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, 1998
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: (732) 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 23, 1999, the aggregate value of the registrant's voting stock
held by non-affiliates was $24,597,051 (computed by multiplying the last
reported sale price on February 23, 1999 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, 1999, there were 11,568,989 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 III
Statement for its 1999 Annual
Meeting (to be filed in definitive
form within 120 days of the
Registrant's Fiscal Year End)
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PART I
ITEM 1. BUSINESS
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 health
maintenance organizations manage the cost of coronary artery disease ("CAD").
The Company also produces and sells high quality medical systems that provide
reliable diagnostic interpretation of certain disease states, including a line
of ambulatory ischemic heart monitors, an interpretative electrocardiographs, a
system for the analysis of heart rate variability and a system 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 and services 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.
Utilizing the experience obtained through various drug trials with such
pharmaceutical companies as Pfizer, Ciba Geigy, ICI and others and the extensive
validations completed on "Monitor One(R)" instruments, the Company developed a
comprehensive, disease management
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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, prevention of cardiac
events, the modification of risk-factors and the appropriate medicine. Early
detection and treatment with emphasis on medical intervention results in an
overall lowering of the cost of CAD care and the improvement in patient health
thereby reducing mortality and morbidity rates in populations having CAD.
In March 1998 the Company and SmithKline Beecham Health Care Services, a
division of SmithKline Beecham Corporation ("SmithKline Beecham") agreed to
terminate their Strategic Alliance to market the ohms|cad system which was
formed in April 1996. Under the terms of the termination agreement, the Company
retained all future revenue from contracts executed during the term of the
alliance and SmithKline Beecham waived its rights to reimbursement of any of its
costs. The termination permits the Company to pursue other relationships in its
efforts to develop and provide disease management products and services. S.R.
One Limited, SmithKline Beecham's venture capital affiliate retained a $2.0
million equity investment in the Company and continues to hold warrants to
acquire an additional 63,492 shares of the Company's Common Stock for $15.75 per
share.
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.
The Company's executive offices are located at 100 Metro Park South,
Laurence Harbor, New Jersey 08878 and its telephone number is (732) 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 primary and secondary
prevention analysis and treatment. Recommendations for management are relational
and tailored to an individual patient for ambulant ischemia, silent heart
disease, lipid and hypertension, 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 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 for the managed care organization. As a
result, the early implementation of ohms|cad should contribute to significant
savings and patient gains in market share.
The results of the utilization of ohms|cad to manage CAD patients 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.
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Ambulatory Ischemic Heart Disease Monitoring
While ambulatory monitoring for arrhythmias was first introduced in the
early 1960's and has been broadly used in medical practice as a diagnostic
monitoring system useful to detect rhythm and rate disturbances of the heart, no
company had developed a novel application using solid-state electronics and a
validated ischemia analysis program to evaluate the presence and duration of
ambulatory ischemic heart disease (Monitor One). Thus, the medical utility of
Monitor One allows the detection and analysis of reduced coronary artery blood
flow during a patient's daily routines (Ambulant Ischemic Heart Disease). Such
analysis can result in the early prevention of heart attack, unstable angina and
death. In addition, silent heart disease which is prevalent in coronary artery
disease patients and diabetics, may also be detected and evaluated by the
Monitor One technology. The basic design of Monitor One to accomplish this
special function, utilizes an on-board microprocessor and an extensively
clinically validated algorithm to analyze ischemic ECG signals and distinguish
between normal and abnormal heart beats as the patient is wearing the device
throughout their normal daily routines. Heightened recognition that ischemic
episodes are predominantly silent and prognosticate morbid cardiac events such
as heart attacks, sudden death and unstable angina prompted the Company to
develop the Monitor One technology.
The Company's Monitor One systems utilize technology which detects changes
in the ECG signal which may be associated with diseases of the heart. Monitor
One systems store analyzed ECG wave forms, statistical data, produce printed
reports and can transmit data either directly to a printer or over telephone
lines or to a personal computer for physician analysis, interpretation and
ischemic intervention. The Company's Monitor One, which may be worn on a belt or
carried in the patient's pocket, is capable of interpreting a wide variety of
ECG signals which may be associated with cardiac conditions. Monitor One
technology has been independently validated in controlled research studies for
the detection of ischemic episodes associated with coronary ST-segment
deviations in patients with diagnosed CAD.
Each Monitor One system is a computerized monitor with five high-fidelity
electrodes which are either disposable or reusable and attached to the monitor
through a single connector. The reusable electrodes were originally developed by
the National Aeronautics and Space Administration ("NASA"). Monitoring for
periods of greater than 24 hours is possible due to solid-state memory and the
design of the reusable electrodes, which allows high-fidelity signal capture
without the need for daily replacement of disposable electrodes. The United
States Patent Office abstract (No. 3,420,223) for the reusable electrode system
reports that the electrodes can be used continuously for 28 days without
appreciable deterioration of the electrodes or irritation of the wearer. In
practice, the reusable electrode system (which includes a plastic casing and
attached wiring) is subjected to physical abuse in its application and removal
from the patients' chests following a 24 hour monitoring session. Based upon the
Company's experience to date, it appears that the reusable electrode system has
an average life of six months. The Company offers extended one, two and
three-year warranties, at an additional cost to the purchaser, which includes
the cost of one set of replacement reusable electrodes for each year. The
monitor retains all information stored in a non-volatile memory driven by a
lithium battery during battery pack replacement or if the monitor is turned off
for a minimum of one year. In addition, the monitors
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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
The Company directly markets its ohms|cad service to health maintenance
organizations, large physician practice groups and similar managed care
organizations through its sales staff. At present, the Company's sales team
consists primarily of senior management supported by 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
distributors.
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
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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 13.5% and 15.7% of
net sales for fiscal 1998 and 1997, 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 1998
and 1997, the Company replaced approximately two monitors per year 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 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, equipment 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.
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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 1998 and 1997 one customer accounted for 14% and 18% of net
sales respectively. During fiscal 1996, 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
ohms|cad is a unique solution for CAD management. However, there are
several CAD management companies, including pharmaceutical companies, pharmacy
benefit managers and independent vendors that are pursuing CAD management that
could be considered competition.
To the Company's knowledge, none of these companies deal with CAD
comprehensively. Most have designed their programs to respond to a cardiac
event, essentially waiting for a patient to have a heart attack or procedure and
follow with post-hospitalization case management. In addition, manufacturers of
drugs that reduce cholesterol have designed programs based on high blood lipids
and have developed protocols to emphasize the use of their
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drug(s). To the Company's knowledge, ohms|cad is the only operating disease
management system that includes primary and secondary prevention; risk
stratifies the patients into those who are and who are not in danger of adverse
events in the near term and reduces practice variation and referrals. No other
CAD management program has shown comparable results with beneficial patient
outcomes that lowered overall CAD healthcare costs.
The Company believes it has competitive advantages based on the following:
o The entire management system and its components are proprietary and
patented: STRx is covered by U.S. Pat. #4679144 and ohms|cad by U.S.
Pat. #5724580.
o Clinically validated digital ischemia technology.
o Documented outcomes presented at American Heart Association Scientific
Sessions.
o Extensive and growing database of how specific therapeutic modalities
affect patients.
o 1,000 patient-per-day system throughput capability.
o Proven success in implementing a CAD disease management system in the
field that leads to a faster rollout and faster health and economic
outcomes to the plan.
o Proprietary analytics to define the target population at risk.
o Established infrastructure with integrated resources and processes
amplified by corporate expertise.
Competition may increase and such competition could come from companies
that are considerably larger and have greater financial and marketing resources
than the Company.
Monitor One ischemia products compete primarily with ambulatory arrhythmia
ECG scanning services, of which there are more than 75 in the United States, and
other ambulatory ECG monitoring equipment manufacturers. The Company is aware of
more than 20 ambulatory ECG monitoring equipment manufacturers of which five
manufacture digital systems. Certain large medical equipment companies such as
Hewlett Packard and Marquette Electronics have introduced electronic ambulatory
monitors which compete directly with those of the Company. These companies have
substantially greater marketing, financial and other resources than those of the
Company but management believes that the Company's products' price and
performance are competitive in this field.
The Company believes that Monitor One ischemia monitoring products offer
certain advantages over traditional ambulatory arrthymia ECG recording monitors
and scanning services. Monitor One products can provide continuous analysis and
quantification of ambulant
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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 1998, 1997, and 1996, the Company expended $486,843, $551,681 and
$454,268 respectively, for research and 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 10% to 12% of anticipated revenue for
such research and development in fiscal 1999.
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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.
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
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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, 1999, had 30 full time employees. Of these
full time employees, 3 were executives, 2 were engaged in sales supervisory
capacities, 3 in sales and marketing, 5 in engineering, 3 in production, 10 in
technical support and 4 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 30 of the Registrant's 1998 Annual Report to Stockholders is
incorporated herein by reference.
On November 16, 1998, the Company sold an aggregate of 1,926,702 shares
(the "Shares") of its common stock $.001 par value ("Common Stock") for
$3,217,626, in a private placement to investors led by Galen Partners III, L.P.
