-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V0M795nQ/qIBOCkZ0+/YQl6+dFDwZTmkeOPoD4UgywFhebzQoebNt6rUlQSs+t2a H3oAV5raEqhFAcTE+OW8gw== 0000950130-97-005040.txt : 19971117 0000950130-97-005040.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950130-97-005040 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEUROMEDICAL SYSTEMS INC CENTRAL INDEX KEY: 0000866933 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TESTING LABORATORIES [8734] IRS NUMBER: 133526980 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26984 FILM NUMBER: 97719067 BUSINESS ADDRESS: STREET 1: TWO EXECUTIVE BLVD STE 306 CITY: SUFFERN STATE: NY ZIP: 10901 BUSINESS PHONE: 9143683600 MAIL ADDRESS: STREET 1: TWO EXECUTIVE BLVD STREET 2: SUITE 306 CITY: SUFFERN STATE: NY ZIP: 10901-4164 10-Q 1 FORM 10-Q 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 September 30, 1997 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 No. 0-26984 Neuromedical Systems, Inc. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Delaware 13-3526980 - -------------------------------------------------------------------------------- (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) Two Executive Boulevard, Suffern, NY 10901-4164 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) Registrant's telephone number including area code: (914) 368-3600 -------------- - -------------------------------------------------------------------------------- (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 As of October 31, 1997, an aggregate of 31,039,385 shares of the Registrant's common stock, par value $.0001 per share, were outstanding. NEUROMEDICAL SYSTEMS, INC. Table of Contents Form 10-Q for the Quarterly Period Ended September 30, 1997 PART I FINANCIAL INFORMATION PAGE - ------ --------------------- ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets at September 30, 1997 (unaudited) and December 31, 1996 3 Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 1997 and 1996 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1996 (unaudited) 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II OTHER INFORMATION - ------- ----------------- Item 1. Legal Proceedings 20 Item 2. Changes in Securities 20 Item 3. Defaults upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 22 Safe Harbor Statement 23 -2- PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. NEUROMEDICAL SYSTEMS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1997 1996 --------------- --------------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 22,642,000 $ 83,391,000 Short-term investments 30,182,000 - Accounts receivable, net of allowance 2,550,000 1,650,000 Prepaid expenses 447,000 803,000 Other current assets 788,000 732,000 --------------- --------------- Total current assets 56,609,000 86,576,000 Restricted cash 819,000 1,000,000 Property and equipment 16,411,000 16,388,000 Intangible assets, net of accumulated amortization (1997-$563,000, 1996-$450,000) 878,000 166,000 Other assets 658,000 74,000 --------------- --------------- $ 75,375,000 $104,204,000 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of notes and bank loans payable $ 2,655,000 $ 1,200,000 Current portion of capital lease obligations 2,294,000 1,972,000 Accounts payable 1,325,000 2,256,000 Accrued liabilities 3,447,000 4,082,000 --------------- --------------- Total current liabilities 9,721,000 9,510,000 Notes and bank loans payable-long-term 4,189,000 4,704,000 Notes payable-stockholder -- 600,000 Capital lease obligations, less current portion 5,295,000 5,862,000 Commitments and contingencies Stockholders' equity: Preferred stock, $.0001 par value; authorized - 10,000,000 shares; none issued and outstanding -- -- Common stock, $.0001 par value; authorized - 100,000,000 shares; issued and outstanding - 31,005,695 shares in 1997 and 29,795,049 shares in 1996 3,000 3,000 Additional paid-in capital 178,719,000 177,559,000 Deferred compensation (722,000) -- Accumulated deficit (122,246,000) (94,508,000) Foreign currency translation 416,000 474,000 --------------- --------------- Total stockholders' equity 56,170,000 83,528,000 --------------- --------------- $ 75,375,000 $104,204,000 =============== ===============
See accompanying notes -3- NEUROMEDICAL SYSTEMS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- --------------------------- 1997 1996 1997 1996 ------------- ------------- ------------ ------------ Revenues: Slide processing $ 2,526,000 $ 1,286,000 $ 6,407,000 $ 2,954,000 ------------- ------------- ------------ ------------ Total revenues 2,526,000 1,286,000 6,407,000 2,954,000 ------------- ------------- ------------ ------------ Costs and Expenses: Cost of sales 3,138,000 2,085,000 8,390,000 5,709,000 Marketing 3,962,000 6,262,000 14,273,000 13,635,000 Research and development 2,207,000 1,945,000 6,196,000 5,024,000 General and administrative 2,817,000 1,559,000 6,815,000 5,115,000 ------------- ------------- ------------ ------------ Total costs and expenses 12,124,000 11,851,000 35,674,000 29,483,000 ------------- ------------- ------------ ------------ Loss from operations (9,598,000) (10,565,000) (29,267,000) (26,529,000) Other income (expense): Interest income 816,000 1,236,000 2,812,000 4,044,000 Interest expense (397,000) (305,000) (1,213,000) (789,000) Foreign exchange (65,000) 46,000 (70,000) (539,000) ------------- ------------- ------------ ------------ Other income (expense) - net 354,000 977,000 1,529,000 2,716,000 ------------- ------------- ------------ ------------ Net loss $ (9,244,000) $ (9,588,000) $ (27,738,000) $ (23,813,000) ============= ============= ============ ============ Net loss per share $ (0.30) $ (0.33) $ (0.90) $ (0.82) ============= ============= ============ ============ Weighted average shares outstanding 30,931,000 29,450,000 30,891,000 29,117,000 ============= ============= ============ ============
See accompanying notes -4- NEUROMEDICAL SYSTEMS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, ---------------------------------- 1997 1996 --------------- --------------- OPERATING ACTIVITIES Net Loss $ (27,738,000) $ (23,813,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 3,738,000 2,445,000 Foreign exchange (gain) (70,000) -- Issuance of common stock warrants & options for services rendered 159,000 237,000 Changes in operating assets and liabilities: (Increase) in accounts receivable (705,000) (291,000) (Decrease) in accounts payable (1,043,000) (324,000) (Decrease) increase in accrued liabilities (640,000) 720,000 (Increase) in prepaid expenses and other assets 441,000 (2,086,000) --------------- --------------- Net cash used in operating activities (25,858,000) (23,112,000) --------------- --------------- INVESTING ACTIVITIES Purchases of short-term securities (30,182,000) -- Purchases of property and equipment (3,874,000) (6,531,000) Acquisition of businesses (1,156,000) -- Loan to officer (600,000) -- --------------- --------------- Net cash used in investing activities (35,812,000) (6,531,000) --------------- --------------- FINANCING ACTIVITIES Restricted cash 181,000 (1,250,000) Issuance of common stock 279,000 1,406,000 Proceeds from notes and bank loans 1,690,000 1,001,000 Proceeds from capital lease financing 1,669,000 2,655,000 Payment of notes and bank loans (1,341,000) (1,063,000) Payments on capital leases (1,671,000) (670,000) --------------- --------------- Net cash provided by financing activities 807,000 2,079,000 --------------- --------------- Effect of exchange rate changes on cash 114,000 547,000 --------------- --------------- Net (decrease) in cash and cash equivalents (60,749,000) (27,017,000) Cash and cash equivalents, beginning of period 83,391,000 114,143,000 --------------- --------------- Cash and cash equivalents, end of period $ 22,642,000 $ 87,126,000 =============== ===============
See accompanying notes -5- NEUROMEDICAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 (UNAUDITED) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. 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. Certain prior year amounts have been reclassified to conform with the current year presentation. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Neuromedical Systems, Inc. (the "Company" or "NSI") Annual Report on Form 10-K for the year ended December 31, 1996. Operating results for the interim periods ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. NOTE 2. EMPLOYEE STOCK OPTIONS During the third quarter of 1997, the Company entered into Replacement Option Agreements, each dated as of July 28, 1997, with certain Company employees participating in the Neuromedical Systems, Inc. 1993 Stock Option Plan, as Amended and Restated October 25, 1995 (each such agreement, a "Replacement Option Agreement"). Pursuant to the terms of the Replacement Option Agreements, the Company canceled 1,015,570 employee stock options at exercise prices ranging from $5.56 to $17.63 per share and issued 942,904 replacement options, each at an exercise price of $4.00 per share representing the fair market value of the common stock on the grant date (collectively, the "Replacement Options"). The Replacement Option Agreements provided for a 1 for 1 exchange of options granted on or after October 1, 1996, except for senior management (Company Vice Presidents and above) who received Replacement Options covering shares equal only to 80% of their respective original option grant amounts received on or after such date. The Replacement Options vest over a four year period and will become exercisable beginning in 1998 at a rate of 25% per year on July 28th of each year until fully vested. If the holder of the Replacement Options is terminated by the Company without cause prior to July 28 1998, 25% of the holder's options will vest and become exercisable as of the termination date. Also in the third quarter, the Company modified the terms of all outstanding employee stock option -6- NEUROMEDICAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED) agreements (with the exception of those executed by interim Co-CEOs John B. Henneman, III and Uzi Ish-Hurwitz) to allow employees to exercise their vested stock options for a period of two years from the date of their termination if one of the following two conditions are met: (i) the employee remains in the employment of the Company for a period of six months after the employment of the new CEO of the Company, or (ii) the employee is terminated by the Company without cause prior to the date set forth in (i) above. The foregoing modification as applied to the interim Co-CEOs extends their respective exercise period to three years provided that they meet the conditions of clauses (i) or (ii) above. NOTE 3. ACQUISITIONS IN HONG KONG, CHINA AND TAIWAN As previously reported in the Company's Form 10-Q for the period ending June 30, 1997, in an agreement effective as of June 1, 1997, the Company acquired New System International Ltd., a Hong Kong corporation, for a net purchase price of $1,564,000. During the third quarter of 1997, the Company completed the documentation and formalities related to this stock purchase. New System International Ltd. was previously the operating subsidiary of Papnet (Far East) Ltd. a Hong Kong corporation ("PFEL"), a distributor of the Company's PAPNET(R) Testing System in Hong Kong and China. New System International Ltd. also provides clinical laboratory services through its Hong Kong-based Compuscreen Medical Diagnostic Centre. Dr. Ng served as president of New System International Ltd. prior to its acquisition and in the third quarter of 1997 entered into an employment agreement with the Company providing for his continuation in such capacity. In an agreement effective as of August 1, 1997, the Company acquired the assets of the Taiwan PAPNET(R) distributor, Papnet Far East Ltd. (Taiwan) through the Company's acquisition subsidiary, New System Ltd., for a purchase price of $392,000. In a related transaction, the Company executed a license and management services agreement with Papnet Far East Ltd. (Taiwan) for operation of the Company's assets in Taiwan. Related to each of the foregoing acquisitions, on September 30, 1997 PFEL entered into an Amended and Restated Representation Agreement with the Company, and a Sublicense Agreement with the Company's subsidiary, NSI Asia Pacific Ltd., pursuant to which the Company received $800,000 from PFEL for the right of PFEL to receive a royalty of 3% to 4% based on sales in Hong Kong, China and Taiwan over a fifteen year period. The Company expects that it will invest additional cash in its Hong Kong, Taiwan and China businesses to fund operations and expansion of their respective marketing and sales programs. -7- NEUROMEDICAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED) NOTE 4. SUBSEQUENT EVENTS - CHANGES IN MANAGEMENT AND BOARD OF DIRECTORS On November 5, 1997, the Company announced the appointment of Paul Sohmer, M.D. as President and Chief Executive Officer of the Company, and the election by the Board of C. Raymond Larkin, Jr. as the non-executive Chairman of the Board. From June 30, 1997, when the Company announced that Mark R. Rutenberg submitted his resignation as President and Chief Executive Officer of the Company, the Office of the Chief Executive was filled jointly by Uzi Ish-Hurwitz and John B. Henneman, III. Mr. Henneman will continue with the Company in his capacity as Vice President of Corporate Development, Secretary and General Counsel, and Mr. Ish-Hurwitz will continue with the Company as Executive Vice President, Chief of Technical Operations and President, Neuromedical Systems Israel Ltd. In addition, the Company increased the size of the Company's Board of Directors