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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: February 28, 2003 or
[ ] 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.
(Exact name of registrant as specified in its charter)
Delaware 22-2468665
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 Christopher Way, Eatontown, New Jersey 07724
(Address of principal executive offices) (Zip Code)
(732) 544-5544
-----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
-----------------------------------------------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of shares of the registrant's common stock outstanding on
April 8, 2003: 14,511,070.
Part I. Financial Information
Item 1. Financial Statements
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
February 28, 2003 November 30,
(Unaudited) 2002
--------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 1,820,643 $ 2,383,123
Investments 6,263,318 6,873,491
Accounts receivable, net of
allowances of approximately $2,000 2,615,484 203,216
Inventory 163,417 173,046
Prepaid expenses and other current assets 335,713 344,667
--------------- ---------------
11,198,575 9,977,543
Property and equipment, net 1,198,879 1,168,002
Product software development costs 469,475 461,261
Other assets 560,757 556,375
Investment in joint venture - -
--------------- ---------------
$ 13,427,686 $ 12,163,181
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,590,744 $ 1,015,084
Leases payable, current portion 61,611 46,980
Accrued salaries and commissions 157,369 334,642
Fees reimbursable to health plans 4,550 3,050
Contract billings in excess of revenues 2,270,928 1,760,620
Deferred warranty revenue 43,973 58,867
Income taxes payable 16,000 40,000
--------------- ---------------
4,145,175 3,259,243
Leases payable - long term 49,939 35,948
--------------- ---------------
4,195,114 3,295,191
Stockholders' equity Common stock $.001 par value;
40,000,000 shares authorized; 14,533,070 and
14,506,153 shares issued and 14,511,070 and
14,484,153 outstanding 14,533 14,506
Paid-in capital 33,165,502 33,079,409
Accumulated deficit (23,822,207) (24,113,196)
Accumulated other comprehensive income
Unrealized gains on securities available for sale (49,631) (37,104)
--------------- ---------------
9,308,197 8,943,615
Less treasury stock at cost, 22,000 common shares (75,625) (75,625)
--------------- ---------------
Total stockholders' equity 9,232,572 8,867,990
--------------- ---------------
$ 13,427,686 $ 12,163,181
=============== ===============
See Accompanying Notes to Condensed Consolidated Financial Statements
2
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three For the Three
Months Ended Months Ended
February 28, February 28,
2003 2002
--------------- ----------------
Sales
Disease management services $ 3,605,013 $ 3,060,298
Medical equipment 61,031 125,417
--------------- ----------------
3,666,044 3,185,715
--------------- ----------------
Cost of sales
Disease management services 1,548,417 1,222,232
Medical equipment 46,076 69,624
--------------- ----------------
1,594,493 1,291,856
--------------- ----------------
Gross profit 2,071,551 1,893,859
Selling, general and administrative expenses 1,556,351 1,385,372
Research and development expenses 250,841 256,450
--------------- ----------------
Income from operations 264,359 252,037
Interest income 49,617 56,265
Interest expense (6,987) (5,601)
Loss in operations of joint venture - (25,000)
--------------- ----------------
Income before income tax (provision) benefit 306,989 277,701
Gain on sale of state tax benefits - 124,618
Provision for state income taxes (16,000) -
--------------- ----------------
Net income $ 290,989 $ 402,319
=============== ================
Basic income per share
Weighted average shares outstanding 14,516,959 14,297,100
--------------- ----------------
Basic earnings per share $ .02 $ .03
=============== ================
Diluted income per share
Weighted average shares outstanding 16,292,207 16,845,095
--------------- ----------------
Diluted earnings per share $ .02 $ .02
=============== ================
See Accompanying Notes to Condensed Consolidated Financial Statements
3
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
For the Three For the Three
Months Ended Months Ended
February 28, February 28,
2003 2002
--------------- ----------------
Net income 290,989 402,319
Other comprehensive income
Unrealized (loss) on securities
available for sale (12,527) (38,496)
Less: reclassification adjustment for