The Company received gross cash proceeds of $2,020,936 from the sale of Shares
and the balance was paid by Galen Partners III, L.P. and two affiliated funds
(the "Galen Funds") by converting $1,050,000 of $2,000,000 principal amount of
8% Convertible Notes due December 18, 2002 (the "Notes") and accrued interest of
$146,663 into shares of Common Stock. The remaining $950,000 principal amount of
the Notes were amended to increase the interest rate to 16% per annum, and to
grant the Galen Fund a security interest in substantially all of the Company's
assets. In addition, in order to induce the Funds to convert a portion of the
Notes and invest an additional $1,000,000 in cash, the Company issued the Galen
Funds, pro rata, an aggregate of 500,000 seven year warrants (the "Warrants") to
purchase additional shares of Common Stock. The exercise price of the Warrants
and the conversion price of the remaining Notes will be fixed at a price equal
to the average closing price for the ten trading days ending December 1, 1998
(the "Initial Price"). Interest on the Notes is capitalized annually and will be
due at maturity. The Company may redeem the Notes for cash or Common Stock:
(i) in the event the average closing price of shares of the Company's
Common Stock equals or exceeds twice the Initial Price for a period of
twenty consecutive trading days at the following times with the
following premiums:
Year Redemption Price
---- ----------------
1998 105%
1999 104%
2000 103%
2001 102%
2002 100%; or
14
<PAGE>
(ii) at the following times without condition for the following premiums:
Year Redemption Price
---- ----------------
1998 112.1%
1999 125.6%
2000 140.8%
2001 157.7%
2002 176.8%
The Company is required to redeem the Notes at higher premiums in the event of a
change of control. The Note Agreement prohibits the Company from paying
dividends until the Notes are paid.
In connection with the sale of the Shares, the Company granted certain
rights to the purchasers, including registration rights and the right to cause
the Company to purchase the Shares at the following prices in certain events,
such as bankruptcy, a default in payments or if the Company is no longer listed
on the NASDAQ Small Cap Market at the following prices:
Year Redemption Price
---- ----------------
1998 $2.0875
1999 $2.0040
2000 $1.9205
2001 $1.8370
2002 and thereafter $1.6700
In connection with the sale of the shares and amendment 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 7 of the Registrant's 1998 Annual
Report to Stockholders is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's discussion and analysis of financial condition and results of
operations as set forth on pages 8 to 13 of the Registrant's 1998 Annual Report
to Stockholders is incorporated herein by reference.
15
<PAGE>
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 14 to 28
of the Registrant's 1998 Annual Report to Stockholders is incorporated herein by
reference.
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
16
<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, 1998 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, 1998 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, 1998 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, 1998 and is incorporated herein by
reference.
17
<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, 1998 and 1997
Consolidated Statement of Operations for each of the three years ended
November 30, 1998, 1997 and 1996
Consolidated Statement of Stockholder's Equity for each of the three years
ended November 30, 1998, 1997 and 1996
Consolidated Statement of Cash Flow for each of the three years ended
November 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedules have been omitted because they are not applicable.
(b) Reports on Form 8-K.
Report dated November 16, 1998
(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:
18
<PAGE>
<TABLE>
<CAPTION>
Official Sequential
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
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
Exhibit 3.5 to the Company's Form 10-K Report
dated November 30, 1997) I/B/R
4.1 Specimen of Stock Certificate (Exhibit 4.1 to the
Company's Report on Form 10-K dated November 30,
1989) I/B/R
4.2 Warrant to Purchase Common Stock dated May 6, 1996
i/n/o S.R. One Limited (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
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C>
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
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
4.6 Form of 16% Convertible Subordinated Note (Exhibit
99.2 to the Company's report on Form 8-K dated
November 16, 1998) I/B/R
4.7 Form of Warrant Agreement dated November 16, 1998
(Exhibit 99.6 to the Company's report on Form 8-K
dated November 16, 1998) I/B/R
9.1 Form of Shareholder and Voting Rights Agreement
between the Company and several stockholders dated
as of November 16, 1998 (Exhibit 99.4 to the Company's
report on Form 8-K dated November 16, 1998) I/B/R
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 Lease dated August 31, 1993 between the Company
and Alexandria Atrium Associates (Exhibit 28.1 to
the Company's Form 10-QSB Report dated August 31,
1993) I/B/R
10.3** 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
10.4 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
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C>
10.5 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
10.6 Q-Med, Inc. 1997 Equity Incentive Plan (Exhibit 10.11
to the Company's Form 10-K Report dated November
30, 1998) I/B/R
10.7 Amendment dated as of November 15, 1998 to 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 99.1 to the Company's report on Form 8-K
dated November 16, 1998) I/B/R
10.8 Form of Registration Rights Agreement between Q-Med, Inc.
and several stockholders dated as of November 15, 1998
(Exhibit 99.3 to the Company's report on Form 8-K dated
November 16, 1998) I/B/R
10.9 Form of Option Agreement between the Company and
several stockholders dated as of November 16, 1998
(Exhibit 99.5 to the Company's report on Form 8-K dated
November 15, 1998) I/B/R
10.10* Termination Agreement and Release dated March 6, 1998
between the Company and SmithKline Beecham
10.11* Amendment dated December 16, 1998 to Employment
Agreement between the Company and Michael W. Cox
11 None
13* Q-Med, Inc. 1998 Annual Report.
16 None.
18 None.
21* Subsidiaries of Registrant
22 None.
</TABLE>
21
<PAGE>
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.
22
<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 26, 1999 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:
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ Michael W. Cox President and Treasurer (Principal February 26, 1999
- --------------------------- Executive and Financial Officer)
Michael W. Cox
/s/ Richard I. Levin Director February 26, 1999
- ---------------------------
Richard I. Levin
/s/ Robert A. Burns Director February 26, 1999
- ---------------------------
Robert A. Burns
/s/ Howard L. Waltman Director February 26, 1999
- ---------------------------
Howard L. Waltman
/s/ Herbert H. Sommer Director February 26, 1999
- ---------------------------
Herbert H. Sommer
Director February 26, 1999
- ---------------------------
A. Bruce Campbell*
/s/ Debra A. Fenton Controller February 26, 1999
- ---------------------------
Debra A. Fenton
- ----------
*appointment effective after filing
</TABLE>
23
<PAGE>
EXHIBIT INDEX
Exhibit
No.
- -------
10.10 Termination Agreement and Release dated March 6, 1998
between the Company and SmithKline Beecham
10.11 Amendment dated December 16, 1998 to Employment
Agreement between the Company and Michael W. Cox
13 Q-Med, Inc. 1998 Annual Report
21 Subsidiaries of Registrant
23 Consent of Amper, Politziner & Mattia
27 Financial Data Schedule
- ----------
TERMINATION AGREEMENT AND RELEASE
THIS AGREEMENT (the "Agreement"), effective as of March 6, 1998, is entered
into by QMED, INC., A Delaware corporation and Interactive Health Management
Corporation collectively ("QMED") and SMITHKLINE BEECHAM HEALTHCARE SERVICES, a
division of SMITHKLINE BEECHAM CORPORATION, A Pennsylvania corporation ("SB").
Background
A. SB and QMED (the "Parties") entered into a Strategic Alliance Agreement
(the "Alliance Agreement"), effective as of April 1, 1996, whereby SB and QMED
formed a joint venture (the "Strategic Alliance") under which QMED would utilize
its proprietary On-Line Health Management System for Coronary Artery Disease
(the "Product") and SB would, among other things, market and sell the Product.
B. The Parties believe that it would be in their mutual best interests to
terminate the Alliance Agreement.
C. The Parties also desire to reach a mutually beneficial settlement for
the termination of the Alliance Agreement without the additional time and
expense required by a formal audit and accounting pursuant to the termination
provisions of the Alliance Agreement.
THEREFORE, intending to be legally bound, and for good and valuable
consideration, the adequacy of which is hereby confirmed, the Parties agree to
the following terms:
TERMS
1. Termination. SB and QMED agree that, except for the provisions expressly
reserved hereby, the Alliance Agreement, a copy of which is attached hereto as
Schedule A, and all provisions thereof, are hereby terminated.
2. (a) Expenses, Assignment of Certain Assets and Release. Each of QMED and
SB shall be solely responsible for all of their own expenses arising out of the
Strategic Alliance whether incurred with a third party or internally allocated
on either party's books and records as an expense. SB hereby transfers and
assigns all interest which it may have in future revenues arising from the
Alliance Agreement to QMED. SB further hereby transfers and assigns to QMED all
of its interests in the parties' contract with the San Jose Medical Group and
any interest it may have in the contract between Interactive Heart Management
Corporation and CIGNA HCO. (b) Each of QMED and SB hereby unconditionally
releases the other from any obligations and liabilities incurred during or after
the term of the Alliance Agreement arising from the Alliance Agreement, except
for those obligations and liabilities
<PAGE>
arising from any term of the Alliance Agreement that survives as specifically
set forth in this Agreement and any obligations specifically set forth herein.
3. Ratification of Certain Sections of Alliance Agreement. SB and QMED
hereby ratify and confirm Sections 4.4, 4.5, 14, 16.2, 16.4, 16.5, 17.3.3 and 19
of the Alliance Agreement and agree that only those provisions enumerated herein
(the "Surviving Terms"), shall continue to be in full force and effect after the
date hereof. Notwithstanding any language to the contrary in the Alliance
Agreement, SB shall have the right to (i) require QMED to prefund the insurance
provided by QMED under Section 19 of the Alliance Agreement or (ii) require QMED
to purchase tail coverage on behalf of SB if SB is not covered by existing QMED
insurance policies, such coverage to be within the limits specified in Section
19 of the Alliance Ageement.
