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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, 2001
Commission File Number: 0-11411
Q-MED, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 22-2468665
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(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.
100 Metro Park South, Laurence Harbor, New Jersey 08878
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(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 January 28, 2002, the aggregate value of the registrant's voting
stock held by non-affiliates was $136,826,521 (computed by multiplying the last
reported sale price on January 28, 2002 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 January 28, 2002, there were 14,323,277 shares of the
registrant's common stock, $.001 par value, issued and outstanding.
Documents incorporated by reference:
Document Form 10-K Reference
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Portions of the Registrant's Proxy Statement for III
its 2002 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 we operate, projections of future performance, perceived
opportunities in the market and statements regarding our mission and vision. Our
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." We undertake no obligation to update or
revise such forward-looking statements.
General
Q-Med, Inc. is a Delaware corporation and is the successor by merger to
the business of a New Jersey corporation organized on February 1, 1983.
Interactive Heart Management Corp. ("IHMC(R)"), a subsidiary founded during the
year ended November 30, 1995 ("fiscal 1995"), developed and is marketing an
integrated cardiovascular disease management system under the name "ohms|cvdsm"
(Online Health Management System for Cardiovascular Disease). It includes
related systems to assist health plans, government organizations and employer
groups in managing the incidence, treatment, and cost of cardiovascular
conditions, including coronary artery disease ("CAD"), stroke, congestive heart
failure ("CHF"), hypertension, hyperlipidemia and the cardiovascular
complications of diabetes. These systems are designed to aid primary health care
physicians in the use of optimal medical management for patients with these
conditions, as well as those at high risk of developing these conditions. The
net impact of this approach is the improvement in cardiovascular health and the
associated reduction in its cost. Our system and services are uniquely suited to
assist primary health care physicians in discharging their greater medical
responsibilities, and assisting in their efforts to reduce the overall cost of
health care while improving the cardiovascular health of their patients. As of
November 30, 2001, we had contracts to provide these services to 10 health plans
in multiple markets in 8 states covering approximately 1.1 million health plan
members.
The ohms|cvd system consists of Monitor One(TM) STRx ambulatory ECG
monitoring technology; an on-line analysis, reporting and archiving center (The
ohms Center); and an integrated cardiology consultant practice. This entire
system noninvasively and reliably quantifies the probable risk of a heart
attack, unstable angina and cardiovascular complications and provides the
physician with appropriate patient-specific medical therapy recommendations. The
emphasis throughout the process is on early identification and prevention of
cardiovascular events, modification of critical risk-factors and the
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optimization of appropriate medicine. Early treatment, with emphasis on medical
intervention results in an overall lowering of the cost of cardiovascular
disease and its complications.
We also produce, sell and support a line of ischemic heart monitors and
a system that analyzes heart rate variability under the name, Monitor One
nDx(TM) ("nDx"). Determining the diminishment and/or loss of variation in heart
rate may assist the physician in making a diagnosis of the severity of autonomic
neuropathy. Autonomic neuropathy, a deterioration of the autonomic nervous
system, is associated with diabetic patients and may lead to complications in
the functioning of the heart, respiratory systems, digestion, body temperature,
metabolism, perspiration and the secretion of certain endocrine glands.
Our executive offices are located at 100 Metro Park South, Laurence
Harbor, New Jersey 08878 and our telephone number is (732) 566-2666.
ohms|cvdsm Systems
ohms|cvd is the Company's medical "expert system" designed as a total
disease management process for CAD utilizing "best practice" solutions in the
management of this disease. It consists of Monitor One STRx, our 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
its complications, and rationally directs the patient to appropriate therapy
with the accent on early detection, the modification of critical risk factors
and medical intervention. The ohms|cvd system expands upon our core technology,
first incorporated in our ohms|cad(R) system, adding the capability to manage
patients that have congestive heart failure, diabetic cardiovascular
complications and the risk of stroke.
The systems are evidence based, relational mechanisms, using patient
descriptors which include:
o demographics,
o medical history,
o current medical therapy, including aspirin,
o lipid and hypertension profiles,
o obesity and lifestyle,
o smoking,
o glucose levels,
o ambulant ischemia, and
o rate and rhythm disturbances and other ECG abnormalities.
In its decision making process, recommendations for management are relational
and are tailored to an individual patient. Significantly, each individual
patient's medical history including risk factor profile, current medication and
other relevant patient specific information are entered into the systems' "best
practices" database for primary and secondary prevention analysis and treatment.
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The systems' centralized digital storage of each patient's iterative
review allows for the continuous description and analysis of quantifiable
results including:
o success of the stratification,
o proportion of patients assigned to various therapies,
o objective outcomes,
o interplay with pharmacy benefit managers, and
o physician and patient compliance.
For example, in its risk prevention mode (myocardial infarction,
unstable angina, coronary complications), 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 uploaded in near real-time to our central database (The ohms Center), which
in turn stratifies each individual patient into high or low risk. It then
proposes to lower a high risk patient's 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 that will maintain the patient in the low-risk pool. In both
circumstances, therapeutic actions are guided by our proprietary disease
management algorithm, which in turn is based on national practice guidelines and
evidence based medicine. Outcome information is available continuously because
all of the interactions and data are stored electronically in The ohms Center.
Because ohms|cad and ohms|cvd are active disease management processes
emphasizing a continuum of care, derived from early detection of ambulant
ischemia and modification of patient risk factors, important cost-effective
improvements in cardiac events can result from its use, which have been verified
by empirical health and cost outcomes. Plans utilizing the systems have reported
savings of 16% to 20% in the first year of implementation. The ohms|cvd system
continuously monitors the care process, and thus, results are reported as
outcomes. Favorable outcomes increase our market share, decrease our economic
risk and increase our product differentiation.
The systems utilize our Monitor One product, which is technology
designed to detect changes in the ECG signal which may be associated with
diseases of the heart. Our Monitor One may be worn on a belt or carried in the
patient's pocket, and 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.
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At November 30, 2001, we had contracts with 10 health plans to provide
disease management services in multiple health plan markets in 8 states. The
number of members under contract was as follows:
At November 30, 2001 2000 1999
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Members under contract 1,073,046 373,700 126,400
At November 30, 2001, of the 1,073,046 plan members under contract, we
had 913,627 commercial members and 159,419 Medicare+Choice members.
Disease management contracts require sophisticated management
information systems to enable us to manage the care of large populations of
patients with certain chronic diseases such as CAD, stroke, diabetes, and heart
failure as well as certain other medical conditions. They also require us to
assist in reporting outcomes and costs before and after our involvement with a
health plan's enrollees. We have developed and continually expand and improve
our systems which we believe meet our information management needs for disease
management. We have installed and utilize the systems for the benefit of
enrollees in all of the health plans which we contract as customers. The
anticipated expansion and improvements in our information management systems
will continue to require significant investments by us in information technology
software, hardware and our information technology staff.
Medicare Coordinated Care Demonstration
We have been awarded and selected to participate in the Medicare
Coordinated Care Demonstration (MCCD) project. Our ohms|cad program is the only
one that will be evaluated specifically for management of CAD.
The Centers for Medicare and Medicaid Services ("CMS"), which
administer Medicare, designed MCCD to evaluate the cost-effectiveness of
reimbursing disease management services in the Medicare fee for service model.
In accordance with the Balanced Budget Act of 1997, which mandated the
demonstration, CMS "... may issue regulations to implement, on a permanent
basis, the components of the demonstration projects that are proven to be
cost-effective for the Medicare program."
Under the award, we are implementing our ohms|cad disease management
technology in a controlled randomized study of Medicare beneficiaries who have
been diagnosed previously with CAD. Patient enrollment in California will begin
in early 2002 and we will receive fees from CMS for up to four years.
MCCD was authorized by the Balanced Budget Act of 1997. It is intended
to test coordinating the care of Medicare beneficiaries with chronic conditions
that represent high costs to the Medicare program. Coordinated care programs
serving patients with chronic conditions were solicited and evaluated.
