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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: November 30, 1997
Commission File Number: 0-11411
Q-MED, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-2468665
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
100 Metro Park South, Laurence Harbor, New Jersey 08878
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 566-2666
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to
Section 12 (g) of the Act: Common Stock, $.001 par value
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
As of February 19, 1998, the aggregate value of the registrant's voting stock
held by non-affiliates was $46,155,428 (computed by multiplying the last
reported sale price on February 19, 1998 by the number of shares of common stock
held by persons other than officers, directors or by record holders of 10% or
more of the registrant's outstanding common stock. This characterization of
officers, directors and 10% or more beneficial owners as affiliates is for
purposes of computation only and is not an admission for any purposes that such
person are affiliates of the registrant).
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As of February 19, 1998, there were 9,648,519 shares of the
registrant's common stock, $.01 par value, issued and outstanding.
Documents incorporated by reference:
Document Form 10-K Reference
-------- -------------------
Portions of the Registrant's Proxy Statement
for its 1998 Annual Meeting (to be filed III
in definitive form within 120 days of the
Registrant's Fiscal Year End)
2
PART I
ITEM 1. BUSINESS
Forward-Looking Statements
Certain matters discussed herein may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 and as such may involve risks and uncertainties. These forward-looking
statements relate to, among other things, expectations of the business
environment in which the Company operates, projections of future performance,
perceived opportunities in the market and statements regarding the Company's
mission and vision. The Company's actual results, performance, or achievements
may differ significantly from the results, performance, or achievements
expressed or implied in such forward-looking statements. For discussion of the
factors that might cause such a difference, see "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations."
General
Q-Med, Inc. (the "Company") is a Delaware corporation and is the
successor by merger to the business of a New Jersey corporation organized on
February 1, 1983. The Company engages in the development, manufacture, marketing
and sale of advanced medical devices and systems. The Company, through
Interactive Heart Management Corp. ("IHMC"), a subsidiary founded during the
year ended November 30, 1995 ("fiscal 1995"), developed and is marketing an
integrated coronary artery disease management system under the name
"ohms|cad(R)" to assist managed care organizations manage the cost of coronary
artery disease ("CAD"). The Company has historically focused on producing high
quality medical devices that provide reliable diagnostic interpretation of
certain disease states, including a line of ambulatory ischemic heart monitors,
an interpretative electrocardiograph, a device for the analysis of heart rate
variability and a device for the measurement of venous blood flow. These systems
are designed to address the needs of primary health care physicians to
appropriately manage certain diseases cost effectively. The Company's products
are uniquely suited to assist primary health care physicians in discharging the
greater medical responsibilities that are expected to be placed on them, as
efforts are made to reduce the overall cost of health care. Each of the
Company's present products, and those which are under development by the Company
as well as products employing selectively acquired technology developed by
others, are designed to provide sophisticated analysis of physiological data in
near or real-time and report these analytical results to the primary care
physician in order to detect and manage early signs of potentially acute
diseases. These technologically advanced diagnostic tools lead to early
detection and treatment thereby facilitating cost-effective management of
disease by a primary care physician rather than disease management in an
expensive acute care facility, such as a hospital.
The Company has developed and markets a full line of ambulatory
computerized ischemic heart disease monitors utilizing patented technology.
These ambulatory products, marketed under the name "Monitor One(R),"
continuously analyze and interpret the discrete marker of ischemic heart
disease, the ST-segment of electrocardiographic ("ECG") signals
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generated by the heart utilizing patented and proprietary technology in real
time. The Company has also developed and is marketing an electronic medical
device under the name, Monitor One nDx(R) ("nDx") which analyzes heart rate
variability. The loss of variation in heart rate may assist the physician in
making a diagnosis and determining the severity of autonomic neuropathy.
Autonomic neuropathy, a deterioration of the autonomic nervous system, is
associated with diabetic patients which may lead to complications in the
functioning of the heart, respiratory systems, digestion, body temperature,
metabolism, perspiration and the secretion of certain endocrine glands.
Utilizing the experience obtained through various drug trials with such
companies as Pfizer, Ciba Geigy, ICI and others and the extensive validations
completed on Monitor One instruments, the Company developed a comprehensive,
telemedicine disease management system for the coronary artery disease ("CAD")
patient which is marketed under the trade name ohms|cad by the Company's IHMC
subsidiary. This system consists of Monitor One STRx ambulant ischemic
technology; a remote on-line diagnostic center (The ohms Center); and an
integrated cardiology consultant practice. This entire system non-invasively and
reliably quantifies the probable risk of a heart attack, unstable angina and
death and directs the patient to appropriate therapy with the emphasis
throughout on early detection, the modification of risk-factors and medical
intervention. Early treatment, emphasis on medical intervention, appropriate
referrals to the cardiologist results in an overall lowering of the cost of CAD
care and the improvement in mortality and morbidity rates in populations having
CAD.
