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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: November 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period from to
Commission File Number: 0-11411
QMED, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 22-2468665
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(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.
25 Christopher Way, Eatontown, New Jersey 07724
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 544-5544
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to
Section 12 (g) of the Act: Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements by
reference in Part III of this Form 10-K or any amendment to the Form 10-K. [ ]
As of February 20, 2003, the aggregate value of the registrant's voting stock
held by non-affiliates was $62,843,834 (computed by multiplying the last
reported sale price on February 20, 2003 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
people are affiliates of the registrant).
As of February 20, 2003, there were 14,511,070 shares of the registrant's common
stock, $.001 par value, issued and outstanding.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X ] No [ ]
Documents incorporated by reference:
Document Form 10-K Reference
Portions of the Registrant's Proxy Statement III
for its 2003 Annual Meeting (to be filed in
definitive form within 120 days of the
Registrant's Fiscal Year End)
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PART I
Item 1. Business
Forward-Looking Statements
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Certain matters discussed herein may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 and
as such may involve risks and uncertainties. In this report, the words
"anticipates," "believes," "expects," "intends," "future" and similar
expressions identify certain forward-looking statements. These forward-looking
statements relate to, among other things, expectations of the business
environment in which we operate, projections of future performance, perceived
opportunities in the market and statements regarding our mission and vision. Our
actual results, performance, or achievements may differ significantly from the
results, performance, or achievements expressed or implied in such
forward-looking statements. For discussion of the factors that might cause such
a difference, see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" And other factors described in this Item 1
under "Industry and Other Risk Considerations." We undertake no obligation to
update or revise such forward-looking statements.
General
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Q-Med(R), Inc. is a Delaware corporation incorporated in 1987, whose business
was organized in 1983. Interactive Heart Management Corp. ("IHMC(R)") is a
wholly owned subsidiary of QMed, which was incorporated in 1995. IHMC developed
and is co-marketing with QMed health care information and communication services
to health plans, governments and private companies. These services include
"ohms|cvd(R)" (Online Health Management System for Cardiovascular Disease) which
is an integrated cardiovascular disease management system. ohms|cvd includes
related systems to assist health plans, government organizations and employer
groups in managing the incidence, treatment, and cost of cardiovascular
conditions, including coronary artery disease ("CAD"), stroke, congestive heart
failure ("CHF"), hypertension, hyperlipidemia and the cardiovascular
complications of diabetes. These systems are designed to aid primary health care
physicians in the use of optimal "evidence based" medical management for
patients with these conditions, as well as those at high risk of developing
these conditions. The net impact of this approach is the improvement in
cardiovascular health and the associated reduction in mortality, morbidity and
cost. As of November 30, 2002, we had contracts to provide these services to 16
health plans in 8 states covering approximately 1.5 million health plan members.
The ohms|cvd system is a comprehensive disease management system developed to
utilize modern prognostic and therapeutic technologies to reduce the utilization
of expensive invasive medical procedures like cardiac revascularization and
encourage the use of preventative cardiology therapies. The system uses
real-time clinical chart abstracted data, "evidence based" medical
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recommendations, patient monitoring and telecommunication technology. It
analyzes results, generates reports, and archives data. The emphasis throughout
the process is on early identification and prevention of cardiovascular events,
modification of critical risk factors and the optimization of appropriate
medicine. Early treatment, with emphasis on medical intervention results in an
overall lowering of morbidity and mortality the associated cost of
cardiovascular disease and its complications.
We also produce, sell and support a line of ischemic heart monitors and a system
that analyzes heart rate variability under the name, Monitor One nDx(R) ("nDx").
Our executive offices are located at 25 Christopher Way, Eatontown, New Jersey
07724 and our telephone number is (732) 544-5544.
We maintain an Internet website at www.qmedinc.com. We make available free of
charge on our website our annual report on Form 10-K, our quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as
soon as practicable after we electronically file such material, or furnish it to
the Securities and Exchange Commission.
ohms|cvd Systems
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ohms|cvd is our medical "expert system" designed as a total disease management
process for Heart Failure (CHF), CAD, Stroke and Diabetic cardiovascular
complications utilizing "best practice" solutions in the management of these
diseases. It consists of Monitor One(R) STRx, our ambulant ischemia technology,
a remote on-line diagnostic center (The ohms Center), an integrated cardiology
consultant practice and other patient monitoring systems. The entire system
noninvasively and reliably quantifies the probable risk of a cardiovascular,
cerebrovascular or heart failure event, and rationally directs the patient to
appropriate therapy with the accent on early detection, the modification of
critical risk factors and medical intervention. The ohms|cvd system expands upon
our core technology, first incorporated in our ohms|cad(R) system, adding the
capability to manage patients that have congestive heart failure, diabetic
cardiovascular complications and the risk of stroke.
The systems are evidence based, relational mechanisms, using patient descriptors
which include:
o demographics,
o medical history,
o current medical therapy, including aspirin,
o lipid and hypertension profiles,
o obesity and lifestyle,
o smoking,
o glucose levels,
o ambulant ischemia,
o weight gain beyond set parameters, and
o rate and rhythm disturbances and other ECG abnormalities.
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In its decision making process, recommendations for management are relational
and are tailored to an individual patient. Significantly, each individual
patient's medical history including risk factor profile, current medication and
other relevant patient specific information are entered into the systems' "best
practices" database for primary and secondary prevention analysis and treatment.
The systems' centralized digital storage of each patient's iterative review
allows for the continuous description and analysis of quantifiable results
including:
o success of the stratification,
o proportion of patients assigned to various therapies,
o objective outcomes,
o interplay with pharmacy benefit managers, and
o physician and patient compliance.
For example, in its risk prevention mode (myocardial infarction, unstable
angina, coronary complications), it centers on the presence or absence of
ambulant ischemia as a risk stratifier utilizing our specialized non-invasive
STRx technology for evaluation of this phenomena in each patient. This test data
is uploaded in near real-time to our central database (The ohms Center), which
in turn stratifies each individual patient into high or low risk. It then
proposes to lower a high-risk patient's risk with specific anti-ischemic medical
therapies as one treatment option, or, if necessary, recommends further local
cardiology consultation leading to possible invasive intervention. If the data
indicate that the patient is at low risk, a message is sent back to the primary
care physician site within minutes with recommendations for optimization of
medical therapy that will maintain the patient in the low-risk pool. In both
circumstances, our proprietary disease management algorithm, which in turn is
based on national practice guidelines, guides therapeutic actions and
evidence-based medicine. Outcome information is available continuously because
all of the interactions and data are stored electronically in The ohms Center.
Because ohms|cvd is an active disease management processes emphasizing a
continuum of care, including modification of patient risk factors, important
cost-effective improvements in cardiac, cerebrovascular and heart failure events
can result from its use, which have been verified by empirical health and cost
outcomes. The ohms|cvd system continuously monitors the care process, and thus,
results are reported as outcomes. Favorable outcomes increase our market share,
decrease our economic risk and increase our product differentiation.
At November 30, 2002, we had contracts with 16 health plans to provide disease
management services in multiple health plan markets in 8 states. The number of
members under contract was as follows:
At November 30, 2002 2001 2000
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Members under contract 1,569,176 1,073,046 373,700
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At November 30, 2002, of the 1,569,176 plan members under contract, we had
1,370,480 commercial members and 198,696 Medicare+Choice members. In January
2003, a disease management contract with a health plan covering two states was
terminated involving approximately 445,813 plan members of which 29,325 were
Medicare+Choice members. This termination did not effect contracts with related
health plans in two other states.
Disease management contracts require sophisticated management information
systems to enable us to manage the care of large populations of patients with
certain chronic diseases such as CAD, stroke, diabetes, and heart failure as
well as certain other medical conditions. They also require us to assist in
reporting outcomes and costs before and after our involvement with a health
plan's enrollees. We have developed and continually expand and improve our
systems, which we believe meet our information management needs for disease
management. We have installed and utilize the systems for the benefit of
enrollees in all of the health plans, which we contract as customers. The
anticipated expansion and improvements in our information management systems
will continue to require significant investments by us in information technology
software, hardware and our information technology staff.
Medicare Demonstration Projects
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We were selected to participate by the Centers for Medicare and Medicaid
Services ("CMS") in two demonstration projects:
o Medicare Coordinated Care Demonstration ("MCCD"); and
o Disease Management Demonstration
CMS is a federal agency within the U.S. Department of Health and Human Services.
CMS runs the Medicare and Medicaid programs -- two national health care programs
that benefit about 75 million Americans. And with the Health Resources and
Services Administration, CMS runs the State Children's Health Insurance Program
(SCHIP), a program that is expected to cover many of the approximately 10
million uninsured children in the United States. CMS also regulates all
laboratory testing (except research) performed on humans in the United States.
CMS, with the Departments of Labor and Treasury, helps millions of Americans and
small companies get and keep health insurance coverage, and eliminate
discrimination based on health status for people buying health insurance. CMS
spends over $360 billion a year buying health care services for beneficiaries of
Medicare, Medicaid and SCHIP. CMS:
o assures that the Medicaid, Medicare and SCHIP programs are
properly run by its contractors and state agencies;
o establishes policies for paying health care providers;
o conducts research on the effectiveness of various methods of
health care management, treatment, and financing; and
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o assesses the quality of health care facilities and services
and taking enforcement actions as appropriate.
Medicare Coordinated Care Demonstration
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We have received a contract award to participate in the Medicare MCCD project.
Our ohms|cad program is the only one that will be evaluated specifically for
management of CAD.
CMS designed MCCD to evaluate the cost-effectiveness of reimbursing disease
management services in the Medicare fee for service model. In accordance with
the Balanced Budget Act of 1997, which mandated the demonstration, CMS "... may
issue regulations to implement, on a permanent basis, the components of the
demonstration projects that are proven to be cost-effective for the Medicare
program."
Under the award, we are implementing our ohms|cad disease management technology
in a controlled randomized study of Medicare beneficiaries who have been
diagnosed previously with CAD. Patient enrollment in California commenced in
early 2002. As a result of our success in the initial enrollment stage of the
project, CMS authorized doubling the patient base of the project with
commensurate remuneration. We will receive fees from CMS for up to four years.
MCCD was authorized by the Balanced Budget Act of 1997. It is intended to test
coordinating the care of Medicare beneficiaries with chronic conditions that
represent high costs to the Medicare program, of which heart disease is the
highest cost. Coordinated care programs serving patients with chronic conditions
were solicited and evaluated. Conditions included heart disease, diabetes, liver
and lung diseases, stroke and other vascular diseases, psychotic disorders,
major depressive disorders, drug/alcohol dependence, Alzheimer's or other
dementia, cancer or HIV/AIDS. Participant selection was made through a national
competitive process.
CMS Disease Management Demonstration
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On October 23,2002, CMS selected QMed, PacifiCare Health Systems, Inc., with its
subsidiary, Prescription Solutions, and Alere Medical, Inc. - operating jointly
as "Heart Partners" - to participate in its Disease Management Demonstration
Project.
The HeartPartners Program will provide disease management services and a
comprehensive tiered prescription drug plan for up to 15,000 chronically ill
Medicare fee-for-service beneficiaries suffering from congestive heart failure.
The program will also address the significant co-morbidities of coronary artery
disease and diabetes.
The goal of the demonstration project is to provide more comprehensive services
to Medicare beneficiaries and their physicians to better manage their chronic
conditions that will result in improved quality and reduced medical costs,
sufficient to offset the cost of the disease management and pharmacy services.
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PacifiCare, Qmed and Alere were selected following a national competitive
evaluation process. The HeartPartners program is expected to begin in 2003, is
authorized for four years, and is the largest of the three projects awarded for
the CMS Disease Management Demonstration. PacifiCare, QMed and Alere, subject to
the execution of final agreements and CMS final award, will operate
HeartPartners under a single, coordinated management and operational construct.
Business Strategy
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Our strategy is to (1) develop additional CMS contracts (including both large
scale demonstrations for our full suite of interventions as well as providing
other CMS demonstrations with our already successful front-end enrollment
process); (2) add contracts with new health plans to provide disease management
services; (3) to further develop and expand our cardiovascular disease
management business within existing customers; (4) to add disease states to our
platform. We anticipate that we will utilize our medical
information-communication technologies to gain and maintain competitive
advantage in delivering care coordination and its narrower subset, disease
management, services. We anticipate that significant investments will continue
to be made during fiscal 2003 in the development of the clinical programs, the
associated information technology support for these expanded initiatives and
that many of these investments will be made prior to the initiation of revenues
from contracts. It is also anticipated that some of these new capabilities and
technologies may be added through strategic alliances with other entities.
We anticipate that additional disease management contracts that we may sign with
health plans, employer groups and governmental agencies may take one of several
forms, including per member per month payments to us, some form of shared
savings of overall enrollee healthcare costs, fee for services for enrolled
members, or some combination of these arrangements. We anticipate that under
most contracts, some portion of our fees will be at risk and subject to our
performance against financial cost savings and clinical improvements. When we
believe it is prudent to do so, we may insure or reserve against a portion of
revenue.
Industry and Other Risk Considerations
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In the process of executing our business strategy, our operations and financial
condition are subject to certain risks. The primary industry risks are described
below and readers of this Annual Report on Form 10-K should take such risks into
account in evaluating any investment decision involving the company. This
section does not describe all risks applicable to our business and is intended
only as a summary of certain material factors that impact our operations in the
industry in which we operate. More detailed information concerning these and
other risks is contained in other sections of this Annual Report on Form 10-K.
The healthcare industry in which we operate is currently subject to significant
cost reduction pressures as a result of constrained revenues from governmental
and private sources as well as from the increasing underlying cost of medical
care. We believe that these pressures will continue and possibly intensify.
While we believe that our services are geared specifically to assist health
plans, employer groups and governmental agencies in controlling the high costs
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associated with the treatment of chronic diseases, the pressures to reduce costs
immediately may have a negative effect in certain circumstances on the ability
of or the length of time required for us to sign new contracts. In addition,
this focus on cost reduction may result in increased focus from health plans on
contract restructurings that reduce the fees paid to us for our services. There
can be no assurance that these financial pressures will not have a negative
impact on our operations.
Health plans and employers are subject to considerable state and federal
government regulation. Many of these regulations are vaguely written and subject
to differing interpretations that may, in certain cases, result in unintended
consequences that may impact our ability to effectively deliver our services.
The current focus on regulatory and legislative efforts to protect the
confidentiality of patient identifiable medical information, as evidenced by the
Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), is one
such example. We believe that our ability to obtain patient identifiable medical
information for disease management purposes from health plans with which we
contract is protected in recently released federal regulations governing medical
record confidentiality. State legislation or regulation of this information may
be more restrictive and may preempt federal legislation. We are continually
determining the extent to which specific state legislation or regulations govern
our health plan operations. New federal or state legislation or regulation in
this area, which prohibitively restricts the availability of certain critical
information to us, would have a material negative impact on our disease
management operations.
The disease management industry, which is growing rapidly, is a relatively new
segment of the overall healthcare industry and has many entrants marketing
various services and products labeled as "disease management." The generic label
of disease management has been utilized to characterize a wide range of
activities from the sale of medical supplies and drugs to services aimed at
demand management. Because the industry is relatively new, health plan
purchasers of these services have not had significant experience purchasing,
evaluating or monitoring such services which generally results in a lengthy
sales cycle for new health plan contracts. In addition, because the industry is
still relatively new and health plans have only recently entered into disease
management contracts, we have a significant concentration of our revenues
represented by contracts with two health plans, PacifiCare of California and
Regence Blue Cross/Blue Shield of Oregon, which collectively accounted for 47%
of our revenues in fiscal 2002. Our contract with Regence Blue Cross/Blue Shield
of Oregon terminated effective January 31, 2003. Until additional significant
health plan contracts are signed and implemented by us, the loss or a downward
restructuring of a contract with a single large health plan customer would
negatively and materially impact our results of operations and financial
condition.
The disease management industry is dependent on the effective use of information
technology. While we believe that our state-of-the-art technology provides us
with a competitive advantage in the industry, we expect to continually invest in
updating and expanding technology and, in some cases, will be required to make
systems investments in advance of the generation of revenues from contracts. In
addition, these system requirements expose us to technology obsolescence risks.
Accordingly, we amortize our computer software and hardware over five years.
