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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, 1998
Commission File Number: 0-11411
Q-MED, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-2468665
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.
100 Metro Park South, Laurence Harbor, New Jersey 08878
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 566-2666
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to
Section 12 (g) of the Act: Common Stock, $.001 par value
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements by
reference in Part III of this Form 10-K or any amendment to the Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
As of February 23, 1999, the aggregate value of the registrant's voting stock
held by non-affiliates was $24,597,051 (computed by multiplying the last
reported sale price on February 23, 1999 by the number of shares of common stock
held by persons other than officers, directors or by record holders of 10% or
more of the registrant's outstanding common stock. This characterization of
officers, directors and 10% or more beneficial owners as affiliates is for
purposes of computation only and is not an admission for any purposes that such
person are affiliates of the registrant).
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As of February 19, 1999, there were 11,568,989 shares of the registrant's
common stock, $.01 par value, issued and outstanding.
Documents incorporated by reference:
Document Form 10-K Reference
-------- -------------------
Portions of the Registrant's Proxy III
Statement for its 1999 Annual
Meeting (to be filed in definitive
form within 120 days of the
Registrant's Fiscal Year End)
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 health
maintenance organizations manage the cost of coronary artery disease ("CAD").
The Company also produces and sells high quality medical systems that provide
reliable diagnostic interpretation of certain disease states, including a line
of ambulatory ischemic heart monitors, an interpretative electrocardiographs, a
system for the analysis of heart rate variability and a system for the
measurement of venous blood flow. These systems are designed to address the
needs of primary health care physicians to appropriately manage certain diseases
cost effectively. The Company's products and services are uniquely suited to
assist primary health care physicians in discharging the greater medical
responsibilities that are expected to be placed on them, as efforts are made to
reduce the overall cost of health care. Each of the Company's present products,
and those which are under development by the Company as well as products
employing selectively acquired technology developed by others, are designed to
provide sophisticated analysis of physiological data in near or real-time and
report these analytical results to the primary care physician in order to detect
and manage early signs of potentially acute diseases. These technologically
advanced diagnostic tools lead to early detection and treatment thereby
facilitating cost-effective management of disease by a primary care physician
rather than disease management in an expensive acute care facility, such as a
hospital.
Utilizing the experience obtained through various drug trials with such
pharmaceutical companies as Pfizer, Ciba Geigy, ICI and others and the extensive
validations completed on "Monitor One(R)" instruments, the Company developed a
comprehensive, disease management
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system for the coronary artery disease ("CAD") patient which is marketed under
the trade name ohms|cad by the Company's IHMC subsidiary. This system consists
of Monitor One STRx ambulant ischemic technology; a remote on-line diagnostic
center (The ohms Center); and an integrated cardiology consultant practice. This
entire system non-invasively and reliably quantifies the probable risk of a
heart attack, unstable angina and death and directs the patient to appropriate
therapy with the emphasis throughout on early detection, prevention of cardiac
events, the modification of risk-factors and the appropriate medicine. Early
detection and treatment with emphasis on medical intervention results in an
overall lowering of the cost of CAD care and the improvement in patient health
thereby reducing mortality and morbidity rates in populations having CAD.
In March 1998 the Company and SmithKline Beecham Health Care Services, a
division of SmithKline Beecham Corporation ("SmithKline Beecham") agreed to
terminate their Strategic Alliance to market the ohms|cad system which was
formed in April 1996. Under the terms of the termination agreement, the Company
retained all future revenue from contracts executed during the term of the
alliance and SmithKline Beecham waived its rights to reimbursement of any of its
costs. The termination permits the Company to pursue other relationships in its
efforts to develop and provide disease management products and services. S.R.
One Limited, SmithKline Beecham's venture capital affiliate retained a $2.0
million equity investment in the Company and continues to hold warrants to
acquire an additional 63,492 shares of the Company's Common Stock for $15.75 per
share.
The Company has also developed and is marketing an electronic medical
device under the name, Monitor One nDx(R) ("nDx") which analyzes heart rate
variability. The loss of variation in heart rate may assist the physician in
making a diagnosis and determining the severity of autonomic neuropathy.
Autonomic neuropathy, a deterioration of the autonomic nervous system, is
associated with diabetic patients which may lead to complications in the
functioning of the heart, respiratory systems, digestion, body temperature,
metabolism, perspiration and the secretion of certain endocrine glands.
