FORM 10-K/A1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: November 30, 1996
Commission File Number: 0-11411
Q-MED, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-2468665
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.
100 Metro Park South, Laurence Harbor, New Jersey 08878
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 566-2666
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to
Section 12 (g) of the Act: Common Stock, $.001 par value
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements by
reference in Part III of this Form 10-K or any amendment to the Form 10-K. [ ]
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 [ ]
As of February 19, 1997, the aggregate value of the registrant's voting
stock held by non-affiliates was $79,761,981 (computed by multiplying the last
reported sale price on February 19, 1997 by the number of shares of common stock
held by persons other than officers, directors or by record holders of 10% or
more of the registrant's outstanding common stock. This characterization of
officers, directors and 10% or more beneficial owners as affiliates is for
purposes of computation only and is not an admission for any purposes that such
persons are affiliates of the registrant).
As of February 19, 1997, there were 9,504,505 shares of the registrant's
common stock, $.01 par value, issued and outstanding.
Documents incorporated by reference:
Document Form 10-K Reference
-------- -------------------
Portions of the Registrant's Proxy Statement for III
its 1997 Annual Meeting (to be filed in definitive
form within 120 days of the Registrant's Fiscal
Year End)
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PART I
ITEM 1. BUSINESS
General
Q-Med, Inc. (the "Company") is a Delaware corporation and is the successor
by merger to the business of a New Jersey corporation organized on February 1,
1983. The Company engages in the development, manufacture, marketing and sale of
advanced medical devices and systems. The Company, through Interactive Heart
Management Corp. ("IHMC"), a subsidiary founded during the year ended November
30, 1995 ("fiscal 1995"), developed and is marketing an integrated coronary
artery disease management system under the name "ohms|cad(R)" to assist managed
care organizations manage the cost of coronary artery disease ("CAD"). The
Company has historically focused on producing high quality medical devices that
provide reliable diagnostic interpretation of certain disease states, including
a line of ambulatory ischemic heart monitors, an interpretative
electrocardiograph, a device for the analysis of heart rate variability and a
device for the measurement of venous blood flow. These systems are designed to
address the needs of primary health care physicians to appropriately manage
certain diseases cost effectively. The Company's products are uniquely suited to
assist primary health care physicians in discharging the greater medical
responsibilities that are expected to be placed on them, as efforts are made to
reduce the overall cost of health care. Each of the Company's present products,
and those which are under development by the Company as well as products
employing selectively acquired technology developed by others, are designed to
provide sophisticated analysis of physiological data in near or real-time and
report these analytical results to the primary care physician in order to detect
and manage early signs of potentially acute diseases. These technologically
advanced diagnostic tools lead to early detection and treatment thereby
facilitating cost-effective management of disease by a primary care physician
rather than disease management in an expensive acute care facility, such as a
hospital.
The Company has developed and markets a full line of ambulatory
computerized ischemic heart disease monitors utilizing patented technology.
These ambulatory products, marketed under the name "Monitor One(R),"
continuously analyze and interpret the discrete marker of ischemic heart
disease, the ST-segment of electrocardiographic ("ECG") signals generated by the
heart utilizing patented and proprietary technology in real time. The Company
has also developed and is marketing an electronic medical device under the name,
Monitor One nDx(R) ("nDx") which analyzes heart rate variability. The loss of
variation in heart rate may assist the physician in making a diagnosis and
determining the severity of autonomic neuropathy. Autonomic neuropathy, a
deterioration of the autonomic nervous system, is associated with diabetic
patients which may lead to complications in the functioning of the heart,
respiratory systems, digestion, body temperature, metabolism, perspiration and
the secretion of certain endocrine glands.
Utilizing the experience obtained through various drug trials with such
companies as Pfizer, Ciba Geigy, ICI and others and the extensive validations
completed on Monitor One instruments, the Company developed a comprehensive,
telemedicine disease management system
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for the coronary artery disease ("CAD") patient which is marketed under the
trade name ohms|cad by the Company's IHMC subsidiary. This system consists of
Monitor One STRx ambulant ischemic technology; a remote on-line diagnostic
center (The ohms Center); and an integrated cardiology consultant practice. This
entire system non-invasively and reliably quantifies the probable risk of a
heart attack, unstable angina and death and directs the patient to appropriate
therapy with the emphasis throughout on early detection, the modification of
risk-factors and medical intervention. Early treatment, emphasis on medical
intervention, appropriate referrals to the cardiologist results in an overall
lowering of the cost of CAD care and the improvement in mortality and morbidity
rates in populations having CAD.
In April 1996, the Company entered into a Strategic Alliance Agreement
with SmithKline Beecham Health Care Services, a division of SmithKline Beecham
Corporation ("SmithKline Beecham"). Under the agreement, SmithKline Beecham has
the exclusive right to market and sell the Company's ohm | cad system to managed
care companies in the United States, together with the Company's IHMC
subsidiary. In addition, SmithKline Beecham's venture capital affiliate, S.R.
One Limited, made a $2 million equity investment in the Company and acquired
warrants to acquire an additional 63,492 shares of the Company's common stock
for $15.75 per share. In certain circumstances, the Company can require S.R. One
Limited to exercise the warrants. The Company and SmithKline Beecham share
profits and losses after the Company recovers its costs of operating the
ohms|cad system for clients.
The Company's executive offices are located at 100 Metro Park South,
Laurence Harbor, New Jersey 08878 and its telephone number is (908) 566-2666.
ohms|cad System
ohms|cad is IHMC's proprietary "On-line Health Management Service for
Coronary Artery Disease". It is a telecommunications system designed as a total
disease management process for CAD. It consists of Monitor One STRx, IHMC's
Monitor One ambulant ischemia technology, a remote on-line diagnostic center
(The ohms Center), and an integrated cardiology consultant practice. The entire
system noninvasively and reliably quantifies the probable risk of a heart
attack, unstable angina and death and rationally directs the patient to
appropriate therapy with the accent on early detection, the modification of
critical risk-factors and medical intervention.
The overall system operates as an "expert system" emphasizing best medical
treatment options for myocardial ischemia and continued coronary wellness. The
system is an evidence based, relational mechanism, using coronary artery disease
patient descriptors which include:
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demographics, medical history, current medical therapy, including aspirin, lipid
and hypertension profiles, obesity and life style, smoking, glucose levels and
ambulant ischemia in its decision making.
In addition, each individual patient's demographics and risk profiles are
simultaneously entered into the ohms|cad database for secondary prevention
analysis and treatment. Recommendations for management are relational and
tailored to an individual patient for lipid and hypertension management,
antithrombosis, smoking, exercise, obesity and diabetes.
Because of centralized, digital storage of all data, it allows for the
continuous description and analysis of quantifiable results; success of the
stratification, proportion of patients assigned to various therapies, objective
outcomes, interplay with pharmaceutical and pharmacy benefit managers and
physician and patient compliance.
For example, in its risk prevention mode (myocardial infarction, unstable
angina, sudden death), it centers on the presence or absence of ambulant
ischemia as a risk stratifier utilizing our specialized non-invasive STRx
technology for evaluation of this phenomena in each patient. This test data is
telecommunicated to the Company's ohms|cad database (The ohms Center), which in
turn stratifies each individual patient into high or low risk. It then proposes
to lower patient risk with specific anti-ischemic medical therapies as one
treatment option, or, if necessary, recommends further local cardiology
consultation leading to possible invasive intervention. If the data indicate
that the patient is at low risk, a message is sent back to the primary care
physician (PCP) site within minutes with recommendations for optimization of
medical therapy which will maintain the patient in the low-risk pool. In both
circumstances, therapeutic actions are guided by IHMC's proprietary disease
management algorithm which in turn is based on national practice guidelines. All
of the interactions and data are stored in the ohms|cad diagnostic center, thus,
outcome information is available continuously.
Because ohms|cad is an active disease management process emphasizing a
continuum of care, derived from early detection of ambulant ischemia and
modification of patient risk factors, similar cost effective improvements in
cardiac events can be expected from its use. The ohms|cad system continually
monitors the care process at the primary care level, thus, results are reported
as outcomes. Favorable outcomes increase market share, decrease economic risk
and increase product differentiation. In the end, it is "coronary wellness" that
counts. It is durable, measurable and less costly than conventional care. As a
result, the early implementation of ohms|cad should contribute to significant
savings and patient gains in market share.
The ohms|cad system is presently implemented in one large physician
practice group where approximately 1400 CAD patients have been managed for a
period of 20 months. The Company expects to implement the system in several
managed care organizations within the next year.
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Ambulatory Ischemic Heart Disease Monitoring
While ambulatory monitoring for arrhythmias was first introduced in the
early 1960's and has been broadly used in medical practice as a diagnostic
monitoring system useful to detect rhythm and rate disturbances of the heart, no
company had developed a novel application using solid-state electronics and a
validated ischemia analysis program to evaluate the presence and duration of
ambulatory ischemic heart disease (Monitor One). Thus, the medical utility of
Monitor One allows the detection and analysis of reduced coronary artery blood
flow during a patient's daily routines (Ambulant Ischemic Heart Disease). Such
analysis can result in the early prevention of heart attack, unstable angina and
death. In addition, silent heart disease which is prevalent in coronary artery
disease patients and diabetics, may also be detected and evaluated by the
Monitor One technology. The basic design of Monitor One to accomplish this
special function, utilizes an on-board microprocessor and an extensively
clinically validated algorithm to analyze ischemic ECG signals and distinguish
between normal and abnormal heart beats as the patient is wearing the device
throughout their normal daily routines. Heightened recognition that ischemic
episodes are predominantly silent and prognosticate morbid cardiac events such
as heart attacks, sudden death and unstable angina prompted the Company to
develop the Monitor One technology.
The Company's Monitor One systems utilize technology which detects changes
in the ECG signal which may be associated with diseases of the heart. Monitor
One systems store analyzed ECG wave forms, statistical data, produce printed
reports and can transmit data either directly to a printer or over telephone
lines or to a personal computer for physician analysis, interpretation and
ischemic intervention. The Company's Monitor One, which may be worn on a belt or
carried in the patient's pocket, is capable of interpreting a wide variety of
ECG signals which may be associated with cardiac conditions. Monitor One
technology has been independently validated in controlled research studies for
the detection of ischemic episodes associated with coronary ST-segment
deviations in patients with diagnosed CAD.
Each Monitor One system is a computerized monitor with five high-fidelity
electrodes which are either disposable or reusable and attached to the monitor
through a single connector. The reusable electrodes were originally developed by
the National Aeronautics and Space Administration ("NASA"). Monitoring for
periods of greater than 24 hours is possible due to solid-state memory and the
design of the reusable electrodes, which allows high-fidelity signal capture
without the need for daily replacement of disposable electrodes. The United
States Patent Office abstract (No. 3,420,223) for the reusable electrode system
reports that the electrodes can be used continuously for 28 days without
appreciable deterioration of the electrodes or irritation of the wearer. In
practice, the reusable electrode system (which includes a plastic casing and
attached wiring) is subjected to physical abuse in its application and removal
from the patients' chests following a 24 hour monitoring session. Based upon the
Company's experience to date, it appears that the reusable electrode system has
an average life of six months. The Company offers extended one, two and
three-year warranties, at an additional cost to the purchaser, which includes
the cost of one set of replacement reusable electrodes for each year. The
monitor retains all information stored in a non-volatile memory driven by a
lithium battery
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during battery pack replacement or if the monitor is turned off for a minimum of
one year. In addition, the monitors indicate, by audible tone and liquid crystal
display ("LCD"), when battery replacement is required.
An integral part of Monitor One TC and Omni systems developed by the
Company is called the buffered interface module ("BIM"). The BIM permits the
rapid retrieval and storage of data from Monitor One units prior to printing
reports. This permits a physician to remove data stored after a monitoring
session and re-employ the monitor while the report is printing. The BIM also
permits data to be transferred to a microcomputer system base station, either
directly or telephonically. The Company has developed proprietary microcomputer
software to store, organize and assist in the analysis of ECG data.
Additional Products
The Company developed and is marketing a diagnostic device that analyzes
heart rate variability which can provide the physician information on the
functioning of the Autonomic Nervous System ("ANS"). ANS dysfunction is the
failure of the portion of the body's nervous system to regulate such unconscious
functions as respiration, circulation, digestion, heart-rate, body temperatures,
metabolism, sweating and certain glandular secretions. These symptoms are
associated with serious complications of diabetes leading to blindness, kidney
failure, and may contribute to diabetic cardiac autonomic neuropathy, often
associated with silent heart disease, heart attacks and sudden cardiac death.
The Company's Monitor One nDx system ("nDx") automates the analysis of heart
rate variation during deep inspiration and forced expiration, posture changes
and Valsalva Maneuvers. The nDx monitor assists the physician in administering
the test by prompting the patient's breathing patterns and then providing a
statistical analysis. The Company believes that this product can assist
physicians in the early detection of neurological disorders related to diabetes,
before other more dangerous symptoms (heart attacks, blindness, impotence, etc.)
are present and to help manage the treatment of their diagnosed diabetic
patients. The Company received a U.S. patent for the nDx technology on March 29,
1994 (Patent No. 5299119).
The Company also manufactures and markets other non-invasive medical
devices.
Marketing
Pursuant to the Company's Strategic Alliance Agreement with SmithKline
Beecham, SmithKline Beecham provides sales and marketing support to the
Company's ohms|cad sales organization. At present, the Company's sales team
consists primarily of senior management supported by six senior sales staff
persons that formerly were involved in the sales of the Company's Monitor One
products. The Company is still developing and supplementing an integrated
marketing plan with SmithKline Beecham which will include the utilization of
SmithKline Beecham's Integrated Health Care Division sales force to provide and
market ohms|cad services.
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The marketing and sales of the Company's devices to primary care
physicians, hospitals and other health care providers are conducted through the
Company's own direct sales force. Foreign medical product distributors sell the
Company's products in Europe. The Company also participates with unaffiliated
leasing companies in sales promotions involving financing for the end-user.
The Company also markets its products outside of the United States to
physicians and health care institutions through foreign distributors. In an
effort to expand its network of foreign distributors, the Company continually
evaluates established medical product distributors and supports validation
studies of its products by foreign research institutions. There is no assurance
that such efforts will result in the acceptance of the Company's products by the
medical community of countries in which validation studies are performed or
increase the Company's export sales. The Company's international operations are
subject to the usual risks of doing business abroad, including currency
fluctuations, government regulations, and the economic and political stability
of the countries in which it operates. In addition to the use of the Company's
products by physicians, its products have been used in clinical drug testing and
other clinical studies.
Warranty and Sales Terms
The Company extends end-users of purchased or leased devices a standard
warranty and, at additional cost to the end-user, extended one-year to
three-year warranties. Extended warranty sales represented 13.4% of net sales
for fiscal 1996. If there has been equipment malfunction, the Company's warranty
provides for the repair or replacement of the equipment. The average unit cost
of repair is minimal. During fiscal 1996 and 1995, the Company replaced
approximately 4 and 6 monitors, respectively, that could not be repaired
pursuant to its warranty programs.
The Company maintains a general policy of net 30 days payment terms for
distributors, cash or third party leasing arrangements for direct end user sales
and generally requires letters of credit or other secured terms for
international sales. In some cases, the Company has extended credit beyond 30
days. As a matter of general policy, however, the Company does not enter into
consignment arrangements with end-users or distributors and sales are made
without the right of return. From time to time, the Company has offered certain
distributors the opportunity, upon the introduction of new or upgraded products,
to exchange their inventory units as part of its marketing efforts. In such
cases, the customer was billed for the net price differential (generally not
significant) at the time of the product exchange. As of November 30, 1996 and
1995, approximately 19.1% and 20.9% of the receivable balances, respectively,
were more than 90 days past due. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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Reimbursement Policies
The Medicare program is a major payment source for procedures utilizing
the Company's products. The Medicare program is administered by the federal
government through the Health Care Financing Administration ("HCFA"), United
States Department of Health and Human Services. Medicare carriers, typically
private insurance companies, acting as agents of the government, operate under
contract with HCFA to implement Medicare program policies and process claims in
assigned geographic areas. Consequently, reimbursement rates for the same
services may vary by geographic area.
On January 1, 1992, a Medicare physician payment system became effective
which is designated "Resource Based Relative Value Scales" ("RBRVS"). RBRVS,
which is administered by the Health Care Financing Administration, and replaced
the "reasonable charge" system which was utilized since 1965. The reasonable
charge system was criticized because it resulted in wide variations in the
reimbursement payments for the same services performed by physicians of
different specialties and geographic locations. The RBRVS system, which is to be
phased in over five years, is intended to provide uniform reimbursement for the
performance of a service, regardless of the specialty of the physician
performing the service. The Company's analysis of the system concludes that the
RBRVS system seeks to lower overall costs of the delivery of medical care by
rewarding more patient management provided by primary care physicians.
Although the RBRVS system described above is mandated by Congressional
action, there can be no assurance that future Congressional action will not
result in the general reduction in the rates of reimbursement. Nevertheless, the
1995 RBRVS rates for the Company's products were increased between 3-5%. While
uncertainty relating to the Medicare classification of electronic ambulatory
cardiac monitors was resolved by HCFA in October 1988 and adopted by carriers
during fiscal 1989, the Company believes that the overall political climate to
reduce fees for all medical services has a negative impact on medical equipment
sales in general and, therefore, sales by the Company. In addition,
uncertainties created by proposals to reform the health care delivery system, in
general, created, in the Company's opinion, an environment in which many
physicians delay their decisions with respect to expenditures for capital
equipment. Accordingly, the Company expects that this trend had an adverse
impact on its equipment sales. However, the Company also believes that its
experience in designing and marketing equipment that offers high quality results
which are medically necessary and cost-effective, places it in a position to
exploit the evolving managed health care and large practice group market which
is consistent with efforts to lower overall health care costs. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Principal Customers
During fiscal 1996, 1995 and 1994, no single customer accounted for more
than 10% of the Company's net sales.
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Manufacturing
The Company assembles its product line and the components of its ohms|cad
system at its Sag Harbor, New York facility where the final testing and
packaging of the Company's products is performed. It contracts with electronics
companies for the manufacture and sub-assembly of its products and accessories,
as well as certain components of its devices and provides these companies with
technical expertise. Although the Company has not experienced significant delays
or disruptions in the assembly and delivery of its products, there can be no
assurance that delays or disruptions will not occur in the future. A
deterioration of the Company's relationship with its independent sub-contract
manufacturers could subject the Company to substantial delays in the delivery of
its products to customers. Such delays would subject the Company to possible
cancellation of orders and the loss of certain customers.
Whenever possible, the Company uses multiple sources of supply for its
components. However, the Company believes that there are only singular sources
of supply for certain components of its products. There is no assurance that
these sources will continue to supply those parts and, if they become
unavailable, the Company would be adversely affected. Also, there can be no
assurance that the Company's contract manufacturers will maintain an acceptable
level of quality and capability for assembling the products to the Company's
specifications. The Company has not experienced delays in obtaining supplies
which affected the Company's ability to deliver finished goods.
Competition
Monitor One ischemia products compete primarily with ambulatory arrhythmia
ECG scanning services, of which there are more than 75 in the United States, and
other ambulatory ECG monitoring equipment manufacturers. The Company is aware of
more than 20 ambulatory ECG monitoring equipment manufacturers of which five
manufacture digital systems. Certain large medical equipment companies such as
Hewlett Packard and Marquette Electronics have introduced electronic ambulatory
monitors which compete directly with those of the Company. These companies have
substantially greater marketing, financial and other resources than those of the
Company but management believes that the Company's products' price and
performance are competitive in this field.
The Company believes that Monitor One ischemia monitoring products offer
certain advantages over traditional ambulatory arrthymia ECG recording monitors
and scanning services. Monitor One products can provide continuous analysis and
quantification of ambulant ischemia in real-time as well as other irregularities
of the ECG signal for a period of time longer than 24 hours and have a
programmable feature which enables them to emit an audible tone during the
occurrence of certain high-risk ischemic episodes. These characteristics permit
the use of Monitor One products for the monitoring and regulation of drug
therapy and as a possible warning device for impending ischemic heart attacks.
