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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: May 31, 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.
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(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
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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
July 8, 2003: 14,598,321.
Part I. Financial Information
Item 1. Financial Statements
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
May 31, 2003 November 30,
(Unaudited) 2002
--------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 1,389,173 $ 2,383,123
Investments 7,127,522 6,873,491
Accounts receivable, net of
allowances of approximately $2,000 758,591 203,216
Inventory 148,200 173,046
Prepaid expenses and other current assets 645,378 344,667
--------------- ---------------
10,068,864 9,977,543
Property and equipment, net 1,176,079 1,168,002
Product software development costs 494,572 461,261
Accounts receivable, non-current 1,474,674 -
Other assets 174,132 556,375
Investment in joint venture - -
--------------- ---------------
$ 13,388,321 $ 12,163,181
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,259,463 $ 828,845
Leases payable, current portion 64,489 46,980
Accrued salaries and commissions 277,934 334,642
Performance guarantee payable 653,553 248,156
Contract billings in excess of revenues - 1,760,620
Income taxes payable 5,500 40,000
--------------- ---------------
2,260,939 3,259,243
Leases payable - long term 46,210 35,948
Contract billings in excess of revenues - long term 2,270,928 -
--------------- ---------------
4,578,077 3,295,191
Commitment and Contingencies
Stockholders' equity
Common stock $.001 par value; 40,000,000 shares
authorized; 14,618,460 and 14,506,153 shares
issued and 14,596,460 and 14,484,153 outstanding 14,618 14,506
Paid-in capital 33,310,356 33,079,409
Accumulated deficit (24,409,658) (24,113,196)
Accumulated other comprehensive income
Unrealized losses on securities available for sale (29,447) (37,104)
--------------- ---------------
8,885,869 8,943,615
Less treasury stock at cost, 22,000 common shares (75,625) (75,625)
--------------- ---------------
Total stockholders' equity 8,810,244 8,867,990
--------------- ---------------
$ 13,388,321 $ 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 For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
May 31, 2003 May 31, 2002 May 31, 2003 May 31, 2002
------------- ------------- ------------- -------------
Revenue
Disease management services $ 3,245,017 $ 3,397,758 $ 6,850,030 $ 6,458,056
Medical Equipment 71,684 94,563 132,715 219,980
------------- ------------- ------------- -------------
3,316,701 3,492,321 6,982,745 6,678,036
------------- ------------- ------------- -------------
Cost of revenue
Disease management services 1,580,803 1,305,357 3,110,004 2,513,501
Medical equipment 32,803 45,834 76,887 112,984
------------- ------------- ------------- -------------
1,613,606 1,351,191 3,186,891 2,626,485
------------- ------------- ------------- -------------
Gross profit 1,703,095 2,141,130 3,795,854 4,051,551
Selling, general and
administrative expenses 1,779,249 1,471,128 3,262,980 2,809,869
Research and development
expenses 193,242 312,312 443,870 568,161
Depreciation and amortization 99,906 63,394 193,947 127,188
Litigation settlements 230,000 - 230,000 -
------------- ------------- ------------- -------------
(Loss) income from operations (599,302) 294,296 (334,943) 546,333
Interest income 7,127 72,460 56,744 128,726
Interest expense (5,776) (1,906) (12,763) (7,508)
Loss in operations of joint venture (11,250) (36,250)
Other income 94,012 94,012
------------- ------------- ------------- -------------
(Loss) income before income tax
(provision) benefit (597,951) 447,612 (290,962) 725,313
Gain on sale of state tax benefits - - - 124,618
Benefit (provision) for state income
taxes 10,500 - (5,500) -
------------- ------------- ------------- -------------
Net (loss) income $ (587,451) $ 447,612 $ (296,462) $ 849,931
============= ============= ============= =============
Basic income per share
Weighted average shares
outstanding 14,555,717 14,457,022 14,536,551 14,377,939
------------- ------------- ------------- -------------
Basic (loss) earnings
per share $ (.04) $ .03 $ (.02) $ .06
============= ============= ============= =============
Diluted income per share
Weighted average shares
outstanding 14,555,717 16,729,466 14,536,551 16,721,312
------------- ------------- ------------- -------------
Diluted (loss) earnings