to eight (8), and appointed Dr. Sohmer as a Class II member of the Board whose term will end at the Annual Meeting of Stockholders in 2000. Mark Rutenberg, the founder of the Company, was appointed non-executive Vice Chairman of the Board and remains a Class III member of the Board whose term will end at the Annual Meeting of Stockholders in 1998. Mr. Ish-Hurwitz continues as a Class I Director of the Board whose term ends at the Annual Meeting of Stockholders in 1999. The Company entered into an employment agreement with Dr. Sohmer, dated November 4, 1997 (the "Agreement"), which has a term of three years and is renewable automatically for additional one year terms thereafter unless notice is given by either party ninety days prior to the end of the then-current term. The material provisions of the Agreement provide for Dr. Sohmer's employment, annual salary and bonus eligibility. In addition, the Agreement and related option agreements provide for a grant of options to Dr. Sohmer to acquire 750,000 shares of Company Common Stock at an exercise price of $4.56 per share (the fair market value of the Common Stock on the grant date), and options for an additional 250,000 shares of Common Stock at an exercise price of $10.00 per share. All of such options vest and become exercisable at a rate of 25% of the total grant on each anniversary of the grant date. As previously reported in the Company's Form 10-Q for the period ending June 30, 1997, in connection with the resignation of Mark Rutenberg as President and CEO of the Company, the Company entered into a revised and restated employment agreement with Mr. Rutenberg on June 29, 1997 (the "Revised Agreement") which will remain effective until November 19, 1998. The material provisions of the Revised Agreement provide for Mr. Rutenberg's continuation of employment with the Company and participation in the Company's executive benefit plans. In addition, the Revised Agreement provides for a non-recourse loan to Mr. Rutenberg from the Company in an amount of $600,000 which is secured by his pledge of 100,000 shares of Company common stock. The loan is due on the earlier of November 30, 1999 or the date which is ten days after termination of his employment for any reason. The Revised Agreement may be terminated for "Cause" (as defined in the Revised Agreement) or by either party to the Revised Agreement upon -8- NEUROMEDICAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED) thirty days written notice. The Revised Agreement provides that in the event of his voluntary termination prior to November 19, 1998 or if terminated for Cause, Mr. Rutenberg shall receive $598,000; and if terminated for reasons other than Cause, he shall receive in addition to such amount, the equivalent of his remaining base salary as measured from such termination date until the expiration date of the Revised Agreement. The options held by Mr. Rutenberg to purchase Company stock have also been extended so as to expire eight and one-half years after the expiration date of the Revised Agreement, subject to the terms of such stock options as of the execution date of the Revised Agreement. In connection with the extension of the options, the Company will record a non-cash expense amounting to $781,000 over the term of the Revised Agreement. -9- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW The Company's principal activities since its founding in 1988 have been research and product and organizational development. The Company was established to develop, manufacture and market systems for computer-assisted screening of cervical Papanicolaou ("Pap") smears and other cytological specimens. The Company's revenues are currently being derived from sales of PAPNET(R) testing services and interest income. The PAPNET(R) Testing System was approved by the United States Food and Drug Administration (the "FDA") for commercial use in the United States on November 8, 1995. Prior to that time, the PAPNET(R) Testing System was permitted to be utilized in the United States on an investigational basis only, and the Company was permitted to derive revenue with respect thereto only to recover certain of its costs. The Company, however, was previously selling PAPNET(R) testing services for commercial use outside of the United States. The Company has established three scanning facilities (the "Scanning Centers"), one each in the United States, The Netherlands and Hong Kong. The Netherlands operation has scanned slides primarily from customers in Europe while the Hong Kong operation has scanned slides from Asia and Australia. During the third quarter of 1997, the Company announced plans to sell PAPNET(R) scanners and related equipment to laboratories in Europe, and in October 1997 the Company announced the signing of its first European sales contract. The Company expects to deliver the first PAPNET-on-Cyte(TM) system in the fourth quarter of 1997. Although the Company has no active plans to sell scanners in the United States and international markets other than Europe, it may do so if customers express a strong interest in the PAPNET-on-Cyte(TM) system and acceptable economic terms can be reached with the customer. See Note 5 of Notes to Consolidated Financial Statements for the year ended December 31, 1996 for information regarding the Company's revenues, net loss and identifiable assets by geographic area. The Company has incurred net losses since inception through September 30, 1997 of $122,246,000 and has to date generated only limited commercial revenues. Since the approval of the PAPNET(R) Testing System by the FDA, the Company has been increasing the scale of its operations to commercial levels in the United States. Management believes that its existing cash resources will be sufficient to fund the increase in the scale of the Company's operations and to meet its cash requirements through 1998, although there can be no assurance in this regard. The Company's past results of operations reflect its developmental or early commercial stage and are not necessarily indicative of the results from operations that may be expected as the scale of its operations increases. -10- RESULTS OF OPERATIONS The Company's results of operations have fluctuated significantly from year to year and quarter to quarter, principally due to variations in the level of expenditures relating to its clinical trials, research projects, marketing and sales programs and international expansion. The Company's results of operations are expected to continue to fluctuate significantly and may continue to result in substantial losses. From inception through September 30, 1997, the Company has experienced negative gross margins due to the significant under-utilization of its scanning and manufacturing operations which occurred as a result of the plan to establish these capabilities prior to FDA approval and then-expected market demand. Improvement in the Company's future gross margins will be dependent upon the level of commercial acceptance of the PAPNET(R) Testing System. The Company's costs and expenses have increased substantially during 1997, compared to 1996, as the Company continues to expand its commercial operations, including its marketing, sales, manufacturing, slide processing, research and administrative activities, to meet the anticipated increase in market demand for PAPNET(R) testing, expand its clinical claims and develop enhancements to the PAPNET(R) Testing System and to fund the acquisition and expected losses of the Company's new operations in Hong Kong, China and Taiwan acquired in June and August of 1997. General and administrative costs have also increased during 1997 due principally to higher legal fees (primarily related to Company litigation), and costs associated with the severance of the former CEO and recruitment of his replacement. The Company anticipates that aggregate costs and expenses will increase only modestly or decline in 1998 over 1997 because of the Company's decision to reduce direct-to-consumer advertising and agency related costs, and to focus sales and marketing efforts on the laboratory customer and opinion leading clinicians. In addition, the Company believes that the decision to sell scanners to European laboratories will create a more cost effective selling process in that market and reduce related slide processing costs. Nevertheless, total costs and expenses may not decline significantly in 1998 because of expected increases in manufacturing and slide processing costs, higher clinical costs as the Company initiates clinical studies for a primary screening indication in the United States, increased costs associated with the Company's operation of its Hong Kong, China and Taiwan acquisitions for a full year in 1998 versus a partial year in 1997, uncertainty over the level of costs associated with ongoing litigation, and higher royalty payments that will increase proportionate to increases in the Company's revenues in the sales territories of the Company's territorial licensees ("Licensees"). During the third quarter, the Company focused its efforts on developing more effective relationships with laboratories in order to be more responsive to the concerns and needs of the medical marketplace, and to address certain obstacles which the Company has perceived as hindering its marketing programs. The Company believes that several programs initiated during the third quarter will add value in the pathology laboratories, -11- both medically and economically, and that laboratories are becoming more supportive of PAPNET(R) testing. The Company also continued its efforts to build support among opinion-leading cytopathologists and cytotechnologists. Several programs announced during the third quarter contributed toward that goal. First, the Company assembled a distinguished group of physicians into a pathology advisory board (PAB). The PAB is comprised of independent physicians who will help direct the Company's efforts in the development of services and programs that can help laboratory professionals improve patient care. The PAB held its first meeting in September and will continue to meet periodically throughout the coming year. The Company expects that the PAB will add value to the laboratory and to NSI. Second, the Company launched the PAPNET(R) Access Program, a partnership with ten academic medical centers to provide free PAPNET(R) testing to indigent women, and to gather data on the benefits that PAPNET(R) testing can confer to infrequently screened populations. Finally, in October the Company announced the publication of its Food and Drug Administration (FDA) clinical trial in the peer-review journal Human Pathology, showing PAPNET(R) testing can help laboratories detect cervical cancer more efficiently and earlier. This publication now brings the total number of peer-reviewed manuscripts on PAPNET(R) testing in gynecologic cytology to thirty-six (36) and contributes to the large body of data that makes PAPNET(R) testing one of the most widely studied and thoroughly reviewed technologies in cervical cancer screening. During the third quarter, the Company also initiated new programs to help the Company communicate more effectively with pathologists at customer labs. NSI sponsored workshops for pathologists to discuss how PAPNET(R) testing can help laboratory professionals improve patient care. These programs were designed to provide pathologists with a better understanding of the clinical and economic value of integrating PAPNET(R) testing into their laboratories. The Company also focused its technical efforts for the benefit of the pathology laboratory customer. The Company has implemented its Laboratory Support Group (LSG). The LSG has hired cytotechnologists with extensive experience in both hands-on cytology and in the supervision of cytotechnology teams. During the month of October, the Company signed a contract with Mercy Medical Center of Canton, Ohio to rescreen 100% of its Pap smear slides using the PAPNET(R) Testing System. The Company expects to begin generating revenue from this contract during the fourth quarter of 1997. The Company made significant progress in its commitment to seek approval of the PAPNET(R) Testing System as a primary screening device in the United States, and is working with the FDA to establish the trial protocol. The Company expects to complete -12- site selection and training in the fourth quarter of 1997, and anticipates that it will begin screening trial smears during the first quarter of 1998. Interest expense is expected to increase in the future as the Company borrows to fund expansion of its manufacturing, slide processing and marketing capabilities, including the installation of PAPNET(R) Scanning Stations at the Company's Scanning Centers. It is expected that this increase will continue to be substantially offset during 1997 by interest income from the investment of the Company's cash. The Company's interest income has declined in 1997, compared to 1996, because of the significant use of cash in 1996 and 1997. The impact of inflation and changing prices on the Company's revenues and costs has not been significant. RESULTS FOR THE THIRD QUARTER ENDING SEPTEMBER 30, 1997 Revenues for the third quarter of 1997 were $2,526,000, an increase of 96% from $1,286,000 during the third quarter of 1996. Of such revenues, $2,387,000 represented per slide charges for the screening of Pap smears, and the balance of such revenues represented the sale or rental payments for PAPNET(R) Review Stations. The revenue increase over the third quarter of 1996 was due to a significant increase in unit volume, higher average unit pricing, including the pricing impact of the acquisition