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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: August 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.
(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 September
24, 2003: 14,602,607.
Part I.
Item 1. Financial Statements
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
August 31, 2003 November 30,
(Unaudited) 2002
--------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 1,130,422 $ 2,383,123
Investments 7,289,098 6,873,491
Accounts receivable, net of
allowances of approximately $2,000 577,854 203,216
Inventory 150,280 173,046
Prepaid expenses and other current assets 638,729 344,667
--------------- ---------------
9,786,383 9,977,543
Property and equipment, net 1,140,552 1,168,002
Product software development costs 470,451 461,261
Accounts receivable, non-current 1,474,674 -
Other assets 173,964 556,375
Investment in joint venture - -
--------------- ---------------
$ 13,046,024 $ 12,163,181
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,438,978 $ 828,845
Leases payable, current portion 64,494 46,980
Accrued salaries and commissions 202,378 334,642
Performance guarantee payable 735,223 248,156
Contract billings in excess of revenues 102,596 1,760,620
Income taxes payable 8,300 40,000
--------------- ---------------
2,551,969 3,259,243
Leases payable - long term 31,342 35,948
Contract billings in excess of revenue - long term 2,270,928 -
--------------- ---------------
4,854,239 3,295,191
Commitments and Contingencies
Stockholders' equity
Common stock $.001 par value; 40,000,000 shares
authorized; 14,624,607 and 14,506,153 shares
issued and 14,602,607 and 14,484,153 outstanding,
respectively 14,624 14,506
Paid-in capital 33,349,873 33,079,409
Accumulated deficit (25,085,712) (24,113,196)
Accumulated other comprehensive income
Unrealized loss on securities available for sale (11,375) (37,104)
--------------- ---------------
8,267,410 8,943,615
Less treasury stock at cost, 22,000 common shares (75,625) (75,625)
--------------- ---------------
Total stockholders' equity 8,191,785 8,867,990
--------------- ---------------
$ 13,046,024 $ 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 Nine For the Nine
Months Ended Months Ended Months Ended Months Ended
August 31, 2003 August 31, 2002 August 31, 2003 August 31, 2002
--------------- --------------- --------------- ---------------
Revenue
Disease management services $ 3,102,956 $ 2,391,590 $ 9,952,986 $ 8,849,646
Medical Equipment 61,956 100,017 194,671 319,997
------------- ------------- ------------- -------------
3,164,912 2,491,607 10,147,657 9,169,643
------------- ------------- ------------- -------------
Cost of revenue
Disease management services 1,699,609 1,352,792 4,809,613 3,866,293
Medical equipment 27,382 47,216 104,269 160,200
------------- ------------- ------------- -------------
1,726,991 1,400,008 4,913,882 4,026,493
------------- ------------- ------------- -------------
Gross profit 1,437,921 1,091,599 5,233,775 5,143,150
Selling, general and
administrative expenses 1,607,855 1,318,722 4,870,835 4,128,591
Research and development
expenses 237,711 305,228 681,581 873,389
Depreciation and amortization 104,478 68,309 298,425 195,497
Litigation settlements - - 230,000 -
------------- ------------- ------------- -------------
Loss from operations (512,123) (600,660) (847,066) (54,327)
Interest expense (5,915) (3,982) (18,678) (11,490)
Interest income 13,508 56,526 70,252 185,252
Loss in operations of joint venture (168,724) (11,250) (168,724) (47,500)
Other income - - - 94,012
------------- ------------- ------------- -------------
(Loss) income before income (673,254) (559,366) (964,216) 165,947
tax provision
Gain on sale of state tax benefits - 124,618
Provision for state income taxes (2,800) - (8,300) -
------------- ------------- ------------- -------------
Net (loss) income $ (676,054) $ (559,366) $ (972,516) $ 290,565
============= ============= ============= =============
Basic (loss) income per share
Weighted average shares
outstanding 14,598,155 14,479,767 14,557,235 14,412,130
------------- ------------- ------------- -------------
Basic (loss) earnings per
share $ (.05) $ (.04) $ (.07) $ .02
============= ============= ============= =============
Diluted (loss) income per share
Weighted average shares
outstanding 14,598,155 14,479,767 14,557,235 16,645,992
------------- ------------- ------------- -------------
Diluted (loss) earnings per
Share $ (.05) $ (.04) $ (.07) $ .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 For the Nine For the Nine
Months Ended Months Ended Months Ended Months Ended
August 31, 2003 August 31, 2002 August 31, 2003 August 31, 2002
--------------- --------------- --------------- ---------------