4. Maintenance of and Access to Customer-Related Data. To the extent that
QMED has in its possession certain data, defined and described in Attachment 2
and in Section 4.4 of the Alliance Agreement as Customer Related Data, and which
was, or which is, in the future, obtained during and as part of the use of the
Product by San Jose Medical Group as described in the San Jose Medical Group
Customer Agreement (the "Data"), SB shall continue to have the rights set forth
in Section 4.4 and, in furtherance thereof, QMED shall transfer to SB and/or
give SB electronic or hard copy access to such data within 90 days' of the date
of a written request for such data made by SB (the "Request") made by the Vice
President of Research and Development, Healthcare Services; provided that, such
Requests for data shall not be made more frequently, or cover data for periods
of time greater than every six months; such Requests shall be detailed in
writing, reasonably sufficient for QMED to estimate the number of computer
programming personnel hours which will be required to complete the Request (the
"Estimate") which Estimate shall be promptly provided to SB, in writing, not
later than 30 days following the date of the Request. In the event the actual
number of programming hours to complete such Request as detailed in the Estimate
exceed 20 programmer hours, then SB shall reimburse QMED for each hour over 20
hours at the rate of $200 per hour. Such reimbursement, it any, shall be
invoiced to SB upon delivery of the data detailed in the Request and shall be
paid by SB within 30 days of receipt of the data in the Request.
5. Amendment of Customer Contracts. Pursuant to Paragraph 2 hereof, SB has
assigned its rights in contracts with Customers to QMED. QMED hereby agrees to
release SB from such Customer contracts and shall make diligent efforts to
notify each third party of the release and obtain amendments to each contract
indicating that SB is no longer a party thereto, and that SB has no further
obligations or liabilities thereon.
6. Non-Infringement. The Parties acknowledge that each of them made
available to the Strategic Alliance or to the Customer Contracts (as defined in
the Alliance Agreement) certain proprietary information, patents, trade secrets,
know-how, systems, technologies, and methods of operations ("Proprietary
Property"). Each party agrees that neither has acquired any right in the other
party's Proprietary Property during the term of the Alliance Agreement, and
neither may utilize the other's Proprietary Property without permission of the
other.
-2-
<PAGE>
7. Future Communications. QMED and SB each agree to take no action or make
any public statements which would, directly or indirectly, adversely affect the
business reputation or goodwill of the other (or their affiliates), except as
required by law. Neither QMED nor SB will make negative public comments about
the other and the parties further agree that they will restrict their comments
and public statements regarding this Termination Agreement and related
agreements to the statement set forth in Schedule B which will be the sole media
communications, oral or written, made by either party to explain the
circumstances giving rise to this Termination Agreement.
8. Remedies. Without limiting either party's remedies at law or in equity
for a breach of any Section of this Agreement, the Parties acknowledge that
money damages could be incalculable and an insufficient and an inadequate remedy
for any breach of the obligations of confidentiality under Section 3 (and
Section 16.2 and 16.4 and 16.5 of the Alliance Agreement incorporated therein by
reference) and Section 7 of this Agreement, and that any breach of either
Section would cause irreparable harm. In the event of any breach or threatened
breach of these Sections, in addition to any other remedies which may be
available to the parties at law or in equity, the Parties hereby agree that,
without the requirement of posting a bond or other security, equitable relief,
including preliminary and permanent injunctions and specific performance, is
appropriate and may be sought by the injured party and shall not be opposed. No
failure or delay by either of the Parties in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege hereunder. In addition, the
parties agree that damages for QMED's failure to comply with any request under
Paragraph 4 hereof could be incalculable or difficult to determine and,
therefore, the parties agree that SB shall be entitled to liquidated damages in
the amount of $15,000 for each failure to comply with delivery and/or access to
data set forth in paragraph 4.
9. Entire Agreement. This Agreement and the provisions of the Alliance
Agreement expressly reserved hereby represent the entire agreement (the "Entire
Agreement") between the Parties with respect to the subject matter hereof and
the Entire Agreement supersedes the Alliance Agreement and any prior agreements
or understandings between the Parties relating to the subject matter hereof.
10. Governing Law. This Agreement shall be governed by the laws of the
Commonwealth of Pennsylvania.
-3-
<PAGE>
IN WITNESS WHEREOF, SB and QMED have caused this Termination Agreement and
Release to be executed as of the date first above written.
SMITHKLINE BEECHAM HEALTHCARE SERVICES.
a division of SmithKline Beecham Corporation
By: /s/ DANIEL TASSE
------------------------------------------
Name: Daniel Tasse
Title: V.P. Director, Marketing
QMED, INC.
INTERACTIVE HEALTH MANAGEMENT
CORPORATION
By: /s/ MICHAEL W. COX
------------------------------------------
Name: Michael W. Cox
Title: President
AMENDMENT TO EMPLOYMENT AGREEMENT
AMENDMENT dated as of December 16, 1998 to the Employment Agreement dated
June ___, 1995 (the "Original Agreement") between Q-Med, Inc., a Delaware
corporation (the "Company") and Michael W. Cox ("Employee").
WHEREAS, the Original Agreement expires on June 30, 2000; and
WHEREAS, the Company's Board of Directors deems it in the best interests of
the Company to assure that the services of the Employee are available to it for
a period of time beyond the initial term of the Original Agreement.
NOW THEREFORE, in consideration of the agreements set forth in the
Amendment (defined below) and those contained in the Original Agreement, the
parties agree as follows:
A. CERTAIN DEFINITIONS.
(a) Except as otherwise provided in this agreement, all words and terms
defined in the Original Agreement, have the same meanings in this agreement as
such defined words and terms are given in the Original Agreement.
(b) "Agreement" means the Original Agreement dated June ___, 1995, as
supplemented and amended by this agreement and as from time to time further
supplemented and amended.
(c) "Amendment" means this agreement dated as of December 16, 1998.
B. EXTENSION OF TERM.
Section 3 of the Original Agreement is amended to read as follows:
"3. TERM OF EMPLOYMENT.
Unless earlier terminated pursuant to Section 8 hereof, the term of
employment under this Agreement shall be for a period commencing July 1,
1998 (the "Effective Date") and ending November 30, 2000 (the "Expiration
Date"). This Agreement shall be automatically renewed for successive two
(2) year periods, unless either party shall notify the other in writing of
its intention not to renew this Agreement, which notice shall be given at
least 120 days prior to the end of the then current term. The period from
the Commencement Date to the Expiration Date, including the Renewal Term,
if any, is referred to herein as the "Term."
1
<PAGE>
C. ADJUSTMENT OF COMPENSATION.
Section 5 of the original Agreement is amended to read as follows:
"5. COMPENSATION.
5.1 Salary.
(a) Company shall pay Employee a base salary ("Base Salary") of
$140,000 per year during the Term.
(b) The Employee's Base Salary shall be increased to the
following annual rates in the event the Company has contracts with
managed care organizations relating to the management of the specified
number of lives utilizing the Company's disease management system:
Annual Rate
Number of Lives of Base Salary
--------------- --------------
400,000 $180,000
500,000 $200,000
640,000 $250,000
Such rate shall take effect in the first regular pay period of the
month following the month in which revenue is received from the
managed care organization for the requisite number of lives. The last
increase shall not take effect until the month following the month in
which the Company has positive cash flow.
(c) Once increased, such increased amount shall constitute the
Employee's Base Salary and shall not be reduced. Base Salary shall be
payable in accordance with the ordinary payroll practices of the
Company.
5.2 Contingent Compensation.
(a) In addition to Base Salary, beginning with the Company's
fiscal year ending November 30, 1999, the Company shall pay Employee
contingent compensation as follows:
(i) $50,000 if the Company's Adjusted Net Earnings (defined
below) equals or exceeds $1.0 million; plus
2
<PAGE>
(ii) 3% of the Company's Adjusted Net Earnings in excess of
$1.0 million to a maximum aggregate bonus equal to
twice the Employees rate of annual Base Salary during
the last month of the relevant fiscal year.
(b) In order to be eligible for the contingent compensation set
forth in paragraph 5.2 (a) above for any fiscal year, Employee must be
employed by the Company throughout that entire fiscal year; provided,
however, that if Employee's employment terminates during a fiscal year
for any reason other than that set forth in Section 8.4 of the
Agreement, then the Employee (or his estate) shall be eligible for a
pro-rated amount of such contingent compensation.
(c) The adjusted consolidated net earnings ("Adjusted Net
Earnings") of the Company and its subsidiaries, for the purpose of
computing the Employees' contingent compensation under the provisions
of paragraph 5.2(a) above, shall be determined, in accordance with
generally accepted accounting principles, within ninety (90) days
after the end of each fiscal year by the independent accounting firm
employed by the Company as its auditors. The computation by such
accounting firm of the Net Earnings and of the Employees contingent
compensation, made in the manner herein provided, shall be in all
respects final and binding upon the Company, upon the Employee, and
upon all others, and the Company shall pay such compensation to the
Employee within 120 days of the end of the fiscal year in question.