of the Company's new operations in Hong Kong, China and Taiwan, and additional revenues from the sale or rental of Review Stations. Unit volume during the third quarter of 1997, compared to the third quarter of 1996, increased in both the United States and in international markets and accounted for approximately 40% of the revenue increase between the periods. For United States operations (which include Canada and South America), unit volume increased 93% over the third quarter of 1996. In International markets, unit volume increased 8% over the third quarter of 1996. Average unit pricing in the third quarter of 1997 increased by approximately 38% over the third quarter of 1996 due to a higher proportion of slide volume being generated in the United States and the acquisition of the Company's new operations in Hong Kong, China and Taiwan. This increase in average unit pricing accounted for approximately 53% of the revenue increase. Finally, the impact of higher revenue from the sale or rental of review stations accounted for the remaining 7% of the worldwide revenue increase. Total costs and expenses for the quarter ended September 30, 1997 were $12,124,000, an increase of $273,000 over the third quarter of 1996. This increase was due primarily to an increase in cost of sales and general and administrative expenses, partially offset by lower sales and marketing expenses. Sales and marketing expenses declined to $3,962,000 in the third quarter of 1997 from $6,262,000 in the third quarter of 1996, a decrease of $2,300,000. The decline in sales -13- and marketing expenses was due primarily to lower costs for advertising and agency fees in the United States, consistent with the Company's efforts to become a laboratory-focused marketing organization. This decline was partially offset by higher costs for sales and marketing programs in international markets. The Company's cost of sales increased to $3,138,000 in the third quarter of 1997, compared to $2,085,000 during the third quarter of 1996, an increase of $1,053,000. The increase in cost of sales was due primarily to increased royalty expenses as a result of increases in the Company's revenues in the sales territories of the Licensees during 1997, the addition of the operating costs for the laboratory business of New System International Ltd., the Hong Kong company which was acquired by the Company in June 1997, and the expansion of slide processing and manufacturing capacity. Slide processing costs increased in 1997, compared to the third quarter of 1996, due to the establishment of the Company's new 26,500 square foot scanning center in New Jersey in October, 1996 and the additional cost of increased depreciation and other costs at the Company's three slide processing facilities. Manufacturing costs increased due to the physical expansion of the Company's manufacturing facility in late 1996 and expansion of manufacturing capacity and related overhead. The Company's research and development expenses increased to $2,207,000 in the third quarter 1997, from $1,945,000 in the third quarter of 1996. This increase was due primarily to the expansion of the product development and medical organizations of the Company to support expanded clinical claims and indications and future enhancements of the PAPNET(R) Testing System. General and administrative expenses were $2,817,000 during the third quarter of 1997 compared to $1,559,000 during the third quarter of 1996. This increase was due primarily to higher legal expenses (primarily for litigation), increased recruiting costs associated with the search for a new CEO and severance related costs for the former CEO. Interest income for the third quarter ended September 30, 1997 was $816,000 compared to $1,236,000 during the third quarter of 1996. This decrease was due primarily to the lower level of cash, cash equivalents and short term investments available to the Company during the third quarter of 1997 as a result of the Company's continuing losses in 1996 and the first nine months of 1997. Interest expense during the third quarter of 1997 was $397,000 compared to $305,000 during the third quarter of 1996. This increase was due to higher average levels of debt and capital lease obligations, which the Company entered into in late 1996 and 1997, incurred to finance capital equipment additions, primarily related to the Company's PAPNET(R) Scanning Stations. The Company anticipates higher levels of interest expense during the remainder of 1997 and in 1998 as a result of the increased levels of debt and capital lease obligations. -14- The Company incurred a net loss during the third quarter of 1997 of $9,244,000, or $0.30 per share, compared to a net loss of $9,588,000, or $0.33 per share during the third quarter of 1996. The lower net loss during the third quarter of 1997 was due primarily to the factors discussed above. RESULTS FOR THE NINE MONTH PERIOD ENDING SEPTEMBER 30, 1997 Revenues for the nine month period ending September 30, 1997 were $6,407,000, an increase of 117% from $2,954,000 during the same period of 1996. This revenue increase was due to a significant increase in unit volume, higher average unit pricing, including the pricing impact of the acquisition of new operations in Hong Kong, China and Taiwan, and additional revenues from the sale or rental of Review Stations. Unit volume during the first nine months of 1997, compared to the same period of 1996, increased in all of the Company's major markets including the United States, Asia, Australia and Europe and accounted for approximately 49% of the revenue increase. For United States operations (includes Canada and South America), unit volume increased 123% over the same period of 1996. In international markets, unit volume increased 27% over 1996. Worldwide average unit pricing during the first nine months of 1997 increased by approximately 36% over the same period of 1996 and accounted for approximately 47% of the revenue increase due primarily to a higher proportion of slide volume being generated in the United States and the acquisition of the laboratory and marketing operations in Hong Kong, China and Taiwan. Finally, increased revenue from the sale or rental of review stations accounted for the remaining 4% of the worldwide revenue increase. Total costs and expenses for the period ended September 30, 1997 were $35,674,000, an increase of $6,191,000 over the same period of 1996. This increase was due primarily to an increase in general and administrative expenses (principally related to Company litigation, severance costs for the former CEO and recruiting fees for his replacement), research and development expenses, and cost of sales (primarily associated with increased royalty expenses as a result of increased sales in the territories of the Licensees, and the expansion of slide processing and manufacturing capacity). Sales and marketing expenses increased to $14,273,000 during the first nine months of 1997 from $13,635,000 during the same period of 1996, an increase of $638,000. The increase in sales and marketing expenses was due primarily to costs associated with marketing the PAPNET(R) Testing System in the United States and Europe, including salaries for additional personnel and advertising and promotion costs of the PAPNET(R) Testing System, and to the acquisition of new operations in Hong Kong, China and Taiwan in June and August of 1997. The Company's cost of sales increased to $8,390,000 in 1997, compared to $5,709,000 during the same period of 1996, an increase of $2,681,000. As was the case for the quarter, this increase was primarily associated with increased royalty expenses as a result -15- of increases in the Company's revenues in the sales territories of the Licensees during 1997, the acquisition of the laboratory business of New System International Ltd. in June 1997 and the expansion of the Company's slide processing and manufacturing capacity. The Company's research and development expenses increased to $6,196,000 in 1997, from $5,024,000 during the same period of 1996. This increase was due primarily to the expansion of the product development and medical organizations of the Company to support expanded clinical claims and indications, and future enhancements of the PAPNET(R) Testing System. The Company's general and administrative expenses increased to $6,815,000 during the first nine months of 1997, compared to $5,115,000 for the same period of 1996. This increase was due primarily to higher legal expenses, primarily for litigation, increased recruiting costs associated with the search for a new CEO and severance related costs for the former CEO. Interest income for the nine month period ended September 30, 1997 was $2,812,000 compared to $4,044,000 during the same period of 1996. This decrease was due primarily to the lower level of cash, cash equivalents and short term investments available to the Company during 1997 as a result of the Company's continuing losses in 1996 and the first nine months of 1997. Interest expense during the first nine months of 1997 was $1,213,000 compared to $789,000 during the same period 1996. As was the case for the third quarter of 1997, this increase was due to higher average levels of debt and capital lease obligations incurred to finance capital equipment additions. The Company incurred a net loss during the first nine months of 1997 of $27,738,000, or $0.90 per share, compared to a net loss of $23,813,000, or $0.82 per share during the same period of 1996. The increased net loss was due to the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations since its inception primarily by the issuance of equity securities, sales of PAPNET(R) Testing System services, funds received for the territorial license agreements (prior to 1992), interest earned on cash, cash equivalents and short-term investments and proceeds from notes, bank loans and equipment leasing arrangements. In addition, the Company has announced plans to sell PAPNET(R) equipment to laboratories in Europe and has announced that the first contract with a European customer has been signed. The Company expects to generate revenues from this contract in the fourth quarter of 1997. The Company's combined cash and cash equivalents, and short term investments totaled $52,824,000 at September 30, 1997, a decrease of $30,567,000 from December 31, 1996. During the first nine months of 1997, the Company used $25,858,000 for operating -16- activities, $35,812,000 for investing activities, including the purchase of $30,182,000 of short term investments, while generating $807,000 from financing activities. In addition, the effect of exchange rate changes on cash was $114,000, which accounted for the remaining change to the Company's cash balance. The primary uses of cash and cash equivalents during the first nine months of 1997 were $27,738,000 (inclusive of $3,827,000 of non-cash items) to finance the Company's net loss, $30,182,000 to purchase short term investments, $3,874,000 to purchase capital equipment, primarily for the manufacture of PAPNET(R) Scanning Stations and related equipment to support the expansion of the Company's scanning capacity, a net amount of $1,156,000 to acquire the Company's new operations in Hong Kong, China and Taiwan (See Note 3 to Condensed Consolidated Financial Statements set forth above), a $600,000 non-recourse loan to the Company's former CEO in connection with his severance agreement (see Note 4 to the Notes to Condensed Consolidated Financial Statements set forth above), $3,012,000 to repay notes, bank loans and capital lease obligations, and $1,947,000 for changes in operating assets and liabilities. The sources of cash and cash equivalents during the first nine months of 1997 were proceeds of $1,690,000 from notes and bank loans, proceeds of $1,669,000 from capital lease financing transactions (sale/leaseback), a reduction in restricted cash of $181,000 and proceeds of $279,000 from the issuance of common stock, associated with the exercise of stock options. The Company anticipates that its use of cash will be substantial for the foreseeable future. In particular, the Company anticipates that expenditures during the balance of 1997 and in 1998 will continue to be significant due to the cost of marketing the PAPNET(R) Testing System in the United States, the cost of marketing and sales programs in overseas markets, research and development programs for additional clinical indications and claims, and the cost of on-going litigation. The Company anticipates that, during 1997, it will invest approximately $4.0 million for working capital purposes and approximately $7.0 million for capital expenditures, leasehold improvements and the acquisition costs of the Company's new operations in Hong Kong, China and Taiwan. Although funding for capital expenditures is expected to be available out of the Company's cash resources, management believes that it may be desirable for the Company to finance certain of such capital expenditures through additional debt or capital lease obligations. During 1996 and 1997, the Company entered into loan and equipment lease agreements with two equipment financing companies to provide the Company with approximately $11.0 million of lines of credit to finance certain of the Company's equipment purchases. During 1996 and 1997, the Company borrowed approximately $8.0 million under the agreements. The Company is required to maintain certain financial covenants throughout the duration of both the loan and lease agreements. The agreements stipulate that additional funding can be denied in the event of a material adverse change in the financial condition, operation or prospects of the Company. The