In April 1996, the Company entered into a Strategic Alliance Agreement
with SmithKline Beecham Health Care Services, a division of SmithKline Beecham
Corporation ("SmithKline Beecham"). Under the agreement, SmithKline Beecham has
the exclusive right to market and sell the Company's ohms|cad system to managed
care companies in the United States, together with the Company's IHMC
subsidiary. In addition, SmithKline Beecham's venture capital affiliate, S.R.
One Limited, made a $2 million equity investment in the Company and acquired
warrants to acquire an additional 63,492 shares of the Company's common stock
for $15.75 per share. The Company and SmithKline Beecham share profits and
losses after the Company recovers its costs of operating the ohms|cad system for
clients.
The Strategic Alliance Agreement, which has an initial term of five
years, permits either the Company or SmithKline, beginning in April 1998, to
terminate the arrangement in certain events, subject to continuing the venture
to provide services contracted for prior to the termination of the venture. The
Company and SmithKline have discussed possibilities for improving the results of
the alliance or terminating the alliance upon mutually beneficial terms.
The Company's executive offices are located at 100 Metro Park South,
Laurence Harbor, New Jersey 08878 and its telephone number is (908) 566-2666.
ohms|cad System
ohms|cad is IHMC's proprietary "On-line Health Management Service for
Coronary Artery Disease". It is a telecommunications system designed as a total
disease management process for CAD. It consists of Monitor One STRx, IHMC's
Monitor One ambulant ischemia technology, a remote on-line diagnostic center
(The ohms Center), and an integrated cardiology consultant practice. The entire
system noninvasively and reliably quantifies the probable risk of a heart
attack, unstable angina and death and rationally directs the patient to
appropriate therapy with the accent on early detection, the modification of
critical risk-factors and medical intervention.
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The overall system operates as an "expert system" emphasizing best
medical treatment options for myocardial ischemia and continued coronary
wellness. The system is an evidence based, relational mechanism, using coronary
artery disease patient descriptors which include: demographics, medical history,
current medical therapy, including aspirin, lipid and hypertension profiles,
obesity and life style, smoking, glucose levels and ambulant ischemia in its
decision making.
In addition, each individual patient's demographics and risk profiles
are simultaneously entered into the ohms|cad database for secondary prevention
analysis and treatment. Recommendations for management are relational and
tailored to an individual patient for lipid and hypertension management,
antithrombosis, smoking, exercise, obesity and diabetes.
Because of centralized, digital storage of all data, it allows for the
continuous description and analysis of quantifiable results; success of the
stratification, proportion of patients assigned to various therapies, objective
outcomes, interplay with pharmaceutical and pharmacy benefit managers and
physician and patient compliance.
For example, in its risk prevention mode (myocardial infarction,
unstable angina, sudden death), it centers on the presence or absence of
ambulant ischemia as a risk stratifier utilizing our specialized non-invasive
STRx technology for evaluation of this phenomena in each patient. This test data
is telecommunicated to the Company's ohms|cad database (The ohms Center), which
in turn stratifies each individual patient into high or low risk. It then
proposes to lower patient risk with specific anti-ischemic medical therapies as
one treatment option, or, if necessary, recommends further local cardiology
consultation leading to possible invasive intervention. If the data indicate
that the patient is at low risk, a message is sent back to the primary care
physician (PCP) site within minutes with recommendations for optimization of
medical therapy which will maintain the patient in the low-risk pool. In both
circumstances, therapeutic actions are guided by IHMC's proprietary disease
management algorithm which in turn is based on national practice guidelines. All
of the interactions and data are stored in the ohms|cad diagnostic center, thus,
outcome information is available continuously.
Because ohms|cad is an active disease management process emphasizing a
continuum of care, derived from early detection of ambulant ischemia and
modification of patient risk factors, similar cost effective improvements in
cardiac events can be expected from its use. The ohms|cad system continually
monitors the care process at the primary care level, thus, results are reported
as outcomes. Favorable outcomes increase market share, decrease economic risk
and increase product differentiation. In the end, it is "coronary wellness" that
counts. It is durable, measurable and less costly than conventional care. As a
result, the early implementation of ohms|cad should contribute to significant
savings and patient gains in market share.