Conditions included heart disease, diabetes, liver and lung diseases, stroke and
other vascular diseases, psychotic disorders, major depressive disorders,
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drug/alcohol dependence, Alzheimer's or other dementia, cancer or HIV/AIDS.
Participant selection was made through a national competitive process.
Business Strategy
Our strategy is to develop additional relationships with health plans
to provide disease management services and to further develop and expand our
cardiovascular disease management business. We anticipate that we will utilize
our state-of-the-art medical information technologies to gain a competitive
advantage in delivering disease management services. We anticipate that
significant investments will be made during fiscal 2002 in the development of
the clinical programs, the associated information technology support for these
expanded initiatives and that many of these investments will be made prior to
the initiation of revenues from contracts. It is also anticipated that some of
these new capabilities and technologies may be added through strategic alliances
with other entities.
We anticipate that additional disease management contracts that we may
sign with health plans, employer groups and governmental agencies may take one
of several forms, including per member per month payments to us, some form of
shared savings of overall enrollee healthcare costs, fee for services for
enrolled members, or some combination of these arrangements. We anticipate that
under most contracts, some portion of our fees will be at risk and subject to
our performance against financial cost savings and clinical improvements. When
we believe it is prudent to do so, we may insure or reserve against a portion of
revenue.
Industry and Other Risk Considerations
In the process of executing our business strategy, our operations and
financial condition are subject to certain risks. The primary industry risks are
described below and readers of this Annual Report on Form 10-K should take such
risks into account in evaluating any investment decision involving the company.
This section does not describe all risks applicable to our business and is
intended only as a summary of certain material factors that impact our
operations in the industry in which we operate. More detailed information
concerning these and other risks is contained in other sections of this Annual
Report on Form 10-K.
The healthcare industry in which we operate is currently subject to
significant cost reduction pressures as a result of constrained revenues from
governmental and private sources as well as from increasing underlying cost of
medical care. We believe that these pressures will continue and possibly
intensify. While we believe that our services are geared specifically to assist
health plans, employer groups and governmental agencies in controlling the high
costs associated with the treatment of chronic diseases, the pressures to reduce
costs immediately may have a negative effect in certain circumstances on the
ability of or the length of time required for us to sign new contracts.
Health plans and employers are subject to considerable state and
federal government regulation. Many of these regulations are vaguely written and
subject to differing interpretations that may, in certain cases, result in
unintended consequences that may impact our ability to effectively deliver our
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services. The current focus on regulatory and legislative efforts to protect the
confidentiality of patient identifiable medical information, as evidenced by the
Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), is one
such example. We believe that our ability to obtain patient identifiable medical
information for disease management purposes from health plans with which we
contract is protected in recently released federal regulations governing medical
record confidentiality. State legislation or regulation of this information may
be more restrictive and may preempt federal legislation. We are continually
determining the extent to which specific state legislation or regulations govern
our health plan operations. New federal or state legislation or regulation in
this area which prohibitively restricts the availability of certain critical
information to us would have a material negative impact on our disease
management operations.
The disease management industry, which is growing rapidly, is a
relatively new segment of the overall healthcare industry and has many entrants
marketing various services and products labeled as "disease management." The
generic label of disease management has been utilized to characterize a wide
range of activities from the sale of medical supplies and drugs to services
aimed at demand management. Because the industry is relatively new, health plan
purchasers of these services have not had significant experience purchasing,
evaluating or monitoring such services which generally results in a lengthy
sales cycle for new health plan contracts. In addition, because the industry is
still relatively new and health plans have only recently entered into disease
management contracts, we have a significant concentration of our revenues
represented by contracts with two health plans, PacifiCare of California and
Regence Blue Cross/Blue Shield of Oregon, which collectively accounted for 63%
of our revenues in fiscal 2001. Until additional significant health plan
contracts are signed and implemented by us, our results of operations and
financial condition would be negatively and materially impacted by the loss or a
downward restructuring of a contract with a single large health plan customer.
The disease management industry is dependent on the effective use of
information technology. While we believe that our state-of-the-art technology
provides us with a competitive advantage in the industry, we expect to
continually invest in updating and expanding technology and, in some cases, will
be required to make systems investments in advance of the generation of revenues
from contracts. In addition, these system requirements expose us to technology
obsolescence risks. Accordingly, we amortize our computer software and hardware
over five years.
The measurement of our performance under our health plan contracts is
highly dependent upon the timely receipt of accurate data from its health plan
customers and the accuracy of the analysis of such data. Data acquisition, data
quality control and data analysis are intense and complex processes subject to
error. Untimely, incomplete or inaccurate data from a customer or flawed
analysis of such data could materially impact our revenues from that contract.
A potential seasonal impact on covered membership could include a
decision by a health plan to withdraw or expand coverage thereby automatically
disenrolling previously covered members or enrolling new members.
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Share prices of healthcare companies and our share price in particular
may be volatile. The volatility may be influenced by the market's perceptions of
the healthcare sector in general, or other companies believed to be similar to
us or by the market's perception of our operations and future prospects. Many of
these perceptions are beyond our control.
Marketing
We directly market our services to health plans, large physician
practice groups, employers and governmental agencies through our sales staff.
Contracting efforts are conducted and coordinated by senior management
personnel, with the aid, where appropriate, of certain independent consultants.
In addition, we generally pursue 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, employer or government
organization, to which a number of companies respond. We utilize demographic and
cost of service data from the organization as well as statistical information to
conduct an initial cost analysis to determine program feasibility. As part of
our sales efforts, management meets with appropriate personnel from the
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 qualifications and the
price at which the bidder is willing to provide the services. We sometimes
engage independent consultants to assist in responding to RFPs. Based on the
proposals received in response to an RFP, the organization will award a contract
to the successful bidder. In addition to issuing formal RFPs, some organizations
may issue an RFQ. In the RFQ process, the requesting agency selects a firm it
believes is the most qualified to provide the requested services and then
negotiates the terms of the contract with that firm, including the price at
which its services are to be provided. We also attend and promote our services
at key conferences throughout the United States where potential clients are
present.
Warranty
In our medical equipment segment, we extend a standard warranty to
end-users of purchased or leased devices. Extended one-year to three-year
warranties are available to end-users at additional cost. Beginning in May, 1999
we changed our policy to extend only one year warranties. Extended warranty
sales represented 1.7%, 7.6%, and 16.1% of total sales for fiscal 2001, 2000 and
1999, respectively, and are not expected to represent a significant portion of
revenue in future periods.
Manufacturing
We contract with electronics companies for the manufacture and
sub-assembly of devices and accessories and provide these contractors with
technical expertise. These devices undergo final testing and packaging at our
facility located in Sag Harbor, New York. Although we have 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 our relationship with our independent contract
manufacturers could subject us to substantial delays in the delivery of our
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products to customers. Such delays would subject us to possible cancellation of
orders and the loss of certain customers.
Whenever possible, we use multiple sources of supply for components.
However, we believe that there are only singular sources of supply for certain
components. There is no assurance that these sources will continue to supply
those parts and, if they become unavailable, we would be adversely affected.
Also, there can be no assurance that our contract manufacturers will maintain an
acceptable level of quality and capability for assembling the products to our
specifications. We have not experienced delays in obtaining supplies which
affected our ability to deliver finished goods.
Competition
We believe ohms|cad and ohms|cvd offer unique solutions for
cardiovascular disease management. However, there are several entities,
including pharmaceutical companies, pharmacy benefit managers and independent
companies that are pursuing CAD management which we consider to be competition.
To our knowledge, none of these companies deal with CAD and related
diseases 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 to follow it with post-hospitalization case management. In
addition, manufacturers of drugs that reduce cholesterol have designed programs
based on high blood lipids and have developed protocols emphasizing the use of
their drug(s). To our knowledge, ohms|cad and ohms|cvd are the only operating
disease management systems that include primary and secondary prevention; risk
stratify the patients into those who are and who are not in danger of adverse
events in the near term; and reduce practice variation and referrals. No other
CAD management program to our knowledge has shown comparable results with
beneficial patient outcomes that lowered overall CAD healthcare costs.