The Company's executive offices are located at 100 Metro Park South,
Laurence Harbor, New Jersey 08878 and its telephone number is (732) 566-2666.
ohms|cad System
ohms|cad is IHMC's proprietary "On-line Health Management Service for
Coronary Artery Disease". It is a telecommunications system designed as a total
disease management process for CAD. It consists of Monitor One STRx, IHMC's
Monitor One ambulant ischemia technology, a remote on-line diagnostic center
(The ohms Center), and an integrated cardiology consultant practice. The entire
system noninvasively and reliably quantifies the probable risk of a heart
attack, unstable angina and death and rationally directs the patient to
appropriate therapy with the accent on early detection, the modification of
critical risk-factors and medical intervention.
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The overall system operates as an "expert system" emphasizing best medical
treatment options for myocardial ischemia and continued coronary wellness. The
system is an evidence based, relational mechanism, using coronary artery disease
patient descriptors which include: demographics, medical history, current
medical therapy, including aspirin, lipid and hypertension profiles, obesity and
life style, smoking, glucose levels and ambulant ischemia in its decision
making.
In addition, each individual patient's demographics and risk profiles are
simultaneously entered into the ohms|cad database for primary and secondary
prevention analysis and treatment. Recommendations for management are relational
and tailored to an individual patient for ambulant ischemia, silent heart
disease, lipid and hypertension, antithrombosis, smoking, exercise, obesity and
diabetes.
Because of centralized, digital storage of all data, it allows for the
continuous description and analysis of quantifiable results; success of the
stratification, proportion of patients assigned to various therapies, objective
outcomes, interplay with pharmaceutical and pharmacy benefit managers and
physician and patient compliance.
For example, in its risk prevention mode (myocardial infarction, unstable
angina, sudden death), it centers on the presence or absence of ambulant
ischemia as a risk stratifier utilizing our specialized non-invasive STRx
technology for evaluation of this phenomena in each patient. This test data is
telecommunicated to the Company's ohms|cad database (The ohms Center), which in
turn stratifies each individual patient into high or low risk. It then proposes
to lower patient risk with specific anti-ischemic medical therapies as one
treatment option, or, if necessary, recommends further local cardiology
consultation leading to possible invasive intervention. If the data indicate
that the patient is at low risk, a message is sent back to the primary care
physician site within minutes with recommendations for optimization of medical
therapy which will maintain the patient in the low-risk pool. In both
circumstances, therapeutic actions are guided by IHMC's proprietary disease
management algorithm which in turn is based on national practice guidelines. All
of the interactions and data are stored in the ohms|cad diagnostic center, thus,
outcome information is available continuously.
Because ohms|cad is an active disease management process emphasizing a
continuum of care, derived from early detection of ambulant ischemia and
modification of patient risk factors, similar cost effective improvements in
cardiac events can be expected from its use. The ohms|cad system continually
monitors the care process at the primary care level, thus, results are reported
as outcomes. Favorable outcomes increase market share, decrease economic risk
and increase product differentiation for the managed care organization. As a
result, the early implementation of ohms|cad should contribute to significant
savings and patient gains in market share.
The results of the utilization of ohms|cad to manage CAD patients was the
subject of a presentation at the Scientific Section of the American Heart
Association's Annual Meeting in November 1997. The results showed significant
health benefits for those patients undergoing ohms|cad management as compared to
patients receiving usual care.
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Ambulatory Ischemic Heart Disease Monitoring
While ambulatory monitoring for arrhythmias was first introduced in the
early 1960's and has been broadly used in medical practice as a diagnostic
monitoring system useful to detect rhythm and rate disturbances of the heart, no
company had developed a novel application using solid-state electronics and a
validated ischemia analysis program to evaluate the presence and duration of
ambulatory ischemic heart disease (Monitor One). Thus, the medical utility of
Monitor One allows the detection and analysis of reduced coronary artery blood
flow during a patient's daily routines (Ambulant Ischemic Heart Disease). Such
analysis can result in the early prevention of heart attack, unstable angina and
death. In addition, silent heart disease which is prevalent in coronary artery
disease patients and diabetics, may also be detected and evaluated by the
Monitor One technology. The basic design of Monitor One to accomplish this
special function, utilizes an on-board microprocessor and an extensively
clinically validated algorithm to analyze ischemic ECG signals and distinguish
between normal and abnormal heart beats as the patient is wearing the device
throughout their normal daily routines. Heightened recognition that ischemic
episodes are predominantly silent and prognosticate morbid cardiac events such
as heart attacks, sudden death and unstable angina prompted the Company to
develop the Monitor One technology.