loan and lease commitments expire on December 31, 1997. There can be no assurance, however, that the remaining credit line balance of $3.0 million of these loan and equipment lease agreements, or any -17- other financings, will ultimately be obtained by the Company or, if obtained, that the terms thereof will not change or will be reasonable. The Company anticipates that its current cash and cash equivalents will be sufficient to enable the Company to meet its future operating requirements through 1998. The Company does not expect to generate a positive internal cash flow in the foreseeable future due to continued capital expenditures, working capital requirements, repayment of debt and capital lease obligations, and ongoing losses during the next year, including the expected cost of continued commercialization of the PAPNET(R) Testing System. The Company may need to arrange additional equity or debt financing for the future operation of its business. There can be no assurance that such financing can be obtained or, if it is obtained, that the terms thereof will be reasonable. The Company plans to invest excess funds in short-term instruments, including money market funds. On November 5, 1997, the Company announced the appointment of Paul Sohmer, M.D. as President and Chief Executive Officer of the Company, and the election by the Board of C. Raymond Larkin, Jr. as the non-executive Chairman of the Board. In addition, the Company increased the size of the Company's Board to eight (8), and appointed Dr. Sohmer as a member of the Board. Mark Rutenberg, the founder of the Company, was appointed non-executive Vice Chairman of the Board. See the Notes to the Condensed Consolidated Financial Statements Note 4, set forth above, which describes in detail the foregoing developments. As previously reported in the Company's Form 10-Q for the period ending June 30, 1997, in an agreement effective as of June 1, 1997, the Company acquired New System International Ltd., a Hong Kong corporation, for a net purchase price of $1,564,000 and, in an agreement effective as of August 1, 1997, the Company acquired the assets of the Taiwan PAPNET(R) distributor, Papnet Far East Ltd. (Taiwan) through the Company's acquisition subsidiary, New System Ltd., for a purchase price of $392,000. In addition, the Company and its subsidiary, NSI Asia Pacific Ltd., entered into agreements with PFEL pursuant to which the Company received $800,000 for the right of PFEL to receive a royalty of 3% to 4% based on sales in Hong Kong, China and Taiwan. See the Notes to the Condensed Consolidated Financial Statements Note 3, set forth above, which describes in detail the foregoing and related transactions. To date, the Company has not implemented a program to hedge its foreign currency risk, but may do so in the future. As previously reported in the Company's Forms 10-Q for the periods ended March 31, 1997 and June 30, 1997, each respectively filed with the Securities and Exchange Commission (the "Commission"), the Company is a defendant in a civil lawsuit brought by Herbst et al., a patent infringement lawsuit filed by NeoPath, Inc. ("NeoPath"), and a civil lawsuit by Cytyc Corporation. The Company is the plaintiff in a lawsuit against NeoPath for patent infringement and additional claims related to unfair business practices, and NeoPath has filed counter-claims against the Company in such lawsuit -18- seeking damages and injunctive relief for false advertising and unfair competition. Each of the foregoing lawsuits have been disclosed in the Company's previous filings with the Commission and no material developments have occurred since the most recent such filing. The Company believes that an adverse judgment in any or all of these cases would not have a material adverse effect on the Company's operations, financial position or cash flows, but there can be no assurance in this regard. -19- PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. See Management's Discussion and Analysis of Financial Condition and Results of Operation in Part I herein for disclosure concerning legal proceedings, which information is incorporated herein by reference thereto. ITEM 2. CHANGES IN SECURITIES. During the third quarter 1997, the Company completed its obligations to report information to the Commission with respect to the use of proceeds of $94,705,000 from the sale of 6,900,000 shares of its Common Stock, par value $.0001 per share, in its initial public offering, declared effective on Securities Act registration statement Form S-1 on December 7, 1995 under Commission file number 33-97722 (the "Offering"). As of the ending date of the current reporting period, the amount of costs incurred for the Company's account and deemed as paid-for from proceeds of the sale of its securities, represent application of all of the Offering proceeds. Such application includes $12,994,000 for the purchase and installation of machinery and equipment, $1,564,000 for the acquisition of other businesses, $2,524,000 for working capital purposes, $71,040,000 for costs and expenses, $2,088,000 for interest expense, $2,388,000 for payment of leases and $2,107,000 for payment of loans. With respect to payment for acquisition of other businesses set forth above, Stephen Ng, M.D., president of NSI Asia Pacific Ltd., a subsidiary of the Company and a member of the Company's Board of Directors until May 15, 1997, is also an officer and principal stockholder of Papnet (Far East) Ltd. ("PFEL"), the seller of New System International Ltd., a Hong Kong corporation, which was purchased by the Company effective as of June 1, 1997 for the net amount indicated above. -20- ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 5. OTHER INFORMATION. During the third quarter, the Company acquired the assets of its Taiwan PAPNET(R) distributor, entered into royalty arrangements related to its acquisitions in Hong Kong, China and Taiwan, repriced certain employee stock options, and subsequent to the end of the quarter announced the appointment of a new President and Chief Executive Officer of the Company and a new Chairman of the Board. See the Notes to the Condensed Consolidated Financial Statements, set forth above, which describe in detail the foregoing and related developments. -21-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. Number Exhibit ------ ------- 10.32 Form of Employee Replacement Option Agreement, dated July 28, 1997 10.33 Form of Executive Employment Agreement, dated July 1, 1997 10.34 Employment Agreement, between Neuromedical Systems, Inc., and Stephen K.C. Ng, M.D., dated as of June 1, 1997 10.35 Employment Agreement, between NSI Netherlands B.V. and Henk Snyman, M.D., dated as of October 8, 1996, as amended July 1, 1997 10.36 Stock Purchase Agreement, dated as of June 1, 1997 among NSI Asia Pacific Ltd., Papnet (Far East) Ltd. ("PFEL") and the PFEL Stockholders 10.37 Asset Purchase Agreement, dated as of August 1, 1997 among New System Ltd., Papnet Far East Ltd. (Taiwan), and the stockholders of Papnet Far East Ltd. (Taiwan) 10.38 License and Management Services Agreement, dated as of August 1, 1997, between New System Ltd. and Papnet Far East Ltd. (Taiwan) 10.39 Amended and Restated Representation Agreement, dated September 30, 1997, by and between Neuromedical Systems, Inc.,and Papnet (Far East) Ltd. 10.40 Sublicense Agreement between NSI Asia Pacific Ltd. and Papnet (Far East) Ltd., dated September 30, 1997 10.41 Employment Agreement between the Company and Paul Sohmer, dated as of November 4, 1997 10.42 Option Agreement (A) between the Company and Paul Sohmer, dated as of November 4, 1997 10.43 Option Agreement (B) between the Company and Paul Sohmer, dated as of November 4, 1997 10.44 Form of Amendment to Company Stock Option Agreements, dated September 18, 1997, between the Company and Employee Participants in the Neuromedical Systems, Inc. 1993 Stock Option Plan (the "Plan") and/or the Plan as amended and restated on October 25, 1995 11.0 Statement Regarding Computation of Per Share Earnings 27.1 Financial Data Schedule 99.1 Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995*
* Previously filed as an exhibit to the Company's 1996 Annual Report on Form 10-K and incorporated herein by reference thereto. -22- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED) (b) Reports on Form 8-K during the quarter for which this report is filed: July 30, 1997 (Second Quarter 1997 Earnings Report) SAFE HARBOR STATEMENT - --------------------- Forward-looking statements discussed in this Form 10-Q are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Except for the historical information contained herein, the matters discussed and presented herein are forward-looking statements which reflect the Company's current views with respect to future events and financial performance, which include, but are not limited to, statements regarding Company plans and operations, management assessments and decisions, marketing and promotion strategy, and discussions of product development and performance. The words "believe", "expect", "anticipate", "estimate", "project" and similar expressions identify forward-looking statements, which speak only as of the date hereof. Investors are cautioned that such forward looking statements involve risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated due to many factors, including but not limited to, the Company's continuing negative cash flow, reliance on a single product, competition, dependence on key personnel, the impact on the Company of its territorial license agreements, dependence on patents and proprietary technology, government regulation of products and advertising, success of marketing and sales programs, the impact of third-party reimbursement decisions, litigation and other risks detailed in the Company's Securities and Exchange Commission filings, including its 1996 Form 10-K and Exhibit 99.1 attached thereto. The Company undertakes no obligation to publicly update or revise any forward-looking statements. -23- SIGNATURE 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, a duly authorized officer and the Company's principal financial officer. NEUROMEDICAL SYSTEMS, INC. Dated: November 13, 1997 By: /s/ David Duncan, Jr. --------------------- David Duncan, Jr. Vice President, Finance and Administration, Chief Financial Officer -24- EX-10.32 2 FORM OF EMPLOYEE REPLACEMENT OPTION AGREEMENT Exhibit 10.32 Form of Employee Replacement Option Agreement --------------------------------------------- NEUROMEDICAL SYSTEMS, INC. 1993 STOCK OPTION PLAN, AS AMENDED NONQUALIFIED STOCK OPTION AGREEMENT REPLACEMENT OPTIONS THIS AGREEMENT, effective as of the 28th day of July, 1997 (the "Grant Date"), between Neuromedical Systems, Inc., a Delaware corporation (the "Company"), and [name of employee] (the "Optionee"). WHEREAS, the Company has adopted the Neuromedical Systems, Inc. 1993 Stock Option Plan, as amended and restated on October 25, 1995 (the "Plan") in order to provide additional incentive to selected directors, officers, employees and consultants of the Company and its Subsidiaries; and WHEREAS, the Company previously granted to the Optionee, effective as of [prior grant date] certain option rights to purchase all or any part of an aggregate of [amount of prior grant] whole Shares, subject to the terms and conditions of an agreement between Optionee and the Company dated as of even date therewith (the "Old Options" and such agreement governing the terms of grant and exercise thereof, the "Old Option Agreement"). WHEREAS, as of July 28, 1997 and as authorized by the provisions of Article 3 of the Plan, the Board of Directors of the Company duly adopted a resolution authorizing the issuance of replacement options (the "Replacement Options") to acquire shares of Company common stock, $.0001 par value per share ("Common Stock"), in substitution of outstanding stock options granted on or after October 1, 1996, as and when such options are surrendered by the holders thereof, among which are the Old Options; and WHEREAS, the Optionee desires to surrender Old Options in exchange for the Replacement Options and the Company and the Optionee hereby wish to memorialize the terms and conditions applicable to the Replacement Options; NOW, THEREFORE, the parties hereto agree as follows: 1. Surrender of Old Options and Grant of Replacement Options. --------------------------------------------------------- 1.1 Effective as of the Grant Date and upon (a) surrender by the Optionee of all right, title and interest in Optionee's Old Options and (b) termination of any and all rights, obligations and duties of each of the parties hereto under the terms of Optionee's Old Option Agreement and any and all ancillary representations or agreements by the Company with respect thereto, the Company hereby grants to the Optionee the right and option (the "Option") to purchase all or any part of an aggregate of [amount of replacement options] whole Shares subject to, and in accordance with, the terms and conditions set forth in this Agreement. Each of the parties hereto agree that foregoing conditions (a) and (b) of this paragraph 1.1 shall each be duly performed, acknowledged and definitively evidenced by the sole act of execution of this Agreement. 1.2 The Option is not intended to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code. 1.3 This Agreement shall be construed in accordance and consistent with, and subject to, the terms of the Plan (the provisions of which are incorporated herein by reference); and, except as otherwise expressly set forth herein, the capitalized terms used in this Agreement shall have the same definitions as set forth in the Plan. 2. Purchase Price. -------------- The price at which the Optionee shall be entitled to purchase Shares upon the exercise of the Option shall be $4.00 per Share. 