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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: November 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period from _________ to __________
Commission File Number: 0-11411
QMED, 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.
25 Christopher Way, Eatontown, New Jersey 07724
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 544-5544
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 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 [ ]
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. [ ]
The aggregate market value of the common stock held by non affiliates of the
registrant was approximately $116,190,000 on May 28, 2004, based on the last
reported sales price of the registrant's common stock on the NASDAQ Small Cap
Market on such date. All executive officers, directors and 10% or more
beneficial owners of the registrant's common stock have been deemed, solely for
the purpose of the foregoing calculation, "affiliates" of the registrant.
As of January 24, 2005, there were 15,752,789 shares of the registrant's common
stock, $.001 par value, issued and outstanding.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
Documents incorporated by reference:
Document Form 10-K Reference
Portions of the Registrant's Proxy Statement
for III its 2005 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
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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" and other factors described in this Item 1
under "Industry and Other Risk Considerations." We undertake no obligation to
update or revise such forward-looking statements.
General
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QMed(R), Inc. was incorporated in New Jersey in 1983 and reincorporated in
Delaware in 1987. Interactive Heart Management Corp. ("IHMC(R)") is a wholly
owned subsidiary of QMed, which was incorporated in 1995. IHMC developed and
often co-markets with QMed health care information and communication services to
health plans, governments and private companies. The services of QMed include
"ohms|cvd(R)"(Online Health Management System for Cardiovascular Disease) which
is an integrated cardiovascular disease management system. ohms|cvd includes
related systems to assist health plans, government organizations and employer
groups in managing the care, and cost of diabetes, cardiovascular conditions,
including coronary artery disease ("CAD"), stroke, heart failure ("CHF"),
hypertension, hyperlipidemia and the cardiovascular complications of diabetes.
These systems are designed to aid health care physicians in the optimal use of
"evidence based" medical management for patients with these conditions including
co-morbidities, as well as those at high risk of developing these conditions.
The net impact of this approach is the improvement in health and the associated
reduction in mortality, morbidity and cost. As of November 30, 2004, we had
contracts to provide these services to the Center for Medicare and Medicaid
Services and 13 licensed health plans in 11 states covering approximately 1.1
million health plan members.
QMed Inc is a fully configured, technology integrated and interactive disease
management company that synchronizes the latest scientific evidence to insure
that the right care is received by patients all of the time. QMed is dedicated
to improving clinical outcomes for individuals, providing decision support for
physicians, and reducing costs for payors.
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QMed empowers individuals using tools such as health education, training in
self-monitoring, and personalized coaching by trained professionals. Timely,
clinically validated, actionable "evidence based" information is provided to
physicians to proactively prevent medical episodes that can result in
unnecessary emergency room visits and hospitalizations. QMed has demonstrated
results that our programs reduce hospitalizations and overall medical costs.
QMed's dedicated professionals follow nationally accepted clinical standards of
care to complete their mission. Medical expertise combined with the most current
computer-based technology offers programs that are highly scalable and offer
reliable results.
We also produce, sell and support a line of ischemia assessing heart monitors
and a system that analyzes heart rate variability under the name, Monitor One
nDx(R) ("nDx").
Our executive offices are located at 25 Christopher Way, Eatontown, New Jersey
07724 and our telephone number is (732) 544-5544.
We maintain an Internet website at www.qmedinc.com. We make available free of
charge on our website our annual report on Form 10-K, our quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as
soon as practicable after we electronically file such material, or furnish it to
the Securities and Exchange Commission.
ohms|cvd Systems
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ohms|cvd is our medical "expert system" designed as a total disease management
process for Heart Failure (HF), Coronary Artery Disease (CAD), Stroke, Diabetic
cardiovascular complications, Hypertension, Hyperlipidemia and other
co-morbidities utilizing "best practice" solutions in the management of these
diseases and conditions. The entire system non-invasively and reliably
quantifies the probable risk of a clinical event most significantly a
cardiovascular, cerebrovascular or heart failure event, 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 heart failure,
diabetes, diabetic cardiovascular complications and the risk of stroke.
The systems produce clinical recommendations for physicians, tailored to an
individual patient. Significantly, each individual patient's medical history
inclusive of co-morbidities, 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.
The systems' centralized digital storage of each patient's iterative review
affords continuous description and analysis of quantifiable results including:
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o success of the risk stratification,
o proportion of patients assigned to various therapies,
o objective outcomes,
o interplay with pharmacy use, and pharmacy benefit managers
o physician and patient compliance with evidence based medicine.
Our expert medical system, ohms|cvd is an active disease and care management
process emphasizing a continuum of care, including modification of patient risk
factors. Use of this system can result in important cost-effective improvements
in diabetic care, coronary, cerebrovascular and heart failure events,
improvements which have been verified by empirical health and cost outcomes. 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.
At November 30, 2004, we had contracts with the Center for Medicare and Medicaid
Services and 13 health plans to provide disease management services in multiple
health plan markets in 11 states. The number of members under contract was as
follows:
At November 30, 2004 2003 2002
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Approximate Members under contract 1,065,000 1,200,000 1,569,000
At November 30, 2004, of the approximately 1.1 million plan members under
contract, we had approximately 800,000commercial members and 300,000 Medicare
Advantage 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 Demonstration Projects
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The Centers for Medicare and Medicaid Services ("CMS") selected us to
participate in two demonstration projects:
o Medicare Coordinated Care Demonstration ("MCCD"); and
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o BIPA Medicare Disease Management Demonstration
CMS is a federal agency within the U.S. Department of Health and Human Services.
CMS runs the Medicare and Medicaid programs -- two national health care programs
that benefit millions of Americans. In addition, CMS runs the State Children's
Health Insurance Program (SCHIP) with the Health Resources and Services
Administration, a program that covers millions of uninsured children in the
United States. CMS also regulates all laboratory testing (except research)
performed on humans in the United States. CMS, with the Departments of Labor and
Treasury, helps millions of Americans and small companies get and keep health
insurance coverage, and eliminate discrimination based on health status for
people buying health insurance. CMS spends billions of dollars a year buying
health care services for beneficiaries of Medicare, Medicaid and SCHIP. CMS
among other things:
o assures that the Medicaid, Medicare and SCHIP programs are
properly run by its contractors and state agencies;
o establishes policies for paying health care providers;
o conducts research on the effectiveness of various methods of
health care management, treatment, and financing; and
o assesses the quality of health care facilities and services
and taking enforcement actions as appropriate.
Medicare Coordinated Care Demonstration
We have received a contract award to participate in the Medicare MCCD project.
Our ohms|cad program is the only one under this demonstration that will be
evaluated specifically for management of CAD.
CMS 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 commenced in
early 2002. As a result of our success in the initial enrollment stage of the
project, CMS authorized doubling the patient base of the project with
commensurate remuneration. We will receive fees from CMS through January 31,
2006.