(losses) gains included in net income (3,609) 6,878
--------------- ----------------
Comprehensive income $ 274,853 $ 370,701
=============== ================
See Accompanying Notes to Condensed Consolidated Financial Statements
4
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Months Ended February 28, 2003
(Unaudited)
Accumulated
Other Common Stock
Common Stock Paid-in Accumulated Comprehensive Held in Treasury
Shares Amount Capital Deficit Income Shares Amount Total
------ ------ ------- ------- ------ ------ ------ -----
Balance - November 30, 2002 14,506,153 $14,506 $33,079,409 $(24,113,196) $(37,104) 22,000 $(75,625) $8,867,990
Exercise of stock options and
warrants 26,917 27 78,626 78,653
Amortization of non-employee
stock options 7,467 7,467
Net income for the three months
ended February 28, 2003 290,989 290,989
Unrealized holding losses on
securities available for sale (12,527) (12,527)
---------- ------- ----------- ------------ -------- ------ -------- ----------
Balance - February 28, 2003 14,533,070 $14,533 $33,165,502 $(23,822,207) $(49,631) 22,000 $(75,625) $9,232,572
========== ======= =========== ============ ======== ====== ======== ==========
See Accompanying Notes to Condensed Consolidated Financial Statements
5
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three For the Three
Months Ended Months Ended
February 28, 2003 February 28, 2002
----------------- -----------------
Cash flows from operating activities:
Net income $ 290,989 $ 402,319
------------- -------------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Gain on sale of investments 3,609 (6,878)
Loss in operations of joint venture - 25,000
Depreciation and amortization 94,041 63,794
Stock compensation expense - 108,986
Amortization of non-employee stock options 7,467 7,467
(Increase) decrease in
Accounts receivable (2,412,268) 265,139
Inventory 9,629 8,335
Prepaid expenses and other current assets 8,954 (36,093)
Increase (decrease) in
Accounts payable and accrued liabilities 399,887 (281,692)
Contract billings in excess of revenues and
deferred revenue 495,414 103,974
Other, net (24,000) (1,453)
------------- -------------
Total adjustments (1,417,267) 256,579
------------- -------------
$ (1,126,278) $ 658,898
============= =============
Cash flows from investing activities:
Proceeds from sale of securities available for sale 4,087,398 3,328,545
Purchases of securities available for sale (3,493,361) (4,193,772)
Capital expenditures, net (91,984) (75,356)
Investment in joint venture - (25,000)
------------- -------------
Net cash provided by (used in) investing
activities $ 502,053 $ (965,583)
============= =============
Cash flows from financing activities:
Payments for capital leases (16,908) (14,565)
Proceeds from issuance of common stock 78,653 1,162,286
------------- -------------
$ 61,745 $ 1,147,721
============= =============
Net change in cash and cash equivalents (562,480) 841,036
Cash and cash equivalents at beginning of period 2,383,123 531,450
------------- -------------
Cash and cash equivalents at end of period $ 1,820,643 $ 1,372,486
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 7,000 $ 5,601
Income Taxes 39,000 9,174
See Accompanying Notes to Condensed Consolidated Financial Statements
6
QMED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Reporting
- ------------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, these financial statements do not include
all of the information and footnotes required by generally accepted accounting
principles. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three month period ended February 28, 2003
are not necessarily indicative of the results that may be expected for the year
ending November 30, 2003. These condensed consolidated financials statements
include the accounts of QMed, Inc., its wholly owned subsidiary Interactive
Heart Management Corp. ("IHMC"), and QMed, Inc.'s majority owned (83%) inactive
subsidiary HeartMap, Inc. These condensed consolidated financial statements
should be read in conjunction with the financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
November 30, 2002.
References to the "Company" in these condensed consolidated financial statements
include QMed, Inc. and its subsidiaries.
Note 2 - 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 and not covered by reinsurance 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
February 28, 2003, based on information and data available, the Company has
deferred approximately $2,300,000 of revenue, which may be subject to refund.