3. Duration of Option. ------------------ Subject to the terms and conditions of this Agreement, the Option shall be exercisable to the extent and in the manner provided herein for a period of ten (10) years from the Grant Date (the "Exercise Term"); provided, -------- however, that the Option may be earlier terminated as provided in Section 6 - ------- hereof. 4. Exercisability of Option. ------------------------ Subject to the terms and conditions of this Agreement, the Option shall be exercisable as follows: (a) The Option shall become vested and exercisable with respect to 25% of the aggregate number of Shares covered by the Option as of each of the first, second, third and fourth anniversaries of the Grant Date, provided, -------- however, that in the event that the Optionee is terminated by the Company "without cause" (as defined in the Plan) prior to July 28, 1998, 25% of Optionee's Option will vest and become exercisable as of such termination date. (b) Any fractional number of shares resulting from the application of the percentages set forth above in this Section 4 shall be rounded to the next higher whole number of Shares. -2- 5. Manner of Exercise and Payment. ------------------------------ 5.1 Subject to the terms and conditions of this Agreement and the Plan, the Option may be exercised by delivery of written notice to the Company, at its principal executive office. Such notice shall state that the Optionee is electing to exercise the Option and the number of Shares in respect of which the Option is being exercised and shall be signed by the person or persons exercising the Option. If requested by the Committee (as defined in the Plan), such person or persons shall (i) deliver this Agreement to the Secretary of the Company who shall endorse thereon a notation of such exercise and (ii) provide satisfactory proof as to the right of such person or persons to exercise the Option. 5.2 The notice of exercise described in Section 5.1 shall be accompanied by (x) either (i) payment of the full purchase price for the Shares in respect of which the Option is being exercised, in cash, by check or, at the sole discretion of the Committee, by transferring Shares to the Company having a Fair Market Value on the day preceding the date of exercise equal to the cash amount for which such Shares are substituted or (ii) subject to the consent of the Committee, instructions from the Optionee to the Company directing the Company to deliver a specified number of Shares directly to a designated broker or dealer pursuant to a cashless exercise election which is made in accordance with such requirements and procedures as are acceptable to the Committee in its sole discretion and (y) full payment of all applicable Withholding Taxes (as defined in Section 11) pursuant to Section 11 hereof 5.3 Upon receipt of the notice of exercise and any payment or other documentation as may be necessary pursuant to Section 5.2 relating to the Shares in respect of which the Option is being exercised, the Company shall, subject to the Plan and this Agreement, take such action as may be necessary to effect the transfer to the Optionee of the number of Shares as to which such exercise was effective. 5.4 The Optionee shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to any Shares subject to the Option until (i) the Option shall have been exercised pursuant to the terms of this Agreement and the Optionee shall have paid the full purchase price for the number of Shares in respect of which the Option was exercised, (ii) the Company shall have issued and delivered the Shares to the Optionee, and (iii) the Optionee's name shall have been entered as a stockholder of record on the books of the Company, whereupon the Optionee shall have full voting and other ownership rights with respect to such Shares. 6. Termination of Employment. ------------------------- 6.1 Death or Disability. In the event the employment of the ------------------- Optionee is terminated as a result of Disability or death, the Optionee may at any time within one (1) year after such termination of employment, exercise the Option to the extent, but only to the extent, that the Option or portion thereof was exercisable on the date of such termination of employment, after which time the Option shall terminate in full. In the event of the Optionee's -3- death, the Option shall be exercisable, to the extent provided in the Plan and this Agreement, by the legatee or legatees under the Optionee's will, or by the Optionee's personal representatives or distributees and such person or persons shall be substituted for the Optionee each time the Optionee is referred to herein. 6.2 Cause. In the event the employment of the Optionee is ----- terminated for Cause, the Option shall terminate on the date of the Optionee's termination of employment whether or not exercisable. 6.3 Other Termination of Employment. If the employment of the ------------------------------- Optionee is terminated for any reason other than Disability, death or Cause (including the Optionee's ceasing to be employed by a Subsidiary or division of the Company or any Subsidiary as a result of the sale of such Subsidiary or division or an interest in such Subsidiary or division), the Optionee may at any time within three (3) months after such termination of employment, exercise the Option to the extent, but only to the extent, that the Option or portion thereof was exercisable on the date of the termination of employment, after which time the Option shall terminate in full. 7. Nontransferability. ------------------ The Option shall not be transferable other than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Code or by such other means explicitly permitted pursuant to Rule 16b-3 under the Exchange Act. During the lifetime of the Optionee, the Option shall be exercisable only by the Optionee, except in the case of an Option transferred pursuant to a qualified domestic relations order. 8. No Right to Continued Employment. -------------------------------- Nothing in this Agreement or the Plan shall be interpreted or construed to confer upon the Optionee any right with respect to continuance of employment by the Company or any Subsidiary, nor shall this Agreement or the Plan interfere in any way with the right of the Company or any Subsidiary to terminate the Optionee's employment at any time. 9. Adjustments. ----------- In the event of a Change in Capitalization, the Committee may make appropriate adjustments to the number and class of Shares or other stock or securities subject to the Option and the purchase price for such Shares or other stock or securities. The Committee's adjustment shall be made in accordance with the provisions of Section 6 of the Plan and shall be final and binding for all purposes of the Plan and this Agreement. 10. Effect of a Liquidation, Merger or Consolidation. ------------------------------------------------ Upon the effective date of (i) the liquidation or dissolution of the Company or (ii) a merger or consolidation of the Company (a "Transaction"), the Option shall continue in -4- effect in accordance with its terms and the Optionee shall be entitled to receive in respect of each Share subject to the Option, upon exercise of the Option, the same number and kind of stock, securities, cash, property or other consideration that each holder of a Share was entitled to receive in the Transaction in respect of a Share. 11. Withholding of Taxes. -------------------- The Company shall have the right to deduct from any distribution of cash to the Optionee an amount equal to the federal, state and local income taxes and other amounts as may be required by law to be withheld (the "Withholding Taxes") with respect to the Option. If the Optionee is entitled to receive Shares upon exercise of the Option, the Optionee shall pay the Withholding Taxes to the Company in cash prior to the issuance of such Shares. In satisfaction of the Withholding Taxes, the Optionee may make a written election (the "Tax Election"), which may be accepted or rejected in the discretion of the Committee, to have withheld a portion of the Shares issuable to him or her upon exercise of the Option, having an aggregate Fair Market Value, on the date preceding the date of such issuance, equal to the Withholding Taxes, provided that if the Optionee may be subject to liability under Section 16(b) of the Exchange Act either (i) (A) the Tax Election is made at least six (6) months prior to the date the Option is exercised and (B) the Tax Election is irrevocable with respect to the exercise of all Options which are exercised prior to the expiration of six (6) months following a revocation of the Tax Election or (ii) (A) the Optionee makes the Tax Election at least six (6) months after the Grant Date, (B) the Option is exercised during the ten-day period beginning on the third business day and ending on the twelfth business day following the release for publication of the Company's quarterly or annual statement of sales and earnings (a "Window Period"), and (C) the Tax Election is made during the Window Period in which the Option is exercised or prior to such Window Period and subsequent to the immediately preceding Window Period. 12. Optionee Bound by the Plan. -------------------------- The Optionee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. 13. Modification of Agreement. ------------------------- This Agreement may be modified, amended, suspended or terminated, and any terms or conditions may be waived, but only by a written instrument executed by the parties hereto, provided, however, that the Company may unilaterally -------- ------- amend this Agreement with respect to the modification of any provision herein so long as (i) the result of such amendment does not adversely affect Optionee's rights under this Agreement or the Plan, and (ii) reasonable notice of any such unilateral amendment is provided to Optionee. -5- 14. Severability. ------------ Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms. 15. Governing Law. ------------- The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware without giving effect to the conflicts of laws principles thereof. 16. Successors in Interest. ---------------------- This Agreement shall inure to the benefit of and be binding upon any successor to the Company. This Agreement shall inure to the benefit of the Optionee's legal representatives. All obligations imposed upon the Optionee and all rights granted to the Company under this Agreement shall be final, binding and conclusive upon the Optionee's heirs, executors, administrators and successors. 17. Resolution of Disputes. ---------------------- Any dispute or disagreement which may arise under, or as a result of, or in any way relate to, the interpretation, construction or application of this Agreement shall be determined by the Committee. Any determination made hereunder shall be final, binding and conclusive on the Optionee and Company for all purposes. 18. No Assignment. ------------- Except as otherwise provided herein, the rights of the Optionee hereunder may not be assigned or otherwise transferred to any other party. [Signature Page Follows] -6- IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be effective as of the day and year first set forth above. NEUROMEDICAL SYSTEMS, INC. By: ------------------------------- John B. Henneman, III Co-CEO, Vice President of Corporate Development, Secretary and General Counsel ----------------------------------- [Name of Optionee] -7- Form of Employee Replacement Option Agreement Schedule ---------- Pursuant to the General Instructions to Item 601 of Regulation SK of the Securities Act of 1933, as amended, the Company has filed only the form of the Company's 1993 Stock Option Plan, as Amended, Nonqualified Stock Option Agreement for Replacement Options (the "Agreements") because the executed exemplars of such document are substantially identical in all material respects, except as to the parties thereto, the amount and date of the prior option grant and the amount of replacement options granted therein, in each case as set forth as follows:
Amount Amount of Replacement Employee Prior Grant Date Prior Grant Options - -------------------------------------------------------------------------------- David Duncan, Jr. February 13, 1997 20,000 16,000 Vice President Finance and Administration and Chief Financial Officer Zeev Hadass, Ph.D. February 13, 1997 20,000 16,000 Vice President, Processing Operations John B. Henneman, III February 13, 1997 20,000 16,000 Co-CEO, Vice President of Corporate Development, Secretary and General Counsel James M. Herriman, February 13, 1997 20,000 16,000 Vice President of Product Development Uzi Ish-Hurwitz February 13, 1997 35,000 28,000 Co-CEO, Executive Vice President, Chief of Technical Operations and President, Neuromedical Systems Israel Ltd. Laurie J. Mango, M.D. February 13, 1997 20,000 16,000 Vice President and Medical Director
-8-
Amount Amount of Replacement Employee Prior Grant Date Prior Grant Options - -------------------------------------------------------------------------------- Andrew C. Panagy February 13, 1997 20,000 16,000 Vice President, Marketing and Sales Howard M. Solomon, M.D. March 1, 1997 35,000 28,000 Vice President Medical Operations Mark R. Rutenberg February 13, 1997 70,000 56,000 Chairman Henk Snyman, M.D. November 7, 1996 and President, NSI Europe B.V. February 13, 1997 53,330 42,664 Stephen Ng, M.D. June 23, 1997 50,000 40,000 President, NSI Asia Pacific Ltd.