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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, of which heart disease is the
highest cost. 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, drug/alcohol dependence, Alzheimer's or other
dementia, cancer or HIV/AIDS. Participant selection was made through a national
competitive process.
BIPA Medicare Disease Management Demonstration
On October 23,2002, CMS selected QMed, PacifiCare Health Systems, Inc., with its
subsidiary, Prescription Solutions, and Alere Medical, Inc. - operating jointly
as "Heart Partners" - to participate in its BIPA Disease Management
Demonstration Project.
The HeartPartners Program will provide disease management services and a
comprehensive tiered prescription drug plan for up to 15,000 chronically ill
Medicare fee-for-service beneficiaries suffering from congestive heart failure.
The program will also address the significant co-morbidities of coronary artery
disease and diabetes.
The goal of the demonstration project is to provide more comprehensive services
to Medicare beneficiaries and their physicians to better manage their chronic
conditions that will result in improved quality and reduced medical costs,
sufficient to offset the cost of the disease management program and pharmacy
services.
PacifiCare Health Systems, Inc., with its subsidiary, Prescription Solutions,
QMed Inc. and Alere Medical, Inc. were selected following a national competitive
evaluation process. The HeartPartners program, which commenced in January 2004,
is authorized for three years, and is the largest of the three projects awarded
for the CMS Disease Management Demonstration. PacifiCare Health Systems, Inc.,
with its subsidiary, Prescription Solutions, QMed and Alere Medical, Inc, will
operate HeartPartners under a single, coordinated management and operational
construct.
Business Strategy
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Our strategy is to (1) develop additional CMS contracts (including both large
scale demonstrations for our full suite of interventions as well as providing
other CMS demonstrations with our already successful front-end enrollment
process); (2) add contracts with new health plans to provide disease management
services; (3) to further develop and expand our cardiovascular disease
management business within existing customers; (4) to add disease states to our
platform; and (5) to pursue other opportunities within the healthcare industry.
We anticipate that we will utilize our medical information-communication
technologies to gain and maintain competitive advantage in delivering care
coordination and its narrower subset, disease management services. We anticipate
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that significant investments will continue to be made during fiscal 2005 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 sharing of
savings of overall enrollee healthcare cost reductions, 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. The
Company would defer revenue in those situations which interim
performance-to-date data on the contract are below performance obligations.
The settlement process under a contract, which includes the settlement of any
performance-based fees and involves reconciliation of health-care claims and
clinical data, is generally not completed until sometime after the end of the
contract year. Data reconciliation differences between the Company and the
customer can arise due to health plan data deficiencies, omissions and/or data
discrepancies, for which the Company negotiates with the plan until agreement is
reached with respect to identified issues.
Industry and Other Risk Considerations
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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.
We depend on payments from CMS and health plans, and cost reductions on the
entities may adversely affect our business and results of operations.
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 the 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 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. In addition, this focus on cost
reduction may result in increased focus from health plans on contract
restructurings that reduce the fees paid to us for our services. There can be no
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assurance that these financial pressures will not have a negative impact on our
operations.
Compliance with new federal and state legislation and regulation could adversely
affect our results of operations or may require us to invest substantial amount
acquiring and implementing new information systems or modifying existing
systems.
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 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 from health plans and CMS
patient identifiable medical information for disease management purposes is
protected in federal regulations governing medical record confidentiality. State
legislation or regulation of this information may be more restrictive. 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 is a relatively new segment of the health-care
industry and, as a result, experiences a lengthy sales cycle for new contracts.
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
disease 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 three health plans, PacifiCare of California,
PacifiCare of Texas, and HealthPartners, Inc. of Minnesota, which collectively
accounted for 45% of our revenues in fiscal 2004. Until we sign and implement
additional significant health plan contracts , the loss or a downward
restructuring of a contract with a single large health plan customer would
negatively and materially impact our results of operations and financial
condition.
The disease management industry depends on effectively using information systems
and the failure of these systems could adversely affect our business.
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
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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.
We depend on the timely receipt of accurate data from our health plan customers
and our accurate analysis this data.
The measurement of our performance under our health plan contracts is highly
dependent upon the timely receipt of accurate data from our 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 have a material adverse impact on our revenues from
that contract.
Our revenue is subject to seasonal pressure resulting from the disenrollment
process of our health plan clients.
The membership enrollment and disenrollment processes of our health plan
customers can result in a cyclical reduction of lives under management,
especially during our first quarter. Employers typically make decisions about
health insurance carriers at the end of each calendar year. Health plans also
assess the types of markets they service as well as the contractual arrangements
of medical groups within those markets. In any event, all of these factors will
have an effect on membership as of January 1 of each year. A health plan's
decision to exit markets or non-renewal of contracts with its medical groups
will result in a loss of covered lives under management as of January 1.
Although these decisions may also result in a gain of members, the process of
identification and enrollment will typically lag by six months or longer. The
result of these cyclical changes has not, to date, had a material impact on the
company's revenues or results of operations, but could have such an effect in
the future.
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, as would significant shifts
in employer's participation in the plans.
In addition, because the disease management industry is relatively new, the
renewal experience for these contracts is limited. No assurances can be given
that results from contract restructurings and possible terminations at or prior
to renewal would not have a material negative impact on our operations and
financial condition.
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
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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
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We market our disease management services to health plans, large physician
practice groups, and governmental agencies through our sales staff. In addition
to marketing through our sales staff, we promote our services at key conferences
throughout the United States where potential clients are present.
A key to our success in marketing our services is the relationships we develop
with providers, physicians and patients. QMed builds the critical links among
them that result in superior patient outcomes and reduced costs.
We have developed a comprehensive Medicare strategy, and we project that a large
portion of our future business will be in contracts with the government. In our
current Medicare projects, our relationships with physicians have given us a key
advantage in identifying patients for the projects. We will continue to promote
these relationships, as they are critical to patient enrollment.
Contracting efforts are conducted and coordinated by senior management
personnel, with the aid, where appropriate, of certain independent consultants.
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. 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.
Warranty
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In our medical equipment segment, we extend a standard warranty to end-users of
purchased or leased devices. Extended one-year warranties are available to
end-users at additional cost. Extended warranty revenue represented 0.3%, 0.5%,
and 1.0% of total revenue for fiscal 2004, 2003 and 2002, respectively, and are
not expected to represent a significant portion of revenue in future periods.
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Manufacturing
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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 products to
customers. Such delays could 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 or provide equipment used in our
disease management services.
Competition
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We believe ohms|cvd offers a unique solution for cardiovascular disease
management. However, there are several entities, including pharmaceutical
companies, pharmacy benefit managers and independent companies that are pursuing
disease management, which we consider to be competition.
