1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30,1999
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: 1-12529
NETMED, INC.
(Exact name of Registrant as specified in its charter)
OHIO 31-1282391
(State of incorporation (I.R.S. Employer
or organization) Identification No.)
1275 KINNEAR ROAD, COLUMBUS, OHIO 43212
(Address of principal executive offices, including zip code)
(614) 675-3722
(Registrant's telephone number, including area code)
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 report(s), and (2) has been subject to such
filing requirement for the past 90 days. YES X NO
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date 12,868,951 common
shares, without par value, on July 26, 1999.
Transitional Small Business Disclosure Format YES NO X
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TABLE OF CONTENTS
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PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheet June 30, 1999 1
Consolidated Statements of Operations for the Three Months Ended
and the Six Months Ended June 30, 1999 and 1998 2
Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 1999 and 1998 3
Notes to Consolidated Financial Statements -
June 30, 1999 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 9
Item 2. Changes in Securities. N/A
Item 3. Defaults Upon Senior Securities. N/A
Item 4. Submission of Matters to a Vote of Security Holders. N/A
Item 5. Other Information. N/A
Item 6. Exhibits and Reports on Form 8-K. 9
Signatures 10
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETMED, INC.
Consolidated Balance Sheet
June 30, 1999
(Unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 197,552
Prepaid assets 13,609
-----------
Total current assets 211,161
Furniture and equipment (net of
accumulated depreciation) 36,988
License (net of accumulated
amortization) 296,787
Deposits and other assets 1,538
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Total assets $ 546,474
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 188,322
Accrued expenses 71,626
Other liabilities 37,568
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Total current liabilities 297,516
Minority interest 12,206
Preferred stock of subsidiary 491,000
Stockholders' equity:
Common stock 8,068,877
Retained deficit (8,323,125)
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Total stockholders' equity (deficit) (254,248)
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Total liabilities and deficit in stockholders' equity $ 546,474
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See accompanying notes.
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NETMED, INC.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
----------------------------- -----------------------------
Royalty revenue $ -- $ 114,500 $ -- $ 265,755
Operating expenses:
Selling, general and administrative 331,419 471,743 594,098 1,064,910
Business development 36,938 123,836 100,853 268,374
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Total operating expense 368,357 595,579 694,951 1,333,284
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Operating loss (368,357) (481,079) (694,951) (1,067,529)
Other income (expense):
Interest income 607 12,337 7,549 29,576
Interest expense -- (28,322) (4,965) (59,271)
(Loss) on available-for-
sale securities (6,151) (635,762) (385,865) (894,147)
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Total other income (expense) (5,544) (651,747) (383,281) (923,842)
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Loss before minority interest (373,901) (1,132,826) (1,078,232) (1,991,371)
Minority interest (5,290) 11,010 (9,932) 11,010
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Net loss (379,191) (1,121,816) (1,088,164) (1,980,361)
Preferred dividend (5,845) -- (509,905) --
Gain on redemption of
preferred stock 1,252,142 -- 1,252,142 --
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Net income (loss) applicable to
common stockholders $ 867,106 $(1,121,816) $ (345,927) $(1,980,361)
=================================================================
Net income (loss) per share-basic and diluted $ 0.07 $ (0.10) $ (0.03) $ (0.18)
=================================================================
Shares used in computation 12,868,951 11,465,381 12,546,519 11,310,017
=================================================================
See accompanying notes.
