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, 1999
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 18, 2000, the aggregate value of the registrant's voting
stock held by non-affiliates was $85,794,405 (computed by multiplying the last
reported sale price on February 18, 2000 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 18, 2000, there were 12,264,781 shares of the registrant's
common stock, $.001 par value, issued and outstanding.
Documents incorporated by reference:
Document Form 10-K Reference
-------- -------------------
Portions of the Registrant's Proxy III
Statement for its 2000 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. In this report, the words
"anticipates," "believes," "expects," "intends," "future" and similar
expressions identify certain forward-looking statements. 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
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"Monitor One(R)" instruments, the Company developed a comprehensive, disease
management system for the coronary artery disease ("CAD") patient which is
marketed under the trade name ohms|cad by the Company's IHMC subsidiary. This
system consists of Monitor One STRx ambulant ischemic technology; a remote
on-line diagnostic center (The ohms Center); and an integrated cardiology
consultant practice. This entire system non-invasively and reliably quantifies
the probable risk of a heart attack, unstable angina and death and directs the
patient to appropriate therapy with the emphasis throughout on early detection,
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.
The Company is exploring alliances with other companies which are seeking
to provide disease management services in an effort to provide more
comprehensive monitoring and permit the management of a wider range of
conditions that are related to CAD. The Company expects that such alliances will
permit the Company to tailor disease management solutions for the needs of
various managed care organizations. In addition, the Company is developing
internet based solutions for the management of CAD. The Company believes it is
well positioned to exploit the growing market for internet based health care
solutions for managed care organizations, physicians and the patient as a result
of its leadership in the development and implementation of on-line CAD
management systems.
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).
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. Marketing efforts are conducted and
coordinated by the Company's President and other senior management personnel,
and with the aid, where appropriate, of certain independent consultants. In
addition, the Company generally pursues business opportunities through the
traditional competitive process where a Request for Proposals ("RFP") or a
Request for Qualifications ("RFQ") is issued by a managed care organization,
with a number of companies responding and receives unsolicited requests for
proposals. The Company utilizes demographic and cost of service data from the
managed care provider and statistical information concerning the cost savings
that can be realized by utilizing the ohms|CAD system to conduct an initial cost
analysis to further determine program feasibility . As part of the Company's
sales efforts, management meets with appropriate personnel from the managed care
organization making the request to best determine the organization's needs. A
typical RFP requires bidders to provide detailed information, including the
service to be provided by the bidder, its experience and qualification and the
price at which the bidder is willing to provide the services. The Company
sometimes engages independent consultants to assist it in responding to RFPs.
Based on the proposals received in response to an RFP, the agency will award a
contract to the successful bidder. In addition to issuing formal RFPs, some
managed care organizations may issue an RFQ. In the RFQ process, the requesting
agency selects a firm believed to be most qualified to provide the requested
services and then negotiates the terms of the contract with that firm, including
the price
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at which its services are to be provided. The Company also attends and promotes
its services at key conferences throughout the United States where potential
clients are present.
The marketing and sales of the Company's devices to primary care
physicians, hospitals and other health care providers are conducted through
distributors.
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 16.1% and 13.5% of
net sales for fiscal 1999 and 1998, 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 1999
and 1998, the Company replaced three and two monitors respectively that could
not be repaired pursuant to its warranty programs.
Reimbursement Policies
The Medicare program is a major payment source for procedures utilizing
the Company's products. The Medicare program is administered by the federal
government through the Health Care Financing Administration ("HCFA"), United
States Department of Health and Human Services. Medicare carriers, typically
private insurance companies, acting as agents of the government, operate under
contract with HCFA to implement Medicare program policies and process claims in
assigned geographic areas. Consequently, reimbursement rates for the same
services may vary by geographic area.
On January 1, 1992, a Medicare physician payment system became effective
which is designated "Resource Based Relative Value Scales" ("RBRVS"). RBRVS,
which is administered by the Health Care Financing Administration, and replaced
the "reasonable charge" system which was utilized since 1965. The reasonable
charge system was criticized because it resulted in wide variations in the
reimbursement payments for the same services performed by physicians of
different specialties and geographic locations. The RBRVS system, which is to be
phased in over five years, is intended to provide uniform reimbursement for the
performance of a service, regardless of the specialty of the physician
performing the service. The Company's analysis of the system concludes that the
RBRVS system seeks to lower overall costs of the delivery of medical care by
rewarding more patient management provided by primary care physicians.
Although the RBRVS system described above is mandated by Congressional
action, there can be no assurance that future Congressional action will not
result in the general reduction in the 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
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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. 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 1999, 1998 and 1997 one customer accounted for 21%, 15% and
18% of net sales respectively.
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
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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 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.
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The Company believes that Monitor One ischemia monitoring products offer
certain advantages over traditional ambulatory arrthymia ECG recording monitors
and scanning services. Monitor One products can provide continuous analysis and
quantification of ambulant ischemia in real-time as well as other irregularities
of the ECG signal for a period of time longer than 24 hours and have a
programmable feature which enables them to emit an audible tone during the
occurrence of certain high-risk ischemic episodes. These characteristics permit
the use of Monitor One products for the monitoring and regulation of drug
therapy and as a possible warning device for impending ischemic heart attacks.
The Company's sales of Interp 1000 EKG systems is not significant in the
market for such devices. The market is dominated by companies such as Burdick,
Hewlett Packard and Marquette Electronics, which have far greater financial,
marketing and other resources than those of the Company. The Company believes
that its Interp 1000 product offers certain advantages, particularly its
validated accuracy, compact size, portability and pricing.
The Company is not aware of any commercial product which competes with it
nDx system which automates the process of testing for autonomic dysfunction nor
is it aware of any comprehensive CAD management system which competes with
ohms|cad.
The Company believes that direct competition in ambulatory ischemic
monitors; products for testing autonomic function; and interpretive ECG 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 1999, 1998, and 1997, the Company expended $571,449, $486,843
and $551,681 respectively, for research and development. During these years,
research and development was primarily focused on the development of an advanced
version of the ohms|cad system.
Management expects to continue to develop new products, as well as enhance
its existing products and has budgeted approximately 10% of anticipated revenue
for such product development in fiscal 2000.
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) and a
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patent for the ohms|cad system (Patent No. 5,724,580) 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 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.
The Health Insurance Portability and Accountability Act of 1996 mandates
the use of standard transactions, standard identifiers, security and other
provisions by the year 2000. Regulations have been proposed to implement these
requirements, and we are designing our
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applications to comply with the proposed regulations. However, until these
regulations become final, possible changes in these regulations could cause us
to use additional resources and lead to delays as we revise our operations.