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The Company's sales of Interp 1000 EKG systems is not significant in the
market for such devices. The market is dominated by companies such as Burdick,
Hewlett Packard and Marquette Electronics, which have far greater financial,
marketing and other resources than those of the Company. The Company believes
that its Interp 1000 product offers certain advantages, particularly its
validated accuracy, compact size, portability and pricing.
The Company is not aware of any commercial product which competes with its
nDx system which automates the process of testing for autonomic dysfunction nor
is it aware of any comprehensive CAD management system which competes with
ohms|cad.
The Company's VasoSpect system, which is designed to detect abnormalities
of venous blood flow, competes with other older and more well known technologies
such as doppler and ultrasound. Nevertheless, management believes that
VasoSpect's unique interpretative diagnostic capabilities for the analysis of
venous blood flow will allow it to compete favorably with existing technologies.
The Company believes that direct competition in ambulatory ischemic
monitors; products for testing autonomic function; interpretive ECG; and venous
blood flow analysis may, in the future, come from companies that are
considerably larger and have greater financial and human resources and marketing
capabilities. Primary competitive factors in the medical device industry include
scientific and technological superiority, price, service, product support,
availability of patent protection, access to adequate capital, the ability to
successfully develop and market products and processes.
Research and Development
In fiscal 1996, 1995 and 1994, the Company expended $348,840, $382,244 and
$337,277 respectively, for research and development. During fiscal 1996 and
1995, research and development was primarily focused on the development of the
ohms|cad system for managed care such as health maintenance organizations,
preferred provider organizations, and large physician groups.
Management expects to continue to develop new products, as well as enhance
its existing products and has budgeted 8% to 10% of anticipated revenue for such
research and development in fiscal 1997.
Patent Protection and Proprietary Information
The Company maintains a policy of seeking patent protection in the United
States and other countries in connection with certain elements of its technology
when it believes that such protection will benefit the Company. The Company's
Monitor One technology has been granted patents in the United States (Patent No.
4679144), Canada (No. 1281081) and Spain (No. 547040) and has additional patent
applications pending in other countries. The Company received a U.S. patent for
the nDx technology on March 29, 1994 (Patent No. 5299119). The
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Company applied for a patent for the ohms|cad system (Serial No. 08/414,510) on
March 31, 1995 which is pending. Certain patents relating to the Company's
technology begin expiring in 2004.
The patent laws of foreign countries may differ from those of the United
States as to the patentability of the Company's products and, accordingly, the
degree of protection afforded by the pendency or issuance of foreign patents may
be different than protection afforded under associated United States patents.
There can be no assurance that patents will be obtained in foreign jurisdictions
with respect to the Company's products or that the United States patent and any
foreign patents will significantly protect or commercially benefit the Company.
The Company does not intend to rely solely on patent protection for its
proprietary technology. The Company also relies upon confidentiality agreements
with employees, know-how, expertise and lead-time to attain and maintain its
competitive position, and to the extent it does so, there can be no assurance
that others may not independently develop similar technology or that secrecy
will not be breached.
Governmental Regulation
The Company's products, to the extent they may be deemed "medical
devices," are regulated by the Food and Drug Administration (the "FDA") under
the Federal Food, Drug and Cosmetics Act (the "FDCA") and regulations
promulgated thereunder.
All medical devices sold in interstate commerce are subject to FDA
clearance. The Company's products are subject to pre-market notification
(510(k)), pursuant to which the FDA determines whether a new medical product is
"substantially equivalent" to a product that was on the market prior to May 28,
1976. Products found to be "substantially equivalent" to those products may
thereafter be sold. The FDA has the authority, which it has not yet exercised,
to issue performance standards for the type of products manufactured by the
Company.
Regulations of the FDA known as Good Manufacturing Practices ("GMP")
provide standards for manufacturing processes, facilities, and record-keeping
requirements with which the Company and its contract manufacturers must also
comply. The Company believes that the manufacturing and quality control
procedures employed by it and its contract manufacturers meet the GMP
requirements. If the FDA should determine that the Company's products were not
manufactured in accordance with GMP's, it has the authority to order the Company
to cease production of its products and may require the Company to recall
products already sold by the Company. In addition, any facilities used to
manufacture or assemble the Company's products will be subject to inspection by
the FDA at least biannually.
The FDCA is not the exclusive source of regulation of medical devices and,
by its terms, allows state and local authorities to adopt more stringent
regulations for medical devices.
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Employees
The Company, as of January 31, 1997, had 47 full time employees. Of these
full time employees, 3 were executives, 8 were engaged in sales supervisory
capacities, 12 in sales and marketing, 4 in engineering, 7 in production, 5 in
technical support and 8 in office administration. None of the Company's
employees are covered by a collective bargaining agreement. The Company believes
its relations with employees are good.
Item 2. Properties.
The Company's executive offices occupy approximately 9,000 square feet of
office space in Laurence Harbor, New Jersey. These facilities are used
principally for administrative offices, sales training, and marketing. In
addition, the Company leases approximately 6,000 square feet of space in Sag
Harbor, New York used principally for research and development, assembly and
quality control. Management believes that the foregoing facilities are adequate
for the Company's current level of operations.
Item 3. Legal Proceedings.
The Company is subject to claims and legal proceedings covering a wide
range of matters that arise in the ordinary course of business. It is
management's opinion that the ultimate resolution of these matters will not have
a material effect on the Company's consolidated financial position and results
of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters.
Market for the Registrant's Common Stock and related stockholder matters
as set forth on page 24 of the Registrant's 1996 Annual Report to Stockholders
is incorporated herein by reference.
Item 6. Selected Financial Data.
Selected financial data as set forth on page 5 of the Registrant's 1996
Annual Report to Stockholders is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's discussion and analysis of financial condition and results of
operations as set forth on pages 6 to 10 of the Registrant's 1996 Annual
Report to Stockholders is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
Financial statements and supplementary data as set forth on pages 11 to
22 of the Registrant's 1996 Annual Report to Stockholders is incorporated
herein by reference.
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
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PART III
Item 10. Directors, Executive Officers, Promoters, Control Persons and
Compliance with Section 16(a) of the Exchange Act of the Registrant.
Information with respect to executive officers and directors of the
Company will be set forth in the Company's definitive proxy statement which is
expected to be filed within 120 days of November 30, 1996 and is incorporated
herein by reference.
Item 11. Executive Compensation.
Information with respect to executive compensation will be set forth in
the Company's definitive proxy statement which is expected to be filed within
120 days of November 30, 1996 and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information with respect to the ownership of the Company's securities by
certain persons will be set forth in the Company's definitive proxy statement
which is expected to be filed within 120 days of November 30, 1996 and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Information with respect to transactions with management and others will
be set forth in the Company's definitive proxy statement which is expected to be
filed within 120 days of November 30, 1996 and is incorporated herein by
reference.
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PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) Financial Statements.
Description Page
----------- ----
Independent Auditors Report
Consolidated Balance Sheets as of November 30, 1996 and
1995
Consolidated Statement of Operations for each of the three
years ended November 30, 1996, 1995 and 1994
Consolidated Statement of Stockholder's Equity for each of
the three years ended November 30, 1996, 1995 and 1994
Consolidated Statement of Cash Flow for each of the three
years ended November 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedules have been omitted because they are not applicable.
(3) Exhibits.
The following Exhibits are filed as part of this report. Where such filing
is made by incorporation by reference (I/B/R) to a previously filed statement or
report, such statement or report is identified in parentheses:
Official
Exhibit Sequential
No. Description Page No.
- --------- ----------- ----------
2 None
3.1 Amended and restated New Jersey Certificate of
Incorporation dated July 6, 1983 (Exhibit 3C to
the S-18 Registration Statement 2-86653-NY of the
Company effective December 1, 1983) I/B/R
15
<PAGE>
3.2 New Jersey By-Laws as amended on January 16, 1984
(Exhibit 3F to the Company's Annual Report on Form
10-K for the year ending November 30, 1984) I/B/R
3.3 Amended and Restated Delaware Certificate of
Incorporation of Q-Med, Inc. as in effect on July
11, 1987 (Exhibit 3.3 to the Company's Report on
Form 10-Q dated May 31, 1987) I/B/R
3.4 By-Laws as in effect on July 1, 1987 (Exhibit 3.3
to the Company's Report on Form 10-Q dated May 31,
1987) I/B/R
4.1 Specimen of Stock Certificate (Exhibit 4.1 to the
Company's Report on Form 10-K dated November 30,
1989) I/B/R
4.2 Warrant to Purchase Common Stock dated May 6, 1996
i/n/o S.R. One Limited
9 None
10.1 Q-Med, Inc. 1986 Incentive Stock Option Plan
(Exhibit 10N to the Company's Registration
Statement No. 33-4499 on Form S-1) I/B/R
10.2 Loan and Security Agreement dated November 1, 1989
between First Fidelity Bank, National Association
and the Company (Exhibit 10.1 to the Company's
report on Form 8-K dated November 27, 1989, as
amended by Form 8 dated December 6, 1989) I/B/R
10.3 Modification Agreement dated April 16, 1991
between the Company and First Fidelity Bank, N.A.
New Jersey (Exhibit 10.1 to the Company's Form
10-Q Report dated February 28, 1991) I/B/R
10.4 Limited Corporate Guaranty of Heart Map, Inc.
dated April 16, 1991 (Exhibit 10.3 to the
Company's Form 10-Q Report dated February 28,
1991) I/B/R
10.5 Security Agreement between Heart Map, Inc. First
Fidelity Bank, N.A. New Jersey dated April 16,
1991 (Exhibit 10.2 to the Company's Form 10-Q
Report dated February 28, 1991) I/B/R
10.6 Term Promissory Note payable to First Fidelity
Bank dated March 13, 1992 (Exhibit 25.1 to the
Company's Form 8-K Report dated March 13, 1992)
I/B/R
16
<PAGE>
10.7 Lease dated August 31, 1993 between the Company
and Alexandria Atrium Associates (Exhibit 28.1 to
the Company's Form 10-QSB Report dated August 31,
1993) I/B/R
10.8* Strategic Alliance Agreement effective as of April
1, 1996 between Q-Med, Inc. and SmithKline Beecham
Health Services, a division of SmithKline Beecham
Corporation
10.9 Securities Purchase Agreement dated May 6, 1996
between Q-Med, Inc. and S.R. One Limited
10.10 Registration Rights Agreement dated May 6, 1996
between Q-Med, Inc. and S.R. One Limited
11 None
13 Q-Med, Inc. 1996 Annual Report.
16 None.
18 None.
21 Subsidiaries of Registrant
22 None.
23 Consent of Amper, Politziner & Mattia
24 None.
(b) Reports on Form 8-K
None.
27 Financial Data Schedule
- ----------
* Exhibit omits certain information which the Company has filed separately with
the Commission pursuant to a confidential treatment request under Rule 24b-2
under the Securities Exchange Act of 1934, as amended.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amended report to be
signed by the undersigned, thereunto duly authorized.
Dated: November 13, 1997 Q-MED, INC.
By: /s/ Michael W. Cox
-------------------------------
Michael W. Cox, President
18
<PAGE>
EXHIBIT INDEX
Exhibit Sequential
No. Page No.
- ------- ----------
4.2 Warrant to Purchase Common Stock dated May 6, 1996
i/n/o S.R. One Limited *
10.8 Strategic Alliance Agreement effective as of April 1,
1996 between Q-Med, Inc. and SmithKline Beecham
Health Services, a division of SmithKline Beecham
Corporation **
10.9 Securities Purchase Agreement dated May 6, 1996
between Q-Med, Inc. and S.R. One Limited *
10.10 Registratioin Rights Agreement dated May 6, 1996
between Q-Med, Inc. and S.R. One Limited *
13 Q-Med, Inc. 1996 Annual Report. ***
21 Subsidiaries of Registrant *
23 Consent of Amper, Politziner & Mattia ***
27 Financial Data Schedule ***
- ----------
* Filed with the initial filing of this report.
** Filed herewith. Exhibit omits certain information which the Company has
separately filed with the Commission pursuant to a confidential treatment
request under Rule 24b-2 under the Securities Exchange Act of 1934, as
amended.
*** Filed herewith.
PAGES WHERE CONFIDENTIAL TREATMENT HAS BEEN REQUESTED ARE STAMPED
"CONFIDENTIAL TREATMENT REQUESTED. THE REDACTED MATERIAL HAS BEEN
SEPARATELY FILED WITH THE COMMISSION." THE APPROPRIATE SECTION HAS BEEN
MARKED "CONFIDENTIAL" AT THE APPROPRIATE PLACE.
STRATEGIC ALLIANCE AGREEMENT
THIS AGREEMENT ("Agreement"), effective as of April 1, 1996, is entered
into by QMED, INC., a company organized and existing under the laws of the State
of Delaware and having its principal office at 100 Metro Park South, 3rd Floor,
Laurence Harbor, NJ 08878 ("Qmed") and SMITHKLINE BEECHAM HEALTHCARE SERVICES, a
division of SMITHKLINE BEECHAM CORPORATION, a company organized under the laws
of the Commonwealth of Pennsylvania and having its principal office at One
Franklin Plaza, Philadelphia, PA 19101 ("SB").
Whereas, Qmed has developed the On-Line Health Management System for
Coronary Artery Disease ("ohms|cad"), a proprietary system which, when used by
appropriate medical personnel, can provide evaluations relating to ambulatory
myocardial ischemia and certain other coronary risk factors for patients with
coronary artery disease ("CAD"), and/or who are being evaluated for such
conditions, and can contribute to the formation by the patients' treating
physicians of appropriate medical management plans for such patients, which
system and services are more fully described in Attachment 1 hereto, and Qmed is
interested in obtaining the assistance of SB in marketing and selling the
ohms|cad service, in obtaining customers and potential customers for such
service, administering certain aspects of the ohms|cad services and the
collection of payments for use of the ohms|cad services;
Whereas, SB is interested in providing marketing, selling and
administrative assistance and support in connection with the ohms|cad system;
Whereas, SB's affiliate, S.R. One, Limited ("S.R.One"), and Qmed are
entering into a separate agreement pursuant to which S.R. One is making an
equity investment in Qmed in order to provide Qmed with certain operating
capital to fund operations that are expected to occur in connection with this
Agreement as more fully set forth in such separate agreement; and
Whereas, Qmed and SB desire to set forth the terms and conditions on which
they will conduct their strategic alliance (the "Strategic Alliance").
NOW THEREFORE, the parties hereto agree as follows:
1. DESCRIPTION OF STRATEGIC ALLIANCE AND OHMS|CAD SERVICES
SB and Qmed will jointly market and sell the ohms|cad services to persons
and/or entities lawfully engaged in providing medical services outside of the
fee-for-service market, including, but not limited to, health maintenance
organizations ("HMOs"), preferred provider organizations, "at risk" physician
groups, integrated delivery systems that assume risk, and other managed care
organizations (the "Potential Customers") under the terms and conditions
<PAGE>
set forth in this Agreement. This Agreement sets forth the responsibilities of
each of SB and Qmed in connection with the marketing of the ohms|cad services to
Potential Customers, the negotiation and administration of contracts entered
into by customers for the provision of the ohms|cad services, and the provision
of the ohms|cad services to such customers, as well as the reimbursement of
costs and compensation each party will receive for its activities hereunder.
2. JOINT STEERING COMMITTEE
2.1 Within thirty (30) days following the execution of this Agreement, the
parties shall establish a Joint Steering Committee ("JSC") which shall consist
of up to two (2) members appointed by each of the parties. Each of the parties
will designate one of its members as a co-chairperson of the JSC. Either party
may, at any time by written notice to the other, replace any of its members of
the JSC without the consent of the other party.
2.2 The JSC shall have overall responsibility for strategic and other
major decisions regarding the Strategic Alliance, including, but not limited to;
(a) review and approval of the marketing and business plan for the Strategic
Alliance; and (b) resolution of any disputes or other matters that cannot be
resolved by the JMC (as defined in Section 3.1 below). Notwithstanding the
foregoing, it is understood and agreed that Qmed shall be responsible for the
actual provision of the ohms|cad services, including the provision of the
results of the ohms|cad monitoring, communication of any ohms|cad
recommendations in connection with such results, and arranging for any
consultations provided in connection with such services, such ohms|cad services
being more fully described in Attachments 1 and 2 hereto.
2.3 The JSC shall meet at least once every six (6) months (or as otherwise
agreed to by the parties), in person or by telephone, to discuss the operation
of the Strategic Alliance and any issues that may be appropriate for discussion
by the JSC. The parties shall mutually agree on the date, place, time and agenda
for JSC meetings. The JSC shall prepare and maintain written minutes or other
suitable written records of the actions taken at and the results of such
meetings.
2.4 Each of SB and Qmed shall have one vote on the JSC and all JSC
decisions will be by unanimous vote of the JSC. In the event that the JSC is not
able to agree on an issue involving a strategic decision, such as how to fund
certain expenses or other costs related to the Strategic Alliance, no action
will be taken on such issue. In the event that the JSC is not able to agree on
an issue involving the marketing of the ohms|cad services, SB shall have the
right, after due discussion of such issue, to determine what action will be
taken with respect to such issue and will inform Qmed in writing of such
decision. In the event that the JSC is not able to agree on an issue which
involves the operation of the ohms|cad system, after due discussion of such
issue, Qmed shall have the right to determine what action will be taken with
respect to such issue and will inform SB in writing of any such decision.
2
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED. THE REDACTED MATERIAL HAS BEEN
SEPARATELY FILED WITH THE COMMISSION.
3. JOINT MARKETING COMMITTEE
3.1 Within thirty (30) days following the execution of this Agreement, the
parties shall establish a Joint Marketing Committee (the "JMC") which shall
consist of up to two members appointed by each of the parties. Each of the
parties will designate one of its members as a co-chairperson of the JMC. Either
party may, at any time by written notice to the other, replace any of its
members of the JMC without the consent of the other party.
3.2 The JMC shall be responsible for all decisions regarding the marketing
and promotion of the ohms|cad services under this Agreement, and for the
administrative activities required in connection with this Agreement including
the following: (a) development of a detailed marketing and business plan for
submission to the JSC; (b) modifying the marketing and business plan as needed
from time to time; (c) monitoring performance against the business and marketing
plans; and (d) such other activities as are reasonably necessary in connection
with the administration of this Agreement. Each party shall use all due
diligence to ensure that all tasks assigned by the JMC are performed in a timely
manner and in accordance with the applicable budget.
3.3 The JMC shall meet at least once each calendar quarter (or as
otherwise agreed to by the parties), in person or by telephone, to discuss the
actual results achieved through the Strategic Alliance compared to the marketing
and business plan and any other matters that may be appropriate for discussion
by the JMC. The parties shall mutually agree on the date, place, time and agenda
for JMC meetings. Each of SB and Qmed will have one vote on the JMC and all
decisions of the JMC will be by unanimous vote of the JMC. Any matters that
cannot be resolved by the JMC will be submitted to the JSC for consideration and
resolution. JMC shall prepare and maintain written minutes or other suitable
written records of the action taken at and the results of such meetings.
4. SERVICES PROVIDED BY THE PARTIES
4.1 Marketing and Selling
4.1.1 SB, with input from Qmed, will be responsible for developing a
prioritized target account list consisting primarily of staff model HMOs and
capitated (i.e., at risk) physician groups located in [CONFIDENTIAL] (the
"Initial Target Accounts"). The target account list will be submitted to the JMC
for review and approval. SB, with input from Qmed, will also identify 2-3 IPA
model HMOs that may be willing to serve as pilot sites for the provision of the
ohms|cad services in such a setting. In these accounts, the use of SBCL testing
sites as monitoring stations will be explored. After the development of the list
of Initial Target
3
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED. THE REDACTED MATERIAL HAS BEEN
SEPARATELY FILED WITH THE COMMISSION.