per share $ (.04) $ .03 $ (.02) $ .05
============= ============= ============= =============
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 For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
May 31, 2003 May 31, 2002 May 31, 2003 May 31, 2002
------------- ------------- ------------- -------------
Net (loss) income $ (587,451) $ 447,612 $ (296,462) $ 849,931
Other comprehensive income
Unrealized losses on
securities available for sale (8,660) (14,345) (21,187) (52,841)
Less: reclassification
adjustment for losses
included in net income 32,453 42,104 28,844 30,387
------------- ------------- ------------- -------------
Comprehensive (loss) income $ (563,658) $ 475,371 $ (288,805) $ 827,477
============= ============= ============= =============
See Accompanying Notes to Condensed Consolidated Financial Statements
4
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Six Months Ended May 31, 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 112,307 112 218,503 218,615
Amortization of non-employee
stock options 12,444 12,444
Net loss for the six months
ended May 31, 2003 (296,462) (296,462)
Unrealized holding losses on
securities available for sale 7,657 7,657
---------- ------- ----------- ------------ -------- ------ -------- ----------
Balance - May 31, 2003 14,618,460 $14,618 $33,310,356 $(24,409,658) $(29,447) 22,000 $(75,625) $8,810,244
========== ======= =========== ============ ======== ====== ======== ==========
See Accompanying Notes to Condensed Consolidated Financial Statements
5
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six For the Six
Months Ended Months Ended
May 31, 2003 May 31, 2002
------------- -------------
Cash flows from operating activities:
Net (loss) income $ (296,462) $ 849,931
============= =============
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Loss (gain) on sale of investments 28,844 (30,387)
Loss in operations of joint venture - 36,250
Depreciation and amortization 193,947 127,188
Amortization of non-employee stock options 12,444 14,934
Amortization of bond discounts and premiums 27,483 -
(Increase) decrease in
Accounts receivable (2,030,049) 241,586
Inventory 24,846 6,147
Prepaid expenses and other current assets (300,711) (112,524)
Increase (decrease) in
Accounts payable and accrued liabilities 802,234 537,754
Contract billings in excess of revenues and
deferred revenue 487,381 (27,069)
Other, net 347,178 (1,453)
------------- -------------
Total adjustments (406,403) 792,426
------------- -------------
Net cash (used in) provided by operating activities $ (702,865) $ 1,642,357
============= =============
Cash flows from investing activities:
Proceeds from sale of securities available for sale 8,180,399 6,050,389
Purchases of securities available for sale (8,483,100) (8,037,402)
Capital expenditures, net (173,791) (369,056)
Investment in joint venture - (36,250)
------------- -------------
Net cash used in investing activities $ (476,492) $ (2,392,319)
============= =============
Cash flows from financing activities:
Payments for capital leases (33,208) (40,029)
Proceeds from issuance of common stock 218,615 1,464,747
------------- -------------
Net cash provided by financing activities $ 185,407 $ 1,424,718
============= =============
Net change in cash and cash equivalents (993,950) 674,756
Cash and cash equivalents at beginning of period 2,383,123 531,450
------------- -------------
Cash and cash equivalents at end of period $ 1,389,173 $ 1,206,206
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 12,776 $ 7,508
Income taxes 39,000 9,000
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 of QMed,
Inc. and its subsidiaries (the "Company") 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 and six month periods ended May 31, 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.
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+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 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 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 the Company's 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. The Company bills its 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. The Company adjusts or defers
revenue for contracts where it believes 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. The Company
reviews these estimates periodically and makes adjustments, 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
May 31, 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, the revenue from these
agreements which are 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.