The Company's IHMC subsidiary, individually and together with
SmithKline as part of the Strategic Alliance, entered into three contracts for
the utilization of ohms|cad systems covering approximately 200,000 members. One
contract has been fully implemented and has been operational since 1995. The
results of the utilization of ohms|cad to manage CAD patients
5
was the subject of a presentation at the Scientific Section of the American
Heart Association's Annual Meeting in November 1997. The results showed
significant health benefits for those patients undergoing ohms|cad management as
compared to patients receiving usual care. Implementation began pursuant to a
contract with the San Jose Medical Group in August 1997 and IHMC entered into a
contract of ohms|cad services with CIGNA Health Care of Ohio in December 1997.
Ambulatory Ischemic Heart Disease Monitoring
While ambulatory monitoring for arrhythmias was first introduced in the
early 1960's and has been broadly used in medical practice as a diagnostic
monitoring system useful to detect rhythm and rate disturbances of the heart, no
company had developed a novel application using solid-state electronics and a
validated ischemia analysis program to evaluate the presence and duration of
ambulatory ischemic heart disease (Monitor One). Thus, the medical utility of
Monitor One allows the detection and analysis of reduced coronary artery blood
flow during a patient's daily routines (Ambulant Ischemic Heart Disease). Such
analysis can result in the early prevention of heart attack, unstable angina and
death. In addition, silent heart disease which is prevalent in coronary artery
disease patients and diabetics, may also be detected and evaluated by the
Monitor One technology. The basic design of Monitor One to accomplish this
special function, utilizes an on-board microprocessor and an extensively
clinically validated algorithm to analyze ischemic ECG signals and distinguish
between normal and abnormal heart beats as the patient is wearing the device
throughout their normal daily routines. Heightened recognition that ischemic
episodes are predominantly silent and prognosticate morbid cardiac events such
as heart attacks, sudden death and unstable angina prompted the Company to
develop the Monitor One technology.
The Company's Monitor One systems utilize technology which detects
changes in the ECG signal which may be associated with diseases of the heart.
Monitor One systems store analyzed ECG wave forms, statistical data, produce
printed reports and can transmit data either directly to a printer or over
telephone lines or to a personal computer for physician analysis, interpretation
and ischemic intervention. The Company's Monitor One, which may be worn on a
belt or carried in the patient's pocket, is capable of interpreting a wide
variety of ECG signals which may be associated with cardiac conditions. Monitor
One technology has been independently validated in controlled research studies
for the detection of ischemic episodes associated with coronary ST-segment
deviations in patients with diagnosed CAD.
Each Monitor One system is a computerized monitor with five
high-fidelity electrodes which are either disposable or reusable and attached to
the monitor through a single connector. The reusable electrodes were originally
developed by the National Aeronautics and Space Administration ("NASA").
Monitoring for periods of greater than 24 hours is possible due to solid-state
memory and the design of the reusable electrodes, which allows high-fidelity
signal capture without the need for daily replacement of disposable electrodes.
The United States Patent Office abstract (No. 3,420,223) for the reusable
electrode system reports that the electrodes can be used continuously for 28
days without appreciable deterioration of the electrodes or irritation
6
of the wearer. In practice, the reusable electrode system (which includes a
plastic casing and attached wiring) is subjected to physical abuse in its
application and removal from the patients' chests following a 24 hour monitoring
session. Based upon the Company's experience to date, it appears that the
reusable electrode system has an average life of six months. The Company offers
extended one, two and three-year warranties, at an additional cost to the
purchaser, which includes the cost of one set of replacement reusable electrodes
for each year. The monitor retains all information stored in a non-volatile
memory driven by a lithium battery during battery pack replacement or if the
monitor is turned off for a minimum of one year. In addition, the monitors
indicate, by audible tone and liquid crystal display ("LCD"), when battery
replacement is required.
Additional Products
The Company developed and is marketing a diagnostic device that
analyzes heart rate variability which can provide the physician information on
the functioning of the Autonomic Nervous System ("ANS"). ANS dysfunction is the
failure of the portion of the body's nervous system to regulate such unconscious
functions as respiration, circulation, digestion, heart-rate, body temperatures,
metabolism, sweating and certain glandular secretions. These symptoms are
associated with serious complications of diabetes leading to blindness, kidney
failure, and may contribute to diabetic cardiac autonomic neuropathy, often
associated with silent heart disease, heart attacks and sudden cardiac death.