Net (loss) income $ (676,054) $ (559,366) $ (972,516) $ 290,565
Other comprehensive income
Unrealized gain (loss)
on securities available
for sale 3,102 (6,558) (18,085) (59,399)
Less: reclassification
adjustment for gains included
in net (loss) income 14,970 11,439 43,814 (41,826)
------------- ------------- ------------- -------------
Comprehensive (loss) income $ (657,982) $ (554,485) $ (946,787) $ 189,340
============= ============= ============= =============
See Accompanying Notes to Condensed Consolidated Financial Statements
4
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Nine Months Ended August 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 117,574 117 237,046 237,163
Issuance in connection with
Directors equity plan 880 1 6,406 6,407
Amortization of non-employee
stock options 27,012 27,012
Net loss for the nine months
ended August 31, 2003 (972,516) (972,516)
Change in unrealized holding
losses On securities available
for sale 25,729 25,729
---------- -------- ------------ ------------- --------- ------ --------- -----------
Balance - August 31, 2003 14,624,607 $ 14,624 $ 33,349,873 $ (25,085,712) $ (11,375) 22,000 $ (75,625) $ 8,191,785
========== ======== ============ ============= ========= ====== ========= ===========
See Accompanying Notes to Condensed Consolidated Financial Statements
5
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine For the Nine
Months Ended Months Ended
August 31, 2003 August 31, 2002
--------------- ---------------
Cash flows from operating activities:
Net (loss) income $ (972,516) $ 290,565
============= =============
Adjustments to reconcile net income to cash and cash
equivalents (used in) provided by operating activities:
Loss (gain) on sale of investments 43,814 (41,826)
Loss in operations of joint venture 168,724 47,500
Depreciation and amortization 298,425 195,497
Issuance of stock in connection with the directors
equity plan 6,407
Amortization of non-employee stock options 27,012 22,400
Amortization of bond discounts and premiums 59,482 -
(Increase) decrease in
Accounts receivable (1,849,312) 581,618
Inventory 22,766 10,515
Prepaid expenses and other current assets 80,630 (233,023)
Increase (decrease) in
Accounts payable and accrued liabilities 831,633 72,084
Contract billings in excess of revenues 577,483 1,271,692
Other, net (29,583) (74,296)
------------- -------------
Total adjustments 237,481 1,852,161
------------- -------------
(735,035) 2,142,726
============= =============
Cash flows from investing activities:
Proceeds from sale of securities available for sale 11,619,056 11,273,005
Purchases of securities available for sale (12,112,230) (11,768,309)
Capital expenditures (213,584) (700,637)
Investment in joint venture - (47,500)
------------- -------------
$ (706,758) $ (1,243,441)
============= =============
Cash flows from financing activities:
Payments for capital leases (48,071) (40,030)
Proceeds from issuance of common stock 237,163 1,464,747
------------- -------------
$ 189,092 $ 1,424,717
============= =============
Net (decrease) increase in cash and cash equivalents (1,252,701) 2,324,002
Cash and cash equivalents at beginning of period 2,383,123 531,450
------------- -------------
Cash and cash equivalents at end of period $ 1,130,422 $ 2,855,452
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 18,552 $ 11,490
Income taxes 39,000 10,200
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 nine month periods ended August 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
August 31, 2003, based on information and data available, the Company has
deferred approximately $2,400,000 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 majority of contract billings in excess of revenues on the balance sheet are
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 August 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 August 31, 2003 were as
follows:
Cost Market Value Unrealized Gain (Loss)
---- ------------ ----------------------
Corporate debt securities $ 4,668,194 $ 4,657,945 $ (10,249)
U.S. Government short term
obligations 2,632,279 2,631,153 (1,126)
----------- ----------- ---------
$ 7,300,473 $ 7,289,098 $ (11,375)
=========== =========== =========
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:
August 31, 2003 November 30, 2002
(Unaudited)
--------------- -----------------
Raw materials (component parts) $ 120,741 $ 132,425
Finished units 29,539 40,621
------------- -------------
$ 150,280 $ 173,046
============= =============
Note 5 - Product Software Development Costs
During the three and nine months ended August 31, 2003, the Company capitalized
approximately $5,000 and $79,000, respectively, in product software development
costs. These costs are amortized over a five-year useful life.