We believe we have competitive advantages based on the following:
o Our clinical platform links the physician, patient and nurse
to a coordinated plan of care therefore improving adherence to
evidence-based medicine and reducing "gaps in care".
o We have a specialty field management team dedicated to working
directly with physicians and their office staff to promote the
benefits of our disease management program yielding a 75%
national active participation rate.
o The entire management system and its components are
proprietary and patented.
o Our ischemia assessment 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 and cost effective results appear in a
peer reviewed journal.
o We have an extensive and growing knowledgebase of how specific
therapeutic modalities positively affect patients' health.
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o We have proven successes in actual implementation of our
disease management system in the field that demonstrates our
ability to produce faster rollouts and faster health and
economic outcomes to the plan.
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 (Health Plan Employer Data and Information Set)
audit, a competitive advantage for each customer.
Competition may increase and such competition could come from companies that are
considerably larger and have greater financial and marketing resources than we
have.
Our ischemia assessment products compete primarily with ambulatory arrhythmia
ECG scanning services. 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 believe that direct competition in ambulatory ischemic monitoring, products
for testing autonomic function and disease management may 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
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In fiscal 2004, 2003 and 2002, we expended approximately $904,000, $905,000, and
$1,000,000 respectively, for research and development. During these years,
research and development was primarily focused on the development of advanced
algorithms which coordinate care more rigorously and cost-effectively, and
systems which improve our patient out-reach capabilities.
We plan to continue to add new disease states to our platform, as well as
enhance our existing systems and products and have budgeted approximately 10% of
anticipated revenue for such development in fiscal 2005.
Patent Protection and Proprietary Information
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We maintain a policy of seeking patent protection in the United States and other
countries in connection with certain elements of our 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) . We received a U.S.
patent for the nDx technology on March 29, 1994 (Patent No. 5299119) and a
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patent for the ohms|cad system (Patent No. 5,724,580) on March 3, 1998. Certain
patents relating to our technology began expiring in 2004.
The patent laws of foreign countries may differ from those of the United States
as to the patentability 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
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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."
Our customers also implement their own procedures to protect the confidentiality
of information being transferred into and out of their computer network. Despite
these efforts, it is not possible to assure 100% data security.
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.
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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 effected.
Government Regulation
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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.
The cost of complying with our contractual privacy obligations has not, to date,
had a material negative impact on our results of operations and financial
condition. By April 20, 2005, health plans, most health-care providers and
certain other entities will be required to comply with federal security
regulations issued pursuant to HIPAA, which require the use of administrative,
physician and technical safeguards to protect the confidentiality, integrity and
availability of electronic individually-identifiable health information. We will
be contractually required to comply with certain aspects of the security
regulations by the regulatory compliance date.
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.
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
related regulations.
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
15
requirements with which our contract manufacturers and we 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 report 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 managed care errors and omissions, product liability and general
liability insurance for all of our locations and operations. 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 sufficient to cover all
future claims. In recent years, the cost of liability and other forms of
insurance have increased significantly. There is no assurance that such
insurance will continue to be available in adequate amounts or at reasonable
costs. Our liability insurance coverage provides for certain deductible levels
to be paid by us. 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 140 employees as of November 30, 2004, none of which are subject to a
collective bargaining agreement. We believe our relations with employees are
good.
16
Executive Officers of the Registrant
- --------------------------------------------------------------------------------
The following sets forth certain information concerning our executive officers
as of January 26, 2005:
Officer Age Position with the Company
- ------- --- -------------------------
Michael W. Cox 62 President, Chief Executive Officer and
Director since February 1983.
Jane Murray 42 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 55 Senior Vice President - Program
Implementation since January 1, 2002. Vice
President - Strategic Development since
June 1988.
John Siegel 48 Senior Vice President - Sales since April 17,
2001. Vice
President - Field
Services since
1998.
William T. Schmitt, Jr., CPA 44 Senior Vice President, Chief Financial
Officer since October 2002 and
Treasurer, since October 2003.
Steven M. Vella 41 Controller since December 2003.
Debra Fenton, CPA 40 Secretary since June 2004.
Item 2. Properties.
Our executive offices occupy approximately 21,000 square feet of office space in
Eatontown, New Jersey, pursuant to a lease agreement, which expires in November,
2007. These facilities are used principally for administrative offices, sales
training, and marketing. We lease approximately 800 square feet of space in Sag
Harbor, New York, used principally for repairs, assembly and product quality
control.
17
We believe our facilities are suitable and adequate to meet our present needs,
but we may require expansion with increased business.
Item 3. Legal Proceedings.
On March 28, 2003, HeartMasters LLC, a limited liability company 50% owned by
our IHMC subsidiary, received a Demand for Arbitration before the American
Arbitration Association of approximately $13,000,000 plus interest, of which
approximately $6,500,000 related to IHMC, for claims under certain terminated
disease management agreements. The amount of the claim was later increased to
$17,000,000, of which $8.5 million related to IHMC, for claims under certain
terminated disease management agreements. The claims alleged breach of disease
management agreements between Regence of Washington and Oregon and HeartMasters
LLC. HeartMasters LLC also received a notice from a reinsurer, Centre, denying
coverage for the Regence of Oregon HMO first year coverage period asserting that
an outside actuarial report concerning Regence's claims history and other
information, which were considered by the reinsurer prior to issuance of
coverage, contained "grossly incorrect data." HeartMasters LLC denied the claims
of Regence and asserted counter claims. In addition, Heartmasters demanded
payment of the insurance coverage.
On June 15, 2004, the Company entered into an agreement to settle its dispute
with The Regence Group, including all issues surrounding the HeartMasters LLC's
arbitration. The settlement agreement provided QMed, Inc. and IHMC with releases
from any and all claims related to Regence and the Regence contract in exchange
for a financial guarantee of certain payments from HeartMasters LLC to Regence.
The amount of the financial guarantee can range between $0 and $2,300,000 and is
contingent upon the outcome of a separate arbitration being pursued by Regence
and HeartMasters LLC against the reinsurer, Centre Insurance. Based upon
management's estimates, as of May 31, 2004, the Company increased its reserve
estimate to $1,150,001. The Company made an advance payment on this guarantee of
$1,150,001on June 15, 2004. The advance payment, and any subsequent payment,
could be subject to refund based upon certain recovery targets under the Centre
Insurance arbitration, if successful.
The dispute with Centre over the insurance coverage on all of the relevant
Regence disease management plans, for which coverage was purchased, is now the
subject of an arbitration proceeding. Initially, the Company sued Centre over
the nonpayment of the policies; the court determined that this must be resolved
in the arbitration with Centre. At this stage, management is unable to predict
the outcome of these matters.
The Company is subject to claims and legal proceedings covering a wide range of
matters that arise in the ordinary course of business. Although management of
the Company cannot predict the ultimate outcome of these legal proceedings with
certainty, it believes that their ultimate resolution, including any other
amounts we may be required to pay will not have a material effect on the
financial statements.