We believe we have competitive advantages based on the following:
o The entire management system and its components are
proprietary and patented.
o Our ischemia technology has been clinically validated with
results appearing in several "peer reviewed" journals.
o Health outcomes have been documented and presented at
prestigious meetings, such as the American Heart Association
Scientific Sessions.
o We have an extensive and growing knowledgebase of how specific
therapeutic modalities positively affect patients' health.
o We have proven successes in actual implementation of our CAD
disease management system in the field that demonstrates our
ability to produce faster rollouts and faster health and
economic outcomes to the plan.
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o We have created proprietary analytics that define the target
population at risk.
o We have established an operating infrastructure with
integrated resources and processes amplified by corporate
expertise.
o We have documented improvements for a health plan customer of
its HEDIS audit, a competitive advantage for each customer.
o We are perhaps the only disease management program in which
the patient is seen face to face on a regularly scheduled
basis by disease management specialists who work for us.
Competition may increase and such competition could come from companies
that are considerably larger and have greater financial and marketing resources
than we have.
Monitor One(TM) 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. In many
cases, some of these companies have substantially greater marketing, financial
and other resources than we have, but management believes that our products'
price and performance are competitive in this field.
We are not aware of any commercial product competing with our nDx
system, a system which automates the process of testing for autonomic
dysfunction. Nor are we aware of any comprehensive CAD management system which
competes with ohms|cad or ohms|cvd.
We believe that direct competition in ambulatory ischemic monitoring,
products for testing autonomic function and disease management 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 2001, 2000 and 1999, we expended $757,355, $524,275 and
$571,449 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 and the ohms|cvd system.
Management expects to continue to develop new offerings, as well as
enhance its existing systems and products and has budgeted approximately 10% of
anticipated revenue for such development in fiscal 2002.
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Patent Protection and Proprietary Information
We maintain a policy of seeking patent protection in the United States
and other countries in connection with certain elements of its technology. Our
Monitor One technology has been granted patents in the United States (Patent No.
4679144), Canada (Patent No. 1281081) and Spain (Patent No. 547040) and has
additional patent applications pending in other countries. We received a U.S.
patent for the nDx(TM)technology on March 29, 1994 (Patent No. 5299119) and a
patent for the ohms|cad(R)system (Patent No. 5,724,580) on March 3, 1998.
Certain patents relating to our technology begin expiring in 2004.
The patent laws of foreign countries may differ from those of the
United States as to the patentibility of our products and, accordingly the
degree of protection afforded by the pendency or issuance of foreign patents may
be different than the protection afforded under corresponding United States
patents. There can be no assurance that patents will be obtained in foreign
jurisdictions with respect to our products or that the United States patents and
any foreign patents will significantly protect or be commercially beneficial.
We do not intend to rely solely on patent protection for our
proprietary technology. We also rely upon trade secrets, copyright protection,
confidentiality agreements with employees, know-how, expertise and lead-time to
attain and maintain our competitive position. To the extent that we rely upon
these measures, there can be no assurance that others might not independently
develop similar technology or that secrecy will not be breached.
Privacy Issues
Because our applications and services are utilized to transmit and
manage highly sensitive and confidential health information, the security and
confidentiality concerns of our customers and their patients are a primary
concern. In order to enable our applications and services to transmit sensitive
and confidential medical information, we utilize advanced technologies designed
to ensure a high degree of security. These technologies generally include:
o security that requires a password to access our systems;
o user access restrictions that allow our customers to determine
the individuals who will have access to data and what level of
access each individual will have;
o encryption of data relating to our applications and services;
and
o a mechanism for preventing outsiders from improperly accessing
private data resources on our internal network and our
applications, commonly referred to as a "firewall."
The level of data encryption utilized by our products is in compliance
with the encryption guidelines set forth in the proposed rule regarding security
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and electronic signature standards in connection with HIPPA. Our customers also
implement their own procedures to protect the confidentiality of information
being transferred into and out of their computer network.
Internally, we work to ensure the safe handling of confidential data by
employees by:
o using individual user names and passwords for each employee
handling electronic data; and
o requiring each employee to sign an agreement to comply with
all company policies, including our policy regarding handling
confidential information.
We monitor proposed regulations that might affect our applications and
services, in order to ensure that we are in compliance with such regulations
when and if they are affected.
Government Regulation
HEALTHCARE REGULATION. As a participant in the healthcare industry, our
operations and relationships are subject to regulation by federal and state laws
and regulations and enforcement by federal and state governmental agencies.
Sanctions may be imposed for violation of these laws. We believe our operations
are in substantial compliance with existing laws that are material to our
operations.
HIPAA. HIPAA required the Secretary of the Department of Health and
Human Services, referred to as the Secretary, to promulgate national standards
to facilitate the electronic exchange of health information and to ensure the
confidentiality and security of such information.
A substantial part of our activities involves the receipt or delivery
of confidential health information concerning members of health plans with whom
we have direct relationships. For example, we electronically transfer
confidential health information obtained from providers and health plans in
connection with our patient selection enrollment and ohms|cvd programs. The
results of this process are then transmitted to the proper recipient. On
December 28, 2000, the Secretary published a final rule setting standards to
limit the permissible use and disclosure of individually identifiable health
information by health care providers, health plans and health care
clearinghouses, known collectively as "covered entities." Certain requirements
of the rule extend to "business associates" of the covered entities. The covered
entities are required to enter into agreements with their business associates,
extending applicable provisions of the rule to those business associates. The
covered entities are responsible for enforcing those contractual provisions. The
Secretary's actions are mandated by HIPAA because Congress did not pass
legislation protecting health information privacy by the August 1999 deadline
set by HIPAA. The rule took effect on April 14, 2001, and all covered entities
(except small health plans with annual receipts of $5 million or less) are
required to be in compliance with this rule as of April 14, 2003.
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Because of the broad definition of "business associates" under the
final privacy rule, we would be, at a minimum, considered to be business
associates of covered entities. The rule establishes a complex regulatory
framework on a variety of subjects, including (1) disclosure and use of health
information, (2) individuals' rights to access and amend their health
information, (3) individuals' rights to an accounting of disclosures and (4)
administrative, technical and physical safeguards required of covered entities
that maintain or transmit protected health information. The rule generally
prohibits any disclosure or use of protected health information except as
authorized either by the rule or by the patient under standards set by the final
rule.
In addition to the federal privacy rule described above, most states
have enacted patient confidentiality laws, which prohibit the disclosure of
confidential medical information. The federal privacy rule establishes minimum
standards and preempts conflicting state laws, less restrictive than HIPAA
regarding health information privacy. But it does not preempt conflicting state
laws more restrictive than HIPAA. The rule promulgated by the Secretary may
require substantial changes to our applications and services, policies and
procedures.
In addition to the federal privacy rule, on August 12, 1998 the
Secretary issued proposed regulations addressing security standards regarding
the transmission of health information data under HIPAA. The security standards
address various areas, including, administrative procedures, physical
safeguards, technical security services and technical security mechanisms.
Security standards may require us to enter into agreements with certain of our
customers restricting the dissemination of health information and requiring
implementation of specified security measures. Final regulations are expected at
an undetermined date and will require compliance two years after the effective
date of the final rule. Although we are working to design our applications and
services to comply with the proposed security standards, there can be no
assurance that final security regulations will not require additional
modifications to our applications, policies and procedures.
Lastly, the Secretary published the final transactions and code sets
rule in August 2000, which took effect on October 16, 2000. Its purpose is to
create uniformity in electronic data interchange (EDI) standards, which allow
computers to exchange information without human involvement. Compliance with
this rule is mandatory for most covered entities that engage in the eight
transactions covered in the rule, by October 16, 2002. However, the recently
enacted Administrative Simplification Compliance Act allows covered entities to
apply for a one-year extension of such date if the entity submits a plan to the
Secretary by October 15, 2002. We intend to comply with any rule which is
determined to be applicable to us.