This deferral has been reflected as contract billings in excess of revenues on
the balance sheet.
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,
7
QMED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Revenue Recognition (Cont'd)
- -------------------------------------
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.
The Company believes these estimates adequately provide for any potential
adjustments that may be applied to revenues from these contracts. Although these
contracts are multi-year agreements, the Regence Oregon and Washington contracts
terminated as of January 31, 2003. As of February 28, 2003, accounts receivable
includes approximately $1,500,000 for services rendered and owed on these
contracts.
Note 3 - Investments in Securities
- ----------------------------------
Investment in securities available-for-sale as of February 28, 2003 were as
follows:
Unrealized
Cost Market Value Gain (Loss)
---- ------------ -----------
Corporate debt securities $3,464,373 $3,414,730 $(49,643)
U.S. Government short term
obligations 2,848,576 2,848,588 12
---------- ---------- --------
$6,312,949 $6,263,318 $(49,631)
========== ========== ========
Note 4 - Inventory
- ------------------
Inventories, consisting of finished units and raw materials, are stated at the
lower of cost (determined on a moving weighted average method) or market.
Inventories consist of the following:
February 28, 2003 November 30, 2002
(Unaudited)
----------------- -----------------
Raw materials (component parts) $ 127,083 $ 132,425
Finished units 36,334 40,621
------------- -------------
$ 163,417 $ 173,046
============= =============
Note 5 - Product Software Development Costs
- -------------------------------------------
During the three months ended February 28, 2003, the Company capitalized
approximately $24,000 in product software development costs. These costs are
amortized over a five-year useful life.
Note 6 - Patent and Deferred Legal Costs
- ----------------------------------------
During the third quarter of fiscal 2001, the Company instituted patent
litigation. The Company defers legal costs associated with the prosecution of a
patent infringement claim. 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 February 28, 2003, $381,734 has been capitalized as
deferred legal costs and is included in other assets.
Note 7 - Investment in Joint Venture
- ------------------------------------
The Company has a 50% interest in HeartMasters, L.L.C. ("HM"). The management
agreement provides for profits and losses to be allocated based on the Company's
50% interest. As of February 28, 2003, the Company contributed approximately
$236,000 to HM, however, losses to date exceeded this amount bringing the
investment in joint venture to zero.
8
QMED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Accounts Payable and Accrued Expenses
- ----------------------------------------------
Accounts payable and accrued expenses include the following:
February 28, November 30,
2003 2002
(Unaudited)
------------- -------------
Accounts payable trade $ 341,464 $ 248,862
Performance guarantee payable 752,815 248,156
Insurance premiums payable 215,168 269,400
Other accrued expenses - none in excess of
5% of current liabilities 281,297 248,666
------------- -------------
$ 1,590,744 $ 1,015,084
============= =============
Note 9 - Business Segment Information
- -------------------------------------
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.
The Company segments are 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.
Income (loss) before income taxes by operating segment excludes interest income,
interest expense and general corporate expenses.
Summarized financial information by operating segment for three months ending
February 28, is as follows:
Three Months Ended
February 28,
2003 2002
------------- --------------
Revenue:
Disease management services $ 3,605,013 $ 3,060,298
Medical equipment sales 61,031 125,417
------------- --------------
$ 3,666,044 $ 3,185,715
============= ==============
Income (loss) before income taxes:
Disease management services $ 839,627 $ 621,846
Medical equipment sales 14,955 11,388
------------- --------------
Total segments $ 854,582 $ 633,234
General corporate expenses - net $ (547,593) $ (355,533)
------------- --------------
$ 306,989 $ 277,701
============= ==============
9
QMED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 February 28, 2003.
Note 11 - Earnings Per Share
- ----------------------------
For the three months ended February 28, 2003 and 2002, shares totaling 1,775,248
and 2,547,995 respectively are included in diluted earning per share due to the
assumed conversion of warrants and stock options outstanding.
