FORM 10-K
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, 1997
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-K 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, 1998, the aggregate value of the registrant's voting stock
held by non-affiliates was $46,155,428 (computed by multiplying the last
reported sale price on February 19, 1998 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
person are affiliates of the registrant).
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As of February 19, 1998, there were 9,648,519 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 its 1998 Annual Meeting (to be filed III
in definitive form within 120 days of the
Registrant's Fiscal Year End)
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PART I
ITEM 1. BUSINESS
Forward-Looking Statements
Certain matters discussed herein may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 and as such may involve risks and uncertainties. These forward-looking
statements relate to, among other things, expectations of the business
environment in which the Company operates, projections of future performance,
perceived opportunities in the market and statements regarding the Company's
mission and vision. The Company's actual results, performance, or achievements
may differ significantly from the results, performance, or achievements
expressed or implied in such forward-looking statements. For discussion of the
factors that might cause such a difference, see "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations."
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
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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 (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 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. The Company and SmithKline Beecham share profits and
losses after the Company recovers its costs of operating the ohms|cad system for
clients.
The Strategic Alliance Agreement, which has an initial term of five
years, permits either the Company or SmithKline, beginning in April 1998, to
terminate the arrangement in certain events, subject to continuing the venture
to provide services contracted for prior to the termination of the venture. The
Company and SmithKline have discussed possibilities for improving the results of
the alliance or terminating the alliance upon mutually beneficial terms.
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.
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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.
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 Company's IHMC subsidiary, individually and together with
SmithKline as part of the Strategic Alliance, entered into three contracts for
the utilization of ohms|cad systems covering approximately 200,000 members. One
contract has been fully implemented and has been operational since 1995. The
results of the utilization of ohms|cad to manage CAD patients
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was the subject of a presentation at the Scientific Section of the American
Heart Association's Annual Meeting in November 1997. The results showed
significant health benefits for those patients undergoing ohms|cad management as
compared to patients receiving usual care. Implementation began pursuant to a
contract with the San Jose Medical Group in August 1997 and IHMC entered into a
contract of ohms|cad services with CIGNA Health Care of Ohio in December 1997.
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
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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 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.
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 is required to provide 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 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.
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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
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 15.7% and 13.4% of
net sales for fiscal 1997 and 1996, respectively. 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 1997
and 1996, the Company replaced approximately 2 and 4 monitors, respectively,
that could not be repaired pursuant to its warranty programs.
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
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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 1997 one customer accounted for 18% of net sales. During
fiscal 1996 and 1995, no single customer accounted for more than 10% of the
Company's net sales.
Manufacturing
The Company 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. Products
undergo final testing and packaging at the Company's engineering facility
located in Sag Harbor, New York. 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
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
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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.
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
it 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 1997, 1996, and 1995, the Company expended $179,519,
$348,840, and $382,244 respectively, for research and
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development. During these years, 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 1998.
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
Company applied for a patent for the ohms|cad system (Serial No. 08/414,510) on
March 31, 1995 and the Company was advised that a patent would be issued on
March 3, 1998. 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.
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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.
Employees
The Company, as of January 31, 1998, had 39 full time employees. Of
these full time employees, 3 were executives, 3 were engaged in sales
supervisory capacities, 7 in sales and marketing, 6 in engineering, 8 in
production, 5 in technical support and 7 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 27 of the Registrant's 1997 Annual Report to
Stockholders is incorporated herein by reference.
On December 18, 1997, the Company sold an aggregate $2,000,000 8%
Convertible Subordinated Notes due December 18, 2002 (the "Notes"), with
discount or premium, in a private placement to three investors led by Galen
Partners III, L.P. The Notes were sold for cash, without any underwriter or
placement agent and no commissions were paid. Interest on the Notes is accrued
monthly compounded annually and will be due at maturity. The Notes are
convertible into shares of the Company's Common Stock at the rate of $5.60 per
share, provided that if the average closing price of shares of the Company's
Common Stock for the 90 trading days following the closing exceeds $7.25, then
the conversion price will increase to $6.00. The Company may redeem the Notes in
the event the average closing price of shares of the Company's Common Stock
equals or exceeds $12.00 for a period of 90 days at the following times with the
following premiums and may elect to pay the redemption price in shares of Common
Stock:
Year Redemption Price
---- ----------------
1998 105%
1999 104%
2000 103%
2001 102%
2002 100%
The Company is required to redeem the Notes at higher premiums in the event of a
change of control.
In connection with the sale of the Notes, the Company granted certain
rights to the purchasers, including registration rights and the right to appoint
a member of the Company's board of directors. The Note Purchase Agreement
prohibits the Company from paying dividends until the Notes are paid. The sale
was made in reliance on the exemption contained in Section 4(2) of the
Securities Act of 1933, as amended.
Item 6. Selected Financial Data.
Selected financial data as set forth on page 5 of the Registrant's 1997
Annual Report to Stockholders is incorporated herein by reference.
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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 11 of the Registrant's 1997 Annual
Report to Stockholders is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
Financial statements and supplementary data as set forth on pages
12 to 26 of the Registrant's 1997 Annual Report to Stockholders is incorporated
herein by reference.
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
14
<PAGE>
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, 1997 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, 1997 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, 1997 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, 1997 and is incorporated herein by
reference.
15
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) Financial Statements.
Description
Independent Auditors Report
Consolidated Balance Sheets as of November
30, 1997 and 1996
Consolidated Statement of Operations for
each of the three years ended November 30,
1997, 1996 and 1995
Consolidated Statement of Stockholder's
Equity for each of the three years ended
November 30, 1997, 1996 and 1995
Consolidated Statement of Cash Flow for each
of the three years ended November 30, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedules have been omitted because they are
not applicable.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the last
quarter of the fiscal year covered by this report.
(c) 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:
16
<PAGE>
Official Sequential
Exhibit 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
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
3.5* Amendment to By-Laws dated December 18, 1997
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 (Exhibit 4.2 to the Company's
Report on Form 10-K dated November 30, 1996) I/B/R
4.3 Note Purchase Agreement between Q-Med, Inc.
and Galen Partners III, L.P., Galen Partners
International III, L.P., Galen Employee Fund III,
L.P. dated as of December 18, 1997 (Exhibit 4.1
to the Company's Report on Form 8-K dated
December 18, 1997) I/B/R
4.4 Form of 8% Convertible Subordinated Note
(Exhibit 4.2 to the Company's Report on
Form 8-K dated December 18, 1997) I/B/R
17
<PAGE>
4.5 Registration Rights Agreement between Q-Med, Inc.
and Galen Partners III, L.P., Galen Partners
International III, L.P., and Galen Employee
Fund III, L.P. dated as of December 18, 1997
(Exhibit 4.3 to the Company's report
on Form 8-K dated December 18, 1997) I/B/R
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
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
18
<PAGE>
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 (Exhibit 10.8 to the Company's Form 10-K
Report dated November 30, 1996, as amended) I/B/R
10.9 Securities Purchase Agreement dated May 6, 1996
between Q-Med, Inc. and S.R. One Limited (Exhibit
10.9 to the Company's Form 10-K Report dated
November 30, 1996, as amended) I/B/R
10.10 Registration Rights Agreement dated May 6, 1996
between Q-Med, Inc. and S.R. One Limited (Exhibit
10.10 to the Company's Form 10-K Report dated
November 30, 1996, as amended) I/B/R
10.11* Q-Med, Inc. 1997 Equity Incentive Plan
11 None
13* Q-Med, Inc. 1997 Annual Report.
16 None.
18 None.
21* Subsidiaries of Registrant
22 None.
23* Consent of Amper, Politziner & Mattia
24 None.
27* Financial Data Schedule
- ---------
* Filed herewith
** 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.
19
<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 report to be signed by
the undersigned, thereunto duly authorized.
Dated: February 27, 1998 Q-MED, INC.
By: /s/ Michael W. Cox
-------------------------
Michael W. Cox, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on behalf of the Registrant and in capacities and at
the dates indicated:
Signature Capacity Date
- --------- -------- ----
/s/ Michael W. Cox President and Treasurer February 27, 1998
- -------------------------
Michael W. Cox (Principal Executive and
Financial Officer)
/s/ Richard I. Levin Director February 27, 1998
- -------------------------
Richard I. Levin
/s/ Robert A. Burns Director February 27, 1998
- -------------------------
Robert A. Burns
/s/ Howard L. Waltman Director February 27, 1998
- ---------------------
Howard L. Waltman
/s/ Herbert H. Sommer Director February 27, 1998
- ---------------------
Herbert H. Sommer
/s/ Debra A. Fenton Controller February 27, 1998
- -------------------------
Debra A. Fenton
20
<PAGE>
EXHIBIT INDEX
Exhibit Sequential
No. Page No.
- ------- ----------
3.5 Amendment to By-Laws dated December 18, 1997
10.11 Q-Med, Inc. 1997 Equity Incentive Plan
13 Q-Med, Inc. 1996 Annual Report
21 Subsidiaries of Registrant
23 Consent of Amper, Politziner & Mattia
27 Financial Data Schedule
- ----------
21
RESOLVED, that the By-laws of the Corporation are hereby amended to delete
present Article XII in its entirety and replace it with the following new
Article XII:
ARTICLE XII
Indemnification of Directors and Officers
SECTION 1. General. The Corporation shall indemnify any person who was
-------
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director or officer of the Corporation,
or is or was serving at the request of the Corporation as a director or officer
of another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
---- ----------
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful. For purposes of this
Article XII of the bylaws, any person who, pursuant to a provision in the
certificate of incorporation of the Corporation, exercises or performs any of
the powers or duties conferred or imposed upon a director of the Corporation
shall be entitled to all the benefits conferred upon a director of the
Corporation and be entitled to all the benefits (including without limitation,
the right to indemnification and advancement of expenses) set forth in this
Article XII.
SECTION 2. Derivative Actions. The Corporation shall indemnify any
-------------------
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he is
or was a director or officer of the Corporation, or is or was serving at the
request of the Corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation, provided that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the Corporation unless and only to the extent that
the Court of Chancery of the State of Delaware or the court in which such action
or suit was brought shall determine upon
<PAGE>
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
SECTION 3. Indemnification in Certain Cases. To the extent that a
-----------------------------------
director, officer, employee or agent of the Corporation has been successful on
the merits or otherwise in defense of any action, suit or proceeding referred to
in Sections 1 and 2 of this Article XII, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
SECTION 4. Procedure. Any indemnification under Sections 1 and 2 of
---------
this Article XII (unless ordered by a court) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
such Sections 1 and 2. Such determination shall be made (a) by a majority vote
of the directors who are not parties to such action, suit or proceeding, even
though less than a quorum, or (b) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion, or (c)
by the stockholders.
SECTION 5. Advances for Expenses. Expenses (including attorney's fees)
---------------------
incurred by a director or officer in defending a civil, criminal, administrative
or investigative action, suit or proceeding shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of the director, officer, employee or agent to
repay such amount if it shall be ultimately determined that he is not entitled
to be indemnified by the Corporation as authorized in this Article XII.
SECTION 6. Rights Not-Exclusive. The indemnification and advancement of
--------------------
expenses provided by, or granted pursuant to, the other subsections of this
Article XII shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
law, by-law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office.