To our knowledge and other than what we have described in this statement
and other than occupational health and safety laws and labor laws which are
generally applicable to most companies, our products are not subject to
governmental regulation by any federal, state or local agencies that would
affect the manufacture, sale or use of our products. We cannot, of course,
predict what sort of regulations of this type may be imposed in the future, but
we do not anticipate any unusual difficulties in complying with governmental
regulations which may be adopted in the future.
Employees
The Company, as of January 31, 2000, had 31 full time employees. Of these
full time employees, 3 were executives, 4 were engaged in sales supervisory
capacities, 3 in marketing, 6 in product development, 2 in production, 5 in
technical support, 4 on-site coordinators 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.
The Company's Annual Meeting of Stockholders was held on October 4, 1999,
pursuant to written notice and the Company's bylaws. The total number of the
Company's shares outstanding on September 30, 1999, the record date of the
meeting, was 12,238,781 of which 11,011,781 were present, in person or by proxy.
The following persons were nominated by management and each was elected to serve
as director until the next annual meeting of stockholders:
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Michael W. Cox
David Feldman
Richard I. Levin
Robert A. Burns
A. Bruce Campbell
Herbert H. Sommer
The following matters were submitted to stockholders and adopted by the
requisite vote of a majority of the shares present and voting on the matter:
For Against Abstain
To approve the Company's
1999 Equity Incentive Plan 5,151,210 169,129 24,498
To ratify the selection of
Auditors 10,985,278 17,275 6,100
A proposal to amend the Company's certificate of incorporation to
authorize a class of "blank check" preferred stock was not passed by the
requisite vote of a majority of the shares issued and outstanding as follows:
For Against Abstain
To amend the Company's
Certificate of Incorporation 5,507,019 280,397 7,150
14
<PAGE>
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 29 of the Registrant's 1999 Annual Report to Stockholders
is incorporated herein by reference.
Item 6. Selected Financial Data.
Selected financial data as set forth on page 7 of the Registrant's 1999
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 1999 Annual Report
to Stockholders is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
Financial statements and supplementary data as set forth on pages 14 to 28
of the Registrant's 1999 Annual Report to Stockholders is incorporated herein by
reference.
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
15
<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, 1999 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, 1999 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, 1999 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, 1999 and is incorporated herein by
reference.
16
<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, 1999 and
1998
Consolidated Statement of Operations for each of the three years ended
November 30, 1999, 1998 and 1997
Consolidated Statement of Stockholder's Equity for each of the three years
ended November 30, 1999, 1998 and 1997
Consolidated Statement of Cash Flow for each of the three years ended
November 30, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedules have been omitted because they are not applicable.
(b) Reports on Form 8-K.
None.
(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:
17
<PAGE>
Official Sequential
Exhibit No. Description Page No.
- ----------- ----------- --------
2 None
3.1 Amended and restated New Jersey
Certificate of Incorporation dated July
6, 1983 (Exhibit 3C to the S-18
Registration Statement 2-86653-NY of the
Company effective December 1, 1983) I/B/R
3.2 New Jersey By-Laws as amended on January
16, 1984 (Exhibit 3F to the Company's
Annual Report on Form 10-K for the year
ending November 30, 1984) I/B/R
3.3 Amended and Restated Delaware
Certificate of Incorporation of Q-Med,
Inc. as in effect on July 11, 1987
(Exhibit 3.3 to the Company's Report on
Form 10-Q dated May 31, 1987) I/B/R
3.4 By-Laws as in effect on July 1, 1987
(Exhibit 3.3 to the Company's Report on
Form 10-Q dated May 31, 1987) I/B/R
3.5 Amendment to By-Laws dated December 18,
1997 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 Note Purchase Agreement between Q-Med,
Inc. and Galen Partners III, L.P., Galen
Partners International III, L.P., Galen
Employee Fund III, L.P. dated as of
December 18, 1997 (Exhibit 4.1 to the
Company's Report on Form 8-K dated
December 18, 1997) I/B/R
4.3 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
18
<PAGE>
4.4 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
4.5 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
4.6 Form of common stock purchase warrants
exercisable at $1.67 per share until
November 15, 2005 (Exhibit 4.1 to the
Company's report on Form 8-K dated May
17, 1999) I/B/R
4.7 Form of common stock purchase warrants
exercisable at $2.87 per share until
November 15, 2005 (Exhibit 4.2 to the
Company's report on Form 8-K dated May
17, 1999) I/B/R
4.8 Form of common stock purchase warrants
exercisable at $2.625 per share until
November 15, 2005 (Exhibit 4.2 to the
Company's report on Form 8-K dated
August 25, 1999) 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 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
19
<PAGE>
10.4 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
10.5 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
10.6 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
10.7 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
10.8 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
10.09 Amendment dated December 16, 1998 to
Employment Agreement between the Company
and Michael W. Cox (Exhibit 10.11 to the
Company's Form 10-K for year ended
November 30, 1998) I/B/R
10.10 Amendment of option agreement dated May
17, 1999 (Exhibit 99.1 to the Company's
report on Form 8-K dated May 17, 1999) I/B/R
10.11 Second Amendment dated as of August 25,
1999 to Note Purchase Agreement between
qmed, 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
August 25, 1999) I/B/R
20
<PAGE>
10.12 Securities Purchase Agreement between
qmed, Inc. and Galen Partners III, L.P.,
Galen Partners International III, L.P.,
Galen Employee Fund III, L.P. dated as
of August 25, 1999 (Exhibit 99.2 to the
Company's report on Form 8-K dated
August 25, 1999) I/B/R
10.13 Qmed, Inc. 1999 Equity Incentive Plan
(Exhibit 4.1 to the Company's
Registration Statement on Form S-8
(333-93697) filed December 28, 1999) I/B/R
11 None
13* Q-Med, Inc. 1999 Annual Report.
16 None.
18 None.
20.1 Notice of consent requested and given to
award certain option agreements (Exhibit
20.1 to the Company's report on Form 8-K
dated May 17, 1999) I/B/R
21* Subsidiaries of Registrant
22 None.
23* Consent of Amper, Politziner & Mattia
24 None.
27* Financial Data Schedule
- -------
* Filed herewith
** Exhibit omits certain information which the Company has filed separately with
the Commission pursuant to a confidential treatment request under Rule 24b-2
under the Securities Exchange Act of 1934, as amended.
21
<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 25, 2000 Q-MED, INC.