18
Item 4. Submission of Matters to a Vote of Security Holders.
None.
19
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
(a) Market Price and Dividend Information
Our common stock is traded in the Nasdaq Small Cap Market, under symbol "QMED".
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 transactions.
Fiscal Year Ended November 30, 2004 High Low
First Quarter $ 12.59 $ 9.65
Second Quarter 11.94 9.03
Third Quarter 10.21 7.57
Fourth Quarter 11.55 6.27
Fiscal Year Ended November 30, 2003 High Low
First Quarter $ 7.43 $ 4.85
Second Quarter 7.75 5.50
Third Quarter 8.38 5.85
Fourth Quarter 10.23 6.03
(b) Approximate Number of Holders of Common Stock
As of January 24, 2005, the Company's common stock was held of record by 323
persons. Based upon requests from record holders for additional materials for
our 2004 annual meeting, we believe that there are at least 3,300 beneficial
holders of our common stock. On January 24, 2005, the closing price reported was
$9.30.
(c) Dividends
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.
20
(d) Recent Sales of Unregistered Securities
See the Company's Form 8-K dated October 21, 2004.
Item 6. Selected Financial Data.
For the Years Ended November 30,
--------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Results of Operations
Net revenue $ 15,576,599 $ 12,899,361 $ 12,744,754 $ 8,021,634 $ 2,872,205
Cost of revenue 8,878,104 6,726,867 5,607,563 3,300,526 1,424,779
------------- ------------- ------------- ------------- -------------
Gross profit 6,698,495 6,172,494 7,137,191 4,721,108 1,447,426
Selling, general and
administrative expenses 7,288,783 6,875,834 5,789,730 5,424,183 3,045,052
Research and development expenses 903,921 905,360 999,985 757,355 524,275
Debt conversion expense 38,623
Litigation settlement - 230,000 - - -
------------- ------------- ------------- ------------- -------------
Income (Loss) from operations (1,494,209) (1,838,700) 347,476 (1,460,430) (2,160,524)
Interest expense (33,874) (25,595) (9,173) (16,517) (33,168)
Interest income 68,238 90,418 220,014 232,607 133,668
Loss in operations of joint venture (502,027) (362,499) (47,500) (42,500) (146,148)
Other income 8,703 - 104,444 24,180 15,406
------------- ------------- ------------- ------------- -------------
Income (loss) before income tax
benefit (provision) (1,953,169) (2,136,376) 615,261 (1,262,660) (2,190,766)
Gain on sale of state tax benefits 229,724 - 129,885 219,603 309,256
Provision for state income taxes (16,000) (15,000) (40,000) - -
------------- ------------- ------------- ------------- -------------
Net income (loss) (1,739,445) (2,151,376) 705,146 (1,043,057) (1,881,510)
Other comprehensive income (loss)
Unrealized gain (loss) on
securities available for sale (8,553) (14,725) (69,617) 32,513 -
Reclassification adjustment for
gains included in net income 8,914 44,830 (59,598) - -
------------- ------------- ------------- ------------- -------------
Comprehensive income (loss) $ (1,739,084) $ (2,121,271) $ 575,931 $ (1,010,544) $ (1,881,510)
------------- ------------- ------------- ------------- -------------
Per Share Data
Net income (loss) per share -
Basic $ (.12) $ (.15) $ .05 $ (.08) $ (.15)
------------- ------------- ------------- ------------- -------------
Diluted $ (.12) $ (.15) $ .04 $ (.08) $ (.15)
------------- ------------- ------------- ------------- -------------
Balance Sheet Data (at end of periods)
Working capital $ 5,819,350 $ 6,151,367 $ 6,718,300 $ 5,749,732 $ 2,009,012
Total assets $ 10,837,477 $ 12,918,311 $ 12,163,181 $ 8,167,511 $ 3,390,428
Total liabilities $ 2,946,807 $ 5,870,129 $ 3,295,191 $ 1,472,990 $ 739,145
21
Stockholders' equity $ 7,890,670 $ 7,048,182 $ 8,867,990 $ 6,694,521 $ 2,651,283
Selected Quarterly Financial Data (Unaudited)
For the Quarters Ending 2004
----------------------------
February 28, May 31, August 31 November 30, Total
------------ ---------- --------- ------------ ------------
Net revenue $ 3,792,820 $ 3,724,881 $ 3,273,083 $ 4,785,815 $15,576,599
Gross profit 1,791,622 1,033,936 892,907 2,980,030 6,698,495
Net income (loss) (262,414) (1,432,269) (1,180,896) 1,136,134 (1,739,445)
Income (loss) per share (.02) (.10) (.08) .08 (.12)
For the Quarters Ending 2003
----------------------------
February 28, May 31, August 31 November 30, Total
------------ ---------- --------- ------------ ------------
Net revenue $ 3,666,044 $ 3,316,701 $ 3,164,912 $ 2,751,704 $12,899,361
Gross profit 2,071,551 1,685,985 1,423,309 991,649 6,172,494
Net income (loss) 290,989 (587,451) (676,054) (1,178,860) (2,151,376)
Income (loss) per share .02 (.04) (.05) (.08) (.15)
22
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with our Consolidated
Financial Statements, and Notes thereto, contained elsewhere in this report.
Overview
- --------------------------------------------------------------------------------
QMed(R), Inc. was incorporated in New Jersey in 1983 and reincorporated in
Delaware in 1987. Interactive Heart Management Corp. ("IHMC(R)") is a wholly
owned subsidiary of QMed, which was incorporated in 1995. IHMC developed and
often co-markets with QMed health care information and communication services to
health plans, governments and private companies. The services of QMed include
"ohms|cvd(R)"(Online Health Management System for Cardiovascular Disease) which
is an integrated cardiovascular disease management system. ohms|cvd includes
related systems to assist health plans, government organizations and employer
groups in managing the care, and cost of diabetes, cardiovascular conditions,
including coronary artery disease ("CAD"), stroke, heart failure ("CHF"),
hypertension, hyperlipidemia and the cardiovascular complications of diabetes.
These systems are designed to aid health care physicians in the optimal use of
"evidence based" medical management for patients with these conditions including
co-morbidities, as well as those at high risk of developing these conditions.
The net impact of this approach is the improvement in health and the associated
reduction in mortality, morbidity and cost. As of November 30, 2004, we had 2
contracts to provide these services to two Medicare demonstration projects and
13 licensed health plans in 11 states covering approximately 1.1 million health
plan members.
Our disease management program is for members identified with chronic disease
conditions as well as being at high risk for significant and costly episodes of
care. The program is supported by technology that is designed to deliver the
best clinical and financial outcomes to our customers.