SECTION 7. Insurance. The Corporation shall have power to purchase and
---------
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not
2
<PAGE>
the Corporation would have the power to indemnify him against such liability
under the provisions of this Article XII.
SECTION 8. Definition of Corporation. For the purposes of this Article
-------------------------
XII, references to "the Corporation" include all constituent corporations
absorbed in a consolidation or merger as well as the resulting or surviving
corporation so that any person who is or was a director or officer of such a
constituent corporation or is or was serving at the request of such constituent
corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise shall stand in the same position under the
provisions of this Article XII with respect to the resulting or surviving
corporation as he would if he had served the resulting or surviving corporation
in the same capacity.
SECTION 9. Survival of Rights. The indemnification and advancement of
------------------
expenses provided by, or granted pursuant to this Article XII shall continue as
to a person who has ceased to be a director or officer and shall inure to the
benefit of the heirs, executors and administrators of such a person. No
subsequent amendment of this Article XII shall diminish the rights hereunder of
any director or officer with respect to any action taken or claim made prior to
such amendment.
3
Q-MED, INC.
1997 EQUITY INCENTIVE PLAN
1. NAME AND PURPOSE.
----------------
The name of this plan is the Q-MED, INC. 1997 Equity Incentive Plan
(the "Plan"). The purpose of this Plan is to enable Q-MED, INC. (the "Company")
and its Subsidiaries and Affiliates to attract and retain employees, consultants
and directors who contribute to the Company's success by their ability,
ingenuity and industry, and to enable such employees and directors to
participate in the long-term success and growth of the Company through an equity
interest in the Company.
2. DEFINITIONS.
-----------
For purposes of this Plan, the following terms shall be defined as set
forth below:
"Affiliate" means any corporation (other than a subsidiary),
partnership, joint venture or any other entity in which the Company owns,
directly or indirectly, at least a ten percent (10%) beneficial ownership
interest.
"Board" means the Board of Directors of the Company.
"Cause" means a felony conviction of a participant or the failure of a
participant to contest prosecution for a felony, or a participant's willful or
grossly negligent action which is demonstrably inimical to the interests,
business or reputation of the Company or any Subsidiary or Affiliate.
"Code" means the Internal Revenue Code of 1986, as amended, or any
successor thereto.
"Committee" means the Stock Option Committee of the Board, whose
members shall be appointed from time to time by the Board. If at any time no
Committee shall be in existence, the functions of the Committee specified in
this Plan shall be exercised by the Board.
"Commission" means the Securities and Exchange Commission.
"Company" means Q-MED, INC., a corporation organized under the laws of
the State of Delaware (or any successor corporation).
"Deferred Stock" means an award made pursuant to Section 10 of the
right to receive Stock at the end of a specified deferral period.
"Director Stock Option" means any option to purchase shares of Stock
granted pursuant to Section 7.
1
<PAGE>
"Disability" means total and permanent disability as determined under
the Company's long term disability program.
"Disinterested Person" shall have the meaning set forth in Rule
16b-3(d)(3) as promulgated by the Commission under the Exchange Act, or any
successor definition adopted by the Commission.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and any successor thereto.
"Fair Market Value" means, as of any given date, the closing price of
the Stock on such date on the National Association of Securities Dealers
Automated Quotation System (NASDAQ) National Market System, or if not then
traded or listed on that system, on the securities trading system or stock
exchange on which the Stock is then primarily traded or listed; or if the stock
is not traded or listed on an exchange the average of the reported bid and ask
price on such date.
"Incentive Stock Option" means any Stock Option intended to be and
designated as an "incentive stock option" within the meaning of Code Section
422.
"Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
"Normal Retirement," solely for the purpose of this Plan means
retirement from active employment with the Company, any Subsidiary, and any
Affiliate on or after age 65.
"Plan" means this 1992 Employee Stock Incentive Plan.
"Restricted Stock" means an award of shares of Stock that are subject
to restrictions under Section 9.
"Retirement" means Normal Retirement.
"Stock" means the common stock of the Company.
"Stock Appreciation Right" means a right granted under Section 8 to
surrender to the Company all or a portion of a Stock Option in exchange for an
amount equal to the difference between (i) the Fair Market Value, as of the date
such Stock Option or such portion thereof is surrendered, of the shares of Stock
covered by such Stock Option or such portion thereof, and (ii) the aggregate
exercise price of such Stock Option or such portion thereof.
"Stock Option" means any option to purchase shares of Stock granted
pursuant to Section 6.
2
<PAGE>
"Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations (other than the last corporation in the unbroken chain) owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in the chain.
3. ADMINISTRATION.
--------------
This Plan shall be administered by the Committee which shall at all
times consist of not less than three Disinterested Persons, each of whom shall
be members of the Board of the Directors. The Committee shall have the power and
authority to grant to eligible employees, pursuant to the terms of this Plan:
(i) Stock Options, (ii) Stock Appreciation Rights, (iii) Restricted Stock, or
(iv) Deferred Stock. In particular, the Committee shall have the authority to:
3.1 Select the officers, other employees and consultants of the
Company, its Subsidiaries, and its Affiliates to whom Stock Options, Stock
Appreciation Rights, Restricted Stock or Deferred Stock awards, or a combination
of the foregoing from time to time will be granted hereunder;
3.2 Determine whether and to what extent Incentive Stock Options,
Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock or
Deferred Stock, or a combination of the foregoing are to be granted hereunder;
3.3 Determine the number of shares of Stock to be covered by each such
award granted hereunder;
3.4 Determine the terms and conditions, not inconsistent with the
terms of this Plan, of any award granted hereunder, including, but not limited
to, any restriction on any Stock Option or other award and/or the shares of
Stock relating thereto based on performance and/or such other factors as the
Committee may determine, in its sole discretion, and any vesting acceleration
features based on performance and/or such other factors as the Committee may
determine, in its sole discretion;
3.5 Determine whether, to what extent, and under what circumstances
Stock and other amounts payable with respect to an award under this Plan shall
be deferred either automatically or at the election of a participant, including
providing for and determining the amount (if any) of deemed earnings on any
deferred amount during any deferral period;
3.6 Adopt, alter, and repeal such administrative rules, guidelines,
and practices governing this Plan as it shall, from time to time, deem
advisable;
3.7 Interpret the terms and provisions of this Plan and any award
issued under this Plan (and any agreements relating thereto); and
3
<PAGE>
3.8 Otherwise supervise the administration of this Plan.
All decisions made by the Committee pursuant to the provisions of this
Plan shall be final and binding on all persons, including the Company and
participants in this Plan.
4. STOCK SUBJECT TO PLAN.
---------------------
The total number of shares of Stock reserved and available for
distribution under this Plan shall be 600,000. Such shares may consist, in whole
or in part, of authorized and unissued shares or treasury shares. If any shares
of Stock that have been optioned cease to be subject to option, or if any shares
subject to any Restricted Stock or Deferred Stock award granted hereunder are
forfeited or such award otherwise terminates, those shares shall again be
available for distribution in connection with future awards under this Plan.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, or other change in corporate structure
affecting the Stock, a substitution or adjustment shall be made in the aggregate
number of shares reserved for issuance under this Plan, in the number and option
price of shares subject to outstanding Stock Options and Director Stock Options
granted under this Plan, and in the number of shares subject to Restricted Stock
or Deferred Stock awards granted under this Plan, in such manner as may be
determined to be appropriate by the Committee, in its sole discretion, provided
that the number of shares subject to any award shall always be a whole number.
Such adjusted option price shall also be used to determine the amount payable by
the Company upon the exercise of any Stock Appreciation Right associated with
any Stock Option.
5. ELIGIBILITY.
-----------
5.1 Officers, other employees and consultants of the Company, its
Subsidiaries or its Affiliates (but excluding members of the Committee and any
person who serves only as a director) who are responsible for or contribute to
the management, growth, and/or profitability of the business of the Company, its
Subsidiaries, or its Affiliates are eligible to be granted Stock Options, Stock
Appreciation Rights, Restricted Stock or Deferred Stock awards.
5.2 Directors of the Company (other than directors who are also
officers or employees of the Company, its Subsidiaries or its Affiliates) are
eligible to be granted Director Stock Options pursuant to Section 7 of the Plan.
5.3 The optionees and participants under this Plan shall be selected
from time to time by the Committee, in its sole discretion, from among those
eligible, and the Committee shall determine, in its sole discretion, the number
of shares covered by each award or grant to an optionee or participant.
4
<PAGE>
6. STOCK OPTIONS FOR EMPLOYEES.
---------------------------
Stock Options may be granted either alone or in addition to other
awards granted under this Plan. Any Stock Option granted under this Plan shall
be in such form as the Committee from time to time approve, and the provisions
of Stock Option awards need not be the same with respect to each optionee.
The Stock Options granted under this Plan may be of two types: (i)
Incentive Stock Options, or (ii) Non-Qualified Stock Options. The Committee
shall have the authority to grant any optionee Incentive Stock Options,
Non-Qualified Stock Options, or both types of Stock Options (in each case with
or without Stock Appreciation Rights) except that Incentive Stock Options shall
not be granted to employees of an Affiliate. To the extent that any Stock Option
does not qualify as an Incentive Stock Option, it shall constitute a separate
Non-Qualified Stock Option.
Anything in this Plan to the contrary notwithstanding, no term of this
Plan relating to Incentive Stock Options shall be interpreted, amended, or
altered, nor shall any discretion or authority granted under this Plan be so
exercised, so as to disqualify either this Plan or any Incentive Stock Option
under Code Section 422. Notwithstanding the foregoing, in the event an optionee
voluntarily disqualifies an option as an Incentive Stock Option within the
meaning of Code Section 422, the Committee may, but shall not be obligated to,
make such additional grants, awards, or bonuses as the Committee shall deem
appropriate, to reflect the tax savings to the Company which results from such
disqualification.
Stock Options granted under this Plan shall be subject to the following
terms and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of this Plan, as the Committee shall deem desirable:
6.1 Option Price. The option price per share of Stock purchasable under
------------
a Stock Option shall be determined by the Committee at the time of grant but
shall not be less than 100% of the Fair Market Value of the Stock on the date of
the grant of the Stock Option.
6.2 Option Term. The term of each Stock Option shall be fixed by the
------------
Committee, but no Incentive Stock Option shall be exercisable later than 10
years after the date such Incentive Stock Option is granted and no Non-Qualified
Stock Option shall be exercisable later than 10 years and two days after the
date such Non-Qualified Stock Option is granted.
6.3 Exercisability. Subject to Section 6.10 with respect to Incentive
--------------
Stock Options, Stock Options shall be exercisable at such time or times and
subject to such terms and conditions as shall be determined by the Committee at
the date of grant; provided, however, that, except as provided in Sections 6.6,
6.7, and 6.8, unless otherwise determined by the Committee at grant, no Stock
Option shall be exercisable prior to the first anniversary date of the granting
of the option. If the Committee provides, in its discretion, that any Stock
Option is
5
<PAGE>
exercisable only in installments, the Committee may waive such installment
exercise provisions at any time in whole or in part based on performance and/or
such other factors as the Committee may determine in its sole discretion.