By: /s/ Michael W. Cox
------------------------------------
Michael W. Cox, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on behalf of the Registrant and in capacities and at the
dates indicated:
Signature Capacity Date
/s/ Michael W. Cox President and Treasurer February 25, 2000
- ------------------------ (Principal Executive and
Michael W. Cox Financial Officer)
/s/ Richard I. Levin Director February 25, 2000
- ------------------------
Richard I. Levin
/s/ Robert A. Burns Director February 25, 2000
- ------------------------
Robert A. Burns
/s/ David Feldman Director February 25, 2000
- ------------------------
David Feldman
/s/ Herbert H. Sommer Director February 25, 2000
- ------------------------
Herbert H. Sommer
/s/ A. Bruce Campbell Director February 25, 2000
- ------------------------
A. Bruce Campbell
/s/ Debra A. Fenton Controller February 25, 2000
- ------------------------
Debra A. Fenton
22
<PAGE>
EXHIBIT INDEX
Exhibit Sequential
No. Page No.
- ------- --------
13 Q-Med, Inc. 1999 Annual Report
21 Subsidiaries of Registrant
23 Consent of Amper, Politziner & Mattia
27 Financial Data Schedule
- ----------
23
qmed [LOGO]
1999 ANNUAL REPORT
<PAGE>
Sponsored research about
Qmed, Inc., can be found at
www.wbn.com
<PAGE>
PRESIDENT'S MESSAGE
================================================================================
Dear Fellow Shareholder:
In last year's message we alluded to major positive developments on the horizon.
In the fiscal year just ended, a number of them were realized and in the few
months between then and now the trend implied has accelerated.
FIRST, while the Disease Management (DM) industry composite outlook improved
markedly, our Company's participation in that outlook was in the top tier.
Requests for proposal by managed care organizations (MCOs) rose nearly 100%, but
for us there was a 400% increase. And whereas in the past our sales cycle was
approximately 30 months, it appears to have shortened by more than 50%.
Expected developments early in FY 2000 could confirm that shortening.
SECOND, in 1999 we signed contracts with four MCOs. There were three with CIGNA
Health and one with PacifiCare Health. The expansion possibilities with both
organizations are substantial. As cost savings data from our program are
delivered to the MCOs, we expect that such expansion will materialize.
THIRD, we added two exceptional members to our Board of Directors:
o David Feldman, formerly CEO of AT&T pension funds, became Chairman. He
serves as a director of a number of mutual funds in the Dreyfus Group
and of Heitman Financial LTD., a real estate investment firm.
o Bruce Campbell, MD, former President of Monsanto Health Solutions,
former Senior Vice President of Aetna US Healthcare, Inc., the
nation's largest health insurer with 22 million covered lives, and
former Chief Medical Officer of Aetna Health Plans. He was also Vice
President, Medical Programs, for ScrippsHealth and is currently
President and CEO of Camber Companies, LLC, a privately funded
multi-disciplinary musculoskeletal ambulatory treatment center
business.
FOURTH, the investment community is discovering our industry. Obviously, their
continued interest will depend upon unfolding developments. However, it is
reassuring to find that both investment analyst and investment banker attention
is at last turning our way. We presented at the First Union Securities
conference on DM in October in Boston. Attendance was heartening as has been
follow-up.
FIFTH, we are in the process of forming a joint venture with LifeMasters
Supported Self Care, a private firm in Newport Beach, California. They offer DM
programs in some co-morbidities linked to coronary artery disease as well as
having a sophisticated Internet presence aimed at their patients. We are
currently bidding with LifeMasters for substantial business.
SIXTH, we neared completion of ohms II. The new platform is client/server based
and gives us scalable capacity to handle any volume of patient/physician
evaluations and recommendations foreseeable under optimal circumstances. We
expect to complete migration to ohms II early in the year.
Because our business model starkly differentiates us from the competition, we
are more confident than ever before that trends emerging in health care in
general and DM in particular will give us a disproportionate advantage and lift.
We expect that it will be evident in new business as well as in the expansion of
current business. Indeed, in the first half of the first quarter of FY 2000, we
added two HMOs, one in Kentucky and one in South Dakota. These brought our total
lives under management to over 300,000. This confirms expectations that
profitable operations will be achieved in the current fiscal year.
1999 Annual Report Page 1
<PAGE>
A further significant development is the submission of a paper by Rich Levin,
MD, our medical director, and his co-authors to a major peer review medical
journal. The paper details the health and economic outcomes at our Bakersfield
study site. If accepted for publication, it should be a milestone for our
Company, increasing visibility for new business and in the investment community,
as well as further differentiating us from competitors.
A word about our vision of the future. We are committed to advancing the health
care of the nation. This includes both increasing the number of HMO contracts
and participating in the vast opportunity of Medicare. Further, we understand
that we must continue to press our technological advantages. So, your Company
expects to have a significant Internet presence in the year 2000. The ohms
platform gives us a clear path to intensive and expansionary utilization of the
Web in ways that can lengthen our competitive lead and secure an ever-growing
business.
Finally, let me thank you for your patience and confidence. We believe that both
will be rewarded and look forward to a prosperous and exciting future.
Very truly yours,
Michael W. Cox
President
1999 Annual Report Page 2
<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.
1999 Annual Report Page 3
<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 risk of a heart attack, unstable angina and death while
rationally directing the patient to appropriate therapy, accenting early
detection, 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 the
individual patient for lipid and hypertension management, antithrombosis,
smoking, exercise, obesity and diabetes.
Because of centralized, digital storage of all data, it allows for:
o continuous description and analysis of quantifiable results
o success of the stratification, proportion of patients assigned to
various therapies, objective outcomes
o interplay with pharmaceutical and pharmacy benefit managers
o physician and patient compliance and satisfaction.
For example, in its risk prevention mode (myocardial infarction, unstable
angina, sudden death), ohms|cad centers on the presence or absence of ambulant
ischemia as a risk stratifier utilizing our specialized non-invasive STRx
technology for evaluating these phenomena in each patient. This test data is
telecommunicated to the Company's 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 either
circumstance, 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,
and 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 continuously
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, early implementation of ohms|cad has contributed to significant savings
and improved health outcomes at those organizations which have contracted for
its use.
As ohms|cad outcomes proliferate, its utility is seen as a system which
significantly decreases variability in physician approaches to treatment. The
net result, is uniform care and utilization of "evidence based medicine" to
optimize the patient's condition. The net effect, is a healthier patient.
1999 Annual Report Page 4
<PAGE>
THE OHMS|CAD INTERNET CONNECTION
As Internet usage increases, so does the public's search for health
information. Health information online can vary in quality from clinical
research results to advice columns written by people who are not health
professionals. The appetite for online health information often leads to
information overload and even to misinformation. Many physicians, who understand
the value of having well informed patients, are concerned nevertheless about
losing control over their interactions with patients. In a ten-minute office
visit, they cannot possibly answer all the questions of a patient armed with 400
pages printed from the Internet. At the same time they are reluctant to give a
patient short shrift.