Note 6 - Patent and Deferred Legal Costs
During the quarter ended August 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
August 31, 2003, the Company had incurred approximately $391,000 of legal costs
related to this matter of which approximately $160,000 is currently recorded 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 August 31, 2003, the Company has recorded losses to date of
approximately $405,000 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:
August 31, 2003 November 30, 2002
(Unaudited)
--------------- -----------------
Accounts payable trade $ 157,354 $ 248,862
Accrued settlement costs 180,000 -
Insurance premiums payable 355,241 269,400
Fees reimbursable to health plans 94,099 3,050
Deferred warranty revenue 23,446 58,867
Due to joint venture 168,724 -
Other accrued expenses - none in excess of
5% of current liabilities 460,114 248,666
------------- -------------
$ 1,438,978 $ 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 nine months
ended August 31, is as follows:
Three Months Ended Nine Months Ended
August 31, August 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenue:
Disease management services $ 3,102,956 $ 2,391,590 $ 9,952,986 $ 8,849,646
Medical equipment sales 61,956 100,017 194,671 319,997
------------ ------------ ------------ ------------
$ 3,164,912 $ 2,491,607 $ 10,147,657 $ 9,169,643
============ ============ ============ ============
(Loss) Income before income taxes:
Disease management services $ (13,849) $ (363,817) $ 881,888 $ 1,148,580
Medical equipment sales 22,196 44,437 46,498 133,981
------------ ------------ ------------ ------------
Total segments $ 8,347 $ (319,380) $ 928,386 $ 1,282,561
General corporate expenses - net $ (681,601) $ (239,986) $ (1,892,602) $ (1,116,614)
------------ ------------ ------------ ------------
$ (673,254) $ (559,366) $ (964,216) $ 165,947
============ ============ ============ ============
9
QMED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 10 - Earnings per Share
For the three and nine months ended August 31, 2003, the basic and diluted loss
per share were the same because the assumed conversion of warrants and stock
options which totaled 1,750,072 and 1,754,613 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 Nine Months Ended
August 31, August 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net (loss) income - as reported $ (676,054) $ (559,366) $ (972,516) $ 290,565
Deduct:
Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects 240,127 251,416 604,752 756,274
------------ ------------ ------------ ------------
Pro forma net loss $ (916,181) $ (810,782) $ (1,577,268) $ (465,709)
============ ============ ============ ============
Net (loss) income per share:
Basic earnings (loss)
per share - as reported $ (.05) $ (.04) $ (.07) $ .02
============ ============ ============ ============
Basic loss per share - proforma $ (.06) $ (.06) $ (.11) $ (.03)
============ ============ ============ ============
Net (loss) income per share:
Diluted earnings (loss)
per share - as reported $ (.05) $ (.04) $ (.07) $ .02
============ ============ ============ ============
Diluted loss per share - proforma $ (.06) $ (.06) $ (.11) $ (.03)
============ ============ ============ ============
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 August 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 August 31, 2003 management is not able to adequately predict what
adjustments, if any, may be required under these contracts.
The Company is obligated to purchase heart-monitoring equipment under various
orders from one supplier, all of which are expected to be fulfilled with no
adverse consequences material to the companies operations or financial
condition. Total open commitments under these purchase orders are approximately
$302,000 as of August 31, 2003.
The Company is subject to claims and legal proceedings covering a wide range of
matters that arise in the ordinary course of business. Management has recorded
estimates totaling approximately $180,000 for the resolution of one of these
matters.
Note 15 - Reclassifications
Certain reclassifications have been made to prior period's financial statements
in order to conform to the current year presentation.
Note 16 - 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.
11
QMED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 16 - Recently Issued Accounting Standards (Cont'd)
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.
In November 2002, the FASB issued interpretation No. ("FIN") 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which requires that guarantees within the
scope of FIN 45 issued or amended after December 31, 2002, a liability for the
fair value of the obligation undertaken in issuing the guarantee, be recognized
at the inception of the guarantee. The effective date for this FIN 45 is for
fiscal years ending after 12/15/2002.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities," which is effective for interim periods beginning after June 15, 2003.