6.4 Method of Exercise. Stock Options may be exercised in whole or in
------------------
part at any time during the option period, by giving written notice of exercise
to the Company specifying the number of shares to be purchased, accompanied by
payment in full of the purchase price, in cash, by check or such other
instrument or mode of payment as may be acceptable to the Committee. As
determined by the Committee, in its sole discretion, at or after grant, payment
in full or in part may also be made in the form of unrestricted Stock already
owned by the optionee or, in the case of the exercise of a Non-Qualified Stock
Option, Restricted Stock or Deferred Stock subject to an award hereunder (based,
in each case, on the Fair Market Value of the Stock on the date the option is
exercised, as determined by the Committee). If payment of the option exercise
price of a Non-Qualified Stock Option is made in whole or in part in the form of
Restricted Stock or Deferred Stock, the shares received upon the exercise of
such Stock Option shall be restricted or deferred, as the case may be, in
accordance with the original term of the Restricted Stock award or Deferred
Stock award in question, equal to the number of shares of Restricted Stock or
Deferred Stock surrendered upon the exercise of that option. No shares of
unrestricted Stock shall be issued until full payment therefor has been made. An
optionee shall have the right to dividends or other rights of a stockholder with
respect to shares subject to the option when the optionee has given written
notice of exercise and has paid in full for those shares.
6.5 Non-transferability of Options. No Stock Option shall be
---------------------------------
transferable by the optionee otherwise than by will or by the laws of descent
and distribution, and all Stock Options shall be exercisable, during the
optionee's lifetime, only by the optionee.
6.6 Termination by Death. Unless otherwise determined by the Committee
--------------------
at grant, if an optionee's employment with the Company, any Subsidiary, and any
Affiliate terminates by reason of his death, the Stock Option may thereafter be
exercised, to the extent then exercisable (or on such accelerated basis as the
Committee shall determine at or after grant), by the legal representative of the
estate or by the legatee of the optionee under the will of the optionee or by
the heir of the optionee under the laws of descent and distribution, for a
period of one year from the date of such death or until the expiration of the
stated term of such Stock Option, whichever period is the shorter.
6.7 Termination by Reason of Disability. Unless otherwise determined by
-----------------------------------
the Committee at grant, if an optionee's employment with the Company, any
Subsidiary and any Affiliate terminates by reason of Disability, any Stock
Option held by such optionee may thereafter be exercised to the extent it was
exercisable at the time of termination due to Disability (or on such accelerated
basis as the Committee shall determine at or after grant), but may not be
exercised after one year from the date of such termination of employment or the
expiration of the stated term or such Stock Option, whichever period is shorter;
provided, however, that, if the optionee dies within such one-year period, any
unexercised Stock Option held by such optionee shall thereafter be exercisable
to the extent to which it was exercisable at the time of death for a
6
<PAGE>
period of three months from the date of such death or for the stated term of
such Stock Option, whichever period is the shorter. In the event of termination
of employment by reason of Disability, if an Incentive Stock Option is exercised
after the expiration of the exercise periods that apply for purposes of Code
Section 422, such Stock Option will thereafter be treated as a Non-Qualified
Stock Option.
6.8 Termination by Reason of Retirement. Unless otherwise determined by
-----------------------------------
the Committee at grant, if an optionee's employment with the Company, any
Subsidiary and any Affiliate terminates by reason of Normal Retirement, any
Stock Option held by such optionee may thereafter be exercised to the extent it
was exercisable at the time of such Retirement (or on such accelerated basis as
the Committee shall determine at or after grant), but may not be exercised after
one year from the date of such termination of employment or the expiration of
the stated term of such Stock Option, whichever period is the shorter; provided,
however, that, if the optionee dies within such one-year period any unexercised
Stock Option held by such optionee shall thereafter be exercisable, to the
extent to which it was exercisable at the time of death, for a period of three
months from the date of such death or for the stated term of the Stock Option,
whichever period is the shorter. Notwithstanding the foregoing, the tax
treatment available pursuant to Section 422 of the Internal Revenue Code of 1986
upon the exercise of an Incentive Stock Option will not be available to an
optionee who exercises any Incentive Stock Options more than (i) 12 months after
the date of termination of employment due to permanent disability or (ii) three
months after the date of termination of employment due to retirement.
6.9 Other Termination. Unless otherwise determined by the Committee at
-----------------
grant, if an optionee's employment with the Company, any Subsidiary and any
Affiliate terminates for any reason other than death, Disability or Normal
Retirement, any Stock Option held by such optionee shall thereupon terminate,
except that such Stock Option may be exercised for the lesser of three months
from the date of termination or the balance of such Stock Option's term if the
optionee's employment with the Company, any Subsidiary and any Affiliate is
involuntarily terminated by the optionee's employer without Cause.
6.10 Limit on Value of Incentive Stock Option First Exercisable
-----------------------------------------------------------------
Annually. The aggregate Fair Market Value (determined at the time of grant) of
- --------
the Stock for which "incentive stock options" within the meaning of Code Section
422 are exercisable for the first time by an optionee during any calendar year
under this Plan (and/or any other stock option plans of the Company, any
Subsidiary and any Affiliate) shall not exceed $100,000.
7. DIRECTOR STOCK OPTIONS.
----------------------
Director Stock Options granted under this Plan shall be Non-Qualified
Stock Options which are not intended to be "incentive stock options" within the
meaning of Code Section 422. Director Stock Options granted under this Plan
shall be in such form as the Committee may
7
<PAGE>
from time to time approve, and the provisions of Director Stock Options need not
be the same with respect to each optionee. The Committee shall have the
authority to grant any eligible optionee Director Stock Options.
Director Stock Options granted under the Plan shall be evidenced by a
written agreement in such form as the Committee shall from time to time approve,
which agreements shall comply with and be subject to the following terms and
conditions:
7.1 Option Price. The option price per share of Stock purchasable under
------------
a Director Stock Option shall be determined by the Committee at the time of
grant but shall not be less than 100% of the Fair Market Value of the Stock on
the date of the grant of the Director Stock Option.
7.2 Option Term. Each Director Stock Option shall be fixed by the
------------
Committee, but shall in no event be exercisable later than 10 years and two days
after the date such Director Stock Option is granted (subject to prior
termination as hereinafter provided).
7.3 Exercisability. Director Stock Options shall be exercisable at such
--------------
time or times and subject to such terms and conditions as shall be determined by
the Committee at the date of grant. If the Committee provides, in its
discretion, that any Director Stock Option is exercisable only in installments,
the Committee may waive such installment exercise provisions at any time in
whole or in part based on performance and/or such other factors as the Committee
may determine in its sole discretion; provided, however, that in the event of a
"Change of Control" (as defined in Section 14 below), the value of all
outstanding Director Stock Options that have been outstanding for at least six
months shall be cashed out on the basis of the "Change of Control Price" (as
defined in Section 14 below) as of the date the Change of Control occurs, and
all Director Stock Options that have not been outstanding for at least six
months shall be immediately exercisable.
7.4 Method of Exercise. Director Stock Options may be exercised in
-------------------
whole or in part at any time during the option period, by giving written notice
of exercise to the Company specifying the number of shares to be purchased,
accompanied by payment in full of the purchase price, in cash, by check or such
other instrument or mode of payment as may, be acceptable to the Committee.
Payment in full or in part may also be made in the form of Stock already owned
by the optionee (based on the Fair Market value of the Stock on the date the
option is exercised). No shares of Stock shall be issued until full payment
therefor has been made. An optionee shall have the rights to dividends or other
rights of a stockholder with respect to shares subject to the option when the
optionee has given written notice of exercise and has paid in full for such
shares.
7.5 Non-transferability of Options. No Director Stock Option shall be
-------------------------------
transferable by the optionee otherwise than by will or by the laws of descent
and distribution, and all Director Stock Options shall be exercisable, during
the optionee's lifetime, only by the optionee.
8
<PAGE>
7.6 Termination by Disability or Death. Upon an optionee's termination
----------------------------------
of service as a director by reason of disability or death, any Director Stock
Options held by such optionee may thereafter be immediately exercised by the
optionee or, in the case of death, by the legal representative or the estate or
by the legatee of the optionee under the will of the optionee, until the
expiration of the stated term of such Director Stock Options.
7.7 Other Termination. Upon an optionee's termination of service as a
-----------------
director with the Company for any reason other than disability or death, any
Director Stock Options held by such optionee may thereafter be exercised, to the
extent exercisable at termination, until the expiration of the stated term of
such Director Stock Options.
8. STOCK APPRECIATION RIGHTS.
-------------------------
8.1 Grant and Exercise. Stock Appreciation Rights may be granted in
-------------------
conjunction with all or part of any Stock Option granted under this Plan. In the
case of a Non-Qualified Stock Option, such rights may be granted either at or
after the time of the grant of such Non-Qualified Stock Option. In the case of
an Incentive Stock Option, such rights may be granted only at the time of the
grant of such Incentive Stock Option.
A Stock Appreciation Right or applicable portion thereof
granted with respect to a given Stock Option shall terminate and no longer be
exercisable upon the termination or exercise of the related Stock Option, except
that, unless otherwise provided by the Committee at the time of grant, a Stock
Appreciation Right granted with respect to less than the full number of shares
covered by a related Stock Option shall only be reduced if and to the extent
that the number of shares covered by the exercise or termination of the related
Stock Option exceeds the number of shares not covered by the Stock Appreciation
Right.
A Stock Appreciation Right may be exercised by an optionee, in
accordance with Section 8.2, by surrendering the applicable portion of the
related Stock Option. Upon such exercise and surrender, the optionee shall be
entitled to receive amount determined in the manner prescribed in Section 8.2.
Stock Option have been so surrendered, in whole or in part, shall no longer be
exercisable to the extent the related Stock Appreciation Rights have been
exercised.
8.2 Terms and Conditions. Stock Appreciation Rights shall be subject to
--------------------
such terms and conditions, not inconsistent with the provisions of this Plan, as
shall be determined from time to time by the Committee, including the following:
(a) Stock Appreciation Rights shall be exercisable only at
such time or times and to the extent that the Stock Options to
which they relate shall be exercisable in accordance with the
provisions of Section 6 and this Section; provided, however,
that any Stock Appreciation Right granted subsequent to the
grant of the related Stock Option shall not be exercisable
during the first six months of the
9
<PAGE>
term of the Stock Appreciation Right, except that
this additional limitation shall not apply in the event of
death or Disability of the optionee prior to the expiration
of the six-month period.
(b) Upon the exercise of a Stock Appreciation Right, an optionee
shall be entitled to receive up to, but not more than, an
amount in cash or shares of Stock equal in value to the excess
of the Fair Market Value of one share of Stock over the option
price per share specified in the related Stock Option
multiplied by the number of shares with respect to which the
Stock Appreciation Right shall have been exercised, with the
Committee having the sole and exclusive right to determine the
form of payment.
(c) Stock Appreciation Rights shall be transferable only when and
to the extent that the underlying Stock Option would be
transferable under Section 6.5.
(d) Upon the exercise of a Stock Appreciation Right, the Stock
Option or part thereof to which such Stock Appreciation Right
is related shall be deemed to have been exercised for the
purpose of the limitation set forth in Section 4 on the number
of shares of Stock to be issued under this Plan.