FDA REGULATION. The Food and Drug Administration, or FDA, generally has
the authority to regulate medical devices, including computer applications, when
devices are indicated, labeled or intended to be used in the diagnosis of
disease or other conditions, or in the cure, mitigation, treatment or prevention
of disease, or are intended to affect the structure or function of the body. We
do not believe that any of our current services are subject to FDA regulation as
medical devices, however, expansion of our application and service offerings
could subject us to FDA regulation.
14
Our products, to the extent they may be deemed "medical devices," are
regulated by 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. Our monitors 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 monitors manufactured by us.
Regulations by the FDA, known as Good Manufacturing Practices ("GMP"),
provide standards for manufacturing processes, facilities, and record-keeping
requirements with which we and our contract manufacturers must also comply. We
believe that the manufacturing and quality control procedures employed by us and
our contract manufacturers meet the GMP requirements. If the FDA should
determine that our monitors were not manufactured in accordance with GMP's, it
has the authority to order us to cease production and may require us to recall
products already sold by us. In addition, any facilities used to manufacture or
assemble our 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.
REGULATION OF THE INTERNET. Laws and regulations applicable to
communications or commerce over the Internet may be adopted covering user
privacy, pricing, content, copyright, distribution and characteristics and
quality of products and services. In addition, some states or foreign countries
could apply existing laws concerning issues such as property ownership, sales
tax, libel and personal privacy to transactions conducted over the Internet.
Additional laws or regulations or application of laws to transactions over the
Internet could require us to change our operations or increase our cost of doing
business.
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 that may be adopted in the future.
Insurance
We maintain professional malpractice, errors and omissions and general
liability insurance for all of our locations and operations. We also carry
insurance policies to support our performance under contract with three health
plans. While we believe our insurance policies to be adequate in amount and
coverage for our current operations, there can be no assurance that coverage is
15
sufficient to cover all future claims or will continue to be available in
adequate amounts or at a reasonable cost. Our liability insurance coverage
provides for certain deductible levels to be paid by us. Estimated reserves to
cover potential payments under these policies have been provided in our
financial statements. We also maintain property and workers compensation
insurance for each of our locations with commercial carriers on relatively
standard commercial terms and conditions.
Employees
We had 122 employees as of December 31, 2001. We believe our relations
with employees are good.
Item 2. Properties.
Our 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, we lease
approximately 2,000 square feet of space in Sag Harbor, New York used
principally for monitor repairs, assembly and quality control. We also lease
approximately 800 square feet in California for sales support. Management is
actively seeking additional space to support our growing operations.
Item 3. Legal Proceedings.
We brought a patent infringement and unfair competition action against
LifeMasters Supported Selfcare ("LifeMasters"). In the action, which is pending
in the U.S. District Court for the District of New Jersey under the caption
Q-Med, Inc v. LifeMasters Supported Selfcare, Inc. (CV-01-3469), we are seeking
damages and other relief for patent infringement, violation of the Lanham Act
and common law unfair competition. In November 2001, LifeMasters then brought
arbitration proceedings against both the company and IHMC, seeking, in
arbitration, compensatory and punitive damages in an unspecified amount,
together with costs and fees. In the arbitration proceedings, LifeMasters
asserts claim of fraud, constructive fraud, declaratory relief, breach of
contract, and claims for determination as to the validity, enforceability and
infringement of our patent, as well as for other relief. LifeMasters moved in
the U.S. District Court action, for an order, transferring, staying or
dismissing parts of our case, in favor of the arbitrations brought by
LifeMasters. We have opposed LifeMasters' motion and arbitrations, and will
vigorously defend against LifeMasters' claims, and in pursuit of our own.
We are 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 our consolidated financial position and results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
16
Executive Officers of the Registrant
The following sets forth certain information concerning our executive
officers as of January 28, 2002:
Officer Age Position
Michael W. Cox 59 President, Treasurer, Chief
Executive Officer and Director since
February 1983.
Jane Murray 39 Executive Vice President, Chief
Operating Officer and Director since
January 1, 2002, Executive Vice
President - Operations of IHMC since
December 2000, various other
positions with the company since
1985.
Teri J. Kraf 53 Senior Vice President - Program
Implementation since January 1,
2002. Vice President - Strategic
Development since June 1988.
John Siegel 45 Senior Vice President - Sales since
April 17, 2001. Vice President -
Field Services since 1998.
Debra A. Fenton, CPA 37 Controller since 1990.
Herbert H. Sommer, Esq. 43 Secretary and a Director since
June 1996.
17
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters.
Our 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 our shares reported by the Nasdaq Small Cap Market. 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, 1999 High Low
First Quarter $ 4.000 $ 2.375
Second Quarter 3.125 2.250
Third Quarter 5.625 2.750
Fourth Quarter 4.500 2.750
Fiscal Year Ended November 30, 2000 High Low
First Quarter $ 10.625 $ 8.500
Second Quarter 10.125 6.125
Third Quarter 8.000 6.250
Fourth Quarter 11.375 7.000
Fiscal Year Ended November 30, 2001 High Low
First Quarter $ 7.906 $ 3.188
Second Quarter 8.950 5.625
Third Quarter 14.450 8.410
Fourth Quarter 13.890 7.000
As of January 28, 2002, the Company's common stock was held of record
by 348 persons. On January 28, 2002, the closing price reported was $15.40.
We have never paid a cash dividend on our common stock. It is the
current policy of our Board of Directors to retain any earnings to finance the
operations and expansion of our business. The payment of dividends in the future
will depend upon our earnings, financial condition and capital needs and on
other factors deemed pertinent by the Board of Directors.
18
Item 6. Selected Financial Data.
For the Years Ended November 30:
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Results of Operations
Net sales $ 8,021,634 $ 2,872,205 $ 2,040,520 $ 2,046,627 $ 2,412,149
Cost of sales 3,300,526 1,424,779 1,167,020 1,099,515 1,406,480
----------- ----------- ----------- ----------- -----------
Gross profit 4,721,108 1,447,426 873,500 947,112 1,005,669
Selling, general and
administrative expenses 5,424,183 3,045,052 2,319,277 2,623,984 3,038,949
Provision for uncollectible
accounts - - 74,148 289,716 214,601
Research and development
expenses 757,355 524,275 571,449 486,843 551,681
Debt conversion expense - 38,623 737,135 - -
----------- ----------- ----------- ----------- -----------
Loss from operations (1,460,430) (2,160,524) (2,828,509) (2,453,431) (2,799,562)
Gain on sale of investments 24,180 15,406 - - (30,574)
Interest income 232,607 133,668 68,126 57,081 98,214
Interest expense (16,517) (33,168) (143,891) (179,704) (25,430)
Loss in operations of joint
venture (42,500) (146,148)
----------- ----------- ----------- ----------- -----------
Loss before income tax benefit (1,262,660) (2,190,766) (2,904,274) (2,576,054) (2,757,352)
Income tax benefit
Gain on sale of state net
operating loss carryovers 219,603 309,256 - - -
----------- ----------- ----------- ----------- -----------
Net loss $(1,043,057) $(1,881,510) $(2,904,274) $(2,576,054) $(2,757,352)
Other comprehensive
income (loss)
Unrealized gains (losses)
on securities available
for sale 32,513 - - - -
Comprehensive loss $(1,010,544) $(1,881,510) $(2,904,274) $(2,576,054) $(2,757,352)
=========== =========== =========== =========== ===========
Per Share Data
Net Loss per share -
basic and diluted $ (.08) $ (.15) $ (.25) $ (.26) $ (.29)
=========== =========== =========== =========== ===========
Balance Sheet Data (at end of periods)
Working capital $ 5,749,732 $ 2,009,012 $ 691,668 $ 2,392,161 $ 803,415
Total assets 8,167,511 3,390,428 1,966,050 3,757,424 2,450,533
Total liabilities 1,472,990 739,145 824,261 1,638,425 888,015
Stockholders' equity 6,694,521 2,651,283 1,141,789 (1,902,992) 1,562,518
Temporary equity, put - - 4,021,991 - -
Stockholders equity (including
temporary equity) 6,694,521 2,651,283 1,141,789 2,118,999 1,562,518
19
Selected Quarterly Financial Data (Unaudited)
For the Quarters Ending 2001
February 28, May 31, August 31, November 30, Total
Net sales $ 1,207,927 $ 1,654,698 $ 2,129,421 $ 3,029,588 $ 8,021,634
Gross profit $ 690,722 $ 937,690 $ 1,155,768 $ 1,936,928 $ 4,721,108
Net income (loss) $ (283,975) $ (516,275) $ (382,232) $ 139,425 $ (1,043,057)
Net Income (loss) per share $ (.02) $ (.04) $ (.03) $ .01 $ (.08)
For the Quarters Ending 2000
February 28, May 31, August 31, November 30, Total
Net sales $ 530,389 $ 542,562 $ 835,745 $ 963,509 $ 2,872,205
Gross profit $ 233,402 $ 223,872 $ 467,469 $ 522,683 $ 1,447,426
Net income (loss) $ (233,159) $ (532,689) $ (505,573) $ (610,089) $ (1,881,510)
Net Income (loss) per share $ (.02) $ (.04) $ (.04) $ (.05) $ (.15)
20
Item 7. 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.