It is precisely because so much diverse, inconsistent, and incoherent
information is now available on the internet, that opportunities exist for new
approaches to collect and combine information for easier use where content and
connectivity jointly benefit the patient and the physician experience. We have a
strategy and a Year 2000 mission to deliver an ohms|cad Internet Connection
centered on enhancing both the physician and patient experience. It will be
instructive to the patient, increasing both knowledge and compliance. It will
decrease physician workload while increasing efficiency and productivity. We
believe it will be a premier part of the future of utilizing the internet for
health care information and management.
1999 Annual Report 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).
1999 Annual Report Page 6
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below as of November 30, 1999 and
1998 and for each of the three years in the three year period ended November 30,
1999 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, 1997, 1996 and 1995 and the years ended November 30,
1996 and 1995 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:
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net Sales $ 2,040,520 $ 2,046,627 $ 2,412,149 $ 3,316,659 $ 5,648,754
Cost of sales 1,167,020 1,099,515 1,406,480 1,531,851 1,579,196
----------- ----------- ----------- ----------- -----------
Gross profit 873,500 947,112 1,005,669 1,784,808 4,069,558
Selling, general and administrative
expenses 2,319,277 2,623,984 3,038,949 3,910,436 5,164,478
Provisions for uncollectible accounts 74,148 289,716 214,601 16,051 25,347
Research and development expenses 571,449 486,843 551,681 454,268 382,244
Impairment charge -- -- -- 341,683 --
Debt conversion expense 737,135 -- -- -- --
----------- ----------- ----------- ----------- -----------
(Loss) earnings from operations (2,828,509) (2,453,431) (2,799,562) (2,937,630) (1,502,511)
Interest income 68,126 57,081 98,214 117,623 --
Interest expense (143,891) (179,704) (25,430) (33,876) (68,142)
(Loss) gain on sale of securities -- -- (30,574) 42,473 --
----------- ----------- ----------- ----------- -----------
(Loss) earnings before provision
for income taxes (2,904,274) (2,576,054) (2,757,352) (2,811,410) (1,570,653)
Provision for income taxes -- -- -- -- --
----------- ----------- ----------- ----------- -----------
(Loss) earnings before minority interest (2,904,274) (2,576,054) (2,757,352) (2,811,410) (1,570,653)
Minority interest in loss of subsidiary -- -- -- -- 16,000
----------- ----------- ----------- ----------- -----------
(Loss) earnings before extraordinary item (2,904,274) (2,576,054) (2,757,352) (2,811,410) (1,554,653)
Extraordinary item-benefit from utilization
of net operating loss carryforwards -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net (loss) income $(2,904,274) $(2,576,054) $(2,757,352) $ (2,811,410) $(1,554,653)
=========== =========== =========== ============ ============
PER SHARE DATA
(Loss) Income per common and
dilutive common equivalent shares $ (.25) $ (.26) $ (.29) $ (.30) $ (.19)
=========== =========== =========== ============ ============
BALANCE SHEET DATA (AT END OF PERIODS)
Working Capital $ 691,668 $ 2,392,161 $ 803,415 $ 3,481,104 $ 3,369,177
Total Assets 1,966,050 3,757,424 2,450,533 5,171,064 6,014,620
Total Liabilities 824,261 1,638,425 888,015 1,072,585 1,777,393
Stockholders' equity 1,141,789 (1,902,992) 1,562,518 4,098,479 4,237,227
Temporary equity, put -- 4,021,991 -- -- --
Stockholders equity (including
temporary equity) 1,141,789 2,118,999 1,562,518 4,098,479 4,237,227
</TABLE>
1999 Annual Report 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
Year Ended Period -to-Period
November 30, % Changes
------------------------- ---------------------------
1999 1998 1997
vs. vs. vs.
1999 1998 1997 1998 1997 1996
---- ---- ----- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0 100.0 100.0 (.3) (15.2) (27.3)
Cost of sales 57.2 53.7 58.3 6.1 (21.8) (8.2)
----- ----- -----
Gross profit 42.8 46.3 41.7 (7.8) (5.8) (43.7)
Selling, general and administrative expenses 113.7 128.2 126.0 (11.6) (13.7) (22.3)
Provisions for uncollectible accounts 3.6 14.2 8.9 (74.4) 35.0 1237.0
Research and development expenses 28.0 23.8 22.8 17.4 (11.8) (21.4)
Debt conversion expense 36.1 -- -- * * *
----- ----- -----
(Loss) earnings from operations (138.6) (119.9) (116.0) 15.3 (12.4) (4.7)
Interest Income 3.3 2.7 4.1 19.3 (41.9) (16.5)
Interest expense (7.0) (8.7) (1.1) (19.9) 606.7 (24.9)
(Loss) gain on sale of securities -- -- (1.2) * * *
----- ----- -----
(Loss) earnings before income taxes (142.3) (125.9) (114.2) 12.7 (6.6) (1.9)
Income taxes -- -- -- * * *
----- ----- -----
Net (loss) income (142.3) (125.9) (114.2) 12.7 (6.6) (1.9)
===== ===== =====
</TABLE>
*Not meaningful
FISCAL 1999 COMPARED WITH FISCAL 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Net sales for fiscal 1999 of $2,040,520 decreased slightly when compared to
net sales of $2,046,627 for fiscal 1998. The Company's business continues to
transition 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
10% to $1,171,226 in fiscal 1999 while sales of disease management services
increased 16.5% 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
Company added several new clients during fiscal 1999, which include a new CIGNA
plan in Massachusetts and PacifiCare in California. Subsequent to the end of
fiscal 1999, contracts to add two additional ohms|cad programs, CHA in Kentucky
and DAKOTACARE in South Dakota, each covering in excess of 80,000 lives, were
completed and are on target to begin implementation during March and April 2000,
respectively. Management believes that with the addition of these plans as well
as new contracts expected to close in the near future, the Company may achieve
profitability before the end of this fiscal year.
Also, during December 1999, the Company, through it's IHMC subsidiary,
sold unused net operating loss carryforwards and R&D credits in the amount of
$4,115,178 for cash by way of the New Jersey Technology Tax Certificate Transfer
Program. The Company received $309,256 from this transaction. The Company has
available $223,984 in remaining tax benefits as well as an allocated portion of
losses and credits from fiscal 1999 which it intends to sell as part of the
program during fiscal 2000.