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The measurement of our performance under our health plan contracts is highly
dependent upon the timely receipt of accurate data from our health plan
customers and the accuracy of the analysis of such data. Data acquisition, data
quality control and data analysis are intense and complex processes subject to
error. Untimely, incomplete or inaccurate data from a customer or flawed
analysis of such data could have a material adverse impact on our revenues from
that contract.
A potential seasonal impact on covered membership could include a decision by a
health plan to withdraw or expand coverage thereby automatically disenrolling
previously covered members or enrolling new members, as would significant shifts
in employer's participation in the plans. In addition, because the disease
management industry is relatively new, the renewal experience for these
contracts is limited. No assurances can be given that results from contract
restructurings and possible terminations at or prior to renewal would not have a
material negative impact on our operations and financial condition.
Share prices of healthcare companies and our share price in particular may be
volatile. The volatility may be influenced by the market's perceptions of the
healthcare sector in general, or other companies believed to be similar to us or
by the market's perception of our operations and future prospects. Many of these
perceptions are beyond our control.
Marketing
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We directly market our services to health plans, large physician practice
groups, employers and governmental agencies through our sales staff. Contracting
efforts are conducted and coordinated by senior management personnel, with the
aid, where appropriate, of certain independent consultants. In addition, we
generally pursue business opportunities through the traditional competitive
process where a Request for Proposals ("RFP") or a Request for Qualifications
("RFQ") is issued by a managed care, employer or government organization, to
which a number of companies respond. We utilize demographic and cost of service
data from the organization as well as statistical information to conduct an
initial cost analysis to determine program feasibility. As part of our sales
efforts, management meets with appropriate personnel from the organization
making the request to best determine the organization's needs. A typical RFP
requires bidders to provide detailed information, including the service to be
provided by the bidder, its experience and qualifications and the price at which
the bidder is willing to provide the services. We sometimes engage independent
consultants to assist in responding to RFPs. Based on the proposals received in
response to an RFP; the organization will award a contract to the successful
bidder. In addition to issuing formal RFPs, some organizations may issue an RFQ.
In the RFQ process, the requesting agency selects a firm it believes is the most
qualified to provide the requested services and then negotiates the terms of the
contract with that firm, including the price at which its services are to be
provided. We also attend and promote our services at key conferences throughout
the United States where potential clients are present.
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Warranty
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In our medical equipment segment, we extend a standard warranty to end-users of
purchased or leased devices. Extended one-year warranties are available to
end-users at additional cost. Extended warranty sales represented 1.0%, 1.7%,
and 7.6% of total revenue for fiscal 2002, 2001 and 2000, respectively, and are
not expected to represent a significant portion of revenue in future periods.
Manufacturing
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We contract with electronics companies for the manufacture and sub-assembly of
devices and accessories and provide these contractors with technical expertise.
These devices undergo final testing and packaging at our facility located in Sag
Harbor, New York. Although we have not experienced significant delays or
disruptions in the assembly and delivery of its products, there can be no
assurance that delays or disruptions will not occur in the future. A
deterioration of our relationship with our independent contract manufacturers
could subject us to substantial delays in the delivery of our products to
customers. Such delays would subject us to possible cancellation of orders and
the loss of certain customers.
Whenever possible, we use multiple sources of supply for components. However, we
believe that there are only singular sources of supply for certain components.
There is no assurance that these sources will continue to supply those parts
and, if they become unavailable, we would be adversely affected. Also, there can
be no assurance that our contract manufacturers will maintain an acceptable
level of quality and capability for assembling the products to our
specifications. We have not experienced delays in obtaining supplies, which
affected our ability to deliver finished goods.
Competition
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We believe ohms|cad and ohms|cvd offer unique solutions for cardiovascular
disease management. However, there are several entities, including
pharmaceutical companies, pharmacy benefit managers and independent companies
that are pursuing CAD management, which we consider to be competition.
We believe we have competitive advantages based on the following:
o The entire management system and its components are
proprietary and patented.
o Our ischemia technology has been clinically validated with
results appearing in several "peer reviewed" journals.
o Health outcomes have been documented and presented at
prestigious meetings, such as the American Heart Association
Scientific Sessions.
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o We have an extensive and growing knowledgebase of how specific
therapeutic modalities positively affect patients' health.
o We have proven successes in actual implementation of our CAD
disease management system in the field that demonstrates our
ability to produce faster rollouts and faster health and
economic outcomes to the plan.
o We have created proprietary analytics that define the target
population at risk.
o We have established an operating infrastructure with
integrated resources and processes amplified by corporate
expertise.
o We have documented improvements for a health plan customer of
its HEDIS audit, a competitive advantage for each customer.
o We are perhaps the only disease management program in which
disease management specialists who work for us see the patient
face to face on a regularly scheduled basis.
Competition may increase and such competition could come from companies that are
considerably larger and have greater financial and marketing resources than we
have.
Monitor One ischemia products compete primarily with ambulatory arrhythmia ECG
scanning services, of which there are more than 75 in the United States, and
other ambulatory ECG monitoring equipment manufacturers. In many cases, some of
these companies have substantially greater marketing, financial and other
resources than we have, but management believes that our products' price and
performance are competitive in this field.
We believe that direct competition in ambulatory ischemic monitoring, products
for testing autonomic function and disease management may come from companies
that are considerably larger and have greater financial and human resources and
marketing capabilities. Primary competitive factors in the medical device
industry include scientific and technological superiority, price, service,
product support, availability of patent protection, access to adequate capital,
the ability to successfully develop and market products and processes.
Research and Development
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In fiscal 2002, 2001 and 2000, we expended $999,985, $757,355 and $524,275
respectively, for research and development. During these years, research and
development was primarily focused on the development of an advanced version of
the ohms|cad system and the ohms|cvd system.
We plan to continue to add new disease states to our platform, as well as
enhance our existing systems and products and have budgeted approximately 10% of
anticipated revenue for such development in fiscal 2003.
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Patent Protection and Proprietary Information
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We maintain a policy of seeking patent protection in the United States and other
countries in connection with certain elements of its technology. Our Monitor One
technology has been granted patents in the United States (Patent No. 4679144),
Canada (Patent No. 1281081) and Spain (Patent No. 547040) and has additional
patent applications pending in other countries. We received a U.S. patent for
the nDx technology on March 29, 1994 (Patent No. 5299119) and a patent for the
ohms|cad system (Patent No. 5,724,580) on March 3, 1998. Certain patents
relating to our technology begin expiring in 2004.
The patent laws of foreign countries may differ from those of the United States
as to the patentibility of our products and, accordingly the degree of
protection afforded by the pendency or issuance of foreign patents may be
different than the protection afforded under corresponding United States
patents. There can be no assurance that patents will be obtained in foreign
jurisdictions with respect to our products or that the United States patents and
any foreign patents will significantly protect or be commercially beneficial.
We do not intend to rely solely on patent protection for our proprietary
technology. We also rely upon trade secrets, copyright protection,
confidentiality agreements with employees, know-how, expertise and lead-time to
attain and maintain our competitive position. To the extent that we rely upon
these measures, there can be no assurance that others might not independently
develop similar technology or that secrecy will not be breached.
Privacy Issues
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Because our applications and services are utilized to transmit and manage highly
sensitive and confidential health information, the security and confidentiality
concerns of our customers and their patients are a primary concern. In order to
enable our applications and services to transmit sensitive and confidential
medical information, we utilize advanced technologies designed to ensure a high
degree of security. These technologies generally include:
o security that requires a password to access our systems;
o user access restrictions that allow our customers to determine
the individuals who will have access to data and what level of
access each individual will have;
o encryption of data relating to our applications and services;
and
o a mechanism for preventing outsiders from improperly accessing
private data resources on our internal network and our
applications commonly referred to as a "firewall."
Our customers also implement their own procedures to protect the confidentiality
of information being transferred into and out of their computer network. Despite
these efforts, it is not possible to assure 100% data security.
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Internally, we work to ensure the safe handling of confidential data by
employees by:
o using individual user names and passwords for each employee
handling electronic data; and
o requiring each employee to sign an agreement to comply with
all company policies, including our policy regarding handling
confidential information.
We monitor proposed regulations that might affect our applications and services,
in order to ensure that we are in compliance with such regulations when and if
they are affected.
Government Regulation
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HEALTHCARE REGULATION. As a participant in the healthcare industry, our
operations and relationships are subject to regulation by federal and state laws
and regulations and enforcement by federal and state governmental agencies.
Sanctions may be imposed for violation of these laws. We believe our operations
are in substantial compliance with existing laws that are material to our
operations.
HIPAA. In December 2000 and in August 2002, the Department of Health and Human
Services issued final privacy regulations, pursuant to HIPAA, which impose
extensive restrictions on the use and disclosure of individually identifiable
health information by certain entities. We will be required to comply with
certain aspects of the regulations, and plan to implement necessary changes to
our business operations by the regulatory compliance date of April 2003.
FDA REGULATION. The Food and Drug Administration, or FDA, generally has the
authority to regulate medical devices, including computer applications, when
devices are indicated, labeled or intended to be used in the diagnosis of
disease or other conditions, or in the cure, mitigation, treatment or prevention
of disease, or are intended to affect the structure or function of the body. We
do not believe that any of our current services are subject to FDA regulation as
medical devices, however, expansion of our application and service offerings
could subject us to FDA regulation.
Our products, to the extent they may be deemed "medical devices," are regulated
by the FDA under the Federal Food, Drug and Cosmetics Act (the "FDCA") and
related regulations.
All medical devices sold in interstate commerce are subject to FDA clearance.
Our monitors are subject to pre-market notification (510(k)), pursuant to which
the FDA determines whether a new medical product is "substantially equivalent"
to a product that was on the market prior to May 28, 1976. Products found to be
"substantially equivalent" to those products may thereafter be sold. The FDA has
the authority, which it has not yet exercised, to issue performance standards
for the type of monitors manufactured by us.
14
Regulations by the FDA, known as Good Manufacturing Practices ("GMP"), provide
standards for manufacturing processes, facilities, and record-keeping
requirements with which our contract manufacturers and we must also comply. We
believe that the manufacturing and quality control procedures employed by us and
our contract manufacturers meet the GMP requirements. If the FDA should
determine that our monitors were not manufactured in accordance with GMP's, it
has the authority to order us to cease production and may require us to recall
products already sold by us. In addition, any facilities used to manufacture or
assemble our products will be subject to inspection by the FDA at least
biannually.
The FDCA is not the exclusive source of regulation of medical devices and, by
its terms, allows state and local authorities to adopt more stringent
regulations for medical devices.
REGULATION OF THE INTERNET. Laws and regulations applicable to communications or
commerce over the Internet may be adopted covering user privacy, pricing,
content, copyright, distribution and characteristics and quality of products and
services. In addition, some states or foreign countries could apply existing
laws concerning issues such as property ownership, sales tax, libel and personal
privacy to transactions conducted over the Internet. Additional laws or
regulations or application of laws to transactions over the Internet could
require us to change our operations or increase our cost of doing business.
To our knowledge and other than what we have described in this report and other
than occupational health and safety laws and labor laws which are generally
applicable to most companies, our products are not subject to governmental
regulation by any federal, state or local agencies that would affect the
manufacture, sale or use of our products. We cannot, of course, predict what
sort of regulations of this type may be imposed in the future, but we do not
anticipate any unusual difficulties in complying with governmental regulations
that may be adopted in the future.
Insurance
- --------------------------------------------------------------------------------
We maintain professional malpractice, product liability and general liability
insurance for all of our locations and operations. We also carry insurance
policies to support our performance under contract with three health plans.
While we believe our insurance policies to be adequate in amount and coverage
for our current operations, there can be no assurance that coverage is
sufficient to cover all future claims. In recent years, the cost of liability
and other forms of insurance have increased significantly. There is no assurance
that such insurance will continue to be available in adequate amounts or at
reasonable costs. In addition, the claims process depends, in part, on the same
timely receipt of accurate data from our health plan customers and the analysis
of such data. Untimely, incomplete or inaccurate data from a customer or flawed
analysis of such data could have an adverse impact on the timing or validity of
a claim. Our liability insurance coverage provides for certain deductible levels
to be paid by us. Estimated reserves to cover potential payments under these
policies have been provided in our financial statements. We also maintain
property and workers compensation insurance for each of our locations with
commercial carriers on relatively standard commercial terms and conditions.
15
Employees
- --------------------------------------------------------------------------------
We had 143 employees as of December 31, 2002, none of which are subject to a
collective bargaining agreement. We believe our relations with employees are
good.
Executive Officers of the Registrant
- --------------------------------------------------------------------------------
The following sets forth certain information concerning our executive officers
as of February 20, 2003:
Officer Age Position with the Company
------- --- -------------------------
Michael W. Cox 60 President, Treasurer, Chief Executive
Officer and Director since February
1983.
Jane Murray 40 Executive Vice President, Chief
Operating Officer and Director since
January 1, 2002, Executive Vice
President - Operations of IHMC since
December 2000, various other
positions with the company since
1985.
Teri J. Kraf 54 Senior Vice President - Program
Implementation since January 1, 2002.
Vice President - Strategic
Development since June 1988.
John Siegel 46 Senior Vice President - Sales since
April 17, 2001. Vice President -
Field Services since 1998.
William T. Schmitt, Jr. CPA 42 Senior Vice President, Chief Financial
Officer since October 2002
Debra A. Fenton, CPA 38 Controller since 1990.
Herbert H. Sommer, Esq. 44 Secretary and a Director since
June 1996.
Item 2. Properties.
- -------------------
Our executive offices occupy approximately 21,000 square feet of office space in
Eatontown, New Jersey, pursuant to a lease agreement, which expires in November,
2007. These facilities are used principally for administrative offices, sales
training, and marketing. We moved out of our prior executive offices in December
2002 and still have approximately 9,000 square feet of office space in Laurence
Harbor, New Jersey pursuant to a lease expiring November 30, 2003, which we are
attempting to sublet. We lease approximately 2,000 square feet of space in Sag
16
Harbor, New York, used principally for monitor repairs, assembly and quality
control. We also lease approximately 800 square feet in California for sales
support.
We believe our facilities are suitable and adequate to meet our present needs.
Item 3. Legal Proceedings.
- --------------------------
We previously disclosed that we brought a patent infringement and unfair
competition action against LifeMasters Supported SelfCare ("LifeMasters"). In
the action, which was brought in the U.S. District Court for the District of New
Jersey under the caption QMed, Inc v. LifeMasters Supported SelfCare, Inc.
(CV-01-3469), we sought damages and other relief for patent infringement,
violation of the Lanham Act, and common law unfair competition. In November
2001, LifeMasters then brought arbitration proceedings against both QMed and
IHMC, seeking, in arbitration, compensatory and punitive damages in an
unspecified amount, together with costs and fees. In the arbitration
proceedings, LifeMasters asserted claims of fraud, constructive fraud,
declaratory relief, breach of contract, and claims for determination as to the
validity, enforceability and infringement of our patent, as well as for other
relief. LifeMasters' motion in the U.S. District Court action, for an order,
transferring, staying or dismissing parts of our case, in favor of their
arbitrations, was denied, and our cross motion to stay the arbitration was
granted. LifeMasters then appealed this order. We opposed LifeMasters appeal.
We have now reached a tentative settlement with LifeMasters, which we are
attempting to finalize and document. The settlement is expected to resolve the
differences between the parties.
We are subject to claims and legal proceedings covering a wide range of matters
that arise in the ordinary course of business. It is management's opinion that
the ultimate resolution of these matters will not have a material effect on our
consolidated financial position and results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
None.
17
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters.
(a) Market Price and Dividend Information
Our common stock is traded in the Nasdaq Small Cap Market, under symbol "QMED".
The following table sets forth the range of high and low bid quotations for our
shares reported by the Nasdaq Small Cap Market. This information represents
inter-dealer quotations, without retail mark-ups, mark-downs, or commissions,
and does not necessarily represent actual quotations.
Fiscal Year Ended November 30, 2002 High Low
First Quarter $ 15.56 $ 9.98
Second Quarter 13.12 8.20
Third Quarter 9.65 5.65
Fourth Quarter 8.80 5.16
Fiscal Year Ended November 30, 2001 High Low
First Quarter $ 7.91 $ 3.19
Second Quarter 8.95 5.63
Third Quarter 14.45 8.41
Fourth Quarter 13.89 7.00
(b) Approximate Number of Holders of Common Stock
As of February 20, 2003, the Company's common stock was held of record by 297
persons. Based upon requests from record holders for additional materials for
our 2002 annual meeting, we believe that there are at least 3,000 beneficial
holders of our common stock. On February 20, 2003, the closing price reported
was $6.10.