-9- EX-10.33 3 FORM OF EXECUTIVE EMPLOYMENT AGREEMENT Exhibit 10.33 FORM OF EXECUTIVE EMPLOYMENT AGREEMENT -------------------------------------- RESTATED -------- EMPLOYMENT AGREEMENT -------------------- AGREEMENT, effective as of the 1st day of July, 1997, by and between NEUROMEDICAL SYSTEMS, INC., a Delaware corporation with principal executive offices at Two Executive Boulevard, Suffern, New York 10901-4114 ("NSI"), and [Employee], (the "Employee"). W I T N E S S E T H : WHEREAS, the Employee is currently employed by NSI as [executive position]; and WHEREAS, NSI is desirous of continuing to employ the Employee of NSI in such capacity, and the Employee is desirous of continuing to serve NSI in such capacity, all upon the terms and subject to the conditions hereinafter provided. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto, intending to be legally bound, agree as follows: 1. Employment. ---------- NSI agrees to employ the Employee, and the Employee agrees to be employed by NSI, upon the terms and subject to the conditions of this Agreement. 2. Term. ---- The employment of the Employee by NSI as provided in Section 1 will be for the period commencing on the date hereof (the "Commencement Date") and ending on the third anniversary of the Commencement Date (the "Term"); provided, however, on the third anniversary of the Commencement Date and on each anniversary thereafter, the Term shall be automatically extended for an additional period of one (1) year, unless either party gives written notice to the other at least ninety (90) days' prior thereto that the Term of this Agreement shall not be so extended; provided, further, however, that the Term may be earlier terminated as hereinafter provided. 3. Duties; Best Efforts; Indemnification. ------------------------------------- The Employee shall serve as [executive position] of NSI, or such other senior management level position(s) as the Board of Directors of NSI (the "Board") may from time to time and in its reasonable discretion appoint the Employee, and shall perform and discharge well and faithfully the duties which may from time to time be prescribed by the President and Chief Executive Officer of NSI. The Employee shall devote all of his business time, attention and energies to the business and affairs of NSI, shall use his best efforts to advance the best interests of NSI and shall not during the Term be actively engaged in any other business activity, whether or not such business activity is pursued for gain, profit or other pecuniary advantage. Subject to the provisions of NSI's Certificate of Incorporation and Bylaws, each as amended from time to time, NSI shall indemnify the Employee to the fullest extent permitted by the General Corporation Law of the State of Delaware, as amended from time to time, for all amounts (including without limitation, judgments, fines, settlement payments, expenses and attorney's fees) incurred or paid by the Employee in connection with any action, suit, investigation or proceeding arising out of or relating to the performance by the Employee of services for, or the acting by the Employee as an officer or employee of, NSI, or any other person or enterprise at NSI's request; provided, however, that NSI shall not be required to indemnify the Employee against any liability resulting from conduct which is willful, intentional or grossly negligent. NSI shall use its best efforts to obtain and maintain in full force and effect during the Term directors' and officers' liability insurance policies providing full and adequate protection to the Employee for his capacities, provided that the Board shall have no obligation to purchase such insurance if, in its opinion, coverage is available only on unreasonable terms. -2- 4. Compensation and Benefits. ------------------------- (a) Base Salary. NSI shall pay to the Employee a base salary (the "Base ----------- Salary") at a rate of not less than $[annual salary] per annum, payable in accordance with NSI's ordinary payroll practices as in effect from time to time during the Term. The Board at least annually will review the Base Salary and other compensation during the Term with a view to the increase thereof based upon the Employee's performance, the performance of NSI, inflation, then prevailing industry salary scales and other relevant factors. Base Salary will not include any bonus paid to the Employee from time to time. (b) Out-of-Pocket Expenses. NSI shall promptly pay to the Employee the ---------------------- reasonable expenses incurred by him in the performance of his duties hereunder, including, without limitation, those incurred in connection with business related travel or entertainment, or, if such expenses are paid directly by the Employee, shall promptly reimburse him for such payment, provided that the Employee properly accounts therefor in accordance with NSI's policy. (c) Participation in Benefit Plans. The Employee shall be entitled to ------------------------------ participate in or receive benefits under any pension plan, profit sharing plan, health and accident plan or any other employee benefit plan or arrangement made available in the future by NSI to its executives and key management employees, subject to the terms and conditions applicable to executives and key management generally. (d) Vacation. The Employee shall be entitled to such paid vacation days -------- in each calendar year as determined by NSI from time to time, but not less than three (3) weeks in any calendar year, prorated in any calendar year during which the Employee is employed hereunder for less than an entire year in accordance with the number of days in such year during which he is so employed. The Employee shall also be entitled to all paid holidays given by NSI to its executives and key management employees. Such vacation and holiday allowance shall otherwise be subject to the policies and practices of NSI. 5. Termination. ----------- The Employee's employment hereunder shall be terminated upon the Employee's death and may be terminated as follows: -3- (a) By NSI for "Cause." A termination for Cause is a termination upon a finding by NSI that the Employee has: (i) intentionally failed to perform reasonably assigned duties, (ii) engaged in dishonest or willful misconduct in the performance of his duties, (iii) engaged in a transaction in connection with the performance of his duties to the Company or any of its Subsidiaries thereof which transaction is adverse to the interests of the Company or any of its Subsidiaries and which is engaged in for personal profit by the Employee, or (iv) willfully violated any law, rule or regulation in connection with the performance of his duties (other than traffic violations or similar offenses). (b) By NSI due to the Employee's "Disability." For purposes of this Agreement a termination for Disability shall occur: (i) upon the thirtieth (30th) day after the issuance of a written termination notice to the Employee in the event that the Employee shall have become so incapacitated as to be unable to resume, within the ensuing six (6) months, his employment hereunder by reason of physical or mental illness or injury, or (ii) upon the issuance of a written termination notice after the Employee has been unable to substantially perform his duties hereunder for three (3) consecutive months by reason of any physical or mental illness. 6. Compensation Upon Termination. ----------------------------- (a) In the event of the termination of the Employee's employment as a result of the Employee's death, NSI shall (i) pay to the Employee's estate his Base Salary through the date of his death and (ii) for the shorter of one (1) year following his death or the balance of the Term (as if such termination had not occurred) provide continuation coverage to the members of the Employee's family under all Blue Cross/Blue Shield, major medical and other health, accident, life or other disability plans and programs in which such family members participated immediately prior to his death. (b) In the event of the termination of the Employee's employment by NSI for Cause or by the Employee for any reason, NSI shall pay to the Employee his Base Salary through the date of his termination and the Employee's entitlement to any other compensation or benefits shall be determined in accordance with NSI's plans, policies and practices as in effect from time to time. -4- (c) In the event of the termination of the Employee's employment by NSI due to Disability, NSI shall pay to the Employee his Base Salary through the date of his termination. In addition, for the shorter of one (1) year following any such termination or the balance of the Term (as if such termination had not occurred), NSI shall (i) continue to pay the Employee the Base Salary in effect at the time of such termination less the amount, if any, then payable to the Employee under any disability benefits of NSI and (ii) provide the Employee continuation coverage under all Blue Cross/Blue Shield, major medical and other health, accident, life or other disability plans and programs in which the Employee participated immediately prior to such termination, to the extent that such benefits continue to be made available to active employees of NSI. (d) In the event that the Employee's employment is terminated by NSI other than for Cause or Disability, for a period of one (1) year following any such termination, NSI shall (i) continue to pay the Employee the Base Salary in effect at the time of such termination and (ii) provide continuation coverage under all Blue Cross/Blue Shield, accident, life or other disability plans and programs in which the Employee participated immediately prior to such termination, to the extent such benefits continue to be made available to active employees of NSI. The continuation of Base Salary provided for in clause (i) of the preceding sentence shall not be reduced by any compensation or other income that the Employee may earn from subsequent employment or otherwise. (e) The continuation coverage under any Blue Cross/Blue Shield, major medical and other health, accident, life or other disability plans and programs for the periods provided in Sections 6(a), 6(c) and 6(d) shall be provided (i) at the expense of NSI and (ii) in satisfaction of NSI's obligation under Section 4980B of the Code (and any similar state law) with respect to the period of time such benefits are continued hereunder. Notwithstanding anything to the contrary contained herein, NSI's obligation to provide such continuation coverage under Sections 6(a), 6(c) or 6(d) shall cease immediately upon the date any covered individual becomes eligible for similar benefits under the plans or policies of another employer. -5- (f) This Section 6 sets forth the only obligations of NSI with respect to the termination of the Employee's employment with NSI and the Employee acknowledges that upon his termination of employment he shall not be entitled to any payments or benefits which are not explicitly provided herein. 7. Covenant Regarding Inventions and Copyrights. -------------------------------------------- The Employee shall disclose promptly to NSI any and all inventions, discoveries, improvements and patentable or copyrightable works initiated, conceived or made by him, either alone or in conjunction with others, during the Term and related to the business or activities of NSI and he assigns all of his interest therein to NSI or its nominee; whenever requested to do so by NSI, the Employee shall execute any and all applications, assignments or other instruments which NSI shall deem necessary to apply for and obtain letters patent or copyrights of the United States or any foreign country or otherwise protect NSI's interest therein. These obligations shall continue beyond the conclusion of the Term with respect to inventions, discoveries, improvements or copyrightable works initiated, conceived or made by the Employee during the Term and shall be binding upon the Employee's assigns, executors, administrators and other legal representatives. 