The Company's Monitor One nDx system ("nDx") automates the analysis of heart
rate variation during deep inspiration and forced expiration, posture changes
and Valsalva Maneuvers. The nDx monitor assists the physician in administering
the test by prompting the patient's breathing patterns and then providing a
statistical analysis. The Company believes that this product can assist
physicians in the early detection of neurological disorders related to diabetes,
before other more dangerous symptoms (heart attacks, blindness, impotence, etc.)
are present and to help manage the treatment of their diagnosed diabetic
patients. The Company received a U.S. patent for the nDx technology on March 29,
1994 (Patent No. 5299119).
The Company also manufactures and markets other non-invasive medical
devices.
Marketing
Pursuant to the Company's Strategic Alliance Agreement with SmithKline
Beecham, SmithKline Beecham is required to provide sales and marketing support
to the Company's ohms|cad sales organization. At present, the Company's sales
team consists primarily of senior management supported by six senior sales staff
persons that formerly were involved in the sales of the Company's Monitor One
products.
The marketing and sales of the Company's devices to primary care
physicians, hospitals and other health care providers are conducted through the
Company's own direct sales force. Foreign medical product distributors sell the
Company's products in Europe. The Company also participates with unaffiliated
leasing companies in sales promotions involving financing for the end-user.
7
The Company also markets its products outside of the United States to
physicians and health care institutions through foreign distributors. In an
effort to expand its network of foreign distributors, the Company continually
evaluates established medical product distributors and supports validation
studies of its products by foreign research institutions. There is no assurance
that such efforts will result in the acceptance of the Company's products by the
medical community of countries in which validation studies are performed or
increase the Company's export sales. The Company's international operations are
subject to the usual risks of doing business abroad, including currency
fluctuations, government regulations, and the economic and political stability
of the countries in which it operates. In addition to the use of the Company's
products by physicians, its products have been used in clinical drug testing and
other clinical studies.
Warranty
The Company extends end-users of purchased or leased devices a standard
warranty and, at additional cost to the end-user, extended one-year to
three-year warranties. Extended warranty sales represented 15.7% and 13.4% of
net sales for fiscal 1997 and 1996, respectively. If there has been equipment
malfunction, the Company's warranty provides for the repair or replacement of
the equipment. The average unit cost of repair is minimal. During fiscal 1997
and 1996, the Company replaced approximately 2 and 4 monitors, respectively,
that could not be repaired pursuant to its warranty programs.
Reimbursement Policies
The Medicare program is a major payment source for procedures utilizing
the Company's products. The Medicare program is administered by the federal
government through the Health Care Financing Administration ("HCFA"), United
States Department of Health and Human Services. Medicare carriers, typically
private insurance companies, acting as agents of the government, operate under
contract with HCFA to implement Medicare program policies and process claims in
assigned geographic areas. Consequently, reimbursement rates for the same
services may vary by geographic area.
On January 1, 1992, a Medicare physician payment system became
effective which is designated "Resource Based Relative Value Scales" ("RBRVS").
RBRVS, which is administered by the Health Care Financing Administration, and
replaced the "reasonable charge" system which was utilized since 1965. The
reasonable charge system was criticized because it resulted in wide variations
in the reimbursement payments for the same services performed by physicians of
different specialties and geographic locations. The RBRVS system, which is to be
phased in over five years, is intended to provide uniform reimbursement for the
performance of a service, regardless of the specialty of the physician
performing the service. The Company's analysis of the system concludes that the
RBRVS system seeks to lower overall costs of the delivery of medical care by
rewarding more patient management provided by primary care physicians.
Although the RBRVS system described above is mandated by Congressional
action, there can be no assurance that future Congressional action will not
result in the general reduction in the
8
rates of reimbursement. Nevertheless, the 1995 RBRVS rates for the Company's
products were increased between 3-5%. While uncertainty relating to the Medicare
classification of electronic ambulatory cardiac monitors was resolved by HCFA in
October 1988 and adopted by carriers during fiscal 1989, the Company believes
that the overall political climate to reduce fees for all medical services has a
negative impact on medical equipment sales in general and, therefore, sales by
the Company. In addition, uncertainties created by proposals to reform the
health care delivery system, in general, created, in the Company's opinion, an
environment in which many physicians delay their decisions with respect to
expenditures for capital equipment. Accordingly, the Company expects that this
trend had an adverse impact on its equipment sales. However, the Company also
believes that its experience in designing and marketing equipment that offers
high quality results which are medically necessary and cost-effective, places it
in a position to exploit the evolving managed health care and large practice
group market which is consistent with efforts to lower overall health care
costs. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Principal Customers
During fiscal 1997 one customer accounted for 18% of net sales. During
fiscal 1996 and 1995, no single customer accounted for more than 10% of the
Company's net sales.