Note 12 - 2003 Outside Directors Equity Plan
- --------------------------------------------
The Company has adopted, subject to shareholder approval, an Outside Directors
Equity Plan to better enable the retention and attraction of qualified outside
directors to serve on the Company's Board of Directors. The plan requires up to
250,000 shares to be authorized for issuance under the plan and is designed to
allow outside directors the option to receive a portion of their fees in the
form of the Company's common stock in lieu of cash.
Note 13 - Commitments and Contingencies
- ---------------------------------------
On March 28, 2003, HeartMasters LLC, a limited liability company 50% owned by
Interactive Heart Management Corp., QMed Inc.'s subsidiary ("IHMC"), received a
Demand for Arbitration of approximately $13,000,000 plus interest, of which
approximately $ 6,500,000 relates to IHMC, for claims under certain terminated
disease management agreements. The claims involve disease management agreements
between Regence of Washington and Oregon and HeartMasters LLC. HeartMasters LLC
also received a notice form a reinsurer denying coverage for the Regence of
Oregon HMO first year coverage period asserting that an outside actuarial report
concerning Regence's claims history and other information, which were considered
by the reinsurer prior to issuance of coverage, contained "grossly incorrect
data." HeartMasters LLC is investigating the claims of Regence and the reinsurer
and plans to defend its rights under the agreements and where appropriate, bring
claims of its own. At this early stage, management is unable to adequately
predict its outcome.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
QMed(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 February 28, 2003, we had contracts to provide these services to 11
health plans in 8 states covering approximately 1.1 million health plan members.
As of February 28, 2003, we contracted to provide services in a Medicare
demonstration project. In October 2002, we 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 or arbitration
o general economic conditions
11
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.
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 and not covered by reinsurance, 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 February 28, 2003, based on information and data available at
this time, we deferred approximately $2,300,000 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 were provided under these Regence
contracts through HeartMasters, a limited liability company whose members are
IHMC and LifeMasters, an unaffiliated private company, under which IHMC provides
coronary artery disease management services and Life Masters provides services
for congestive heart failure. Since these contracts were performance based,
HeartMasters 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 $2,300,000 represents fees, which may be subject to
refund 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.
On March 28, 2003, HeartMasters LLC, a limited liability company 50% owned by
IHMC, received a Demand for Arbitration of approximately $13,000,000 plus
12
interest, of which approximately $6,500,000 relates to IHMC, for claims under
certain terminated disease management agreements. The claims involve disease
management agreements between Regence of Washington and Oregon and HeartMasters
LLC. At this early stage, management is unable to adequately predict its
outcome.
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, 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, 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.
As of February 28, 2003, approximately 38% of disease management services were
derived from two health plans that each comprised more than 10% of our revenues.
Results of Operations
The following table presents the percentage of total revenues for the periods
indicated and changes from period to period of certain items included in our
Condensed Consolidated Statements of Operations.
Period to Period Percentage Changes
For the Three Months For the Three Months Ended
Ended February 28, February 28, 2003 vs.
2003 2002 February 28, 2002
-------------------- --------------------------
Revenue 100.0% 100.0% 15.1
Cost of revenue 43.5 40.6 23.4
----- -----
Gross profit 56.5 59.4 9.3
Selling, general and administrative 42.5 43.5 12.3
Research and development 6.8 8.0 (2.2)
----- -----
Income (loss) from operations 7.2 7.9 4.8
Interest income 1.4 1.8 (11.8)
Interest expense (.2) (.2) 24.7
Loss in operations of joint venture - (.8) *
----- -----
Income before tax (provision)benefit 8.4 8.7 10.5
Income tax (provision) benefit (.4) 3.9 *
----- -----
Net income 8.0 12.6 (23.7)
===== =====
* Not meaningful
Revenue for the three month period ended February 28, 2003 increased
approximately 15% over the same period in 2002. This increase in revenue
resulted primarily from an increase in the enrolled members covered our disease
management programs. Since February 28, 2002, we entered into contracts with
health plan customers in Arizona, Colorado and Oregon representing approximately
300,000 members. On January 31, 2003 the HeartMasters agreement with Regence of
Oregon and Washington was terminated. This termination resulted in the loss of
13
approximately 445,000 members. As of February 28, 2003 and February 28, 2002,
our disease management programs covered approximately 1.1 million members. At
February 28, 2003, of the total health plan members under contract, we had
approximately 986,000 commercial members and 150,000 Medicare+Choice members.