% For Period-to-Period
Year Ended % Changes
November 30, ---------
------------ 2001 2000 1999
vs. vs. vs.
2001 2000 1999 2000 1999 1998
---- ---- ---- ---- ---- ----
Net sales 100.0 100.0 100.0 179.3 40.8 (.3)
Cost of sales 41.1 49.6 57.2 131.7 22.1 6.1
------ ------ -------
Gross profit 58.9 50.4 42.8 226.2 65.7 (7.8)
Selling, general and administrative
expenses 67.6 106.0 113.7 78.1 31.3 (11.6)
Provisions for uncollectible accounts - - 3.6 * * (74.4)
Research and development expenses 9.5 18.3 28.0 44.5 (8.3) 17.4
Debt conversion expense - 1.3 36.1 * (94.8) *
------ ------ -------
(Loss) from operations (18.2) (75.2) (138.6) (32.4) (23.6) 15.3
Gain on sale of investments .3 .5 - 57.0 * *
Interest Income 2.9 4.7 3.3 74.0 96.2 19.3
Interest expense (.2) (1.2) (7.0) (50.2) (76.9) (19.9)
Loss in operations of joint venture (.5) (5.1) - (70.9) * *
------ ------ -------
(Loss) before income tax benefit (15.7) (76.3) (142.3) (42.4) (24.6) 12.7
Income tax benefit
Gain on sale of state net operating
loss carryforwards 2.7 10.8 - (29.0) * *
------ ------ -------
Net (loss) (13.0) (65.5) (142.3) (44.6) (35.2) 12.7
Other comprehensive income(loss)
Unrealized gains(losses) on
securities available for sale .4 - - * * *
Comprehensive (loss) (12.6) (65.5) (142.3) (46.3) (35.2) 12.7
====== ====== =======
*Not meaningful
21
Fiscal 2001 Compared to Fiscal 2000
Total revenues for fiscal 2001 increased by approximately $5,149,000 or
179.3% when compared to fiscal 2000. The total revenue increase consists of an
increase in the disease management segment of approximately $5,474,000 or 266%
compared to fiscal 2000 offset by a decrease in medical equipment sales of
approximately $325,000 or 40% compared to fiscal 2000. The increase in revenues
from 2000 to 2001 primarily resulted from an increase in total membership from
health plan contracts for our disease management business segment to
approximately 1.1 million members for fiscal 2001 compared to approximately
400,000 members for fiscal 2000. This increase was primarily the result of new
health plan contracts signed and implemented during fiscal 2000 and 2001. At
November 30, 2001, of the 1,073,046 plan members under contract, we had 913,627
commercial members and 159,419 Medicare+Choice members. Revenue for
Medicare+Choice members are significantly higher than commercial members. We did
not have a significant number of Medicare+Choice members in fiscal 2000. We
expect to have a slightly higher percentage of Medicare+Choice membership in
fiscal 2002, and, if this occurs, increases in revenue may result primarily from
this change in membership mix. We expect revenue growth for 2002 to continue to
increase over 2001 as a result of additional members enrolled under our existing
contracts as well as anticipated new health plan contracts during fiscal 2002.
During fiscal 2001, we sold unused state net operating loss
carryforwards for cash by way of the New Jersey Technology Tax Certificate
Transfer Program through our IHMC subsidiary. We received approximately $220,000
from this transaction. We also had remaining tax benefits, which were sold as
part of the program during fiscal 2002 in which we received approximately
$130,000.
Gross profit margins increased to 58.9% in fiscal 2001 from 50.4% in
fiscal 2000. The increase was primarily the result of revenue growth in the
disease management segment. During fiscal 2001 we were able to contract with
different plans within the same geographic area which also assisted in improving
gross margins.
Selling, general and administrative expenses for the year ended
November 30, 2001 increased by approximately $2,379,000 or 78.1% when compared
to fiscal 2000. The increase includes a non-recurring charge of $354,000
associated with an executive employee's compensation expense and severance
payment. Without this charge, selling general and administrative expenses would
have increased by approximately $2,025,000 or 66.5% when compared to 2000. The
increase primarily resulted from an increase in salaries and benefits associated
with increased staff to support the higher levels of members enrolled in our
disease management programs, incentive payments for new contracts and
achievement of targeted performance goals. We expect selling, general and
administrative expenses to continue to increase as we add more health plan
contracts, increase staffing levels and increase employee compensation
associated with improvement of operating performance.
22
Research and development expenses increased in fiscal 2001 by
approximately $233,000 or 44.5% when compared to fiscal 2000. The increase is
primarily the increase in staffing levels in our Information Technology
department. We have dedicated these resources primarily on new product software
development and upgrades to existing technology in order to support our current
operations, new disease states managed and the increased volume of patients
associated.
Fiscal 2000 Compared with Fiscal 1999
Net sales for fiscal 2000 increased by approximately $832,000 or 40.8%
compared to fiscal 1999. During fiscal 2000, we added a substantial volume to
our disease management segment, increasing this segments revenues to
approximately $2,040,000 from approximately $869,000 or by 137% when compared to
the prior year. The system has demonstrated "cost effective" outcomes while
improving the health status of the patient. Subsequent to year-end we added
275,000 members to our disease management segment and have executed an agreement
to cover an additional 400,000 members beginning in the second quarter of 2001.
The capital equipment segment of our business showed a decline in revenues of
approximately $360,000 or 30.7%.
During fiscal 2000, we sold unused state net operating loss
carryforwards for cash through the New Jersey Technology Tax Certificate
Transfer Program. We received $309,256 from this transaction.
Debt conversion expense for the fiscal year ended November 30, 2000 was
reported in the amount of $38,623. This non-cash charge resulted from the
conversion of the remaining $50,000 of debt held by the Galen Funds to equity at
a price of $2.87 per share rather than the conversion price of $3.6875
originally set at the time the Note was issued. Without the debt conversion
expense, net losses for the year ended November 30, 2000 would have been
$(1,842,887) compared to $(2,167,139) for the prior fiscal year.
Gross profit margins increased to 50.4% in fiscal 2000 from 42.8% in
fiscal 1999. The increase was primarily due to the revenue increase in the
disease management segment.
Selling, general and administrative expenses for the year ended
November 30, 2000 increased by approximately $726,000 or 31% when compared to
fiscal 1999, primarily due to the increased selling activity related to the
disease management segment as well as increases in administrative functions
supporting enrollment of disease management patients.
Research and development expenses decreased by approximately $47,000 or
8.3% when compared to the prior year. We have focused these efforts on product
software development as well as upgrading existing technology to support new
diseases and a larger volume of patients.
23
Liquidity and Capital Resources
To date, our principal sources of working capital have been provided by
proceeds from public and private placements of securities and the sale of
certain assets. Since our inception, issuance of securities and sale of assets
have generated approximately $31,000,000 less applicable expenses.
In March and April 2000 we sold an aggregate of 449,014 shares of
common stock to two private investors for approximately $2,985,000, net of
expenses.