7
QMED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2 - Revenue Recognition (Cont'd)
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 May 31, 2003, non-current 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 May 31, 2003 were as follows:
Unrealized Gain
Cost Market Value (Loss)
---- ------------ ---------------
Corporate debt securities $4,879,478 $4,851,227 $(28,251)
U.S. Government short term
obligations 2,277,491 2,276,295 (1,196)
---------- ---------- --------
$7,156,969 $7,127,522 $(29,447)
========== ========== ========
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:
May 31, 2003
(Unaudited) November 30, 2002
-------------- -----------------
Raw materials (component parts) $ 123,303 $ 132,425
Finished units 24,897 40,621
------------- -------------
$ 148,200 $ 173,046
============= =============
Note 5 - Product Software Development Costs
During the three and six months ended May 31, 2003, the Company capitalized
approximately $50,000 and $74,000, respectively, in product software development
costs. These costs are amortized over a five-year useful life.
Note 6 - Patent and Deferred Legal Costs
Subsequent to May 31, 2003, the Company reached an out of court settlement of
its patent infringement claim against LifeMasters Supported SelfCare, Inc. The
settlement resolves the outstanding dispute between the parties and includes a
license of one of the Company's patents. The Company has deferred all legal
costs associated with this claim. The settlement also includes a reimbursement
for legal costs associated with this matter. As of May 31, 2003, the Company has
recorded $387,220 of legal costs related to this matter in other current 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 May 31, 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 (Continued)
Note 8 - Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses include the following:
May 31, 2003
(Unaudited) November 30, 2002
------------ -----------------
Accounts payable trade $ 316,395 $ 248,862
Accrued settlement costs 230,000 -
Insurance premiums payable 206,162 269,400
Fees reimbursable to health plans 83,199 3,050
Deferred warranty revenue 35,940 58,867
Other accrued expenses - none in excess of
5% of current liabilities 387,767 248,666
----------- -----------
$ 1,259,463 $ 828,845
=========== ===========
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 and six months
ended May 31, is as follows:
Three Months Ended Six Months Ended
May 31, May 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenue:
Disease management services $ 3,245,017 $ 3,397,758 $ 6,850,030 $ 6,458,056
Medical equipment sales 71,684 94,563 132,715 219,980
------------ ------------ ------------ ------------
$ 3,316,701 $ 3,492,321 $ 6,982,745 $ 6,678,036
============ ============ ============ ============
Income (loss) before income taxes:
Disease management services $ 40,110 $ 890,551 $ 879,737 $ 1,512,397
Medical equipment sales 9,347 71,796 24,302 83,184
------------ ------------ ------------ ------------
Total segments 49,457 962,347 904,039 1,595,581
General corporate expenses - net (647,408) (514,735) (1,195,001) (870,268)
------------ ------------ ------------ ------------
$ (597,951) $ 447,612 $ (290,962) $ 725,313
============ ============ ============ ============
9
QMED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 10 - Earnings per Share
For the three and six months ended May 31, 2003, the basic and diluted loss per
share were the same because the assumed conversion of warrants and stock options
which totaled 1,741,354 and 1,797,925 shares, respectively, were antidilutive
and not included in the calculation of loss per share.
Note 11 - Stock-Based Compensation
The Company accounts for stock option plans under the recognition and
measurement principles of Accounting principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. No
stock-based employee compensation cost is reflected in net income (loss), as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. In accordance with
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," the effect on net income (loss) and net income (loss) per share if
the Company had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee compensation
is as follows:
Three Months Ended Six Months Ended
May 31, May 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income (loss) - as reported $ (587,451) $ 447,612 $ (296,462) $ 849,931
Deduct:
Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects 221,938 256,622 377,097 519,792
------------ ------------ ------------ ------------
Pro forma net income (loss) $ (809,389) $ 190,990 $ (673,559) $ 330,139
============ ============ ============ ============
Net income (loss) per share:
Basic earnings (loss)
per share - as reported $ (.04) $ .03 $ (.02) $ .06
============ ============ ============ ============
Basic earnings (loss)
per share - proforma $ (.06) $ .01 $ (.05) $ .02
============ ============ ============ ============
Net income (loss) per share:
Diluted earnings (loss)
per share - as reported $ (.04) $ .03 $ (.02) $ .05
============ ============ ============ ============
Diluted earnings (loss)
per share - proforma $ (.06) $ .01 $ (.05) $ .02
============ ============ ============ ============
Note 12 - 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 May 31, 2003.