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements, which are based upon current
expectations and involve a number of risks and uncertainties. In order for us to
utilize the "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995, investors are hereby cautioned that these statements may be
affected by the important factors, among others, set forth below, and
consequently, actual operations and results may differ materially from those
expressed in these forward-looking statements. The important factors include:
o our ability to renew and/or maintain contracts with our
customers under existing terms or restructure these contracts
on terms that would not have a material negative impact on our
results of operations;
o our ability to execute new contracts for health plan disease
management services;
23
o the risks associated with a significant concentration of our
revenues with a limited number of health plan customers;
o the timing and costs of implementation, and the effect, of
regulatory rules and interpretations relating to the Medicare
Prescription Drug, Improvement, and Modernization Act 2003;
o our ability to effect estimated cost savings and clinical
outcome improvements under health plan disease management
contracts and reach mutual agreement with customers with
respect to cost savings, or to effect such savings and
improvements within the timeframes contemplated by us;
o the ability of our health plan customers to provide timely,
complete and accurate data that is essential to the operation
and measurement of our performance under the terms of our
health plan contracts and our accurate analysis of such data;
o our ability to resolve favorably contract billing and
interpretation issues with our health plan customers;
o our ability to effectively integrate new technologies into our
care management information technology platform;
o our ability to obtain adequate financing to provide the
capital that may be needed to support the growth of our health
plan operations and financing or insurance to support our
performance under new health plan contracts;
o unusual and unforeseen patterns of healthcare utilization by
individuals within the health plans with chronic conditions,
including coronary artery disease ("CAD"), stroke, heart
failure ("HF"), hypertension, hyperlipidemia and the
cardiovascular complications of diabetes with which we have
executed disease management contracts;
o the impact of the introduction of new technologies;
o the ability of the health plans to maintain the number of
covered lives enrolled in the plans during the terms of the
agreements between the health plans and us;
o our ability to attract and/or retain and effectively manage
the employees required to implement our agreements with health
plan organizations;
o the impact of future state and federal healthcare legislation
and regulations on our ability to deliver services;
o the financial health of our customers and their willingness to
purchase our services;
o the impact of litigation or arbitration;
o our ability to accurately estimate our performance and revenue
recognition under the terms of our contracts;
o our ability to develop new products and deliver outcomes on
those products;
o our ability to implement our strategy within expected cost
estimates;
o general economic conditions
We undertake no obligation to update or revise any such forward-looking
statements.
24
Critical Accounting Policies
Our accounting policies are described in Note 1 of the consolidated financial
statements included in this Annual Report on Form 10-K for the fiscal year ended
November 30, 2004. The consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America, which 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.
We consider the following policies to be the most critical in understanding the
judgments involved in preparing the financial statements and the uncertainties
that could impact our results of operations, financial condition and cash flows.
Revenue Recognition
We enter into contractual arrangements with health plans and government agencies
to provide disease management services. Fees under our health plan contracts are
generally determined by multiplying a contractually negotiated rate per health
plan member per month ("PMPM") by the number of health plan members covered by
our services during the month. The PMPM rates usually differ between contracts
due to the various types of health plan product groups (e.g. PPO, HMO, Medicare
Advantage). These contracts are generally for terms of one to three years with
provisions for subsequent renewal, and typically provide that all or a portion
of our fees may be "performance-based". Performance-based contracts have varying
degrees of risk associated with our ability to deliver the guaranteed financial
cost savings. In most cases we guarantee a percentage reduction of disease costs
compared to a prior baseline year determined by actuarial analysis and other
estimates used as a basis to measure performance objectives. The measurement of
our performance against the base year information is a data intensive and
time-consuming process that is typically not completed until six to eight months
after the end of the contract year. We bill our customers each month for the
entire amount of the fees contractually due based on previous months membership,
which always includes the amount, if any, that may be subject to refund for
retroactive member terminations and a shortfall in performance. We adjust or
defer revenue for contracts where we believe performance is short of contractual
obligations, possibly resulting in a refund of fees or where fees generated may
be subject to further retroactive adjustment associated with a contract or
plan's decision to completely terminate its coverage in a geographic market as
well as general membership changes. For example, general terminations can be due
to death, member change of health plan, etc. We recognize revenue, in accordance
with SEC Staff Accounting Bulletins No. 101 and No. 104, as follows: 1.) we
recognize the fixed portion of our monthly fee as revenue during the period we
perform the services; 2.) we recognize the performance - based portion of the
monthly fees based on indicators of performance to date in the contract year;
and 3.) we recognize previously recorded deferred revenue upon final settlement
25
of the contract measurement year. Adjustments for shortfalls in performance
targets 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.
We assess our estimates by analyzing various information including but not
limited to, medical claims data, prior performance under the contract and review
of physician and patient participation levels. We review these estimates
periodically and make adjustments, as interim information is available.
We determine our level of performance at interim periods based on medical claims
data, achievement of physician and patients participation levels or other data
supplied by the health plan. In the event these interim performance measures
indicate that performance targets are not being met or sufficient data is
unavailable, fees, which could be subject to refund, are not recorded as revenue
but rather are recorded as a current liability entitled "contract billings in
excess of revenues." Under performance based arrangements, the ability to make
estimates at interim periods can be challenging due to the inherent nature of
the medical claims process and the lag time associated with it. In most cases,
complete paid claims data is not available until up to six months after claims
are incurred. Although interim data measurements are indicative of performance
objectives, actual results could differ from our estimates.
The settlement process under a contract, which includes the settlement of any
performance-based fees and involves reconciliation of health-care claims and
clinical data, is generally not completed until sometime after the end of the
contract year. Data reconciliation differences between the Company and the
customer can arise due to health plan data deficiencies, omissions and/or data
discrepancies, for which the Company negotiates with the plan until agreement is
reached with respect to identified issues.
During the fiscal year ended November 30, 2004, approximately 45% of disease
management services were derived from three health plans that each comprised
more than 10% of the Company's revenues. During the fiscal year ended November
30, 2003, approximately 57% of disease management services were derived from
four health plans that each comprised more than 10% of the Company's revenues.
During the fiscal year ended November 30, 2002, approximately 47% of disease
management services were derived from two health plans that each comprised more
than 10% of the Company's revenues.
Income Taxes
As part of the process of preparing consolidated financial statements, the
Company is required to estimate income taxes in each of the jurisdictions in
which it operates. Significant judgment is required in determining the income
tax expense provision. The Company recognizes deferred tax assets and
liabilities based on differences between the financial reporting and tax bases
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
assesses the likelihood of our deferred tax assets being recovered from future
taxable income. The Company then provides a valuation allowance for deferred tax
assets for which the Company does not consider realization of such assets to be
more likely than not. The Company considers future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the valuation
26
allowance. Any decrease in the valuation allowance could have a material impact
on net income in the period in which such determination is made.