On April 13, 2000, the remaining $50,000 principal amount of notes
relating to a private placement in 1997, plus accrued interest of $134,582 was
converted into 64,315 shares of common stock. On April 4, 2001 we sold 796,813
shares of common stock for approximately $4,000,000 to three investors led by
Galen Partners III, L.P. As part of this transaction, we also extended the terms
on outstanding warrants to November 12, 2007.
Working capital was $5,749,732 at November 30, 2001 compared to
$2,009,012 at November 30, 2000 and ratios of current assets to current
liabilities are 5.0:1 and 4.1:1 as of November 30, 2001 and 2000, respectively.
The working capital increase of approximately $3,700,000 was primarily due to
the equity investment of Galen Partners III, L.P. totaling approximately
$4,000,000.
On September 11, 2001 we entered into a loan agreement with First Union
National Bank for a line of credit of $1 million. The annual interest rate is
the lower of the bank's reference rate minus 1% or the LIBOR Market Index Rate
plus 1.5%. The entire $1 million is currently available.
We anticipate that funds generated from operations, together with cash
and investments, and available credit under our credit line should be sufficient
to fund our current level of growth. However, to the extent the expansion of our
operations requires significant additional resources or certain forms of
financial guarantees to assure our performance under the terms of new health
plan contracts, we may be required to seek additional financing. No assurance
can be given that such financing would be available on terms that would be
acceptable to us.
Additional Factors That May Affect Future Results
Future Operating Results. Future operating results, which reflect
management's current expectations may be impacted by a number of factors that
could cause actual results to differ materially from those stated herein. These
factors include worldwide economic and political conditions, terrorist's
activities, industry specific factors, our ability to maintain access to
external financing sources and its financial liquidity, the acceptance of our
disease management system by health plan organizations, and our ability to
manage expense levels.
Need for Additional Capital. As of November 30, 2001, we had
approximately $5,968,000 cash and short term investments. While we have
experienced negative cash flows since fiscal 1995 we expect to have positive
cash flow beginning in fiscal 2002. Nevertheless, our future success is highly
24
dependent upon our continued access to capital markets, which we believe are
necessary for the continued support of our growth. In the event we are unable to
maintain access to our existing financing sources, or obtain other sources of
financing, there would be a material adverse effect on our business, financial
position and results of operations.
Fluctuations in our quarterly operating results may cause volatility in
the price of our common stock and the debentures. Given the nature of the
markets in which we participate, we cannot reliably predict future revenue and
profitability. As demand for our services has increased in recent periods, our
quarterly sales and operating results have become highly dependent on the timing
of contracts signed and programs implemented during the quarter, which are
difficult to forecast. In addition, a portion of our operating expenses is
relatively fixed in nature due to our sales, research and development costs.
We are in the process of implementing new information systems, and
problems with the redesign and implementation of these new systems could
interfere with our operations. We are in the process of implementing new
information systems to enhance our current systems in order to improve our
operating effectively and expand the range of disease management services we
offer. We may not be successful in implementing these new systems and
transitioning data. As part of this effort, we are implementing new enterprise
resource planning software applications to manage our business operations.
Failure to smoothly and successfully implement this and other systems could
temporarily interrupt our operations and adversely impact our ability to run our
business. In addition, any failure or significant downtime in our legacy or new
information systems could prevent us from efficiently implementing disease
management programs, reconciling cost savings and could harm our business.
If we do not introduce successful new disease management services in a
timely manner, our services will become obsolete, and our operating results will
suffer. Our services are for industries that are characterized by rapid
technological changes, frequent new product and service introductions and
changing industry standards. Without the timely introduction of new products,
services and enhancements, our products and services will become technologically
obsolete over time, in which case our revenue and operating results would
suffer. The success of our new product and service offerings will depend on
several factors, including our ability to:
o properly identify customer needs;
o innovate and develop new technologies, services and
applications;
o successfully commercialize new technologies in a timely
manner;
o differentiate our offerings from our competitors' offerings;
o price our services competitively; and
o anticipate our competitors' announcements of new products,
services or technological innovations
Our business will suffer if we are not able to retain and hire key
personnel. Our future success depends partly on the continued service of our key
research, engineering, sales, marketing, manufacturing, executive and
administrative personnel. If we fail to retain and hire a sufficient number of
25
these personnel, we will not be able to maintain or expand our business.
Although the labor market has changed dramatically within the past year, and our
attrition rate has dropped, there is still intense competition for certain
highly technical specialties in geographic areas where we continue to recruit.
Acquisitions, strategic alliances, and joint ventures may result in
financial results that are different than expected. We engage in discussions
with third parties relating to possible acquisitions, strategic alliances, and
joint ventures. As a result of such transactions, our financial results may
differ from the investment community's expectations in a given quarter. In
addition, acquisitions and strategic alliances may require us to integrate a
different company culture, management team and business infrastructure. We may
have difficulty developing, manufacturing and marketing the products of a
newly-acquired company in a way that enhances the performance of our combined
businesses or product lines to realize the value from expected synergies.
Depending on the size and complexity of an acquisition, our successful
integration of the entity depends on a variety of factors, including:
o the retention of key employees;
o the management of facilities and employees in separate
geographic areas;
o the retention of key customers; and
o the integration or coordination of different research and
development, product manufacturing and sales programs and
facilities
All of these efforts require varying levels of management resources,
which may divert our attention from other business operations. If we do not
realize the expected benefits from such transactions, our financial position
results and stock price could be negatively impacted.
We and our customers are subject to various governmental regulations,
compliance with which may cause us to incur significant expenses, and if we fail
to maintain satisfactory compliance with certain regulations, we may be forced
to curtail operations, and we could be subject to civil or criminal penalties.
Our businesses are subject to various significant federal, state and local,
health and safety, health information disclosure, and labor regulations. These
regulations are complex, change frequently and have tended to become more
stringent over time. We may be required to incur significant expenses to comply
with these regulations or to remedy violations of these regulations. Any failure
by us to comply with applicable government regulations could also result in
cessation of our operations or portions of our operations, or impositions of
fines and restrictions on our ability to carry on or expand our operations.
Litigation regarding patents or intellectual property could be costly
and time consuming. Any litigation regarding patents or other intellectual
property could be costly and time consuming and could divert our management and
key personnel from our business operations. The complexity of the technology
involved and the uncertainty of intellectual property litigation increase these
risks. Claims of intellectual property infringement might also require us to
enter into costly royalty or license agreements. However, we may not be able to
26
obtain royalty or license agreements on terms acceptable to us, or at all. We
also may be subject to significant damages or injunctions against development
and sale of certain of our products.
Third parties may infringe our intellectual property, and we may expend
significant resources enforcing our rights or suffer competitive injury. Our
success depends in large part on our proprietary technology. We rely on a
combination of patents, copyrights, trademarks, trade secrets, confidentiality
provisions and licensing arrangements to establish and protect our proprietary
rights. If we fail to successfully enforce our intellectual property rights, our
competitive position could suffer, which could harm our operating results.
Our pending patent and trademark registration applications may not be
allowed, or competitors may challenge the validity or scope of these patents or
trademark registrations. In addition, our patents may not provide us a
significant competitive advantage.
We may be required to spend significant resources to monitor and police
our intellectual property rights. We may not be able to detect infringement and
our competitive position may be harmed before we do so. In addition, competitors
may design around our technology or develop competing technologies. Intellectual
property rights may also be unavailable or limited in some foreign countries,
which could make it easier for competitors to capture market share.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Quantitative and qualitative disclosures about market risk as set forth
in Note 2 of the Notes to Consolidated Financial Statement.
Item 8. Financial Statements and Supplementary Data.
Attached.
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
27
QMED, INC. AND SUBSIDIARIES
For the Years Ended
November 30, 2001 and 2000
Page
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations and Comprehensive Loss F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 - F-21
28
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, 2001 and 2000, and the related consolidated
statements of operations and comprehensive loss, stockholders' equity and cash
flows for the years ended November 30, 2001, 2000 and 1999. 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 auditing standards generally accepted
in the United States of America. 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, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years ended November 30, 2001, 2000 and 1999, in
conformity with accounting principles generally accepted in the United States of
America.