The Company's Monitor One systems utilize technology which detects changes
in the ECG signal which may be associated with diseases of the heart. Monitor
One systems store analyzed ECG wave forms, statistical data, produce printed
reports and can transmit data either directly to a printer or over telephone
lines or to a personal computer for physician analysis, interpretation and
ischemic intervention. The Company's Monitor One, which may be worn on a belt or
carried in the patient's pocket, is capable of interpreting a wide variety of
ECG signals which may be associated with cardiac conditions. Monitor One
technology has been independently validated in controlled research studies for
the detection of ischemic episodes associated with coronary ST-segment
deviations in patients with diagnosed CAD.
Each Monitor One system is a computerized monitor with five high-fidelity
electrodes which are either disposable or reusable and attached to the monitor
through a single connector. The reusable electrodes were originally developed by
the National Aeronautics and Space Administration ("NASA"). Monitoring for
periods of greater than 24 hours is possible due to solid-state memory and the
design of the reusable electrodes, which allows high-fidelity signal capture
without the need for daily replacement of disposable electrodes. The United
States Patent Office abstract (No. 3,420,223) for the reusable electrode system
reports that the electrodes can be used continuously for 28 days without
appreciable deterioration of the electrodes or irritation of the wearer. In
practice, the reusable electrode system (which includes a plastic casing and
attached wiring) is subjected to physical abuse in its application and removal
from the patients' chests following a 24 hour monitoring session. Based upon the
Company's experience to date, it appears that the reusable electrode system has
an average life of six months. The Company offers extended one, two and
three-year warranties, at an additional cost to the purchaser, which includes
the cost of one set of replacement reusable electrodes for each year. The
monitor retains all information stored in a non-volatile memory driven by a
lithium battery during battery pack replacement or if the monitor is turned off
for a minimum of one year. In addition, the monitors
6
indicate, by audible tone and liquid crystal display ("LCD"), when battery
replacement is required.
Additional Products
The Company developed and is marketing a diagnostic device that analyzes
heart rate variability which can provide the physician information on the
functioning of the Autonomic Nervous System ("ANS"). ANS dysfunction is the
failure of the portion of the body's nervous system to regulate such unconscious
functions as respiration, circulation, digestion, heart-rate, body temperatures,
metabolism, sweating and certain glandular secretions. These symptoms are
associated with serious complications of diabetes leading to blindness, kidney
failure, and may contribute to diabetic cardiac autonomic neuropathy, often
associated with silent heart disease, heart attacks and sudden cardiac death.
The Company's Monitor One nDx system ("nDx") automates the analysis of heart
rate variation during deep inspiration and forced expiration, posture changes
and Valsalva Maneuvers. The nDx monitor assists the physician in administering
the test by prompting the patient's breathing patterns and then providing a
statistical analysis. The Company believes that this product can assist
physicians in the early detection of neurological disorders related to diabetes,
before other more dangerous symptoms (heart attacks, blindness, impotence, etc.)
are present and to help manage the treatment of their diagnosed diabetic
patients. The Company received a U.S. patent for the nDx technology on March 29,
1994 (Patent No. 5299119).
The Company also manufactures and markets other non-invasive medical
devices.
Marketing
The Company directly markets its ohms|cad service to health maintenance
organizations, large physician practice groups and similar managed care
organizations through its sales staff. At present, the Company's sales team
consists primarily of senior management supported by senior sales staff persons
that formerly were involved in the sales of the Company's Monitor One products.
The marketing and sales of the Company's devices to primary care
physicians, hospitals and other health care providers are conducted through
distributors.
The Company also markets its products outside of the United States to
physicians and health care institutions through foreign distributors. In an
effort to expand its network of foreign distributors, the Company continually
evaluates established medical product distributors and supports validation
studies of its products by foreign research institutions. There is no assurance
that such efforts will result in the acceptance of the Company's products by the
medical community of countries in which validation studies are performed or
increase the Company's export sales. The Company's international operations are
subject to the usual risks of doing business abroad, including currency
fluctuations, government regulations, and the economic and political stability
of the countries in which it operates. In addition to the use of the Company's
7
products by physicians, its products have been used in clinical drug testing and
other clinical studies.
Warranty
The Company extends end-users of purchased or leased devices a standard
warranty and, at additional cost to the end-user, extended one-year to
three-year warranties. Extended warranty sales represented 13.5% and 15.7% of
net sales for fiscal 1998 and 1997, respectively. If there has been equipment
malfunction, the Company's warranty provides for the repair or replacement of
the equipment. The average unit cost of repair is minimal. During fiscal 1998
and 1997, the Company replaced approximately two monitors per year that could
not be repaired pursuant to its warranty programs.