Subsequent to February 28, 2003, we signed a new contract to provide stroke and
coronary artery disease management services with SummaCare Health Plan of
northeastern Ohio, covering approximately 30,000 commercial and 13,000 senior
members. Enrollment is expected to begin in July 2003.
Since February 28, 2002, we also began the enrollment process for the Medicare
Coordinated Care Demonstration. 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. As a result
of our success in the initial enrollment stage of the project, the Center for
Medicare Studies (CMS) authorized to increase the patient base by 100% with
commensurate remuneration. During October, 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 a new
Disease Management Demonstration Project. The program is designed to provide
disease management services for congestive heart failure, including a
comprehensive prescription drug plan for up to 15,000 Medicare fee-for-service
beneficiaries. Enrollment is expected to begin during July 2003.
We anticipate revenues for the second quarter to decrease slightly because of
reductions in membership due to the termination of the Regence contract as well
as the cyclical reduction of lives under management due to the membership
enrollment and disenrollment process of our health plan customers. We
experienced the reduction of approximately 50,000 Medicare+Choice members due to
health plans member changes primarily consisting of health plans exit of certain
markets, which went into effect on January 1. Revenue for the remainder of
fiscal 2003 is expected to increase with the enrollment of additional members
under both existing and anticipated new contracts with health care providers,
and, more significantly, with the launch of the HeartPartners program.
Gross profit margins for the three months ended February 28, 2003 decreased to
56.5% from 59.4% in the prior year. This decrease was due to the increased costs
associated with the launch of new health plan contracts in Arizona, Colorado and
Oregon. Salaries, travel and other direct costs are all factors in the initial
implementation of any new contract. The costs will decrease as a percentage of
revenue once a significant number of members are enrolled into the program.
Selling, general and administrative expenses for the three months ended February
28, 2003 increased approximately 12% compared to the prior year. The increase
was primarily due to an increase in both executive and administrative staff,
legal costs associated with contracting issues, and rent expenses for our new
corporate headquarters. Selling, general and administrative expenses as a
percentage of revenue decreased by 1% , from 43.5% at February 28, 2002 to 42.5%
at February 28, 2003.
Research and development expenses for the three months ended February 28, 2003
decreased slightly compared to the prior period. During the past year we have
focused our efforts primarily on the development of new, advanced software
programs to help us better identify, locate and evaluate patients who are at
risk for developing various disease conditions. These programs incorporate state
of the art telecommunications, data management, security and information
technology. Some of the costs associated with the development of new product
software is capitalized and amortized over a 5 year useful life. We intend to
continue to improve and expand the capabilities of the ohms|cvd system ongoing.
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 $7,053,400 at February 28, 2003 compared to $6,718,300
at November 30, 2002 and ratios of current assets to current liabilities of
2.7:1 as of February 28, 2003 and 3.1:1 as of November 30, 2002. The working
capital increase of approximately $350,000 was primarily due to the net income
of approximately $307,000 and proceeds from the sale of common stock through the
exercise of outstanding options and warrants of approximately $79,000. 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 August 31, 2002 the entire $1,000,0000 was available under this
credit line.
14
Receivables balances over 90 days past due was 11.6% of the total receivables
balance at February 28, 2003. Included in the receivables balance at February
28, 2003 was $1,474,674 due from the Regence Health Plans, which is currently in
dispute. We are aggressively seeking resolution of this matter.
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
February 28, 2003 in the periods indicated.