(c) Dividends
We have never paid a cash dividend on our common stock. It is the current policy
of our Board of Directors to retain any earnings to finance the operations and
expansion of our business. The payment of dividends in the future will depend
upon our earnings, financial condition and capital needs and on other factors
deemed pertinent by the Board of Directors.
(d) Equity Compensation Plans
Information about our equity compensation plans required by this item will be
set forth in our definitive proxy statement, which is expected to be filed
within 120 days of November 30, 2002 and is incorporated herein by reference.
18
(e) Recent Sales of Unregistered Securities
On March 17, 2000, Quest Diagnostics Ventures, LLC, the venture capital
affiliate of Quest Diagnostics, Inc., purchased 285,714 shares of our common
stock in a directly negotiated private placement. The transaction was claimed to
be exempt from registration under the Act under Sections 4(2), 4(6) and Rule 506
of Regulation D thereunder.
On April 13, 2000, we issued 64,315 of our shares of common stock to three
investors that held our 16% Subordinated Convertible Notes issued in 1997, and
amended in 1998 and 1999. The issuance was claimed to be exempt form
registration under the Act pursuant to Section 3(a)(9) for securities issued in
an exchange exclusively with existing security holders where no commission or
remuneration is paid for soliciting the exchange.
On April 28, 2000, a single private investor purchased 163,300 shares of our
common stock in a privately negotiated private placement. The transaction was
claimed to be exempt from registration under the Securities Act of 1933, as
amended (the "Act") under Sections 4(2), 4(6) or Rule 506 of Regulation D,
thereunder.
On April 4, 2001, three investors led by Galen Partners III, L.P. purchased
796,813 shares of our common stock in a directly negotiated private placement.
The transaction was claimed to be exempt from registration under the Act under
Sections 4(2), 4(6) or Rule 506 of Regulation D, thereunder.
19
Item 6. Selected Financial Data.
For the Years Ended November 30:
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Results of Operations
Net sales $12,744,754 $ 8,021,634 $ 2,872,205 $ 2,040,520 $ 2,046,627
Cost of sales 5,607,563 3,300,526 1,424,779 1,167,020 1,099,515
----------- ----------- ----------- ----------- -----------
Gross profit 7,137,191 4,721,108 1,447,426 873,500 947,112
Selling, general and
administrative expenses 5,789,730 5,424,183 3,045,052 2,319,277 2,623,984
Provision for uncollectible
accounts - - - 74,148 289,716
Research and development
expenses 999,985 757,355 524,275 571,449 486,843
Debt conversion expense - - 38,623 737,135 -
----------- ----------- ----------- ----------- -----------
Income (Loss) from operations 347,476 (1,460,430) (2,160,524) (2,828,509) (2,453,431)
Gain on sale of investments 59,598 24,180 15,406 - -
Other income 264,860 232,607 133,668 68,126 57,081
Interest expense (9,173) (16,517) (33,168) (143,891) (179,704)
Loss in operations of joint
venture (47,500) (42,500) (146,148)
----------- ----------- ----------- ----------- -----------
Income (loss) before income
tax benefit (provision) 615,261 (1,262,660) (2,190,766) (2,904,274) (2,576,054)
Gain on sale of state tax
benefits 129,885 219,603 309,256 - -
Provision for state income
taxes (40,000) - - - -
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 705,146 $(1,043,057) $(1,881,510) $(2,904,274) $(2,576,054)
Other comprehensive income (loss)
Unrealized gain (loss) on
securities available for sale (69,617) 32,513 - - -
Reclassification adjustment for
gains included in net income 59,598 - - - -
----------- ----------- ----------- ----------- -----------
Comprehensive income (loss) $ 695,127 $(1,010,544) $(1,881,510) $(2,904,274) $(2,576,054)
=========== =========== =========== =========== ===========
Per Share Data
Net income (loss) per share -
Basic $ .05 $ (.08) $ (.15) $ (.25) $ (.26)
=========== =========== =========== =========== ===========
Diluted $ .04 $ (.08) $ (.15) $ (.25) $ (.26)
=========== =========== =========== =========== ===========
Balance Sheet Data (at end of periods)
Working capital $ 6,718,300 $ 5,749,732 $ 2,009,012 $ 691,668 $ 2,392,161
Total assets 12,163,181 8,167,511 3,390,428 1,966,050 3,757,424
Total liabilities 3,295,191 1,472,990 739,145 824,261 1,638,425
Stockholders' equity 8,867,990 6,694,521 2,651,283 1,141,789 (1,902,992)
Temporary equity, put - - - 4,021,991
Stockholders equity (including
temporary equity) 8,867,990 6,694,521 2,651,283 1,141,789 2,118,999
20
Selected Quarterly Financial Data (Unaudited)
For the Quarters Ending 2002
February 28, May 31, August 31, November 30, Total
Net sales $ 3,185,715 $ 3,492,321 $ 2,491,607 $ 3,575,111 $ 12,744,754
Gross profit $ 1,893,859 $ 2,123,879 $ 1,074,123 $ 2,045,330 $ 7,137,191
Net income (loss) $ 402,319 $ 447,612 $ (559,366) $ 414,581 $ 705,146
Net Income (loss) per share $ .03 $ .03 $ (.04) $ .03 $ .05
For the Quarters Ending 2001
February 28, May 31, August 31, November 30, Total
Net sales $ 1,207,927 $ 1,654,698 $ 2,129,421 $ 3,029,588 $ 8,021,634
Gross profit $ 809,299 $ 937,690 $ 1,155,768 $ 1,818,351 $ 4,721,108
Net income (loss) $ (283,975) $ (516,275) $ (382,232) $ 139,425 $ (1,043,057)
Net Income (loss) per share $ (.02) $ (.04) $ (.03) $ .01 $ (.08)
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
- --------------------------------------------------------------------------------
The following discussion should be read in conjunction with our Consolidated
Financial Statements, and Notes thereto, contained elsewhere in this report.
Overview
- --------------------------------------------------------------------------------
Q-Med(R), Inc. is a Delaware corporation incorporated in 1987, whose business
was organized in 1983. Interactive Heart Management Corp. ("IHMC(R)") is a
wholly owned subsidiary of QMed, which was incorporated in 1995. IHMC developed
and is co-marketing with QMed health care information and communication services
to health plans, governments and private companies. These services include
"ohms|cvd(R)" (Online Health Management System for Cardiovascular Disease) which
is an integrated cardiovascular disease management system. ohms|cvd includes
related systems to assist health plans, government organizations and employer
groups in managing the incidence, treatment, and cost of cardiovascular
conditions, including coronary artery disease ("CAD"), stroke, congestive heart
failure ("CHF"), hypertension, hyperlipidemia and the cardiovascular
complications of diabetes. These systems are designed to aid primary health care
physicians in the use of optimal "evidence based" medical management for
patients with these conditions, as well as those at high risk of developing
these conditions. The net impact of this approach is the improvement in
cardiovascular health and the associated reduction in mortality, morbidity and
cost. As of November 30, 2002, we had contracts to provide these services to 16
health plans in 8 states covering approximately 1.5 million health plan members.
Our disease management program is for members identified as being at high risk
for significant and costly episodes of care. The program is supported by
technology that is designed to deliver the best clinical and financial outcomes
to our customers.
As of November 30, 2002, we contracted to provide services in a Medicare
demonstration project and to 16 health plans nationwide. In October 2002, we
21
were selected to participate with two other entities in a second disease
management program for the Centers for Medicare and Medicaid Services. The
program is expected to begin in the second quarter of fiscal 2003.
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements, which are based upon current
expectations and involve a number of risks and uncertainties. In order for us to
utilize the "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995, investors are hereby cautioned that these statements may be
affected by the important factors, among others, set forth below, and
consequently, actual operations and results may differ materially from those
expressed in these forward-looking statements. The important factors include:
o our ability to renew and/or maintain contracts with its
customers under existing terms or restructure these contracts
on terms that would not have a material negative impact on our
results of operations;
o our ability to execute new contracts for health plan disease
management services;
o the risks associated with a significant concentration of our
revenues with a limited number of health plan customers;
o our ability to effect estimated cost savings and clinical
outcome improvements under health plan disease management
contracts and reach mutual agreement with customers with
respect to cost savings, or to effect such savings and
improvements within the timeframes contemplated by us;
o the ability of our health plan customers to provide timely and
accurate data that is essential to the operation and
measurement of our performance under the terms of its health
plan contracts;
o our ability to resolve favorably contract billing and
interpretation issues with its health plan customers;
o our ability to effectively integrate new technologies into our
care management information technology platform;
o our ability to obtain adequate financing to provide the
capital that may be needed to support the growth of our health
plan operations and financing or insurance to support our
performance under new health plan contracts;
o unusual and unforeseen patterns of healthcare utilization by
individuals within the health plans with cardiovascular
conditions, including coronary artery disease ("CAD"), stroke,
congestive heart failure ("CHF"), hypertension, hyperlipidemia
and the cardiovascular complications of diabetes with which we
have executed disease management contracts;
o the ability of the health plans to maintain the number of
covered lives enrolled in the plans during the terms of the
agreements between the health plans and us;
o our ability to attract and/or retain and effectively manage
the employees required to implement our agreements with health
plan organizations;
o the impact of future state and federal healthcare legislation
and regulations on our ability to deliver services
o the financial health of our customers and their willingness to
purchase our services
o the impact of litigation involving us
o general economic conditions
22
We undertake no obligation to update or revise any such forward-looking
statements.
Critical Accounting Policies
- --------------------------------------------------------------------------------
Our accounting policies are described in Note 1 of the consolidated financial
statements included in this Annual Report on Form 10-K for the fiscal year ended
November 30, 2002. The consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America, which requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
We consider the following policy to be the most critical in understanding the
judgments involved in preparing the financial statements and the uncertainties
that could impact our results of operations, financial condition and cash flows.
Revenue Recognition
- -------------------
We enter into contractual arrangements with health plans to provide disease
management services. Fees under our health plan contracts are generally
determined by multiplying a contractually negotiated rate per health plan member
per month ("PMPM") by the number of health plan members covered by our services
during the month. The PMPM rates usually differ between contracts due to the
various types of health plan product groups (e.g. PPO, HMO, Medicare+Choice).
These contracts are generally for terms of three to five years with provisions
for subsequent renewal, and typically provide that all or a portion of our fees
may be "performance-based". Performance-based contracts have varying degrees of
risk associated with our ability to deliver the guaranteed financial cost
savings. In most cases we guarantee a percentage reduction of disease costs
compared to a prior baseline year determined by actuarial analysis and other
estimates used as a basis to measure performance objectives. The measurement of
our performance against the base year information is a data intensive and
time-consuming process that is typically not completed until six to eight months
after the end of the contract year. We bill our customers each month for the
entire amount of the fees contractually due based on previous months membership,
which always includes the amount, if any that may be subject to refund for
member retroactivity and a shortfall in performance. We adjust or defer revenue
for contracts where we believe that there could be an issue of non-performance,
possibly resulting in a refund of fees or where fees generated may be subject to
further retroactive adjustment associated with a contract or plan's decision to
completely terminate its coverage in a geographic market as well as general
membership changes. For example, general terminations can be due to death,
member change of health plan, etc. Adjustments for non-performance under the
terms of the contract or other factors affecting revenue recognition are accrued
on an estimated basis in the period the services are provided and are adjusted
in future periods when final settlement is determined. We review these estimates
periodically and make adjustments, as interim information is available.
23
We determine our level of performance at interim periods based on medical claims
data, achievement of enrollment targets or other data required to be supplied by
the health plan. In the event these interim performance measures indicate that
performance targets are not being met or sufficient data is unavailable, fees,
which could be subject to refund, are not recorded as revenue but rather are
recorded as a current liability entitled "contract billings in excess of
revenues." Under performance based arrangements, the ability to make estimates
at interim periods can be challenging due to the inherent nature of the medical
claims process and the lag time associated with it. In most cases, complete paid
claims data is not available until up to six months after claims are incurred.
Although interim data measurements are indicative of performance objectives,
actual results could differ from our estimates. As of November 30, 2002, based
on information and data available at this time, we deferred approximately
$1,800,000 related to contracts with two Regence health plans, Regence Oregon
and Washington, which may be subject to refund. This deferral has been reflected
as contract billings in excess of revenues on the balance sheet. Services are
provided under these Regence contracts through HeartMasters, a limited liability
company whose members are IHMC and LifeMasters, an unaffiliated private company,
under which we provide coronary artery disease management services and Life
Masters provides services for congestive heart failure. Since these contracts
are performance based, HeartMasters has limited its exposure under these
contracts by purchasing insurance from an unaffiliated insurer in the amount of
approximately $9,800,000. The deferral of approximately $1,800,000 represents
fees in excess of its share of insurance coverage. HeartMasters has submitted an
estimate of claims in the amount of approximately $6,750,000 to the insurer and
the claims are currently under review by the insurer.
The contract billings in excess of revenues on the balance sheet is subject to
reconciliation at future periods, however, since the initial contract year
reconciliation did not provide positive results and enrollment targets have not
improved, all of the revenue from this agreement which is estimated to be
subject to refund is deferred in accordance with our revenue recognition policy.
If future reconciliations provide positive results, revenue will be recorded at
that time.
We believe these estimates adequately provide for any potential adjustments that
may be applied to revenues from these contracts. Although these contracts are
multi-year agreements, since both parties have been unable to reach a resolution
on certain modifications to the contracts, the Regence Oregon and Washington
contracts terminated as of January 31, 2003.
We also have contracts with Regence of Idaho and Utah. Regence Idaho and Utah
contracts are not subject to the same terms and conditions as those in Oregon
and Washington. In addition, the Idaho and Utah contract outcomes are designed
to measure the effect of our disease management of coronary disease and stroke
against a control population not managed by a formal disease management process.
We determined that while there were modest savings in Oregon and Washington, the
contract contained a number of unforeseeable issues, which made the expected
outcome unachievable. Certain provisions in the contract covering "all claims"
versus "disease specific" claims had a negative impact on contract performance
to date. These provisions are not included in any of our other disease
management contracts. Furthermore, we operate all of our other contractual
agreements without any outside parties' involvement.
24
During the fiscal years ended November 30, 2002, and 2001, approximately 47% and
67%, respectively, of disease management services were derived from two health
plans that each comprised more than 10% of our revenues, one of which is
Regence. During fiscal 2000, revenues from five health plans comprised more than
10% of our revenue.
Health Plan Contracts
- --------------------------------------------------------------------------------
Most of our revenues in Fiscal 2000 through 2002 were generated from programs
designed to assist health plans in improving the quality of care for health plan
members with diseases such as coronary artery disease, stroke, congestive heart
failure, hypertension, hyperlipidemia and the cardiovascular complications of
diabetes. These programs are designed to improve care and to reduce healthcare
costs. We anticipate that a substantial portion of our future revenue growth
will continue to result from providing disease management services to health
plans. We also believe that a greater portion of our future revenue will be from
contracts with CMS.
We first introduced a coronary artery disease program with a medical group in
1995. Since that time, we added congestive heart failure, stroke, hypertension,
hyperlipidemia and the cardiovascular complications of diabetes to our program.
During fiscal 2001, we were awarded a Medicare Coordinated Care Demonstration
project, which is designed to evaluate the cost-effectiveness of reimbursing
disease management services in the Medicare fee for service model. Enrollment of
patients under this program began in Fiscal 2002. During fiscal 2002, we
received an accreditation by the National Committee on Quality Assurance. In
October 2002, we, together with two other entities, were selected to participate
in a disease management program for the Centers for Medicare and Medicaid
Services. The program is expected to begin in the second quarter of fiscal 2003.