Reimbursement Policies
The Medicare program is a major payment source for procedures utilizing the
Company's products. The Medicare program is administered by the federal
government through the Health Care Financing Administration ("HCFA"), United
States Department of Health and Human Services. Medicare carriers, typically
private insurance companies, acting as agents of the government, operate under
contract with HCFA to implement Medicare program policies and process claims in
assigned geographic areas. Consequently, reimbursement rates for the same
services may vary by geographic area.
On January 1, 1992, a Medicare physician payment system became effective
which is designated "Resource Based Relative Value Scales" ("RBRVS"). RBRVS,
which is administered by the Health Care Financing Administration, and replaced
the "reasonable charge" system which was utilized since 1965. The reasonable
charge system was criticized because it resulted in wide variations in the
reimbursement payments for the same services performed by physicians of
different specialties and geographic locations. The RBRVS system, which is to be
phased in over five years, is intended to provide uniform reimbursement for the
performance of a service, regardless of the specialty of the physician
performing the service. The Company's analysis of the system concludes that the
RBRVS system seeks to lower overall costs of the delivery of medical care by
rewarding more patient management provided by primary care physicians.
Although the RBRVS system described above is mandated by Congressional
action, there can be no assurance that future Congressional action will not
result in the general reduction in the rates of reimbursement. Nevertheless, the
1995 RBRVS rates for the Company's products were increased between 3-5%. While
uncertainty relating to the Medicare classification of electronic ambulatory
cardiac monitors was resolved by HCFA in October 1988 and adopted by carriers
during fiscal 1989, the Company believes that the overall political climate to
reduce fees for all medical services has a negative impact on medical equipment
sales in general and, therefore, equipment sales by the Company. In addition,
uncertainties created by proposals to reform the health care delivery system, in
general, created, in the Company's opinion, an environment in which many
physicians delay their decisions with respect to expenditures for capital
equipment. Accordingly, the Company expects that this trend had an adverse
impact on its equipment sales.
8
However, the Company also believes that its experience in designing and
marketing equipment that offers high quality results which are medically
necessary and cost-effective, places it in a position to exploit the evolving
managed health care and large practice group market which is consistent with
efforts to lower overall health care costs. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Principal Customers
During fiscal 1998 and 1997 one customer accounted for 14% and 18% of net
sales respectively. During fiscal 1996, no single customer accounted for more
than 10% of the Company's net sales.
Manufacturing
The Company contracts with electronics companies for the manufacture and
sub-assembly of its products and accessories, as well as certain components of
its devices and provides these companies with technical expertise. Products
undergo final testing and packaging at the Company's engineering facility
located in Sag Harbor, New York. Although the Company has not experienced
significant delays or disruptions in the assembly and delivery of its products,
there can be no assurance that delays or disruptions will not occur in the
future. A deterioration of the Company's relationship with its independent
contract manufacturers could subject the Company to substantial delays in the
delivery of its products to customers. Such delays would subject the Company to
possible cancellation of orders and the loss of certain customers.
Whenever possible, the Company uses multiple sources of supply for its
components. However, the Company believes that there are only singular sources
of supply for certain components of its products. There is no assurance that
these sources will continue to supply those parts and, if they become
unavailable, the Company would be adversely affected. Also, there can be no
assurance that the Company's contract manufacturers will maintain an acceptable
level of quality and capability for assembling the products to the Company's
specifications. The Company has not experienced delays in obtaining supplies
which affected the Company's ability to deliver finished goods.
Competition
ohms|cad is a unique solution for CAD management. However, there are
several CAD management companies, including pharmaceutical companies, pharmacy
benefit managers and independent vendors that are pursuing CAD management that
could be considered competition.
To the Company's knowledge, none of these companies deal with CAD
comprehensively. Most have designed their programs to respond to a cardiac
event, essentially waiting for a patient to have a heart attack or procedure and
follow with post-hospitalization case management. In addition, manufacturers of
drugs that reduce cholesterol have designed programs based on high blood lipids
and have developed protocols to emphasize the use of their
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drug(s). To the Company's knowledge, ohms|cad is the only operating disease
management system that includes primary and secondary prevention; risk
stratifies the patients into those who are and who are not in danger of adverse
events in the near term and reduces practice variation and referrals. No other
CAD management program has shown comparable results with beneficial patient
outcomes that lowered overall CAD healthcare costs.
The Company believes it has competitive advantages based on the following:
o The entire management system and its components are proprietary and
patented: STRx is covered by U.S. Pat. #4679144 and ohms|cad by U.S.