For the purpose of computing the Employee contingent
compensation, the Adjusted Net Earnings of the Company and its
subsidiaries for the above mentioned period shall be the consolidated
net earnings of the Company and its subsidiaries for such period, as
audited and reported upon, for the purposes of the Company's annual
report to stockholders for such period, by the Company's independent
auditors, plus all amounts charged against such consolidated net
earnings in respect of the following:
(i) Taxes of the United States and foreign governments
(including, but without limitation, excess profits
taxes) based upon or measured, in whole or in part, by
income of the Company or its subsidiaries but exclusive
of sate and territorial taxes and taxes imposed by
political subdivisions thereof;
(ii) Contingent compensation, if any, which may be payable
by the Company under any plan or agreement, including
this Agreement, other than a profit-sharing plan
qualified under
3
<PAGE>
Section 401 of the Internal Revenue Code or any
statutory provision that may hereafter be enacted to
replace such section;
(iii) All items of non-recurring loss or other extraordinary
charge which, by reason of size, character, or other
factors did not, in the sole and uncontrolled judgment
of the Board of Directors, arise in the ordinary and
usual course of the business of the Company and its
subsidiaries, including expenses properly attributable
to such loss or charge;
less, however, all amounts included in such consolidated net earnings
in respect of items of capital gain, non-recurring profit, or other
extraordinary credit which, by reason of size, character, or other
factors did not, in the sole and uncontrolled judgment of the Board of
Directors, arise in the ordinary and usual course of business of the
Company and its subsidiaries, after deducting expenses properly
attributable to such gain, profit, or credit, except and to the extent
that the Board of Directors, in its sole and uncontrolled judgment,
shall find that the Employee was responsible for such gain, profit, or
credit and shall direct the inclusion, in whole or in part, of such
gain, profit, or credit in the computation of consolidated net
earnings.
5.3 Stock Options.
The Company will grant Employee an aggregate of 240,000 stock
options from its 1997 Equity Incentive Plan (the "Plan"). Such options
shall be "incentive stock options" to the extent permissible under
rules and regulations of the Internal Revenue Service or Non-Qualified
Option and shall vest 50% upon the signing of this Amendment; 25% upon
the first anniversary of the grant of the option and 25% upon the
second anniversary of the grant of the option, provided the Employee's
employment has not been terminated under Section 8.4 of this Agreement
prior to the date of such vesting."
D. EFFECT OF ORIGINAL AGREEMENT.
Except as supplemented and amended by this Amendment and such conforming
changes as necessary to reflect the modification herein, all of the provisions
of the Original Agreement shall remain in full force and effect from and after
the effective date of this Amendment.
[SIGNATURE PAGE FOLLOWS]
4
<PAGE>
This Amendment has been duly authorized and approved by all required
corporate action by the Company and does not violate the certificate of
incorporation or by-laws of the Company.
Q-MED, INC.
[CORPORATE SEAL]
By: /s/ Richard I. Levin
------------------------------
Richard I. Levin, Vice President
ATTEST:
/s/ Herbert H. Sommer
- ----------------------------------
Herbert H. Sommer
Secretary
EMPLOYEE:
/s/ Michael W. Cox
------------------------------
Michael W. Cox
Annual Report 1998 - Page 1
5
The ohms/cad(R) Process
[ART]
GRAPHICAL REPRESENTATION OF THE ohms/cad(R) PROCESS
24 hr. Ischemia Evaluation
[ART]
o Stratifies patients into low/high risk prognostic groups for coronary
events
o Best predictor of adverse outcome in stable CAD, post MI, PTCA and CABG
patients
Annual Report 1998 - Page 1
<PAGE>
President's Message
================================================================================
Dear Fellow Shareholder:
The end of Fiscal Year 1998 found our Company on the brink of major positive
developments, despite real carnage everywhere evident in the healthcare services
industry. There is no doubt that the industry problems which devastated
physician practice management firms (PPMs) like Medpartners, FPA Medical and
Phycor, also impacted the time horizon of our efforts, forcing us to rethink at
least the PPM market. But the good news is that those problems appear to have
had the collateral effect of making our ohms|cad(R) service both more visible
and necessary to some of the largest HMO and other payor organizations in
American healthcare.
During the year we presented data on the patient health improvements and
economic benefits derived from ohms|cad to three significant healthcare
conferences. The data are remarkable. For example, when comparing the health of
those patients whose doctors actually embraced the ohms|cad treatment guidelines
with the health of those patients whose doctors did not, we find that the former
group had very positive outcomes while the latter were their near mirror image
in negative outcomes.
Outcomes I*
Ischemia and Risk Factor Change
(by physician compliance within study group)
[THE FOLLOWING TABLES WERE REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
ISCHEMIA
Patients Improved Patients Worsened
----------------- -----------------
Compliant (90%) 97% 3%
Non-Compliant (10%) 16% 84%
BLOOD PRESSURE
Patients Improved Patients Worsened
----------------- -----------------
Compliant (70%) 72% 28%
Non-Compliant (30%) 27% 73%
CHOLESTEROL
Patients Improved Patients Worsened
----------------- -----------------
Compliant (50%) 75% 25%
Non-Compliant (50%) 12% 88%
As a result of physician compliance with ohms|cad guidelines, the numbers of
adverse coronary events and invasive medical procedures were substantially
reduced.
Outcomes II
Events and Procedures
for Patients in ohms Group
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Reduction in
Events and
Procedures
----------
Catheterization -59%
Angioplasty -63%
Heart Attack -83%
Hospital Admissions -81%
*All outcomes from Bakersfield, California study of 1,546 patients - 18 months
data and observations.
Annual Report 1998 - Page 2
<PAGE>
Combining these outcomes, it is clear that the economic benefit is not dependent
on depriving care to patients, but results from refocusing aggressive
best-practice care to prevention and management, and thereby away from the
traditional model of damage control. These kinds of data are incomplete,
however, until we survey patients' satisfaction not only with their improved
health but also with the process.
Outcomes III
Patient Life Measures
Post-Intervention
Quality of Life Measures Satisfaction
------------------------ ------------
|X| Program's ability to help you understand
CAD better 92%
|X| Program's ability to improve your energy
level and/or ability to do other physical activities 81%
|X| Knowledge and helpfulness of the nurse who
worked with you 94%
|X| Overall quality of the care and services
provided to you 94%
When these data are combined with the economics of heart disease as
traditionally practiced, the implication is that ohms|cad is not just a good
thing but also a good bet to be a big business. The expenditure for heart
disease is already above $100 billion annually and it is growing. And with baby
boomers nearing Medicare entry, the economics of this most expensive disease are
likely to become a serious national problem if not dealt with. At qmed we deal
with it.
In 1998, your Company signed its first regional agreement with Cigna of Ohio, an
operating unit of Cigna HealthCare, one of the largest healthcare insurers in
the country. Our expectation that it was but the first agreement with Cigna was
verified by an extension of coverage to some Medicare patients in Ohio, and by
completion of an agreement to enroll patients in Cigna of Florida, Tampa Bay
region. Both these occurred in the first quarter of 1999. We look forward to a
growing and mutually beneficial relationship with all of Cigna. In addition,
some of our extended negotiations with other insurers that began in 1998 should
also result in new business in 1999.
In 1998, we announced an alliance with Life Masters, Inc., which will enable us
to offer management of congestive heart failure (CHF) patients for the nearly
completed heart disease management coverage many of our potential customers
desire. Life Masters, a private company which has contracts with some managed
care firms we have targeted, counts Intel as one of its significant
shareholders.
As of September 1998, all devices sold by qmed are Year 2000 compliant.
Customers' devices under warranty will be upgraded and those not under warranty
will be notified of purchase availability. ohms|cad was designed to be Year 2000
compliant and all of our internal operations systems are on schedule for
compliance. In addition, our Vendor Audit Plan has incorporated this issue.
In November 1998, we completed a second round of financing led by Galen Partners
III, LP. This $3.2 million will permit us to expand our marketing,
implementation and product improvement activities.
While A. Bruce Campbell, Ph.D., M.D., agreed to join our Board of Directors in
February 1999, I would nevertheless like to take this opportunity to again
welcome him. His background includes former President, Monsanto Health
Solutions, former Senior VP of Aetna US Healthcare and former chief medical
officer of Aetna Health Plans.
We believe that qmed is at the brink of success. That is why our dedicated
employees have persevered through the difficult industry environment of the past
eighteen months. We appreciate their tenacity as we appreciate the hopes and
patience of our shareholders. Thank you.
Very truly yours,
Michael W. Cox
President
Annual Report 1998 - Page 3
<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 in 1995, 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.
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.
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.