Our disease management services include the stratification of high-risk
patients, contact with their primary care physicians, review of patient chart
information, contact and assessment with the patient and coordination of care
with the primary care physician. Fees under our health plan contracts are
generally determined by multiplying a contractually negotiated rate per health
plan member per month ("PMPM") by the number of health plan members covered by
our services during the month. The PMPM rates usually differ between contracts
due to the various types of health plan product groups (e.g. PPO, HMO,
Medicare). These contracts are generally for terms of three to five years with
provisions for subsequent renewal, and typically provide that all or a portion
of our fees may be "performance-based". We earn performance-based fees upon
achieving a targeted percentage reduction in the customer's healthcare costs, in
addition to clinical and other criteria, compared to a baseline year.
The membership enrollment and disenrollment processes of our health plan
customers can result in a cyclical reduction of lives under management,
especially during our first quarter. Employers typically make decisions about
health insurance carriers at the end of each calendar year. Health plans also
assess the types of markets they service as well as the contractual arrangements
of medical groups within those markets. In any event, all of these factors will
25
have an effect on membership as of January 1 of each year. A health plans
decision to exit markets or non-renewal of contracts with their medical groups
will result in a loss of covered lives under management as of January 1.
Although these decisions may also result in a gain of members, the process of
identification and enrollment will typically lag by six months or longer. As a
result, we have experienced a loss of covered lives of approximately 3% of total
covered lives as of December 31, 2002, thereby negatively affecting our revenues
in the first quarter of fiscal 2003.
During the fiscal years ended November 30, 2002, and 2001, approximately 47% and
67%, respectively, of disease management services were derived from two health
plans that each comprised more than 10% of our revenues. During fiscal 2000
revenues from five health plans comprised more than 10% of our revenue. During
fiscal 2002, the same two health plans as in 2001 each comprised more than 10%
of the Company's revenues. One of these contracts terminated as of January 31,
2003, which represented approximately 28% of our membership. Since most of the
revenue from this contract was previously deferred, revenue for the first
quarter will only be reduced by approximately 5% due to this contract
termination.
Our strategy is to develop additional CMS contracts, business contracts with
health plans to provide disease management services and to further develop and
expand our cardiovascular disease management business. We anticipate that we
will utilize our state-of-the-art medical information technologies to gain a
competitive advantage in delivering disease management services. We anticipate
that significant investments will continue to be made during fiscal 2003 in the
development of the clinical programs, the associated information technology
support for these expanded initiatives and that many of these investments will
be made prior to the initiation of revenues from contracts. It is also
anticipated that some of these new capabilities and technologies may be added
through strategic alliances with other entities.
We anticipate that additional disease management contracts that we may sign with
health plans, employer groups and governmental agencies may take one of several
forms, including per member per month payments to us, some form of shared
savings of overall enrollee healthcare costs, fee for services for enrolled
members, or some combination of these arrangements. We anticipate that under
most contracts, some portion of our fees will be at risk and subject to our
performance against financial cost savings and clinical improvements. When we
believe it is prudent to do so, we may insure or reserve against a portion of
revenue.
26
Results of Operations
- --------------------------------------------------------------------------------
The following table presents the percentage of total revenue for the periods
indicated and changes from period to period of certain items included in the
Company's Consolidated Statements of Operations.
% For Period -to-Period
Year Ended % Changes
November 30, ---------
------------- 2002 2001 2000
vs. vs. vs.
2002 2001 2000 2001 2000 1999
---- ---- ---- ---- ---- ----
Sales 100.0 100.0 100.0 58.9 179.3 40.8
Cost of sales 44.0 41.1 49.6 69.9 131.7 22.1
----- ----- -----
Gross profit 56.0 58.9 50.4 51.2 226.2 65.7
Selling, general and administrative
expenses 45.4 67.6 106.0 6.7 78.1 31.3
Research and development expenses 7.9 9.5 18.3 32.0 44.5 (8.3)
Debt conversion expense - - 1.3 * * (94.8)
----- ----- -----
Income (loss) from operations 2.7 (18.2) (75.2) * (32.4) (23.6)
Gain on sale of investments .5 .3 .5 146.5 57.0 *
Other Income 2.1 2.9 4.7 13.9 74.0 96.2
Interest expense (.1) (.2) (1.2) (44.5) (50.2) (76.9)
Loss in operations of joint venture (.4) (.5) (5.1) 11.8 (70.9) *
----- ----- -----
Income (loss) before income tax benefit 4.8 (15.7) (76.3) * (42.4) (24.6)
(provision)
Gain on sale of state tax benefits 1.0 2.7 10.8 (40.9) (29.0) *
Provision for state income taxes .3 - - * * *
----- ----- -----
Net income (loss) 5.5 (13.0) (65.5) * (44.6) (35.2)
Other comprehensive income (loss)
Unrealized gain (loss) on securities
available for sale (.5) .4 - * * *
Reclassification adjustment for gains
included in net income .5 - - * * *
----- ----- -----
Comprehensive income (loss) 5.8 (12.6) (65.5) * (46.3) (35.2)
===== ===== =====
*Not meaningful
27
Fiscal 2002 Compared to Fiscal 2001
- --------------------------------------------------------------------------------
Revenues for fiscal 2002 increased $4.7 million or 59% from fiscal 2001 due to
an increase in the number of health plan contracts as well as the increase in
the number of members actually enrolled in our program during the fiscal year
which were previously contracted for. At the end of fiscal 2002 we had
approximately 1,370,480 commercial members and approximately 198,696
Medicare+Choice members compared to approximately 913,627 commercial members and
159,419 Medicare+Choice at the end of fiscal 2001. Approximately $1.5 million of
revenue came from new contracts that were implemented during 2002. The largest
portion of our revenue increase was due to the increased enrollment during this
fiscal year of contracts signed during fiscal 2001. Approximately $2.8 million
was due to increased enrollment in one health plan whose total revenue accounted
for approximately 39% of our total revenue for fiscal 2002. We anticipate that
revenue for fiscal 2003 will increase over fiscal 2002 revenues primarily from
additional members enrolled under our existing and anticipated new health plan
contracts as well as the growth in governmental contracts with CMS for the
Medicare fee for service market.
During fiscal 2002, we sold unused state net operating loss carryforwards for
cash by way of the New Jersey Technology Tax Certificate Transfer Program
through our IHMC subsidiary. We received approximately $130,000 from this
transaction.
Cost of revenue for fiscal 2002 increased $2.3 million or 70% compared to fiscal
2001 primarily due to higher staffing levels associated with the increases in
enrollment of our health plan members, associated travel costs, physician's fees
and related expenses. Cost of revenue as a percentage of total revenue increased
to 44% in fiscal 2002 from 41% in fiscal 2001. This increase was primarily due
to the costs associated with the staffing and continued enrollment of members in
Regence of Oregon and Washington during fiscal 2002 where revenues from these
contracts were not being recognized. We anticipate that the cost of revenue for
fiscal 2003 will increase over fiscal 2002 due to the implementation of the CMS
(Medicare) contract, where revenue will lag implementation costs by several
months.
Selling, general and administrative costs in fiscal 2002 increased by
approximately $365,500 or 7% compared to fiscal 2001 primarily due to increased
administrative staff to support our overall growth. Selling general and
administrative expenses as a percentage of revenue decreased from 67.6% in
fiscal 2001 to 45.4% in fiscal 2002 primarily due to our ability to leverage our
selling, general and administrative expenses as a result of the growth in our
health plan operations.
Research and development expenses for fiscal 2002 increased by approximately
$243,000 or 32% compared to fiscal 2001. During the past year we have focused
our efforts primarily on the development of new, advanced software programs to
enable us to better identify, locate and evaluate patients who are at risk for
developing various disease conditions. These programs incorporate state of the
art telecommunications, data management, security and information technology. We
intend to continue to improve and expand the capabilities of our systems
ongoing.
28
Fiscal 2001 Compared to Fiscal 2000
- --------------------------------------------------------------------------------
Total revenues for fiscal 2001 increased by approximately $5,149,000 or 179.3%
when compared to fiscal 2000. The total revenue increase consists of an increase
in the disease management segment of approximately $5,474,000 or 266% compared
to fiscal 2000 offset by a decrease in medical equipment sales of approximately
$325,000 or 40% compared to fiscal 2000. The increase in revenues from 2000 to
2001 primarily resulted from an increase in total membership from health plan
contracts for our disease management business segment to approximately 1.1
million members for fiscal 2001 compared to approximately 400,000 members for
fiscal 2000. This increase was primarily the result of new health plan contracts
signed and implemented during fiscal 2000 and 2001. At November 30, 2001, of the
1,073,046 plan members under contract, we had 913,627 commercial members and
159,419 Medicare+Choice members. Revenue for Medicare+Choice members is
significantly higher than commercial members. We did not have a significant
number of Medicare+Choice members in fiscal 2000. We expect to have a slightly
higher percentage of Medicare+Choice membership in fiscal 2002, and, if this
occurs, increases in revenue may result primarily from this change in membership
mix. We expect revenue growth for 2002 to continue to increase over 2001 as a
result of additional members enrolled under our existing contracts as well as
anticipated new health plan contracts during fiscal 2002.
During fiscal 2001, we sold unused state net operating loss carryforwards for
cash by way of the New Jersey Technology Tax Certificate Transfer Program
through our IHMC subsidiary. We received approximately $220,000 from this
transaction. We also had remaining tax benefits, which were sold as part of the
program during fiscal 2002 in which we received approximately $130,000.
Gross profit margins increased to 58.9% in fiscal 2001 from 50.4% in fiscal
2000. The increase was primarily the result of revenue growth in the disease
management segment. During fiscal 2001 we were able to contract with different
plans within the same geographic area, which also assisted in improving gross
margins.
Selling, general and administrative expenses for the year ended November 30,
2001 increased by approximately $2,379,000 or 78.1% when compared to fiscal
2000. The increase includes a non-recurring charge of $354,000 associated with
an executive employee's compensation expense and severance payment. Without this
charge, selling general and administrative expenses would have increased by
approximately $2,025,000 or 66.5% when compared to 2000. The increase primarily
resulted from an increase in salaries and benefits associated with increased
staff to support the higher levels of members enrolled in our disease management
programs, incentive payments for new contracts and achievement of targeted
performance goals. We expect selling, general and administrative expenses to
continue to increase as we add more health plan contracts, increase staffing
levels and increase employee compensation associated with improvement of
operating performance.
Research and development expenses increased in fiscal 2001 by approximately
$233,000 or 44.5% when compared to fiscal 2000. The increase is primarily the
increase in staffing levels in our Information Technology department. We have
29
dedicated these resources primarily on new product software development and
upgrades to existing technology in order to support our current operations, new
disease states managed and the increased volume of patients associated.
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
To date, our principal sources of working capital have been provided by proceeds
from public and private placements of securities and the sale of certain assets.
Since our inception, sales of securities and assets have generated approximately
$31,000,000 less applicable expenses.
We had working capital of $6,718,300 at November 30, 2002 compared to $5,749,732
at November 30, 2001 and ratios of current assets to current liabilities of
3.1:1 as of November 30, 2002 and 5.0:1 as of November 30, 2001. The working
capital increase of approximately $1,000,000 was primarily due to the net income
of approximately $700,000 and proceeds from the sale of common stock through the
exercise of outstanding options and warrants of approximately $1,500,000. In
September 2001 we entered into a $1,000,000 line of credit agreement with First
Union National Bank. Outstanding balances under the loan bear interest at an
annual rate equal to the lower of the bank's reference rate minus 1% or LIBOR
plus 1.5%. As of November 30, 2002 the entire $1,000,0000 was available under
this credit line.
We anticipate that funds generated from operations, together with cash and
investments, and availability under our credit line will be sufficient to fund
our current level of growth. However, to the extent the expansion of our
operations requires significant additional resources or certain forms of
financial guarantees to assure its performance under the terms of new health
plan contracts, we may be required to seek additional financing. No assurance
can be given that such financing would be available on terms that would be
acceptable to us.
Material Commitments
- --------------------------------------------------------------------------------
The following schedule summarizes our contractual cost obligation as of
November 30, 2002 in the periods indicated.
- ---------------------------------------- --------------------------------------------------------------------------------
Contractual Payments Due by Period
Obligations --------------- --------------- ---------------- --------------- ---------------
Total Less than 1 1-3 years 4-5 years After 5 years
year
- ---------------------------------------- --------------- --------------- ---------------- --------------- ---------------
Long-Term Debt -0- -0- -0- -0- -0-
- ---------------------------------------- --------------- --------------- ---------------- --------------- ---------------
Capital Lease Obligations $ 95,532 $ 56,258 $ 39,274
- ---------------------------------------- --------------- --------------- ---------------- --------------- ---------------
Operating Leases 2,465,750 757,910 1,462,024 $ 245,816
- ---------------------------------------- --------------- --------------- ---------------- --------------- ---------------
Unconditional Purchase Obligations -0- -0- -0- -0- -0-
- ---------------------------------------- --------------- --------------- ---------------- --------------- ---------------
Other Long-Term Obligations -0- -0- -0- -0- -0-
- ---------------------------------------- --------------- --------------- ---------------- --------------- ---------------
Total Contractual Cash Obligations $ 2,561,282 $ 814,168 $ 1,501,298 $ 245,816 -0-
- ---------------------------------------- --------------- --------------- ---------------- --------------- ---------------
30
- ---------------------------------------- --------------------------------------------------------------------------------
Other Commercial Commitments
--------------------------------------------------------------------------------
Amount of Commitment Expiration
Per Period
- ---------------------------------------- --------------- --------------- ---------------- --------------- ---------------
Total Amounts Less than 1 1-3 years 4-5 years After 5 years
Committed year
- ---------------------------------------- --------------- --------------- ---------------- --------------- ---------------
Line of Credit -0- -0- -0- -0- -0-
- ---------------------------------------- --------------- --------------- ---------------- --------------- ---------------
Standby Letters of Credit -0- -0- -0- -0- -0-
- ---------------------------------------- --------------- --------------- ---------------- --------------- ---------------
Guarantees -0- -0- -0- -0- -0-
- ---------------------------------------- --------------- --------------- ---------------- --------------- ---------------
Standby Repurchase Obligations -0- -0- -0- -0- -0-
- ---------------------------------------- --------------- --------------- ---------------- --------------- ---------------
Other Commercial Commitments -0- -0- -0- -0- -0-
- ---------------------------------------- --------------- --------------- ---------------- --------------- ---------------
Total Commercial Commitments -0- -0- -0- -0- -0-
- ---------------------------------------- --------------- --------------- ---------------- --------------- ---------------
Additional Factors That May Affect Future Results
- --------------------------------------------------------------------------------
Future Operating Results. Future operating results, which reflect management's
current expectations may be impacted by a number of factors that could cause
actual results to differ materially from those stated herein. These factors
include worldwide economic and political conditions, terrorist's activities,
industry specific factors, our ability to maintain access to external financing
sources and its financial liquidity, the acceptance of our disease management
system by health plan organizations, and our ability to manage expense levels.
Need for Additional Capital. As of November 30, 2002, we had approximately
$9,257,000 cash and short-term investments. Nevertheless, our future success is
highly dependent upon our continued access to capital markets, which we believe
are necessary for the continued support of our growth. In the event we are
unable to maintain access to our existing financing sources, or obtain other
sources of financing, there would be a material adverse effect on our business,
financial position and results of operations.
Fluctuations in our quarterly operating results may cause volatility in the
price of our common stock and the debentures. Given the nature of the markets in
which we participate, we cannot reliably predict future revenue and
profitability. As demand for our services has increased in recent periods, our
quarterly sales and operating results have become highly dependent on the timing
of contracts signed and programs implemented during the quarter, which are
difficult to forecast. In addition, a portion of our operating expenses is
relatively fixed in nature due to our sales, research and development costs.
We are in the process of implementing new information systems, and problems with
the redesign and implementation of these new systems could interfere with our
operations. We are in the process of implementing new information systems to
enhance our current systems in order to improve our operating effectively and
expand the range of disease management services we offer. We may not be
successful in implementing these new systems and transitioning data. As part of
this effort, we are implementing new enterprise resource planning software
31
applications to manage our business operations. Failure to smoothly and
successfully implement this and other systems could temporarily interrupt our
operations and adversely impact our ability to run our business. In addition,
any failure or significant downtime in our new information systems could prevent
us from efficiently implementing disease management programs, reconciling cost
savings and could harm our business.