Pat. #5724580.
o Clinically validated digital ischemia technology.
o Documented outcomes presented at American Heart Association Scientific
Sessions.
o Extensive and growing database of how specific therapeutic modalities
affect patients.
o 1,000 patient-per-day system throughput capability.
o Proven success in implementing a CAD disease management system in the
field that leads to a faster rollout and faster health and economic
outcomes to the plan.
o Proprietary analytics to define the target population at risk.
o Established infrastructure with integrated resources and processes
amplified by corporate expertise.
Competition may increase and such competition could come from companies
that are considerably larger and have greater financial and marketing resources
than the Company.
Monitor One ischemia products compete primarily with ambulatory arrhythmia
ECG scanning services, of which there are more than 75 in the United States, and
other ambulatory ECG monitoring equipment manufacturers. The Company is aware of
more than 20 ambulatory ECG monitoring equipment manufacturers of which five
manufacture digital systems. Certain large medical equipment companies such as
Hewlett Packard and Marquette Electronics have introduced electronic ambulatory
monitors which compete directly with those of the Company. These companies have
substantially greater marketing, financial and other resources than those of the
Company but management believes that the Company's products' price and
performance are competitive in this field.
The Company believes that Monitor One ischemia monitoring products offer
certain advantages over traditional ambulatory arrthymia ECG recording monitors
and scanning services. Monitor One products can provide continuous analysis and
quantification of ambulant
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ischemia in real-time as well as other irregularities of the ECG signal for a
period of time longer than 24 hours and have a programmable feature which
enables them to emit an audible tone during the occurrence of certain high-risk
ischemic episodes. These characteristics permit the use of Monitor One products
for the monitoring and regulation of drug therapy and as a possible warning
device for impending ischemic heart attacks.
The Company's sales of Interp 1000 EKG systems is not significant in the
market for such devices. The market is dominated by companies such as Burdick,
Hewlett Packard and Marquette Electronics, which have far greater financial,
marketing and other resources than those of the Company. The Company believes
that its Interp 1000 product offers certain advantages, particularly its
validated accuracy, compact size, portability and pricing.
The Company is not aware of any commercial product which competes with it
nDx system which automates the process of testing for autonomic dysfunction nor
is it aware of any comprehensive CAD management system which competes with
ohms|cad.
The Company's VasoSpect system, which is designed to detect abnormalities
of venous blood flow, competes with other older and more well known technologies
such as doppler and ultrasound. Nevertheless, management believes that
VasoSpect's unique interpretative diagnostic capabilities for the analysis of
venous blood flow will allow it to compete favorably with existing technologies.
The Company believes that direct competition in ambulatory ischemic
monitors; products for testing autonomic function; interpretive ECG; and venous
blood flow analysis may, in the future, come from companies that are
considerably larger and have greater financial and human resources and marketing
capabilities. Primary competitive factors in the medical device industry include
scientific and technological superiority, price, service, product support,
availability of patent protection, access to adequate capital, the ability to
successfully develop and market products and processes.
Research and Development
In fiscal 1998, 1997, and 1996, the Company expended $486,843, $551,681 and
$454,268 respectively, for research and development. During these years,
research and development was primarily focused on the development of the
ohms|cad system for managed care such as health maintenance organizations,
preferred provider organizations, and large physician groups.
Management expects to continue to develop new products, as well as enhance
its existing products and has budgeted 10% to 12% of anticipated revenue for
such research and development in fiscal 1999.
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Patent Protection and Proprietary Information
The Company maintains a policy of seeking patent protection in the United
States and other countries in connection with certain elements of its technology
when it believes that such protection will benefit the Company. The Company's
Monitor One technology has been granted patents in the United States (Patent No.
4679144), Canada (No. 1281081) and Spain (No. 547040) and has additional patent
applications pending in other countries. The Company received a U.S. patent for
the nDx technology on March 29, 1994 (Patent No. 5299119). The Company applied
for a patent for the ohms|cad system (Serial No. 08/414,510) on March 31, 1995
and the Company was advised that a patent would be issued on March 3, 1998.
Certain patents relating to the Company's technology begin expiring in 2004.
The patent laws of foreign countries may differ from those of the United
States as to the patentability of the Company's products and, accordingly, the
degree of protection afforded by the pendency or issuance of foreign patents may
be different than protection afforded under associated United States patents.
There can be no assurance that patents will be obtained in foreign jurisdictions
with respect to the Company's products or that the United States patent and any
foreign patents will significantly protect or commercially benefit the Company.
The Company does not intend to rely solely on patent protection for its
proprietary technology. The Company also relies upon confidentiality agreements
with employees, know-how, expertise and lead-time to attain and maintain its
competitive position, and to the extent it does so, there can be no assurance
that others may not independently develop similar technology or that secrecy
will not be breached.