Manufacturing
The Company contracts with electronics companies for the manufacture
and sub-assembly of its products and accessories, as well as certain components
of its devices and provides these companies with technical expertise. Products
undergo final testing and packaging at the Company's engineering facility
located in Sag Harbor, New York. Although the Company has not experienced
significant delays or disruptions in the assembly and delivery of its products,
there can be no assurance that delays or disruptions will not occur in the
future. A deterioration of the Company's relationship with its independent
contract manufacturers could subject the Company to substantial delays in the
delivery of its products to customers. Such delays would subject the Company to
possible cancellation of orders and the loss of certain customers.
Whenever possible, the Company uses multiple sources of supply for its
components. However, the Company believes that there are only singular sources
of supply for certain components of its products. There is no assurance that
these sources will continue to supply those parts and, if they become
unavailable, the Company would be adversely affected. Also, there can be no
assurance that the Company's contract manufacturers will maintain an acceptable
level of quality and capability for assembling the products to the Company's
specifications. The Company has not experienced delays in obtaining supplies
which affected the Company's ability to deliver finished goods.
Competition
Monitor One ischemia products compete primarily with ambulatory
arrhythmia ECG scanning services, of which there are more than 75 in the United
States, and other ambulatory
9
ECG monitoring equipment manufacturers. The Company is aware of more than 20
ambulatory ECG monitoring equipment manufacturers of which five manufacture
digital systems. Certain large medical equipment companies such as Hewlett
Packard and Marquette Electronics have introduced electronic ambulatory monitors
which compete directly with those of the Company. These companies have
substantially greater marketing, financial and other resources than those of the
Company but management believes that the Company's products' price and
performance are competitive in this field.
The Company believes that Monitor One ischemia monitoring products
offer certain advantages over traditional ambulatory arrthymia ECG recording
monitors and scanning services. Monitor One products can provide continuous
analysis and quantification of ambulant ischemia in real-time as well as other
irregularities of the ECG signal for a period of time longer than 24 hours and
have a programmable feature which enables them to emit an audible tone during
the occurrence of certain high-risk ischemic episodes. These characteristics
permit the use of Monitor One products for the monitoring and regulation of drug
therapy and as a possible warning device for impending ischemic heart attacks.
The Company's sales of Interp 1000 EKG systems is not significant in
the market for such devices. The market is dominated by companies such as
Burdick, Hewlett Packard and Marquette Electronics, which have far greater
financial, marketing and other resources than those of the Company. The Company
believes that its Interp 1000 product offers certain advantages, particularly
its validated accuracy, compact size, portability and pricing.
The Company is not aware of any commercial product which competes with
it nDx system which automates the process of testing for autonomic dysfunction
nor is it aware of any comprehensive CAD management system which competes with
ohms|cad.
The Company's VasoSpect system, which is designed to detect
abnormalities of venous blood flow, competes with other older and more well
known technologies such as doppler and ultrasound. Nevertheless, management
believes that VasoSpect's unique interpretative diagnostic capabilities for the
analysis of venous blood flow will allow it to compete favorably with existing
technologies.
The Company believes that direct competition in ambulatory ischemic
monitors; products for testing autonomic function; interpretive ECG; and venous
blood flow analysis may, in the future, come from companies that are
considerably larger and have greater financial and human resources and marketing
capabilities. Primary competitive factors in the medical device industry include
scientific and technological superiority, price, service, product support,
availability of patent protection, access to adequate capital, the ability to
successfully develop and market products and processes.
Research and Development
In fiscal 1997, 1996, and 1995, the Company expended $179,519,
$348,840, and $382,244 respectively, for research and
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development. During these years, research and development was primarily focused
on the development of the ohms|cad system for managed care such as health
maintenance organizations, preferred provider organizations, and large physician
groups.
Management expects to continue to develop new products, as well as
enhance its existing products and has budgeted 8% to 10% of anticipated revenue
for such research and development in fiscal 1998.