Annual Report 1998 - Page 4
<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 lifestyle, 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 1998 - Page 5
<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 1998 - Page 6
<PAGE>
Selected Financial Data
The selected financial data presented below as of November 30, 1998 and
1997 and for each of the three years in the three year period ended November 30,
1998 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, 1996, 1995 and 1994 and the years ended November 30,
1995 and 1994 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:
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Results of Operations
Net Sales $ 2,046,627 $ 2,412,149 $ 3,316,659 $ 5,648,754 $ 8,369,461
Cost of sales 1,099,515 1,406,480 1,531,851 1,579,196 2,027,090
----------- ----------- ----------- ----------- -----------
Gross profit 947,112 1,005,669 1,784,808 4,069,558 6,342,371
Selling, general and administrative
expenses 2,623,984 3,038,949 3,910,436 5,164,478 5,806,320
Provisions for uncollectible accounts 289,716 214,601 16,051 25,347 106,826
Research and development expenses 486,843 551,681 454,268 382,244 337,277
Impairment charge -- -- 341,683 -- --
----------- ----------- ----------- ----------- -----------
(Loss) earnings from operations (2,453,431) (2,799,562) (2,937,630) (1,502,511) 91,948
Interest income 57,081 98,214 117,623 -- --
Interest expense (179,704) (25,430) (33,876) (68,142) (84,429)
(Loss) gain on sale of securities -- (30,574) 42,473 --
----------- ----------- ----------- ----------- -----------
(Loss) earnings before provision
for income taxes (2,576,054) (2,757,352) (2,811,410) (1,570,653) 7,519
Provision for income taxes -- -- -- -- --
----------- ----------- ----------- ----------- -----------
(Loss) earnings before minority interest (2,576,054) (2,757,352) (2,811,410) (1,570,653) 7,519
Minority interest in loss of subsidiary -- -- -- 16,000 17,000
----------- ----------- ----------- ----------- -----------
(Loss) earnings before extraordinary item (2,576,054) (2,757,352) (2,811,410) (1,554,653) 24,519
Extraordinary item-benefit from utilization
of net operating loss carryforwards -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net (loss) income $(2,576,054) $(2,757,352) $(2,811,410) $(1,554,653) $ 24,519
=========== =========== =========== =========== ===========
Per Share Data
(Loss) Income per common and
dilutive common equivalent shares $ (.26) $ (.29) $ (.30) $ (.19) $ .00
=========== =========== =========== =========== ===========
Balance Sheet Data (at end of periods)
Working Capital $ 2,392,161 $ 803,415 $ 3,481,104 $ 3,369,177 $ 1,826,909
Total Assets 3,757,424 2,450,533 5,171,064 6,014,620 4,399,104
Total Liabilities 1,638,425 888,015 1,072,585 1,777,393 2,002,865
Stockholders' equity (1,902,992) 1,562,518 4,098,479 4,237,227 2,380,239
Temporary equity, put 4,021,991 -- -- -- --
Stockholders equity (including
temporary equity) 2,118,999 1,562,518 4,098,479 4,237,227 2,380,239
</TABLE>
Annual Report 1998 - Page 7
<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, ------------------------------
------------------------------ 1998 1997 1996
vs. vs. vs.
1998 1997 1996 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0 100.0 100.0 (15.2) (27.3) (41.3)
Cost of sales 53.7 58.3 46.2 (21.8) (8.2) (3.0)
------ ------ -----
Gross profit 46.3 41.7 53.8 (5.8) (43.7) (56.1)
Selling, general and administrative expenses 128.2 126.0 117.9 (13.7) (22.3) (24.3)
Provisions for uncollectible accounts 14.2 8.9 .5 35.0 1237.0 (36.7)
Research and development expenses 23.8 22.8 13.7 (11.8) (21.4) 18.8
Impairment charge -- -- 10.3 * * *
------ ------ -----
(Loss) earnings from operations (119.9) (116.0) (88.6) (12.4) (4.7) 95.5
Interest Income 2.7 4.1 3.5 (41.9) (16.5) *
Interest expense (8.7) (1.1) (1.0) 606.7 (24.9) (50.3)
(Loss) gain on sale of securities -- (1.2) 1.3 * * *
------ ------ -----
(Loss) earnings before income taxes (125.9) (114.2) (84.8) (6.6) (1.9) 79.0
Income taxes -- -- -- * * *
------ ------ -----
(Loss) earnings before minority interest (125.9) (114.2) (84.8) (6.6) (1.9) 79.0
Minority interest in loss of subsidiary -- -- -- * * *
------ ------ -----
Net (loss) income (125.9) (114.2) (84.8) (6.6) (1.9) 80.8
====== ====== =====
</TABLE>
*Not meaningful
Fiscal 1998 Compared with Fiscal 1997
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Net sales for fiscal 1998 decreased 15.2% to $2,046,627 when compared to
net sales of $2,412,149 for fiscal 1997. This decrease is primarily due to the
continued transition of the Company's business from selling capital equipment to
selling its ohms|cad disease management services through its wholly owned
subsidiary, Interactive Heart Management Corp. As a result, sales of capital
equipment decreased approximately 28% to $1,300,630 in fiscal 1998 while sales
of disease management services increased 25% for the same period. The Company
continues to focus on selling its ohms|cad system to managed care companies. The
system has demonstrated "cost effective" outcomes while improving the health
status of the patient. The ohms|cad program which began in CIGNA of Ohio during
July 1998, was recently expanded to add their Medicare members. CIGNA HealthCare
of Florida has also recently entered into an agreement to use the ohms|cad
program beginning in April 1999.
Revenues received through IHMC 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
Annual Report 1998 - Page 8
<PAGE>
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 savings derived are distributed to the Company on a predetermined
basis by the contracting organization. From inception of the contract, the
Company receives a monthly pre-payment of a portion of the estimated savings.
Such pre-payments are recorded as revenue. Once the actual reduction of cost is
calculated, the pre-payments are subtracted and any additional savings
distribution owed to the Company is billed and recorded at that time.
The Company intends to aggressively continue marketing the ohms|cad system
to leading health care providers throughout the United States. Although the
Company has recently entered into several contractual arrangements, the
recognition of total savings revenue will lag behind administrative and
marketing costs for at least the first year of the contract period. Included in
the Company's net loss of $(2,576,054) was approximately $(2,081,000) from
Interactive Heart Management Corp.
The Company's gross profit margin increased from 41.7% in fiscal 1997 to
46.3% in fiscal 1998. The increase was primarily due to the continued reduction
of 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
$415,000 when compared to fiscal 1997, primarily due to management's continued
commitment to reduce overall administrative expenses to bring them in line with
expected revenues.
The provision for doubtful accounts increased by approximately $75,000 when
compared to fiscal 1997. This increase is primarily due to the reservation of
certain accounts receivable of Interactive Heart Management Corp. 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. Management is
aggressively seeking payment on these overdue amounts.
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
implementing its 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
deal with the problem as well. The Company has begun 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 $180,000, most of which has been expensed
as incurred during fiscal 1998. The Company estimates the cost of upgrading
internal software programs to be about $25,000 which will be incurred during
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 June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income". SFAS 130 establishes standards for the reporting and presentation of
comprehensive income, its components and accumulated balances. Comprehensive
income, as defined, includes all changes to equity except those resulting from
investments by or distributions to owners. Among other disclosures, SFAS 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statement. The Company will adopt SFAS 130 in the fiscal year ending
November 30, 1999. Adoption of this statement will have no impact on the
Company's financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS
Annual Report 1998 - Page 9
<PAGE>
131"), "Disclosures about Segments of an Enterprise and Related Information".
SFAS 131 establishes standards for the disclosure of certain information about
the operating segments of a business. It also requires the disclosure of
information about the products and services of the business, the geographic
areas in which it operates, and its major customers. The Company will adopt SFAS
131 in the fiscal year ending November 30, 1999. Adoption of this Statement will
have no impact on the Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 establishes accounting and
reporting standards for derivative as either assets or liabilities and measure
them at fair value. Under certain conditions, the gains or losses from
derivatives may be offset against those from the items the derivatives hedge
against. Otherwise, gains and losses from derivatives are recognized currently
in the results of operations. The Company will adopt SFAS 133 in the fiscal year
ending November 30, 2000. Adoption of this statement is not anticipated to have
a material effect on the Company's financial position or results of operations.
In management's opinion, SFAS Nos. 130, 131, and 133, when adopted, will
not have a material effect on the Company's financial statements.
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. The decrease was 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 IHMC. The decision
to place a decreasing emphasis on the sales of capital equipment was 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 resulted in adding San Jose Medical Group and CIGNA HealthCare of Ohio
to the managed care organizations utilizing ohms|cad during 1997.
The Company's gross profit margin decreased to 41.7% in fiscal 1997 from
53.8% in fiscal 1996. The decrease was primarily due to the decline in capital
equipment sales while certain fixed costs remained constant.
Selling, general and administrative expenses for fiscal 1997 decreased by
approximately $870,000 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.
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 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, which was
Annual Report 1998 - Page 10
<PAGE>
terminated by the parties in March 1998. SmithKline purchased $2,000,000 worth
of the Company's common stock and warrants 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 53.8%
during fiscal 1996. The decrease was directly related to the decrease in net
sales while certain fixed costs remained constant.
Selling, general and administrative expenses decreased by approximately
$1,250,000, 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 maintains 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.
Liquidity and Capital Resources
To date, the Company's principle sources of working capital have been
provided by proceeds from public and private placements of securities and the
sale of certain assets. Since the Company's inception, sales of securities and
assets have generated approximately $20,000,000 less applicable expenses.
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.
On December 18, 1997, the Company sold 8% Convertible Notes (the "Notes")
in the principal amount of $2,000,000 in a private placement to three investors.