Governmental Regulation
The Company's products, to the extent they may be deemed "medical devices,"
are regulated by the Food and Drug Administration (the "FDA") under the Federal
Food, Drug and Cosmetics Act (the "FDCA") and regulations promulgated
thereunder.
All medical devices sold in interstate commerce are subject to FDA
clearance. The Company's products are subject to pre-market notification
(510(k)), pursuant to which the FDA determines whether a new medical product is
"substantially equivalent" to a product that was on the market prior to May 28,
1976. Products found to be "substantially equivalent" to those products may
thereafter be sold. The FDA has the authority, which it has not yet exercised,
to issue performance standards for the type of products manufactured by the
Company.
Regulations of the FDA known as Good Manufacturing Practices ("GMP")
provide standards for manufacturing processes, facilities, and record-keeping
requirements with which the Company and its contract manufacturers must also
comply. The Company believes that the manufacturing and quality control
procedures employed by it and its contract manufacturers meet the GMP
requirements. If the FDA should determine that the Company's products were not
manufactured in accordance with GMP's, it has the authority to order the Company
to cease production of its products and may require the Company to recall
products already sold by the
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Company. In addition, any facilities used to manufacture or assemble the
Company's products will be subject to inspection by the FDA at least biannually.
The FDCA is not the exclusive source of regulation of medical devices and,
by its terms, allows state and local authorities to adopt more stringent
regulations for medical devices.
Employees
The Company, as of January 31, 1999, had 30 full time employees. Of these
full time employees, 3 were executives, 2 were engaged in sales supervisory
capacities, 3 in sales and marketing, 5 in engineering, 3 in production, 10 in
technical support and 4 in office administration. None of the Company's
employees are covered by a collective bargaining agreement. The Company believes
its relations with employees are good.
Item 2. Properties.
The Company's executive offices occupy approximately 9,000 square feet of
office space in Laurence Harbor, New Jersey. These facilities are used
principally for administrative offices, sales training, and marketing. In
addition, the Company leases approximately 6,000 square feet of space in Sag
Harbor, New York used principally for research and development, assembly and
quality control. Management believes that the foregoing facilities are adequate
for the Company's current level of operations.
Item 3. Legal Proceedings.
The Company is subject to claims and legal proceedings covering a wide
range of matters that arise in the ordinary course of business. It is
management's opinion that the ultimate resolution of these matters will not have
a material effect on the Company's consolidated financial position and results
of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
13
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters.
Market for the Registrant's Common Stock and related stockholder matters as
set forth on page 30 of the Registrant's 1998 Annual Report to Stockholders is
incorporated herein by reference.
On November 16, 1998, the Company sold an aggregate of 1,926,702 shares
(the "Shares") of its common stock $.001 par value ("Common Stock") for
$3,217,626, in a private placement to investors led by Galen Partners III, L.P.
The Company received gross cash proceeds of $2,020,936 from the sale of Shares
and the balance was paid by Galen Partners III, L.P. and two affiliated funds
(the "Galen Funds") by converting $1,050,000 of $2,000,000 principal amount of
8% Convertible Notes due December 18, 2002 (the "Notes") and accrued interest of
$146,663 into shares of Common Stock. The remaining $950,000 principal amount of
the Notes were amended to increase the interest rate to 16% per annum, and to
grant the Galen Fund a security interest in substantially all of the Company's
assets. In addition, in order to induce the Funds to convert a portion of the
Notes and invest an additional $1,000,000 in cash, the Company issued the Galen
Funds, pro rata, an aggregate of 500,000 seven year warrants (the "Warrants") to
purchase additional shares of Common Stock. The exercise price of the Warrants
and the conversion price of the remaining Notes will be fixed at a price equal
to the average closing price for the ten trading days ending December 1, 1998
(the "Initial Price"). Interest on the Notes is capitalized annually and will be
due at maturity. The Company may redeem the Notes for cash or Common Stock:
(i) in the event the average closing price of shares of the Company's
Common Stock equals or exceeds twice the Initial Price for a period of
twenty consecutive trading days at the following times with the
following premiums:
Year Redemption Price
---- ----------------
1998 105%
1999 104%
2000 103%
2001 102%
2002 100%; or
14
(ii) at the following times without condition for the following premiums:
Year Redemption Price
---- ----------------
1998 112.1%
1999 125.6%
2000 140.8%
2001 157.7%
2002 176.8%
The Company is required to redeem the Notes at higher premiums in the event of a
change of control. The Note Agreement prohibits the Company from paying
dividends until the Notes are paid.