Accounts, SB, with input from Qmed, will also develop a national target list of
accounts that includes capitated (i.e., at risk) physician groups, staff model
HMOs, and, as appropriate, IPA model HMOs (the "National Target Accounts"). The
expanded list will be reviewed, approved and prioritized by the JMC.
4.1.2 SB will utilize its Integrated Healthcare Division ("IHD")
sales force to market and promote the ohms|cad services to the Initial Target
Accounts and to other customers as determined by SB with input from Qmed. The
IHD sales force will make the initial contacts with such clients to describe the
ohms|cad services and to determine the level of interest in the ohms|cad
services. SB, with input from Qmed, will develop a sales presentation for the
IHD sales force to use. For those potential customers that appear interested in
the ohms|cad services, SB will, where appropriate, arrange for a meeting
involving Qmed personnel to provide the needed technical sales support, and to
inform the potential customer as to the details regarding the operation and use
of the ohms|cad services.
4.1.3 SB will utilize, as appropriate, its pharmaceutical
consultants in [CONFIDENTIAL] (the "Sales Consultants") and in other states as
deemed appropriate to assist the IHD sales force in establishing appropriate
target customer contacts and in promoting the ohms|cad services to such
accounts. In addition, after a customer has executed an agreement to use the
ohms|cad services, the Sales Consultants will, as appropriate, help "pull
through" the use of the ohms|cad services in accounts in which those consultants
are active by providing reminder information regarding the ohms|cad services,
discussing the ohms|cad services with the physician and/or the physician's
staff, and through other appropriate activities.
4.1.4 SB, with input from Qmed, shall be responsible for developing
and producing sales and marketing materials required to carry out the marketing
plan approved by the JMC. SB will provide administrative support services in
coordinating sales and marketing activities, including scheduling SB/Qmed booths
at appropriate symposia.
4.1.5 Qmed, with input from SB, will be responsible for developing a
technical sales presentation to be used with accounts that have indicated to the
IHD sales force that they are interested in the ohms|cad system. Qmed will
develop and train a team of experts on the ohms|cad services that will provide
the technical expertise and rationale for why a Potential Customer should
consider using the ohms|cad services. Qmed will train and place into the
geographic regions in which the target accounts are located one or more
technical experts on the ohms|cad services who can assist accounts with set-up
and implementation. Qmed will submit recommendations as to the number and
locations of such technical experts to the JSC which shall determine the
appropriate number and location of such experts.
4
<PAGE>
4.2 Ohms|cad Services
Qmed will be solely responsible for the provision of the ohms|cad
services to Potential Customers who enter into contracts for the provision of
such services (the "Customers"), and/or to physicians and other health care
professionals affiliated with such Customers as may be appropriate. The ohms|cad
services to be provided are described in Attachments 1 and 2 hereto, and,
subject to the agreement entered into by the Customer, generally include (1) the
provision, installation, and maintenance of ohms|cad monitors and related
equipment and software; (2) ohms|cad analysis of data received from patients,
including reviews by the ohms|cad consulting cardiology service of results of
patient monitoring and of recommendations for such patients where such review is
deemed appropriate by an ohms|cad consulting cardiologist, or under a protocol
established for the ohms|cad services; (3) provision of the results of patient
monitoring, and the ohms|cad recommendations to Customers; (4) arranging for
consultations with the ohms|cad consulting cardiology service where appropriate;
(5) provision of a variety of reports to customers; and (6) other operational,
administrative and support services related to the ohms|cad services.
4.3 Contract Administration and Support Services
4.3.1 SB and Qmed shall develop and agree upon the substance and
form of a standard contract template to be executed by customers interested in
utilizing the ohms|cad system (the "Contract Template"). SB shall be responsible
for preliminary negotiations with Potential Customers, including introducing the
Contract Template to such customers. In the event the Contract Template needs to
be customized for such customer, Qmed (which is to provide the ohms|cad service)
and SB will negotiate with the customer to achieve the customization. In the
event that a customer requires significant changes to the contract template,
those changes shall be submitted to the parties or to the JMC for approval. Each
contract for the provision of ohms|cad services must be approved and signed by
Qmed before becoming effective.
4.3.2 SB and Qmed will jointly agree upon their respective
responsibilities with respect to (a) the analysis of historical data regarding
costs and utilization relating to CAD data submitted by a Customer or Potential
Customer to determine the baseline costs against which the performance of the
ohms|cad services will be measured, (b) the assessment of outcomes data and
calculation of the cost savings generated for a Customer in connection with the
ohms|cad system and the portion due for services rendered pursuant to that
Customer's agreement, and (c) reporting the results of such analysis and
assessment to Customers or Potential Customers. Each party shall have access to
all such information.
4.3.3 SB shall be responsible for establishing and maintaining a
separate bank account to hold funds generated through contracts with Customers,
collecting amounts due from Customers, tracking revenues generated through the
Strategic Alliance and expenses reimbursed
5
<PAGE>
out of such revenues, distributing funds to SB and/or Qmed in accordance with
this Agreement or as otherwise directed by the JMC or JSC, and other
administrative support services related to these activities as determined from
time to time by the JMC or by agreement of the parties.
4.4 Maintenance of and Access to Customer-Related Data
As part of its provision of services to Customers, Qmed will receive
and, through the ohms|cad system, will generate data regarding patients of
Customers or aggregate data relating to Customers, including baseline
information, the results of monitoring, and certain statistical reports more
fully described in Attachment 2 hereto (the "Customer-Related Data"). Unless
prohibited by applicable law or a contract with a Customer, during the term of
this Agreement SB will have the right to copy, obtain and use all
Customer-Related Data for purposes pertaining to the Strategic Alliance and for
any other purpose agreed to by a Customer, provided that in no event will SB
have access to any of Qmed's proprietary software, treatment algorithms, or
other data (other than Customer-Related Data) within, or utilized by, the
ohms|cad system.
4.5 Ownership of Equipment and Other Property
4.5.1 The parties recognize that ohms|cad technology, equipment,
hardware and software, including all Monitor-One STRx units, communication
modules, software and property used therewith, is and shall remain the property
solely of Qmed, or of Qmed's affiliate, Interactive Heart Management Corp.,
regardless of where such equipment is located, used and/or installed. The
parties recognize that the ohms|cad system is a proprietary system of Qmed and
that the software and algorithms and use thereof are also proprietary, and are
owned by Qmed. The parties further recognize that, in using the ohms|cad system,
information relevant to patients, customers and other matters, will, or may be,
input into and/or generated by the ohms|cad system; any additions and/or changes
to the ohms|cad databases and/or system resulting from its use, and any
information input into or generated by the ohms|cad system, become part of, and
are owned by Qmed; the parties also recognize that some of the information so
input and/or generated may also be Customer-Related Data, which is also owned by
SB, pursuant to paragraph 4.4, but this shall not affect the ownership of the
ohms|cad system and databases, or of the information as it exists as a part of
the ohms|cad system and databases, which shall remain in Qmed. Notwithstanding
the foregoing, in the event that the parties decide to pursue additional
developmental activities as provided for in Section 10.1.1 or Section 10.2
hereof, rights in and ownership of any intellectual property, data and other
property created or developed, pursuant to such activities, shall be determined
in accordance with the agreement or agreements reached pursuant to those
sections.
4.5.2 The parties agree that, unless otherwise provided under a
contract with a Customer or prohibited by applicable law, the Customer-Related
Data shall be owned jointly by SB and Qmed and each of SB and Qmed shall have
the right to independently utilize such data in the manner that each deems
appropriate subject to the provisions of any such contract or
6
<PAGE>
applicable law. SB acknowledges that there is information contained in the
ohms|cad database other than the Customer-Related Data to which it has no
ownership rights and that its right to obtain and use the Customer-Related Data
included in the ohms|cad database shall be governed by Section 4.4 above.
4.6 Compliance with Laws
It is understood and agreed that the ohms|cad services will not be
marketed, sold or provided in any state until the parties are satisfied that the
provision of the ohms|cad services in such state would not violate any state
law, rule or regulation.
5. REVENUES GENERATED THROUGH THE STRATEGIC ALLIANCE
All revenues generated from the provision of ohms|cad services to Customers
that enter into agreements for the provision of such services after the date of
the Agreement shall be treated as subject to this Agreement. In addition, as of
the effective date of this Agreement, Qmed is negotiating or has signed
agreements to provide the ohms|cad services to the Potential Customers listed on
Attachment 3 hereto ("Qmed Potential or Existing Customers"). Revenues from all
such Customers (except for the Bakersfield Medical Group) related to the
provision of the ohms|cad services shall be treated as subject to this agreement
and those customers (except for the Bakersfield Medical Group) will be
considered "Customers" for purposes of this Agreement. The parties shall agree
on the appropriate mechanisms to be used to collect, record and account for
revenue from Qmed Potential or Existing Customers. Revenues generated by Qmed
from the provision of ohms|cad services to physicians that provide services on a
fee-for-service basis shall not be subject to this Agreement, provided that Qmed
will not provide ohms|cad services for any such physicians in connection with
such physicians' provision of services to HMOs that are Customers or Potential
Customers of SB and Qmed through the Strategic Alliance.
6. REIMBURSABLE EXPENSES
6.1 General Marketing Costs
The reasonable expenses SB incurs in developing general marketing
and sales materials and programs related to the ohms|cad services, such as in
the development of patient and physician education materials, development of a
physician kickoff program, development of a training program for IHD and Sales
Consultants, certain costs associated with conferences or conventions at which
SB and/or Qmed will promote the ohms|cad services, and professional agency fees
associated with these items ("General Marketing Costs") will be reimbursed out
of revenues received from Customers. Attachment 4 hereto contains a detailed
list of such reimbursable General Marketing Costs. Any such costs not
7
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED. THE REDACTED MATERIAL HAS BEEN
SEPARATELY FILED WITH THE COMMISSION.
included in Attachment 4 hereto will be reimbursed upon the approval of the JMC.
Subject to the limitation set forth in Section 6.2 below, SB will initially
incur these costs and will be reimbursed for such costs as provided herein.
6.2 Client Specific Marketing Materials
The reasonable expenses SB incurs in connection with the printing
and production of marketing materials designed for specific target customers and
other out of pocket expenses incurred in marketing and selling the ohms|cad
services to specific clients ("Client Marketing Costs") will be reimbursed out
of revenues received from Customers. Attachment 4 hereto contains a more
detailed list of such reimbursable Client Marketing Costs. Any such costs not
included in Attachment 4 hereto will be reimbursed upon the approval of the JMC.
SB will initially incur the Client Marketing Costs and will be reimbursed for
such costs as provided herein, provided that SB will not be required to incur
unreimbursed General Marketing Costs, Client Marketing Costs and other
operational costs to be agreed to by Qmed and SB in excess of [CONFIDENTIAL].
6.3 Qmed Operational Costs
The reasonable out-of-pocket expenses incurred by Qmed in providing
the ohms|cad service to customers ("Qmed Operational Costs") will be reimbursed
out of revenues received from Customers. Attachment 4 hereto contains a more
detailed list of such Qmed Operational Costs. Any such costs not included in
Attachment 4 hereto will be reimbursed upon approval of the JMC.
6.4 Contract Administration Costs
Any reasonable out-of-pocket costs (including legal or accounting
costs) incurred by a party in connection with the negotiation of a customer
contract, the administration of the Strategic Alliance, the collection and
distribution of revenues or other activities relating to the Strategic Alliance
("Contract Administration Costs") will be reimbursed out of revenues received
from Customers. In addition, the parties will be reimbursed for the costs of
their personnel (or external personnel hired by them for this purpose) that
perform the accounting and recordkeeping support services required in connection
with the Strategic Alliance. Attachment 4 sets forth the reimbursable Contract
Administration Costs in more detail. Any such costs not included in Attachment 4
hereto will be reimbursed upon approval of the JMC.
8
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED. THE REDACTED MATERIAL HAS BEEN
SEPARATELY FILED WITH THE COMMISSION.
6.5 Miscellaneous Costs
The JMC may from time to time agree to reimburse other costs
incurred by a party in connection with the Strategic Alliance ("Miscellaneous
Costs") out of revenue received from Customers.
6.6 Submission of Summary of Reimbursable Expenses
On a monthly basis, each of Qmed and SB shall submit to the other a
summary setting forth in detail all costs that it has incurred in the applicable
month that are reimbursable out of revenues received from Customers with such
costs assigned to the Customer on whose behalf such costs were incurred to the
extent such assignment is practicable. Qmed does not believe it is currently
practicable to allocate costs to Customers, but will work with SB to agree upon
a methodology for such allocation to help estimate the profitability of specific
accounts. Each party shall also submit adequate supporting documentation for
such costs and the designation of the type of cost that such expense represents.
In the event that a party submits an expense that does not fall within the
categories of reimbursable expenses established by this Agreement or
subsequently by the JMC or JSC, such party's request for reimbursement shall be
submitted to the JMC for review.
7. PROFITS OR LOSSES
SB and Qmed will share in any profits (i.e., revenues in excess of
reimbursable expenses) or losses (i.e., reimbursable expenses in excess of
revenues generated from the provision of the ohms|cad service under this
Agreement) [CONFIDENTIAL]. While funds received from Customers will initially be
distributed according to the priorities set forth in Section 8 below, at the
expiration or termination of this Agreement, a reconciliation will be made
between costs incurred by each party, the profits or losses allocable to each
party, and the amount of distribution each party has received in order to assure
that the funds received by a party out of the revenues received from Customers
equals the total of that party's' reimbursable expenses plus or minus, as the
case may be, its [CONFIDENTIAL] of such profit or loss.
8. DISTRIBUTION OF FUNDS
8.1 Frequency and Determination of Amount of Distribution
Subject to the provisions of Section 8.4 below and any decision of
the JMC or JSC that provides otherwise, funds generated through the provision of
ohms|cad services to Customers will be distributed on a monthly basis. SB and
Qmed anticipate that contracts with Customers will provide for two types of
payments from such Customers: (1) a monthly per member per month amount intended
as a prepayment of the actual amount earned under a
9
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED. THE REDACTED MATERIAL HAS BEEN
SEPARATELY FILED WITH THE COMMISSION.
Customer's contract (the "Customer Prepayments"); and (2) other payments
designed to pay the balance of the amounts due under a Customer's contract (the
"Other Payments"). The determination of the total amount distributable to each
party each month will be done in two steps based on the type of payment the
funds represent. First, the Customer Prepayments will be allocated for
distribution as set forth in Section 8.2 below. Second, the Other Payments
received from Customers will be allocated for distribution as set forth in
Section 8.3 below.
8.2 Customer Prepayments
8.2.1 Customer Prepayments received during a month will first be
used to reimburse Qmed for the Qmed Operational Costs actually incurred by Qmed
during such month and not previously reimbursed.
8.2.2 In the event that any portion of the Customer Prepayments
received in a month remain after the distribution provided for under Section
8.2.1, such funds will then be distributed to the parties on a pro rata basis
based on the total amount of Qmed Operational Costs, Client Marketing Costs,
Contract Administration Costs, General Marketing Costs and Miscellaneous Costs
(together, hereinafter referred to as the "Reimbursable Expenses") actually
incurred by each party from the effective date of this Agreement through the end
of such month and not yet reimbursed (or scheduled to be reimbursed under
Section 8.2.1 above) out of payments received from Customers.
8.2.3 In the event that any portion of the Customer Prepayments
received in a month remain after the distributions provided for under Sections
8.2.1 and 8.2.2, such funds will then be distributed to the parties
[CONFIDENTIAL].
8.3 Other Payments
8.3.1 Other Payments received during a month will first be used to
reimburse each party for Reimbursable Expenses actually incurred by a party from
the effective date of this Agreement through the end of such month and not yet
reimbursed (or scheduled to be reimbursed under Section 8.2 above) out of
payments received from Customers (the "Cumulative Unreimbursed Expenses"). In
the event that the Other Payments received during a month are less than the
Cumulative Unreimbursed Expenses, such Other Payments will be distributed to the
parties [CONFIDENTIAL] based on their respective portions of the Cumulative
Unreimbursed Expenses.
8.3.2 In the event that the Other Payments received during a month
exceed the Accrued Unreimbursed Expenses, such excess will be distributed to the
parties on a [CONFIDENTIAL].
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8.4 Retention of Funds for Operational Purposes
The JSC may provide from time to time that funds otherwise
distributable pursuant to this Section 8 not be distributed but retained to fund
ongoing operations of the Strategic Alliance or to fund other costs associated
with the Strategic Alliance not provided for above.
9. REPORTS
SB will prepare and distribute to Qmed on a quarterly basis reports
regarding the activities of the Strategic Alliance in such form and substance as
the parties shall agree.
10. DEVELOPMENTAL ACTIVITIES
10.1 Additional Development of Program
10.1.1 Unless otherwise agreed to by the parties (including any
agreement pursuant to section 10.2 below), Qmed shall be responsible for any
further development or enhancement of the ohms|cad system. In the event that the
parties decide to jointly pursue the further development or enhancement of the
ohms|cad system, SB and Qmed will negotiate a separate agreement setting forth
their respective rights and obligations with respect to developments or
enhancements arising out of such activities. In the event that SB independently
develops, makes, conceives or reduces to practice a potential enhancement to the
ohms|cad system, and if Qmed agrees to incorporate the enhancement into the
ohms|cad system, SB and Qmed shall negotiate a separate agreement setting forth
their respective rights and obligations to such enhancements.
10.1.2 Qmed shall disclose to SB the complete texts of all patent
applications filed by Qmed which relate to the ohms|cad monitor or the ohms|cad
system or services as well as all information received concerning the
institution or possible institution of any interference, opposition,
re-examination, reissue, revocation, nullification or any official proceeding
involving the patent applications. SB shall have the right to review all such
pending applications and other proceedings and make recommendations to Qmed
concerning them and their conduct. Qmed agrees to keep SB promptly and fully
informed of the course of patent prosecution of other proceedings including by
providing SB with copies of substantive communications, search reports and third
party observations submitted to or received from patent offices. SB shall
provide such patent consultation to Qmed at no cost to Qmed. SB shall hold all
information disclosed to it under this section as confidential subject to the
provisions of Section 16.
10.1.3 During the term of this Agreement, SB shall have the right to
assume responsibility for any patent applications filed by Qmed which relate to
the ohms|cad monitor or the ohms|cad system or services or any part of such
patent applications which Qmed intends to abandon or otherwise cause or allow to
be forfeited. Qmed shall give SB reasonable written
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notice prior to abandonment or other forfeiture of any such patent applications
or any part of such patent applications so as to permit SB to exercise its
rights under this paragraph.
10.1.4 By April 12, 1996, SB shall complete a review of the ohms|cad
system and services to determine whether, in its reasonable good faith judgment,
the manufacture, use and/or sale of the ohms|cad system or services would
infringe the valid patents of a third party and shall also complete a review of
Qmed's Patents to determine, in its reasonable good faith judgment, the likely
scope of any allowable subject matter in the pending Qmed Patents (collectively,
the "Diligence Review"). During the Diligence Review, Qmed shall timely provide
SB with reasonable assistance, including, but not limited to, a response to SB,
to SB patent counsel's letter of March 15, 1996 to Qmed patent counsel; the
provision of complete copies of all Information Disclosure Statements filed or
to be filed in U.S. Patent Application No. 08/414,510 and any substantive
communications sent to, to be sent to or received from the United States Patent
and Trademark Office relating to said application; and access to and provision
of ohms|cad system product and manufacturing information, including information
related to the Monitor-One STRx solid state ambulatory ischemia analyzer device,
which product and manufacturing information is, in SB's opinion, reasonably
necessary for SB to examine during the Diligence Review. If concerns are
identified by SB during the Diligence Review, SB shall notify Qmed by April 19,
1996, identifying such concerns and Qmed shall use reasonable efforts to resolve
such concerns no later than May 1, 1996 and, by such date, shall provide SB with
all information that it has to help resolve such concerns. If such concerns are
not resolved or resolvable to the satisfaction of SB, SB may, by written notice
to Qmed given by May 10, 1996 (1) immediately terminate this agreement upon
written notice to Qmed, or (2) inform Qmed that it believes such concerns are
resolvable by Qmed obtaining a license from one or more third parties, provided
that if such a notice is not given by May 10, 1996, SB will no longer have the
right to terminate this Agreement pursuant to this provision. In the event that
SB provides notice to Qmed that it believes that the concerns are resolvable by
Qmed obtaining one or more licenses from third parties, Qmed shall inform SB by
May 14, 1996 whether or not it will seek such licenses from such third party or
third parties. If Qmed informs SB by such date that it will not seek such
licenses, SB will have the right to terminate this Agreement upon written notice
to Qmed given by May 17, 1996, provided that if such a notice is not given by
May 17, 1996, SB will no longer have the right to terminate this Agreement
pursuant to this provision. In the event that Qmed informs SB that it will seek
licenses from such third party or third parties, Qmed shall promptly commence
negotiations with such third party or third parties for such licenses. If such
negotiations are not completed within forty-five (45) days of May 17, 1996, SB
may terminate this agreement upon written notice to Qmed.