(e) A Stock Appreciation Right granted in connection with an
Incentive Stock Option may be exercised only if and when the
market price of the Stock subject to the Incentive Stock
Option exceeds the exercise price of such Stock Option.
(f) In its sole discretion, the Committee may provide, at the time
of grant of a Stock Appreciation Right under this Section,
that such Stock Appreciation Right can be exercised only in
the event of a "Change of Control" and/or a "Potential Change
of Control" (as defined in Section 14).
(g) The Committee, in its sole discretion, may also provide
that, in the event of a "Change of Control" and/or a
"Potential Change of Control" (as defined in Section 14),
the amount to be paid upon the exercise of a Stock
Appreciation Right shall be based on the "Change of Control
Price" (as defined in Section 14).
9. RESTRICTED STOCK.
----------------
9.1 Administration. Shares of Restricted Stock may be issued
--------------
either alone or in addition to other awards granted under this Plan. The
Committee shall determine the officers and key employees of the Company and its
Subsidiaries and Affiliates to whom, and the time or times at which, grants of
Restricted Stock will be made, the number of shares to be awarded, the price, if
any, to be paid by the recipient of Restricted Stock (subject to Section 9.2,
the time or times within which such awards may be subject to forfeiture, and all
other conditions of the awards. The Committee may also condition the grant of
Restricted Stock upon the attainment of specified performance goals, or such
other criteria as the Committee may
10
<PAGE>
determine, in its sole discretion. The provisions of Restricted Stock awards
need not be the same with respect to each recipient.
9.2 Awards and Certificates. The prospective recipient of an
-----------------------
award of shares of Restricted Stock shall not have any rights with respect to
such award, unless and until such recipient has executed an agreement evidencing
the award (a "Restricted Stock Award Agreement") and has delivered a fully
executed copy thereof to the Company, and has otherwise complied with the then
applicable terms and conditions.
(a) Awards of Restricted Stock must be accepted within a
period of 90 days (or such shorter period as the Committee may
specify) after the award date by executing a Restricted Stock
Award Agreement and paying whatever price, if any, is
required.
(b) Each participant who is awarded Restricted Stock shall be
issued a stock certificate with respect to those shares of
Restricted Stock. The certificate shall be registered in the
name of the participant, and shall bear an appropriate legend
referring to the terms, conditions, and restrictions
applicable to such award, substantially in the following form:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) of the Q-MED, INC. 1997 Equity Incentive Plan and a
Restricted Stock Award Agreement entered into between the registered
owner and Q-MED, INC. Copies of the Plan and the Agreement are on file
in the offices of Q-MED, INC., 100 Metro Park South, 3rd Floor,
Laurence Harbor, New Jersey 08878."
(c) The Committee shall require that the stock certificates
evidencing such shares will be held in custody by the
Company until the restrictions thereon shall have lapsed,
and that, as a condition of any Restricted Stock award, the
participant shall have delivered a stock power to the Company,
endorsed in blank, relating to the Stock covered by such award.
9.3 Restrictions and Conditions. The shares of Restricted
-----------------------------
Stock awarded pursuant to this Section shall be subject to the following
restrictions and conditions:
(a) Subject to the provisions of this Plan and the Restricted
Stock Award Agreements, during such period as may be set by
the Committee commencing on the grant date (the "Restriction
Period"), the participant shall not be permitted to sell,
transfer, pledge or assign shares of Restricted Stock awarded
under this Plan. Within these limits, the Committee may, in
its sole discretion, provide for the lapse of such
restrictions in installments and may accelerate or waive such
restrictions in whole or in part based on performance and/or
such other factors as the Committee may determine, in its sole
discretion.
11
<PAGE>
(b) Except as provided in Section 9.3(a), the participant shall
have, with respect to the shares of Restricted Stock, all of
the rights of a stockholder of the Company, including the
right to receive any dividends. Dividends paid in stock of the
Company or stock received in connection with a stock split
with respect to Restricted Stock shall be subject to the same
restrictions as on such Restricted Stock. Certificates for
shares of unrestricted Stock shall be delivered to the
participant promptly after, and only after, the period of
forfeiture shall expire without forfeiture in respect of such
shares of Restricted Stock.
(c) Subject to the provisions of the Restricted Stock Award
Agreement and this Section, upon the participant's termination
of employment for any reason during the Restriction Period,
all shares still subject to restriction shall be forfeited by
the participant, and the participant shall only receive the
amount, if any, paid by the participant for such forfeited
Restricted Stock.
(d) In the event of special hardship circumstances of a
participant whose employment is involuntarily terminated
(other than for Cause), the Committee may, in its sole
discretion, waive in whole or in part any or all remaining
restrictions with respect to such participant's shares of
Restricted Stock.
10. DEFERRED STOCK AWARDS.
---------------------
10.1 Administration. Deferred Stock may be awarded either
--------------
alone or in addition to other awards granted under this Plan. The Committee
shall determine the officers and key employees of the Company, its Subsidiaries
and Affiliates to whom, and the time or times at which, Deferred Stock shall be
awarded, the number of shares of Deferred Stock to be awarded to any
participant, the duration of the period (the "Deferral Period") during which,
and the conditions under which, receipt of the Stock will be deferred and the
terms and conditions of the award in addition to those set forth in Section
10.2. The Committee may also condition the grant of Deferred Stock upon the
attainment of specified performance goals, or such other criteria as the
Committee shall determine, in its sole discretion. The provisions of Deferred
Stock awards need not be the same with respect to each recipient.
10.2 Terms and Conditions. The shares of Deferred Stock
----------------------
awarded pursuant to this Section shall be subject to the following terms and
conditions:
(a) Subject to the provisions of this Plan and the award
agreement, Deferred Stock awards may not be sold, assigned,
transferred, pledged, or otherwise encumbered during the
Deferral Period. At the expiration of the Deferral Period (or
Elective Deferral Period, where applicable), share
certificates shall be delivered to the participant, or his
legal representative, in a number equal to the shares covered
by the Deferred Stock award.
12
<PAGE>
(b) At the time of the award, the Committee may, in its sole
discretion, determine that amounts equal to any dividends
declared during the Deferral Period with respect to the number
of shares covered by a Deferred Stock award will be: (a) paid
to the participant currently, (b) deferred and deemed to be
reinvested, or (c) forfeited because the participant has no
rights with respect thereto.
(c) Subject to the provisions of the award agreement and this
Section, upon termination of employment for any reason during
the Deferral Period for a given award, the Deferred Stock in
question including any deferred and reinvested dividends
thereon shall be forfeited by the participant.
(d) Based on performance and/or such other criteria as the
Committee may determine, the Committee may, at or after the
grant, accelerate the vesting of all or any part of any
Deferred Stock award and/or waive the deferral limitations for
all or any part of such award.
(e) In the event of special hardship circumstances of a
participant whose employment is involuntarily terminated
(other than for Cause), the Committee may, in its sole
discretion, waive in whole or in part any or all of the
remaining deferral limitations imposed hereunder with respect
to any or all of the participant's Deferred Stock.
(f) A participant may elect to defer further receipt of the award
for a specified period or until a specified event (the
"Elective Deferral Period"), subject in each case to the
Committee's approval and to such terms as are determined by
the Committee, all in its sole discretion. Subject to any
exceptions adopted by the Committee, such election must be
made at least six months prior to the completion of the
Deferral Period for a Deferred Stock award (or for an
installment of such an award).
(g) Each award shall be confirmed by, and subject to the terms of,
a Deferred Stock award agreement executed by the Company and
the participant.
11. LOAN PROVISIONS. With the consent of the Committee, the Company may
---------------
make, guarantee, or arrange for, a loan or loans to an employee with respect to
the exercise of any Stock Option granted under this Plan and/or with respect to
the payment of the purchase price, if any, of any Restricted Stock awarded
hereunder and/or with respect to the payment by optionee of any or all federal
and/or state income taxes due on account of the granting or exercise of any
stock option or other awards hereunder. The Committee shall have full authority
to decide whether to make a loan or loans hereunder and to determine the amount,
terms and provisions of any such loan or loans, including the interest rate to
be charged in respect of any such loan or loans, whether the loan or loans are
to be with or without recourse against the borrower, the terms on which the loan
is to be repaid and the conditions, if any, under which the loan or loans may be
forgiven.
13
<PAGE>
12. AMENDMENTS AND TERMINATION.
--------------------------
The Board may amend, alter, or discontinue this Plan, but no
amendment, alteration, or discontinuation shall be made which would impair the
right of an optionee or participant under a Stock Option, Director Stock Option,
Stock Appreciation Right, Restricted Stock or Deferred Stock award theretofore
granted, without the optionee's or participant's consent, or which without the
approval of the stockholders would:
12.1 Except as expressly provided in this Plan, increase the
total number of shares reserved for the purpose of this Plan;
12.2 Extend the maximum option period under Section 6.2 or 7.2
of the Plan.
The Committee may amend the terms of any award or option
(other than Director Stock Options) theretofore granted, prospectively or
retroactively, but no such amendment shall impair the rights of any holder
without his consent. The Committee may also substitute new Stock Options for
previously granted Stock Options having higher option prices.
13. UNFUNDED STATUS OF PLAN.
-----------------------
This Plan is intended to constitute an "unfunded" plan for
incentive and deferred compensation. With respect to any payments not yet made
to a Participant or optionee by the Company, nothing set forth herein shall give
any such participant or optionee any rights that are greater than those of an
unsecured, general creditor of the Company. In its sole discretion, the
Committee may authorize the creation of trusts or other arrangements to meet the
obligations created under this Plan to deliver Stock or payments in lieu of or
with respect to awards hereunder; provided, however, that the existence of such
trusts or other arrangements is consistent with the unfunded status of this
Plan.
14. CHANGE OF CONTROL.
-----------------
The following acceleration and valuation provisions shall
apply in the event of a "Change of Control" or "Potential Change of Control," as
defined in this Section:
14.1 In the event of a "Change of Control," as defined in
Section 14.2, unless otherwise determined by the Committee or the Board in
writing at or after grant, but prior to the occurrence of the Change of Control,
or, if and to the extent so determined by the Committee or the Board in writing
at or after grant (subject to any right of approval expressly reserved by the
Committee or the Board at the time of such determination) in the event of a
"Potential Change of Control," as defined in Section 14(c):
14
<PAGE>
(a) Any Stock Appreciation Rights outstanding for at least six (6)
months and any Stock Options awarded under this Plan not
previously exercisable and vested shall become fully
exercisable and vested;
(b) The restrictions and deferral limitations applicable to any
Restricted Stock and Deferred Stock awards under this Plan
shall lapse and such shares and awards shall be deemed fully
vested; and
(c) All outstanding Stock Options, Stock Appreciation Rights,
Restricted Stock and Deferred Stock awards, shall, to the
extent determined by the Committee at or after grant, be
canceled and the holder thereof shall be paid in cash therefor
on the basis of the "Change of Control Price" (as defined in
Section 14.4) as of the date that the Change of Control occurs
or Potential Change of Control is determined to have occurred,
or such other date as the Committee may determine prior to the
Change of Control or Potential Change of Control.