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NETMED, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
--------
1999 1998
----------------------------
OPERATING ACTIVITIES
Net loss $(1,088,164) $(1,980,361)
Adjustments to reconcile net loss to net
cash provided by (used for) operating activities:
Depreciation and amortization 26,498 20,668
Minority interest 9,932 (11,010)
Loss on available-for-sale securities 385,865 894,147
Deferred compensation 17,777 85,478
Write off NSI note receivable 6,757 --
Warrants issued for consulting -- 10,000
Warrants issued to former officer 24,300 --
Changes in operating assets and liabilities:
Accounts receivable 30,000 64,641
Prepaid assets 11,600 13,800
Accounts payable 137,040 3,141
Accrued expenses and other liabilities (2,765) 11,894
----------------------------
Net cash used in operating activities (441,160) (887,468)
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INVESTING ACTIVITIES
Proceeds from joint
development partner 250,000 --
Notes receivable-COTI -- (84,933)
Acquisition of OxyNet -- (100,000)
Purchase of furniture and equipment -- (6,296)
----------------------------
Net cash (used) provided by investing activities 250,000 (191,229)
----------------------------
FINANCING ACTIVITIES
Redemption of preferred stock (125,000) --
Sale of options -- 16,666
----------------------------
Net cash (used) provided by financing activities (125,000) 16,666
----------------------------
Net decrease in cash (316,160) (1,062,031)
Cash and cash equivalents at beginning of period 513,712 1,656,370
----------------------------
Cash and cash equivalents at end of period $ 197,552 $ 594,339
============================
See accompanying notes.
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NETMED, INC.
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1999
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of NetMed, Inc.
(the "Company" or "NetMed") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-QSB and Item 10(a) of Regulation S-B, and include the
results of operations of OxyNet, Inc. ("OxyNet"), a 95% owned subsidiary (89.7%
after the transaction described in Note B) beginning April 3, 1998. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended and six month period ended June 30,
1999 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1999. For further information, refer to the financial
statements and footnotes thereto included in the NetMed, Inc. Form 10-K for the
year ended December 31, 1998 as filed with the Securities and Exchange
Commission.
NOTE B - CONVERTIBLE PREFERRED STOCK
On January 22, 1999, pursuant to an exchange agreement between NetMed and the
holders of the Company's outstanding 6% Convertible Debentures ("Debentures"),
97,712 Series A, 6% Convertible Preferred Shares ("Preferred Stock") were issued
in exchange for the outstanding Debentures, which at the time of the exchange
had a principle balance of $1,350,000 and accrued interest of $117,634.
The Preferred Stock was convertible into Common Stock at a conversion price
equal to 75% of the average closing price of the Common Stock for the three
business days immediately preceding the date of conversion. The Preferred Stock
could be redeemed for cash at the Company's option. Dividends were cumulative,
and at the option of the Company could be paid in cash or converted to Common
Stock at the conversion price. The Company recorded a preferred dividend
financing charge to retained earnings in the amount of $489,000 to reflect the
value of the discount as of the closing date.
In May 1999, the Company redeemed the remaining outstanding Preferred Stock
(with an aggregate stated value and accrued dividends of $1,388,521) for an
immediate payment of $125,000 and 400 shares of OxyNet, Inc. common stock owned
by the Company. In addition, the Company agreed to pay as additional
consideration, fifty percent (50%) of any net cash proceeds received by the
Company in respect of claims of the Company allowed in the Chapter 11
reorganization proceedings of Neuromedical Systems, Inc., pending in the United
States Bankruptcy Court for the District of Delaware, but with the maximum
amount of such additional consideration payable capped at $100,000.
NOTE C - COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement No. 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in shareholders' equity to be included in other comprehensive income. For the
quarter ended June 30, 1999 and 1998 total comprehensive loss amounted to
($104,890) and ($984,698). For the six months ended June 30, 1999 and 1998 total
comprehensive loss was ($452,603) and ($1,796,013), respectively.
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NOTE D - NSI CONTINGENCY
On March 26, 1999, NSI announced that it had commenced reorganization
proceedings under Chapter 11 of the U.S. Bankruptcy Code. As of May 6, 1999,
NSI, as debtor in possession, rejected the Company's license and the Bankruptcy
Court confirmed the rejection despite the Company's argument to preserve the
agreement as a license of NSI's intellectual property. As a result, the Company
now becomes an unsecured creditor with respect to its breach of contract claim
for the termination of the license and must establish a claim for damages in the
Bankruptcy Court. The Company is unable to predict the amount, if any, of the
damages that may be allowed by the Bankruptcy Court or its share in any
distributions from the bankruptcy estate.