Payments Due by Period
Contractual --------------------------------------------------------------------------------
Obligations 2004 2005 - 2006 2007 - 2008 2009 and After Total
- ---------------------------------------- --------------- --------------- ---------------- --------------- ---------------
Long-Term Debt $ -- $ -- $ -- $ -- $ --
Capital Lease Obligations 48,066 27,096 -- -- 75,162
Operating Leases 749,551 995,126 618,252 -- $2,362,929
Unconditional Purchase Obligations -- -- -- -- -0-
Other Long-Term Obligations -- -- -- -- -0-
Total Contractual Cash Obligations $797,617 $1,022,222 $ 618,252 -- $2,438,091
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------------
Our exposure to market risk for changes in interest rates relates primarily to
the increase or decrease in the amount of interest income we can earn on our
available funds for investment. We ensure the safety and preservation of our
invested principal funds by limiting default risk, market risk and reinvestment
risk. We mitigate default risk by investing in short term high-credit quality
securities.
Item 4. Controls and Procedures
- -------------------------------
Quarterly evaluation of the Company's Disclosure Controls and Internal Controls.
Within the 90 days prior to the date of this Quarterly Report on Form 10-Q, 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 Quarterly 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). This section of the Quarterly 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 Quarterly 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
15
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 Quarterly 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
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 Quarterly 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 Quarterly 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.
16
Part II - Other Information
Item 1. Legal Proceedings
We previously disclosed that we brought a patent infringement
and unfair competition action against LifeMasters Supported
SelfCare ("LifeMasters"). The action 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). The parties have discussed and are attempting to
finalize a settlement of this matter.
On March 28, 2003, HeartMasters LLC, a limited liability
company 50% owned by our IHMC subsidiary, received a Demand
for Arbitration before the American Arbitration Association of
approximately $13,000,000 plus interest, of which
approximately $6,500,000 relates to IHMC, for claims under
certain terminated disease management agreements. The claims
allege breach of disease management agreements between Regence
of Washington and Oregon and HeartMasters LLC. HeartMasters
LLC also received a notice from a reinsurer denying coverage
for the Regence of Oregon HMO first year coverage period
asserting that an outside actuarial report concerning
Regence's claims history and other information, which were
considered by the reinsurer prior to issuance of coverage,
contained "grossly incorrect data." HeartMasters LLC is
investigating the claims of Regence and the reinsurer and
plans to defend its rights under the agreements and where
appropriate, bring claims of its own. At this early stage,
management is unable to adequately predict its outcome.
The Company is subject to claims and legal proceedings
covering a wide range of matters that arise in the ordinary
course of business. Although management of the Company cannot
predict the ultimate outcome of these legal proceedings with
certainty, it believes that their ultimate resolution,
including any amounts we may be required to pay will not have
a material effect on the financial statements.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this
report:
99.1 Certification pursuant to 18 U.S.C. Section
1350
99.2 Certification pursuant to 18 U.S.C. Section
1350
(b) Reports on Form 8-K
1. On February 3, 2003, QMed filed a Form 8-K
Report, which was amended on February 4,
2003 relating to an announcement regarding
the termination of an agreement.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
QMed, Inc.
By: /s/ Michael W. Cox
-------------------------------------
Michael W. Cox
President and Chief Executive Officer
By: /s/ William T. Schmitt, Jr.
-------------------------------------
William T. Schmitt, Jr.
Senior Vice President and
Chief Financial Officer
18
CERTIFICATION
I, Michael W. Cox, certify that:
1. I have reviewed this quarterly report on Form 10-Q of QMed, Inc.;
2. Based on my knowledge, this quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly 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 quarterly 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.
Dated: April 14, 2003
/s/ Michael W. Cox
-------------------------------------
Michael W. Cox
President and Chief Executive Officer
19
CERTIFICATION
I, William T. Schmitt, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of QMed, Inc.;
2. Based on my knowledge, this quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly 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 quarterly 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.
Dated: April 14, 2003
/s/ William T. Schmitt, Jr.
---------------------------
William T. Schmitt, Jr.
Senior Vice President and
Chief Financial Officer
20