In connection with our audits of the financial statements referred to above, we
audited the financial schedule listed under Item 14. In our opinion, the
financial schedule, when considered in relation to the financial statements
taken as a whole, presents fairly, in all material respects, the information
stated therein.
AMPER, POLITZINER & MATTIA P.A.
/s/ AMPER, POLITZINER & MATTIA P.A.
January 14, 2002
Edison, New Jersey
F-1
QMED, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
November 30,
Assets
2001 2000
---- ----
Current assets
Cash and cash equivalents $ 531,450 $ 576,537
Investments in securities 5,436,290 1,651,250
Accounts receivable, net of allowance for
doubtful accounts of $75,000 and $42,000 886,028 85,416
Inventory 178,386 188,663
Prepaid expenses and other current assets 159,787 154,785
------------------ -----------------
7,191,941 2,656,651
Property and equipment, net of accumulated depreciation 466,456 447,693
Product software development costs, net 277,812 155,031
Other assets 231,302 131,053
Investment in joint venture - -
----------------- -----------------
$ 8,167,511 $ 3,390,428
================== =================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 435,479 $ 287,832
Lease payable, current portion 53,034 68,683
Accrued salaries and commissions 498,815 156,115
Fees reimbursable to health plans 15,524 20,800
Deferred revenue 360,524 -
Deferred warranty revenue 78,833 114,209
------------------ -----------------
1,442,209 647,639
Leases payable, long term 30,781 81,833
Deferred warranty revenue, long term - 9,673
------------------ -----------------
1,472,990 739,145
Commitments and Contingencies
Stockholders' equity
Common stock, $.001 par value, 40,000,000 shares
authorized, 14,175,713 and 12,846,631 shares issued
and 14,153,713 and 12,824,631 outstanding, respectively 14,175 12,846
Paid-in capital 31,541,800 26,489,347
Accumulated deficit (24,818,342) (23,775,285)
Accumulated other comprehensive income
Unrealized gains on securities available for sale 32,513 -
------------------ -----------------
6,770,146 2,726,908
Less treasury stock at cost, 22,000 common shares (75,625) (75,625)
------------------ -----------------
Total stockholders' equity 6,694,521 2,651,283
------------------ -----------------
$ 8,167,511 $ 3,390,428
================== =================
See accompanying notes to consolidated financial statements.
F-2
QMED, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
For the Years Ended November 30,
2001 2000 1999
---- ---- ----
Sales
Disease management services $ 7,534,931 $ 2,060,461 $ 869,294
Medical equipment 486,703 811,744 1,171,226
------------------- -------------------- -------------------
8,021,634 2,872,205 2,040,520
------------------- -------------------- -------------------
Cost of sales
Disease management services 3,017,380 937,560 610,814
Medical equipment 283,146 487,219 556,206
------------------- -------------------- -------------------
Cost of sales 3,300,526 1,424,779 1,167,020
------------------- -------------------- -------------------
Gross profit 4,721,108 1,447,426 873,500
Selling, general and administrative expenses 5,424,183 3,045,052 2,319,277
Provision for uncollectible accounts - - 74,148
Research and development expenses 757,355 524,275 571,449
Debt conversion expense - 38,623 737,135
------------------- -------------------- -------------------
Loss from operations (1,460,430) (2,160,524) (2,828,509)
Gain on sale of investments 24,180 15,406 -
Interest income 232,607 133,668 68,126
Interest expense (16,517) (33,168) (143,891)
Loss in operations of joint venture (42,500) (146,148) -
------------------- -------------------- ------------------
Loss before income tax benefit (1,262,660) (2,190,766) (2,904,274)
Income tax benefit
Gain on sale of state net operating
loss carryovers 219,603 309,256 -
------------------- -------------------- -------------------
Net loss (1,043,057) (1,881,510) (2,904,274)
Other comprehensive income (loss)
Unrealized gains (losses) on
securities available for sale 32,513 - -
------------------- -------------------- -------------------
Comprehensive loss $ (1,010,544) $ (1,881,510) $ (2,904,274)
=================== ==================== ===================
Net loss per share - basic and diluted $ (.08) $ (.15) $ (.25)
=================== ==================== ===================
Weighted average common shares
outstanding - basic and diluted 13,866,216 12,650,831 11,761,054
=================== ==================== ===================
See accompanying notes to consolidated financial statements.
F-3
QMED, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Years Ended November 30,
Accumulated Common Stock
Common Stock Other Held in Treasury
------------------- Paid-in Accumulated Comprehensive ------------------
Shares Amount Capital Deficit Income Shares Amount Total
------ ------ ------- ------- ------ ------ ------ -----
Balances - November 30, 1998 11,586,321 $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 1,000 1 2,999 - - - - 3,000
Stock issued in conversion
of debt 538,922 539 872,944 - - - - 873,483
Securities issued to induce
debt conversion - - 737,135 - - - - 737,135
Exercise of stock options 37,335 37 104,798 - - - - 104,835
Issuance of common stock
for cash 95,203 95 208,516 - - - - 208,611
Net loss - - - (2,904,274) - - - (2,904,274)
---------- ------- ------------ ------------ --------- ------ -------- -----------
Balance - November 30, 1999 12,258,781 12,259 23,098,930 (21,893,775) - 22,000 (75,625) 1,141,789
Exercise of stock options
and warrants for cash 74,521 73 167,580 - - - - 167,653
Sale of stock to Quest
Diagnostics for cash 285,714 286 1,984,714 - - - - 1,985,000
Sale of stock to private
investor for cash 163,300 163 1,000,049 - - - - 1,000,212
Stock issued in conversion
of debt 64,315 65 184,517 - - - - 184,582
Securities issued to induce
debt conversion - - 38,623 - - - - 38,623
Amortization of non-employee
stock options - - 14,934 - - - - 14,934
Net loss - - - (1,881,510) - - - (1,881,510)
---------- ------- ------------ ------------ --------- ------ -------- -----------
Balance - November 30, 2000 12,846,631 12,846 26,489,347 (23,775,285) - 22,000 (75,625) 2,651,283
Exercise of stock options
and warrants 532,269 532 868,890 - - - - 869,422
Sale of stock to Galen
Associates for cash 796,813 797 3,954,361 - - - - 3,955,158
Stock compensation expense - - 199,334 - - - - 199,334
Amortization of non-employee
options - - 29,868 - - - - 29,868
Net loss - - - (1,043,057) - - - (1,043,057)
Unrealized holding gains on
securities available for sale - - - - 32,513 - - 32,513
---------- ------- ------------ ------------ --------- ------ -------- -----------
Balance - November 30, 2001 14,175,713 $14,175 $ 31,541,800 $(24,818,342) $ 32,513 22,000 $(75,625) $ 6,694,521
========== ======= ============ ============ ========= ====== ======== ===========
See accompanying notes to consolidated financial statements.