If we do not introduce successful new disease management services in a timely
manner, our services will become obsolete, and our operating results will
suffer. Our services are for industries that are characterized by rapid
technological changes, frequent new product and service introductions and
changing industry standards. Without the timely introduction of new products,
services and enhancements, our products and services will become technologically
obsolete over time, in which case our revenue and operating results would
suffer. The success of our new product and service offerings will depend on
several factors, including our ability to:
o properly identify customer needs,
o innovate and develop new technologies, services and
applications,
o successfully commercialize new technologies in a timely
manner,
o differentiate our offerings from our competitors' offerings,
o price our services competitively, and
o anticipate our competitors' announcements of new products,
services or technological innovations
Our business will suffer if we are not able to retain and hire key personnel.
Our future success depends partly on the continued service of our key research,
engineering, sales, marketing, manufacturing, executive and administrative
personnel. If we fail to retain and hire a sufficient number of these personnel,
we will not be able to maintain or expand our business. Although the labor
market has changed dramatically within the past year, and our attrition rate has
dropped, there is still intense competition for certain highly technical
specialties in geographic areas where we continue to recruit.
Acquisitions, strategic alliances, and joint ventures may result in financial
results that are different than expected. We engage in discussions with third
parties relating to possible acquisitions, strategic alliances, and joint
ventures. As a result of such transactions, our financial results may differ
from the investment community's expectations in a given quarter. In addition,
acquisitions and strategic alliances may require us to integrate a different
company culture, management team and business infrastructure. We may have
difficulty developing, manufacturing and marketing the products of a newly
acquired company in a way that enhances the performance of our combined
businesses or product lines to realize the value from expected synergies.
Depending on the size and complexity of an acquisition, our successful
integration of the entity depends on a variety of factors, including:
o the retention of key employees,
o the management of facilities and employees in separate
geographic areas,
o the retention of key customers, and
32
o the integration or coordination of different research and
development, product manufacturing and sales programs and
facilities
All of these efforts require varying levels of management resources, which may
divert our attention from other business operations. If we do not realize the
expected benefits from such transactions, our financial position results and
stock price could be negatively impacted.
We and our customers are subject to various governmental regulations, compliance
with which may cause us to incur significant expenses, and if we fail to
maintain satisfactory compliance with certain regulations, we may be forced to
curtail operations, and we could be subject to civil or criminal penalties. Our
businesses are subject to various significant federal, state and local, health
and safety, health information disclosure, and labor regulations. These
regulations are complex, change frequently and have tended to become more
stringent over time. We may be required to incur significant expenses to comply
with these regulations or to remedy violations of these regulations. Any failure
by us to comply with applicable government regulations could also result in
cessation of our operations or portions of our operations, or impositions of
fines and restrictions on our ability to carry on or expand our operations.
Litigation regarding patents or intellectual property could be costly and time
consuming. Any litigation regarding patents or other intellectual property could
be costly and time consuming and could divert our management and key personnel
from our business operations. The complexity of the technology involved and the
uncertainty of intellectual property litigation increase these risks. Claims of
intellectual property infringement might also require us to enter into costly
royalty or license agreements. However, we may not be able to obtain royalty or
license agreements on terms acceptable to us, or at all. We also may be subject
to significant damages or injunctions against development and sale of certain of
our products.
Third parties may infringe our intellectual property, and we may expend
significant resources enforcing our rights or suffer competitive injury. Our
success depends in large part on our proprietary technology. We rely on a
combination of patents, copyrights, trademarks, trade secrets, confidentiality
provisions and licensing arrangements to establish and protect our proprietary
rights. If we fail to successfully enforce our intellectual property rights, our
competitive position could suffer, which could harm our operating results.
Our pending patent and trademark registration applications may not be allowed,
or competitors may challenge the validity or scope of these patents or trademark
registrations. In addition, our patents may not provide us a significant
competitive advantage.
We may be required to spend significant resources to monitor and police our
intellectual property rights. We may not be able to detect infringement and our
competitive position may be harmed before we do so. In addition, competitors may
design around our technology or develop competing technologies. Intellectual
property rights may also be unavailable or limited in some foreign countries,
which could make it easier for competitors to capture market share.
33
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
- --------------------------------------------------------------------
Quantitative and qualitative disclosures about market risk as set forth in Note
2 of the Notes to Consolidated Financial Statement.
Item 8. Financial Statements and Supplementary Data.
- ----------------------------------------------------
Attached.
Item 9. Disagreements on Accounting and Financial Disclosure.
- -------------------------------------------------------------
None.
34
QMED, INC. AND SUBSIDIARIES
For the Years Ended
November 30, 2002 and 2001
Page
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Comprehensive Income F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F-26
Independent Auditors' Report
Board of Directors
QMed, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of QMed, Inc. and
Subsidiaries as of November 30, 2002 and 2001, and the related consolidated
statements of operations, comprehensive income, stockholders' equity and cash
flows for the years ended November 30, 2002, 2001 and 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly in all
material respects the financial position of QMed, Inc. and Subsidiaries as of
November 30, 2002 and 2001, and the results of their operations and their cash
flows for each of the three years ended November 30, 2002, 2001 and 2000, in
conformity with accounting principles generally accepted in the United States of
America.
In connection with our audits of the financial statements referred to above, we
audited the financial schedule listed under Item 15. In our opinion, the
financial schedule, when considered in relation to the financial statements
taken as a whole, presents fairly, in all material respects, the information
stated therein.
/s/ Amper, Politziner & Mattia, P.C.
AMPER, POLITZINER & MATTIA, P.C.
February 4, 2003
Edison, New Jersey
F-1
QMED, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
November 30,
Assets
2002 2001
----------------- ----------------
Current assets
Cash and cash equivalents $ 2,383,123 $ 531,450
Investments in securities 6,873,491 5,436,290
Accounts receivable, net of allowance for
doubtful accounts of $2,000 and $75,000 203,216 886,028
Inventory 173,046 178,386
Prepaid expenses and other current assets 344,667 159,787
----------------- ----------------
9,977,543 7,191,941
Property and equipment, net of accumulated depreciation 1,168,002 466,456
Product software development costs, net 461,261 277,812
Other assets 556,375 231,302
Investment in joint venture - -
----------------- ----------------
$ 12,163,181 $ 8,167,511
================= ================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 1,015,084 $ 435,479
Lease payable, current portion 46,980 53,034
Accrued salaries and commissions 334,642 498,815
Fees reimbursable to health plans 3,050 15,524
Contract billings in excess of revenues 1,760,620 360,524
Deferred warranty revenue 58,867 78,833
Income taxes payable 40,000 -
----------------- ----------------
3,259,243 1,442,209
Leases payable, long term 35,948 30,781
----------------- ----------------
3,295,191 1,472,990
----------------- ----------------
Commitments and contingencies
Stockholders' equity
Common stock, $.001 par value, 40,000,000 shares
authorized, 14,506,153 and 14,175,713 shares issued
14,484,153 and 14,153,713 outstanding, respectively 14,506 14,175
Paid-in capital 33,079,409 31,541,800
Accumulated deficit (24,113,196) (24,818,342)
Accumulated other comprehensive income
Unrealized (losses) gains on securities available for sale (37,104) 32,513
----------------- ----------------
8,943,615 6,770,146
Less treasury stock at cost, 22,000 common shares (75,625) (75,625)
----------------- ----------------
Total stockholders' equity 8,867,990 6,694,521
----------------- ----------------
$ 12,163,181 $ 8,167,511
================= ================
See accompanying notes to consolidated financial statements.
F-2
QMED, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended November 30,
2002 2001 2000
------------------ ------------------- ------------------
Sales
Disease management services $ 12,324,877 $ 7,534,931 $ 2,060,461
Medical equipment 419,877 486,703 811,744
------------------ ------------------- ------------------
12,744,754 8,021,634 2,872,205
------------------ ------------------- ------------------
Cost of sales
Disease management services 5,392,550 3,017,380 937,560
Medical equipment 215,013 283,146 487,219
------------------ ------------------- ------------------
Cost of sales 5,607,563 3,300,526 1,424,779
------------------ ------------------- ------------------
Gross profit 7,137,191 4,721,108 1,447,426
Selling, general and administrative expenses 5,789,730 5,424,183 3,045,052
Research and development expenses 999,985 757,355 524,275
Debt conversion expense - - 38,623
------------------ ------------------- ------------------
Income (loss) from operations 347,476 (1,460,430) (2,160,524)
Gain on sale of investments 59,598 24,180 15,406
Other income 264,860 232,607 133,668
Interest expense (9,173) (16,517) (33,168)
Loss in operations of joint venture (47,500) (42,500) (146,148)
------------------ ------------------- ------------------
Income (loss) before income tax benefit (provision) 615,261 (1,262,660) (2,190,766)
Gain on sale of state tax benefits 129,885 219,603 309,256
Provision for state income taxes (40,000) - -
------------------ ------------------- ------------------
Net income (loss) $ 705,146 $ (1,043,057) $ (1,881,510)
================== =================== ==================
Basic income (loss) per share
Weighted average shares outstanding 14,433,922 13,866,216 12,650,831
================== =================== ==================
Basic earnings (loss) per share $ .05 $ (.08) $ (.15)
================== =================== ==================
Diluted income (loss) per share
Weighted average shares outstanding 16,587,169 13,866,216 12,650,831
================== =================== ==================
Diluted earnings (loss) per share $ .04 $ (.08) $ (.15)
================== =================== ==================
See accompanying notes to consolidated financial statements.
F-3
QMED, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Years Ended November 30,
2002 2001 2000
------------------ ------------------ ------------------
Net income (loss) $ 705,146 $ (1,043,057) $ (1,881,510)
Other comprehensive income (loss)
Unrealized gain (loss) on securities
available for sale (69,617) 32,513 -
Reclassification adjustment for
gains included in net income 59,598 - -
------------------ ------------------ ------------------
Comprehensive income (loss) $ 695,127 $ (1,010,544) $ (1,881,510)
================== =================== ==================
See accompanying notes to consolidated financial statements.
F-4
QMED, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Years Ended November 30,
Accumulated Common Stock
Other Held in Treasury
Common Stock Paid-in Accumulated Comprehensive ------------------
Shares Amount Capital Deficit Income Shares Amount Total
---------- ------- ----------- ------------ ------------- ------ -------- -----------
Balances - November 30, 1999 12,258,781 $12,259 $23,098,930 $(21,893,775) $ - 22,000 $(75,625) $ 1,141,789
Exercise of stock options and
warrants for cash 74,521 73 167,580 - - - - 167,653
Sale of stock to Quest
Diagnostics for cash 285,714 286 1,984,714 - - - - 1,985,000
Sale of stock to private
investor for cash 163,300 163 1,000,049 - - - - 1,000,212
Stock issued in conversion
of debt 64,315 65 184,517 - - - - 184,582
Securities issued to induce
debt conversion - - 38,623 - - - - 38,623
Amortization of non-employee
stock options - - 14,934 - - - - 14,934
Net loss - - - (1,881,510) - - - (1,881,510)
---------- ------- ----------- ------------ -------- ------ -------- -----------
Balances - November 30, 2000 12,846,631 12,846 26,489,347 (23,775,285) - 22,000 (75,625) 2,651,283
Exercise of stock options
and warrants 532,269 532 868,890 - - - - 869,422
Sale of stock to Galen
Associates for cash 796,813 797 3,954,361 - - - - 3,955,158
Stock compensation expense - - 199,334 - - - - 199,334
Amortization of non-employee
options - - 29,868 - - - - 29,868
Net loss - - - (1,043,057) - - - (1,043,057)
Unrealized holding gains on
securities available for sale - - - - 32,513 - - 32,513
---------- ------- ----------- ------------ -------- ------ -------- -----------
Balances - November 30, 2001 14,175,713 14,175 31,541,800 (24,818,342) 32,513 22,000 (75,625) 6,694,521
Exercise of stock options
and warrants 330,440 331 1,507,741 - - - - 1,508,072
Amortization of non-employee
stock options - - 29,868 - - - - 29,868
Net income - - - 705,146 - - - 705,146
Unrealized holding losses on
securities available for sale - - - - (69,617) - - (69,617)
---------- ------- ----------- ------------ -------- ------ -------- -----------
Balances - November 30, 2002 14,506,153 $14,506 $33,079,409 $(24,113,196) $(37,104) 22,000 $(75,625) $ 8,867,990
========== ======= =========== ============ ======== ====== ======== ===========
See accompanying notes to consolidated financial statements.
F-5
QMED, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended November 30,
2002 2001 2000
--------------- --------------- ---------------
Cash flows from operating activities
Net income (loss) $ 705,146 $ (1,043,057) $ (1,881,510)
--------------- --------------- ---------------
Adjustments to reconcile net loss to
net cash (used) by operating activities
Gain on sale of investments (59,598) (24,180) (15,406)
Loss in operations of joint venture 47,500 42,500 146,148
Depreciation and amortization 258,179 272,601 248,732
Debt conversion expense - 38,623
Stock compensation expense - 199,334 -
Amortization of non-employee stock options 29,868 29,868 14,934
(Increase) decrease in
Accounts receivable 682,813 (800,612) 85,241
Inventory 5,340 10,277 184,079
Prepaid expenses and other current assets (184,880) (5,002) (120,129)
Increase (decrease) in
Accounts payable and accrued liabilities 402,958 485,071 101,404
Contract billings in excess of revenues 1,380,130 315,475 -
Income taxes payable 40,000 - -
Other (75,270) 2,573 (14,869)
--------------- --------------- ---------------
Total adjustments 2,527,040 527,905 668,757
--------------- --------------- ---------------
3,232,186 (515,152) (1,212,753)
--------------- --------------- ---------------
Cash flows from investing activities
Proceeds from sale of securities available for sale 16,933,028 8,399,747 1,700,000
Purchase of securities available for sale (18,380,248) (12,213,094) (3,335,844)
Capital expenditures (1,353,836) (516,967) (297,292)
Proceeds from sale of investments - 85,000 -
Investment in joint venture (47,500) (42,500) (146,148)
--------------- --------------- ---------------
(2,848,556) (4,287,814) (2,079,284)
--------------- --------------- ---------------
Cash flows from financing activities
Net proceeds from issuance of common
stock and put options 1,508,072 4,824,580 3,152,865
Payments on capital leases (40,029) (66,701) (78,721)
--------------- --------------- ---------------
1,468,043 4,757,879 3,074,144
--------------- --------------- ---------------
Net change in cash and cash equivalents 1,851,673 (45,087) (217,893)
Cash and cash equivalents - beginning 531,450 576,537 794,430
--------------- --------------- ---------------
Cash and cash equivalents - ending $ 2,383,123 $ 531,450 $ 576,537
=============== =============== ===============
Supplemental disclosure of cash paid
Interest $ 9,173 $ 16,517 $ 152,963
Income taxes 10,572 10,112 6,834
Non-cash investing and financing activities:
On January 8, 2001, the Company received a note receivable in the amount of
$91,059 from an employee for the exercise of stock options. The note was paid on
August 29, 2001.
See accompanying notes to consolidated financial statements.
F-6
QMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Significant Accounting Policies
- ----------------------------------------
Nature of Business
------------------
QMed, Inc. (the "Company") operates in two industry segments:
disease-management services and medical equipment sales. The majority
of the Company's operations consist of the operations of Interactive
Heart Management Corp. ("IHMC"), the Company's wholly owned subsidiary.
The Company and IHMC provide disease management services to health
plans nationwide.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company, IHMC and the Company's majority-owned (83%) inactive
subsidiary, Heart Map, Inc. All intercompany accounts and transactions
have been eliminated in consolidation. Investments in joint ventures
are accounted for under the equity method.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents for financial
statement purposes.
Concentration of Credit Risk
----------------------------
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of cash and cash investments. The
Company restricts cash and cash investments to financial institutions
with high credit standings. The Company has not experienced any losses
on its deposits of cash and cash equivalents.
Investments in Securities
-------------------------
The Company accounts for investments in securities pursuant to the
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Under this
Statement, the Company's securities with a readily determinable fair
value have been classified as available for sale and are carried at
fair value with an offsetting adjustment to Stockholders' Equity. Net
unrealized gains and losses on marketable securities are credited or
charged to accumulated other comprehensive income.
Inventory
---------
Inventory consists of finished units, components and supplies, and is
stated at the lower of cost (moving weighted-average method) or market.