8. Protection of Confidential Information. -------------------------------------- The Employee acknowledges that he has been and will be provided with information about, and his employment by NSI will, throughout the Term, bring him into close contact with, many confidential affairs of NSI and its subsidiaries, including proprietary information about costs, profits, markets, sales, products, key personnel, pricing policies, operational methods, technical processes and other business affairs and methods, plans for future developments and other information not readily available to the public, all of which are highly confidential and proprietary and all of which were developed by NSI at great effort and expense. The Employee further acknowledges that the services to be performed by him under this Agreement are of a special, unique, unusual, extraordinary and intellectual character, that the business of NSI will be conducted throughout the world (the "Territory"), that its products will be marketed throughout the Territory, that NSI competes and will compete in nearly all of its -6- business activities with other organizations which are located in nearly any part of the Territory and that the nature of the relationship of the Employee with NSI is such that the Employee is capable of competing with NSI from nearly any location in the Territory. In recognition of the foregoing, the Employee covenants and agrees during the Term and for a period of five (5) years thereafter: (i) That he will keep secret all confidential matters of NSI and not copy them or disclose them to anyone outside of NSI, either during or after the Term, except with NSI's prior written consent or, if during the Term, in the performance of his duties hereunder, the Employee makes a good faith determination that it is in the best interest of NSI to disclose such matters; (ii) That he will not make use of any of such confidential matters for his own purposes or the benefit of anyone other than NSI; and (iii) That he will deliver promptly to NSI on termination of this Agreement, or at any time NSI may so request, all confidential memoranda, notes, records, reports and other confidential documents (and all copies thereof) relating to the business of NSI, which he may then possess or have under his control. 9. Restriction on Competition, Interference and Solicitation. --------------------------------------------------------- In recognition of the considerations described in Section 8 hereof, the Employee covenants and agrees that, during the Term and for a period of two (2) years after the termination of his employment hereunder, the Employee will not, directly or indirectly, (A) enter into the employ of, or render any services to, any person, firm or corporation engaged in any business competitive with the business of NSI in any part of the Territory; (B) engage in any such business for his account; (C) become interested in any such business as an individual, partner, shareholder, creditor, director, officer, principal, agent, employee, trustee, consultant advisor, franchisee or in any other relationship or capacity; or (D) interfere with NSI's relationship with, or endeavor to employ or entice away from NSI any person, firm, corporation, governmental entity or other business organization who or which is or was an employee, customer or supplier of, or maintained a business relationship with, NSI at any time (whether before, during or after the -7- Term), or which NSI has solicited or prepared to solicit; provided, however, -------- ------- that nothing contained in this Section 9 shall be deemed to prohibit the Employee from acquiring or holding, solely for investment, publicly traded securities of any corporation some of the activities of which are competitive with the business of NSI so long as such securities do not, in the aggregate, constitute more than five percent (5%) of any class or series of outstanding securities of such corporation. 10. Specific Remedies. ----------------- For purposes of Sections 7, 8 and 9 of this Agreement, references to NSI shall include all current and future majority-owned subsidiaries of NSI and all current and future joint ventures in which NSI may from time to time be involved. It is understood by the Employee and NSI that the covenants contained in this Section 10 and in Sections 7, 8, and 9 hereof are essential elements of this Agreement and that, but for the agreement of the Employee to comply with such covenants, NSI would not have agreed to enter into this Agreement. NSI and the Employee have independently consulted with their respective counsel and have been advised concerning the reasonableness and propriety of such covenants with specific regard to the nature of the business conducted by NSI and the interests of NSI and its stockholders. The Employee agrees that the covenants of Sections 7, 8, and 9 are reasonable and valid. If the Employee commits a breach of any of the provisions of Sections 7, 8, or 9, such breach shall be deemed to be grounds for termination for Cause. In addition, the Employee acknowledges that NSI may have no adequate remedy at law if he violates any of the terms hereof. The Employee therefore understands and agrees that NSI shall have (i) the right to have such provisions specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach will cause irreparable injury to NSI and that money damages will not provide an adequate remedy to NSI, and (ii) the right to require the Employee to account for and pay over to NSI all compensation, profits, monies, accruals, increments and other benefits (collectively, the "Benefits") derived or received by the Employee as a result of any transaction constituting a willful breach of any of the provisions of Sections 7, 8, or 9 and the Employee hereby agrees to account for and pay over such Benefits to NSI. -8- 11. Independence, Severability and Non-Exclusivity. ---------------------------------------------- Each of the rights enumerated in Section 10 hereof shall be independent of the others and shall be in addition to and not in lieu of any other rights and remedies available to NSI at law or in equity. If any of the covenants contained in Sections 7, 8, or 9, or any part of any of them, is hereafter construed or adjudicated to be invalid or unenforceable, the same shall not affect the remainder of the covenant or covenants or rights or remedies which shall be given full effect without regard to the invalid portions. The parties intend to and do hereby confer jurisdiction to enforce the covenants contained in Sections 7, 8, or 9 and the remedies enumerated in Section 10 upon the federal and state courts of New York sitting in New York County. If any of the covenants contained in Sections 7, 8, or 9 is held to be invalid or unenforceable because of the duration of such provision or the area covered thereby, the parties agree that the court making such determination shall have the power to reduce the duration and/or area of such provision and in its reduced form said provision shall then be enforceable. No such holding of invalidity or unenforceability in one jurisdiction shall bar or in any way affect NSI's right to the relief provided in Section 10 or otherwise in the courts of any other state or jurisdiction within the geographical scope of such covenants as to breaches of such covenants in such other respective states of jurisdictions, such covenants being, for this purpose, severable into diverse and independent covenants. 12. Disputes. -------- If NSI or the Employee shall dispute any termination of the Employee's employment hereunder or if a dispute concerning any payment hereunder shall exist: (a) either party shall have the right (but not the obligation), in addition to all other rights and remedies provided by law, to compel arbitration of the dispute in the City of New York under the rules of the American Arbitration Association by giving written notice of arbitration to the other party within thirty (30) days after notice of such dispute has been received by the party to whom notice has been given; and (b) if such dispute (whether or not submitted to arbitration pursuant to Section 12(a) hereof) results in a determination that (i) NSI did not have the right to terminate the -9- Employee's employment under the provisions of this Agreement or (ii) the position taken by the Employee concerning payments to the Employee is correct, NSI shall promptly pay, or if theretofore paid by the Employee, shall promptly reimburse the Employee for, all costs and expenses (including attorney's fees) reasonably incurred by the Employee in connection with such dispute. 13. Successors; Binding Agreement. ----------------------------- In the event of a future disposition by NSI (whether direct or indirect, by sale of assets or stock, merger, consolidation or otherwise) of all or substantially all of its business and/or assets in a transaction to which the Employee consents, NSI will require any successor, by agreement in form and substance satisfactory to the Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that NSI would be required to perform if no such disposition had taken place. This Agreement and all rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, administrators c.t.a., successors, heirs, distributees, devisees and legatees. Unless otherwise provided herein, any amounts payable hereunder after the Employee's death shall be paid in accordance with the terms of this Agreement to the Employee's estate. 14. Notices. ------- All notices, consents or other communications required or permitted to be given by any party hereunder shall be in writing (including telecopy or other similar writing) and shall be given by personal delivery, certified or registered mail, postage prepaid, or telecopy (or other similar writing) as follows: To NSI: Attn: General Counsel Two Executive Boulevard Suffern, New York, 10901-4414 -10- To the Employee: C/O Neuromedical Systems, Inc. Two Executive Boulevard Suffern, New York, 10901-4414 or at such other address or telecopy number (or other similar number) as either party may from time to time specify to the other. Any notice, consent or other communication required or permitted to be given hereunder shall be deemed to have been given on the date of mailing, personal delivery or telecopy or other similar means thereof (provided the appropriate answer back is received) and shall be conclusively presumed to have been received on the second business day following the date of mailing or, in the case of personal delivery or telecopy or other similar means, the day of delivery thereof, except that a change of address shall not be effective until actually received. 15. Modifications and Waivers. ------------------------- No term, provision or condition of this Agreement may be modified or discharged unless such modification or discharge is authorized by the Board of Directors of NSI and is agreed to in writing and signed by the Employee. No waiver by either party hereto of any breach by the other party hereto of any term, provision or condition of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 16. Entire Agreement. ---------------- This Agreement constitutes the entire understanding between the parties hereto relating to the subject matter hereof, superseding all negotiations, prior discussions, preliminary agreements and agreements relating to the subject matter hereof made prior to the date hereof. 17. Law Governing. ------------- Except as otherwise explicitly noted, this Agreement shall be governed by and construed in accordance with the laws of the State of New York (without giving effect to conflicts of law). -11- 18. Invalidity. ---------- Except as otherwise specified herein, the invalidity or unenforceability of any term or terms of this Agreement shall not invalidate, make unenforceable or otherwise affect any other term of this Agreement which shall remain in full force and effect. 19. Headings. -------- The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. 20. Execution and Counterparts. -------------------------- This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. [Signature Page Follows] -12- IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year set forth above. NEUROMEDICAL SYSTEMS, INC. By: --------------------------------------- Name: John B. Henneman, III Title: Co-CEO, Vice President of Corporate Development, Secretary and General Counsel ------------------------------------------ [Employee] -13- Schedule ----------- Pursuant to the General Instructions to Item 601 of Regulation SK of the Securities Act of 1933, as amended, the Company has filed only the form of the Company's Executive Employment Agreements (the, "Agreements") entered into by certain of the Company's employees, because the executed exemplars of such document are substantially identical in all material respects, except as to the parties thereto, executive position, compensation, and certain additional and substituted terms, in each case as set forth as follows:
Employee and Annual Executive Position Compensation Additional Terms - ---------------------------------------------------------------------------------------- David Duncan, Jr. $ 151,000 New Agreement amends prior employment Vice President Finance and agreement in all respects. Administration and Chief Financial Officer Zeev Hadass, Ph.D. $ 151,000 None Vice President, Processing Operations John B. Henneman, III $ 151,000 None Co-CEO, Vice President of Corporate Development, Secretary and General Counsel James M. Herriman, $ 151,000 None Vice President of Product Development Uzi Ish-Hurwitz $174,000.00 Substitute provisions re employment in Israel: Co-CEO, Executive Vice a. Managers Insurance (Company contribution President, Chief of 13-1/3% of gross salary); Technical Operations and b. Sick leave per Company's Israeli President, Neuromedical subsidiary policy; Systems Israel Ltd. c. Disability Insurance (Company contribution of 2-1/2% of gross salary); d. Keren Hishtalmut Fund (Company contribution of 7-1/2% of gross salary); e. Telephone Reimbursement; f. Company Car; g. Company contributions subject to adjustment per changes in law and/or custom; h. Non-Duplication of Benefits.