Patent Protection and Proprietary Information
The Company maintains a policy of seeking patent protection in the
United States and other countries in connection with certain elements of its
technology when it believes that such protection will benefit the Company. The
Company's Monitor One technology has been granted patents in the United States
(Patent No. 4679144), Canada (No. 1281081) and Spain (No. 547040) and has
additional patent applications pending in other countries. The Company received
a U.S. patent for the nDx technology on March 29, 1994 (Patent No. 5299119). The
Company applied for a patent for the ohms|cad system (Serial No. 08/414,510) on
March 31, 1995 and the Company was advised that a patent would be issued on
March 3, 1998. Certain patents relating to the Company's technology begin
expiring in 2004.
The patent laws of foreign countries may differ from those of the
United States as to the patentability of the Company's products and,
accordingly, the degree of protection afforded by the pendency or issuance of
foreign patents may be different than protection afforded under associated
United States patents. There can be no assurance that patents will be obtained
in foreign jurisdictions with respect to the Company's products or that the
United States patent and any foreign patents will significantly protect or
commercially benefit the Company.
The Company does not intend to rely solely on patent protection for its
proprietary technology. The Company also relies upon confidentiality agreements
with employees, know-how, expertise and lead-time to attain and maintain its
competitive position, and to the extent it does so, there can be no assurance
that others may not independently develop similar technology or that secrecy
will not be breached.
Governmental Regulation
The Company's products, to the extent they may be deemed "medical
devices," are regulated by the Food and Drug Administration (the "FDA") under
the Federal Food, Drug and Cosmetics Act (the "FDCA") and regulations
promulgated thereunder.
All medical devices sold in interstate commerce are subject to FDA
clearance. The Company's products are subject to pre-market notification
(510(k)), pursuant to which the FDA determines whether a new medical product is
"substantially equivalent" to a product that was on the market prior to May 28,
1976. Products found to be "substantially equivalent" to those products may
thereafter be sold. The FDA has the authority, which it has not yet exercised,
to issue performance standards for the type of products manufactured by the
Company.
11
Regulations of the FDA known as Good Manufacturing Practices ("GMP")
provide standards for manufacturing processes, facilities, and record-keeping
requirements with which the Company and its contract manufacturers must also
comply. The Company believes that the manufacturing and quality control
procedures employed by it and its contract manufacturers meet the GMP
requirements. If the FDA should determine that the Company's products were not
manufactured in accordance with GMP's, it has the authority to order the Company
to cease production of its products and may require the Company to recall
products already sold by the Company. In addition, any facilities used to
manufacture or assemble the Company's products will be subject to inspection by
the FDA at least biannually.
The FDCA is not the exclusive source of regulation of medical devices
and, by its terms, allows state and local authorities to adopt more stringent
regulations for medical devices.
Employees
The Company, as of January 31, 1998, had 39 full time employees. Of
these full time employees, 3 were executives, 3 were engaged in sales
supervisory capacities, 7 in sales and marketing, 6 in engineering, 8 in
production, 5 in technical support and 7 in office administration. None of the
Company's employees are covered by a collective bargaining agreement. The
Company believes its relations with employees are good.
Item 2. Properties.
The Company's executive offices occupy approximately 9,000 square feet
of office space in Laurence Harbor, New Jersey. These facilities are used
principally for administrative offices, sales training, and marketing. In
addition, the Company leases approximately 6,000 square feet of space in Sag
Harbor, New York used principally for research and development, assembly and
quality control. Management believes that the foregoing facilities are adequate
for the Company's current level of operations.
Item 3. Legal Proceedings.
The Company is subject to claims and legal proceedings covering a wide
range of matters that arise in the ordinary course of business. It is
management's opinion that the ultimate resolution of these matters will not have
a material effect on the Company's consolidated financial position and results
of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters.
Market for the Registrant's Common Stock and related stockholder
matters as set forth on page 27 of the Registrant's 1997 Annual Report to
Stockholders is incorporated herein by reference.
On December 18, 1997, the Company sold an aggregate $2,000,000 8%
Convertible Subordinated Notes due December 18, 2002 (the "Notes"), with
discount or premium, in a private placement to three investors led by Galen
Partners III, L.P. The Notes were sold for cash, without any underwriter or
placement agent and no commissions were paid. Interest on the Notes is accrued
monthly compounded annually and will be due at maturity. The Notes are
convertible into shares of the Company's Common Stock at the rate of $5.60 per
share, provided that if the average closing price of shares of the Company's
Common Stock for the 90 trading days following the closing exceeds $7.25, then
the conversion price will increase to $6.00. The Company may redeem the Notes in
the event the average closing price of shares of the Company's Common Stock
equals or exceeds $12.00 for a period of 90 days at the following times with the
following premiums and may elect to pay the redemption price in shares of Common
Stock:
Year Redemption Price
---- ----------------
1998 105%
1999 104%
2000 103%
2001 102%
2002 100%
The Company is required to redeem the Notes at higher premiums in the event of a
change of control.