1999 Annual Report Page 8
<PAGE>
The Company reported a one-time debt conversion expense for the fiscal year
ended November 30, 1999 of $737,135. This non-cash charge resulted from the
conversion of $900,000 of debt held by the Galen Funds to equity at a price of
$1.67 per share rather than the conversion price of $3.6875 originally set at
the time the Note was issued. This conversion is discussed in more detail under
"Liquidity and Capital Resources." Without the debt conversion expense, net
losses for the year ended November 30, 1999 would have been $(2,167,139)
compared to $(2,576,054) for the prior fiscal year.
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 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 $(2,904,274) was approximately $(1,551,961) from
Interactive Heart Management Corp.
The Company's gross profit margin decreased from 46.3% in fiscal 1998 to
42.8% in fiscal 1999. The decrease was primarily due to the write off of
obsolete inventory in the capital equipment segment. These reductions were made
in response to the decline in capital equipment sales.
Selling, general and administrative expenses for the year ended November
30, 1999 decreased by approximately $305,000 when compared to fiscal 1998,
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 decreased by approximately $215,000
when compared to fiscal 1998. This decrease is primarily due to cessation of the
reservation of certain accounts receivable of Interactive Heart Management Corp.
FISCAL 1998 COMPARED WITH FISCAL 1997
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 was 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.
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.
1999 Annual Report Page 9
<PAGE>
The provision for doubtful accounts increased by approximately $75,000 when
compared to fiscal 1997. This increase was 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.
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.
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 $23,000,000 less applicable expenses.
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.
On May 17, 1999 the agreement was amended to eliminate such redemption
rights in exchange for 290,000 common stock purchase warrants exercisable at
$1.67 per share and 200,000 warrants exercisable at $2.87 per share until
November 15, 2005 to be distributed pro rata among such holders. The exercise
price of all
1999 Annual Report Page 10
<PAGE>
the warrants issued and amended may be adjusted in certain circumstances to
protect holders against dilution. The elimination of these redemption rights
resulted in a significant increase to total stockholders' equity because such
rights were previously characterized as temporary equity.
On August 25, 1999, the holders of $950,000 principal amount of the
Company's 16% Convertible Notes due December 18, 2002 (the "Notes") converted
$900,000 of the principal into 538,922 shares of common stock and 500,000 common
stock purchase warrants exercisable at $1.67 per share (subject to adjustment in
the manner described below) until November 15, 2002. In addition, Galen Partners
III, L.P., a Delaware limited partnership, Galen Partners International III,
L.P., a Delaware limited partnership, and Galen Employee Fund III, L.P., a
Delaware limited partnership (collectively the "Galen Funds") invested an
additional $250,000 in exchange for 95,238 shares of the Company's common stock
and 75,000 common stock purchase warrants exercisable at $2.625 per share until
November 15, 2002. The exercise price of all the warrants issued and amended may
be adjusted in certain circumstance to protect the holders against dilution. The
note purchase agreements between the Company and the funds represented by Galen
were further amended to limit the Company's ability to prepay the remaining
$50,000 principal and $118,407.34 of accrued interest due on the Notes and to
reduce the conversion price of the Notes to $2.87. In the event the closing
price of the Company's common stock equals or exceeds $8.61 for twenty
consecutive days and the average trading volume during the two weeks preceding
the notice of redemption is equal or greater than 100,000 shares per week then
the Notes may be redeemed by the Company at the following prices
Year Redemption Price
---- ----------------
1999 104%
2000 103%
2001 102%
2002 100%
The Notes continue to bear interest at the rate of 16% per annum on the
remaining principal (which is capitalized annually and due upon maturity) and
payment is secured by a lien on substantially all of the Company's assets. As of
December 18, 1999 the principal amount of the Notes was $170,373.
The Company had working capital of $691,668 at November 30, 1999 compared
to $2,392,161 at November 30, 1998 and ratios of current assets to current
liabilities of 2.1:1 and 5.4:1 as of November 30, 1999 and 1998, respectively.
The working capital decrease of approximately $1,700,000 was primarily due to
the loss from operations for fiscal 1999.
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, 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 in its medical device segment. The Company's
receivables balances over 90 days past due was 16.8% of the receivables balance
at November 30, 1999 compared to 11.4% at November 30, 1998. 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 2000.
The Company believes that there has not been a significant impact from
inflation on the Company's operations during the past three fiscal years.
IMPACT OF YEAR 2000
Beginning in fiscal 1998, we established a year 2000 Program to address
certain year 2000 issues. This program focused on three key areas of readiness:
o Internal Infrastructure Readiness, addressing internal hardware
and software, including both information and non-information
technology systems;
1999 Annual Report Page 11
<PAGE>
o Supplier Readiness, addressing the preparedness of suppliers
providing material incorporated into our products; and
o Product Readiness, addressing product functionality.
For each readiness area, we performed risk assessment, tested and repaired
year 2000 issues as needed, developed contingency plans as considered necessary
to mitigate unknown risks, and communicated year 2000 information to employees,
suppliers, customers and other third parties.
INTERNAL INFRASTRUCTURE READINESS. We completed an assessment of our
internal software applications and information technology hardware and completed
any necessary testing and repairs. These readiness activities were intended to
encompass all major categories of software applications we use, including:
o those used for manufacturing, engineering, sales, finance, and
human resources;
o hardware, including hubs, routers, telecommunication equipment,
workstations and other items; and
o non-information technology systems, including embedded systems,
facilities and other operations, such as financial, banking,
security and utility systems.
As of November 30, 1999, we completed the evaluation and necessary testing
and repairs of our mission critical internal infrastructure and determined it to
be year 2000 ready.
SUPPLIER READINESS. This area focused on minimizing two components of risk
associated with suppliers:
o a supplier's product integrity and
o a supplier's business capability to continue providing products
and services.
We identified and contacted key suppliers regarding their relative risks in
these two components. As of December 31, 1999, we had received responses from
our key suppliers, who indicated that the products provided to us were year 2000
compliant, or they were in the process of developing or executing repair plans
to address year 2000 issues which may have affected their ability to continue
providing products and services to us.
PRODUCT READINESS. This area focused on identifying and resolving year 2000
issues existing in our products. This area encompassed a number of activities,
including testing, evaluation, engineering and manufacturing implementation. As
of November 30, 1999, we had completed a year 2000 readiness assessment for our
current generation of released products based upon a series of
industry-recognized testing parameters and had determined that these products
were year 2000 ready or had developed product upgrades to address any known
issues.
FUTURE IMPACT. As of January 31, 2000, we have not had any Year 2000
readiness issues. Although we are not aware of any Year 2000 readiness issues
affecting us at this time, there can be no assurance that issues, not yet
apparent to us, will not arise during the year 2000 and beyond.
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, 1999, the Company had
approximately $794,430 cash and short term investments. The Company has
experienced negative cash flows since fiscal 1995 and expects
1999 Annual Report Page 12
<PAGE>
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 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.