Health Plan Contracts
Most of our revenues in Fiscal 2001 through 2004 were generated from programs
designed to assist health plans in improving the quality of care for health plan
members with diseases such as diabetes, coronary artery disease, stroke, heart
failure, hypertension, hyperlipidemia and the cardiovascular complications of
diabetes. These programs are designed to improve care and to reduce healthcare
costs. We anticipate that a substantial portion of our future revenue growth
will continue to result from providing disease management services to health
plans. We also believe that a greater portion of our future revenue will be from
contracts with CMS.
We first introduced a coronary artery disease program with a medical group in
1995. Since that time, we added diabetes, heart failure, stroke, hypertension,
hyperlipidemia and the cardiovascular complications of diabetes to our program.
During fiscal 2001, we were awarded a Medicare Coordinated Care Demonstration
project, which is designed to evaluate the cost-effectiveness of reimbursing
disease management services in the Medicare fee for service model. Enrollment of
patients under this program began in Fiscal 2002. During fiscal 2002, we
received an accreditation by the National Committee on Quality Assurance. In
October 2002, we, together with two other entities, were selected to participate
in a disease management program for the Centers for Medicare and Medicaid
Services. The program commenced in January of 2004.
Our disease management services include the stratification of high-risk
patients, contact with their primary care physicians, review of patient chart
information, contact and assessment with the patient and coordination of care
with the primary care physician. Fees under our health plan contracts are
generally determined by multiplying a contractually negotiated rate per health
plan member per month ("PMPM") by the number of health plan members covered by
our services during the month. The PMPM rates usually differ between contracts
due to the various types of health plan product groups (e.g. PPO, HMO,
Medicare). These contracts are generally for terms of one to three years with
provisions for subsequent renewal, and typically provide that all or a portion
of our fees may be "performance-based". We earn performance-based fees upon
achieving a targeted percentage reduction in the customer's healthcare costs, in
addition to clinical and other criteria, compared to a baseline year.
The membership enrollment and disenrollment processes of our health plan
customers can result in a cyclical reduction of lives under management,
especially during our first quarter. Employers typically make decisions about
health insurance carriers at the end of each calendar year. Health plans also
assess the types of markets they service as well as the contractual arrangements
27
of medical groups within those markets. In any event, all of these factors will
have an effect on membership as of January 1 of each year. A health plan's
decision to exit markets or non-renewal of contracts with their medical groups
will result in a loss of covered lives under management as of January 1.
Although these decisions may also result in a gain of members, the process of
identification and enrollment will typically lag by six months or longer. The
result of these cyclical changes has not had a material impact on the company's
revenues or results of operations.
During the fiscal year ended November 30, 2004, approximately 45% of disease
management services were derived from PacifiCare of California, PacifiCare of
Texas, and HealthPartners, Inc. of Minnesota, each of which comprised more than
10% of the Company's revenues. During the fiscal year ended November 30, 2003,
approximately 57% of disease management services were derived from PacifiCare of
California, PacifiCare of Texas, PacifiCare of Oregon, and PacifiCare of
Colorado, each of which comprised more than 10% of the Company's revenues.
During the fiscal year ended November 30, 2002, approximately 47% of disease
management services were derived from PacifiCare of California and Regence of
Oregon, each of which comprised more than 10% of the Company's revenues.
Our strategy is to (1) develop additional CMS contracts (including both large
scale demonstrations for our full suite of interventions as well as providing
other CMS demonstrations with our already successful front-end enrollment
process); (2) add contracts with new health plans to provide disease management
services; (3) to further develop and expand our cardiovascular disease
management business within existing customers; (4) to add disease states to our
platform; and (5) to pursue other opportunities within the healthcare industry.
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 continue to be made
during fiscal 2005 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 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 appropriate we will defer
a portion of this revenue.
Recent Accounting Pronouncements
Refer to note 1 in the accompanying consolidated financial statements.
28
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.
Period-to-Period
% Changes
% For Year Ended ---------
November 30, 2004 2003
------------ vs. vs.
2004 2003 2002 2003 2002
---- ---- ---- ---- ----
Revenue 100.0% 100.0% 100.0% 20.8% 1.2%
Cost of revenue 57.0 52.1 44.0 32.0 20.0
Gross Profit 43.0 47.9 56.0 8.5 (13.5)
Selling, general and administrative 46.8 53.3 45.4 6.0 18.8
Research and development 5.8 7.0 7.8 (0.2) (9.5)
Litigation settlement 1.8 - * *
Loss (income) from operations (9.6) (14.3) 2.7 * *
Interest expense (0.2) (0.2) (0.1) 32.3 179.0
Interest income, net 0.4 0.7 1.7 (24.5) (58.9)
Loss on operations of joint venture (3.2) (2.8) (0.4) * *
Other income 0.1 - 0.8 * *
(Loss) income before tax (provision) benefit
(12.5) (16.6) 4.8 (8.6) *
Gain on sale of tax benefit 1.5 - 1.0 * *
Income tax (provision) benefit (0.1) (0.1) (0.3) 6.7 (62.5)
Net (loss) income (11.2) (16.7) 5.5 (19.1) *
* Not meaningful
29
Fiscal 2004 Compared to Fiscal 2003
- --------------------------------------------------------------------------------
Revenue for fiscal 2004 increased approximately $2.7 million or 20.8% over the
fiscal 2003. This increase consists of (i) approximately $4.9 million of
additional revenue related to new contracts entered into during fiscal 2004.
This increase was offset by a reduction in revenue of approximately $2.2 million
representing (i) approximately $1.2 million related to market exits and
reductions in membership under existing disease management programs, the
termination of disease management programs under agreements with the Regence
Group and with a customer in Oregon and (ii) a reduction of approximately
$353,000 related an increase in management's deferred revenue estimate related
to its settlement with the Regence Group and $580,000 related to an increase in
management's deferred revenue estimate with a customer in Oregon.
Gross profit margins for fiscal 2004 decreased to 43.0% from 47.9% for fiscal
2003. This decrease was primarily due to (i) a reduction of approximately
$353,000 related an increase in management's deferred revenue estimate related
to its settlement with the Regence Group, (ii) $580,000 related to an increase
in management's deferred revenue estimate with a customer in Oregon and (iii)
implementation costs associated with our expansion into new market places
related to new contracts, including costs associated with one contract totaling
approximately $800,000. Salaries, travel and other direct costs are all factors
in the initial implementation related to any new markets and contracts. The
direct costs will decrease as a percentage of revenue once a marketplace and
contract matures with a significant number of members being enrolled.
Selling, general and administrative expenses for fiscal 2004 increased
approximately $413,000 or 6.0% compared to fiscal 2003. The increase was
primarily due to costs associated with compliance with the provisions under the
Sarbanes-Oxley Act of approximately $250,000, costs associated with negotiating
and signing new disease management services contracts of approximately $247,000,
and an increase in both executive and administrative staff of approximately
$223,000. These increases were partially offset by the reduction of costs
associated with the end of a lease on old corporate office space of
approximately $226,000 and a reduction in insurance costs of approximately
$94,000.