NOTE E - LITIGATION
On March 1, 1999, the Company and OxyNet commenced a lawsuit in the Common Pleas
Court of Franklin County, Ohio against CeramPhysics, Inc. of Westerville, Ohio
("Ceram") and its principals over a purported termination of the license for the
ceramic oxygen generation technology, as well as over other disputes, including
whether oxygen "scrubbing" applications are included in the scope of the license
and whether minimum royalties are payable prior to the manufacture or sale of
products incorporating the technology. On March 3, 1999, the Company and OxyNet
obtained a temporary restraining order prohibiting Ceram from taking any action
to terminate the license or that otherwise is inconsistent with the rights of
the Company and Ceram under the license. On March 24, 1999, the court issued a
decision finding that the license had not been terminated and granting a
preliminary and permanent injunction against Ceram from taking any action
inconsistent with the Company's rights under the license. While the Company is
confident that it will prevail in any appeal from that decision, and that its
other claims will be found meritorious, it is unable to predict the ultimate
outcome of the litigation.
NOTE F - WARRANTS
In May 1999, the Company's president and chief executive officer, resigned. As
complete settlement for all contractual obligations the Company owed the former
officer, the Company issued 390,775 warrants to purchase NetMed common stock at
an exercise price of $.10 per share, the market price at the date of grant. The
warrants may be exercised for a period of 60 months from the date of issue. In
addition, OxyNet issued a warrant to purchase 100 convertible preferred shares
at an exercise price of $1,000 per share. The term of the OxyNet warrant is 12
months. As a result of issuing the warrants, the Company recorded a non-cash
expense of $24,000 in the quarter ended June 30, 1999.
NOTE G - JOINT DEVELOPMENT AGREEMENT
In May 1999, the Company and OxyNet completed a joint development agreement and
a licensing agreement with MG Generon, Inc. to pursue development of a device to
produce highly concentrated nitrogen from gas mixtures through the removal of
oxygen from such mixtures. The Company granted a first security interest in the
license agreement between the Company, OxyNet and Ceram and if successful, MG
Generon would have exclusive rights to the nitrogen purification technology and
the Company would be paid a royalty. MG Generon made a payment of $250,000 to
the Company upon execution of the agreement, and agreed to fund additional
development costs based upon a project schedule to be approved by MG Generon.
Under certain conditions relating to the litigation with Ceram as described in
Note E, payments made by MG Generon could be refundable. The Company has
recorded the payment of the $250,000 as a reduction in the carrying value of the
license on the accompanying balance sheet.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is an Ohio corporation engaged in the business of
acquiring, developing and marketing medical and health-related technologies. The
principal business activity of the Company, through its majority owned
subsidiary OxyNet, Inc., is the development and commercialization of products
incorporating a new ceramic-based technology for separation of oxygen from
ambient air and other gases. The first such product targeted for
commercialization is an oxygen concentrator for use in the home health industry.
In early 1997, the Company entered into an agreement with Ceram,
pursuant to which the Company obtained the right to acquire 95% ownership of
Ceram Oxygen Technologies, Inc. ("COTI"), a Ceram subsidiary that holds an
exclusive world-wide license to Ceram's patented ceramic oxygen generation
technology for all applications of the technology except oxygen sensors and fuel
cells. On April 3, 1998, the Company acquired from COTI 7,125 common shares,
representing 95 percent of COTI's outstanding common shares for $200,000.
Following this transaction, COTI's name was changed to "OxyNet, Inc."
The Company is currently engaged in litigation with Ceram and its
principals over a purported termination of the license for this technology, as
well as disputes concerning the scope of the license and the payment of
royalties. See "Legal Proceedings."
In May 1999, the Company and OxyNet completed a joint development
agreement and a licensing agreement with MG Generon, Inc. to pursue development
of a device to produce highly concentrated nitrogen from gas mixtures through
the removal of oxygen from such mixtures. MG Generon made a payment of $250,000
to the Company upon execution of the agreement, and agreed to fund additional
development costs based upon a project schedule to be approved by MG Generon.
Prior to March 26, 1999, the Company was also in the business of
marketing the PAPNET(R) Testing System, which is a proprietary product of
Neuromedical Systems, Inc. ("NSI"). On March 26, 1999, NSI announced that it had
commenced reorganization proceedings under Chapter 11 of the U.S. Bankruptcy
Code. As of May 6, 1999, NSI, as debtor in possession, rejected the Company's
license and the Bankruptcy Court confirmed the rejection despite the Company's
argument to preserve the agreement as a license of NSI's intellectual property.