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.
1999 Annual Report Page 13
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30,
ASSETS
1999 1998
---- ----
<S> <C> <C>
Current assets
Cash and cash equivalents $ 794,430 $ 2,075,179
Accounts receivable, net of allowance for doubtful accounts
of $116,000 and $500,000 170,657 304,465
Inventory 372,742 503,994
Prepaid expenses and other current assets 34,656 57,776
------------ -----------
1,372,485 2,941,414
Property and equipment, net of accumulated depreciation 440,555 578,404
Product software development costs 8,714 34,856
Other assets 144,296 202,750
------------ -----------
$ 1,966,050 $ 3,757,424
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 680,817 $ 549,253
Convertible long-term debt 50,000 950,000
Leases payable, long-term 68,902 107,724
Deferred warranty revenue 24,542 31,448
------------ -----------
Total liabilities 824,261 1,638,425
============ ===========
Temporary equity - put option -- 4,021,991
Stockholders' equity
Common stock $.001 par value; 20,000,000 shares
authorized, 12,258,781 and 11,586,321 shares issued
and 12,236,781 and 11,564,321 outstanding, respectively 12,259 11,587
Paid-in capital 23,098,930 17,150,547
Accumulated deficit (21,893,775) (18,989,501)
------------ -----------
1,217,414 (1,827,367)
Less treasury stock at cost, 22,000 common shares (75,625) (75,625)
------------ -----------
Total stockholders' equity 1,141,789 (1,902,992)
------------ -----------
$ 1,966,050 $ 3,757,424
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements
1999 Annual Report Page 14
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED NOVEMBER 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Sales $ 2,040,520 $ 2,052,157 $ 2,452,084
Less sales returns and allowances -- 5,530 39,935
----------- ----------- -----------
2,040,520 2,046,627 2,412,149
Cost of sales 1,167,020 1,099,515 1,406,480
----------- ----------- -----------
Gross profit 873,500 947,112 1,005,669
Selling, general, and administrative expenses 2,319,277 2,623,984 3,038,949
Provision for uncollectible accounts 74,148 289,716 214,601
Research and development expenses 571,449 486,843 551,681
Debt conversion expense 737,135 -- --
Loss from operations (2,828,509) (2,453,431) (2,799,562)
Interest income 68,126 57,081 98,214
Interest expense (143,891) (179,704) (25,430)
(Loss) gain on sale of securities -- -- (30,574)
----------- ----------- -----------
Loss before provision for income taxes (2,904,274) (2,576,054) (2,757,352)
Provision for income taxes -- -- --
----------- ----------- -----------
Net loss $(2,904,274) $(2,576,054) $(2,757,352)
=========== =========== ===========
Net loss per share - basic and diluted $ (.25) $ (.26) $ (.29)
=========== =========== ===========
Weighted average common shares
outstanding - basic and diluted 11,761,054 9,893,022 9,562,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
1999 Annual Report Page 15
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30,
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, 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)
Elimination of put option
related to convertible debt -- 4,021,991 -- -- -- -- 4,021,991
Issuance of common stock
in exchange for services 1 2,999 -- -- -- -- 3,000
Stock issued in
conversion of debt 539 872,944 -- -- -- -- 873,483
Securities issued to
induce debt conversion -- 737,135 -- -- -- -- 737,135
Exercise of stock options 37 104,798 -- -- -- -- 104,835
Issuance of common stock
for cash 95 208,516 -- -- -- -- 208,611
Net loss -- -- (2,904,274) -- -- -- (2,904,274)
------- ------------ ------------ ------ --------- -------- -----------
Balances - November 30, 1999 $12,259 $ 23,098,930 $(21,893,775) 22,000 $(75,625) $ -- $ 1,141,789
======= ============ ============ ====== ======== ======== ============
</TABLE>
See accompanying notes to consolidated financial statements
1999 Annual Report Page 16
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(2,904,274) $(2,576,054) $(2,757,352)
----------- ----------- -----------
Adjustments to reconcile net loss to
net cash (used) by operating activities
Depreciation and amortization 258,975 269,471 267,738
Debt conversion expense 737,135 -- --
(Increase) decrease in
Accounts receivable 133,808 (106,564) 206,029
Inventory 131,252 163,261 456,409
Prepaid expenses and other current assets 23,120 (28,988) 15,635
Increase (decrease) in
Accounts payable and accrued liabilities 131,564 (38,780) (85,349)
Other, net (42,529) 4,583 (50,917)
----------- ----------- -----------
Total adjustments 1,373,325 262,983 809,545
----------- ----------- -----------
(1,530,949) (2,313,071) (1,947,807)
----------- ----------- -----------
Cash flows from investing activities
Sale of securities available for sale -- -- 2,185,594
Capital expenditures (66,246) (168,699) (383,840)
----------- ----------- -----------
(66,246) (168,699) 1,801,754
----------- ----------- -----------
Cash flows from financing activities
Principal payment on long-term debt -- -- (100,000)
Net proceeds from issuance of long-term
convertible debt -- 1,980,805 --
Net proceeds from issuance of common stock
and put options 316,446 1,935,878 205,633
----------- ----------- -----------
316,446 3,916,683 105,633
----------- ----------- -----------
Net change in cash and cash equivalents (1,280,749) 1,434,913 (40,420)
Cash and cash equivalents - beginning 2,075,179 640,266 680,686
----------- ----------- -----------
Cash and cash equivalents - ending $ 794,430 $ 2,075,179 $ 640,266
=========== =========== ===========
Supplemental disclosure of cash paid
Interest $ 27,891 $ 25,416 $ 25,430
Income taxes 8,691 4,076 5,632
</TABLE>
See accompanying notes to consolidated financial statements
1999 Annual Report Page 17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
LIQUIDITY
During August 1999, 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 possible operating losses during the 2000
fiscal year, the Company believes that the available cash on hand and the
operating plan for 2000, 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 health care providers.
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, 1999, the Company had approximately $736,000 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. Repair 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.
FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments, including cash and cash
equivalents, accounts receivable and accounts payable approximated fair value as
of November 30, 1999 because of the relative short maturity of these
instruments. The carrying value of leases payable and the note payable
approximated fair value at November 30, 1999 based upon quoted market prices for
the same or similar instruments.
1999 Annual Report Page 18
<PAGE>
NOTE 2
SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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.
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.
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, 1999,
1998, and 1997, approximately $863,000, $745,000, and $595,000, respectively,
from the above such contracts were included in revenue.
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.
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.