Interest on the notes accrued monthly and was due on December 18, 2002. On
November 16, 1998, the Company sold an aggregate of 1,926,702 shares of its
common stock for $3,217,626 in a private placement to investors led by the same
three investors that purchased the Notes. The Company received gross cash
proceeds of $2,020,936 from the sale of shares and the balance was paid by
converting $1,050,000 of $2,000,000 principal amount of the Notes and accrued
interest of $146,663 into shares of common stock. The remaining $950,000
principal amount of the Notes were amended to increase the interest rate to 16%
per annum, and to grant to Noteholders a security interest in substantially all
of the Company's assets. Interest on the Notes is capitalized annually and will
be due at maturity. The Company may redeem the Notes for cash or common stock
for certain premiums and subject to conditions contained in the amended Note
Agreement. The Company is required to redeem the Notes at higher premiums in the
event of a change of control. The Note Agreement prohibits the Company from
paying dividends until the Notes are paid.
In connection with the sale of the shares, the Company granted certain
rights to the purchasers, including registration rights and the right to cause
the Company to purchase the shares at the following prices in certain events,
such as bankruptcy, a default in payments or if the Company is no longer listed
on the NASDAQ Small Cap Market at the following prices:
Year Redemption Price
---- ----------------
1998 $2.0875
1999 $2.0040
2000 $1.9205
2001 $1.8370
2002 and thereafter $1.6700
Annual Report 1998 - Page 11
<PAGE>
In the event the Company is required to redeem the shares for cash, which
management believes is not likely during fiscal 1999, the Company will have to
seek financing or sell assets to pay the redemption price. See Note 8 of Notes
to Consolidated Financial Statements.
The Company had working capital of $2,392,161 at November 30, 1998 compared
to $803,415 at November 30, 1997 and ratios of current assets to current
liabilities of 5.4:1 and 2.0:1 as of November 30, 1998 and 1997, respectively.
The working capital increase of approximately $1,600,000 was primarily due to
the Company's debt refinancing and sales of securities.
The Company has anticipated that funds generated from operations, together
with cash and investments, may be sufficient to meet its working capital
requirements for the current year. However, in the event revenues do not meet
management's expectations or there is an event which causes the Notes to be due
and requires the Company to repurchase the shares in the manner described above,
the Company will be required to seek additional financing. There can be no
assurance that such financing will be available to the Company.
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 11.4%
of the receivables balance at November 30, 1998 compared to 19.2% at November
30, 1997. The Company is aggressively seeking payment arrangements on these
overdue amounts.
The Company, with its IHMC subsidiary, enters into contract arrangements
with physician groups and managed care organizations where a prepayment toward
cost savings is made per month. The Company expects revenue to increase as it
recognizes cost savings from current contracts and additional revenues from new
contracts during fiscal 1999.
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, 1998, the Company had
approximately $2,075,000 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. 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 addition, significant additional financing would be
required in the event the Company is required to redeem the Notes and shares of
stock issued in a private placement in November 1998. In the event the Company
is unable to maintain access to its existing financing sources, or obtain other
sources of financing, there would be a material adverse effect on the Company's
business, financial position and results of operations.
Regulation The Company's products are subject to extensive government
regulation in the United States by federal, state and local agencies including
the Food and Drug Administration. The process of obtaining and maintaining FDA
and other required regulatory approvals for the Company's products is lengthy,
expensive and uncertain. There can be no assurance that changes in existing
regulations or the adoption of new regulations will not occur which will
adversely affect the Company.
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 significant risk
investors should consider.
Annual Report 1998 - Page 12
<PAGE>
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 1998 - Page 13
<PAGE>
CONSOLIDATED BALANCE SHEETS
November 30,
<TABLE>
<CAPTION>
ASSETS
1998 1997
------------ ------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 2,075,179 $ 640,266
Accounts receivable, net of allowance for doubtful accounts
and sales returns of $500,000 and $250,000, respectively 304,465 197,901
Inventory 503,994 667,255
Prepaid expenses and other current assets 57,776 68,439
------------ ------------
2,941,414 1,573,861
Property and equipment, net of accumulated depreciation 578,404 624,761
Product software development costs 34,856 60,998
Other assets 202,750 190,913
------------ ------------
$ 3,757,424 $ 2,450,533
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 549,253 $ 770,446
Convertible long-term debt 950,000 --
Leases payable, long-term 107,724 77,522
Deferred warranty revenue 31,448 40,047
------------ ------------
Total Liabilitites 1,638,425 888,015
============ ============
Temporary equity-put option 4,021,991 --
Stockholders' equity
Common stock $.001 par value; 20,000,000 shares
authorized; 11,586,321 and 9,648,519 shares issued
and 11,564,321 and 9,626,519 outstanding, respectively 11,587 9,649
Paid-in capital 17,150,547 18,041,941
Accumulated deficit (18,989,501) (16,413,447)
------------ ------------
(1,827,367) 1,638,143
Less: treasury stock at cost, 22,000 common shares (75,625) (75,625)
------------ ------------
Total stockholders' equity (1,902,992) 1,562,518
------------ ------------
$ 3,757,424 $ 2,450,533
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
Annual Report 1998 - Page 14
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended November 30,
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Sales $ 2,052,157 $ 2,452,084 $ 3,529,216
Less sales returns and allowances 5,530 39,935 212,557
----------- ----------- -----------
2,046,627 2,412,149 3,316,659
Cost of sales 1,099,515 1,406,480 1,531,851
----------- ----------- -----------
Gross profit 947,112 1,005,669 1,784,808
Selling, general, and administrative expenses 2,623,984 3,038,949 3,910,436
Provision for uncollectible accounts 289,716 214,601 16,051
Research and development expenses 486,843 551,681 454,268
Impairment charge -- -- 341,683
----------- ----------- -----------
Loss from operations (2,453,431) (2,799,562) (2,937,630)
Interest income 57,081 98,214 117,623
Interest expense (179,704) (25,430) (33,876)
(Loss) gain on sale of securities -- (30,574) 42,473
----------- ----------- -----------
Loss before provision for income taxes (2,576,054) (2,757,352) (2,811,410)
Provision for income taxes -- -- --
----------- ----------- -----------
Net loss $(2,576,054) $(2,757,352) $(2,811,410)
=========== =========== ===========
Net loss per share - basic and diluted $ (.26) $ (.29) $ (.30)
=========== =========== ===========
Weighted average common shares
Outstanding - basic and diluted 9,893,022 9,562,000 9,287,420
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
Annual Report 1998 - Page 15
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Years Ended November 30, 1998
<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, 1995 $ 8,950 $15,138,714 $(10,844,685) 22,000 $(75,625) $ 9,873 $ 4,237,227
Exercise of stock options 349 704,740 -- -- -- -- 705,089
and warrants
Issuance fees associated
with private placements -- (6,787) -- -- -- -- (6,787)
Issuance of common stock
through strategic alliance
agreement 178 1,999,813 -- -- -- -- 1,999,991
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 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
Issuance of common stock
and put options 1,927 (806,324) -- -- -- -- (804,397)
Issuance fees associated
with financing -- (100,424) -- -- -- -- (100,424)
Exercise of stock options 11 15,354 -- -- -- -- 15,365
Net loss -- -- (2,576,054) -- -- -- (2,576,054)
------- ----------- ------------ ------- -------- -------- -----------
Balances - November 30, 1998 $11,587 $17,150,547 $(18,989,501) 22,000 $(75,625) $ -- $(1,902,992)
======= =========== ============ ======= ======== ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements
Annual Report 1998 - Page 16
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended November 30,
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(2,576,054) $(2,757,352) $(2,811,410)
----------- ----------- -----------
Adjustments to reconcile net loss to
net cash (used) by operating activities
Depreciation and amortization 269,471 267,738 297,432
Impairment charge -- -- 341,683
(Increase) decrease in
Accounts receivable (106,564) 206,029 444,755
Inventory 163,261 456,409 285,141
Prepaid expenses and other current assets (28,988) 15,635 (15,671)
Increase (decrease) in
Accounts payable and accrued liabilities (38,780) (85,349) (410,589)
Other, net 4,583 (50,917) 16,871
----------- ----------- -----------
Total adjustments 262,983 809,545 959,622
----------- ----------- -----------
(2,313,071) (1,947,807) (1,851,788)
----------- ----------- -----------
Cash flows from investing activities
Purchase of securities available for sale -- -- (3,662,600)
Sale of securities available for sale -- 2,185,594 3,204,000
Capital expenditures (168,699) (383,840) (273,969)
----------- ----------- -----------
(168,699) 1,801,754 (732,569)
----------- ----------- -----------
Cash flows from financing activities
Principal payment on long-term debt -- (100,000) (300,000)
Net proceeds from issuance of long-term
convertible debt 1,980,805 -- --
Net proceeds from issuance of common stock
and put options 1,935,878 205,633 2,698,293
----------- ----------- -----------
3,916,683 105,633 2,398,293
----------- ----------- -----------
Net change in cash and cash equivalents 1,434,913 (40,420) (186,064)
Cash and cash equivalents - beginning 640,266 680,686 866,750
----------- ----------- -----------
Cash and cash equivalents - ending $ 2,075,179 $ 640,266 $ 680,686
=========== =========== ===========
Supplemental disclosure of cash paid
Interest $ 25,416 $ 25,430 $ 36,708
Income taxes 4,076 5,632 7,853
</TABLE>
See accompanying notes to consolidated financial statements
Annual Report 1998 - Page 17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Liquidity
During November 1998, qmed, Inc. and Subsidiaries (the "Company")
restructured certain debt with the Galen Funds (see Note 8) to provide working
capital and to increase equity.