In connection with the sale of the Notes, the Company granted certain
rights to the purchasers, including registration rights and the right to appoint
a member of the Company's board of directors. The Note Purchase Agreement
prohibits the Company from paying dividends until the Notes are paid. The sale
was made in reliance on the exemption contained in Section 4(2) of the
Securities Act of 1933, as amended.
Item 6. Selected Financial Data.
Selected financial data as set forth on page 5 of the Registrant's 1997
Annual Report to Stockholders is incorporated herein by reference.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's discussion and analysis of financial condition and results
of operations as set forth on pages 6 to 11 of the Registrant's 1997 Annual
Report to Stockholders is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
Financial statements and supplementary data as set forth on pages
12 to 26 of the Registrant's 1997 Annual Report to Stockholders is incorporated
herein by reference.
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
14
PART III
Item 10. Directors, Executive Officers, Promoters, Control Persons and
Compliance with Section 16(a) of the Exchange Act of the Registrant.
Information with respect to executive officers and directors of the
Company will be set forth in the Company's definitive proxy statement which is
expected to be filed within 120 days of November 30, 1997 and is incorporated
herein by reference.
Item 11. Executive Compensation.
Information with respect to executive compensation will be set forth in
the Company's definitive proxy statement which is expected to be filed within
120 days of November 30, 1997 and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information with respect to the ownership of the Company's securities
by certain persons will be set forth in the Company's definitive proxy statement
which is expected to be filed within 120 days of November 30, 1997 and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Information with respect to transactions with management and others
will be set forth in the Company's definitive proxy statement which is expected
to be filed within 120 days of November 30, 1997 and is incorporated herein by
reference.
15
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) Financial Statements.
Description
Independent Auditors Report
Consolidated Balance Sheets as of November
30, 1997 and 1996
Consolidated Statement of Operations for
each of the three years ended November 30,
1997, 1996 and 1995
Consolidated Statement of Stockholder's
Equity for each of the three years ended
November 30, 1997, 1996 and 1995
Consolidated Statement of Cash Flow for each
of the three years ended November 30, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedules have been omitted because they are
not applicable.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the last
quarter of the fiscal year covered by this report.
(c) The following Exhibits are filed as part of this report. Where such
filing is made by incorporation by reference (I/B/R) to a previously filed
statement or report, such statement or report is identified in parentheses:
16
Official Sequential
Exhibit No. Description Page No.