10.2 Utilization of SBCL and DPS Data
During the term of this Agreement, the JSC may elect to attempt to
enhance the services being provided to Customers by combining the data generated
through use of the ohms|cad system (the "ohms|cad Data") with patient data
generated through SmithKline Beecham Clinical Laboratories, Inc. ("SBCL") and/or
Diversified Pharmaceutical Services,
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CONFIDENTIAL TREATMENT REQUESTED. THE REDACTED MATERIAL HAS BEEN
SEPARATELY FILED WITH THE COMMISSION.
Inc. ("Diversified"), affiliates of SB (the "SB Data"). In such case, SB and
Qmed shall negotiate a separate agreement setting forth the terms on which such
enhancements will be undertaken.
11. CHF DISEASE MANAGEMENT PROGRAM
11.1 Development of CHF DM Program
SB is in the process of developing [CONFIDENTIAL] that SB currently
expects to test in pilot sites in the second half of 1996. Qmed believes that
there will be substantial opportunities for SB and Qmed to jointly market the
utilization of the ohms|cad services and SB's [CONFIDENTIAL]. In addition, Qmed
believes that marketing the [CONFIDENTIAL] in connection with the ohms|cad
services will significantly increase the likelihood that a potential customer
will utilize the [CONFIDENTIAL]. SB believes that most potential customers for
the ohms|cad services and the [CONFIDENTIAL] will view them as separate programs
and that marketing the two programs together may not have a significant impact
on the success of the [CONFIDENTIAL]. SB and Qmed have agreed that it would be
appropriate to test the impact of selling the [CONFIDENTIAL] together with the
ohms|cad services in the manner set forth in Section 11.2.
11.2 Qmed's Marketing and Selling the [CONFIDENTIAL]
11.2.1 Qmed and SB will identify and mutually agree on a list of a
minimum of six (6) and up to ten (10) target accounts (the "[CONFIDENTIAL]
Target Accounts") which are expected to be chosen from (a) a list of accounts
which Qmed has provided to SB and with respect to which Qmed has already had
some contact regarding the ohms|cad services and (b) other accounts to be
mutually agreed upon by SB and Qmed. Each of the Target Accounts is expected to
be an individual health plan (i.e., [CONFIDENTIAL]) rather than the headquarters
of a regional or national health plan.
11.2.2 After SB has decided to launch the [CONFIDENTIAL], it will
provide Qmed with marketing and selling information on the [CONFIDENTIAL] (the
"[CONFIDENTIAL] Marketing Date"). For a period of six (6) months thereafter,
Qmed may market and sell the [CONFIDENTIAL] to the [CONFIDENTIAL] Target
Accounts. In the event that a Target Account is interested in pursuing the
[CONFIDENTIAL], Qmed will so inform SB and will arrange for SB to make a
detailed presentation on the [CONFIDENTIAL] to such account.
11.2.3 If, within six (6) months of the joint SB/Qmed presentation
of the [CONFIDENTIAL], SB either (i) receives a verbal commitment, confirmed in
writing, from a [CONFIDENTIAL] Target Account, (ii) enters into a letter of
intent with a [CONFIDENTIAL] Target Account, or (iii) enters into formal
negotiations of a definitive agreement with a [CONFIDENTIAL] Target Account, and
such confirmed verbal commitment, letter of intent or formal negotiations result
in a definitive agreement within six (6) months of the date of such confirmed
verbal commitment, letter of intent or formal negotiations, SB will pay Qmed
[CONFIDENTIAL] of the net profits from the [CONFIDENTIAL] for that account. The
term "net profits" shall mean the revenue received by SB generated from the
provision of the [CONFIDENTIAL] less all reasonable direct expenses incurred by
SB in connection which such program.
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11.2.4 On or before the one year anniversary of the [CONFIDENTIAL]
Marketing Date, the JSC will review the progress Qmed and SB have made in
selling the [CONFIDENTIAL] to the [CONFIDENTIAL] Target Accounts. If a minimum
of fifty percent (50%) of the [CONFIDENTIAL] Target Accounts have entered into
an agreement with SB for SB to provide the [CONFIDENTIAL], or made a verbal
commitment to SB, or entered into a letter to intent with SB to use the
[CONFIDENTIAL], in each case leading to a definitive agreement within the time
frames set forth in paragraph 11.2.3, then SB and Qmed will enter into
discussions regarding additional appropriate target accounts to which Qmed may
market and sell the [CONFIDENTIAL] and the appropriate compensation for Qmed's
marketing and selling efforts.
11.2.5 SB and Qmed agree to discuss ways in which SB may use
existing Qmed competencies (such as case management) in supporting the operation
of the [CONFIDENTIAL] and the appropriate compensation to Qmed for any such
services Qmed provides to SB in connection with the [CONFIDENTIAL].
11.3 Non-Compete Regarding [CONFIDENTIAL]
Qmed agrees that it will not, nor will it permit any of its
affiliates, officers, directors (when acting on behalf of Qmed), or its
representatives or agents to, directly or indirectly, market, sell or otherwise
offer to any person or entity a disease management program for [CONFIDENTIAL],
nor will Qmed, its affiliates, or any of their respective officers, directors
(when acting on behalf of Qmed), or its representatives or agents, directly or
indirectly, discuss or negotiate with another person or entity regarding an
arrangement pursuant to which such person or entity will market, sell or
otherwise offer a disease management program for [CONFIDENTIAL], from the
effective date of this Agreement to the date on which Qmed in no longer
providing marketing services pursuant to Section 11 above or the date on which
the discussions described in Section 11.2.4 have ended.
12. EXCLUSIVITY
12.1 Coronary Artery Disease Programs
12.1.1 Qmed agrees that, until the expiration or termination of this
Agreement pursuant to Sections 17.1 or 17.2, it will work exclusively with SB in
offering the ohms|cad services to persons or entities located in [CONFIDENTIAL]
that are outside of the fee-for-service market, including, but not limited to,
health maintenance organizations ("HMOs"), preferred provider organizations, "at
risk" physician groups, integrated delivery systems that assume risk, and other
managed care organizations (the "Exclusive Market"). In furtherance of this
commitment, Qmed agrees that, during such period, it will not, nor will it
permit any of its affiliates, officers, directors (when acting on behalf of
Qmed), or its representatives or agents to, directly or indirectly, market, sell
or otherwise offer to any person or entity within the Exclusive Market the
ohms|cad services or any disease management program for coronary artery disease,
nor will Qmed, its affiliates, or any of their respective officers, directors
(when acting on behalf of Qmed), or its representatives or agents, directly or
indirectly, discuss or negotiate with another person or entity regarding an
arrangement pursuant to which such person or entity would market, sell or
otherwise offer the ohms|cad services or any disease management program for
coronary artery disease to any person or entity within the Exclusive Market. It
is understood and agreed that this provision is not intended to prohibit Qmed
from marketing the ohms|cad services to Potential Customers that the JMC decides
should be approached by Qmed on its own, provided that the terms of any proposed
arrangement are approved by the JMC and the revenues from any such arrangement
are treated as revenues covered under this Agreement.
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12.1.2 SB agrees that, until the expiration or termination of this
Agreement pursuant to Sections 17.1 or 17.2, it will work exclusively with Qmed
in offering the ohms|cad system to persons or entities located in
[CONFIDENTIAL]. In furtherance of this commitment, SB agrees that, during the
term of this Agreement, it will not, nor will it permit any of its affiliates,
officers, directors (when acting on behalf of SB), or its representatives or
agents to, directly or indirectly, market, sell or otherwise offer to any person
or entity within [CONFIDENTIAL] the ohms|cad system or any disease management
program for coronary artery disease, nor, during such period, will SB, its
affiliates, or any their respective officers, directors (when acting on behalf
of SB), or its representatives or agents, directly or indirectly, negotiate with
another person or entity regarding an arrangement pursuant to which such person
or entity would market, sell or otherwise offer the ohms|cad services or any
disease management program for coronary artery disease to any person or entity
within [CONFIDENTIAL].
12.2 Right of First Negotiation on Disease Management Opportunities
12.2.1 In the event that Qmed decides to seek the assistance of a
third party in connection with the development of any disease management program
(a "DM Program"), or to seek the assistance of a third party in connection with
the marketing, sale or funding of a DM Program, SB shall have the first right to
negotiate with Qmed for the rights to jointly develop such a program and/or to
market and sell such a program. In such event, Qmed shall notify SB in writing
of its interest and will provide SB with substantially all necessary information
required to reasonably enable SB to evaluate its interest in such opportunity.
SB shall have forty-five (45) days from the date it receives all such
information (the "Exercise Period") to inform Qmed, in writing, whether or not
SB wishes to exercise its right to negotiate an agreement with Qmed for such DM
Program. If SB informs Qmed in writing that it is exercising such right, Qmed
will negotiate in good faith with SB for a period of ninety (90) days after
Qmed's receipt of such notice (the "Negotiation Period"). In the event that (1)
SB informs Qmed in writing that it does not wish to exercise its first right to
negotiate with respect to the DM Program, (2) the Exercise Period expires
without any writing response from SB, or (3) SB exercises its right of first
negotiation but such negotiations are not completed within the Negotiation
Period, Qmed may negotiate an arrangement with respect to the DM Program with a
third party, provided that Qmed may not offer to any third party an arrangement
upon terms which, taken as a whole, are substantially more favorable than those
which Qmed offered to SB during the Negotiation Period (if applicable).
12.2.2 In then event that Qmed decides to market or sell the
ohms|cad services to Potential Customers outside of [CONFIDENTIAL], Qmed shall
notify SB in writing and SB shall have the right to market and sell the ohms|cad
services in such market on substantially the same terms as those set forth in
this Agreement. SB shall have forty-five (45) days from the date it receives the
notice from Qmed to inform Qmed in writing of its intent to exercise such option
and negotiate an agreement with Qmed for such territory. If SB informs Qmed in
writing that it is exercising such right, Qmed will negotiate in good faith with
SB for a period of ninety (90) days after Qmed's receipt of such notice (the
"Negotiation Period"). In the event that (1) SB informs Qmed in writing that it
does not wish to exercise its rights with respect to such territory, (2) the
Exercise Period expires without any written response from SB, or (3) SB
exercises its rights but such negotiations are not completed within the
Negotiation Period, Qmed may negotiate an arrangement with respect to such
territory with a third party, provided that Qmed may not offer to any third
party an arrangement upon terms which, taken as a whole, are substantially more
favorable than those Qmed offered to SB during the Negotiation Period (if
applicable).
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12.3 Intellectual Property Grant
12.3.1 Qmed hereby grants to SB an exclusive, royalty-free license,
limited to the Potential Customers in the United States, Canada or Puerto Rico
(the "Territory"), under U.S. Patent No. 4,679,144 entitled "Cardiac Signal Real
Time Monitor and Method of Analysis" and Method of Analysis" and U.S. Patent
Application Serial No. 08/414,510 entitled "System and Method of Coronary Health
Management" and all foreign patent applications, or any equivalent thereof and
inventor's certificates, including any division, continuation or continuation-in
part thereof or any substitute application therefor, and any patent issuing
thereon, including any reissue, re-examination or extension therefor and any
confirmation patent or registration patent or patent of addition based on any
such patent, owned or controlled by Qmed or later acquired by Qmed and relating
to the management of CAD (the "Patents") and Qmed's confidential know-how
relating thereto to use, offer for sale and sell, for purposes of carrying out
the provisions of this Agreement, all subject matter encompassed within the
scope of the Patents and the confidential know-how subject to the terms and
conditions of this Agreement. The rights to use, offer for sale and sell for
purposes of carrying out the terms of this Agreement shall include all
activities concerning the subject matter of the Patents and the confidential
know-how, which activities would, but for the license herein granted, infringe
an enforceable claim of the Patents.
12.3.2 Qmed hereby grants to SB an exclusive, royalty-free license,
limited to the Potential Customers in the Territory, to use the trademarks and
servicemarks listed on Attachment 5 (the "Marks") for purposes of carrying out
the provisions of this Agreement. SB agrees to maintain Qmed's high standard of
quality for any materials bearing a Qmed trademark or service mark. If Qmed
brings into question the quality of any materials prepared by SB bearing a Qmed
trademark or service mark, SB agrees to reasonably resolve any such quality
issue.
12.3.3 Qmed hereby grants to SB an exclusive, royalty-free license,
limited to the Potential Customers in the Territory, to use Qmed's copyrighted
materials for purposes of carrying out the provisions of this Agreement.
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12.3.4 SB agrees to place appropriate references to patents or
patents pending on all marketing and other literature that it develops
describing any products or service covered by the Patents, as requested by Qmed.
The content, form, location and language of such references shall be in
accordance with the laws and practices of the country where such literature is
used, including, but not limited to, 35 U.S.C. Section 287, to the extent
applicable to such literature.
13. REGULATORY MATTERS
13.1 Qmed shall be responsible for fulfilling and discharging all
obligations under any applicable federal or state law, rule or regulation in
order to obtain and/or maintain the authorization, licensure and/or ability to
market, sell and/or provide the ohms|cad services and/or any portion thereof
(including any product or service utilized in providing the ohms|cad services)
in the U.S., including without limitation, the following:
13.1.1 Obtaining and/or maintaining all federal and/or state
regulatory approvals or licenses necessary for the manufacture, market, sale or
provision of the ohms|cad system or any portion thereof (including any product
or service utilized in providing the ohms|cad services) in the U.S. and the
filing of any applications or notifications required prior to or for the
manufacture, market, sale or provision of the ohms|cad system or any portion
thereof (including any product or service utilized in providing the ohms|cad
services) in the U.S., including any such approvals, filings or notifications
required under the U.S. Federal Food, Drug and Cosmetic Act (the "FD&C Act');
13.1.2 Complying with all rules or regulations regarding good
manufacturing practices applicable to the manufacture of any equipment, software
or other item utilized in connection with the ohms|cad services;
13.1.3 Filing on a timely basis with the U.S. Food and Drug
Administration (the "FDA") all required Medical Device Reports regarding adverse
device events for any equipment, software or other item utilized in connection
with the ohms|cad system for which such reports are required, if any. Qmed will
inform SB of any such adverse device events within 48 hours of such report and
will provide SB with copies of any Medical Device Reports filed with the FDA
with respect to such equipment, software or other item utilized in connection
with the ohms|cad system.
14. REPRESENTATIONS AND WARRANTIES
14.1 Each party warrants and represents to the other that it has the full
right and authority to enter into this Agreement, and that it is not aware of
any impediment that would inhibit its ability to perform its obligations under
this Agreement.
14.2 Qmed warrants that it owns or controls the entire right, title and
interest in the Patents and the know-how.
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14.3 Qmed represents and warrants that it has no present knowledge that is
unknown to SB from which it can be inferred that either the manufacture or use
of the ohms|cad monitor or the ohms|cad system would infringe upon any patents
or other intellectual property rights of any third party. Qmed makes no warranty
whatsoever that either the offer for sale, sale, manufacture or use of the
ohms|cad monitor or use of the ohms|cad system does not infringe or does not
cause infringement of patent rights owned or controlled by third parties.
14.4 Qmed represents and warrants that, to the best of its knowledge, it
has made any and all regulatory filings or submissions and has secured any and
all licenses or other regulatory approvals necessary or required to manufacture,
market, sell or provide the ohms|cad system or any portion of the ohms|cad
system (including any product or service utilized in providing the ohms|cad
services), including, but not limited to, any required state licensures or
required submissions to and reviews and/or approvals of the FDA.
14.5 Qmed represents and warrants that it has conducted appropriate
validation and other studies of all equipment, software, output of treatment
algorithms, and other items used in connection with the ohms|cad system and that
it has no information concerning such items used in connection with the ohms|cad
system which suggests that there may be material concerns regarding the utility,
accuracy, safety or effectiveness of the ohms|cad system or any such items.
14.6 Qmed represents and warrants that (a) the ohms|cad monitor used in
connection with the ohms|cad system provides and will provide accurate readings
and measurements of S-T segment deviation as, and to the extent, reflected in
the medical literature provided to SB by Qmed when used in accordance with the
monitor's users manual and instructions and with the other directions and
instructions for use of the ohms|cad system, (b) the system Qmed utilizes to
transmit patient information stored in the ohms|cad monitor and the results of
patient monitoring with that monitor to Qmed's ohms|cad system, and to transmit
the results of patient monitoring and Qmed's recommendations based thereon to
the treating physician, transmits and will transmit such information accurately,
(c) the software/treatment algorithm utilized by the Qmed ohms|cad system to
make treatment recommendations based upon the results of the ohms|cad monitoring
and individual patient information produces and will produce recommendations
that are appropriate for patients, whose information is as input into the
ohms|cad system, and that accurately reflect the treatment recommendations and
protocols input into the ohms|cad system, and (d) the ohms|cad system functions
and will function in accordance with the descriptions of such system set forth
in Attachments 1 and 2 hereto, as such documents may be modified in the future.
14.7 Qmed acknowledges that, in entering into this Agreement, SB has
relied or will rely upon information supplied, or that will be supplied, by
Qmed, its agents and/or representatives and represents that all such information
is and will be timely and accurate in all material respects. Qmed further
warrants and represents that, to the best of its knowledge, it has not, up
through and including the date of this Agreement, omitted to furnish SB with any
information known to it concerning the ohms|cad system or any part or portion
thereof or the
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transactions contemplated by this Agreement, which would be material to SB's
decision to enter into this Agreement and to undertake the commitments and
obligations set forth herein.
14.8 SB acknowledges that, in entering into this Agreement, Qmed has
relied or will rely upon information supplied, or that will be supplied, by SB,
its agents and/or representatives and represents that all such information is
and will be timely and accurate in all material respects. SB further warrants
and represents that, to the best of its knowledge, it has not, up through and
including the date of this Agreement, omitted to furnish Qmed with any
information known to it concerning any part or portion of the transactions
contemplated by this Agreement, which would be material to Qmed's decision to
enter into this Agreement and to undertake the commitments and obligations set
forth herein.
14.9 Qmed has provided SB with copies of certain of its FDA filings,
opinions of its FDA counsel, certain documentation regarding the ohms|cad
system, and other oral and written information and representations regarding the
ohms|cad system and Qmed's interactions with the FDA. In addition, Qmed has
advised SB of certain medical and related literature pertaining to the
functioning, accuracy and/or potential uses of all or parts of the ohms|cad
system, and has provided SB with certain other oral and written information and
representations regarding the functioning, accuracy and/or potential uses of all
or parts of the ohms|cad system. In addition, SB has utilized its own counsel
and/or other personnel to conduct its own investigation and evaluation of the
ohms|cad system, to the extent deemed appropriate by SB. SB has elected to
proceed with the marketing of the ohms|cad services.
15. FORCE MAJEURE
Neither of the parties shall be liable or be in breach of any provision of
this Agreement for any failure or omission on its part to perform any obligation
because of force majeure, including, but not limited to war, riot, fire,
explosion, flood, sabotage, accident or breakdown of machinery; unavailability
of fuel, labor, containers or transportation facilities; accidents of navigation
or breakdown or damages of vessels, or other conveyances for air, land or sea;
other impediments or hindrances to transportation; strike or other labor
disturbances; or any other cause beyond the control of the party; and provided
that such failure or omission resulting from one of the above causes is cured as
soon as practicable after the occurrence of one or more of the above-mentioned.