Although the Company anticipates operating losses during the 1999 fiscal
year, the Company believes that available cash on hand and the operating plan
for 1999, which includes new contracts both signed and anticipated to be signed
for its disease management services, will provide sufficient working capital to
meet its needs for the current year.
Note 2
Significant Accounting Policies
Nature of Business
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 owned (83%) subsidiary, Heart Map, Inc., and its wholly 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. At November 30, 1998, the Company had approximately $2,000,000
invested with one financial institution.
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 (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, which is 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. It was
determined that such technology no longer had a realizable value because in
fiscal 1996, the
Annual Report 1998 - Page 18
<PAGE>
Note 2
Significant Accounting Policies - (continued)
Company focused primarily on the development and marketing of the ohms|cad
system. Acquired technology was being amortized on a straight-line basis over
the estimated useful life of 7 years. Amortization was $0 in both 1998 and 1997
and approximately $100,000 in 1996.
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 that the number of options granted and the exercise price are known.
Earnings Per Common Share
Effective for the Company's financial statements for the year ended
November 30, 1998, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share," (SFAS 128). SFAS 128 replaces the
presentation of primary earnings per share ("EPS") and fully diluted EPS with a
presentation of basic EPS and diluted EPS, respectively. Basic EPS excludes
dilution and is computed by dividing earnings available to common stockholders
by the weighted-average number of common shares outstanding during the period.
Diluted EPS assumes conversion of dilutive options and warrants, and the
issuance of common stock for all other potentially dilutive equivalent shares
outstanding.
All EPS data for prior periods has been restated. The adoption of SFAS 128
did not have a material effect on the Company's reported EPS amounts.
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; however, management does 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. For the years ended November 30, 1998,
1997, and 1996, approximately $745,000, $595,000, and $276,000, respectively,
from the above such contracts were included in revenue. Certain contracts
contain stipulations that, if not met, would require the Company to refund a
portion of prepayments received. The maximum amount of the refund would be
$164,000 at November 30, 1998. However, it is management's opinion that the
stipulations will be met.
The Company sells extended service warranty contracts to consumers 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.
Annual Report 1998 - Page 19
<PAGE>
Note 2
Significant Accounting Policies - (continued)
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.
Reclassifications
Certain reclassifications have been made to the cost of sales in the prior
years income statements in order to conform to the current year presentation.
$514,000 and $212,000 was reclassed from operating expenses into cost of goods
sold for 1997 and 1996, respectively.
Note 3
Investments
Sales of available-for-sale securities for the year ended November 30, were
as follows:
1998 1997 1996
---- ---- ----
Proceeds from sale $ -- $ 2,185,594 $ 3,204,000
Gross realized gains -- -- 42,473
Gross realized losses -- (30,574) --
Note 4
Inventory
November 30,
1998 1997
---- ----
Raw materials
(component parts and supplies) $216,350 $209,580
Finished units 287,644 457,675
-------- --------
$503,994 $667,225
======== ========
During 1998 and 1997, the Company capitalized as equipment approximately
$40,000 and $205,000, respectively, of inventory which is loaned to physicians
in the event that their original unit is being repaired. The estimated useful
life is five years.
Note 5
Property and Equipment
November 30,
1998 1997
---- ----
Machinery and equipment $ 1,151,318 $ 1,146,762
Loaner equipment 244,542 204,698
Furniture and fixtures 387,011 385,527
Office equipment 622,881 611,675
Leasehold improvements 51,746 45,846
Equipment held under capital leases 341,696 235,987
----------- -----------
2,799,194 2,630,495
Less accumulated depreciation and
amortization (2,220,790) (2,005,734)
----------- -----------
Property and equipment - net $ 578,404 $ 624,761
=========== ===========
At November 30, 1998 and 1997, the equipment under the capital leases had
net book values of approximately $148,000 and $100,000, respectively.
Depreciation expenses were $198,000, $214,000, and $167,000 for 1998, 1997,
and 1996, respectively.
Annual Report 1998 - Page 20
<PAGE>
Note 6
Product Software Development Costs
During the years ended November 30, 1998, 1997, and 1996, amortization
costs related to product software development costs were $26,142 per year.
Note 7
Accounts Payable and Accrued Liabilities
November 30,
1998 1997
---- ----
Accounts payable - trade $278,224 $394,264
Deferred warranty revenue 156,813 204,260
Accrued payroll 78,539 76,997
Other accrued expenses 35,677 94,925
-------- --------
$549,253 $770,446
======== ========
Note 8
Convertible Long-Term Debt
On December 18, 1997, the Company issued 8% Convertible Subordinated Notes
(the "Notes") at face value, to three investors (the "Galen Funds"), in exchange
for $2,000,000 cash. The Notes mature December 18, 2002. Interest accrues
monthly, is compounded annually, and is payable upon maturity. The Notes were
convertible into shares of common stock at the rate of $5.60 per share.
On November 16, 1998, the Galen Funds converted Notes with a face value of
$1,050,000, plus $146,657 of accrued interest, into shares of common stock. The
Galen Funds also invested an additional $2,020,936 in cash. In exchange, the
Company issued to the Galen Funds 1,926,702 shares of common stock and 500,000
seven-year warrants (the "Warrants") to purchase additional shares of common
stock for $3.6875 per share. The terms of the remaining $950,000 of Notes were
changed to increase the interest rate to 16%, to decrease the conversion rate to
$3.6875 per share, and to grant the Galen Funds a security interest in
substantially all of the Company's assets. The Galen Funds were also given the
right to redeem any or all of the 1,926,702 shares at the prices specified
below, upon the occurrence of an event of default (such as bankruptcy or NASDAQ
delisting), change in control, or transfer or lease of a substantial part of the
Company's assets. The prices at which the Company would be obliged to redeem the
stock are as follows:
Year Redemption Price
---- ----------------
1998 $2.0875
1999 2.0040
2000 1.9205
2001 1.8370
2002 and after 1.6700
In the event the average closing price of the Company's common stock equals
or exceeds $7.375 for a period of twenty consecutive trading days, the Company
may redeem the Notes for cash or common stock for Redemption Price, as specified
in Column A below. Otherwise, the Notes may be redeemed by the Company for the
Redemption Price in Column B.
Year Redemption Price
---- ----------------
A B
1998 105% 112.1%
1999 104% 125.6%
2000 103% 140.8%
2001 102% 157.7%
2002 100% 176.8%
The Company is required to redeem the Notes at higher premiums in the event
of a change of control. The Company is prohibited from paying dividends until
the Notes are paid.
Annual Report 1998 - Page 21
<PAGE>
Note 8
Convertible Long-Term Debt - (Continued)
The Company has excluded the maximum possible cash obligation related to
the potential redemption of the $1,926,702 shares issued to the Galen Funds
outside of permanent equity, under the caption "Temporary equity-put option".
Since this amount exceeded the proceeds received from the Galen Funds, a
decrease to additional paid-in capital was recorded. As the maximum possible
cash obligation declines in accordance with the redemption prices noted above,
such decline will be reflected as a decrease to "Temporary equity-put option",
and an increase in additional paid-in capital.
Note 9
Capital Lease Obligations
The Company has entered into various capital leases for equipment expiring
through November 2001 with aggregate monthly payments of $5,943.
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, 1998:
For the Years Ending
November 30,
1999 $ 63,043
2000 50,788
2001 45,080
2002 27,011
2003 8,352
---------
Total minimum lease payments 194,274
Less amount representing interest (39,652)
---------
Present value of net minimum lease
payments 154,622
Less current maturities (46,898)
---------
Long-term maturities $ 107,724
=========
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.
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 incentive and nonqualifying stock options expire ten years
after the date of the grant.
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
Annual Report 1998 - Page 22
<PAGE>
Note 10
Stock Options and Warrants - (Continued)
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for November 30:
1998 1997
---- ----
Risk-free interest rate 4.7% 6.8%
Expected volatility 70.0% 65.0%
Dividend yield -- --
Expected life 5.5 years 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:
1998 1997
---- ----
Pro forma net loss $ (2,576,054) $ (2,895,256)
Pro forma loss per share
Basic (.27) (.30)
Diluted (.27) (.30)
There was no compensation expense recorded from stock options for the years
ended November 30, 1998, 1997, and 1996.