10
QMED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13 - 2003 Outside Directors Equity Plan
The Company has adopted 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 14 - Commitments and Contingencies
On March 28, 2003, HeartMasters LLC, a limited liability company 50% owned by
Interactive Heart Management Corp., QMed Inc.'s wholly owned 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 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.
Typically, the Company's fees or incentives are higher in contracts with
increased financial risk such as those contracts with performance-based fees or
guarantees against cost increases. The failure to achieve targeted cost
reductions could, in certain cases, render a contract unprofitable and could
have a material negative impact on the Company's results of operations.
The Company has reinsurance contracts with provisions whereby the reinsurer has
the ability to retroactively adjust premiums as the result of certain conditions
being met. These adjustments are determined subsequent to the end of the policy
year. As of May 31, 2003 management is not able to adequately predict what
adjustments, if any, may be required under these contracts.
The Company is subject to claims and legal proceedings covering a wide range of
matters that arise in the ordinary course of business, unrelated to our patent
claim against LifeMasters. Management has recorded estimates totaling
approximately $230,000 for the resolution of certain of these matters.
Note 15 - Recently Issued Accounting Standards
Accounting for costs associated with exit on disposal activities. In June 2002,
the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities". SFAS No. 146 rescinds Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized and measured initially at its
fair value in the period that the liability is incurred. The provisions of SFAS
No. 146 are effective for exit or disposal activities initiated after December
31, 2002, with early application encouraged. The adoption of SFAS No. 146 did
not have a material impact on the Company's financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation", which amends SFAS No. 123 to provide alternative methods of
transaction for an entity that voluntarily changes to the fair value method of
accounting for stock based compensation. It also amends the disclosure
provisions of SFAS No. 123 to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect to
stock based employee compensation. Finally, SFAS No. 148 amends APB Opinion No.
28, "Interim Financial Reporting", to require disclosure of those effects in
interim financial statements. SFAS No. 148 is effective for fiscal years ended
after December 15, 2002, but early adoption is permitted. Accordingly, the
Company has adopted the applicable disclosure requirements of this Statement
within this report. The adoption of SFAS No. 148 is not expected to have a
significant impact on the Company's financial disclosures.
11
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 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 May 31, 2003, we had contracts to provide these services to 11
health plans in 10 states covering approximately 1.1 million health plan
members.
As of May 31, 2003, the Company continues to provide services in its current
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
fourth 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
We undertake no obligation to update or revise any such forward-looking
statements.
12
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 May 31, 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
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.
13
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 May 31, 2003, approximately 56% of disease management services were
derived from four 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 Six Months For the Three Months For the Six Months
Ended May 31, Ended May 31, Ended May 31, Ended May 31,
2003 2002 2003 2002 2003 Vs. 2002 2003 Vs. 2002
---- ---- ---- ---- ------------- -------------
Revenue 100.0% 100.0% 100.0% 100.0% (5.0)% 4.6%
Cost of revenue 48.7 38.7 45.6 39.3 19.4 21.3
----- ----- ----- -----
Gross profit 51.3 61.3 54.4 60.7 (20.5) (6.3)
Selling, general and administrative 53.7 42.2 46.7 42.1 20.9 16.1
Research and development 5.8 8.9 6.4 8.5 (38.1) (21.9)
Depreciation and amortization 3.0 1.8 2.8 1.9 57.6 52.5
Litigation settlement 6.9 - 3.3 - * *
----- ----- ----- -----
Income (loss) from operations (18.1) 8.4 (4.8) 8.2 (303.6) (161.3)
Interest income .3 2.0 .8 1.9 (90.2) (55.9)
Interest expense (.2) (.1) (.2) (.1) 203.0 70.0
Loss in operations of joint venture - (.3) - (.5) * *
Other income - 2.8 - 1.4 * *
----- ----- ----- -----
Loss before tax (provision) benefit (18.0) 12.8 (4.2) 10.9 (233.6) (140.1)
Income tax (provision) benefit .3 - - 1.8 * *
----- ----- ----- -----
Net income (loss) 17.7 12.8 (4.2) 12.7 (231.2) (134.9)
===== ===== ===== =====
* Not meaningful
Three Months Ended May 31, 2003 Compared to Three Months Ended May 31, 2002
Revenue for the three-month period ended May 31, 2003 decreased approximately
$176,000 or 5% over the same period in 2002. This decrease was primarily due to
the termination of disease management programs under HeartMasters agreements
with Regence of Oregon and Washington on January 31, 2003. These terminations
resulted in the loss of approximately 445,000 members and $634,000. This
decrease was partially offset by an increase in the enrolled members covered
under existing disease management programs, and additional contracts with health
plan customers in Arizona, Colorado and Oregon entered into since May 31, 2002
representing approximately 300,000 members and $476,000. As of May 31, 2003 and
May 31, 2002, our disease management programs covered approximately 1.1 million
members. At May 31, 2003, of the total health plan members under contract, we
had approximately 986,000 commercial members and 150,000 Medicare+Choice
members.