This interpretation changes the method of determining whether certain entities
should be included in the Company's consolidated financial statements. An entity
is subject to FIN 46 and is called a variable interest entity ("VIE") if it has
(1) equity that is insufficient to permit the entity to finance its activities
without additional subordinated financial support from other parties, or (2)
equity investors that cannot make significant decisions about the entity's
operations or that do not absorb the expected losses or receive the expected
returns of the entity. All other entities are evaluated for consolidation under
SFAS No. 94, "Consolidation of All Majority-Owned Subsidiaries." A VIE is
consolidated by its primary beneficiary, which is the party involved with the
VIE that has a majority of the expected losses or a majority of the expected
residual returns or both.
Note 17 - Subsequent Event
Subsequent to August 31, 2003 the Company entered into an agreement with a
customer to replace its existing contract with a new contract to be effective no
later than November 15, 2003. The agreement requires good faith negotiations
towards this new contract that, when compared to the existing contract, would
reduce the Company's financial exposure. As part of this agreement, the Company
will remit this customer approximately $454,000, which has been charged against
revenue and recorded as performance guarantee payable on the balance sheet.
If the Company and the customer are unable to come to agreement on the new
contract terms, this agreement provides that the existing contract will
terminate and the Company will make a payment to the customer of approximately
$1.2 million.
********************
12
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 August 31, 2003, we had contracts to provide these services to 13
health plans in 10 states covering approximately 1.2 million health plan
members.
As of August 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
13
We undertake no obligation to update or revise any such forward-looking
statements.
Critical Accounting Policies
Our accounting policies are described in Note 2 of the condensed consolidated
financial statements included in this Report on Form 10-Q for the quarter ended
August 31, 2003. 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 August 31, 2003, based on information and data available at
this time, we deferred approximately $2,400,000 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 $2,400,000 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
14
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.
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 August 31, 2003, approximately 47% 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.
For the Three Months For the Nine Months For the Three Months For the Nine Months
Ended August 31, Ended August 31, Ended August 31, Ended August 31,
2003 2002 2003 2002 2003 Vs. 2002 2003 Vs. 2002
---- ---- ---- ---- ------------- -------------
Revenue 100.0% 100.0% 100.0% 100.0% 27.0% 10.7
Cost of revenue 54.6 56.2 48.4 43.9 23.4 22.0
----- ----- ----- -----
Gross profit 45.4 43.8 51.6 56.1 21.7 1.8
Selling, general and administrative 40.8 52.9 48.0 45.0 21.9 18.0
Research and development 7.5 12.3 6.7 9.5 (22.1) (22.0)
Depreciation and amortization 3.3 2.7 2.9 2.1 52.9 52.6
Litigation settlement - - 2.3 - * *
----- ----- ----- -----
Income (loss) from operations (16.2) (24.1) (8.3) (.6) (14.7) (1,459.2)
Interest income .4 2.3 .7 2.0 (76.1) (62.1)
Interest expense (.2) (.2) (.2) (.1) 48.5 62.6
Loss in operations of joint venture (5.3) (.5) (1.7) (.5) * *
Other income - - - 1.0 * *
----- ----- ----- -----
Loss before tax (provision) benefit (21.3) (22.5) (9.5) 1.8 (20.4) (681.0)
Income tax (provision) benefit (.1) - (.1) - * *
----- ----- ----- -----
Net income (loss) (21.4) (22.5) (9.6) 1.8 (20.9) (434.7)
* Not meaningful
Three Months Ended August 31, 2003 Compared to Three Months Ended August 31,
2002
Revenue for the three-month period ended August 31, 2003 increased approximately
$673,000 or 27.0% 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 an additional contract with a health plan customer in Colorado
entered into since August 31, 2002 representing approximately 125,000 members
and $316,000. This increase was partially offset by a approximately $454,000
related to a difference in estimated verses actual cost savings measures under a
15
contract with a customer and market exits under an existing disease management
program in California. As of August 31, 2003 and August 31, 2002, our disease
management programs covered approximately 1.2 million members. At August 31,
2003, of the total health plan members under contract, we had approximately
1,006,000 commercial members and 169,000 Medicare+Choice members.
Gross profit margins for the three-month period ended August 31, 2003 increased
to 45.4% from 43.8% in the prior year. This increase was primarily due to the
increase in revenue of $673,000 as described above.