As a result, the Company now becomes an unsecured creditor with respect to its
breach of contract claim for the termination of the license and must establish a
claim for damages in the Bankruptcy Court. The Company is unable to predict the
amount, if any, of the damages that may be allowed by the Bankruptcy Court or
its share in any distributions from the bankruptcy estate.
This report contains forward-looking statements which involve risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in Item I of
the Company's Form 10-K as filed with the United States Securities and Exchange
Commission, File No. 1-12529, in the section titled Business Risks.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Royalty revenue decreased from $114,500 for the three months ended
June 30, 1998 to zero for the three months ended June 30, 1999. This resulted
from NSI being in default on payment of royalties earned for the first quarter
and with NSI's filing for Chapter 11 bankruptcy reorganization on March 26,1999.
Total operating expenses decreased from $596,000 for the three months
ended June 30, 1998 to $368,000 for the same period in 1999. The decrease was
the result of reduced sales representatives, lower development expenses and
certain executives of the Company working for no cash compensation.
The Company recorded a loss on available-for-sale securities in the
amount of $6,000 for the quarter ended June 30, 1999. The securities are common
shares of NSI and the decline in value is considered permanent. In August 1997,
the Company completed a 6%, $3,000,000 convertible debenture financing. The
Company, as a condition to the financing, has pledged shares of common stock of
NSI that under certain conditions may be used by the purchasers to convert
outstanding debentures as well as accrued interest. For the three months ended
June 30, 1998, the purchasers converted $272,000 of principal plus accrued
interest into a total of 234,506 shares of NSI. This resulted in a loss on
available for sale securities of $636,000 for the three months ended June 30,
1998.
Interest income decreased to $600 for the three months ended June 30,
1999 from $12,000 for the three months ended June 30, 1998. The decrease is due
to lower cash balances to invest.
Interest expense decreased to zero for the three months ended June 30,
1999 from $28,000 for the same period in 1998. The decrease is primarily the
result of the exchange of debentures for convertible preferred stock described
in Note B to the financial statements in January 1999.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Royalty revenue decreased from $266,000 for the six months ended June
30, 1998 to zero for the six months ended June 30, 1999. This resulted from NSI
being in default on payment of royalties earned for the first quarter and with
NSI's filing for Chapter 11 bankruptcy reorganization on March 26,1999.
Total operating expenses decreased from $1,333,000 for the six months
ended June 30, 1998 to $695,000 for the same period in 1999. The decrease was
the result of reduced sales representatives, lower development expenses and
certain executives of the Company working for no cash compensation.
The Company recorded a loss on available-for-sale securities in the
amount of $386,000 for the six months ended June 30, 1999. The securities are
common shares of NSI and the decline in value is considered permanent. In August
1997, the Company completed a 6%, $3,000,000 convertible debenture financing.
The Company, as a condition to the financing, has pledged shares of common stock
of NSI that under certain conditions may be used by the purchasers to convert
outstanding debentures as well as accrued interest. For the six months ended
June 30, 1998, the purchasers converted $475,000 of principal plus accrued
interest into a total of 352,200 shares of NSI. This resulted in a loss on
available for sale securities of $894,000 for the six months ended June 30,
1998.
Interest income decreased to $8,000 for the six months ended June 30,
1999 from $30,000 for the six months ended June 30, 1998. The decrease is due to
lower cash balances to invest.
Interest expense decreased to $5,000 for the six months ended June 30,
1999 from $59,000 for the same period in 1998. The decrease is primarily the
result of the exchange of debentures for convertible preferred stock described
in Note B to the financial statements in January 1999.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily by the sale
of NSI common stock owned by the Company, the sale of Common Shares, the sale of
the convertible debentures and the joint development agreement. The Company's
combined cash and cash equivalents totaled $198,000 at June 30, 1999, a decrease
of $316,000 from December 31, 1998.