16. EXCHANGE OF INFORMATION AND CONFIDENTIALITY
16.1 During the term of this Agreement, each party shall promptly inform
the other party of any information that it obtains or develops regarding the
utility and/or safety of the ohms|cad services or any portion thereof. Each
party shall report to the other any information on all serious or unexpected
results related to the utilization of the ohms|cad services or any portion
thereof.
16.2 Each party recognizes that in the performance of this Agreement,
confidential and/or proprietary information belonging to each other concerning
the business and operations
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of the parties in connection with the transactions contemplated herein has been
or may be disclosed or become known to other parties ("Confidential
Information"). Each party agrees that, during the term of this Agreement and for
a period of four (4) years after termination of this Agreement, it will (a) hold
in confidence any and all Confidential information which belongs to the other
party, and take such precautions with respect to the Confidential Information as
it normally takes with its confidential and/or proprietary information and (b)
not use the Confidential Information for any purpose other than for purposes of
the arrangements or transactions described in this Agreement. This obligation
shall not apply to:
16.2.1 Information that, at the time of disclosure, is in the public
domain;
16.2.2. Information that, after disclosure, is published or
otherwise becomes part of the public domain through no fault of the disclosing
parties;
16.2.3 Information that was in a party's possession or the
possession of an affiliate at the time of disclosure; and
16.2.4 Information that may be received by a party in good faith
from a source other than the other party, which source either has no duty of
nondisclosure to such other party or, if such source does have a duty of
nondisclosure, the receiving party was unaware of or had no reasonable basis for
knowing.
16.3 Each party shall maintain as confidential the terms of this Agreement
and the matters described in this Agreement. Neither party shall announce or
otherwise disclose the existence of this Agreement or the matters described in
this Agreement without the consent of the other party except to the extent such
disclosure is required under applicable law, rules or regulations based upon the
opinion of outside legal counsel. If either party desires to make a public
announcement regarding this Agreement or the terms hereof, such party shall
first submit the contents of such announcement to the other party for their
approval, and such approval shall not be unreasonably withheld.
16.4 Each party shall maintain, however, the right to disclose
Confidential Information in judicial or administrative hearings or proceedings,
but shall endeavor to keep and assist the other party's keeping it confidential
in such hearings or proceedings, including providing assistance in obtaining
confidential treatment under applicable laws, statutes or regulations. If a
party finds it necessary to disclose any such information in any such judicial
or administrative hearing or proceeding, the party shall attempt to disclose
such information "in camera" or subject to "protective order" or on some other
non-public basis.
16.5 Upon termination of this Agreement, the parties shall either return
or certify as to the destruction of each other's written Confidential
Information, provided that the parties shall be entitled to retain one record
copy in their legal departments to determine the extent of their continuing
obligations.
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17. TERM AND TERMINATION
17.1 Term
The term of this Agreement shall be for a period of five (5) years
years from the date first set forth above, provided that, in the event that SB
and Qmed have entered into an agreement or agreements with a Customer or
Customers for the provision of the ohms|cad services for a period of time
extending beyond the term of this Agreement, this Agreement will be regarded as
terminated but will continue in full force and effect, but only to the extent of
providing services to that Customer or Customers until the last of such
agreements expires or is terminated.
17.2 Termination
17.2.1 Default. If either party materially breaches the terms of
this Agreement, the other party may terminate this Agreement upon not less than
sixty (60) days written notice to the breaching party, provided that if the
non-breaching party cures such breach within such sixty (60) day period, the
Agreement will not be terminated at the end of the notice period. In the event
that either party materially breaches a representation or warranty contained in
this Agreement, the other party may terminate this Agreement upon not less than
thirty (30) days written notice to the other party.
17.2.2 Insolvency. Either party may terminate this Agreement if, at
any time, the other party shall file in any court pursuant to any statute of the
United States or of any individual state or foreign country, a petition in
bankruptcy or insolvency or for the appointment of a receiver or trustee of the
party or of its assets, or if the other party shall be served with an
involuntary petition against it, filed in any insolvency proceeding, and such
petition shall not be dismissed within sixty (60) days after the filing thereof,
or if the other party shall propose or be a party to any dissolution or
liquidation or shall cease or terminate its business activities.
17.2.3 Change in Control. The parties agree that if during the term
of this Agreement and prior to its expiration more than fifty percent (50%) or
more of the issued and outstanding shares of SB p.l.c., the parent of SB, or
Qmed is acquired by any single third party, or a group of third parties acting
in concert, the other party shall have the right, but not the obligation, to
terminate this Agreement by providing sixty (60) days written notice to the
other party.
17.2.4 Absence of Profitability. Within sixty (60) days after each
of the second, third, and fourth anniversaries of the effective date of this
Agreement, SB will prepare an accounting of revenues generated from Customer
contracts (calculated on an accrual basis) and the Reimbursable Expenses
incurred by the parties. In the event that the revenues earned during last
quarter of the second year of this Agreement did not exceed the Reimbursable
Expenses incurred
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during such period by $200,000 or more, either party may terminate the Agreement
upon ninety (90) days written notice to the other party, provided that such
notice must be given within three (3) months of the completion of such
accounting. In the event that the revenues earned during the last quarter of the
third year of this Agreement did not exceed the Reimbursable Expenses incurred
during such period by $225,000 or more, either party may terminate the Agreement
upon ninety (90) days written notice to the other party, provided that such
notice must be given within three (3) months of the completion of such
accounting. In the event that the revenues earned during the last quarter of the
fourth year of this Agreement did not exceed the Reimbursable Expenses incurred
during such period by $250,000 or more, either party may terminate the Agreement
upon ninety (90) days written notice to the other party, provided that such
notice must be given within three (3) months of the completion of such
accounting
17.3 Effect of Termination
17.3.1 Upon expiration or termination of this Agreement for any
reason, each party shall continue to provide services under the terms of this
Agreement to meet commitments to Customers that have entered into contracts for
the ohms|cad services prior to such termination, and the applicable provisions
of this Agreement shall survive for such period as may be necessary to permit
the parties hereto to satisfy their obligations under such Customer contracts
and to account for revenues, expenses, profits and losses relating to such
contracts.
17.3.2 Upon expiration or termination of this Agreement for any
reason, SB shall perform a reconciliation of the revenues, expenses, profits and
losses generated through the Strategic Alliance and the distributions made to
each party with the objective of assuring that each party has been distributed
funds equal to its Reimbursable Expenses plus or minus, as the case may be, its
allocable portion of the profits or losses generated through the Strategic
Alliance. SB shall distribute any funds not distributed to a party at the time
of termination or expiration of this Agreement in a manner designed to achieve
this objective. In the event that, after the distribution of funds in this
fashion, one party has received distributions in excess of the amount of its
Reimbursable Expenses plus or minus, as the case may be, its portion of the
profits or losses generated through the Strategic Alliance, that party will
promptly pay the other party an amount that will achieve this equal distribution
of funds generated through the Strategic Alliance.
17.3.3 The termination of this Agreement shall not affect any rights
or obligations of any party under this Agreement which specifically provide that
they shall survive the termination or expiration of this Agreement.
18. AUDIT PROVISIONS
18.1 Each party shall keep accurate records of the costs it incurs that
are reimbursable under this Agreement. Each party shall have the right to audit
such records of the other party for the purpose of verifying the appropriateness
of the amount of such expenses submitted for
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reimbursement, provided that such audits shall occur no more frequently than
twice a year. Such audits shall be conducted using an independent accounting
firm acceptable to both parties, except that a party may use its own employees
to audit records that do not contain any confidential information of the other
party which the party performing the audit does not have a right to review. Upon
reasonable prior written notice, a party shall have access during ordinary
business hours to records of the other party necessary to determine the
correctness of any expense submitted for reimbursement. This right to audit
shall continue for a period of one year after the termination of this Agreement.
The costs of any such audit shall be borne by the party requesting such audit.
18.2 SB shall maintain the financial records of the revenues from Customer
contracts, reimbursable expenses, distributions and other matters relating to
the Strategic Alliance and shall provide copies of such records to Qmed upon
request, and shall make those records available for audit by an independent
accounting firm selected by Qmed and acceptable to SB during ordinary business
hours upon reasonable prior written notice from Qmed. Qmed will also have the
right to utilize its own employees to audit records that do not contain any
confidential information of SB which Qmed does not have a right to review. Such
audits shall occur no more frequently than twice a year. The costs of any such
audit shall be borne by the party requesting such audit.
19. INDEMNIFICATION, INSURANCE AND NOTICE
19.1 Indemnification
19.1.1 Qmed agrees to defend, indemnify and hold harmless SB, its
parents, subsidiaries, affiliates, officers, directors, employees, agents, and
representatives from and against any and all liability, losses, damages,
injuries (including wrongful death), claims, causes of action, suits or
proceedings and expenses connected therewith (including reasonable attorneys'
fees) arising out of or relating to the provision or use of the ohms|cad system
or services or any part thereof (including, but not limited to, the equipment,
software, reports, recommendations, consultations and other items or services
used in providing or provided as part of the ohms|cad services) or the
negligence or willful misconduct of Qmed, its parents, subsidiaries, affiliates,
officers, directors, employees, agents, and representatives, except as set forth
in paragraph 19.1.2 below.
19.1.2 SB agrees to defend, indemnify and hold harmless Qmed, its
parents, subsidiaries, affiliates, officers, directors, employees, agents, and
representatives from and against any and all liability, losses, damages, claims,
causes of action, suits or proceedings and expenses connected therewith
(including reasonable attorneys' fees) to the extent caused solely by the
negligence or willful misconduct of SB or any of its parents, subsidiaries,
affiliates, directors, officers, employees, agents or representatives.
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19.2 Insurance
19.2.1 Qmed shall maintain products/professional or other
appropriate liability insurance to cover Qmed's obligations under Section 19.1.1
above, with minimum limits of $20,000,000 for each occurrence or claim and
$20,000,000 annual aggregate in full force and effect from the earlier of the
date the first Customer signs a contract for ohms|cad services covered by this
Agreement or the date Qmed begins to provide ohms|cad services covered by this
Agreement, through the end of this Agreement. Such insurance will include
contractual liability coverage and be written by insurance companies licensed to
do business in New Jersey and possessing an A.M. Best's Rating of "B+" or
better. Qmed currently has insurance coverage of $1,000,000 for each
occurrence or claim and $1,000,000 annual aggregate. Qmed will use its best
efforts to assure that, when it obtains the additional $19,000,000 insurance
coverage required under this provision, that such additional coverage will be
designed to cover activities of Qmed which are covered under Qmed's obligations
under Section 19.1.1 above, and will not cover items arising out of Qmed's other
businesses or out of Qmed's provision of ohms|cad services where such activities
are not covered by this Agreement. In the event Qmed is unable to secure
coverage in the manner described in the prior sentence, Qmed will use its best
efforts to secure total insurance coverage of $25,000,000 for each occurrence
or claim and $25,000,000 annual aggregate.
19.2.2 In the event Qmed's coverage is written on a "claims-made"
basis, Qmed agrees that its insurance policies will include a five year claims
reporting endorsement or "Tail" coverage relating to its performance under this
Agreement.
19.2.3 Qmed shall have SB added as an "additional insured" under the
insurance policy(ies) required under paragraph 19.2.1.
19.2.4 Qmed agrees to furnish SB with a current and valid
certificate of insurance evidencing the extent of its products/professional or
other appropriate liability coverage required under paragraph 19.2.1.
19.3 Notice
The party seeking indemnification shall promptly notify in writing
the other party of any claim asserted against it for which such indemnification
is sought, and shall promptly deliver to the party from whom indemnification is
sought a true copy of any such claim including, but not limited to, a true copy
of any summons or other process, pleading or notice issued in any lawsuit or
other proceeding to assert or enforce such claim. Where acceptance of its
obligation to indemnify is deemed proper by the indemnifying party, said party
reserves the right to control the investigation, trial and defense of such
lawsuit or action (including all negotiations to effect settlement) and any
appeal arising therefrom and to employ or engage attorneys of its own choice.
The party seeking indemnification may, at its own cost,
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participate in such investigation, trial and defense of such lawsuit or action
and any appeal arising therefrom. The party seeking indemnification, its
employees, agents, servants and representatives shall provide full cooperation
to the indemnifying party at all times during the pendency of the claim or
lawsuit, including, without limitation, providing them with all available
information concerning the claim.
19.4 Survival
The provisions of this Section 19 shall survive the termination of this
Agreement.
20. INVESTMENT IN QMED
SB's affiliate, S.R. One, and Qmed are entering into a separate agreement
pursuant to which S.R. One is making an equity investment in Qmed in order to
provide Qmed with certain operating capital to fund the operations that are
expected to occur in connection with this Agreement. While Qmed does not intend
to segregate such funds, Qmed will use its best efforts to assure that the net
proceeds of the investment made by S.R. One in Qmed will be utilized primarily
to fund operating and other expenses incurred by Qmed in support of the
provision of the ohms|cad services pursuant to this Agreement.
21. WAIVER MODIFICATION
Any term or condition of this Agreement may be waived or modified at any
time by the party entitled to the benefit thereof by a written instrument
executed by both parties. No delay or failure on the part of any party in
exercising any rights hereunder and no partial or single exercise thereof, will
constitute a waiver of such rights or of any rights hereunder.
22. HEADINGS
The headings used in this Agreement are intended for guidance only and
shall not be considered part of the written understanding between the parties
hereto.
23. GOVERNING LAW
This Agreement shall be construed and the respective rights of the parties
hereto determined according to substantive laws of the Commonwealth of
Pennsylvania notwithstanding the provisions governing conflict of laws under
such law to the contrary.
24. SEVERANCE
If any one or more of the provisions of this Agreement shall be held to be
invalid, illegal or unenforceable, the validity, legality or enforceability of
the remaining provisions hereof shall not in any way be affected or impaired
thereby. To the extent permitted by applicable law, each party waives any
provision of law which renders any provision hereof invalid, illegal or
unenforceable in any respect. In the event any provision of this Agreement shall
be held to be
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invalid, illegal or unenforceable, the parties hereto shall use best efforts to
substitute a valid, legal and enforceable provision which, insofar as practical,
implements the purposes hereof.
25. ENTIRE AGREEMENT
This Agreement contains the entire agreement between the parties in
respect of the subject matter hereof and supersedes and cancels all previous
agreements, negotiations, commitments and writings between the parties hereto in
respect of the subject matter hereof and may not be changed or modified in any
manner or released, discharged, abandoned or otherwise terminated unless in
writing and signed by the duly authorized officers or representatives of the
parties.
26. NOTICE
Any notice or request required or permitted to be given in connection with
this Agreement shall be deemed to have been sufficiently given if sent by
pre-paid registered mail or telecopier to the intended recipient at the address
set forth below or such other business address as may have been furnished in
writing by the intended recipient to the sender. The date of mailing or
telecopying shall be deemed to be the effective date on which notice was given,
provided that all telecopies shall contain a provision requiring the intended
recipient to confirm receipt and such telecopy shall not be effective unless
confirmation of its receipt is received within twenty-four (24) hours of its
transmission.
Any notice required to be given to Qmed shall be addressed to:
Qmed, Inc.
100 Metro Park South, 3rd Floor
Laurence Harbor, NJ 08878
Attention: President
Notice to SB shall be addressed to:
SmithKline Beecham
One Franklin Plaza
Philadelphia, Pennsylvania 19101
Attention: Vice President - Disease Management
27. PUBLIC ANNOUNCEMENTS
Any public announcements or similar publicity with respect to this
Agreement or the transactions contemplated herein shall be at such time and in
such manner as SB and Qmed shall agree, provided that nothing herein shall
prevent either party from, upon written notice to and opportunity to review by
the other, making such public announcements as such party's legal obligations
may require.
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28. ASSIGNMENT
This Agreement may not be assigned or transferred by either party without
the prior written consent of the other, provided that SB may assign this
Agreement to a parent, subsidiary or affiliate without the consent of Qmed and
Qmed may assign this Agreement to its wholly-owned subsidiary, Interactive Heart
Management Corp. ("IMHC"). Any assignment by SB to a parent, subsidiary or
affiliate, or by Qmed to IMHC will not relieve SB or Qmed, as the case may be,
of its obligations under this Agreement, including, but not limited to, any such
obligations imposed under Section 19 hereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized officers or representatives.
QMED, INC.
By: /s/ MICHAEL W. COX
--------------------------
Title: President
-----------------------
SMITHKLINE BEECHAM HEALTHCARE SERVICES,
a division of
SMITHKLINE BEECHAM CORPORATION
By: /s/ TADATAKA YAMADA
--------------------------
Title: President
-----------------------
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ATTACHMENT 1
DESCRIPTION OF OHMS|CAD DISEASE MANAGEMENT PROGRAM
See attached description of the ohms/cad system. The Monitor One STRx
User's Manual, Version 1.3 is not attached but is incorporated by reference.
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ATTACHMENT 2
QMED OHMS|CAD SERVICES
See Attached.
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CONFIDENTIAL TREATMENT REQUESTED. THE REDACTED MATERIAL HAS BEEN
SEPARATELY FILED WITH THE COMMISSION.
ATTACHMENT 3
QMED POTENTIAL AND EXISTING CUSTOMERS
[CONFIDENTIAL]
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ATTACHMENT 4
REIMBURSABLE EXPENSES
A. General Marketing Costs
o Agency Fees: i.e., negotiated hourly rates or commissions, creative fees
associated with individual projects, etc.
o Agency Expenses: Costs associated with a project that are passed through
by the agency. These may include consultant costs, mechanical creation,
comp creation, promotional piece mock-ups, delivery charges, agency
personnel travel expenses, etc.
o Physician ohms|cad launch meetings: Costs of developing and creating
agendas, communications messages and materials, meeting handouts, speaker
slides, other out-of-pocket costs, etc.
o Training Programs: Development and creation of printed and other materials
to train the IHD sales force, SB sales consultants, and Qmed technical
specialists. Convention Activities: Booth development, communications
message creation, panel creation, etc.
B. Client Marketing Costs
o Promotional Material Production and Creation: Production and printing
costs for marketing and other materials.
o MCO Customization: Fees and costs associated with customization of
existing marketing pieces to be used with specific MCO customers.
o Physician launch meetings: "Pass-through" costs associated with individual
physician launch meetings. Examples include slide creation, printing of
meeting materials, physician recruitment telephone calls, speaker
honoraria, meals, speaker travel expenses, meeting management, CME
expenses, etc.
o Advertising: The purchase of advertising, which may be in a variety of
mediums, including print, mail, etc.
o Grants: Cash grants or donations to support plan-specific ohms|cad launch
activities.
o Representative Expenses: Limited to meals and other modest expenditures
that may support ohms|cad pull-through activities. (A specific example
would be a lunch arranged at a capitated physician group for physicians
and office staff to explain the ohms|cad system)
o Convention Activities: Space fees, shipping and drayage, booth set-up,
panel creation and/or printing, receptions or social events, hotel
charges, etc.
o Preparation of Customized MCO Presentations: Printing, photocopying,
reproduction costs for customized account presentations (i.e., creation of
a customized slide presentation with 10 copies reproduced in color at SB
or at an outside vendor such as Kinkos)
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C. Qmed Operational Costs
ohms/cad Direct Costs
Positive Consultant
Cost OHMS Senior Staff
OHMS Supervisor
OHMS Tech salaries
OHMS RN salaries
OHMS Trainers/Field
Payroll Tax Sales
Employee Benefits
Site Visits -- OHMS Managers
Telephone -- ohms|cad
Mail -- ohms|cad
Telephone OHMS Admin.
Amortization of OHMS Equip. and Development costs (actual costs to be agreed
upon by JSC)
Database Development costs & software/hardware site support (actual costs to be
agreed upon by JSC)
Product Liability Insurance
Contract Costs (Legal/Acctg.)