Research and development expenses for fiscal 2004 were flat compared to fiscal
2003. We continue to focus our efforts on the development of new, advanced
software programs to assist in the identification and evaluation of patients who
are at risk for developing various disease conditions. These programs
incorporate state of the art telecommunications, data management, and security
and information technology. Certain costs associated with the development of new
product software to be incorporated into our disease management programs are
capitalized and amortized over a 5-year useful life. We intend to continue to
improve and expand the capabilities of the ohms|cvd system.
30
Loss on operations of joint ventures for fiscal 2004 increased to approximately
$502,000 from $362,000 in 2003. The expense in 2004 primarily represents legal
fees associated with the arbitration with the Regence Group and startup costs
related to a joint venture entered into with two partners to provide services
under a disease management contract in Minnesota. Loss on operations of joint
venture for fiscal 2003 primarily represents legal fees associated the
arbitration with the Regence Group.
There was no cost of litigation settlements in 2004. In 2003, the litigation
settlement expense of $230,000 represents costs associated with settlement of
certain outstanding legal proceedings, which have either reached settlement
during the period or have reached a point at which the outcome can be reasonably
estimated.
Our effective tax rate for fiscal 2003 is a negative 1.0%. The difference in the
Company's effective tax rate from the federal statutory rate is primarily due to
a 100% valuation allowance provided for all deferred tax assets and the sale of
certain state tax benefits. Current period income tax expense of $16,000
represents minimum state tax liabilities.
Fiscal 2003 Compared to Fiscal 2002
- --------------------------------------------------------------------------------
Revenue for fiscal 2003 increased approximately $155,000 or 1.2% over fiscal
2002.This increase consists of approximately $5.8 million of additional revenue
related to expansion of existing contracts and a new contract entered into
during fiscal 2003. This increase was offset by a reduction of revenue of
approximately $4.7 million related to market exits under an existing disease
management program in California and the termination of disease management
programs under HeartMasters agreements with Regence of Oregon and Washington,
and approximately $0.8 million related to a difference in estimated versus
actual cost savings measures under a contract with a customer.
Gross profit margins for fiscal 2003 decreased to 47.9% from 56.0% for fiscal
2002. This decrease was due to the increased costs associated with our expansion
into new market places related to new contracts and the difference in estimated
verses actual cost savings measures under a contract with a customer described
above. Salaries, travel and other direct costs are all factors in the initial
implementation related to any new market and contract. The direct costs will
decrease as a percentage of revenue once a marketplace and contract matures with
a significant number of members being enrolled.
Selling, general and administrative expenses for fiscal 2003 increased
approximately $1,086,000 or 18.8% compared to fiscal 2002. The increase was
included costs associated with a retroactive insurance premium of approximately
$156,000. Selling, general and administrative expenses, excluding this insurance
premium, increased approximately $930,000 or 16.1% compared to the prior year
primarily due to an increase in both executive and administrative staff,
professional fees related to general corporate matters and office rent and
depreciation associated with new office furniture and equipment at our new
headquarters in Eatontown.
31
Research and development expenses for fiscal 2003 decreased approximately
$95,000 or 9.5% compared to fiscal 2002. During the past year we have continued
to focus our efforts on the development of new, advanced software programs to
help us better identify, locate and evaluate patients who are at risk for
developing various disease conditions. These programs incorporate state of the
art telecommunications, data management, and security and information
technology. Certain costs associated with the development of new product
software are capitalized and amortized over a 5-year useful life. We intend to
continue to improve and expand the capabilities of the ohms|cvd system.
The Company incurred a litigation settlement expense of $230,000 in 2003 and no
expense in 2002. Litigation settlements represent costs associated with
settlement of certain outstanding legal proceedings, which have either reached
settlement during the period or have reached a point at which the outcome can be
reasonably estimated.
Loss on operations of joint venture for fiscal 2003 increased to approximately
$362,000 from $48,000 in 2002. In 2003, this loss was generated primarily from
legal fees associated the arbitration between Regence of Washington and Oregon
and HeartMasters LLC.
Our effective tax rate for fiscal 2003 is a negative 0.7%. The difference in the
Company's effective tax rate from the federal statutory rate is primarily due to
a 100% valuation allowance provided for all deferred tax assets. Current period
income tax expense of $15,000 represents minimum state tax liabilities.
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
To date, our principal sources of working capital have been the proceeds from
public and private placements of securities. Since our inception, sales of
securities, including the proceeds from the exercise of outstanding options and
warrants, have generated approximately $33,000,000 less applicable expenses.
We had working capital of approximately $5.8 million at November 30, 2004
compared to approximately $5.4 million (net of an approximate $797,000 reserve
related to the settlement with the Regence Group) at November 30, 2003 and
ratios of current assets to current liabilities of 3.1:1 as of November 30, 2004
and 1.9:1 as of November 30, 2003. The working capital increase of approximately
$464,000 was due to a private placement equity transaction on October 21, 2004,
whereby the company sold common stock for approximately $2 million, net of
expenses, and proceeds from the sale of common stock through the exercise of
outstanding options and warrants of approximately $509,000. This increase was
partially offset by a net loss of approximately $1.7 million and capital
expenditures of approximately $641,000. In September 2001 we entered into a
$1,000,000 line of credit agreement with Wachovia Bank, National Association.
The line is collateralized by securities owned by the Company and expires on
September 1, 2005. Outstanding balances under the loan bear interest at an
32
annual rate equal to the lower of the bank's reference rate minus 1% or LIBOR
plus 1.5%. As of November 30, 2004 no debt was outstanding and the entire
$1,000,000 was available under this credit line.
On December 6, 2004, the Company issued shares of the Company's common stock in
a private placement for approximately $6 million, net of expenses. Had this
transaction been completed on November 30, 2004 working capital would have
increased to approximately $11.8 million.
We anticipate that funds generated from operations, together with cash and
investments, and availability under our credit line will be sufficient to fund
our current level of growth and our existing commitments. 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.
Material Commitments
- --------------------------------------------------------------------------------
The following schedule summarizes our contractual cost obligation as of November
30, 2004 in the periods indicated.
- -------------------------------------- ----------------------------------------------------------------------------------
Contractual
Obligations Payments Due by Period
- -------------------------------------- ----------------------------------------------------------------------------------
After 5
Total Less than 1 year 1-3 years 4-5 years years
- -------------------------------------- ---------------- ------------------- ---------------- --------------- ------------
Long-Term Debt $ - $ - $ - $ - $ -
Capital Lease Obligations 292,000 137,000 155,000 - -
Operating Leases 1,283,000 490,000 793,000 - -
Unconditional Purchase Obligations 432,000 432,000 - - -
Other Long-Term Obligations 706,000 706,000 - - -
Total Contractual Cash Obligations $ 2,713,000 $ 1,765,000 $ 948,000 $ - $ -
- -------------------------------------- ---------------- ------------------- ---------------- --------------- ------------
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, and governmental agencies.