14.2 For Purposes of Section 14.2, a "Change of Control"
means the happening of any of the following:
(a) When any "person" as such term is used in Sections 13(d) and
14(d) of the Exchange Act (other than the Company, or any
Company employee benefit plan, including its trustee) is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly of securities of the
Company representing 25 percent or more of the combined voting
power of the Company's then outstanding securities;
(b) The occurrence of any transaction or event relating to the
Company required to be described pursuant to the requirements
of Item 6(e) of Schedule 14A of Regulation 14A of the
Commission under the Exchange Act;
(c) The occurrence of a transaction requiring stockholder approval
for the acquisition of the company by an entity other than the
Company or a Subsidiary, through purchase of assets, or by
merger, or otherwise;
(d) The dissolution of the Company; or
(e) The sale by the Company of substantially all of its assets.
14.3 For purposes of Section 14.1, a "Potential Change of
Control" means the happening of any of the following:
(a) The entering into an agreement by the Company, the
consummation of which would result in a Change of Control of
the Company as defined in Section 14.2;
15
<PAGE>
(b) The public announcement by any person (including the Company)
of an intention to take or consider taking actions which, if
consummated, would constitute a Change in Control; or
(c) The adoption by the Board of Directors of a resolution to the
effect that a Potential Change of Control of the Company has
occurred for purposes of this Plan.
14.4 For purposes of this Section, "Change of Control Price"
means the highest price based upon the Fair Market Value per share or the price
paid or offered in any transaction related to a potential or actual Change of
Control of the Company at any time during the preceding sixty day period as
determined by the Committee, except that (i) in the case of Incentive Stock
Options and Stock Appreciation Rights relating to Incentive Stock Options, such
price shall be based only on transactions reported for the date on which the
Committee decides to cash out such options, and (ii) in the case of Director
Stock Options, the sixty day period shall be the period immediately prior to the
Change of Control.
15. GENERAL PROVISIONS.
------------------
15.1 All certificates for shares of Stock delivered under this
Plan shall be subject to such stock transfer orders and other restrictions as
the Committee may deem advisable under the rules, regulations, and other
requirements of the Commission or the National Association of Securities
Dealers, Inc., any stock exchange upon which the Stock is then listed, and any
applicable federal or state securities law, and the Committee may cause a legend
or legends to be placed on any such certificates to make appropriate reference
to such restrictions.
15.2 Nothing set forth in this Plan shall prevent the Board
from adopting other or additional compensation arrangements, subject to
stockholder approval if such approval is required; and such arrangements may be
either generally applicable or applicable only in specific cases. The adoption
of this Plan shall not confer upon any employee of the Company, any Subsidiary
or any Affiliate, any right to continued employment (or, in the case of a
director, continued retention as a director) with the Company, a Subsidiary or
an Affiliate, as the case may be, nor shall it interfere in any way with the
right of the Company, a Subsidiary or an Affiliate to terminate the employment
of any of its employees at any time.
15.3 Each participant shall, no later than the date as of
which the value of an award first becomes includable in the gross income of the
participant for federal income tax purposes, pay to the Company, or make
arrangements satisfactory to the Committee regarding payment of, any federal,
state, or local taxes of any kind required by law to be withheld with respect to
the award. The obligations of the Company under this Plan shall be conditioned
on such payment or arrangements and the Company (and, where applicable, its
Subsidiaries and Affiliates) shall, to the extent permitted by law, have the
right to deduct any such taxes from any payment of any kind otherwise due to the
participant. If permitted by the Committee, a
16
<PAGE>
participant may irrevocably elect to have the withholding tax obligation or, in
the case of all awards hereunder except Stock Options which have related Stock
Appreciation Rights, if the Committee so determines, any additional tax
obligation with respect to awards hereunder by (a) having the Company withhold
shares of Stock otherwise deliverable to the participant with respect to the
award, or (b) delivering to the Company shares of unrestricted Stock; provided,
however, that any such election shall be made either (i) during one of the
"window" periods described in section (e) (3) (iii) of Rule 16b-3 promulgated
under the Exchange Act, or (ii) at least six months prior to the date income is
recognized with respect to the award.
15.4 At the time of grant or purchase, the Committee may
provide in connection with any grant or purchase made under this Plan that the
shares of Stock received as a result of such grant or purchase shall be subject
to a right of first refusal, pursuant to which the participant shall be required
to offer to the Company any shares that the participant wishes to sell, with the
price being the then Fair Market Value of the Stock, subject to the provisions
of Section 14 and to such other terms and conditions as the Committee my specify
at the time of grant.
15.5 No member of the Board or the Committee, nor any officer
or employee of the Company acting on behalf of the Board or the Committee, shall
be personally liable for any action, determination, or interpretation taken or
made in good faith with respect to this Plan, and all members of the Board or
the Committee and each and any officer or employee of the Company acting on
their behalf shall, to the extent permitted by law, be fully indemnified and
protected by the Company with respect to any such action, determination or
interpretation.
16. EFFECTIVE DATE OF PLAN.
----------------------
This Plan shall be effective on the date it is approved by a
majority of the votes cast at a duly held shareholders' meeting at which a
quorum representing a majority of all outstanding voting stock is, either in
person or by proxy, present and voting on the Plan.
17. TERM OF PLAN.
------------
No Stock Option, Director Stock Option, Stock Appreciation
Right, Restricted Stock or Deferred Stock award shall be granted pursuant to
this Plan on or after July 31, 2007, but awards theretofore granted may extend
beyond that date.
17
<PAGE>
CERTIFICATION OF ADOPTION
-------------------------
I, Herbert H. Sommer, Secretary of Q-MED, INC., hereby certify
that the foregoing is a true and correct copy of the 1997 Equity Incentive Plan
of the Company as adopted by the Board of Directors of the Company at a special
meeting held on March, 1997 and by the Stockholders of the Company at an annual
meeting held on May 30, 1997.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal of the Company this May 30, 1997.
/s/ Herbert H. Sommer
------------------------------
Herbert H. Sommer, Secretary
18
PRESIDENT'S MESSAGE
================================================================================
Dear Fellow Shareholder:
During 1997, we increased the number of lives managed by our ohms|cad(R) system
from approximately 100,000 at the end of 1996 to over 200,000 at the end of
1997. Long-term ohms|cad contracts were signed with the prestigious San Jose
Medical Group in California and the first National HMO contract was entered into
with CIGNA HealthCare, with CIGNA HealthCare of Ohio being the first designated
CIGNA Health Plan to implement ohms|cad. The pipeline of possible accounts
exceeds 3 million lives at present.
The ohms|cad disease management program facilitates early identification of
coronary disease patients who are at high risk for a cardiac event in the near
term. It assists primary care physicians in the implementation of preventive
strategies, thereby enhancing health outcomes and thus reducing invasive
procedures and hospitalization. As a result, cardiac costs can be reduced
significantly.
In November, we presented ohms|cad health outcomes at the 70th Scientific
Sessions of the American Heart Association. The health outcomes effect a
40,321-member managed care practice in Bakersfield, California, wherein 1,546
coronary patients were referred for ohms|cad care. The impact of ohms|cad care
on the total population resulted in a 25% reduction in the total of all cardiac
events. Specifically, heart attacks were reduced by 30%; hospitalizations for
angina, unstable angina, and rule-out heart attacks were reduced by 34%; cardiac
catheterizations were reduced by 20%; and angioplasty was reduced by 20%. Bypass
surgery increased slightly. From a financial perspective, the results showed an
overall cost reduction of 17% in the first 12 months and a 24% cost reduction by
the 18th month.
We reported that this study demonstrates that a coronary disease management
program designed to identify high risk patients early, significantly aids
primary care physicians to practice preventive strategies and reduce morbidity
from coronary disease in their patients.
Compliance with ohms|cad recommendations also was shown to be very beneficial in
the management of ischemia, hypertension and lipids. For ischemia, it was
determined that 90% of the physicians complied with the ohms|cad recommendations
for ischemia management, and as a result ischemia was eliminated in 79% of
patients. In contrast, the patients treated by physicians who did not comply
with the ohms|cad recommendations showed a worsening of ischemia in 84% of
patients. In hypertension management, 70% of the physicians complied with the
ohms|cad recommendations, resulting in normalized or improved blood pressure in
72% of patients. In lipid management, 48% of the physicians complied with the
ohms|cad recommendations, and LDL lipids were normalized or improved by greater
than 10% in 79% of these patients as well.
The data for these patients is the first confirmation that a systematic ohms|cad
approach to coronary disease management delivered through primary practitioners
can achieve positive outcomes and enhance patient management and satisfaction
equal to or better than "traditional care", and it can be done more cost
effectively.
In terms of retaining our proprietary advantage, the Company received a "Notice
of Allowance" in September 1997 from the US Patent Office effecting all of the
claims submitted. This broad Patent, coupled with the continued patient
expansion of the ohms|cad database which now exceeds over 5,000 ohms|cad
interventions, is, in our opinion, a strong barrier to competition.
In December, we completed a $2 million round of financing with a group of
investors led by Galen Partners III, LP. The proceeds will be used to continue
the direct marketing and implementation of ohms|cad to customers as they sign
on.
In preparation for the expected increase in managed care lives under ohms|cad
management, the Company expects to bring on line "ohms|cad 2.0" during the
second quarter of 1998. This new version of ohms|cad will be capable of handling
over 1,000 patients per day giving the system the capacity to handle up to 9.6
million managed care lives.
Our goal is to place ohms|cad with HMOs, Physician Practice Management companies
(PPMs) and large employer groups. It is our expectation that during 1998 we will
add over 600,000 new lives into the ohms|cad system. If successful, we believe
that the Company could operate profitably during the last quarter of 1998 or the
first quarter of 1999.
We continue to appreciate each shareholder's confidence.
Very truly yours,
Michael W. Cox
President
Annual Report 1997 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(R)"), a subsidiary
founded in1995, developed and is marketing an integrated coronary artery disease
management system under the registered trademark "ohms|cad" to assist managed
care organizations 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 ohms|cad which is a
comprehensive, telemedicine disease management system for the CAD patient which
is marketed 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 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.
Annual Report 1997 - 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
telecommunication 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 non-invasively 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 CAD 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 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 1997 - 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.