Cash used in the Company's operations was $441,000 for the six months
ended June 30, 1999 versus $887,000 used in the same period of 1998. The Company
is a development company and anticipates that its cash requirements will be
substantial for the immediate future and believes that it will be necessary to
raise additional capital in order to complete the development of the OxyNet
device and continue funding the negative cash flow from operations.
The Company's future liquidity and capital requirements will depend
upon numerous factors, including the resources required to further develop the
OxyNet oxygen device, the resources required and ultimate outcome of the
Company's claims in the NSI bankruptcy hearings and the outcome of the
litigation with Ceram. Additional funding may not be available when needed or on
terms acceptable to the Company, which would have a material adverse effect on
the Company's business financial condition and results of operations.
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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements in this release which relate to other than strictly
historical facts, including statements about the Company's plans and strategies,
as well as management's expectations about new and existing products,
technologies and opportunities, market growth, demand for and acceptance of new
and existing products are forward looking statements. The words "believe,"
"expect," "anticipate," "estimate," "project," and similar expressions identify
forward-looking statements that speak only as of the date hereof. Investors are
cautioned that such statements involve risks and uncertainties that could cause
actual results to differ materially from historical or anticipated results due
to many factors including, but are not limited to, the Company's ability to
successfully commercialize any products using the ceramic oxygen technology,
continuing losses from operations and negative cash flow, the challenges of
research and development of new products, and other risks detailed in the
Company's most recent Annual Report on Form 10-K and other Securities and
Exchange Commission filings. The Company undertakes no obligation to publicly
update or revise any forward-looking statements.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 1, 1999, the Company and OxyNet commenced a lawsuit in the
Common Pleas Court of Franklin County, Ohio against Ceram and its principals
over a purported termination of the license for the ceramic oxygen generation
technology, as well as over other disputes, including whether oxygen "scrubbing"
applications are included in the scope of the license and whether minimum
royalties are payable prior to the manufacture or sale of products incorporating
the technology. On March 3, 1999, the Company and OxyNet obtained a temporary
restraining order prohibiting Ceram from taking any action to terminate the
license or that otherwise is inconsistent with the rights of the Company and
Ceram under the license. On March 24, 1999, the court issued a decision finding
that the license had not been terminated and granting a preliminary and
permanent injunction against Ceram from taking any action inconsistent with the
Company's rights under the license. While the Company is confident that it will
prevail in any appeal from that decision, and that its other claims will be
found meritorious, it is unable to predict the ultimate outcome of the
litigation.
On March 26, 1999, NSI announced that it had commenced reorganization
proceedings under Chapter 11 of the U.S. Bankruptcy Code in the United States
Bankruptcy Court for the District of Delaware. As of May 6, 1999, NSI, as debtor
in possession, rejected the Company's license and the Bankruptcy Court confirmed
the rejection despite the Company's argument to preserve the agreement as a
license of NSI's intellectual property. As a result, the Company now becomes an
unsecured creditor with respect to its breach of contract claim for the
termination of the license and must establish a claim for damages in the
Bankruptcy Court. The Company is unable to predict the amount, if any, of the
damages that may be allowed by the Bankruptcy Court or its share in any
distributions from the bankruptcy estate.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit Exhibit Description
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27 Financial Data Schedule.
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(b) REPORTS ON FORM 8-K.
On May 28,1999, the Company filed a report on Form 8-K announcing
the resignation of David J. Richards as Chairman and CEO of the Company and that
James F. Zid has been elected Chairman of the Company and Trevor Ferger has been
elected President and CEO (items 5 and 7).
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant has duly caused this Form 10-QSB for the quarterly
period ended June 30, 1999 to be signed on its behalf by the undersigned,
thereto duly authorized.
NETMED, INC.
By: /s/ Kenneth B. Leachman
-----------------------
Kenneth B. Leachman, Vice President of Finance*
Dated: August 11, 1999
* In his capacity as Vice President of Finance, Mr. Leachman is
duly authorized to sign this Report on behalf of the Registrant
and is the Registrant's principal financial officer.
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EXHIBIT INDEX
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
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27 Financial Data Schedule.
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