D. Contract Administration Costs
o Legal: All costs associated with the drafting and execution of ohms|cad
contracts.
o Accounting: All costs (including those for personnel used for such
purposes) associated with monitoring and collecting payments from
customers, tracking reimbursable expenses, coordinating expenses with
Qmed, paying SB marketing bills, tracking cost savings, maintaining a bank
account for the funds received from customers, distributing funds pursuant
to this agreement, etc.
E. Miscellaneous Costs
o Travel Expenses: For SB headquarters personnel incurred in conjunction
with an ohms|cad selling or service trip. These include transportation,
room, meals, miscellaneous, and other usual and customary expenses
associated with business travel. SB will only bill for costs associated
with an ohms|cad visit. IHD (except for Karen Hamby and other
Philadelphia-based IHD management) and SB sales consultant travel expenses
are not considered reimbursable expenses.
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o Other: Additional expenses agreed to be reimbursed by the JMC. These may
include symposia sponsorship, speaking engagements at industry seminars,
and other "market-building" activities not easily attributable to an
individual customer.
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ATTACHMENT 5
TRADEMARKS/SERVICE MARKS
qmed
ohms|cad
Monitor One
Monitor One Strx
34
ANNUAL REPORT 1996
qmed INC. (R)
<PAGE>
President's Message
================================================================================
Dear Shareholder:
During Fiscal 1996, your Company became the leading provider of disease
management systems for coronary artery disease. Approximately 100,000 lives are
currently enrolled with an anticipated 600,000 additional lives to be enrolled
before the end of 1997. Our disease management system, ohms|cad(R), is designed
specifically for HMO's, managed health care providers and large physician group
practices whose goals are aligned with ours - to provide the best possible
systematic and continuing care process for patients with coronary artery
disease. The power of our ohms|cad system to reduce cost and improve the overall
health status of coronary patients has been demonstrated in a pilot project in
California. Results to date show a dramatic improvement in quality of life and
reduction in the need for highly invasive procedures, thereby, resulting in
substantial cost savings. Significantly, the marketing of the ohms|cad system is
now supported through a strategic alliance agreement with SmithKline Beecham
with a planned national roll-out by mid-year.
While there is no doubt that the sales process of the ohms|cad system to
large health care providers is a lengthy and detailed one, the indication thus
far shows an overwhelming positive response. As of the date of this report,
between 20-25 leading health care organizations have shown a strong interest in
implementing the ohms|cad approach to their treatment of coronary artery
disease. As the system develops and gains market share there are significant
opportunities that lie ahead for your Company.
ohms|cad, a proprietary "On-line Health Management Service for Coronary
Artery Disease", is a telecommunications system designed as a total disease
management process for coronary artery disease. It consists of STRx, the
Company's Monitor One(R) ambulant ischemia technology; a remote on-line
diagnostic center (The ohms Center); and an integrated cardiology consultant
practice. The advantage of the system is in its ability to non-invasively and
reliably quantify the probable risk of a heart attack, unstable angina and death
and to rationally direct the patient to appropriate therapy with the accent on
early detection, the modification of critical risk factors and medical
intervention. The overall system operates as an "expert system" emphasizing best
medical treatment options for myocardial ischemia and continued coronary
wellness. Because of centralized, digital storage of all data, it allows for the
continuous description and analysis of quantifiable results; success of
stratification, proportion of patients assigned to various therapies, objective
outcomes, and physician and patient compliance and satisfaction.
It is our strong belief that ohms|cad has every chance of demonstrating
that it is a viable alternative, and in many cases a better patient choice, to
invasive treatment. In the event that our beliefs can be demonstrated and
supported by associated health and cost outcomes of significance, then it is
management's expectation that ohms|cad will add significantly to the value of
your Company.
Very truly yours,
Michael W. Cox
President
Annual Report 1996 - Page 1
<PAGE>
Corporate Profile
qmed, Inc. (the "Company"). The Company engages in the development,
manufacture, marketing and sale of advanced medical devices and systems. The
Company, through Interactive Heart Management Corp. ("IHMC"), a subsidiary
founded during the year ended November 30, 1995, developed and is marketing an
integrated coronary artery disease management system under the name
"ohms|cad"(R) to managed care organizations in order to assist those groups in
managing the cost of coronary artery disease ("CAD"). The Company has
historically focused on producing high quality medical devices that provide
reliable diagnostic interpretation of certain disease states, including a line
of ambulatory ischemic heart monitors, an interpretative electrocardiograph, a
device for the analysis of heart rate variability and a device for the
measurement of venous blood flow. These systems are designed to address the
needs of primary health care physicians to appropriately manage certain diseases
cost effectively. The Company's products are uniquely suited to assist primary
health care physicians in discharging the greater medical responsibilities that
are expected to be placed on them, as efforts are made to reduce the overall
cost of health care. Each of the Company's present products, and those which are
under development by the Company as well as products employing selectively
acquired technology developed by others are designed to provide sophisticated
analysis of physiological data in near or real-time and report these analytical
results to the primary care physician in order to detect and manage early signs
of potentially acute diseases. These technologically advanced diagnostic tools
lead to early detection and treatment thereby facilitating cost-effective
management of disease by a primary care physician rather than disease management
in an expensive acute care facility, such as a hospital.
The Company has developed and markets a full line of ambulatory
computerized ischemic heart disease monitors utilizing patented technology.
These ambulatory products, marketed under the name "Monitor One"(R),
continuously analyze and interpret the discrete marker of ischemic heart
disease, the ST-segment of electrocardiographic ("ECG") signals generated by the
heart utilizing patented and proprietary technology in real time. The Company
has also developed and is marketing an electronic medical device under the name,
Monitor One nDx(R) ("nDx") which analyzes heart rate variability. The loss of
variation in heart rate may assist the physician in making a diagnosis and
determining the severity of autonomic neuropathy. Autonomic neuropathy, a
deterioration of the autonomic nervous system, is associated with diabetic
patients which may lead to complications in the functioning of the heart,
respiratory systems, digestion, body temperature, metabolism, perspiration and
the secretion of certain endocrine glands.
Utilizing the experience obtained through various drug trials with such
companies as Pfizer, Ciba Geigy, ICI and others and the extensive validations
completed on Monitor One instruments, the Company developed a comprehensive,
telemedicine disease management system for the coronary artery disease ("CAD")
patient which is marketed under the trade name ohms|cad by the Company's IHMC
subsidiary. This system consists of Monitor One STRx ambulant ischemic
technology; a remote on-line diagnostic center (ohms center); and an integrated
cardiology consultant practice. This entire system non-invasively and reliably
quantifies the probable risk of a heart attack, unstable angina and death and
directs the patient to appropriate therapy with the emphasis throughout on early
detection, the modification of risk-factors and medical intervention. Early
treatment, emphasis on medical intervention and appropriate referrals to the
cardiologist results in an overall lowering of the cost of CAD care and the
improvement in mortality and morbidity rates in populations having CAD.
In April 1996, the Company entered into a Strategic Alliance Agreement
with SmithKline Beecham Health Care Services, a division of SmithKline Beecham
Corporation ("SmithKline Beecham"). Under the agreement, SmithKline Beecham has
the exclusive right to market and sell the Company's ohms|cad system to managed
care companies in the United States, together with the Company's IHMC
subsidiary. In addition, SmithKline Beecham's venture capital affiliate, S.R.
One Limited, made a $2 million equity investment in the Company and acquired
warrants to acquire an additional 63,492 shares of the Company's common stock
for $15.75 per share. In certain circumstances, the Company can require S.R. One
to exercise the warrants. The Company and SmithKline Beecham share profits and
losses after the Company recovers its costs of operating the ohms|cad system for
a client managed health care organization.
Annual Report 1996 - Page 2
<PAGE>
ohms|cad System
ohms|cad is Interactive Heart Management Corp.'s (IHMC) proprietary
"On-line Health Management Service for Coronary Artery Disease". It is a
telecommunications system designed as a total disease management process for
CAD. It consists of Monitor One STRx, IHMC's Monitor One ambulant ischemia
technology; a remote on-line diagnostic center (The ohms Center); and an
integrated cardiology consultant practice. The entire system noninvasively and
reliably quantifies the probable risk of a heart attack, unstable angina and
death and rationally directs the patient to appropriate therapy with the accent
on early detection, the modification of critical risk-factors and medical
intervention.
The overall system operates as an "expert system" emphasizing best medical
treatment options for myocardial ischemia and continued coronary wellness. The
system is an evidence based, relational mechanism, using coronary artery disease
patient descriptors which include: demographics, medical history, current
medical therapy, including aspirin, lipid and hypertension profiles, obesity and
life style, smoking, glucose levels and ambulant ischemia in its decision
making.
In addition, each individual patient's demographics and risk profiles are
simultaneously entered into the ohms|cad database for secondary prevention
analysis and treatment. Recommendations for management are relational, and
tailored to an individual patient for lipid and hypertension management,
antithrombosis, smoking, exercise, obesity and diabetes.
Because of centralized, digital storage of all data, it allows for the
continuous description and analysis of quantifiable results; success of the
stratification, proportion of patients assigned to various therapies, objective
outcomes, interplay with pharmaceutical and pharmacy benefit managers and
physician and patient compliance and satisfaction.
For example, in its risk prevention mode (myocardial infarction, unstable
angina, sudden death), it centers on the presence or absence of ambulant
ischemia as a risk stratifier utilizing our specialized non-invasive STRx
technology for evaluation of this phenomena in each patient. This test data is
telecommunicated to the Company's ohms|cad database (The ohms Center), which in
turn stratifies each individual patient into high or low risk. It then proposes
to lower patient risk with specific anti-ischemic medical therapies as one
treatment option, or, if necessary, recommends further local cardiology
consultation leading to possible invasive intervention. If the data indicate
that the patient is at low risk, a message is sent back to the primary care
physician (PCP) site within minutes with recommendations for optimization of
medical therapy which will maintain the patient in the low-risk pool. In both
circumstances, therapeutic actions are guided by IHMC's proprietary disease
management algorithm which in turn is based on national practice guidelines. All
of the interactions and data are stored in the ohms|cad diagnostic center, thus,
outcome information is available continuously.
Because ohms|cad is an active disease management process emphasizing a
continuum of care, derived from early detection of ambulant ischemia and
modification of patient risk factors, similar cost effective improvements in
cardiac events can be expected from its use. The ohms|cad system continually
monitors the care process at the primary care level, thus, results are reported
as outcomes. Favorable outcomes increase market share, decrease economic risk
and increase product differentiation. In the end, it is "coronary wellness" that
counts. It is durable, measurable and less costly than conventional care. As a
result, the early implementation of ohms|cad should contribute to significant
savings and improved health outcomes.
Annual Report 1996 - Page 3
<PAGE>
Monitor One and Other Products
The Company's Monitor One systems utilize technology which detects changes
in the ECG signal which may be associated with diseases of the heart. Monitor
One systems store analyzed ECG wave forms, statistical data, produce printed
reports and can transmit data either directly to a printer or over telephone
lines or to a personal computer for physician analysis, interpretation and
ischemic intervention. The Company's Monitor One, which may be worn on a belt or
carried in the patient's pocket, is capable of interpreting a wide variety of
ECG signals which may be associated with cardiac conditions. Monitor One
technology has been independently validated in controlled research studies for
the detection of ischemic episodes associated with coronary ST-segment
deviations in patients with diagnosed CAD.
Each Monitor One system is a computerized monitor with five high-fidelity
electrodes which are either disposable or reusable and attached to the monitor
through a single connector. The reusable electrodes were originally developed by
the National Aeronautics and Space Administration ("NASA"). Monitoring for
periods of greater than 24 hours is possible due to solid-state memory and the
design of the reusable electrodes, which allows high-fidelity signal capture
without the need for daily replacement of disposable electrodes.
An integral part of Monitor One TC and Omni systems developed by the
Company is called the buffered interface module ("BIM"). The BIM permits the
rapid retrieval and storage of data from Monitor One units prior to printing
reports. This permits a physician to remove data stored after a monitoring
session and re-employ the monitor while the report is printing. The BIM also
permits data to be transferred to a microcomputer system base station, either
directly or telephonically. The Company has developed propriety microcomputer
software to store, organize and assist in the analysis of ECG data.
The Company developed and is marketing a diagnostic device that analyzes
heart rate variability which can provide the physician information on the
functioning of the Autonomic Nervous System ("ANS"). ANS dysfunction is the
failure of the portion of the body's nervous system to regulate such unconscious
functions as respiration, circulation, digestion, heart-rate, body temperatures,
metabolism, sweating and certain glandular secretions. These symptoms are
associated with serious complications of diabetes leading to blindness, kidney
failure, and may contribute to diabetic cardiac autonomic neuropathy, often
associated with "silent heart disease," heart attacks and "sudden cardiac
death." The Company's Monitor One nDx system ("nDx") automates the analysis of
heart rate variation during deep inspiration and forced expiration, posture
changes and Valsalva Maneuvers. The nDx monitor assists the physician in
administering the test by prompting the patient's breathing patterns and then
providing a statistical analysis. The Company believes that this product can
assist physicians in the early detection of neurological disorders related to
diabetes, before other more dangerous symptoms (heart attacks, blindness,
impotence, etc.) are present and to help manage the treatment of their diagnosed
diabetic patients. The Company received a U.S. patent for the nDx technology on
March 29, 1994 (Patent No. 5299119).
The Company also manufactures and markets other non-invasive medical
devices.
Annual Report 1996 - Page 4
<PAGE>
Selected Financial Data
The selected financial data presented below as of November 30, 1996 and
1995 and for each of the three years in the three year period ended November 30,
1996 were derived from the Consolidated Financial Statements and Notes thereto
of the Company which are included in this report and have been audited by Amper
Politziner & Mattia, independent auditors. The selected financial data presented
below as of November 30, 1994, 1993 and 1992 and the years ended November 30,
1993 and 1992 were from the audited Consolidated Financial statements of the
Company which are not included in this report. The data presented below should
be read in conjunction with the Company's audited Consolidated Financial
Statements and Notes thereto which are included in this report.
For the Years Ended November 30:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
Results of Operations ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 3,316,659 $ 5,648,754 $ 8,369,461 $ 9,474,661 $ 10,007,636
Cost of sales 1,320,481 1,579,196 2,027,090 2,436,053 2,370,945
----------- ----------- ----------- ----------- ------------
Gross profit 1,996,178 4,069,558 6,342,371 6,987,635 7,636,691
Selling, general and
administrative expenses 4,227,234 5,164,478 5,806,320 6,646,607 6,826,472
Provisions for uncollectible
accounts 16,051 25,347 106,826 38,271 52,766
Research and development
expenses 348,840 382,244 337,277 563,784 559,716
Impairment Charge (341,683) -- -- -- --
----------- ----------- ----------- ----------- ------------
(Loss) earnings from operations (2,937,640) (1,502,511) 91,948 (261,027) 197,737
Other income 160,096 -- -- 50,973 29,535
Interest expense (33,876) (68,142) (84,429) (93,028) (132,971)
----------- ----------- ----------- ----------- ------------
(Loss) earnings before income
taxes (2,811,410) (1,570,653) 7,519 (303,082) 94,301
Income taxes -- -- -- -- 33,000
----------- ----------- ----------- ----------- ------------
(Loss) earnings before minority
interest (2,811,410) (1,570,653) 7,519 (303,082) 61,301
Minority interest in loss
of subsidiary -- 16,000 17,000 17,000 --
----------- ----------- ----------- ----------- ------------
(Loss earning before
extraordinary item (2,811,410) (1,554,653) 24,519 (286,082) 61,301
Extraordinary item-benefit from
utilization of net operating loss
carryforwards -- -- -- -- 33,000
----------- ----------- ----------- ----------- ------------
Net (loss) Income $(2,811,410) $(1,554,653) $ 24,519 $ (286,082) $ 94,301
=========== =========== =========== =========== ============
Per Share Data
(Loss) Income per common and
dilutive common equivalent shares $ (.30) $ (.19) $ .00 $ (.04) $ .01
=========== =========== =========== =========== ============
Balance Sheet Data (at end of periods)
Working Capital $ 3,481,104 $ 3,369,177 $ 1,826,908 $ 2,079,786 $ 2,556,582
Total Assets 5,171,064 6,014,620 4,399,104 4,729,195 5,866,766
Long-Term Debt -- 100,000 400,000 700,000 1,000,000
Stockholders' equity 4,098,478 4,237,227 2,380,239 2,336,094 2,554,736
</TABLE>
Annual Report 1996 - Page 5
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements, and Notes thereto, contained elsewhere in
this report.
Results of Operations
The following table presents the percentage of total revenue for the
periods indicated and changes from period to period of certain items included in
the Company's Statements of Operations.
<TABLE>
<CAPTION>
% For Period-to-Period
Year Ended % Changes
November 30, ---------
------------ 1996 1995 1994
vs. vs. vs.
1996 1995 1994 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0 100.0 100.0 (41.3) (32.5) (11.7)
----- ----- -----
Cost of sales 39.8 28.0 24.2 (16.4) (22.1) (16.8)
----- ----- -----
Gross profit 60.2 72.0 75.8 (50.9) (35.8) (9.9)
Selling, general and administrative expenses 127.5 91.4 69.4 (18.1) (11.1) (12.6)
Provisions for uncollectible accounts .5 .4 1.3 (36.7) (76.3) 179.1
Research and development expenses 10.5 6.8 4.0 (8.7) (13.3) (40.2)
Impairment charge 10.3 -- -- * * *
----- ----- -----
(Loss) earnings from operations (88.6) (26.6) 1.1 72.8 * *
Other Income 4.8 * * * * *
Interest expense (1.0) (1.2) (1.0) (50.3) (19.3) (9.2)
----- ----- -----
(Loss) earnings before income taxes (84.8) (27.8) .1 79.0 * *
Income taxes -- -- -- * * *
----- ----- -----
(Loss) earnings before minority interest (84.8) (27.8) .1 79.0 * *
Minority interest in loss of subsidiary -- .3 .2 * (5.9) *
----- ----- -----
Net (loss) income (84.8) (27.5) .3 80.8 * *
===== ===== =====
</TABLE>
*Not meaningful
Fiscal 1996 Compared with Fiscal 1995
Net sales for fiscal 1996 decreased approximately 41.3% to $3,316,659 when
compared to $5,648,754 for fiscal 1995. This decrease was due to the continued
reduction in capital equipment sales through the Company's direct sales force.
This reduction is primarily attributable to the primary care market shifting
from fee-for-service to prepaid managed contracts. As a result, physicians may
be required to follow certain guidelines in treating certain diseases such as
coronary artery disease, which may not include tests utilizing equipment sold by
the Company. Because of this treatment there has been less demand for capital
equipment such as those produced by the Company, over the past several years,
and it appears that the trend will continue, as society becomes cost conscious
in health care. The shift into managed care effects the Company's sales of
capital equipment since managed care facilities are less likely to buy the
product or will need less equipment that will be shared by the physicians
involved. The size of the market for the Company's equipment diminishes as more
managed care facilities are formed or when physicians join an existing facility.
In response to these trends, the Company has developed and is selling the
ohms|cad system to managed care organizations. Throughout fiscal 1996 the
Company's management had shifted its resources and focused its efforts on the
development and marketing of the ohms|cad system through its wholly owned
subsidiary, IHMC.
During April, the Company entered into a strategic alliance agreement with
SmithKline Beecham to jointly market the ohms|cad system to physician groups and
health maintenance organizations. SmithKline purchased $2,000,000 worth of the
Company's common stock to fund the increased marketing efforts on the
implementation of the ohms|cad system. The Company believes these efforts will
begin to come to fruition during fiscal 1997. Although the Company may complete
contract negotiations with several large health care providers during fiscal
1997, any significant revenue may not be recognized until 15-18 months from the
date of implementation. Accordingly, significant revenue from the sale of
ohms|cad services will lag behind marketing and administrative expenses.
Revenues received through IHMC are on a contractual basis whereby the
Company receives a payment from the managed care organization calculated as a
percentage of the reduction of the organization's costs of providing care for
CAD patients from a base year compared to the year in which the ohms|cad system
is utilized. A base period is selected and total CAD costs are computed,
ohms|cad is placed in service and used for the consecutive one year period.