F-4
QMED, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended November 30,
2001 2000 1999
---- ---- ----
Cash flows from operating activities
Net loss $ (1,043,057) $ (1,881,510) $ (2,904,274)
--------------- --------------- ---------------
Adjustments to reconcile net loss to
net cash (used) by operating activities
Gain on sale of investments (24,180) (15,406) -
Loss in operations of joint venture 42,500 146,148 -
Depreciation and amortization 272,601 248,732 258,975
Debt conversion expense - 38,623 737,135
Stock compensation expense 199,334 - -
Amortization non-employee stock options 29,868 14,934 -
(Increase) decrease in
Accounts receivable (800,612) 85,241 133,808
Inventory 10,277 184,079 131,252
Prepaid expenses and other current assets (5,002) (120,129) 23,120
Increase (decrease) in
Accounts payable and accrued liabilities 485,071 101,404 131,564
Deferred revenue 315,475 - -
Other 2,573 (14,869) (42,529)
--------------- --------------- ---------------
Total adjustments 527,905 668,757 1,373,325
--------------- --------------- ---------------
(515,152) (1,212,753) (1,530,949)
--------------- --------------- ---------------
Cash flows from investing activities
Proceeds from sale of securities available for sale 8,399,747 1,700,000 -
Purchase of securities available for sale (12,213,094) (3,335,844) -
Capital expenditures (516,967) (297,292) (66,246)
Proceeds from sale of investments 85,000 - -
Investment in joint venture (42,500) (146,148) -
--------------- --------------- ---------------
(4,287,814) (2,079,284) (66,246)
--------------- --------------- ---------------
Cash flows from financing activities
Net proceeds from issuance of common
stock and put options 4,824,580 3,152,865 316,446
Payments on capital leases (66,701) (78,721) -
--------------- --------------- ---------------
4,757,879 3,074,144 316,446
--------------- --------------- ---------------
Net change in cash and cash equivalents (45,087) (217,893) (1,280,749)
Cash and cash equivalents - beginning 576,537 794,430 2,075,179
--------------- --------------- ---------------
Cash and cash equivalents - ending $ 531,450 $ 576,537 $ 794,430
=============== =============== ===============
Supplemental disclosure of cash paid
Interest $ 16,517 $ 152,963 $ 27,891
Income taxes 10,112 6,834 8,691
Non-cash investing and financing activities:
On January 8, 2001, the Company received a note receivable in the amount of
$91,059 from an employee for the exercise of stock options. The note was paid on
August 29, 2001.
See accompanying notes to consolidated financial statements.
F-5
QMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Significant Accounting Policies
-------------------------------
Nature of Business
------------------
The Company operates in two industry segments:
disease-management services and medical equipment sales. The
majority of QMed, Inc.'s operations consist primarily of
Interactive Heart Management Corp. ("IHMC"), a wholly owned
subsidiary that provides disease management services to health
plans nationwide.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of
QMed, Inc., its wholly owned subsidiary, Interactive Heart
Management Corp. and its majority-owned (83%) inactive
subsidiary, Heart Map, Inc. (the "Company"). All intercompany
accounts and transactions have been eliminated in
consolidation. Investments in joint ventures are accounted for
under the equity method.
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. The
Company has not experienced any losses on its deposits of cash
and cash equivalents.
Investments in Securities
-------------------------
The Company accounts for investments in securities pursuant to
the Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity
Securities." Under this Statement, the Company's securities
with a readily determinable fair value have been classified as
available for sale and are carried at fair value with an
offsetting adjustment to Stockholders' Equity. Net unrealized
gains and losses on marketable securities are credited or
charged to accumulated other comprehensive income.
Inventory
---------
Inventory consists of finished units, components and supplies,
and is stated at the lower of cost (moving weighted-average
method) or market.
Depreciation and Amortization
-----------------------------
Property and equipment are carried at cost. Depreciation is
computed 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.
F-6
QMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Significant Accounting Policies - (continued)
--------------------------------------------
Comprehensive Income
--------------------
Comprehensive income as defined includes all changes in equity
during a period from non-owner sources. Accumulated other
comprehensive income, as presented on the accompanying
consolidated balance sheets consists of unrealized gains on
securities, net of income tax.
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, 2001, because of
the relative short maturity of these instruments. The carrying
value of leases payable approximated fair value at November
30, 2001, based upon current rates for the same or similar
instruments.
Product Software Development Costs
----------------------------------
The Company recognizes Product Software development costs in
accordance with Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." As such, the Company expenses all
costs incurred that relate to the planning and post
implementation phases of development. Costs incurred in the
development phase are capitalized and amortized over the
estimated useful life of the software developed, which is
generally 60 months.
Stock-Based Compensation
------------------------
Statement of Financial Accounting Standards No. 123
"Accounting for Stock Based Compensation" ("SFAS 123") allows
a company to adopt a fair value based method of accounting of
its stock-based compensation plans or continue to follow the
intrinsic value method of accounting prescribed by Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees." The Company accounts for stock-based
compensation in accordance with the provisions of APB No. 25,
and complies with the disclosure provision of SFAS No. 123.
Under APB No. 25, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount
an employee must pay to acquire the stock.
The Company accounts for stock issued to non-employees in
accordance with the provisions of SFAS 123 and the Emerging
Issues Task Force ("EITF") Issue No. 96-18, "Accounting for
Equity Instruments that are Issued to other than Employees for
Acquiring, or in Conjunction with Selling Goods or Services."
Under SFAS 123, the cost is measured at the fair value of the
consideration received or the fair value of the equity
instruments issued, whichever is more reliably measured.
F-7
QMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Significant Accounting Policies - (continued)
--------------------------------------------
Revenue Recognition
-------------------
Disease Management Services
---------------------------
The Company enters into contractual arrangements with health
plans to provide disease management services. Revenue from
such contracts are calculated on various performance-based and
fixed fee methodologies and are recorded as services are
provided. Performance-based contracts have varying degrees of
risk associated with the Company's ability to deliver the
guaranteed financial cost savings. In most cases the Company
guarantees a percentage reduction of disease costs compared to
a prior baseline year. Nevertheless, based on previous
outcomes and statistical results prepared by outside "third
party" actuarial firms and independent statisticians, and the
Company's historical experience, management believes the
guarantees are reasonably set and achievable. The measurement
of the Company's performance against the base year information
is a data intensive and time consuming process that is
typically not completed until well after the end of the
contract year. The Company will adjust or defer a portion of
the contract revenue for contracts where the Company may
believe that there could be an issue of non-performance,
possibly resulting in a refund of fees. Adjustments for
non-performance under the terms of the contract or other
factors affecting revenue recognition are accrued on an
estimated basis in the period the services are provided and
are adjusted in future periods when final settlement is
determined. These estimates are continually reviewed and
adjusted as interim information is available. Management
believes these estimates adequately provide for any potential
adjustments that may be applied to revenues from its
contracts. As of November 30, 2001, the Company has provided
an allowance of approximately $361,000 related to these
contracts which has been reflected as deferred revenue in the
balance sheet.
During the fiscal year ended November 30, 2001, approximately
63% of disease management revenues were derived from two
health plans that each comprised more than 10% of the
Company's revenues. During fiscal 2000 and 1999, revenues
derived from five and four health plans, respectively, each
comprised more than 10% of the Company's revenue for those
years.
Medical Equipment
-----------------
Revenue is recognized on equipment sales when the equipment is
shipped and title passes. Management establishes estimated
accruals for returns from customers, and for allowances
granted to them at the time of shipment. For the years ended
November 30, 2001, 2000 and 1999, there have been no sales
returns.
During 2001, the Company sold extended one-year service
warranty contracts to customers. Prior to fiscal 2001, the
Company also sold two and three year contracts and recognized
the revenue 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.
F-8
QMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Significant Accounting Policies - (continued)
--------------------------------------------
Research and Development Expenses
---------------------------------
Costs associated with the development of new products and
changes to existing products are charged to operations as
incurred.
Use of Estimates
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Income Taxes
------------
The Company recognizes deferred tax assets and liabilities
based on differences between the financial reporting and tax
basis of assets and liabilities using the enacted tax rates
and laws that are expected to be in effect when the
differences are expected to be recovered. The Company provides
a valuation allowance for deferred tax assets for which it
does not consider realization of such assets to be more likely
than not.
Earnings (Loss) Per Share
-------------------------
Basic earnings (loss) per share are computed by dividing
income (loss) available to common shareholders by the
weighted-average number of common shares outstanding during
the period. Diluted earnings (loss) per share are computed by
dividing income (loss) available to common shareholders by the
weighted-average number of common shares outstanding during
the period increased to include the number of additional
common shares that would have been outstanding if the dilutive
potential common shares had been issued. The dilutive effect
of the outstanding options would be reflected in diluted
earnings (loss) per share by application of the treasury stock
method.
New Accounting Pronouncements
-----------------------------
In December 1999, the Securities and Exchange Commission staff
released Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements (SAB 101), which provides
guidance on the recognition, presentation and disclosure of
revenue in financial statements. The Company believes their
revenue recognition policies comply with SAB 101.
In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities. As amended by SFAS No. 138, SFAS No. 133
is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments,
including cer