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 1997 - Page 4
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below as of November 30, 1997 and
1996 and for each of the three years in the three year period ended November 30,
1997 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, 1995, 1994 and 1993 and the years ended November 30,
1994 and 1993 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.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED NOVEMBER 30:
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net Sales $ 2,412,149 $ 3,316,659 $ 5,648,754 $ 8,369,461 $ 9,423,688
Cost of sales 891,930 1,320,481 1,579,196 2,027,090 2,436,053
----------- ----------- ----------- ----------- -----------
Gross profit 1,520,219 1,996,178 4,069,558 6,342,371 6,987,635
Selling, general and administrative
expenses 3,925,661 4,227,234 5,164,478 5,806,320 6,646,607
Provisions for uncollectible
accounts 214,601 16,051 25,347 106,826 38,271
Research and development expenses 179,519 348,840 382,244 337,277 563,784
Impairment charge - 341,683 - - -
----------- ----------- ----------- ----------- -----------
(Loss) earnings from operations (2,799,562) (2,937,630) (1,502,511) 91,948 (261,027)
Interest income 98,214 117,623 - - 50,973
Interest expense (25,430) (33,876) (68,142) (84,429) (93,028)
(Loss) gain on sale of securities (30,574) 42,473 - - -
----------- ----------- ----------- ----------- -----------
(Loss) earnings before provision
for income taxes (2,757,352) (2,811,410) (1,570,653) 7,519 (303,082)
Provision for income taxes - - - - -
----------- ----------- ----------- ----------- -----------
(Loss) earnings before minority
interest (2,757,352) (2,811,410) (1,570,653) 7,519 (303,082)
Minority interest in loss of
subsidiary - - 16,000 17,000 17,000
----------- ----------- ----------- ----------- -----------
(Loss) earnings before extraordinary
item (2,757,352) (2,811,410) (1,554,653) 24,519 (286,082)
Extraordinary item-benefit from
utilization of net operating
loss carryforwards - - - - -
----------- ----------- ----------- ----------- -----------
Net (loss) income $(2,757,352) $(2,811,410) $(1,554,653) $ 24,519 $ (286,082)
=========== =========== =========== =========== ===========
PER SHARE DATA
(Loss) Income per common and
dilutive common equivalent
shares $ (.29) $ (.30) $ (.19) $ .00 $ (.04)
=========== =========== =========== =========== ===========
BALANCE SHEET DATA (AT END OF PERIODS)
Working Capital $ 803,415 $ 3,481,104 $ 3,369,177 $ 1,826,909 $ 2,079,786
Total Assets 2,450,533 5,171,064 6,014,620 4,399,104 4,729,195
Total Debt 888,015 1,072,585 1,777,393 2,002,865 2,360,101
Stockholders' equity 1,562,518 4,098,479 4,237,227 2,380,239 2,336,094
</TABLE>
Annual Report 1997 - 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 Consolidated Statements of Operations.
<TABLE>
<CAPTION>
% For Period-to-Period
Year Ended % Changes
---------
November 30, 1997 1996 1995
------------
vs. vs. vs.
1997 1996 1995 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0 100.0 100.0 (27.3) (41.3) (32.5)
Cost of sales 37.0 39.8 28.0 (32.5) (16.4) (22.1)
------ ------ ------
Gross profit 63.0 60.2 72.0 (23.8) (50.9) (35.8)
Selling, general and administrative expenses 162.7 127.5 91.4 (7.1) (18.1) (11.1)
Provisions for uncollectible accounts 8.9 .5 .4 1237.0 (36.7) (76.3)
Research and development expenses 7.4 10.5 6.8 (48.5) (8.7) (13.3)
Impairment charge - 10.3 - * * *
------ ------ ------
(Loss) earnings from operations (116.0) (88.6) (26.6) (4.7) (72.8) *
Interest Income 4.1 3.5 - (16.5) * *
Interest expense (1.1) (1.0) (1.2) (24.9) (50.3) (19.3)
(Loss) gain on sale of securities (1.2) 1.3 - * * *
------ ------ ------
(Loss) earnings before income taxes (114.2) (84.8) (27.8) (1.9) 79.0 *
Income taxes - - - * * *
------ ------ ------
(Loss) earnings before minority interest (114.2) (84.8) (27.8) (1.9) 79.0 *
Minority interest in loss of subsidiary - - .3 * * (5.9)
------ ------ ------
Net (loss) income (114.2) (84.8) (27.5) (1.9) 80.8 *
====== ====== ======
</TABLE>
*Not meaningful
FISCAL 1997 COMPARED WITH FISCAL 1996
Net sales for fiscal 1997 decreased 27.3% to $2,412,149 when compared to
$3,316,659 for fiscal 1996. This decrease is primarily due to the Company
changing its sales focus beginning in fiscal 1995 from selling capital equipment
to selling its ohms|cad disease management services through its wholly owned
subsidiary, Interactive Heart Management Corp. (IHMC). The decision to place a
decreasing emphasis on the sales of capital equipment is responsive to the
general decline in the market for capital equipment sold to physicians.
Management believes the demand for office medical equipment decreased because of
the increased utilization of "capitation" arrangements between managed care
organizations and physicians resulting in a change in the way physicians are
compensated for performing testing procedures utilizing equipment manufactured
by the Company. As a result, the Company's sales efforts focused on selling the
ohms|cad system to physician groups and health management organizations. These
efforts have resulted in adding San Jose Medical Group and CIGNA HealthCare of
Ohio to the managed care organizations utilizing ohms|cad during 1997. The total
number of lives under ohms|cad management exceeds 200,000.
Annual Report 1997 - Page 6
<PAGE>
Revenues received through IHMC for ohms|cad services are structured on a
contractual basis whereby the Company receives a payment from physician groups
and health management organizations calculated as a percentage of the reduction
of the organization's costs of providing care for CAD patients. An initial
baseline is selected and the total CAD costs are computed as baseline costs. The
ohms|cad system is then placed in service and used throughout the contract
period to reduce costs and improve the health status of patients with coronary
disease. At the end of each contract year the total CAD costs are then
calculated and compared to the baseline 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 which is recorded as revenue, reflecting a small
percentage of the statistically determined share of the expected reduction in
costs of providing ohms|cad care for CAD patients. Once the actual reduction of
cost is calculated, the prepayments are subtracted and any additional revenue is
billed and recorded at that time.
The Company intends to aggressively market the ohms|cad system to leading
health care providers throughout the United States during 1998. Although the
Company has recently entered into contractual arrangements with San Jose and
CIGNA HealthCare, the recognition of significant revenue from reducing the cost
of providing CAD care will lag behind administrative and marketing costs for at
least the first year. Included in the Company's net loss of $(2,757,352) was
approximately $(2,005,000) from IHMC.
The Company's gross profit margin increased from 60.2% in fiscal 1996 to
63.0% in fiscal 1997. The increase was primarily due to the reduction of certain
fixed costs related to the Company's production facility. These reductions were
made in response to the decline in capital equipment sales.
Selling, general and administrative expenses decreased by approximately
$300,000 when compared to fiscal 1996, primarily due to a continued reduction in
sales related expenses in the capital equipment segment. Management has
continued to reduce overall administrative expenses while selling costs related
to ohms|cad have grown.
The provision for doubtful accounts increased by approximately $200,000
when compared to fiscal 1996. This increase is primarily due to the reservation
of certain accounts receivable of IHMC. While the Company has reviewed interim
data and believes these amounts are due, a reserve has been set aside until the
final accounting has been reconciled.
The Company has conducted a review of its computer systems and products to
identify the systems that could be affected by the "Year 2000" issue and is
developing an implementation plan to resolve the issue. The Year 2000 problem is
the result of computer programs being written using two digits rather than four
to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes, with modifications to existing
software and converting to new software, the Year 2000 problem will not pose
significant operational problems for the Company's computer systems as so
modified and converted. However, if such modifications and conversions are not
completed timely, the Year 2000 problem may have a material impact on the
operations of the Company. Certain of the Company's products will require
software upgrade to resolve the problem as well. The Company is developing and
expects to implement a Year 2000 upgrade for each of its products that are the
subject of warranties and estimates that the total expense to be charged,
including engineering, testing, parts and labor will be approximately $250,000
during fiscal 1998 and 1999. While the Company's ohms|cad system is fully
compliant, the Company relies on the information technology departments of
existing and prospective customers for data utilized in proposing a contract and
in measuring the amount of costs saved through the implementation of ohms|cad.
The Company cannot assess the effect that Year 2000 programs implemented by
these other companies will have.
In March 1997, the Financial Accounting Standards Board issued Statement
128, "Earnings per Share", superseding Opinion 15. The main goals of the
Statement is to harmonize the EPS calculation in the United States with those
common in other countries and with International Accounting Standard No. 33 and
to address criticisms from consultants that Opinion 15 contained unnecessarily
complex and arbitrary provisions. The Statement is effective for periods after
December 15, 1997.
In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure". Statement 129 continues the existing requirements to
disclose the pertinent rights and privileges of all securities
Annual Report 1997 - Page 7
<PAGE>
other than ordinary common stock but expands the number of companies
subject to portions of its requirements. Specifically, the Statement requires
all entities to provide the capital structure disclosures previously required by
Opinion 15. Companies that were exempt from the provisions of Opinion 15 will
now need to make those disclosures. The Statement is effective for financial
statements for periods ending after December 15, 1997.
In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". Statement 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The objective of the Statement is to report a measure of
all changes in equity of an enterprise that result from transactions and other
economic events of the period other than transactions with owners
("Comprehensive income"). Comprehensive income is the total net income and all
other non-owner changes in equity. The Statement is effective for fiscal years
beginning after December 15,1997, with earlier application permitted.
In July 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information". Statement No. 131 requires disclosures
for each segment that are similar to those required under current standards with
the addition of quarterly disclosure requirements and a finer partitioning of
geographic disclosures. It requires limited segment data on a quarterly basis.
It also requires geographic data by country, as opposed to broader geographic
regions as permitted under current standards. The Statement is effective for
fiscal years beginning after December 15, 1997, with earlier application
permitted.
In management's opinion, SFAS Nos. 128, 129, 130 and 131, when adopted,
will not have a material effect on the Company's financial statements.
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 was primarily attributable to the primary care market shifting
from fee-for-service to prepaid managed contracts. 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 1996, 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 has aggressively marketed the ohms|cad system to over 20
leading health care providers throughout the United States. Included in the
Company's net loss of $(2,811,410) was approximately $(1,566,000) from IHMC.
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.
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. Revenue received through the
Company's subsidiary, IHMC, has been on a contractual basis.
Research and development expenses remained consistent with prior years.
Annual Report 1997 - Page 8
<PAGE>
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.
Research and development expenses remained consistent with prior years.
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,
operations and the sale of certain assets. Since the Company's inception, sales
of securities and assets have generated approximately $18,000,000 less
applicable expenses through November 30, 1997.
On December 18, 1997, the Company sold an aggregate $2,000,000 8%
Convertible Subordinated Notes due December 18, 2002 (the "Notes"), without
discount or premium, in a private placement to three investors led by Galen
Partners III, L.P. Interest on the Notes is accrued monthly, compounded annually
and will be due at maturity. The Notes are convertible into shares of the
Company's common stock at the rate of $5.60 per share, provided that if the
average closing price of the shares of the Company's common stock for the 90
trading days following the closing exceeds $7.25, then the conversion price will
increase to $6.00. The Company may redeem the Notes in the event the average
closing price of shares of the Company's common stock equals or exceeds $12.00
for a period of 90 days at the following times with the following premiums and
may elect to pay the redemption price in shares of common stock:
Year Redemption Price
---- ----------------
1998 105%
1999 104%
2000 103%
2001 102%
2002 100%
The Company is required to redeem the Notes at higher premiums in the event
of a change of control.
In connection with the sale of the Notes, the Company granted certain
rights to the purchasers, including registration rights and the right to appoint
a member of the Company's board of directors. The Note Purchase Agreement
prohibits the Company from paying dividends until the Notes are paid.
Annual Report 1997 - Page 9
<PAGE>
The Company had an installment note payable to a bank in the amount of
$625,000 dated March 1, 1995. The Company made monthly installment payments of
$25,000 plus interest at 1% over prime rate. The note was fully paid on March
31, 1997.
The Company had working capital of $803,415 at November 30, 1997 compared
to $3,481,104 at November 30, 1996 and ratios of current assets to current
liabilities of 2.0:1 and 4.6:1 as of November 30, 1997 and 1996, respectively.