Fluctuations in our quarterly operating results may cause volatility in the
price of our common stock. 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 revenue
and operating results have become highly dependent on the timing of contracts
33
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 revenue, 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 efficiency 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 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 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 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
34
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 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
35
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.
The Company does not issue or invest in financial instruments or derivatives for
trading or speculative purposes. All of the operations of the Company are
conducted in the United States, and, as such, are not subject to material
foreign currency exchange rate risk. At November 30, 2004, the Company had no
outstanding long-term debt. Although the Company's assets included approximately
$3.3 million in cash and cash equivalents and approximately $2.1 of securities
with a maturity of generally less than one year at November 31, 2004, market
rate risk associated with changing interest rates in the United States is not
material. See also Note 2 of the Notes to Consolidated Financial Statements.
Item 8. Financial Statements and Supplementary Data.
Attached.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures
Evaluation of the Company's Disclosure Controls and Internal Controls. We
evaluated the effectiveness of the design and operation of our "disclosure
controls and procedures" as of the end of the period covered by the Annual
Report. This evaluation (the Controls Evaluation) was done under the supervision
and with the participation of management, including our Chief Executive Officer
(CEO) and Chief Financial Officer (CFO). Attached as exhibits to this Annual
Report are certifications of the CEO and the CFO, which are required in
accordance with Rule 13a-14 of the Exchange Act. This "Controls and Procedures"
section includes the information concerning the controls evaluation referred to
in the certifications, and it should be read in conjunction with the
certifications for a more complete understanding of the topics presented.
36
Management's Report on Internal Control Over Financial Reporting. Our management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f).
Under the supervision and with the participation of our management, including
our principal executive officer and principle financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on our
evaluation under the framework in Internal Control - Integrated Framework, our
management concluded that our internal control over financial reporting was
effective as of November 30, 2004. Our management's assessment of the
effectiveness of our internal control over financial reporting as of November
30, 2004 has been audited by Amper, Politziner & Mattia P.C., an independent
registered public accounting firm, as stated in their report which is included
herein.
Disclosure Controls and Internal Controls. Disclosure Controls are procedures
that are designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934
(Exchange Act), such as this Report, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's (SEC) rules and forms. Disclosure Controls are also designed with
the objective of ensuring that such information is accumulated and communicated
to our management, including the CEO and CFO, as appropriate to allow timely
decisions regarding required disclosure. Our Disclosure Controls include
components of our internal control over financial reporting, which consists of
control processes designed to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of financial
statements in accordance with generally accepted accounting principles in the
U.S. To the extent that components of our internal control over financial
reporting are included within our Disclosure Controls, they are included in the
scope of our quarterly controls evaluation.
Scope of the Controls Evaluation. The CEO/CFO evaluation of our Disclosure
Controls included a review of the controls' objectives and design, the controls'
implementation by the company and the effect of the controls on the information
generated for use in this Report. In the course of the controls evaluation, we
sought to identify data errors, controls problems or acts of fraud and to
confirm that appropriate corrective action, including process improvements, were
being undertaken. This type of evaluation is performed on a quarterly basis so
that the conclusions concerning controls effectiveness can be reported in our
Quarterly Reports on Form 10-Q and Annual Report on Form 10-K. Our Internal
Controls are also evaluated on an ongoing basis by other personnel in our
finance organization and by our independent auditors in connection with their
audit and review activities.
The overall goals f these various evaluation activities are to monitor our
Disclosure Controls, and to modify them as necessary. Our intent is to maintain
the Disclosure Controls as dynamic systems that change as conditions warrant.
In accordance with SEC requirements, the CEO and CFO note that, since the date
of the Controls Evaluation to the date of this Report, there have been no
significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Conclusions. Based upon the Controls Evaluation, our CEO and CFO have concluded
that, subject to the limitations noted above at the end of the period covered by
this Annual Report, our Disclosure Controls are effective to provide reasonable
assurance that material information relating to QMed and its consolidated
subsidiaries is made known to management, including the CEO and CFO,
particularly during the period when our periodic reports are being prepared.
37
Report of Independent Registered Public Accounting Firm
We have audited management's assessment, included in the accompanying
Management's 2004 Annual Report on Internal Controls, that Qmed, Inc. and
Subsidiaries (the Company) maintained effective internal control over financial
reporting as of November 30, 2004, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment, and an opinion on the effectiveness of the company's internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of November 30, 2004, is fairly
stated, in all material respects, based on control criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of November 30, 2004, based on the criteria established
in Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
38
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Qmed, Inc. and Subsidiaries as of November 30, 2004 and the related consolidated
statements of operations, comprehensive income, stockholders' equity and cash
flows for the year ended November 30, 2004 in our report dated January 25, 2005,
in which we expressed an unqualified opinion.
/s/ Amper, Politziner & Mattia, P.C.
Amper, Politziner & Mattia, P.C.
January 25, 2005
Edison, New Jersey
39
QMED, INC. AND SUBSIDIARIES
For the Years Ended
November 30, 2004 and 2003
Page
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Comprehensive Income F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F-25
40
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of QMed, Inc. and
Subsidiaries as of November 30, 2004 and 2003, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years ended November 30, 2004, 2003, and 2002. 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 the standards of the Public Company
Accounting Oversight Board of United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Qmed, Inc. and
Subsidiaries as of November 30, 2004 and 2003, and the results of its operations
and its cash flows for each of the three years ended November 30, 2004, 2003,
and 2002, in conformity with accounting principles generally accepted in the
United States of America.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board of the United States of America, the effectiveness of
Qmed, Inc. and Subsidiaries internal control over financial reporting as of
November 30, 2004, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated January 25, 2005 expressed an unqualified
opinion.
/s/ Amper, Politziner & Mattia, P.C.
Amper, Politziner & Mattia, P.C.
Edison, New Jersey
January 25, 2005
F-1
QMED, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
November 30,
Assets
2004 2003
---- ----
Current assets
Cash and cash equivalents $ 3,292,571 $ 1,638,271
Investments in securities 2,097,362 6,213,825
Accounts receivable, net of allowance for
doubtful accounts of $52,690 and $2,000, respectively 2,750,507 1,315,021
Inventory, net of reserve 38,355 146,239
Prepaid expenses and other current assets 440,620 392,783
------------------ -----------------
8,619,415 9,706,139
Property and equipment, net of accumulated depreciation 1,180,050 1,133,419
Product software development costs, net 858,022 441,020
Accounts receivable, non-current - 1,474,674
Other assets