1999 Annual Report Page 19
<PAGE>
NOTE 3
INVESTMENTS
Sales of available-for-sale securities for the years ended November 30,
were as follows:
1999 1998 1997
---- ---- ----
Proceeds from sale $ -- $ -- $ 2,185,594
Gross realized gains -- -- --
Gross realized losses -- -- (30,574)
NOTE 4
INVENTORY
November 30,
-------------------------
1999 1998
-------- --------
Raw materials
(component parts and supplies) $167,902 $216,350
Finished units 204,840 287,644
-------- --------
$372,742 $503,994
======== ========
NOTE 5
PROPERTY AND EQUIPMENT
November 30,
-------------------------------
1999 1998
----------- -------------
Machinery and equipment $ 1,158,640 $ 1,151,318
Loaner equipment 244,542 244,542
Furniture and fixtures 387,011 387,011
Office equipment 681,805 622,881
Leasehold improvements 51,746 51,746
Equipment held under capital leases 341,696 341,696
----------- -----------
2,865,440 2,799,194
Less accumulated depreciation and
amortization (2,424,885) (2,220,790)
----------- -----------
Property and equipment - net $ 440,555 $ 578,404
=========== ===========
At November 30, 1999 and 1998, the equipment under the capital leases had
net book values of approximately $101,400 and $148,000, respectively.
Depreciation expenses were $204,000, $198,000, and $214,000 for 1999, 1998,
and 1997, respectively.
NOTE 6
PRODUCT SOFTWARE DEVELOPMENT COSTS
During the years ended November 30, 1999, 1998, and 1997, amortization
costs related to product software development costs was $26,142 per year.
NOTE 7
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
November 30,
--------------------
1999 1998
-------- --------
Accounts payable - trade $325,477 $278,224
Deferred warranty revenue 135,109 156,813
Accrued payroll 96,626 78,539
Other accrued expenses 123,605 35,677
-------- --------
$680,817 $549,253
======== ========
1999 Annual Report Page 20
<PAGE>
NOTE 8
CONVERTIBLE LONG-TERM DEBT
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 the 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 the Note holders a security interest in substantially
all of the Company's assets.
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 certain 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.
On May 17, 1999 the agreement was amended to eliminate such redemption
rights in exchange for 290,000 common stock purchase warrants exercisable at
$1.67 per share and 200,000 warrants exercisable at $2.87 per share until
November 15, 2005 to be distributed pro rata among such holders. The exercise
price of all the warrants issued and amended may be adjusted in certain
circumstances to protect holders against dilution. The elimination of these
redemption rights resulted in a significant increase to total stockholders'
equity because such rights were previously characterized as temporary equity.
On August 25, 1999, the holders of $950,000 principal amount of the
Company's 16% Convertible Notes due December 18, 2002 (the "Notes") converted
$900,000 of the principal into 538,922 shares of common stock and 500,000 common
stock purchase warrants exercisable at $1.67 per share (subject to adjustment in
the manner described below) until November 1, 2002. In addition, Galen Partners
III, L.P., a Delaware limited partnership, Galen Partners International III,
L.P., a Delaware limited partnership, and Galen Employee Fund III, L.P., a
Delaware limited partnership (collectively the "Galen funds") invested an
additional $250,000 in exchange for 95,238 shares of the Company's common stock
and 75,000 common stock purchase warrants exercisable at $2.625 per share until
November 15, 2002. The exercise price of all the warrants issued and amended may
be adjusted in certain circumstances to protect the holders against further
dilution. The note purchase agreements between the Company and the funds
represented by Galen were further amended to limit the Company's ability to
prepay the remaining $50,000 principal and $118,407 due on the Notes and to
reduce the conversion price of the Notes to $2.87. In the event the closing
price of the Company's common stock equal or exceeds $8.61 for twenty
consecutive days and the average trading volume during the two weeks preceding
the notice of redemption is equal or greater than 100,000 shares per week, then
the Notes may be redeemed by the Company at the following prices:
Year Redemption Price
---- ----------------
1999 104%
2000 103%
2001 102%
2002 100%
The Notes continue to bear interest at the rate of 16% per annum on the
remaining principal (which is capitalized annually and due upon maturity) and
payment is secured by a lien on substantially all of the Company's assets.
NOTE 9
CAPITAL LEASE OBLIGATIONS
The Company has entered into various capital leases for equipment expiring
through November 2001 with aggregate monthly payments of $4,562.
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, 1999:
1999 Annual Report Page 21
<PAGE>
For the Years Ending
November 30,
--------------------
2000 $ 50,789
2001 45,080
2002 27,011
2003 8,351
--------
Total minimum lease payments 131,231
Less amount representing interest 22,958
--------
Present value of net minimum lease
payments 108,273
Less current maturities 39,371
--------
Long-term maturities $ 68,902
========
NOTE 10
STOCK OPTIONS AND WARRANTS
The qmed, Inc. 1999 Equity 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 and
consultants of the Company until September 2009. The Plan also provides for
Director Non-Qualified stock options to be granted to Directors of the Company
(other than directors who are also officers or employees of the Company).
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).
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 1990, 1997 and 1999 plans, most 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 non-qualifying 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 estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for November 30:
1999 1998
---- ----
Risk-free interest rate 5.0% 4.7%
Expected volatility 77.0% 70.0%
Dividend yield -- --
Expected life 5.5 years 5.5 years
1999 Annual Report Page 22
<PAGE>
NOTE 10
STOCK OPTIONS AND WARRANTS- (CONTINUED)
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:
1999 1998
---- ----
Pro forma net loss $(3,519,855) $(2,576,054)
Pro forma loss per share
Basic (.30) (.27)
Diluted (.30) (.27)
There was no compensation expense recorded from stock options for the years
ended November 30, 1999, 1998, and 1997.
A summary of the Company's stock option activity, and related information
for the years ended November 30, follows:
<TABLE>
<CAPTION>
Weighted-Average Number of Shares Weighted-Average
Options Exercise Price Exercisable Exercise Price
------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Outstanding
November 30, 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
Granted 569,827 2.44
Exercised (32,033) 2.50
Terminated (22,000) 3.00
Outstanding
November 30, 1999 1,553,724 2.55 1,196,237 2.17
Weighted-average fair
value of options granted
during the year 1999 1998
---- ----
Where exercise price
equals stock price $ 3.24 $ --
Where exercise price
exceeds stock price $ 3.25 $ 3.56
Where stock price
exceeds exercise price $ 3.13 $ --
</TABLE>
1999 Annual Report Page 23
<PAGE>
NOTE 10
STOCK OPTIONS AND WARRANTS- (CONTINUED)
Following is a summary of the status of stock options outstanding at November
30, 1999:
<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 1.1 $ .75 192,324 $ .75
$1.38 - 1.75 400,971 3.5 $1.56 400,971 $1.56
$2.44 - 3.50 708,429 8.2 $2.97 546,942 $2.95
$3.69 - 4.47 252,000 9.5 $4.04 56,000 $3.78
------------ --------- --- ----- --------- -----
$ .75 - 4.47 1,553,724 6.3 $2.50 1,196,237 $2.17
</TABLE>
There were no warrants exercised for the fiscal year ended November 30,
1999, 1998 and 1997.