Depreciation and Amortization
-----------------------------
Property and equipment are carried at cost. Depreciation is computed
using the straight-line method over a five-year period. Leasehold
improvements are amortized on a straight-line basis over the term of
the lease. Repair and maintenance costs are expensed, while additions
and betterments are capitalized. The cost and related accumulated
depreciation of assets sold or retired are eliminated from the accounts
and any gains or losses are reflected in earnings.
F-7
QMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Significant Accounting Policies - (continued)
- ------------------------------------------------------
Comprehensive Income
--------------------
Comprehensive income as defined includes all changes in equity during a
period from non-owner sources. Accumulated other comprehensive income,
as presented on the accompanying consolidated balance sheets consists
of unrealized gains on securities, net of income tax.
Financial Instruments
---------------------
The carrying amounts of financial instruments, including cash and cash
equivalents, accounts receivable and accounts payable approximated fair
value as of November 30, 2002, because of the relative short maturity
of these instruments. The carrying value of leases payable approximated
fair value at November 30, 2002, based upon current rates for the same
or similar instruments.
Product Software Development Costs
----------------------------------
The Company recognizes Product Software development costs in accordance
with Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." As such, the
Company expenses all costs incurred that relate to the planning and
post implementation phases of development. Costs incurred in the
development phase are capitalized and amortized over the estimated
useful life of the software developed, which is generally five years.
Stock-Based Compensation
------------------------
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock Based Compensation," ("SFAS 123") allows a company to adopt a
fair value based method of accounting of its stock-based compensation
plans or continue to follow the intrinsic value method of accounting
prescribed by Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees." The Company accounts for
stock-based compensation in accordance with the provisions of APB No.
25, and complies with the disclosure provision of SFAS No. 123. Under
APB No. 25, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at
the date of the grant over the amount an employee must pay to acquire
the stock.
The Company accounts for stock issued to non-employees in accordance
with the provisions of SFAS 123 and the Emerging Issues Task Force
("EITF") Issue No. 96-18, "Accounting for Equity Instruments that are
Issued to other than Employees for Acquiring, or in Conjunction with
Selling Goods or Services." Under SFAS 123, the cost is measured at the
fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measured.
F-8
QMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Significant Accounting Policies - (continued)
- ------------------------------------------------------
Revenue Recognition
-------------------
The Company enters into contractual arrangements with health plans to
provide disease management services. Fees under the Company's health
plan contracts are generally determined by multiplying a contractually
negotiated rate per health plan member per month ("PMPM") by the number
of health plan members covered by the Company's services during the
month. The PMPM rates usually differ between contracts due to the
various types of health plan product groups (e.g. PPO, HMO, Medicare).
These contracts are generally for terms of three to five years with
provisions for subsequent renewal, and typically provide that all or a
portion of the Company's fees may be "performance-based."
Performance-based contracts have varying degrees of risk associated
with the Company's ability to deliver the guaranteed financial cost
savings. In most cases the Company guarantees an annual percentage
reduction of disease costs compared to a prior baseline period
determined by comparative analysis and other actuarial estimates used
as a basis to measure performance objectives. The measurement of the
Company's performance against the baseline period is a data intensive
and time consuming process that is typically not completed until six to
eight months after the end of a specific measurement year of the
Contract. The Company bills its customers each month for the entire
amount of the fees due based on previous months membership, which
always includes the amount, if any that may be subject to refund for
member retroactivity and a shortfall in performance. The Company
adjusts or defers revenue for contracts where we believe that there
could be an issue of non-performance, possibly resulting in a refund of
fees or where fees generated may be subject to further retroactive
adjustment associated with general membership changes and/or a plan's
decision to completely terminate its coverage in a geographic market as
well. For example, general membership changes can be terminations due
to death, member change of health plan, etc. These adjustments are
accounted for on a monthly basis. Adjustments for non-performance under
the terms of the contract or other factors affecting revenue
recognition of a contract are accrued on an estimated basis in the
period the services are provided and are adjusted in future periods
when final settlement is determined. These estimates are periodically
reviewed and adjusted, as interim information is available.
The Company determines its level of performance at interim periods
based on medical claims data, achievement of enrollment targets or
other data required to be supplied by the health plan. In the event
these interim performance measures indicate that performance targets
are not being met or sufficient data is unavailable, fees subject to
refund are not recorded as revenues but rather are recorded as a
current liability entitled "contract billings in excess of revenues."
Under performance based arrangements, the ability to make estimates at
interim periods can be challenging due to the inherent nature of the
medical claims process and the claims lag time associated with it. In
most cases, paid claims data is not available until up to six months
after claims are incurred. Although interim data measurement is
indicative of performance objectives, actual results could differ from
those estimates. As of November 30, 2002, based on information and data
available, the Company has deferred approximately $1,800,000 of
revenue, which may be subject to refund. This deferral has been
reflected as contract billings in excess of revenues on the balance
sheet.
F-9
QMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Significant Accounting Policies - (continued)
- ------------------------------------------------------
Revenue Recognition - (continued)
---------------------------------
During the fiscal years ended November 30, 2002, and 2001,
approximately 47% and 67%, respectively, of disease management services
were derived from two health plans that each comprised more than 10% of
the Company's revenues. During fiscal 2000 revenues from five health
plans comprised more than 10% of the Company's revenue.
Medical Equipment
-----------------
Revenue is recognized on equipment sales when the equipment is shipped
and title passes. Management establishes estimated accruals for returns
from customers, and for allowances granted to them at the time of
shipment. For the years ended November 30, 2002, 2001 and 2000, there
have been no sales returns or allowances.
During 2002 and 2001, the Company sold extended one-year service
warranty contracts to customers. Prior to fiscal 2001, the Company also
sold two and three year contracts and recognized the revenue over the
period of the contracts based on the historical pattern of costs
incurred. Such related costs, incurred over contract years one, two,
and three, are 76%, 17% and 7%, respectively. Revenue on one-year
warranty contracts is recognized on a straight-line basis over the life
of the contract.
Research and Development Expenses
---------------------------------
Costs associated with the development of new products and changes to
existing products are charged to operations as incurred.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Income Taxes
------------
The Company recognizes deferred tax assets and liabilities based on
differences between the financial reporting and tax basis of assets and
liabilities using the enacted tax rates and laws that are expected to
be in effect when the differences are expected to be recovered. The
Company provides a valuation allowance for deferred tax assets for
which it does not consider realization of such assets to be more likely
than not.
F-10
QMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Significant Accounting Policies - (continued)
- ------------------------------------------------------
Earnings (Loss) Per Share
-------------------------
Basic earnings (loss) per share are computed by dividing income (loss)
available to common shareholders by the weighted-average number of
common shares outstanding during the period. Diluted earnings (loss)
per share are computed by dividing income (loss) available to common
shareholders by the weighted-average number of common shares
outstanding during the period increased to include the number of
additional common shares that would have been outstanding if the
dilutive potential common shares had been issued. The dilutive effect
of the outstanding options would be reflected in diluted earnings
(loss) per share by application of the treasury stock method.
New Accounting Pronouncements
-----------------------------
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." The provisions of SFAS No. 141 apply to all business
combinations initiated after June 30, 2001 and prohibit the use of the
pooling-of-interest method for those business combinations.
Furthermore, SFAS No. 141 applies to all business combinations
accounted for by the purchase method for which the date of acquisition
is July 1, 2001, or later. SFAS No. 142, requires that upon adoption,
amortization of goodwill and indefinite life intangible assets will
cease and instead, the carrying value of goodwill and indefinite life
intangible assets will be evaluated for impairment at least on an
annual basis; impairment of carrying value will be evaluated more
frequently if certain indicators are encountered. Identifiable
intangible assets with a determinable useful life will continue to be
amortized over that period and reviewed for impairment in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001. The Company adopted
SFAS No. 142 in the first quarter of fiscal 2002 and it did not have
any impact resulting on its financial position and results of
operations.
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which supersedes SFAS No. 121 and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." This statement retains certain
requirements of SFAS No. 121 relating to the recognition and
measurement of impairment of long-lived assets to be held and used.
Additionally, this statement results in one accounting model, based on
the framework established in SFAS No. 121, for long-lived assets to be
disposed of by sales and also addresses certain implementation issues
related to SFAS No. 121, including the removal of goodwill from its
scope due to the issuance of SFAS No. 142. SFAS No. 144 is effective
for fiscal years beginning after December 15, 2001, and interim periods
within those fiscal years. The Company does not anticipate any impact
from the adoption of SFAS No. 144 on its financial position and results
of operations.
F-11
QMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Significant Accounting Policies - (continued)
- ------------------------------------------------------
New Accounting Pronouncements - (continued)
-------------------------------------------
In April 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 145 ("SFAS 145"),
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections," which is effective for
fiscal years beginning after May 15, 2002, with earlier application
encouraged. Under SFAS 145, gains and losses from extinguishment of
debt will no longer be aggregated and classified as an extraordinary
item, net of related income tax effect, on the statement of earnings.
The Company plans to adopt SFAS 145 in the first quarter of fiscal year
2003 and believes that it will have no impact on its financial position
or results of operations.
In June 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 146 ("SFAS 146"), "Accounting for
Costs Associated with Exit or Disposal Activities," which is effective
for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. SFAS 146 requires recognition
of a liability for the costs associated with an exit or disposal
activity when the liability is incurred, as opposed to when the entity
commits to an exit plan as required under EITF Issue No. 94-3. SFAS 146
will primarily impact the timing of the recognition of costs associated
with any future exit or disposal activities. The Company plans to adopt
SFAS 146 in the first quarter of fiscal year 2003 and believes that it
will have no impact on its financial position or results of operations.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure." SFAS 148 amends SFAS 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of
transaction for an entity that voluntarily changes to the fair value
based method of accounting for stock-based compensation. It also amends
the disclosure provisions of that statement. The disclosure provisions
of this statement are effective for financial statements issued for
fiscal periods beginning after December 15, 2002 and will become
effective for the Company commencing with the second quarter of our
2003 fiscal year. We do not currently have plans to change to the fair
value method of accounting for our stock based compensation.
Note 2 - Investments in Securities
- ----------------------------------
Investments in securities available-for-sale as of November 30, 2002
and 2001 were as follows:
Market Unrealized
2002 Cost Value Gain (Loss)
---- ---- ----- -----------
Corporate debt securities $ 3,324,474 $ 3,287,549 $ (36,925)
Government debt securities 3,586,121 3,585,942 (179)
-------------- -------------- ---------------
$ 6,910,595 $ 6,873,491 $ (37,104)
============== ============== ===============
F-12
QMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 2 - Investments in Securities - (continued)
- ------------------------------------------------
Market Unrealized
2001 Cost Value Gain (Loss)
---- ---- ----- -----------
Corporate debt securities $ 3,522,409 $ 3,532,631 $ 10,222
Government debt securities 1,881,368 1,903,659 22,291
-------------- -------------- ---------------
$ 5,403,777 $ 5,436,290 $ 32,513
============== ============== ===============
Primarily all of the above securities mature within one year.
During the year ended November 30, 2002, the Company sold available for
sale securities for approximately $17,000,000 resulting in a gain of
approximately $60,000.
During the year ended November 30, 2001, the Company sold available for
sale securities for approximately $8,400,000 resulting in a gain of
approximately $24,000.
Note 3 - Inventory
- ------------------
November 30,
----------------------------------
2002 2001
-------------- ----------------
Raw materials (component parts and supplies) $ 132,425 $ 127,062
Finished units 40,621 51,324
-------------- ----------------
$ 173,046 $ 178,386
============== ================
Note 4 - Property and Equipment
- -------------------------------
November 30,
----------------------------------
2002 2001
-------------- ----------------
Machinery and equipment $ 1,425,392 $ 1,353,914
Loaner equipment 244,542 244,542
Furniture and fixtures 1,013,553 411,074
Office equipment 901,255 825,413
Leasehold improvements 121,477 51,746
Equipment held under capital leases 499,671 433,347
-------------- ----------------
4,205,890 3,320,036
Less accumulated depreciation and
amortization (3,037,888) (2,853,580)
-------------- ----------------
Property and equipment - net $ 1,168,002 $ 466,456
=============== ===============
At November 30, 2002 and 2001, the equipment under the capital leases
had net book values of approximately $110,000 and $91,600,
respectively.
Depreciation expenses were approximately $184,000, $220,000 and
$170,000 for 2002, 2001 and 2000, respectively.
F-13
QMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 5 - Product Software Development Costs
- -------------------------------------------
During the years ended November 30, 2002 and 2001, the Company
capitalized approximately $241,000 and $158,000 in product software
development costs, respectively. These costs are amortized over a
five-year useful life.
During the years ended November 30, 2002, 2001 and 2000, amortization
costs related to product software development costs were approximately
$55,000 and $35,100 and $12,700, respectively.
Note 6 - Patent and Deferred Legal Costs
- ----------------------------------------
During the third quarter of fiscal 2001, the Company has instituted
patent litigation. The Company defers legal costs associated with
lawsuits relating to defending existing patents. If the patent claim is
successful, the costs remain capitalized and will be amortized over the
estimated remaining useful life of the patent. If the claim is
unsuccessful, the amounts deferred will be charged to operating
expense. As of November 30, 2002 and 2001, approximately $375,000 and
$111,000, respectively, has been capitalized as deferred legal costs
and is included in other assets.
Note 7 - Investment in Joint Venture
- ------------------------------------
During April 2000, the Company acquired a 50% equity interest in
Heartmasters, L.L.C. ("HM") for an initial contribution of $60,000. The
management agreement provides for profits and losses to be allocated
based on the Company's percentage of revenue as defined in the
agreement. As of November 30, 2002, the total contribution by the
Company was approximately $236,000 to HM, however, losses through
November 30, 2002 exceeded this amount bringing the investment in the
joint venture to zero. The unaudited summary financial information for
HM as of and for the period ended November 30, is as follows:
November 30,
------------------------------------
2002 2001
--------------- --------------
Balance sheet
Current assets $ 1,147,485 $ 112,490
Liabilities 1,143,342 106,749
--------------- --------------
Capital $ 4,143 $ 5,741
=============== ==============
Statements of operations
Revenues $ 5,862,686 $ 6,463,347
Operating expenses 5,931,729 6,550,763
--------------- --------------
Net loss $ (69,043) $ (87,416)
=============== ==============
F-14
QMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 8 - Accounts Payable and Accrued Liabilities
- -------------------------------------------------
November 30,
--------------------------------------
2002 2001
---------------- ---------------
Accounts payable - trade $ 248,862 $ 252,284
Performance guarantee payable 248,156 -
Health insurance premium payable 129,839 11,544
Insurance premiums payable 139,561 19,516
Other accrued expenses - none in
excess of 5% of current liabilities 248,666 152,135
--------------- --------------
$ 1,015,084 $ 435,479
================ ===============
Note 9 - Fees Reimbursable to Health Plans
- ------------------------------------------
Health plans which utilize the disease management program of the
Company pay participating physicians fees for their services related to
use of the program. Such fees are additional costs to the health plan
which in some cases are deducted from fees paid to the Company. As of
November 30, 2002 and 2001, there was $3,050 and $15,524 outstanding
under these provisions.
Note 10 - Line of Credit
- ------------------------
On September 11, 2001, the Company entered into a loan agreement with
First Union National Bank for a $1 million line of credit. The annual
interest rate is the lower of the bank's reference rate minus 1% or the
LIBOR Market Index Rate plus 1.5%. The line is collateralized by
securities owned by the Company. Borrowings under this line of credit
were $-0- at November 30, 2002 and 2001.
Note 11 - Capital Lease Obligations
- -----------------------------------
The Company has entered into various capital leases for equipment
expiring through November 2004, with aggregate monthly payments of
$7,300.