14
During the fiscal second quarter 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 during the fiscal third
quarter 2003.
Since May 31, 2002, we commenced with 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 commence during fiscal fourth quarter
2003.
Gross profit margins for the three-month period ended May 31, 2003 decreased to
51.3% from 61.3% in the prior year. This decrease was due to the increased costs
associated with the launch of new PacifiCare 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-month period ended
May 31, 2003 increased approximately $308,000 or 20.9% compared to the prior
year. The increase was primarily due to legal costs associated with the pending
arbitration of the Regence contract of approximately $70,000, and a retroactive
insurance premium of approximately $156,000. Selling, general and administrative
expenses, excluding these legal fees and insurance premiums, increased
approximately $82,000 or 5.6% compared to the prior year primarily due to an
increase in both executive and administrative staff to meet our future needs,
professional fees related to general corporate matters, and rent associated with
our new corporate headquarters. As a result, selling, general and administrative
expenses as a percentage of revenue increased by 11.5%, from 42.2% at May 31,
2002 to 53.7% at May 31, 2003.
Research and development expenses for the three-month period ended May 31, 2003
decreased approximately $119,000 or 38.1% compared to the prior year. 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. Certain costs associated with the
development of new product software are capitalized and amortized over a 5-year
useful life. We intend to continue to improve and expand the capabilities of the
ohms|cvd system ongoing.
Depreciation and amortization expenses for the three-month period ended May 31,
2003 increased approximately $37,000 or 57.6% compared to the prior year. The
increase was primarily due to depreciation of new office furniture and equipment
at our headquarters in Eatontown.
Litigation settlements represent costs associated with settlement of certain
outstanding legal proceedings, which have either reached settlement during the
period or have reached a point at which the outcome can be reasonably estimated.
Six Months Ended May 31, 2003 Compared to Six Months Ended May 31, 2002
Revenue for the six-month period ended May 31, 2003 increased approximately
$305,000 or 4.6% over the same period in 2002. This increase was primarily due
to an increase in the enrolled members covered under existing disease management
programs, and contracts with health plan customers in Arizona, Colorado and
Oregon entered into since May 31, 2002 representing approximately 300,000
members. This increase was partially offset by the termination of disease
management programs under HeartMasters agreements with Regence of Oregon and
Washington on January 31, 2003. These terminations resulted in the loss of
approximately 445,000 members. As of May 31, 2003 and May 31, 2002, our disease
management programs covered approximately 1.1 million members. At May 31, 2003,
of the total health plan members under contract, we had approximately 986,000
commercial members and 150,000 Medicare+Choice members.
15
Gross profit margins for the six-month period ended May 31, 2003 decreased to
54.4% from 60.7% 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 six-month period ended May
31, 2003 increased approximately $453,000 or 16.1% compared to the prior year.
The increase was primarily due to costs associated with the pending arbitration
of the Regence contract of approximately $70,000, and a retroactive insurance
premium of approximately $156,000. Selling, general and administrative expenses
excluding these legal fees and insurance premiums increased approximately
$227,000 or 8.1% compared to the prior year primarily due to an increase in both
executive and administrative staff, professional fees related to general
corporate matters, and rent associated with our new corporate headquarters.
Selling, general and administrative expenses as a percentage of revenue
increased by 4.6%, from 42.1% at May 31, 2002 to 46.7% at May 31, 2003.