In connection with the sale of the Shares, the Company granted certain
rights to the purchasers, including registration rights and the right to cause
the Company to purchase the Shares at the following prices in certain events,
such as bankruptcy, a default in payments or if the Company is no longer listed
on the NASDAQ Small Cap Market at the following prices:
Year Redemption Price
---- ----------------
1998 $2.0875
1999 $2.0040
2000 $1.9205
2001 $1.8370
2002 and thereafter $1.6700
In connection with the sale of the shares and amendment of the Notes, the
Company granted certain rights to the purchasers, including registration rights
and the right to appoint a member of the Company's board of directors. The Note
Purchase Agreement prohibits the Company from paying dividends until the Notes
are paid. The sale was made in reliance on the exemption contained in Section
4(2) of the Securities Act of 1933, as amended.
Item 6. Selected Financial Data.
Selected financial data as set forth on page 7 of the Registrant's 1998 Annual
Report to Stockholders is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's discussion and analysis of financial condition and results of
operations as set forth on pages 8 to 13 of the Registrant's 1998 Annual Report
to Stockholders is incorporated herein by reference.
15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
Financial statements and supplementary data as set forth on pages 14 to 28
of the Registrant's 1998 Annual Report to Stockholders is incorporated herein by
reference.
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
16
PART III
Item 10. Directors, Executive Officers, Promoters, Control Persons and
Compliance with Section 16(a) of the Exchange Act of the Registrant.
Information with respect to executive officers and directors of the Company
will be set forth in the Company's definitive proxy statement which is expected
to be filed within 120 days of November 30, 1998 and is incorporated herein by
reference.
Item 11. Executive Compensation.
Information with respect to executive compensation will be set forth in the
Company's definitive proxy statement which is expected to be filed within 120
days of November 30, 1998 and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information with respect to the ownership of the Company's securities by
certain persons will be set forth in the Company's definitive proxy statement
which is expected to be filed within 120 days of November 30, 1998 and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Information with respect to transactions with management and others will be
set forth in the Company's definitive proxy statement which is expected to be
filed within 120 days of November 30, 1998 and is incorporated herein by
reference.
17
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) Financial Statements.
Description
Independent Auditors Report
Consolidated Balance Sheets as of November 30, 1998 and 1997
Consolidated Statement of Operations for each of the three years ended
November 30, 1998, 1997 and 1996
Consolidated Statement of Stockholder's Equity for each of the three years
ended November 30, 1998, 1997 and 1996
Consolidated Statement of Cash Flow for each of the three years ended
November 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedules have been omitted because they are not applicable.
(b) Reports on Form 8-K.
Report dated November 16, 1998
(c) The following Exhibits are filed as part of this report. Where such
filing is made by incorporation by reference (I/B/R) to a previously filed
statement or report, such statement or report is identified in parentheses:
18
Official Sequential
Exhibit No. Description Page No.