The following is a schedule by years of future minimum lease payments
under capital leases together with the present value of the net minimum
lease payments as of November 30, 2002:
For the Years Ending
November 30,
2003 $ 56,258
2004 36,329
2005 2,945
-----------
Total minimum lease payments 95,532
Less amount representing interest (12,604)
-----------
Present value of net minimum lease payments 82,928
Less current maturities 46,980
-----------
Long-term maturities $ 35,948
===========
F-15
QMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 12 - Income Taxes
- ----------------------
Deferred tax attributes resulting from differences between financial
accounting amounts and tax basis of assets and liabilities at November
30, 2002 and 2001, follow:
November 30,
----------------------------------
2002 2001
-------------- ----------------
Current assets and liabilities
Allowance for doubtful accounts $ - $ 30,000
Inventory overhead capitalization 51,000 61,000
Deferred revenue - 144,000
Deferred warranties 24,000 32,000
-------------- ----------------
75,000 267,000
Valuation allowance (75,000) (267,000)
-------------- ----------------
Net current deferred tax asset (liability) $ - $ -
============== ================
Noncurrent assets and liabilities
Depreciation and amortization $ (72,000) $ 39,000
Net operating loss carryforward 10,639,000 10,416,000
Research and development credit carryforward 82,000 82,000
Stock compensation 123,000 80,000
Capital loss carryforward 12,000 12,000
-------------- ----------------
10,784,000 10,629,000
Valuation allowance (10,784,000) (10,629,000)
-------------- ----------------
Net noncurrent deferred tax asset (liability) $ - $ -
============== ================
The Company has a cumulative pre-tax loss for financial reporting
purposes. Recognition of deferred tax assets will require generation of
future taxable income. There can be no assurance that the Company will
generate earnings in future years. Therefore, the Company established a
valuation allowance on deferred tax assets of approximately $10,859,000
and $10,896,000 as of November 30, 2002 and 2001, respectively.
The effective tax rate varied from the statutory rate as follows:
2002 2001 2000
---- ---- ----
Statutory federal income tax rate (34%) (34%) (34%)
State income tax, net of federal
benefit (3.5%) (6%) (6%)
Certain non-deductible expenses .5% 4% 3%
Effect on net operating loss
carryforward and valuation
allowance 31.7% 36% 37%
----- ----- -----
(5.3%) -% -%
===== ===== =====
F-16
QMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 12 - Income Taxes - (continued)
- ------------------------------------
As of November 30, 2002, the Company has available the following
federal net operating loss carryforwards for tax purposes:
Expiration Date:
Years Ending November 30,
-------------------------
2003 $ 4,340,000
2004 1,499,000
2005 496,000
2006 through 2021 18,791,000
----------------
$ 25,126,000
================
The Company has net operating loss carryforwards for state tax purposes
of approximately $20,100,000 expiring at various times from fiscal
years ending 2003 through 2016, of which approximately $7.3 million
expire through 2005.
The utilization of these net operating loss carryforwards may be
significantly limited under the Internal Revenue Code as a result of
ownership changes due to the Company's stock and ownership changes.
During the year ended November 30, 2002 the Company completed the sale
of approximately $563,000 of its New Jersey net operating loss
carryforwards and $105,000 of its New Jersey research and development
tax credits and received approximately $130,000. During the year ended
November 30, 2001 the Company sold approximately $2,922,000 of its New
Jersey net operating loss carryforwards and received $219,603. Proceeds
from these transactions are recorded as a gain on sale of net state tax
benefits.
During the fiscal year 2002, the Business Tax Reform Act was passed in
the State of New Jersey. This legislation is effective for tax years
beginning on or after January 1, 2002 (Fiscal 2003). Taxpayers would
pay an "Alternative Minimum Assessment," ("AMA") which would be based
upon either New Jersey Gross Receipts or New Jersey Gross Profits, if
the AMA exceeds the tax based on net income. An election must be made
in the first year to use either the Gross Profits or Gross Receipts
method and must be kept in place for five years, at which time the
election may be changed. The Company is evaluating the impact that this
legislation will have on its results of operations, financial position
and cash flow for fiscal 2003.
F-17
QMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 13 - Stockholders' Equity
- ------------------------------
Shares Authorized
-----------------
On June 26, 2000, the Company's stockholders approved an amendment to
the Company's restated Certificate of Incorporation to increase the
number of authorized shares of the Company's common stock from
20,000,000 to 40,000,000.
Private Placement Equity Transactions
-------------------------------------
On March 17, 2000, the Company issued to Quest Diagnostics Ventures,
LLC 285,714 shares of the Company's common stock for approximately
$1,985,000, net of expenses.
On April 13, 2000, the remaining $50,000 principal amount of the notes
relating to a private placement in 1997, plus accrued interest of
$134,582, was converted into 64,315 shares of common stock.
On April 28, 2000, the Company completed the sale of 163,300 shares of
the Company's common stock to an individual investor for approximately
$1,000,000.
On April 4, 2001, the Company sold 796,813 shares to three investors
led by Galen Partners III, LP for approximately $4,000,000. As part of
this transaction, the Company extended the terms on all outstanding
warrants to November 12, 2007. All charges related to the change were
treated as a cost of raising capital and were netted in stockholders'
equity.
Stock Options and Warrants
--------------------------
The QMed, Inc. 1999 Equity Incentive Plan provides for stock options,
stock appreciation rights, restricted stock or deferred stock awards up
to 1,000,000 shares of the Company's common stock to be granted to
employees and consultants of the Company until September 2009. The Plan
also provides for Director Non-Qualified stock options to be granted to
directors of the Company (other than directors who are also officers or
employees of the Company). The Plan was amended by a vote of
stockholders on May 22, 2002 to increase the number of shares available
for awards from 1,000,000 to 2,000,000.
The QMed, Inc. 1997 Equity Incentive Plan provides for stock options,
stock appreciation rights, restricted stock or deferred stock awards
for up to 600,000 shares of the Company's common stock to be granted to
employees of the Company until May 2007. The Plan also provides for
director stock options to be granted to directors of the Company (other
than directors who are also officers or employees of the Company).
F-18
QMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 13 - Stockholders' Equity - (continued)
- --------------------------------------------
Stock Options and Warrants - (continued)
----------------------------------------
The QMed, Inc. 1990 Employee Stock Incentive Plan provides for stock
options, stock appreciation rights, restricted stock or deferred stock
awards for up to 1,000,000 shares of the Company's common stock to be
granted to employees of the Company until October 2000. 1,000,000
shares of the Company's common stock are reserved for this plan.
Under the 1990, 1997 and 1999 plans, most options are exercisable in
cumulative 33% increments after the first and each subsequent
anniversary of the date of the grant, except for executive officers'
options, which generally are exercisable immediately. The incentive and
nonqualifying stock options expire ten years after the date of the
grant.
Options granted under all plans must be at a price per share not less
than the fair-market value per share of common stock on the date the
option is granted.
Pro forma information regarding net income and earnings per share has
been determined as if the Company had accounted for its employee stock
options under the fair-value method. The fair value for these options
was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for November 30:
2002 2001 2000
---- ---- ----
Risk-free interest rate 5.0% 5.0% 5.0%
Expected volatility 70.0% 75.0% 80.0%
Dividend yield - - -
Expected life 5.5 years 5.5 years 5.5 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair-value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-19
QMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 13 - Stockholders' Equity - (continued)
- --------------------------------------------
Stock Options and Warrants - (continued)
----------------------------------------
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had
the Company used the fair value method and applied the Black Sholes
model described above for option granted in 2002, 2001 and 2000 the
Company's pro forma net income (loss) would have been as follows:
2002 2001 2000
---- ---- ----
Pro forma net income (loss) $ (277,088) $ (1,649,555) $ (2,476,595)
Pro forma earnings (loss)
per share
Basic (.02) (.12) (.20)
Diluted (.02) (.12) (.20)
There was compensation expense of approximately $109,000, $200,000 and
$0 recorded from stock options under APB 25 for the years ended
November 30, 2002, 2001 and 2000. Effective November 30, 2001, the
Company terminated an employment agreement with an employee which
resulted in the immediate vesting of their unvested stock options. This
termination resulted in a charge to operations of approximately
$109,000 and $200,000 during fiscal 2002 and 2001, respectively, for
the acceleration of the options. In addition the Company recorded a
$154,000 charge to operations for severance payments, during the fiscal
year 2001. The immediate vesting resulted in variable accounting
treatment for the related options, and accordingly the Company adjusted
the charge each period through the exercise or expiration of the
related options. All related options were exercised prior to
expiration.
During the year ended November 30, 2000, the Company granted stock
options to consultants in exchange for services. The fair value of
these options was estimated at the date of the grant, which was
determined to be the measurement date, using a Black-Scholes option
pricing model. The vesting period for these options is three years.
The value of these options was approximately $90,000 and is being
amortized over their respective vesting period. Amortization expense
relating to these options for the years ended November 30, 2002, 2001
and 2000 was approximately $30,000, $30,000 and $15,000, respectively.
F-20
QMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 13 - Stockholders' Equity - (continued)
- --------------------------------------------
Stock Options and Warrants - (continued)
----------------------------------------
On January 8, 2001, the Company accepted a promissory note in the
amount of $91,059 from the Company's president in connection with the
exercise of stock options which were due to expire on February 1, 2001.
The note accrued interest at the rate of 7.5% per annum and was due in
January 2002. The principal amount of this note plus accrued interest
was paid in full on August 29, 2001.
A summary of the Company's stock option activity, and related
information for the years ended November 30, follows:
Weighted-Average Number of Weighted-Average
Options Exercise Price Exercisable Exercise Price
------- -------------- ----------- --------------
Outstanding
November 30, 1999 1,469,474 $ 2.48 1,196,237 $ 2.17
Granted 365,162 6.35
Exercised (69,584) 2.29
Terminated (27,859) 3.73
---------
Outstanding
November 30, 2000 1,737,193 $ 3.28 1,314,284 $ 2.56
Granted 271,796 8.02
Exercised (323,219) 1.49
Terminated (13,831) 7.76
---------
Outstanding
November 30, 2001 1,671,939 $ 4.37 1,170,049 $ 3.25
Granted 136,000 7.05
Exercised (283,053) 4.43
Terminated (43,379) 7.32
Expirations (364) 8.90
---------
Outstanding
November 30, 2002 1,481,143 $ 4.51 1,149,076 $ 3.75
========= ========= ========= =========
Weighted-average fair
value of options granted
during the years 2002 2001
---- ----
Where exercise price
equals stock price $ 4.40 $ 5.30
Where exercise price
exceeds stock price - 5.64
Where stock price
exceeds exercise price - -
F-21
QMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 13 - Stockholders' Equity - (continued)
- --------------------------------------------
Stock Options and Warrants - (continued)
----------------------------------------
Following is a summary of the status of stock options outstanding at
November 30, 2002:
Outstanding Options Exercisable Options
------------------- -------------------
Weighted-
Number Average Weighted- Number Weighted-
Exercise Outstanding Remaining Average Outstanding Average
Price Range at 11/30/02 Contractual Life Exercise Price at 11/30/02 Exercise Price
----------- ----------- ---------------- -------------- ----------- --------------
$ 1.38 - 1.63 225,581 1.2 $ 1.48 225,581 $ 1.48
2.75 - 4.03 642,883 5.4 3.07 604,715 3.03
4.44 - 6.56 210,876 7.4 4.87 139,981 4.71
6.88 - 8.90 370,803 8.9 7.88 177,133 8.28
11.76 - 11.76 31,000 8.7 11.76 1,666 11.76
--------------- --------- --- --------- ---------- --------
$ 1.38 - 11.76 1,481,143 6.0 $ 4.47 1,149,076 $ 3.75
=============== ========= === ======== ========= =======
A summary of the Company's stock warrant activity, and related
information for the years ended November 30, follows:
Weighted-Average Number of Weighted-Average
Warrants Exercise Price Exercisable Exercise Price
-------- -------------- ----------- --------------
Outstanding
November 30, 1999 2,055,889 $ 1.92 2,055,889 $ 1.92
Granted - - - -
Exercised (3,937) 2.16 - -
Terminated - - - -
--------- ---------- --------- ----------
Outstanding
November 30, 2000 2,051,952 1.92 2,051,952 1.92
Granted - - - -
Exercised (210,000) 1.86 - -
Terminated - - - -
--------- ---------- --------- ----------
Outstanding
November 30, 2001 1,841,952 1.93 1,841,952 1.93
Granted - - - -
Exercised (46,437) 3.10 (46,437) -
Terminated - - - -
--------- ---------- --------- ----------
Outstanding
November 30, 2002 1,795,515 $ 1.90 1,795,515 $ 1.90
========= ========== ========= ==========
F-22
QMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 13 - Stockholders' Equity - (continued)
- --------------------------------------------
Stock Options and Warrants - (continued)
----------------------------------------
Following is a summary of the status of stock warrants outstanding at
November 30, 2002:
Outstanding Warrants Exercisable Warrants
-------------------- --------------------
Number Weighted-Average Weighted- Number Weighted-
Exercise Price Outstanding Remaining Average Outstanding Average
Range at 11/30/02 Contractual Life Exercise Price at 11/30/02 Exercise Price
---------------- ----------- ---------------- -------------- ----------- --------------
$1.67 - 1.67 1,460,339 4.9 $ 1.67 1,460,339 $ 1.67
2.62 - 3.50 301,786 4.9 2.80 301,786 2.80
3.64 - 3.64 33,390 4.9 3.34 33,390 3.34
-------------- --------- --- -------- --------- ---------
$1.67 - 3.64 1,795,515 4.9 $ 1.90 1,795,515 $ 1.90
============= ========= === ======== ========= =========
Earnings (Loss) Per Share
-------------------------
The following table sets forth the computations of basic earnings
(loss) per share and diluted earnings (loss) per share:
Year ended November 30, 2002 2002 2001 2000
---- ---- ----
Numerator:
Net income (loss) $ 705,146 $ (1,043,057) $ (1,881,510)
------------- --------------- ---------------
Denominator:
Weighted average common
shares outstanding 14,433,922 13,866,216 12,650,831
Dilutive effect of stock
options and warrants 2,153,247 - -
------------- --------------- ---------------
Diluted shares outstanding $ 16,587,169 $ 13,866,216 $ 12,650,831
============= =============== ===============
Basic earnings
(loss) per share $ .05 $ (.08) $ (.15)
============= =============== ===============
Diluted earnings (loss)
per share $ .04 $ (.08) $ (.15)
============= =============== ===============
Potentially dilutive options and warrants to purchase 3,340,345 shares
of the common stock were outstanding as of November 30, 2001, but were
not included in the computation of diluted loss per share because the
effect of their inclusion would have been anti-dilutive. Additionally,
options to purchase 31,000 and 173,546 shares of common stock were
outstanding as of November 30, 2002 and 2001, respectively but were
also not included in the computation of diluted loss per share because
the options exercise price was greater than the average market price of
the common shares.
Note 14 - Retirement Plan
- -------------------------
The Company has a 401(k) plan which allows its employees to set aside a
part of their earnings, tax deferred, to be matched by the Company as
determined each year by resolution of the Board of Directors. During
the years ended 2002, 2001 and 2000, the Company matched $.25 for each
dollar up to 6% of an employee's contribution on a monthly basis, which
amounted to approximately $46,000, $37,000 and $24,000, respectively.
F-23
QMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 15 - Commitments and Contingencies Leases
- ----------------------------------------------
The Company leases its premises under noncancellable operating leases
expiring through November 2007. Monthly payments under the current
lease are approximately $65,000.
The following is a schedule by years of approximate future minimum
rental payments required under operating leases that have initial or
remaining noncancelable lease terms in excess of one year as of
November 30, 2002.
For the Years Ending
November 30, 2002
---------------------
2003 $ 758,000
2004 516,000
2005 479,000
2006 467,000
2007 246,000
Thereafter -
----------------
Total minimum payments required $ 2,466,000
================
Rent expense for the years ended November 30, 2002, 2001 and 2000 was
approximately $288,000, 241,000 and $232,000, respectively.
Litigation
----------
The Company is subject to claims and legal proceedings covering a wide
range of matters that arise in the ordinary course of business. It is
management's opinion that the ultimate resolution of these matters will
not have a material effect on the Company's consolidated financial
position and results of operations.
Major Customer
--------------
The Company had two major customers during 2002 and 2001. Major
customers were considered to be those who account for more than 10% of
total revenue. Two customers accounted for approximately 47% and 67% of
total revenue for the years ended November 30, 2002 and 2001.
Note 16 - Business Segment Information
- --------------------------------------
Segment Reporting
-----------------
The Company presents segment information in accordance with SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information," which established reporting and disclosure standards for
an enterprise's operating segments. Operating segments are defined as
components of an enterprise for which separate financial information is
available and regularly reviewed by the Company's senior management.