Research and development expenses for the six-month period ended May 31, 2003
decreased approximately $124,000 or 21.9% compared to the prior year. 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. Certain costs associated with the
development of new product software are capitalized and amortized over a 5-year
useful life. We intend to continue to improve and expand the capabilities of the
ohms|cvd system ongoing.
Depreciation and amortization expenses for the six-month period ended May 31,
2003 increased approximately $67,000 or 52.5% compared to the prior year. The
increase was primarily due to depreciation of new office furniture and equipment
at our headquarters in Eatontown.
Litigation settlements represent costs associated with settlement of certain
outstanding legal proceedings, which have either reached settlement during the
period or have reached a point at which the outcome can be reasonably estimated.
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 approximately $7,808,000 at May 31, 2003 compared to
working capital adjusted to reflect current classifications of approximately
$8,245,000 at November 30, 2002 and ratios of current assets to current
liabilities of 4.5:1 as of May 31, 2003, and 5.3:1 as of November 30, 2002. The
working capital decrease of approximately $439,000 was primarily due to a net
loss of approximately $296,000 and an increase in net accounts receivable of
approximately $759,000. These decreases were partially offset by the proceeds
from the sale of common stock through the exercise of outstanding options and
warrants of approximately $219,000. 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 May 31, 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 our performance under the terms of new health
plan contracts, we may be required to seek additional financing. No assurance
can be given that such financing would be available on terms that would be
acceptable to us.
16
Material Commitments
The following schedule summarizes our contractual cost obligation as of
May 31, 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 76,221 49,415 -- -- 125,636
Operating Leases 646,127 974,896 504,119 -- 2,125,142
Unconditional Purchase Obligations -- -- -- -- --
Other Long-Term Obligations 672,500 836,250 -- -- 1,508,750
Total Contractual Cash Obligations $ 1,394,848 $ 1,860,561 $ 504,119 $ -- $ 3,759,528
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
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
17
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.
18
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). Subsequent to May 31, 2003, the
Company reached an out of court settlement in 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 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 12, 2003,
pursuant to written notice and the Company's bylaws. The total number
of the Company's shares outstanding on April 8, 2003, the record date
of the meeting, was 14,511,070 of which 13,683,667 were present, in
person or by proxy. The following persons were nominated by management
and each was elected to serve as director until the next annual meeting
of stockholders:
Michael W. Cox
Bruce F. Wesson
Jane A. Murray
David Feldman
Richard I. Levin
Lucia L. Quinn
John J. Gargana, Jr.
A. Bruce Campbell
Herbert H. Sommer
Broker
For Against Abstain Non-Vote
--- ------- ------- --------
To adopt the Company's
2003 Outside Directors Equity Plan 13,190,107 337,815 155,745 -0-
To ratify the selection of the
Company's independent
certified public accountants
for the current fiscal year. 13,628,087 15,660 39,920 -0-
19
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
10.1 QMed, Inc. 2003 Outside Directors Equity Plan
10.2 Employment Agreement between the Company and
Jane Murray dated April 21, 2003
10.3 Michael W. Cox Waiver of Salary Increase dated
June 30, 2003
10.4 Jane Murray Waiver of Salary Increase dated
June 30, 2003
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. Form 8-K dated March 21, 2003 filed March 26, 2003
reporting under Item 7 "Financial Statements and
Exhibits" and Item 9 "Regulation FD Disclosure"
information relating to certain contracts.
2. Form 8-K dated April 14, 2003 and filed April 15,
2003 under Item 7 "Financial Statements and Exhibits"
and Item 9(12) relating to a press release concerning
the Company's first quarter financial results.
20
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, Chief Financial
Officer and Treasurer
July 15, 2003
21
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 officer and I are 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 officer 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 officer 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: July 15, 2003
/s/ Michael W. Cox
-------------------------------------
Michael W. Cox
President and Chief Executive Officer
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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 officer and I are 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 officer 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 officer 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: July 15, 2003
/s/ William T. Schmitt, Jr.
---------------------------
William T. Schmitt, Jr.
Senior Vice President,
Chief Financial Officer
and Treasurer
23