- ----------- ----------- ----------
2 None
3.1 Amended and restated New Jersey Certificate of
Incorporation dated July 6, 1983 (Exhibit 3C to
the S-18 Registration Statement 2-86653-NY of the
Company effective December 1, 1983) I/B/R
3.2 New Jersey By-Laws as amended on January 16, 1984
(Exhibit 3F to the Company's Annual Report on Form
10-K for the year ending November 30, 1984) I/B/R
3.3 Amended and Restated Delaware Certificate of
Incorporation of Q-Med, Inc. as in effect on July
11, 1987 (Exhibit 3.3 to the Company's Report on
Form 10-Q dated May 31, 1987) I/B/R
3.4 By-Laws as in effect on July 1, 1987 (Exhibit
3.3 to the Company's Report on Form 10-Q dated May 31,
1987) I/B/R
3.5* Amendment to By-Laws dated December 18, 1997
4.1 Specimen of Stock Certificate (Exhibit 4.1 to the
Company's Report on Form 10-K dated November 30,
1989) I/B/R
4.2 Warrant to Purchase Common Stock dated May 6, 1996
i/n/o S.R. One Limited (Exhibit 4.2 to the Company's
Report on Form 10-K dated November 30, 1996) I/B/R
4.3 Note Purchase Agreement between Q-Med, Inc.
and Galen Partners III, L.P., Galen Partners
International III, L.P., Galen Employee Fund III,
L.P. dated as of December 18, 1997 (Exhibit 4.1
to the Company's Report on Form 8-K dated
December 18, 1997) I/B/R
4.4 Form of 8% Convertible Subordinated Note
(Exhibit 4.2 to the Company's Report on
Form 8-K dated December 18, 1997) I/B/R
17
4.5 Registration Rights Agreement between Q-Med, Inc.
and Galen Partners III, L.P., Galen Partners
International III, L.P., and Galen Employee
Fund III, L.P. dated as of December 18, 1997
(Exhibit 4.3 to the Company's report
on Form 8-K dated December 18, 1997) I/B/R
9 None
10.1 Q-Med, Inc. 1986 Incentive Stock Option Plan
(Exhibit 10N to the Company's Registration
Statement No. 33-4499 on Form S-1) I/B/R
10.2 Loan and Security Agreement dated November 1, 1989
between First Fidelity Bank, National Association
and the Company (Exhibit 10.1 to the Company's
report on Form 8-K dated November 27, 1989, as
amended by Form 8 dated December 6, 1989) I/B/R
10.3 Modification Agreement dated April 16, 1991
between the Company and First Fidelity Bank, N.A.
New Jersey (Exhibit 10.1 to the Company's Form
10-Q Report dated February 28, 1991) I/B/R
10.4 Limited Corporate Guaranty of Heart Map, Inc.
dated April 16, 1991 (Exhibit 10.3 to the
Company's Form 10-Q Report dated February 28,
1991) I/B/R
10.5 Security Agreement between Heart Map, Inc. First
Fidelity Bank, N.A. New Jersey dated April 16,
1991 (Exhibit 10.2 to the Company's Form 10-Q
Report dated February 28, 1991) I/B/R
10.6 Term Promissory Note payable to First Fidelity
Bank dated March 13, 1992 (Exhibit 25.1 to the
Company's Form 8-K Report dated March 13, 1992) I/B/R
10.7 Lease dated August 31, 1993 between the Company
and Alexandria Atrium Associates (Exhibit 28.1 to
the Company's Form 10-QSB Report dated August 31,
1993) I/B/R
18
10.8** Strategic Alliance Agreement effective as of April 1,
1996 between Q-Med, Inc. and SmithKline Beecham
Health Services, a division of SmithKline Beecham
Corporation (Exhibit 10.8 to the Company's Form 10-K
Report dated November 30, 1996, as amended) I/B/R
10.9 Securities Purchase Agreement dated May 6, 1996
between Q-Med, Inc. and S.R. One Limited (Exhibit
10.9 to the Company's Form 10-K Report dated
November 30, 1996, as amended) I/B/R
10.10 Registration Rights Agreement dated May 6, 1996
between Q-Med, Inc. and S.R. One Limited (Exhibit
10.10 to the Company's Form 10-K Report dated
November 30, 1996, as amended) I/B/R
10.11* Q-Med, Inc. 1997 Equity Incentive Plan
11 None
13* Q-Med, Inc. 1997 Annual Report.
16 None.
18 None.
21* Subsidiaries of Registrant
22 None.
23* Consent of Amper, Politziner & Mattia
24 None.
27* Financial Data Schedule
- ---------
* Filed herewith
** Exhibit omits certain information which the Company has filed separately with
the Commission pursuant to a confidential treatment request under Rule 24b-2
under the Securities Exchange Act of 1934, as amended.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed by
the undersigned, thereunto duly authorized.
Dated: February 27, 1998 Q-MED, INC.
By: /s/ Michael W. Cox
-------------------------
Michael W. Cox, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on behalf of the Registrant and in capacities and at
the dates indicated:
Signature Capacity Date
- --------- -------- ----
/s/ Michael W. Cox President and Treasurer February 27, 1998
- -------------------------
Michael W. Cox (Principal Executive and
Financial Officer)
/s/ Richard I. Levin Director February 27, 1998
- -------------------------
Richard I. Levin
/s/ Robert A. Burns Director February 27, 1998
- -------------------------
Robert A. Burns
/s/ Howard L. Waltman Director February 27, 1998
- ---------------------
Howard L. Waltman
/s/ Herbert H. Sommer Director February 27, 1998
- ---------------------
Herbert H. Sommer
/s/ Debra A. Fenton Controller February 27, 1998
- -------------------------
Debra A. Fenton
20
EXHIBIT INDEX
Exhibit Sequential
No. Page No.
- ------- ----------
3.5 Amendment to By-Laws dated December 18, 1997
10.11 Q-Med, Inc. 1997 Equity Incentive Plan
13 Q-Med, Inc. 1996 Annual Report
21 Subsidiaries of Registrant
23 Consent of Amper, Politziner & Mattia
27 Financial Data Schedule
- ----------
21