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
------- -------------- ----------- --------
<S> <C> <C> <C> <C>
Price
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
Granted 353,133 3.56
Exercised (11,100) 1.38
Terminated (172,033) 6.57
---------
Outstanding
November 30, 1998 1,037,930 2.09 921,224 1.94
</TABLE>
Annual Report 1998 - Page 23
<PAGE>
Note 10
Stock Options and Warrants - (Continued)
Weighted-average fair
value of options granted
during the year 1998 1997
---- ----
Where exercise price
equals stock price $ -- $ --
Where exercise price
exceeds stock price $ 3.56 $ 4.16
Where stock price
exceeds exercise price $ -- $ --
Following is a summary of the status of stock options outstanding at November
30, 1998:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
------------------- -------------------
Weighted-
Average Weighted- Weighted-
Exercise Remaining Average Average
Price Range Number Contractual Life Exercise Price Number Exercise Price
----------- ------ ---------------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$ .75 - .75 192,324 2.2 $ .75 192,324 $ .75
$ 1.38 - 1.75 403,473 4.6 $ 1.56 403,473 $ 1.56
$ 2.75 - 3.75 442,133 8.3 $ 3.16 325,427 $ 3.10
--------------- --------- --------- --------- ---------- --------
$ .75 - 3.75 1,037,930 5.7 $ 2.09 921,224 $ 1.94
</TABLE>
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.
There were no warrants exercised for the fiscal year ended November 30,
1998 and 1997.
Annual Report 1998 - Page 24
<PAGE>
Note 11
Income Taxes
Deferred tax attributes resulting from differences between financial
accounting amounts and tax bases of assets and liabilities at November 30, 1998
and 1997 follow:
November 30,
1998 1997
Current assets and liabilities
Allowance for doubtful accounts $ 6,600 $ 17,600
Inventory overhead capitalization 42,900 41,000
Deferred warranties 28,200 59,000
---------- ----------
77,700 117,600
Valuation allowance 77,700 117,600
---------- ----------
Net current deferred tax asset (liability) $ -- $ --
========== ==========
Noncurrent assets and liabilities
Depreciation $ 9,000 $ 5,800
General business credit -- 211,000
Net operating loss carryforward 2,354,000 3,960,000
Capital loss carryforward 4,600 --
---------- ----------
2,367,600 4,176,800
Valuation allowance 2,367,600 4,176,800
---------- ----------
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 decreased $1,809,200 in 1998 due to expiration of net operating loss
carryforwards, and increased $229,200 in 1997.
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
1998 1997 1996
---- ---- ----
Federal income tax rate (34.0)% (34.0)% (34.0)%
Effect of net operating loss carryforward
and valuation allowance 34.0% 34.0% 34.0%
---- ---- ----
Effective income tax rate 0.0% 0.0% 0.0%
As of November 30, 1998, the Company has the following net operating loss
carryforwards for tax purposes:
Expiration Date:
For the Year Ending
November 30,
------------
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
-------------
$ 18,775,000
=============
Annual Report 1998 - Page 25
<PAGE>
Note 11
Income Taxes - (Continued)
As of November 30, 1998, the Company has the following general business tax
credit carryforwards for tax purposes:
Expiration Date:
For the Year Ending
November 30,
------------
1999 $ 38,000
2000 58,000
2001 65,000
2002 17,000
----------
$ 178,000
==========
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 year ended November 30, 1996. During the years ended 1998
and 1997 the Company matched $.25 for each dollar up to 6% of an employee's
contribution on a monthly basis which amounted to approximately $20,800 and
$22,000.
Note 13
Commitments and Contingencies
Leases
The Company leases its premises under noncancellable operating leases
expiring through November 2003. The approximate future minimum lease payments
for the year ending November 1999 are $202,323.
Rent expense for the years ended November 30, 1998, 1997 and 1996, were
$130,418, $173,890 and $207,000, respectively.
Litigation
The Company is subject to claims and legal proceedings covering a wide
range of matters that arise in the ordinary course of business. It is
management's opinion that the ultimate resolution of these matters will not have
a material effect on the Company's consolidated financial position and results
of operations.
Major Customer
The Company had one major customer during 1998. Major customers are
considered to be those who account for more than 10% of total sales. This
customer accounted for approximately 15% of total sales for the year ended
November 30, 1998.
Major Supplier
For the years ended November 30, 1998, 1997, and 1996, one supplier
accounted for $86,000, $123,000 and $257,000 of finished goods purchased,
respectively. The loss of this supplier may have an adverse effect on the
Company.
Annual Report 1998 - Page 26
<PAGE>
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 1998, 1997 and
1996 is as follows:
Medical Disease
Equipment Management
Sales Services Consolidated
----- -------- ------------
1998
Sales $ 1,300,630 $ 745,997 $ 2,046,627
Operating (loss) (494,900) (2,081,154) (2,576,054)
Total assets 3,294,865 462,559 3,757,424
Depreciation and amortization 162,564 106,907 269,471
Capital expenditures 112,026 56,673 168,699
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
Note 15
Year 2000
The Company recognizes the need to ensure that its operations will not be
adversely impacted by the Year 2000 software failures. As of November 30, 1998,
all medical devices sold by qmed Inc. are Year 2000 compliant. ohms/cad was
designed to be Year 2000 compliant. All of the Company's internal operating
systems are on schedule for compliance and should be completed by August 1999.
The Company has been upgrading its customer's medical devices since
September 1998 and has notified all of its customers of the need for upgrade
where necessary. All costs to develop these software changes were expensed as
incurred during 1998, which represent approximately $165,000. The remaining
costs to modify the Company's systems for Year 2000 compliance are expected to
be less than $50,000.
In addition to Year 2000 software and equipment implementation activities,
the Company has contacted major suppliers for its medical devices to assess
their compliance. The Company has determined their major suppliers are Year 2000
compliant. While the ohms/cad system is fully compliant, the Company relies on
information from existing and prospective customers, usually health insurance
plans, for data utilized in proposing contract and in measuring the amounts
saved through implementation of ohms/cad. The Company cannot assess the effect
that Year 2000 programs implemented by these other companies will have.
Note 16
New Accounting Standards
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income". SFAS 130 establishes standards for the reporting and presentation of
comprehensive income, its components and accumulated balances. Comprehensive
income, as defined, includes all changes to equity except those resulting from
investments by or distributions to owners. Among other disclosures, SFAS 130
Annual Report 1998 - Page 27
<PAGE>
Note 16 New Accounting Standards - (Continued)
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statement. The Company will adopt SFAS 130 in the fiscal year ending
November 30, 1999. Adoption of this statement will have no impact on the
Company's financial position or results of operations.
Segment Disclosure
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information". SFAS 131 establishes standards for
the disclosure of certain information about the operating segments of a
business. It also requires the disclosure of information about the products and
services of the business, the geographic areas in which it operates, and its
major customers. The Company will adopt SFAS 131 in the fiscal year ending
November 30, 1999. Adoption of this Statement will have no impact on the
Company's financial position or results of operations.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 establishes accounting and
reporting standards for derivative as either assets or liabilities and measure
them at fair value. Under certain conditions, the gains or losses from
derivatives may be offset against those from the items the derivatives hedge
against. Otherwise, gains and losses from derivatives are recognized currently
in the results of operations. The Company will adopt SFAS 133 in the fiscal year
ending November 30, 2000. Adoption of this statement is not anticipated to have
a material effect on the Company's financial position or results of operations.
Annual Report 1998 - Page 28
<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, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended November 30, 1998, 1997 and 1996. 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, such consolidated financial statements present fairly in all
material respects the financial position of qmed, Inc. and Subsidiaries as of
November 30, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years ended November 30, 1998, 1997 and 1996 in
conformity with generally accepted accounting principles.
AMPER, POLITZINER & MATTIA P.A.
January 29, 1999
Edison, New Jersey
Annual Report 1998 - Page 29
<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, 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
Fiscal Year Ended November 30, 1998 High Low
First Quarter $ 7 3/4 $ 4 1/2
Second Quarter 8 3/8 3
Third Quarter 4 3/8 2 3/4
Fourth Quarter 4 3/8 2 5/8
As of February 17, 1998, the Company's common stock was held of record by
422 persons. On February 17, 1998, the closing price reported was $ 2 3/4.
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 1998 - Page 30
<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
A. Bruce Campbell, Ph.D, M.D.
CEO & President of
Camber Companies LLC
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
Registrar and Transfer Agent
American Stock Transfer &
Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
Annual Report 1998 - Page 31
Q-MED, INC.,
A DELAWARE CORPORATION
SCHEDULE OF SUBSIDIARIES
Heart Map, Inc., a Delaware corporation, 83% owned.
Interactive Heart Management Corp., a Delaware corporation, 100% owned.
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation of our report dated January 29, 1999 on the
financial statements of qmed, Inc. and Subsidiaries as of November 30, 1998,
1997, and 1996 and for the years ended November 30, 1998, 1997 and 1996, 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, 1999
Edison, New Jersey
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<CASH> 2,075,179
<SECURITIES> 0
<RECEIVABLES> 804,224
<ALLOWANCES> 499,759
<INVENTORY> 503,994
<CURRENT-ASSETS> 2,941,414
<PP&E> 2,799,194
<DEPRECIATION> 2,220,790
<TOTAL-ASSETS> 3,757,424
<CURRENT-LIABILITIES> 549,253
<BONDS> 0
0
0
<COMMON> 11,587
<OTHER-SE> 2,107,412
<TOTAL-LIABILITY-AND-EQUITY> 3,757,424
<SALES> 2,046,627
<TOTAL-REVENUES> 2,103,708
<CGS> 1,099,515
<TOTAL-COSTS> 3,110,827
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 289,716
<INTEREST-EXPENSE> 179,704
<INCOME-PRETAX> (2,576,054)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,576,054)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,576,054)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