NOTE 11
INCOME TAXES
Deferred tax attributes resulting from differences between financial
accounting amounts and tax bases of assets and liabilities at November 30, 1999
and 1998 follow:
November 30,
1999 1998
------------ ----
Current assets and liabilities
Allowance for doubtful accounts $ 17,000 $ 75,000
Inventory reserve 7,000 --
Inventory overhead capitalization 53,000 43,000
Deferred warranties 24,000 28,000
---------- ----------
101,000 146,000
Valuation allowance 101,000 146,000
---------- ----------
Net current deferred tax asset (liability) $ -- $ --
========== ==========
Noncurrent assets and liabilities
Depreciation $ 13,000 $ 16,000
Net operating loss carryforward 3,743,000 3,224,000
Research and development credit
carryforward 9,000 7,000
Capital loss carryforward 5,000 5,000
---------- ----------
3,770,000 3,252,000
Valuation allowance 3,770,000 3,252,000
Net noncurrent deferred tax ---------- ----------
asset (liability) $ -- $ --
========== ==========
The valuation reserve has been established for those tax credits, loss
carryforwards and deductible temporary differences which are not presently
considered more likely than not to be realized.
The statutory income tax rate differs from the effective tax rate used in
the financial statements as a result of the current year net operating losses,
the benefit of which is not being recognized in the current year. The valuation
allowance increased $473,000 in 1999 due to additional net operating loss
carryforwards.
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
1999 1998 1997
---- ---- ----
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%
==== ==== ====
1999 Annual Report Page 24
<PAGE>
NOTE 11
INCOME TAXES- (CONTINUED)
As of November 30, 1999, the Company has the following net operating loss
carryforwards for tax purposes:
Expiration Date:
For the Year Ending
November 30, Federal New Jersey New York
- -------------------- ------- ---------- --------
2000 $ 438,321 $ 360,431 $ 500,109
2002 915,089 1,344,961 634,130
2003 4,340,459 3,486,872 4,076,553
2004 1,498,680 1,571,569 1,393,399
2005 495,605 2,130,010 1,149,948
2007 12,016 -- --
2008 356,049 -- 342,157
2009 1,180 -- --
2010 1,952,500 -- 1,343,360
2011 5,805,181 -- 3,489,152
2012 3,366,034 -- 1,535,451
2013 2,018 -- --
----------- ----------- -----------
$21,518,990 $ 8,893,843 $15,005,646
=========== =========== ===========
As of November 30, 1999, the Company has the following general business tax
credit carryforwards for tax purposes:
Expiration Date:
For the Year Ending
November 30,
-------------------
2000 $ 58,000
2001 65,000
2002 17,000
--------
$140,000
========
In December 1999, qmed, Inc. sold $4,115,000 of New Jersey net operating
loss carryforwards for $309,256 in cash as part of the New Jersey Technology
Business Tax Certificate Program.
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. During the years ended 1999,
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
$20,900, $20,800 and $22,000 respectively.
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 2000 are $183,756.
Rent expense for the years ended November 30, 1999, 1998 and 1997, were
$213,640, $130,418 and $173,890, respectively.
1999 Annual Report Page 25
<PAGE>
NOTE 13
COMMITMENTS AND CONTINGENCIES- (CONTINUED)
LITIGATION
The Company is subject to claims and legal proceedings covering a wide
range of matters that arise in the ordinary course of business. It is
management's opinion that the ultimate resolution of these matters will not have
a material effect on the Company's consolidated financial position and results
of operations.
MAJOR CUSTOMER
The Company had one major customer during 1999. Major customers are
considered to be those who account for more than 10% of total revenue. This
customer accounted for approximately 21% of total revenue for the year ended
November 30, 1999.
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 1999, 1998 and
1997 is as follows:
Medical Disease
Equipment Management
Sales Services Consolidated
---------- ----------- ------------
1999
- ----
Sales $ 1,171,226 $ 869,294 $ 2,040,520
Operating (loss) (1,352,313) (1,551,961) (2,904,274)
Total assets 1,620,690 345,360 1,966,050
Depreciation and amortization 146,434 112,541 258,975
Capital expenditures 55,462 10,784 66,246
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
NOTE 15
YEAR 2000
As of November 30, 1999, all medical devices sold by qmed, Inc. were Year
2000 compliant. ohms|cad was designed to be Year 2000 compliant. All of the
Company's internal operating systems were compliant as of November 30, 1999,
however, Year 2000 problems may not surface until after January 1, 2000.
1999 Annual Report Page 26
<PAGE>
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
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 statements. The Company adopted SFAS 130 in the fiscal year ending
November 30, 1999. Adoption of this statement had 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 adopted SFAS 131 in the fiscal year ending November
30, 1999. Adoption of this Statement had 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 derivatives 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.
1999 Annual Report Page 27
<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, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended November 30, 1999, 1998 and 1997. 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, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years ended November 30, 1999, 1998 and 1997 in
conformity with generally accepted accounting principles.
AMPER, POLITZINER & MATTIA P.A.
February 23, 2000
Edison, New Jersey
1999 Annual Report Page 28
<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, 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
FISCAL YEAR ENDED NOVEMBER 30, 1999 High Low
---- ---
First Quarter $4 $2 3/8
Second Quarter 3 1/8 2 1/4
Third Quarter 5 5/8 2 3/4
Fourth Quarter 4 1/2 2 3/4
As of February 18, 1999, the Company's common stock was held of record by
391 persons. On February 18, 1999, the closing price reported was $ 9 1/2.
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.
1999 Annual Report Page 29
<PAGE>
General Corporate Information
Board of Directors
David P. Feldman
Chairman of the Board
Retired Chairman of AT&T
Investment Management Corp.
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
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.
24
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation of our report dated February 23, 2000 on
the financial statements of qmed, Inc. and Subsidiaries as of November 30, 1999,
1998 and 1997 and for the years ended November 30, 1999, 1998 and 1997, which is
included in the Annual Report on form 10-K of qmed, Inc. and Subsidiaries.
/s/ Amper, Politziner & Mattia P.A.
AMPER, POLITZINER & MATTIA P.A.
February 24, 2000
Edison, New Jersey
25
<TABLE> <S> <C>
<ARTICLE> 5
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