The working capital decrease of approximately $2,600,000 was primarily due to
the Company's net loss of $2,757,352 for the year ending November 30, 1997.
Assuming the Company's sale of Notes, described above, had occurred on November
30, 1997, the Company would have had working capital after expenses of the
offering of $2,759,220 and a ratio of current assets to current liabilities of
4.6:1, each on a pro forma basis.
The Company believes that funds generated from operations, together with
cash, investments and the proceeds of the Notes sold in December 1997, will be
sufficient to meet its working capital needs for the current year. However, in
the event revenues do not meet management's expectations, the Company may be
required to seek additional financing to support IHMC's sales efforts and
operations.
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 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 19.2%
of the receivables balance at November 30, 1997 compared to 19.1% at November
30, 1996. The Company is aggressively seeking payment arrangements on these
overdue amounts.
The Company, with its IHMC subsidiary, enters into contractual arrangements
with physician groups and managed care organizations where a prepayment toward a
cost savings is made per month. As of November 30, 1997 the Company had entered
into two agreements whereby it received prepayments toward a share in the
reduction of costs and a third agreement entered into in December 1997 under
which prepayments are expected to begin in April 1998. The Company's share of
the reduction of costs under one such agreement in excess of prepayment was
$210,454 which was included in 1997 revenue. The Company expects revenue to
increase as it recognizes cost savings from additional arrangements during
fiscal 1998.
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, 1997, the Company had
approximately $640,000 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 decrease as a result of increased activities related to ohms|cad.
Subsequent to November 30, 1997, the Company has raised additional funds in the
amount of $2,000,000 in order to continue its operations until it is able to
generate sufficient additional revenue from the sale of its products and
services. 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.
Annual Report 1997 - Page 10
<PAGE>
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.
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 1997 - Page 11
<PAGE>
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30,
ASSETS
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current assets
Cash and cash equivalents $ 640,266 $ 680,686
Investments -- 2,144,545
Accounts receivable, net of allowance for doubtful accounts
and sales returns of $250,000 and $67,000, respectively 197,901 403,930
Inventory 667,255 1,123,664
Prepaid expenses and other current assets 68,439 84,074
------------ -----------
1,573,861 4,436,899
Property and equipment, net of accumulated depreciation 624,761 454,674
Product software development costs 60,998 87,140
Other assets 190,913 192,351
------------ -----------
$ 2,450,533 $ 5,171,064
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 770,446 $ 855,795
Current maturities of long-term debt -- 100,000
------------ -----------
770,446 955,795
Leases payable, long-term 77,522 72,053
Deferred warranty revenue 40,047 44,737
------------ -----------
888,015 1,072,585
Stockholders' equity
Common stock $.001 par value; 20,000,000 shares
authorized; 9,648,519 and 9,483,615 shares issued
and 9,626,519 and 9,461,615 outstanding 9,649 9,477
Paid-in capital 18,041,941 17,836,480
Accumulated deficit (16,413,447) (13,656,095)
------------ -----------
1,638,143 4,189,862
Unrealized loss on securities available for sale -- (15,758)
Less: treasury stock at cost, 22,000 common shares (75,625) (75,625)
------------ -----------
Total stockholders' equity 1,562,518 4,098,479
------------ -----------
$ 2,450,533 $ 5,171,064
============ ===========
See accompanying notes to consolidated financial statements
</TABLE>
Annual Report 1997 - Page 12
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED NOVEMBER 30,
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sales $ 2,452,084 $ 3,529,216 $ 6,036,048
Less sales returns and allowances 39,935 212,557 387,294
----------------- -------------- --------------
2,412,149 3,316,659 5,648,754
Cost of sales 891,930 1,320,481 1,579,196
----------------- -------------- --------------
Gross profit 1,520,219 1,996,178 4,069,558
Selling, general and administrative expenses 3,925,661 4,227,234 5,164,478
Provision for uncollectible accounts 214,601 16,051 25,347
Research and development expenses 179,519 348,840 382,244
Impairment charge -- 341,683 --
----------------- -------------- --------------
Loss from operations (2,799,562) (2,937,630) (1,502,511)
Interest income 98,214 117,623 --
Interest expense (25,430) (33,876) (68,142)
(Loss) gain on sale of securities (30,574) 42,473 --
----------------- -------------- --------------
Loss before provision for income taxes (2,757,352) (2,811,410) (1,570,653)
Provision for income taxes -- -- --
----------------- -------------- --------------
Loss before minority interest (2,757,352) (2,811,410) (1,570,653)
Minority interest in loss of subsidiary -- -- 16,000
----------------- -------------- --------------
Net loss $ (2,757,352) $ (2,811,410) $ (1,554,653)
================= ============== ==============
Net loss per common share $ (.29) $ (.30) $ (.19)
================= ============== ==============
Weighted average number of shares outstanding 9,562,000 9,287,420 8,113,978
================= ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
Annual Report 1997 - Page 13
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED NOVEMBER 30, 1997
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
COMMON STOCK ON 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, 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
Exercise of stock options
and warrants 172 205,461 -- -- -- -- 205,633
Net loss -- -- (2,757,352) -- -- -- (2,757,352)
Unrealized gain on securities
Available for sale -- -- -- -- -- 15,758 15,758
--------- ------------ ------------ ------ -------- -------- ------------
Balances - November 30, 1997 $9,649 $ 18,041,941 $(16,413,447) 22,000 $(75,625) $ -- $ 1,562,518
========= ============ ============ ====== ======== ======== ============
</TABLE>
See accompanying notes to consolidated financial statements
Annual Report 1997 - Page 14
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30,
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (2,757,352) $ (2,811,410) $ (1,554,653)
ADJUSTMENTS TO RECONCILE NET (LOSS) TO
NET CASH (USED) BY OPERATING ACTIVITIES
Depreciation and amortization 267,738 297,432 264,272
Impairment charge -- 341,683 --
(Increase) decrease in
Accounts receivable 206,029 444,755 184,502
Inventory 456,409 285,141 114,692
Prepaid expenses and other current assets 15,635 (15,671) 34,222
Increase (decrease) in
Accounts payable and accrued liabilities (85,349) (410,589) 76,180
Other, net (50,917) 16,871 (92,415)
------------- ------------- -------------
Total adjustments 809,545 959,622 581,453
------------- ------------- -------------
(1,947,807) (1,851,788) (973,200)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale -- (3,662,600) (1,701,703)
Sale of securities available for sale 2,185,594 3,204,000 --
Capital expenditures (383,840) (273,969) (186,577)
------------- ------------- -------------
1,801,754 (732,569) (1,888,280)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payment on long-term debt (100,000) (300,000) (300,000)
Proceeds from issuance of common stock 205,633 2,698,293 3,401,768
------------- ------------- -------------
105,633 2,398,293 3,101,768
Net (decrease) increase in cash and cash equivalents (40,420) (186,064) 240,288
Cash and cash equivalents - beginning 680,686 866,750 626,462
------------- ------------- -------------
Cash and cash equivalents - ending $ 640,266 $ 680,686 $ 866,750
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH PAID
Interest $ 25,430 $ 36,708 $ 69,892
Income taxes 5,632 7,853 7,328
</TABLE>
See accompanying notes to consolidated financial statements
Annual Report 1997 - Page 15
<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.
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
concentrations of credit risk consist of cash and cash investments. The Company
restricts cash and cash investments to financial institutions with high credit
standings.
INVESTMENTS
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 DEVELOPMENT COSTS
The Company capitalizes certain costs related to the development of
computer software once technological feasibility of the software has been
established. Product software development costs are amortized using the
straight-line method over the estimated useful economic life of the software
developed, generally 36 months.
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 $0 in 1997 and
approximately $100,000 in 1996 and 1995.
STOCK OPTION PLAN
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options and warrants. Under
this method, compensation cost is measured as the amount by which the market
price of the underlying stock exceeds the exercise price of the stock option at
the date at which both the number of options granted and the exercise price are
known.
Annual Report 1997 - Page 16
<PAGE>
NOTE 1
SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
NET LOSS PER COMMON SHARE
Net loss 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 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. Contracts entered into generally do
not require collateral.
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 coronary artery disease ("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 payments received. At November 30, 1997, 1996 and 1995,
approximately $595,000, $276,000 and $137,000 from the above such contracts is
included in revenue. Certain contracts contain 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%, respectively. 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.
NOTE 2
LIQUIDITY
The Company has anticipated that funds generated from operations, together
with cash and investments, may not be sufficient to meet its working capital
requirements for the current year. The Company received additional financing in
the form of a convertible note for $2,000,000 subsequent to the Balance Sheet
date which it believes will be sufficient to meet its working capital needs for
the current year (See Note 15).
Annual Report 1997 - Page 17
<PAGE>
NOTE 3
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
</TABLE>
Available-for-sale securities at November 30, 1996 mature in one year or
less.
Sales of available-for-sale securities for the year ended November 30, were
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Proceeds from sale $ 2,185,594 $ 3,204,000 $ --
Gross realized gains -- 42,473 --
Gross realized losses (30,574) -- --
</TABLE>
NOTE 4
INVENTORY
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Raw materials
(component parts and supplies) $ 209,580 $ 251,494
Finished units 457,675 872,170
------------- --------------
$ 667,255 $ 1,123,664
============= ==============
</TABLE>
During 1997, the Company capitalized as equipment approximately $205,000 of
inventory which is loaned to physicians in the event their original unit is
being repaired. The estimated useful life is five years.
NOTE 5
PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Machinery and equipment $ 1,146,762 $ 1,102,695
Loaner equipment 204,698 --
Furniture and fixtures 385,527 380,431
Office equipment 611,675 527,537
Leasehold improvements 45,846 44,771
Equipment held under capital lease 235,987 191,222
------------- --------------
2,630,495 2,246,656
Less accumulated depreciation and
amortization (2,005,734) (1,791,982)
------------- --------------
Property and equipment - net $ 624,761 $ 454,674
============= ==============
</TABLE>
At November 30, 1997 and 1996, the equipment under the capital leases had a
net book value of approximately $100,000 and $92,000, respectively.
Depreciation expense was $214,000, $167,000, and $131,000 for 1997, 1996,
and 1995, respectively.
NOTE 6
PRODUCT SOFTWARE DEVELOPMENT COSTS
During the years ended November 30, 1997, 1996, and 1995, amortization of
costs related to product software development costs were $26,142, $26,142, and
$17,428, respectively.
Annual Report 1997 - Page 18
<PAGE>
NOTE 7
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
1997 1996
---- ----
Accounts payable - trade $ 394,264 $ 282,123
Deferred warranty revenue 204,260 247,368
Accrued payroll 76,997 87,417
Other accrued expenses 94,925 238,887
----------- -----------
$ 770,446 $ 855,795
NOTE 8
LONG TERM DEBT
Long-term debt consisted 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 was collateralized by substantially all assets of the Company. The loan was
fully paid on March 31, 1997.
1997 1996
---- ----
$ -- $ 100,000
Less current maturities -- 100,000
--------- -----------
Long-term debt, net of current
maturities $ -- $ --
========= ===========
The bank's base interest rate at November 30, 1997 was 8.5%.