- ----------- ----------- --------
2 None
3.1 Amended and restated New Jersey Certificate of
Incorporation dated July 6, 1983 (Exhibit 3C to
the S-18 Registration Statement 2-86653-NY of the
Company effective December 1, 1983) I/B/R
3.2 New Jersey By-Laws as amended on January 16, 1984
(Exhibit 3F to the Company's Annual Report on Form
10-K for the year ending November 30, 1984) I/B/R
3.3 Amended and Restated Delaware Certificate of
Incorporation of Q-Med, Inc. as in effect on July
11, 1987 (Exhibit 3.3 to the Company's Report on
Form 10-Q dated May 31, 1987) I/B/R
3.4 By-Laws as in effect on July 1, 1987 (Exhibit 3.3
to the Company's Report on Form 10-Q dated May 31,
1987) I/B/R
3.5 Amendment to By-Laws dated December 18, 1997
Exhibit 3.5 to the Company's Form 10-K Report
dated November 30, 1997) I/B/R
4.1 Specimen of Stock Certificate (Exhibit 4.1 to the
Company's Report on Form 10-K dated November 30,
1989) I/B/R
4.2 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
19
4.4 Form of 8% Convertible Subordinated Note (Exhibit
4.2 to the Company's Report on Form 8-K dated
December 18, 1997) I/B/R
4.5 Registration Rights Agreement between Q-Med, Inc.
and Galen Partners III, L.P., Galen Partners International
III, L.P., and Galen Employee Fund III, L.P. dated
as of December 18, 1997 (Exhibit 4.3 to the Company's
report on Form 8-K dated December 18, 1997) I/B/R
4.6 Form of 16% Convertible Subordinated Note (Exhibit
99.2 to the Company's report on Form 8-K dated
November 16, 1998) I/B/R
4.7 Form of Warrant Agreement dated November 16, 1998
(Exhibit 99.6 to the Company's report on Form 8-K
dated November 16, 1998) I/B/R
9.1 Form of Shareholder and Voting Rights Agreement
between the Company and several stockholders dated
as of November 16, 1998 (Exhibit 99.4 to the Company's
report on Form 8-K dated November 16, 1998) I/B/R
10.1 Q-Med, Inc. 1986 Incentive Stock Option Plan
(Exhibit 10N to the Company's Registration
Statement No. 33-4499 on Form S-1) I/B/R
10.2 Lease dated August 31, 1993 between the Company
and Alexandria Atrium Associates (Exhibit 28.1 to
the Company's Form 10-QSB Report dated August 31,
1993) I/B/R
10.3** Strategic Alliance Agreement effective as of April
1, 1996 between Q-Med, Inc. and SmithKline Beecham
Health Services, a division of SmithKline Beecham
Corporation (Exhibit 10.8 to the Company's Form
10-K Report dated November 30, 1996, as amended) I/B/R
10.4 Securities Purchase Agreement dated May 6, 1996
between Q-Med, Inc. and S.R. One Limited (Exhibit
10.9 to the Company's Form 10-K Report dated
November 30, 1996, as amended) I/B/R
20
10.5 Registration Rights Agreement dated May 6, 1996
between Q-Med, Inc. and S.R. One Limited (Exhibit
10.10 to the Company's Form 10-K Report dated
November 30, 1996, as amended) I/B/R
10.6 Q-Med, Inc. 1997 Equity Incentive Plan (Exhibit 10.11
to the Company's Form 10-K Report dated November
30, 1998) I/B/R
10.7 Amendment dated as of November 15, 1998 to Note
Purchase Agreement between Q-Med, Inc. and Galen
Partners III, L.P., Galen Partners International III, L.P.,
Galen Employee Fund III, L.P. dated as of December 18,
1997 (Exhibit 99.1 to the Company's report on Form 8-K
dated November 16, 1998) I/B/R
10.8 Form of Registration Rights Agreement between Q-Med, Inc.
and several stockholders dated as of November 15, 1998
(Exhibit 99.3 to the Company's report on Form 8-K dated
November 16, 1998) I/B/R
10.9 Form of Option Agreement between the Company and
several stockholders dated as of November 16, 1998
(Exhibit 99.5 to the Company's report on Form 8-K dated
November 15, 1998) I/B/R
10.10* Termination Agreement and Release dated March 6, 1998
between the Company and SmithKline Beecham
10.11* Amendment dated December 16, 1998 to Employment
Agreement between the Company and Michael W. Cox
11 None
13* Q-Med, Inc. 1998 Annual Report.
16 None.
18 None.
21* Subsidiaries of Registrant
22 None.
21
23* Consent of Amper, Politziner & Mattia
24 None.
27* Financial Data Schedule
- ---------
* Filed herewith
** Exhibit omits certain information which the Company has filed separately with
the Commission pursuant to a confidential treatment request under Rule 24b-2
under the Securities Exchange Act of 1934, as amended.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed by
the undersigned, thereunto duly authorized.
Dated: February 26, 1999 Q-MED, INC.
By: /s/ Michael W. Cox
------------------------------
Michael W. Cox, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on behalf of the Registrant and in capacities and at the
dates indicated:
Signature Capacity Date
- --------- -------- ----
/s/ Michael W. Cox President and Treasurer (Principal February 26, 1999
- --------------------------- Executive and Financial Officer)
Michael W. Cox
/s/ Richard I. Levin Director February 26, 1999
- ---------------------------
Richard I. Levin
/s/ Robert A. Burns Director February 26, 1999
- ---------------------------
Robert A. Burns
/s/ Howard L. Waltman Director February 26, 1999
- ---------------------------
Howard L. Waltman
/s/ Herbert H. Sommer Director February 26, 1999
- ---------------------------
Herbert H. Sommer
Director February 26, 1999
- ---------------------------
A. Bruce Campbell*
/s/ Debra A. Fenton Controller February 26, 1999
- ---------------------------
Debra A. Fenton
- ----------
*appointment effective after filing
23
EXHIBIT INDEX
Exhibit
No.
- -------
10.10 Termination Agreement and Release dated March 6, 1998
between the Company and SmithKline Beecham
10.11 Amendment dated December 16, 1998 to Employment
Agreement between the Company and Michael W. Cox
13 Q-Med, Inc. 1998 Annual Report
21 Subsidiaries of Registrant
23 Consent of Amper, Politziner & Mattia
27 Financial Data Schedule
- ----------