F-24
QMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 16 - Business Segment Information - (continued)
- ----------------------------------------------------
Segment Reporting - (continued)
-------------------------------
The Company is organized into two business units, disease-management
services and medical equipment sales, which are considered reportable
segments. The segments are managed separately and the Company evaluates
performance on operating profits of the respective segments. The
Company supports both segments with shared human resources, clinical,
marketing and information technology resources. The accounting policies
of the operating segments are the same as those described in the
summary of significant accounting policies in Note 1.
Summarized financial information by operating segment for 2002, 2001
and 2000, is as follows:
2002 2001 2000
---- ---- ----
Revenue:
Disease management services $ 12,324,877 $ 7,534,931 $ 2,060,461
Medical equipment 419,877 486,703 811,744
---------------- ----------------- ----------------
$ 12,744,754 $ 8,021,634 $ 2,872,205
================ ================= ================
Income (loss) before income taxes
Disease management services $ 2,004,808 $ (375,192) $ (1,449,317)
Medical equipment 204,864 203,557 324,525
---------------- ----------------- ----------------
Total segments 2,209,672 (171,635) (1,124,792)
General corporate expense net (1,594,411) (1,091,025) (1,065,974)
---------------- ----------------- ----------------
$ 615,261 $ (1,262,660) $ (2,190,766)
================ ================= ================
Depreciation and amortization:
Disease management services $ 173,646 $ 128,706 $ 105,387
Medical equipment 23,642 67,032 70,243
---------------- ----------------- ----------------
Total segments 197,288 195,738 175,630
General corporate expense net 60,891 76,863 73,102
---------------- ----------------- ----------------
$ 258,179 $ 272,601 $ 248,732
================ ================= ================
Expenditures for long-lived assets:
Disease management services $ 585,119 $ 484,985 $ 203,707
Medical equipment - - -
---------------- ----------------- ----------------
Total segments 585,119 484,985 203,707
General corporate 768,717 31,982 93,585
---------------- ----------------- ----------------
$ 1,353,836 $ 516,967 $ 297,292
================ ================= ================
Identifiable assets:
Disease management services $ 2,928,903 $ 1,813,887 $ 609,630
Medical equipment 8,339,994 6,321,642 2,687,213
---------------- ----------------- ----------------
Total segments 11,268,897 8,135,529 3,296,843
General corporate 894,284 31,982 93,585
---------------- ----------------- ----------------
$ 12,163,181 $ 8,167,511 $ 3,390,428
================ ================= ================
F-25
QMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 17 - Selected Quarterly Financial Data (Unaudited)
- -------------------------------------------------------
For the Quarters Ending 2002
February 28, May 31, August 31, November 30, Total
------------ ------- ---------- ------------ -----
Net sales $ 3,185,715 $ 3,492,321 $ 2,491,607 $ 3,575,111 $12,744,754
Gross profit 1,893,859 2,123,879 1,074,123 2,045,330 7,137,191
Net income (loss) 402,319 447,612 (559,366) 414,581 705,146
Income (loss) per share .03 .03 (.04) .03 .05
For the Quarters Ending 2001
February 28, May 31, August 31, November 30, Total
------------ ------- ---------- ------------ -----
Net sales $ 1,207,927 $ 1,654,698 $ 2,129,421 $ 3,029,588 $ 8,021,634
Gross profit 809,299 937,690 1,155,768 1,818,351 4,721,108
Net income (loss) (283,975) (516,275) (382,232) 139,425 (1,043,057)
Income (loss) per share (.02) (.04) (.03) .01 (.08)
F-26
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, 2002 and is incorporated herein by
reference.
Pursuant to General Instruction G(3), information concerning executive officers
is included in Part I of this form under the caption "Executive Officers of the
Registrant."
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, 2002 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, 2002 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, 2002 and is incorporated herein by reference.
Item 14. Controls and Procedures
- ---------------------------------
Evaluation of the Company's Disclosure Controls and Internal Controls. Within
the 90 days prior to the date of this Report on Form 10-K, the company evaluated
the effectiveness of the design and operation of its "disclosure controls and
procedures" (Disclosure Controls), and its "internal controls and procedures for
financial reporting" (Internal Controls). This evaluation (the Controls
Evaluation) was done under the supervision and with the participation of
management, including our Chief Executive Officer (CEO) and Chief Financial
Officer (CFO). Rules adopted by the SEC require that in this section of the
Report we present the conclusions of the CEO and the CFO about the effectiveness
of our Disclosure Controls and Internal Controls based on and as of the date of
the Controls Evaluation.
CEO and CFO Certifications. Appearing immediately following the Signatures
section of this Report there are two separate forms of "Certifications" of the
CEO and the CFO. The first form of Certification is required in accord with
Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certification).
35
This section of the Report that you are currently reading is the information
concerning the Controls Evaluation referred to in the Section 302 Certifications
and this information should be read in conjunction with the Section 302
Certifications for a more complete understanding of the topics presented.
Disclosure Controls and Internal Controls. Disclosure Controls are procedures
that are designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934
(Exchange Act), such as this Report, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's (SEC) rules and forms. Disclosure Controls are also designed with
the objective of ensuring that such information is accumulated and communicated
to our management, including the CEO and CFO, as appropriate to allow timely
decisions regarding required disclosure. Internal Controls are procedures which
are designed with the objective of providing reasonable assurance that (1) our
transactions are properly authorized; (2) our assets are safeguarded against
unauthorized or improper use; and (3) our transactions are properly recorded and
reported, all to permit the preparation of our financial statements in
conformity with generally accepted accounting principles.
Limitations on the Effectiveness of Controls. The company's management,
including the CEO and CFO, does not expect that our Disclosure Controls or our
Internal Controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
Scope of the Controls Evaluation. The CEO/CFO evaluation of our Disclosure
Controls and our Internal Controls included a review of the controls' objectives
and design, the controls' implementation by the company and the effect of the
controls on the information generated for use in this Report. In the course of
the Controls Evaluation, we sought to identify data errors, controls problems or
acts of fraud and to confirm that appropriate corrective action, including
process improvements, were being undertaken. This type of evaluation will be
done on a quarterly basis so that the conclusions concerning controls
effectiveness can be reported in our Quarterly Reports on Form 10-Q and Annual
Report on Form 10-K. Our Internal Controls are also evaluated on an ongoing
36
basis by other personnel in our Finance organization and by our independent
auditors in connection with their audit and review activities. The overall goals
of these various evaluation activities are to monitor our Disclosure Controls
and our Internal Controls and to make modifications as necessary; our intent in
this regard is that the Disclosure Controls and the Internal Controls will be
maintained as dynamic systems that change (including with improvements and
corrections) as conditions warrant. Among other matters, we sought in our
evaluation to determine whether there were any "significant deficiencies" or
"material weaknesses" in the company's Internal Controls, or whether the company
had identified any acts of fraud involving personnel who have a significant role
in the company's Internal Controls. This information was important both for the
Controls Evaluation generally and because items 5 and 6 in the Section 302
Certifications of the CEO and CFO require that the CEO and CFO disclose that
information to our Board's Audit Committee and to our independent auditors and
to report on related matters in this section of the Report. In the professional
auditing literature, "significant deficiencies" are referred to as "reportable
conditions"; these are control issues that could have a significant adverse
effect on the ability to record, process, summarize and report financial data in
the financial statements. A "material weakness" is defined in the auditing
literature as a particularly serious reportable condition where the internal
control does not reduce to a relatively low level the risk that misstatements
caused by error or fraud may occur in amounts that would be material in relation
to the financial statements and not be detected within a timely period by
employees in the normal course of performing their assigned functions. We also
sought to deal with other controls matters in the Controls Evaluation, and in
each case if a problem was identified, we considered what revision, improvement
and/or correction to make in accord with our on-going procedures.
In accord with SEC requirements, the CEO and CFO note that, since the date of
the Controls Evaluation to the date of this Report, there have been no
significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Conclusions. Based upon the Controls Evaluation, our CEO and CFO have concluded
that, subject to the limitations noted above, our Disclosure Controls are
effective to ensure that material information relating to QMed and its
consolidated subsidiaries is made known to management, including the CEO and
CFO, particularly during the period when our periodic reports are being
prepared, and that our Internal Controls are effective to provide reasonable
assurance that our financial statements are fairly presented in conformity with
generally accepted accounting principles.
37
PART IV
Item 15. 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, 2002 and 2001
Consolidated Statement of Operations for each of the three years ended
November 30, 2002, 2001 and 2000
Consolidated Statement of Comprehensive Income for each of the three
years ended November 30, 2002, 2001 and 2000
Consolidated Statement of Stockholder's Equity for each of the three
years ended November 30, 2002, 2001 and 2000
Consolidated Statement of Cash Flows for each of the three years ended
November 30, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
II - Valuation and Qualifying Accounts
Other schedules have been omitted because they are not applicable.
(b) Reports on Form 8-K.
None.
38
(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:
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
3.6 Certificate of Amendment to Restated
Certificate of Incorporation of Q-Med, Inc.,
dated May 22, 2002 (Exhibit 3.1 to the
Company's Form 10-Q dated May 31, 2002) I/B/R
4.1 Specimen Common Stock Certificate *
4.2 Form of Warrant Agreement dated November 16, 1998
(Exhibit 99.6 to the Company's report on Form 8-K
dated November 16, 1998) I/B/R
4.3 Form of common stock purchase warrants
exercisable at $1.67 per share until November
15, 2005 (Exhibit 4.1 to the Company's report
on Form 8-K dated May 17, 1999) I/B/R
39
4.4 Form of common stock purchase warrants
exercisable at $2.87 per share until November
15, 2005 (Exhibit 4.2 to the Company's report
on Form 8-K dated May 17, 1999) I/B/R
4.5 Form of common stock purchase warrants
exercisable at $2.625 per share until November
15, 2005 (Exhibit 4.2 to the Company's report
on Form 8-K dated August 25, 1999) I/B/R
9.1 Form of Shareholder and Voting Rights Agreement
between the Company and several stockholders
dated as of November 16, 1998 (Exhibit 99.4 to
the Company's report on Form 8-K dated November
16, 1998) I/B/R
10.1 Q-Med, Inc. 1986 Incentive Stock Option Plan
(Exhibit 10N to the Company's Registration
Statement No. 33-4499 on Form S-1)** I/B/R
10.2 Lease dated August 31, 1993 between the Company and
Alexandria Atrium Associates (Exhibit 28.1 to the
Company's Form 10-QSB Report dated August 31, 1993) I/B/R
10.3 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
10.4 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
10.5 Amendment dated December 16, 1998 to Employment
Agreement between the Company and Michael W. Cox
(Exhibit 10.11 to the Company's Form 10-K for year
ended November 30, 1998) I/B/R
10.6 Q-Med, Inc. 1999 Equity Incentive Plan (Exhibit 4.1
to the Company's Registration Statement on Form
S-8 (333-93697) filed December 28, 1999)** I/B/R
10.7 Limited Liability Agreement of HeartMasters LLC
dated April 14, 2000 (Exhibit 99.1 to the
Company's Form 10-Q Report dated May 31, 2000) I/B/R
10.8 Trademark and Data License and Services
Agreement between Interactive Heart Management
Corp. and HeartMasters, LLC dated April 14,
2000 (Exhibit 99.2 to the Company's Form 10-Q
Report dated May 31, 2000) I/B/R
40
10.9 Loan Agreement dated September 11, 2001 between
First Union National Bank and Q-Med, Inc. (Exhibit
10.1 to the Company's Form 10-Q Report dated
August 31, 2001) I/B/R
10.10 Security Agreement dated September 11, 2001 between
First Union National Bank and Q-Med, Inc. (Exhibit
10.2 to the Company's Form 10-Q Report dated
August 31, 2001) I/B/R
10.11 Promissory Note dated September 11, 2001 given to
First Union National Bank by Q-Med, Inc. (Exhibit
10.3 to the Company's Form 10-Q Report dated
August 31, 2001) I/B/R
10.12 First Amendment to the 1999 Equity Incentive Plan
of QMed, Inc. dated May 22, 2002 (Exhibit 10.1 to
the Company's Form 10-Q dated May 31, 2002)** I/B/R
10.13 QMed, Inc. 1999 Equity Incentive Plan, as amended
November 1, 2002** *
10.14 Employment Agreement dated September 23, 2002
between QMed, Inc. and Bill Schmitt (Exhibit 10.1
to the Company's Report on Form 10-Q dated August
31, 2002)** I/B/R
10.15 Employment Agreement dated as of December 1, 2002
between QMed, Inc. and Michael W. Cox** *
10.16 QMed, Inc. 2002 Key Employee Bonus Plan** *
10.17 Real Property Lease between Donato Hi-Tech
Holdings IV, Inc. and the Company dated June
19, 2002 (Exhibit 10.2 to the Company's Report
on Form 10-Q dated May 31, 2002) I/B/R
10.18 Retainer Agreement between Sommer & Schneider
LLP and the Company dated January 8, 2003 *
10.19 Waiver of Benefits under the QMed, Inc. 2002 Key
Employee Bonus dated February 28, 2003** *
11 None.
41
13 None.
16 None.
18 None.
21 Subsidiaries of Registrant *
22 None.
23 Consent of Amper, Politziner & Mattia P.C. *
24 None.
99.1 Certification pursuant to 18 U.S.C. Section 1350 *
99.2 Certification pursuant to 18 U.S.C. Section 1350 *
________
* Filed herewith
** Management contract or compensatory plan or arrangement
42
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 28, 2003 QMED, INC.
By: /s/ Michael W. Cox
------------------------------------
Michael W. Cox, President and CEO
43
SIGNATURES
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, Chief Executive February 28, 2003
- ---------------------------- Officer and Director
Michael W. Cox (Principal Executive Officer)
/s/ Jane Murray Executive Vice President, February 28, 2003
- ---------------------------- Chief Operating Officer
Jane Murray and Director
/s/ William T. Schmitt, Jr. Senior Vice President and February 28, 2003
- ---------------------------- Chief Financial Officer
William T. Schmitt, Jr. (Principal Financial Officer)
/s/ Debra A. Fenton Controller February 28, 2003
- ---------------------------- (Principal Accounting Officer)
Debra A. Fenton
/s/ Herbert H. Sommer Secretary and Director February 28, 2003
- ----------------------------
Herbert H. Sommer, Esq.
/s/ Bruce F. Wesson Chairman of the Board February 28, 2003
- ----------------------------
Bruce F. Wesson
/s/ A. Bruce Campbell Director February 28, 2003
- ----------------------------
A. Bruce Campbell, M.D.
/s/ David Feldman Director February 28, 2003
- ----------------------------
David Feldman
/s/ Richard I. Levin Director February 28, 2003
- ----------------------------
Richard I. Levin, M.D.
/s/ Lucia L. Quinn Director February 28, 2003
- ----------------------------
Lucia L. Quinn
44
CERTIFICATION
I, Michael W. Cox, certify that:
1. I have reviewed this annual report on Form 10-K of QMed, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respect the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officers and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
February 28, 2003 /s/ Michael W. Cox
--------------------------------------
Michael W. Cox
President and Chief Executive Officer
45
CERTIFICATION
I, William T. Schmitt, certify that:
1. I have reviewed this annual report on Form 10-K of QMed, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respect the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officers and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
February 28, 2003 /s/ William T. Schmitt, Jr.
----------------------------
William T. Schmitt, Jr.
Senior Vice President and
Chief Financial Officer
46
Schedule II
QMED, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Balance at Balance at
Beginning of End of
Year Additions Write-offs Year
---- --------- ---------- ----
Allowance for doubtful accounts 2000 116,000 - 74,000 42,000
2001 42,000 33,000 - 75,000
2002 75,000 - 73,000 2,000
47
EXHIBIT INDEX
Exhibit
Sequential
No.
Page No.
4.1 Specimen Common Stock Certificate
10.13 QMed, Inc. 1999 Equity Incentive Plan, as amended
November 1, 2002
10.15 Employment Agreement dated as of December 1, 2002
between QMed, Inc. and Michael W. Cox
10.16 QMed, Inc. 2002 Key Employee Bonus Plan
10.18 Retainer Agreement between Sommer & Schneider LLP
and the Company dated January 8, 2003
10.19 Waiver of Benefits under the QMed, Inc. 2002 Key Employee
Bonus dated February 28, 2003
21 Subsidiaries of Registrant
23 Consent of Amper, Politziner & Mattia P.C.
99.1 Certification pursuant to 18 U.S.C. Section 1350
99.2 Certification pursuant to 18 U.S.C. Section 1350
48