Total CAD costs are then calculated and compared to the base year costs. The
managed care organization then pays the Company the agreed portion of the
calculated reduction in such costs. From the inception of the contract, the
Company receives a monthly prepayment reflecting a small percentage of the
statistically determined share of the expected reduction in costs of providing
care for CAD patients which recorded as revenue. Once the actual reduction of
cost is calculated, the prepayments are subtracted and any additional revenue is
billed and recorded at that time.
Annual Report 1996 - Page 6
<PAGE>
The Company has aggressively marketed the ohms|cad system to over 20
leading health care providers throughout the United States and will continue
these efforts during fiscal 1997. Included in the Company's net loss of
$(2,811,410) was approximately $(1,566,000) from Interactive Heart Management
Corp.
The Company's gross profit margin decreased from 72% to approximately
60.2% during fiscal 1996. The decrease was directly related to the decrease in
net sales. Management expects gross profit margins to remain relatively
consistent with the current year as it continues to emphasize the sale of
ohms|cad and related services.
Selling, general and administrative expenses decreased by approximately
$930,000, primarily due to a reduction in sales-related expenses. While
management has reduced general and administrative expenses where necessary,
expenses related to the marketing and implementation of the ohms|cad disease
management system have risen.
The provision for doubtful accounts remained less than 1% of sales. The
Company continues to maintain strict credit policies with respect to capital
equipment sales to primary care physicians. The Company was amortizing
technology acquired in fiscal 1992 for $750,000 over a seven year term. In
fiscal 1996, the Company focused primarily on the development and marketing of
the ohms|cad system and determined that such technology no longer had a
realizable value. Accordingly the remaining value of the asset was deemed
impaired in fiscal 1996 and totally written off.
Research and development expenses remained consistent with prior years.
Management expects research and development expenses to grow as a percentage of
net sales during fiscal 1997 due to increased development of ohms|cad.
The Financial Accounting Standards Board issued Statement No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123). Under this new
standard, a new fair value based method of accounting for stock-based
compensation arrangements with employees is established. Entities may continue
to use the Opinion 25 method or adopt the SFAS No. 123 fair value based method.
If the Company continues to use the Opinion 25 method, SFAS No. 123 requires
footnote disclosure of proforma net income and earnings per share information as
if the fair value based method had been adopted. The Company has not yet
determined which methods it will use. This Statement is effective for financial
statements for fiscal years beginning after December 15, 1995, or for the fiscal
year for which the Statement is initially adopted for recognizing compensation
expenses, whichever comes first.
Fiscal 1995 Compared with Fiscal 1994
Net sales for fiscal 1995 decreased approximately 32.5% to $5,648,754 when
compared to $8,369,461 for fiscal 1994. The decrease was primarily due to a
slowdown in unit sales to primary care physicians through the Company's domestic
sales force. This slowdown, in management's opinion, was due to the increased
number of physicians joining large group practices and entering into managed
care contracts where revenues or procedures may be controlled. During fiscal
1995 much of its efforts were focused on developing and marketing the ohms|cad
technology, a disease management system for coronary artery disease, to the
managed care market.
During March 1995, the Company formed IHMC to develop, market and
implement ohms|cad (on-line health management system for coronary artery
disease). Included in the net loss of $(1,554,653) for fiscal year ended
November 30, 1995, was approximately $(593,000) from IHMC.
The Company's gross profit margin decreased from 75.8% to approximately
72% during fiscal 1995. The decrease was directly related to the decrease in net
sales.
Selling, general and administrative expenses decreased by approximately
$640,000 due to a reduction in sales-related expenses. While management cut
administrative expenses as necessary, others rose in connection with start-up
costs for ohms|cad, such as travel and legal expenses.
The provision for doubtful accounts decreased to less than 1% of sales.
While this decrease is directly related to the decrease in sales, the Company
also maintains strict credit policies.
Annual Report 1996 - Page 7
<PAGE>
Research and development expenses remained consistent with prior years.
Fiscal 1994 Compared with Fiscal 1993
Net sales for fiscal 1994 decreased by approximately 11.7% to $8,369,461
when compared to $9,474,661 for fiscal 1993. The decrease was primarily due to
the continued uncertainty over health care reform throughout the United States.
The Company anticipated a decrease in sales and managed to reduce certain costs
to come closer to expected revenues. The Company's sales force continued to
focus its efforts at the primary care level and to group practices, which were
growing as a result of the evolution of managed care. The Company was developing
a new "disease management" product which enables physicians to manage coronary
artery disease non-invasively via a telecommunication network. This new system
fills the need for cost saving measures by enabling primary care physicians to
treat the patients out of the hospital through medical management rather than
expensive, invasive procedures involving specialists. The Company increased
efforts toward the development, marketing and implementation of this new
technology to managed care organizations during fiscal 1995.
Gross profit margins increased slightly from 74.3% to 75.8% in fiscal
1994. The increase was due to a mixture of sales price increases in certain
products and product cost decreases in certain other products.
Selling, general and administrative expenses decreased by approximately
$874,000 or 13.2% when compared to the prior year. The decrease was due to
overall reductions in advertising, sales related expenses and administrative
costs. These reductions were part of management's continued efforts to keep
expenses in line with expected revenues.
The provision for uncollectible accounts increased by approximately
$68,500 in fiscal 1994 when compared to fiscal 1993. The increase was the result
of management's decision to reserve for certain accounts after exhaustive
collection measures had taken place. Although the provision increased from the
prior year, it remained only a small percentage (1.3%) of net sales.
Research and development expenses decreased by approximately $226,507 or
40% when compared to the prior year. Most of this reduction was due to the
decrease in operating costs of the facility and small reductions in engineering
personnel. The Company also capitalized approximately $76,000 in product
software development costs during fiscal 1994.
Liquidity and Capital Resources
To date, the Company's principal sources of working capital have been
provided by proceeds from public and private placements of securities, and the
sale of certain assets and operations. Since the Company's inception, sales of
securities and assets have generated approximately $18,000,000 less applicable
expenses.
The Company has an installment note payable to a bank in the amount of
$625,000 dated March 1, 1995. The Company has been making monthly installments
of $25,000 plus interest at 1% over prime rate. The balance as of November 30,
1996 was $100,000. The prime rate at November 30, 1996 was 8.25%. The note will
be fully paid on March 31, 1997.
The Company had working capital of $3,481,104 at November 30, 1996
compared to $3,369,177 at November 30, 1995 and ratios of current assets to
current liabilities of 4.6:1 and 3.2:1 as of November 30, 1996 and 1995. Working
capital remained consistent primarily due to the proceeds from the sale of
shares of the Company's common stock of approximately $2,700,000 which funded
the Company's net loss of approximately $(2,800,000) during fiscal 1996.
The Company anticipates that funds generated from operations, together
with cash and investments, should be sufficient to meet its working capital and
capital requirements for the current year. However, in the event sales do not
meet management's expectations, the Company may be required to seek additional
financing to support IHMC's sales effort.
Annual Report 1996 - Page 8
<PAGE>
The Company maintains a general policy of net 30-day payment terms on
equipment sales to distributors, cash or third-party leasing arrangements with
direct sales to physicians and letters of credit or open account for
international sales. In some instances, the Company has extended payment terms
beyond net 30 to selected distributors. The Company's receivables balances over
90 days past due was 19.1% of the receivables balance at November 30, 1996
compared to 20.9% in 1995. The amount represents slow payment on account of
several distributors and hospital institutions, however, the Company is
aggressively seeking payment arrangements to be made in the near future.
The Company, with its IHMC subsidiary, enters into contract arrangements
with physician groups and managed care organizations where either a prepayment
toward a cost savings is made per month or billing is done on a per test basis.
The Company generally holds a security deposit for systems placed in physicians
offices. As of November 30, 1996 the Company had only entered into one agreement
whereby it received prepayments toward estimated cost savings. The
implementation of the ohms|cad system under that contract resulted in the
managed care organization reducing its cost of CAD care by $735,000 in the first
year. The Company's share of such reduction under the contract was $367,000, of
which approximately $273,000 was received as prepayment revenue on a monthly
basis throughout the contract period. The remaining $94,000 was computed and
billed in May 1997, which was when the data was available for final review. See
"Fiscal 1996 Compared with Fiscal 1995", above.
The Company offers certain distributors the opportunity upon the
introduction of new or upgraded products to exchange their inventory units. In
such cases, the customer is billed for the net price differential at the time of
the product exchange.
Inflation
The Company believes that there has not been a significant impact from
inflation on the Company's operations during the past three fiscal years.
Additional Factors That May Affect Future Results
Future Operating Results. Future operating results may be impacted by a
number of factors that could cause actual results to differ materially from
those stated herein, which reflect management's current expectations. These
factors include worldwide economic and political conditions, industry specific
factors, the Company's ability to maintain access to external financing sources
and its financial liquidity, the acceptance of the ohms|cad system by managed
care organizations, and the Company's ability to manage expense levels.
Need for Additional Capital. As of November 30, 1996, the Company had
approximately $2,825,000 cash and short term investments. The Company has
experienced negative cash flows since fiscal 1995 and expects the negative cash
flow to continue until significant service revenue is generated under agreements
to provide ohms|cad services. The Company expects that the monthly negative cash
flow will increase as a result of increased activities related to the marketing
of ohms|cad. As a result of the increased expenditure of funds, the Company
believes that it will be necessary for the Company to raise additional capital
to sustain its marketing efforts. The Company must raise additional equity funds
in order to continue its operations until it is able to generate sufficient
additional revenue from the sale of its products and services. There can be no
assurance that the Company will be successful in raising such funds on terms
acceptable to it or at all. The Company is discussing the possibility of raising
additional funds with several potential investors, but as of November 30, 1996,
the Company had not entered into any firm commitments for additional funds. The
Company's future success is highly dependent upon its continued access to
sources of financing which it believes are necessary for the continued support
of IHMC's sales effort. In the event the Company is unable to maintain access to
its existing financing sources, or obtain other sources of financing there would
be a material adverse effect on the Company's business, financial position and
results of operations.
Regulation. The Company's products are subject to extensive government
regulation in the United States by federal, state and local agencies including
the Food and Drug Administration. The process of obtaining and maintaining FDA
and other required regulatory approvals for the Company's products is lengthy,
expensive and uncertain. There can be no assurance that changes in existing
regulations or the adoption of new regulations will not occur which will
adversely affect the Company.
Annual Report 1996 - Page 9
<PAGE>
Stock Price Fluctuations. The Company's participation in a highly
competitive industry often results in significant volatility in the Company's
common stock price. This volatility in the stock price is a significant risk
investors should consider.
Forward Looking Statements. This Annual Report contains certain
forward-looking statements that are based on current expectations. In light of
the important factors that can materially affect results, including those set
forth above and elsewhere in this Annual Report, the inclusion of
forward-looking information herein should not be regarded as a representation by
the Company or any other person that the objectives or plans of the Company will
be achieved. The Company may encounter competitive, technological, financial and
business challenges making it more difficult than expected to continue to market
its products and services; competitive conditions within the industry may change
adversely; the Company may be unable to retain existing key management
personnel; the Company's forecasts may not accurately anticipate market demand;
and there may be other material adverse changes in the Company's operations or
business. Certain important factors affecting the forward looking statements
made herein include, but are not limited to (i) accurately forecasting capital
expenditures, and (ii) obtaining new sources of external financing. Assumptions
relating to budgeting, marketing, product development and other management
decisions are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause the Company to alter its capital
expenditure or other budgets, which may in turn affect the Company's financial
position and results of operations.
Annual Report 1996 - Page 10
<PAGE>
CONSOLIDATED BALANCE SHEETS
November 30,
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 680,686 $ 866,750
Investments 2,144,545 1,711,576
Accounts receivable, net of allowance for doubtful accounts
and sales returns of $67,000 and $142,000, respectively 403,930 848,685
Inventory 1,123,664 1,408,805
Prepaid expenses and other current assets 84,074 99,745
------------ ------------
4,436,899 4,935,561
Property and equipment, net of accumulated depreciation 454,674 332,136
Product software development costs 87,140 113,282
Cost of technology -- 441,679
Other assets 192,351 191,962
------------ ------------
$ 5,171,064 $ 6,014,620
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 855,795 $ 1,266,384
Current maturities of long-term debt 100,000 300,000
------------ ------------
955,795 1,566,384
Leases payable, long-term 72,053 50,706
Long-term debt - net of current maturities -- 100,000
Deferred warranty revenue 44,737 60,303
------------ ------------
1,072,585 1,777,393
Stockholders' equity
Common stock $.001 par value; 20,000,000 shares
authorized; 9,483,615 and 8,970,810 shares issued
and 9,461,615 and 8,948,810 outstanding 9,477 8,950
Paid-in capital 17,836,480 15,138,714
Accumulated deficit (13,656,095) (10,844,685)
------------ ------------
4,189,862 4,302,979
Unrealized gain on securities available for sale (15,758) 9,873
Less: treasury stock at cost, 22,000 common shares (75,625) (75,625)
------------ ------------
Total stockholders' equity 4,098,479 4,237,227
------------ ------------
$ 5,171,064 $ 6,014,620
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
Annual Report 1996 - Page 11
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended November 30,
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Sales $ 3,529,216 $ 6,036,048 $ 8,943,212
Less sales returns and allowances 212,557 387,294 573,751
----------- ----------- -----------
3,316,659 5,648,754 8,369,461
Cost of sales 1,320,481 1,579,196 2,027,090
----------- ----------- -----------
Gross profit 1,996,178 4,069,558 6,342,371
Selling, general and administrative expenses 4,227,234 5,164,478 5,806,320
Provision for uncollectible accounts 16,051 25,347 106,826
Research and development expenses 348,840 382,244 337,277
Impairment charge 341,683 -- --
----------- ----------- -----------
(Loss) earnings from operations (2,937,630) (1,502,511) 91,948
Other income - (interest) 160,096 -- --
Interest expense (33,876) (68,142) (84,429)
----------- ----------- -----------
(Loss) earnings before provision for income taxes (2,811,410) (1,570,653) 7,519
Provision for income taxes -- -- --
----------- ----------- -----------
(Loss) earnings before minority interest (2,811,410) (1,570,653) 7,519
Minority interest in loss of subsidiary -- 16,000 17,000
----------- ----------- -----------
Net (loss) income $(2,811,410) $(1,554,653) $ 24,519
=========== =========== ===========
Net (loss) income per common share $ (.30) $ (.19) $--
=========== =========== ===========
Weighted average number of shares outstanding 9,287,420 8,113,978 7,771,488
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Annual Report 1996 - Page 12
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Years Ended November 30, 1996
<TABLE>
<CAPTION>
Unrealized
Gain on
Common Stock Securities
Common Paid-in Accumulated Held in Treasury Available
Stock Capital Deficit Shares Amount for Sale Total
------ ------------ ------------ ------ -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances - November 30, 1993 $7,757 $ 11,718,513 $ (9,314,551) 22,000 $(75,625) $ -- $ 2,336,094
Exercise of stock options 26 19,600 -- -- -- -- 19,626
Net income -- -- 24,519 -- -- -- 24,519
------ ------------ ------------ ------ -------- -------- -----------
Balances - November 30, 1994 7,783 11,738,113 (9,290,032) 22,000 (75,625) -- 2,380,239
Exercise of stock options 88 93,597 -- -- -- -- 93,685
Issuance of common stock
through private placement 1,079 3,307,004 -- -- -- -- 3,308,083
for cash
Net loss -- -- (1,554,653) -- -- -- (1,554,653)
Unrealized gain on securities
available for sale -- -- -- -- -- 9,873 9,873
------ ------------ ------------ ------ -------- -------- -----------
Balances - November 30, 1995 8,950 15,138,714 (10,844,685) 22,000 (75,625) 9,873 4,237,227
Exercise of stock options
and warrants 349 704,740 -- -- -- -- 705,089
Issuance fees associated
with private placements -- (6,787) -- -- -- -- (6,787)
Issuance of common stock
through strategic alliance 178 1,999,813 -- -- -- -- 1,999,991
agreement
Net loss -- -- (2,811,410) -- -- -- (2,811,410)
Unrealized (loss) on securities
available for sale -- -- -- -- -- (25,631) (25,631)
------ ------------ ------------ ------ -------- -------- -----------
Balances - November 30, 1996 $9,477 $ 17,836,480 $(13,656,095) 22,000 $(75,625) $(15,758) $ 4,098,479
====== ============ ============ ====== ======== ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Annual Report 1996 - Page 13
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended November 30,
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net (loss) income $(2,811,410) $(1,554,653) $ 24,519
----------- ----------- ---------
Adjustments to reconcile net (loss) income to
net cash (used) provided by operating activities
Depreciation and amortization 297,432 264,272 233,906
Bad debt expense 16,051 25,342 106,827
Impairment charge 341,683 -- --
(Increase) decrease in
Accounts receivable 428,704 159,160 79,062
Inventory 285,141 114,692 240,411
Prepaid expenses and other current assets (15,671) 34,222 (30,014)
Increase (decrease) in
Accounts payable and accrued liabilities (410,589) 76,180 (63,414)
Other, net 16,871 (92,415) (42,639)
----------- ----------- ---------
Total adjustments 959,622 581,453 524,139
----------- ----------- ---------
(1,851,788) (973,200) 548,658
----------- ----------- ---------
Cash flows from investing activities
Purchase of securities (3,662,600) (1,701,703) --
Sales of securities 3,204,000 -- --
Capital expenditures (273,969) (186,577) (188,289)
----------- ----------- ---------
(732,569) (1,888,280) (188,289)
----------- ----------- ---------
Cash flows from financing activities
Principal payment on notes payable to bank (300,000) (300,000) (300,000)
Proceeds from issuance of common stock 2,698,293 3,401,768 19,626
----------- ----------- ---------
2,398,293 3,101,768 (280,374)
----------- ----------- ---------
Net (decrease) increase in cash and cash equivalents (186,064) 240,288 79,995
Cash and cash equivalents - beginning 866,750 626,462 546,467
----------- ----------- ---------
Cash and cash equivalents - ending $ 680,686 $ 866,750 $ 626,462
=========== =========== =========
Supplemental disclosure of cash paid
Interest $ 36,708 $ 69,892 $ 72,908
Income taxes 7,853 7,328
</TABLE>
See accompanying notes to consolidated financial statements
Annual Report 1996 - Page 14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Significant Accounting Policies
Nature of Business
qmed, Inc. and Subsidiaries (the "Company") operates in two industry
segments, medical equipment sales and disease management services. Sales are
made nationwide through direct sales to physicians and managed care
organizations.
A majority of the Company's revenue is derived from medical equipment
provided to physicians through third-party leasing companies.
Credit is granted at the discretion of management. The Company generally
does not require collateral.
Principles of Consolidation
The consolidated financial statements include the accounts of qmed, Inc.,
its majority (83%) owned subsidiary, Heart Map, Inc., and its wholly (100%)
owned subsidiary, Interactive Heart Management Corp. All intercompany accounts
and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents for financial statement
purposes.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentration of credit risk consist of cash and cash investments. The Company
restricts cash and cash investments to financial institutions with high credit
standings.
Investments
The Company utilizes statement of Financial Accounting Standards No. 115
(SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities."
This statement requires classification of certain investments into one of the
following three categories based on management's intention with regard to such
securities: held-to-maturity, available-for-sale and trading. Securities
classified as held-to-maturity are recorded at cost adjusted for the
amortization of premiums or accretion of discounts, while those classified as
available-for-sale are recorded at fair value with unrealized gains or losses
reported on a net basis as a separate component of stockholders' equity.
Securities classified as trading are recorded at fair value with unrealized
gains or losses reported on net basis in income.
Realized gains and losses are determined using the specific identification
method.
Inventory
Inventory consists of finished units and components and supplies, and is
stated at the lower of cost (determined on a moving weighted average method) or
market.