During 1997 and 1996, the maximum month-end amounts outstanding under this
note payable were $100,000 and $400,000, respectively. Average daily amounts
outstanding during 1997 and 1996 were approximately $62,500 and $262,500,
respectively, with weighted average interest rates of 9.25% and 9.3%,
respectively.
The term loan agreement contained certain debt covenant restrictions
concerning net worth and current ratio.
NOTE 9
CAPITAL LEASE OBLIGATIONS
The Company has entered into various capital leases for equipment expiring
through November 2001 with aggregate monthly payments of $5,263.
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, 1997:
For the Years Ending
November 30,
1998 $ 49,976
1999 39,766
2000 26,956
2001 21,803
2002 3,734
------------
Total minimum lease payments 142,235
Less amount representing interest (29,176)
------------
Present value of net minimum lease
payments 113,059
Less current maturities (35,537)
------------
Long-term maturities $ 77,522
============
NOTE 10
STOCK OPTIONS AND WARRANTS
The qmed, Inc. 1997 Equity Incentive Plan provides for stock options, stock
appreciation rights, restricted stock or deferred stock awards for up to 600,000
shares of the Company's common stock to be granted to employees of the Company
until May 2007. The plan also provides for Director stock options to be granted
to Directors of the Company (other than directors who are also officers or
employees of the Company). 600,000 shares of the Company's common stock are
reserved for this plan.
Annual Report 1997 - Page 19
<PAGE>
NOTE 10
STOCK OPTIONS AND WARRANTS - (CONTINUED)
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.
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.
Under the 1986, 1990 and 1997 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. Options granted under
all plans 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.
Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its employee stock options under
the fair value method. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1997: risk-free interest rate of 6.77%; divided
yields of 0%; volatility factor of the expected market price of the Company's
common stock of 65%; and a weighted-average expected life of the option of 5.5
years. There were no options issued during the year ended November 30, 1996.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
1997 1996
Pro forma net loss $ (2,895,256) $ --
Pro forma earnings per share
Primary (.30) --
Fully diluted (.30) --
There was no compensation expense recorded from stock options for the years
ended November 30, 1997 and 1996.
Annual Report 1997 - Page 20
<PAGE>
NOTE 10
STOCK OPTIONS AND WARRANTS - (CONTINUED)
A summary of the Company's stock option activity, and related information
for the years ended November 30, follows:
<TABLE>
<CAPTION>
Weighted-Average Number of Shares Weighted-Average
Options Exercise Price Exercisable Exercise Price
------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Outstanding
November 30, 1994 1,148,558 $ 1.28
Granted 253,450 3.99
Exercised (85,133) 1.05
Terminated (47,867) 1.52
----------
Outstanding
November 30, 1995 1,269,008 1.81 1,038,328 1.48
Granted - -
Exercised (280,805) 1.48
Terminated (18,224) 2.58
----------
Outstanding
November 30, 1996 969,979 1.91 854,541 1.58
Granted 78,250 6.56
Exercised (164,363) 1.17
Terminated (15,936) 5.20
----------
Outstanding
November 30, 1997 867,930 $ 2.45 788,226 1.97
Weighted-average fair
value of options granted
during the year 1997
----
Where exercise price
equals stock price $ -
Where exercise price
exceeds stock price $ 4.16
Where stock price
exceeds exercise price $ -
</TABLE>
Following is a summary of the status of stock options outstanding at
November 30, 1997:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
- ----------------------------------------------------------------------- ------------------------------
Weighted
Average Weighted Weighted
Exercise Price Remaining Average Exercise Average Exercise
Range Number Contractual Life Price Number Price
<S> <C> <C> <C> <C> <C>
$ .75 - .75 192,324 3.2 $ .75 192,324 $.75
$1.38 - 1.75 414,573 5.6 $1.56 412,906 $1.56
$2.75 - 2.75 110,000 7.6 $2.75 110,000 $2.75
$6.25 - 6.50 148,533 8.6 $6.37 70,496 $6.32
$8.38 - 8.38 2,500 9.4 $8.38 2,500 $8.38
- ------------ ------- --- ----- ------- -----
$.75 - 8.38 867,930 5.8 $2.37 788,226 $1.97
</TABLE>
Annual Report 1997 - Page 21
<PAGE>
NOTE 10
STOCK OPTIONS AND WARRANTS - (CONTINUED)
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 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.
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 ending April 16, 1999.
NOTE 11
INCOME TAXES
Deferred tax attributes resulting from differences between financial
accounting amounts and tax basis of assets and liabilities at November 30, 1997
and 1996 follow:
1997 1996
---- ----
Current assets and liabilities
Allowance for doubtful accounts $ 17,600 $ 16,000
Inventory overhead capitalization 41,000 45,900
Deferred Warranties 59,000 70,100
----------- ----------
117,600 132,000
Valuation allowance 117,600 132,000
----------- ----------
Net current deferred tax asset (liability) $ -- $ --
=========== ==========
Noncurrent assets and liabilities
Depreciation $ 5,800 $ 12,100
General business credit 211,000 211,000
Net operating loss carryforward 3,960,000 3,710,100
----------- ----------
4,176,800 3,933,200
Valuation allowance 4,176,800 3,933,200
----------- ----------
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. The valuation
allowance increased $229,200 and $1,531,000 in 1997 and 1996, respectively.
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
1997 1996 1995
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 1997 - Page 22
<PAGE>
NOTE 11
INCOME TAXES - (CONTINUED)
As of November 30, 1997, 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 5,821,000
2012 3,399,000
-----------
$19,213,000
===========
As of November 30, 1997, 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 12
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 and 1995. During 1997 the
Company matched .25 for each dollar up to 6% of an employee's contribution on a
monthly basis which amounted to approximately $22,000.
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 for
the year ending November 1998 is $134,437.
Rent expense for the years ended November 30, 1997, 1996 and 1995, was
$173,890, $207,000 and $213,000, respectively.
Annual Report 1997 - Page 23
<PAGE>
NOTE 13
COMMITMENTS AND CONTINGENCIES - (CONTINUED)
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 CUSTOMER
The Company had one major customer during 1997. Major customers are
considered to be those who accounted for more than 10% of total sales. This
customer accounted for approximately 18% of total sales for the year ended
November 30, 1997.
MAJOR SUPPLIER
A material amount of the Company's finished goods inventory is acquired
from one supplier, the loss of which may have an adverse effect on the Company.
For the years ended November 30, 1997, 1996 and 1995, one supplier
accounted for $123,000, $257,000 and $222,428 of finished goods purchased,
respectively.
NOTE 14
BUSINESS SEGMENT INFORMATION
The Company's operations have been classified into two business segments:
medical equipment sales and disease management services.
Summarized financial information by business segment for 1997, 1996 and
1995 is as follows:
<TABLE>
<CAPTION>
Medical Disease
Equipment Management
Sales Services Consolidated
----- -------- ------------
<S> <C> <C> <C>
1997
- ----
Sales $ 1,817,069 $ 595,080 $ 2,412,149
Operating (loss) (797,372) (2,002,190) (2,799,562)
Total assets 2,107,431 343,102 2,450,533
Depreciation and amortization 181,516 86,222 267,738
Capital expenditures 334,037 49,803 383,840
1996
- ----
Sales $ 3,040,295 $ 276,364 $ 3,316,659
Operating (loss) (1,375,104) (1,562,526) (2,937,630)
Total assets 4,771,064 400,000 5,171,064
Depreciation and amortization 227,349 70,083 297,432
Capital expenditures 167,183 106,786 273,969
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 103,589 82,988 186,577
</TABLE>
Annual Report 1997 - Page 24
<PAGE>
NOTE 15
SUBSEQUENT EVENT
On December 18, 1997, the Company sold an aggregate $2,000,000 8%
Convertible Subordinated Notes due December 18, 2002 (the "Notes"), without
discount or premium, in a private placement to three investors. Interest on the
Notes is accrued monthly, compounded annually and will be due at maturity. The
Notes are convertible into shares of the Company's common stock at the rate of
$5.60 per share, provided that if the average closing price of the Company's
common stock for the 90 trading days following the closing exceeds $7.25, then
the conversion price will increase to $6.00.
The Company may redeem the Notes in the event the average closing price of
shares of the Company's common stock equals or exceeds $12.00 for a period of 90
days at the following times with the following premiums and may elect to pay the
redemption price in shares of Common Stock:
Year Redemption Price
---- ----------------
2003 105%
2004 104%
2005 103%
2006 102%
2007 100%
The Company is required to redeem the Notes at higher premiums in the event
of change of control.
In connection with the sale of the Notes, the Company granted certain
rights to the purchasers, including registration rights and the right to appoint
a member of the Company's board of directors. The Note Purchase Agreement
prohibits the Company from paying dividends until the Notes are paid.
Annual Report 1997 - Page 25
<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, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended November 30, 1997, 1996 and 1995. 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 present fairly in all
material respects the financial position of qmed, Inc. and Subsidiaries as of
November 30, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years ended November 30, 1997, 1996 and 1995 in
conformity with generally accepted accounting principles.
AMPER, POLITZINER & MATTIA P.A.
January 20, 1998
Edison, New Jersey
Annual Report 1997 - Page 26
<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, 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
FISCAL YEAR ENDED NOVEMBER 30, 1997 High Low
First Quarter $ 10 5/8 $ 8 1/2
Second Quarter 10 1/8 6 1/8
Third Quarter 8 6 1/4
Fourth Quarter 11 3/8 7
As of February 17, 1998, the Company's common stock was held of record by
approximately 450 persons. On February 17, 1998, the closing price reported was
$ 5 7/8.
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 1997 - Page 27
<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
Herbert H. Sommer
Secretary
Partner-Sommer & Schneider LLP
Officers
Michael W. Cox
President and Treasurer
Richard I. Levin, M.D.
Vice President,
Medical Director
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 Politziner & Mattia P.A.
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 1997 - Page 28
[TO COME]
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation of our report dated January 20, 1997 on the
financial statements of qmed, Inc. and Subsidiaries as of November 30, 1997,
1996 and 1995 and for the years ended November 30, 1997, 1996 and 1995, which is
included in the Annual Report on Form 10K of qmed, Inc. and Subsidiaries.
/s/ Amper, Politziner & Mattia P.A.
----------------------------------------
AMPER, POLITZINER & MATTIA P.A.
February 25, 1998
Edison, New Jersey
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> NOV-30-1997
<CASH> 640,266
<SECURITIES> 0
<RECEIVABLES> 477,901
<ALLOWANCES> 250,000
<INVENTORY> 667,255
<CURRENT-ASSETS> 1,573,861
<PP&E> 2,630,495
<DEPRECIATION> 2,005,734
<TOTAL-ASSETS> 2,450,533
<CURRENT-LIABILITIES> 770,446
<BONDS> 0
9,649
0
<COMMON> 0
<OTHER-SE> 1,552,869
<TOTAL-LIABILITY-AND-EQUITY> 2,450,533
<SALES> 2,412,149
<TOTAL-REVENUES> 2,510,363
<CGS> 891,930
<TOTAL-COSTS> 4,105,180
<OTHER-EXPENSES> 30,574
<LOSS-PROVISION> 214,601
<INTEREST-EXPENSE> 25,430
<INCOME-PRETAX> (2,757,352)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,757,352)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,757,352)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
