statements in his proxy material;
Chad sets the record straight and questions McDowell's credibility;
McDowell complains about personal attacks.
Of course, all the while McDowell claims to be a victim, he continues his
disruptive and misleading campaign.
We Urge You - One Last Time -
To Support Chad's Future Growth
By Signing and Returning Your White Proxy Card Today!
Last year we were able to absorb the cost and disruption of McDowell's proxy
contest and still improve Chad's performance. This year we hope to be able to do
the same. However, one thing we cannot guarantee is what will happen if McDowell
gains a seat on the Board and brings disruption to Chad all year long. That is
why we are urging you one last time to sign and return the enclosed WHITE proxy
card today.
We have laid the foundation for strong growth at Chad. We look forward to the
future where we believe Chad's potential will be realized, both in its continued
improving performance and in the market price of its stock.
Thank you once again for your consideration and support.
On behalf of the Board of Directors,
/s/ Earl L. Yager /s/ Thomas E. Jones
Earl L. Yager Thomas E. Jones
President Chief Executive Officer
Please sign, date and return the enclosed WHITE proxy card today. Only your
latest dated proxy card counts. Even if you have sent a gold card to McDowell,
you can revoke that vote and support Chad's nominees by signing and returning a
later dated Board of Directors WHITE proxy card. DO NOT send any gold cards to
McDowell, since a gold card, even marked "withhold" in protest, could revoke a
previously voted White proxy.
To discuss the issues in this proxy contest, please call Earl Yager at Chad
Therapeutics, 818-882-0883, ext. 223. For assistance in voting your WHITE proxy
card, please call our proxy solicitor, Morrow & Co., Inc., at 800-607-0088
Safe Harbor Statements under the Private Securities Litigation Reform Act of
1995
The foregoing statements regarding prospects for future earnings and revenues,
future sales trends for the OXYMATIC 400 series and CYPRESS conservers and the
introduction of products under development are forward-looking statements that
involve certain risks and uncertainties. A number of important factors could
cause actual results to differ materially from those contemplated by such
forward-looking statements. These include the loss of one or more major
customers, increased competition, the introduction of new products with
perceived competitive advantages over the OXYMATIC 400 series and CYPRESS
conservers, changes or proposed changes in health care reimbursement which
affect home care providers and CHAD's ability to anticipate and respond to
technological and economic changes in the home oxygen market. Moreover, the
success of the OXYMATIC 400 series and CYPRESS conservers and products under
development will depend on their efficacy, reliability and the health care
community's perception of the products' capabilities and benefits, the degree of
acceptance the products achieve among home care providers and, with respect to
products under development, obtaining timely regulatory approval. Additional
factors that could cause actual results to differ materially from those
contemplated in this letter can be found in the Company's annual and quarterly
reports filed with the Securities and Exchange Commission under the caption
"Outlook: Issues and Risks."
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Please sign, date and return the enclosed Board of Directors WHITE proxy card
today. If you have already returned a card to McDowell, you have every right to
revoke your vote by signing and returning a later dated WHITE proxy card in the
envelope provided. Only your latest dated proxy counts.
Do not return any gold cards to McDowell. A later dated gold card, even one
voted "withhold" in protest, may revoke a previously voted WHITE proxy.
If you hold your shares in street-name, please return your WHITE proxy card in
the envelope provided by your brokerage firm or bank.
To discuss the issues in this proxy contest, please call Earl Yager at Chad
Therapeutics (818) 882-0883, ext. 223. For assistance in voting your WHITE proxy
card, please call our proxy solicitor, Morrow & Co., Inc., at (800) 607-0088.
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