Depreciation and Amortization
Property and equipment is depreciated using the straight-line method for
financial statement purposes over a five year period. Leasehold improvements are
amortized on a straight-line basis over the term of the lease. Repairs and
maintenance costs are expensed, while additions and betterments are capitalized.
The cost and related accumulated depreciation of assets sold or retired are
eliminated from the accounts and any gains or losses are reflected in earnings.
Product Software Costs
The Company capitalizes certain costs related to the development of
computer software once technological feasibility of the software has been
established. Product software costs are amortized using the straight-line method
over the estimated useful economic life of the software developed, generally 36
months.
Annual Report 1996 - Page 15
<PAGE>
Cost of Technology
Cost of acquired technology is stated at the lower of amortized cost or
estimated net realizable value. The balance of $341,683 at November 30, 1996 was
written off since the estimated realizable value was deemed to be zero. In
fiscal 1996, the Company focused primarily on the development and marketing of
the ohms|cad system and determined that such technology no longer had a
realizable value. Acquired technology was being amortized on a straight-line
basis over the estimated useful life of 7 years. Amortization was approximately
$100,000 in 1996, 1995 and 1994.
Stock Options and Warrants
The Company records transactions involving its stock options and warrants
under APB Opinion 25.
Net (Loss) Income Per Common Share
Net (loss) income per common share is computed on the basis of the
weighted average number of common and common equivalent shares outstanding
during each year. It is assumed that all dilutive stock options are exercised at
the beginning of each year and that the proceeds are used to purchase shares of
the Company's common stock at the average market price during the year. Fully
diluted (loss) income per share amounts are not presented because they are not
materially dilutive. Net (loss) income per common share calculations do not give
effect to any common equivalent share where their inclusion would have the
effect of increasing earnings per share or decreasing the loss per share.
Revenue Recognition
Revenue is recognized on equipment sales when the equipment is shipped and
title passes. The Company does not enter into consignment arrangements with its
customers. Management does, however, allow the return of equipment in certain
situations as an accommodation to the customer, or after exhausting alternative
means of collection of related accounts receivable. Management establishes
estimated accruals for returns from customers and for allowances granted to them
at the time of shipment. The Company has, from time to time, introduced new
products or technologically advanced versions of existing products. The Company
allows certain customers the opportunity, upon the introduction of new or
upgraded products, to exchange their existing units for new units. In such
cases, revenue is recognized and additional funds are received to the extent of
the net price differential at the time of exchange.
The Company enters into contractual arrangements with physician groups and
managed care organizations. Revenue is recognized based on management's
estimates of amounts earned. At the inception of such a contract, management
estimates the total expected reduction in CAD costs over the term of the
contract. The contract provides for the Company to receive a monthly prepayment
toward the Company's fees under the contract, which is a negotiated share of the
actual reduction in CAD costs compared to a base year. The prepayment is a
fraction of the estimated total fees to be received. At specified times during
the course of the contract, the actual reduction in CAD costs is calculated and
the Company then recognizes the amount billed which exceeds the monthly
prepayments received. At November 30, 1996 and 1995, approximately $235,000 and
$137,000 from the above such contracts is included in revenue. One contract
contains stipulations that, if not met, would require the Company to refund a
portion of prepayments received. It is management's opinion that the
stipulations will be met.
The Company sells extended service warranty contracts to customers usually
with terms of one to three years commencing at the termination of the
manufacturer's warranty. The Company recognizes revenue from the sale of two and
three year contracts over the period of the contracts based on the historical
pattern of costs incurred. Such related costs incurred over contract years one,
two and three are 76%, 17% and 7%. Revenue on one year warranty contracts is
recognized on a straight-line basis.
Research and Development Expenses
Costs associated with the development of new products and changes to
existing products are charged to operations as incurred.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Annual Report 1996 - Page 16
<PAGE>
Note 2
Investments
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Amount
---------- -------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
November 30, 1996
Available-for-sale
U.S. Treasury securities $2,160,303 $ -- $ (15,758) $2,144,545 $2,144,545
---------- -------- ----------- ---------- ----------
$2,160,303 $ -- $ (15,758) $2,144,545 $2,144,545
---------- -------- ----------- ---------- ----------
November 30, 1995
Available-for-sale
U.S. Treasury securities $1,002,005 $ 9,873 $ -- $1,011,878 $1,011,878
Corporate equity securities 699,698 -- -- 699,698 699,698
---------- -------- ----------- ---------- ----------
$1,701,703 $ 9,873 $ -- $1,711,576 $1,711,576
---------- -------- ----------- ---------- ----------
</TABLE>
The amortized cost and estimated fair value of available for sale securities at
November 30, 1996 and 1995 mature in one year or less.
Sale of available-for-sale securities for the year ended November 30, was as
follows:
1996 1995 1994
---- ---- ----
Proceeds from sale $3,204,000 $ -- $ --
Gross realized gains 42,473 -- --
Gross realized losses -- -- --
Note 3
Inventory
1996 1995
---- ----
Raw materials
(component parts and supplies) $ 251,494 $ 300,906
Finished units 872,170 1,107,899
---------- ----------
$1,123,664 $1,408,805
========== ==========
The Company's inventory is pledged as collateral in connection with an
outstanding note payable (see Note 7.)
Note 4
Property and Equipment
1996 1995
---- ----
Machinery and equipment $ 1,102,695 $ 985,543
Furniture and fixtures 380,431 377,179
Office equipment 527,537 440,213
Leasehold improvements 44,771 43,301
Equipment held under capital lease 191,222 126,452
----------- -----------
2,246,656 1,972,688
Less accumulated depreciation and
amortization (1,791,982) (1,640,552)
----------- -----------
Property and equipment - net $ 454,674 $ 332,136
=========== ===========
The Company's property and equipment are pledged as collateral in
connection with an outstanding note payable (see Note 7). At November 30, 1996
and 1995, the equipment under the capital lease had a net book value of
approximately $92,000 and $52,000, respectively.
Depreciation expense was $167,000, $131,000 and $123,000 for 1996, 1995
and 1994 respectively.
Note 5
Product Software Development Costs
During the years ended November 30, 1996, 1995 and 1994, amortization of
costs related to product software development costs were $26,142, $17,428 and
$-0-, respectively.
Annual Report 1996 - Page 17
<PAGE>
Note 6
Accounts Payable and Accrued Liabilities
1996 1995
---- ----
Accounts payable - trade $282,123 $ 434,250
Deferred warranty revenue 247,368 288,111
Accrued payroll 87,417 170,965
Other accrued expenses 221,042 270,137
Accrued sales commissions 17,845 102,921
-------- ----------
$855,795 $1,266,384
======== ==========
Note 7
Long Term Debt
Long-term debt consists of a term loan payable to a bank in twenty-five
monthly installments of $25,000 plus interest at the bank's base rate plus 1%
and is collateralized by substantially all assets of the Company.
1996 1995
---- ----
$ 100,000 $ 400,000
Less current maturities 100,000 300,000
----------- ----------
Long-term debt, net of current
maturities $ -- $ 100,000
=========== ==========
The bank's base interest rate at November 30, 1996 was 8.25%.
During 1996 and 1995, the maximum month-end amounts outstanding under this
note payable were $400,000 and $700,000, respectively. Average daily amounts
outstanding during 1996 and 1995 were approximately $262,500 and $552,000,
respectively, with weighted average interest rates of 9.3% and 9.81%,
respectively.
The term loan agreement contains certain debt covenant restrictions
concerning net worth.
Note 8
Capital Lease Obligations
The Company has entered into various capital leases for equipment expiring
through November 2001 with aggregate monthly payments of $4,753.
The following is a schedule by years of future minimum lease payments
under capital leases together with the present value of the net minimum lease
payments as of November 30, 1996: For the Years Ending November 30,
1997 $ 51,415
1998 37,268
1999 26,289
2000 14,869
2001 9,067
---------
Total minimum lease payments 138,908
Less amount representing interest (29,166)
---------
Present value of net minimum lease
payments 109,742
Less current maturities (37,689)
---------
Long-term maturities $ 72,053
=========
Annual Report 1996 - Page 18
<PAGE>
Note 9
Stock Options and Warrants
Under the 1986 stock option plan, options may be granted until March 1996.
700,000 shares of the Company's common stock are reserved for this plan.
The qmed, Inc. 1990 Employee Stock Incentive Plan provides for stock
options, stock appreciation rights, restricted stock or deferred stock awards
for up to 1,000,000 shares of the Company's common stock to be granted to
employees of the Company until October 2000. 1,000,000 shares of the Company's
common stock are reserved for this plan. Options granted under this plan must be
at a price per share not less than the fair market value per share of common
stock on the date the option is granted.
Under both the 1986 and 1990 plans, options are exercisable in cumulative
33% increments after the first and each subsequent anniversary of the date of
the grant, except for officers' options which generally are exercisable
immediately. The options expire ten years after the date of the grant for
incentive stock options and nonqualifying stock options.
The following summarizes the stock option transactions for the years ended
November 30, 1996, 1995 and 1994:
Number of
Shares Exercise Shares
Under Option Rate Exercisable
------------ ---- -----------
Outstanding
November 30, 1993 910,992 $ .75 - $ 2.00 685,123
=======
Granted 376,400 1.375 - 1.40
Exercised (26,167) .75 - -
Terminated (112,667) .75 - 2.00
---------
Outstanding
November 30, 1994 1,148,558 .75 - 2.00 808,095
=======
Granted 253,450 1.40 - 6.75
Exercised (85,133) .75 - 1.75
Terminated (47,867) .75 - 2.00
---------
Outstanding
November 30, 1995 1,269,008 .75 - 6.75 1,038,328
=======
Granted -- -- - --
Exercised (280,805) .75 - 6.75
Terminated (18,134) .75 - 6.75
---------
Outstanding
November 30, 1996 970,069 $ .75 - $ 6.75 854,541
========= =======
In April 1992, the Company issued to a corporation, warrants to purchase
20,000 shares of the Company's common stock at an exercise price of $2.00 per
share. The warrants were exercised in March 1996.
In May 1996, the Company sold 177,777 shares of common stock and 63,942
warrants to a private investor resulting in net proceeds of $1,999,991. The
warrants permit the investor to acquire additional shares of common stock for
$15.75 per share for a period of three years.
During fiscal 1995, the Company issued warrants to various parties, to
purchase 435,890 shares of the Company's common stock at exercise prices ranging
from $2.75 - $5.75 per share. The warrants are exercisable over a three year
period. During fiscal 1996, 55,000 of these warrants were exercised at prices
ranging from $2.75 - $5.75 per share.
Annual Report 1996 - Page 19
<PAGE>
During fiscal 1996, the Company issued warrants to two directors to
purchase an aggregate of 60,000 shares of the Company's common stock at an
exercise price of $8.75 per share. The warrants are exercisable over a three
year period.
Note 10
Income Taxes
Deferred tax attributes resulting from differences between financial
accounting amounts and tax bases of assets and liabilities at November 30, 1996
and 1995 follow:
1996 1995
---- ----
Current assets and liabilities
Allowance for doubtful accounts $ 16,000 $ 34,000
Inventory overhead capitalization 45,900 60,000
Deferred Warranties 70,100 83,500
--------- ---------
132,000 177,500
Valuation allowance 132,000 177,500
--------- ---------
Net current deferred tax asset (liability) $ -- $ --
========= =========
Noncurrent assets and liabilities
Depreciation $ 12,100 $ 6,700
General business credit 211,000 211,000
Net operating loss carryforward 3,710,100 2,139,000
--------- ---------
3,933,200 2,356,700
Valuation allowance 3,933,200 2,356,700
--------- ---------
Net noncurrent deferred tax
asset (liability) $ -- $ --
========= =========
The valuation reserve has been established for those tax credits, loss
carryforwards and deductible temporary differences which are not presently
considered more likely than not to be realized.
The statutory income tax rate differs from the effective tax rate used in
the financial statements as a result of the current year net operating losses,
the benefit of which is not being recognized in the current year for the years
ending November 30, 1996 and 1995. There is no significant difference between
the statutory income tax rates and the effective tax rate for the year ending
November 30, 1994. The valuation allowance increased $1,531,000 and $389,000 in
1996 and 1995, respectively.
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
1996 1995 1994
- --------------------------------------------------------------------------------
Federal income tax rate (34.0)% 34.0% (34.0)%
Deferred tax charge (credit) -- -- --
Effect of net operating loss carryforward
and valuation allowance 34.0% (34.0)% 34.0%
State income tax, net of Federal benefit -- -- --
Other -- -- --
- --------------------------------------------------------------------------------
Effective income tax rate 0.0% 0.0% 0.0%
- --------------------------------------------------------------------------------
Annual Report 1996 - Page 20
<PAGE>
As of November 30, 1996, the Company has the following net operating loss
carryforwards for tax purposes:
Expiration Date:
For the Year Ending
November 30,
2000 $ 438,000
2002 915,000
2003 4,340,000
2004 1,500,000
2005 495,000
2007 12,000
2008 357,000
2010 1,936,000
2011 5,822,000
--------------
$ 15,815,000
==============
As of November 30, 1996, the Company has the following general business
tax credit carryforwards for tax purposes:
Expiration Date:
For the Year Ending
November 30,
1998 $ 33,000
1999 38,000
2000 58,000
2001 65,000
2002 17,000
---------
$ 211,000
=========
Note 11
Retirement Plan
The Company has a 401(k) plan which allows its employees to set aside a
part of their earnings, tax deferred, to be matched by the Company as determined
each year by resolution of the Board of Directors. There was no employer
contribution for the years ended November 30, 1996, 1995 and 1994.
Note 12
Business Segment Information
The Company's operations have been classified into two business segments:
medical equipment sales and disease management services.
Annual Report 1996 - Page 21
<PAGE>
Summarized financial information by business segment for 1996 and 1995 is
as follows (there was no business segment in 1994):
Medical Disease
Equipment Management
Sales Services Consolidated
----- -------- ------------
1996
- ----
Sales $3,040,295 $276,364 $3,316,659
Operating (loss) (1,033,421) (1,562,526) (2,595,947)
Total assets 4,771,064 400,000 5,171,064
Depreciation and amortization 227,349 70,083 297,432
Capital expenditures 167,266 106,786 274,052
1995
- ----
Sales 5,512,254 136,500 5,648,754
Operating (loss) (911,325) (591,186) (1,502,511)
Total assets 5,649,620 365,000 6,014,620
Depreciation and amortization 237,062 27,210 264,272
Capital expenditures 49,309 82,988 132,297
Note 13
Commitments and Contingencies
Leases
The Company leases its premises under noncancellable operating leases
expiring through August 1998. The approximate future minimum lease payments are
as follows:
For the Years Ending
November 30,
------------
1996 $ 133,400
1997 133,400
1998 100,100
Rent expense for the years ended November 30, 1996, 1995 and 1994, was
$207,000, $213,000 and $219,000, respectively.
Litigation
The Company is subject to claims and legal proceedings covering a wide
range of matters that arise in the ordinary course of business. It is
management's opinion that the ultimate resolution of these matters will not have
a material effect on the Company's consolidated financial position and results
of operations.
Major Supplier
A material amount of the Company's finished goods inventory is acquired
from a supplier, the loss of which may have an adverse effect on the Company.
For the years ended November 30, 1996, 1995 and 1994, one supplier
accounted for 36%, 18% and 16% of purchases, respectively.
Note 14
Reclassification
Certain items in the November 30, 1995 and 1994 financial statements have
been reclassified to conform with November 30, 1996 presentation. This
reclassification had no effect on the statement of operations.
Annual Report 1996 - Page 22
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
qmed, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of qmed, Inc. and
Subsidiaries as of November 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended November 30, 1996, 1995 and 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the first
paragraph present fairly the financial position of qmed, Inc. and Subsidiaries
as of November 30, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years ended November 30, 1996 in conformity
with generally accepted accounting principles.
AMPER, POLITZINER & MATTIA
February 12, 1997
Edison, New Jersey
Annual Report 1996 - Page 23
<PAGE>
MARKET INFORMATION
The Company's Common Stock is traded in the NASDAQ Small-Cap Market, under
symbol "QEKG". The following table sets forth the range of high and low bid
quotations for shares of the Company's Common Stock. This information represents
inter-dealer quotations, without retail mark-ups, mark-downs, or commissions,
and does not necessarily represent actual quotations.
Fiscal Year Ended November 30, 1994 High Low
First Quarter $ 2 1/16 $ 1 1/2
Second Quarter 1 5/8 1 1/8
Third Quarter 1 3/4 1
Fourth Quarter 1 3/4 1 1/4
Fiscal Year Ended November 30, 1995 High Low
First Quarter $ 2 1/16 $ 1
Second Quarter 3 7/16 1 7/8
Third Quarter 3 3/4 2 5/8
Fourth Quarter 8 1/2 3
Fiscal Year Ended November 30, 1996 High Low
First Quarter $ 12 1/8 $ 5 7/8
Second Quarter 13 1/2 8
Third Quarter 10 3/4 7 1/8
Fourth Quarter 11 1/4 7 1/4
As of February 20, 1996, the Company's Common Stock was held of record by
approximately 500 persons. On February 20, 1996, the closing price reported was
$10.
The Company has never paid a cash dividend on its Common Stock. It is the
current policy of the Company's Board of Directors to retain any earnings to
finance the operations and expansion of the Company's business. The payment of
dividends in the future will depend upon the Company's earnings, financial
condition and capital needs and on other factors deemed pertinent by the Board
of Directors.
Annual Report 1996 - Page 24
<PAGE>
General Corporate Information
Board of Directors
Howard L. Waltman
Chairman of the Board
Independent Business Consultant
Michael W. Cox
President and Treasurer
Robert A. Burns
Richard I. Levin, M.D.
Vice President and Medical Director
Associate Professor of Medicine -
New York University School of Medicine
Herbert H. Sommer
Secretary
Partner-Sommer & Schneider LLP
Officers
Michael W. Cox
President and Treasurer
Richard I. Levin, M.D.
Vice President,
Medical Director
Teri J. Kraf
Vice President - Strategic Development
Herbert H. Sommer
Secretary
Debra A. Fenton, C.P.A.
Controller and Assistant Secretary
Corporate Headquarters
100 Metro Park South
3rd Floor
Laurence Harbor, New Jersey 08878
Counsel
Sommer & Schneider LLP
600 Old Country Road, Suite 535
Garden City, New York 11530
Auditors
Amper Politzner & Mattia
2015 Lincoln Hwy.
P.O. Box 988
Edison, New Jersey 08818-0988
Stock Listing
NASDAQ SmallCap
Trading Symbol - QEKG
Register and Transfer Agent
American Stock Transfer &
Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
Annual Report 1996 - Page 25
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation of our report dated February 12, 1997 on the
financial statements of qmed, Inc. and Subsidiaries as of November 30, 1996,
1995 and 1994 and for each of the three years ended November 30, 1996, 1995 and
1994, which is included in the Annual Report on Form 10K of qmed, Inc. and
Subsidiaries, as amended.
/s/ AMPER, POLITZINER & MATTIA
-------------------------------
Amper, Politziner & Mattia
November 13, 1997
Edison, New Jersey
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> NOV-30-1996
<CASH> 680,686
<SECURITIES> 2,144,545
<RECEIVABLES> 470,930
<ALLOWANCES> 67,000
<INVENTORY> 1,123,664
<CURRENT-ASSETS> 4,436,899
<PP&E> 2,246,656
<DEPRECIATION> 1,791,982
<TOTAL-ASSETS> 5,171,064
<CURRENT-LIABILITIES> 955,795
<BONDS> 0
0
0
<COMMON> 9,477
<OTHER-SE> 4,089,002
<TOTAL-LIABILITY-AND-EQUITY> 5,171,064
<SALES> 3,316,659
<TOTAL-REVENUES> 3,476,755
<CGS> 1,320,481
<TOTAL-COSTS> 4,576,074
<OTHER-EXPENSES> 341,683
<LOSS-PROVISION> 16,051
<INTEREST-EXPENSE> 33,876
<INCOME-PRETAX> (2,811,410)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,811,410)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,811,410)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