Selling, general and administrative expenses for the three-month period ended
August 31, 2003 increased approximately $289,000 or 21.9% compared to the prior
year. The increase was 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.
Research and development expenses for the three-month period ended August 31,
2003 decreased approximately $67,000 or 22.1% 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, and
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 August
31, 2003 increased approximately $36,000 or 52.9% compared to the prior year.
The increase was primarily due to depreciation of new office furniture and
equipment at our headquarters in Eatontown.
Nine Months Ended August 31, 2003 Compared to Nine Months Ended August 31, 2002
Revenue for the nine-month period ended August 31, 2003 increased approximately
$978,000 or 10.7% 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 a contract with health a plan customer in Colorado entered into
since August 31, 2002 representing approximately 125,000 members. This increase
was partially offset by of approximately $454,000 related to a difference in
estimated verses actual cost savings measures under a contract with a customer
and market exits under an existing disease management program in California and
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 August 31, 2003 and
August 31, 2002, our disease management programs covered approximately 1.2
million members. At August 31, 2003, of the total health plan members under
contract, we had approximately 1,006,000 commercial members and 169,000
Medicare+Choice members.
Gross profit margins for the nine-month period ended August 31, 2003 decreased
to 51.6% from 56.1% in the prior year. This decrease was due to the increased
costs associated with the launch of new health plan contracts in Arizona,
Colorado, Texas and Ohio and the offset related to the performance guaranty
described above. 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 nine-month period ended
August 31, 2003 increased approximately $742,000 or 18.1% compared to the prior
year. The increase was primarily due to costs associated with legal settlements
of approximately $35,000, and a retroactive insurance premium of approximately
$156,000. Selling, general and administrative expenses excluding these legal
fees and insurance premiums increased approximately $551,000 or 13.3% 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.
16
Research and development expenses for the nine-month period ended August 31,
2003 decreased approximately $192,000 or 22.0% 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, and
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 nine-month period ended August
31, 2003 increased approximately $103,000 or 52.6% 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.
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 $7,234,000 at August 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 3.8:1 as of August 31, 2003, and 5.3:1 as of November 30, 2002.
The working capital decrease of approximately $1,010,000 was primarily due to a
net loss of approximately $973,000 and an increase in net accounts receivable of
approximately $375,000. These decreases were partially offset by the proceeds
from the sale of common stock through the exercise of outstanding options and
warrants of approximately $237,000. 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, 2003 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.
Material Commitments
The following schedule summarizes our contractual cost obligation as of
August 31, 2003 in the periods indicated.
Contractual Payments Due by Period
Obligations
- ---------------------------------------- --------------------------------------------------------------------------------
2004 2005 - 2006 2007 - 2008 2009 and After Total
- ---------------------------------------- --------------- --------------- ---------------- --------------- ---------------
Long-Term Debt $ -- $ -- $ -- $ -- $ --
Capital Lease Obligations 74,000 33,000 -- -- 107,000
Operating Leases 556,000 964,000 386,000 -- 1,906,000
Unconditional Purchase Obligations 302,000 -- -- -- 302,000
Other Long-Term Obligations 673,000 668,000 -- -- 1,341,000
Total Contractual Cash Obligations $ 1,605,000 $ 1,665,000 $ 386,000 $ -- $ 3,656,000
- ---------------------------------------- --------------- --------------- ---------------- --------------- ---------------
17
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. The form of Certifications required of the CEO and
CFO in accord with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section
302 Certification) are filed as exhibits 31.1 and 31.2 of this report. 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
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 as of the end of each period 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
18
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 4 and 5 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.
19
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). During the quarter 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 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
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
10.1 Indenture of Trust Dated August 8, 2003 Between QMed, Inc. and
American Stock Transfer and Trust Company.
31.1 Certification of Chief Executive Officer of Periodic Report
pursuant to Rule 13a-14a and Rule 15d-14(a).
31.2 Certification of Chief Financial Officer of Periodic Report
pursuant to Rule 13a-14a and Rule 15d-14(a).
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
- Section 1350.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
- Section 1350.
(b) Form 8-K dated July 15, 2003 reporting under Item 7 "Financial
Statements and Exhibits" and Item 9 relating to a press release concerning the
Company's second 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
October 15, 2003
21