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Employee and Annual Executive Position Compensation Additional Terms - ---------------------------------------------------------------------------------------- Laurie J. Mango, M.D. $151,000 None Vice President and Medical Director Andrew C. Panagy $151,000 None Vice President, Marketing and Sales Howard M. Solomon, M.D. $151,000 Reimbursement of Relocation Expenses Vice President Medical Operations
-15- EX-10.34 4 EMPLOYMENT AGREEMENT Exhibit 10.34 EMPLOYMENT AGREEMENT -------------------- AGREEMENT, effective as of the 1st day of June, 1997, by and between NEUROMEDICAL SYSTEMS, INC., a Delaware corporation with principal executive offices at Two Executive Boulevard, Suffern, New York 10901-4114 ("NSI"), and Stephen K.C. Ng, M.D. (the "Employee"). W I T N E S S E T H : WHEREAS, the Employee was previously employed as president of Papnet (Far East) Ltd. ("PFEL"), a Cayman Islands corporation; WHEREAS, the Employee is currently employed by New System International Ltd. ("New Sys"), a Hong Kong corporation and former subsidiary of PFEL; WHEREAS, all of the capital stock of New Sys was acquired from PFEL as of the date set forth above by NSI Asia Pacific Ltd. ("NSI-APL"), a Cayman Islands corporation and wholly owned subsidiary of NSI; and WHEREAS, NSI is desirous to employ the Employee as President of NSI- APL and its subsidiaries, and the Employee is desirous to serve NSI in such capacity, all upon the terms and subject to the conditions hereinafter provided. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto, intending to be legally bound, agree as follows: 1. Employment. ---------- NSI agrees to employ the Employee, and the Employee agrees to be employed by NSI, upon the terms and subject to the conditions of this Agreement. 2. Term. ---- The employment of the Employee by NSI as provided in Section 1 will be for the period commencing on the date hereof (the "Commencement Date") and ending on the first (1st) anniversary of the Commencement Date (the "Term"); provided, however, on the first anniversary of the Commencement Date and on each anniversary thereafter, the Term shall be automatically extended for an additional period of one (1) year, unless either party gives written notice to the other at least ninety (90) days prior thereto that the Term of this Agreement shall not be so extended; provided, further, however, that the Term may be earlier terminated as hereinafter provided. 3. Duties; Best Efforts; Indemnification. ------------------------------------- The Employee shall serve as President of NSI-APL, or such other senior management level position(s) as the Board of Directors of NSI (the "Board") may from time to time and in its reasonable discretion appoint the Employee, and shall perform and discharge well and faithfully the duties which may from time to time be prescribed by the President and Chief Executive Officer of NSI. The Employee shall devote 90% all of his business time, attention and energies to the business and affairs of NSI-APL and its subsidiaries, shall use his best efforts to advance the best interests of NSI-APL and its subsidiaries, and shall not, except for 10% of his time during the Term which may be devoted to non- competing consultation activities, be actively engaged in any other business activity, whether or not such business activity is pursued for gain, profit or other pecuniary advantage. Subject to the provisions of NSI's Certificate of Incorporation and Bylaws, each as amended from time to time, NSI shall indemnify the Employee to the fullest extent permitted by the General Corporation Law of the State of Delaware, as amended from time to time, for all amounts (including without limitation, judgments, fines, settlement payments, expenses and attorney's fees) incurred or paid by the Employee in connection with any action, suit, investigation or proceeding arising out of or relating to the performance by the Employee of services for, or the acting by the Employee as an officer or employee of, NSI, or any other person or enterprise at NSI's request; provided, however, that NSI shall not be required to indemnify the Employee against any liability -2- resulting from conduct which is willful, intentional or grossly negligent. NSI shall use its best efforts to obtain and maintain in full force and effect during the Term directors' and officers' liability insurance policies providing full and adequate protection to the Employee for his capacities, provided that the Board of Directors of NSI (the "Board") shall have no obligation to purchase such insurance if, in its opinion, coverage is available only on unreasonable terms. 4. Compensation and Benefits. ------------------------- (a) Base Salary. NSI shall pay to the Employee a base salary (the "Base ----------- Salary") at a rate of not less than US$174,000 per annum, payable in twelve (12) equal monthly installments in arrears and in accordance with NSI's ordinary payroll practices as in effect from time to time during the Term. The Board at least annually will review the Base Salary and other compensation during the Term with a view to the increase thereof based upon the Employee's performance, the performance of NSI, inflation, then prevailing industry salary scales and other relevant factors. Base Salary will not include any bonus paid to the Employee from time to time. (b) Out-of-Pocket Expenses. NSI shall promptly pay to the Employee the ---------------------- reasonable expenses incurred by him in the performance of his duties hereunder, including, without limitation, those incurred in connection with business related travel or entertainment, or, if such expenses are paid directly by the Employee, shall promptly reimburse him for such payment, provided that the Employee properly accounts therefor in accordance with NSI's policy. (c) Participation in Benefit Plans. The Employee shall be entitled to ------------------------------ participate in or receive benefits under any pension plan, profit sharing plan, health and accident plan or any other employee benefit plan or arrangement made available in the future by NSI to its executives and key management employees, subject to the terms and conditions applicable to executives and key management generally. -3- (d) Vacation. The Employee shall be entitled to such paid vacation days -------- in each calendar year as determined by NSI from time to time, but not less than three (3) weeks in any calendar year, prorated in any calendar year during which the Employee is employed hereunder for less than an entire year in accordance with the number of days in such year during which he is so employed. The Employee shall also be entitled to all paid holidays given by NSI to its executives and key management employees. Such vacation and holiday allowance shall otherwise be subject to the policies and practices of NSI. (e) Housing Allowance. NSI shall pay to the Employee an annual housing ----------------- allowance of US$60,000, payable in twelve equal monthly installments in arrears. (f) Bonus. NSI shall pay to the Employee an annual bonus equal to the ----- higher of one (1) month Base Salary or such greater amount granted by the Board (i.e., a minimum of one (1) month Base Salary is guaranteed as an annual bonus payment by NSI to the Employee). Such bonus shall be paid at the earlier of twelve (12) months following the effective date hereof or at the date of grant of a bonus to Employee by the Board. (g) Stock Options Grant. Employee shall be eligible to receive stock ------------------- options for the purchase of NSI Common Stock in accordance with the terms and conditions of the NSI 1993 Stock Incentive Plan, as amended and restated October 25, 1995, with such additional terms and conditions of the Board as determined in accordance therewith. The initial stock option grant to Employee following execution of this Agreement shall be for 40,000 shares of NSI Common Stock, which shall be exercisable at a purchase price of $4.00 per share and which will vest over a four (4) year period, becoming exercisable at a rate of 25% per year as of July 28th of each year (i.e., 25% will become exercisable on July 28, 1998 and an additional 25% each year thereafter until fully vested on July 28, 2001); the amount of grant eligibility in subsequent years shall be determined by the Board upon renewal of this Agreement. -4- (h) Taxes. Any and all taxes payable by Employee are the sole ----- responsibility of the Employee, provided, however, that NSI shall comply with -------- ------- any and all applicable tax laws with respect to the withholding of amounts from Employee compensation subject to U.S. federal, state, and local taxes, and any other jurisdictional taxes with respect to which NSI and/or its subsidiaries have a legal obligation of compliance. 5. Termination. ----------- The Employee's employment hereunder shall be terminated upon the Employee's death and may be terminated as follows: (a) By NSI for "Cause." A termination for Cause is a termination upon a finding by NSI that the Employee has (i) intentionally failed to perform reasonably assigned duties, (ii) engaged in dishonest or willful misconduct in the performance of his duties, (iii) engaged in a transaction in connection with the performance of his duties to the Company or any of its Subsidiaries thereof which transaction is adverse to the interests of the Company or any of its Subsidiaries and which is engaged in for personal profit by the Employee, or (iv) willfully violated any law, rule or regulation in connection with the performance of his duties (other than traffic violations or similar offenses). (b) By NSI due to the Employee's "Disability." For purposes of this Agreement a termination for Disability shall occur (i) upon the thirtieth (30th) day after the issuance of a written termination notice to the Employee in the event that the Employee shall have become so incapacitated as to be unable to resume, within the ensuing six (6) months, his employment hereunder by reason of physical or mental illness or injury, or (ii) upon the issuance of a written termination notice after the Employee has been unable to substantially perform his duties hereunder for three (3) consecutive months by reason of any physical or mental illness. -5- 6. Compensation Upon Termination. ----------------------------- (a) In the event of the termination of the Employee's employment as a result of the Employee's death, NSI shall (i) pay to the Employee's estate his Base Salary through the date of his death and (ii) for the shorter of one (1) year following his death or the balance of the Term (as if such termination had not occurred) provide continuation coverage to the members of the Employee's family under all Blue Cross/Blue Shield, major medical and other health, accident, life or other disability plans and programs in which such family members participated immediately prior to his death. (b) In the event of the termination of the Employee's employment by NSI for Cause or by the Employee for any reason, NSI shall pay to the Employee his Base Salary through the date of his termination and the Employee's entitlement to any other compensation or benefits shall be determined in accordance with NSI's plans, policies and practices as in effect from time to time. (c) In the event of the termination of the Employee's employment by NSI due to Disability, NSI shall pay to the Employee his Base Salary through the date of his termination. In addition, for the shorter of one (1) year following any such termination or the balance of the Term (as if such termination had not occurred), NSI shall (i) continue to pay the Employee the Base Salary in effect at the time of such termination less the amount, if any, then payable to the Employee under any disability benefits of NSI, and (ii) provide the Employee continuation coverage under all Blue Cross/Blue Shield, major medical and other health, accident, life or other disability plans and programs in which the Employee participated immediately prior to such termination, to the extent that such benefits continue to be made available to active employees of NSI. (d) In the event that the Employee's employment is terminated by NSI other than for Cause or Disability, for a period of one (1) year following any such termination, NSI shall (i) continue to pay the Employee the Base Salary in effect at the time of such termination, and (ii) provide continuation coverage under all Blue -6- Cross/Blue Shield, accident, life or other disability plans and programs in which the Employee participated immediately prior to such termination, to the extent such benefits continue to be made available to active employees of NSI. The continuation of Base Salary provided for in clause (i) of the preceding sentence shall not be reduced by any compensation or other income that the Employee may earn from subsequent employment or otherwise. (e) The continuation coverage under any Blue Cross/Blue Shield, major medical and other health, accident, life or other disability plans and programs for the periods provided in Sections 6(a), 6(c) and 6(d) shall be provided (i) at the expense of NSI, and (ii) in satisfaction of NSI's obligation under Section 4980B of the Code (and any similar state law) with respect to the period of time such benefits are continued hereunder. Notwithstanding anything to the contrary contained herein, NSI's obligation to provide such continuation coverage under Sections 6(a), 6(c) or 6(d) shall cease immediately upon the date any covered individual becomes eligible for similar benefits under the plans or policies of another employer. (f) This Section 6 sets forth the only obligations of NSI with respect to the termination of the Employee's employment with NSI and the Employee acknowledges that upon his termination of employment he shall not be entitled to any payments or benefits which are not explicitly provided herein. 7. Covenant Regarding Inventions and Copyrights. -------------------------------------------- The Employee shall disclose promptly to NSI any and all inventions, discoveries, improvements and patentable or copyrightable works initiated, conceived or made by him, either alone or in conjunction with others, during the Term and related to the business or activities of NSI and he assigns all of his interest therein to NSI or its nominee; whenever requested to do so by NSI, the Employee shall execute any and all applications, assignments or other instruments which NSI shall deem necessary to apply for and obtain letters patent or copyrights of the United States or any foreign country or -7- otherwise protect NSI's interest therein. These obligations shall continue beyond the conclusion of the Term with respect to inventions, discoveries, improvements or copyrightable works initiated, conceived or made by the Employee during the Term and shall be binding upon the Employee's assigns, executors, administrators and other legal representatives. 8. Protection of Confidential Information. -------------------------------------- The Employee acknowledges that he has been and will be provided with information about, and his employment by NSI will, throughout the Term, bring him into close contact with, many confidential affairs of NSI and its subsidiaries, including proprietary information about costs, profits, markets, sales, products, key personnel, pricing policies, operational methods, technical processes and other business affairs and methods, plans for future developments and other information not readily available to the public, all of which are highly confidential and proprietary and all of which were developed by NSI at great effort and expense. The Employee further acknowledges that the services to be performed by him under this Agreement are of a special, unique, unusual, extraordinary and intellectual character, that the business of NSI will be conducted throughout the world (the "Territory"), that its products will be marketed throughout the Territory, that NSI competes and will compete in nearly all of its business activities with other organizations which are located in nearly any part of the Territory and that the nature of the relationship of the Employee with NSI is such that the Employee is capable of competing with NSI from nearly any location in the Territory. In recognition of the foregoing, the Employee covenants and agrees during the Term and for a period of five (5) years thereafter: (i) That he will keep secret all confidential matters of NSI and not copy them or disclose them to anyone outside of NSI, either during or after the Term, except with NSI's prior written consent or, if during the Term, in the performance of his -8- duties hereunder, the Employee makes a good faith determination that it is in the best interest of NSI to disclose such matters; (ii) That he will not make use of any of such confidential matters for his own purposes or the benefit of anyone other than NSI; and (iii) That he will deliver promptly to NSI on termination of this Agreement, or at any time NSI may so request, all confidential memoranda, notes, records, reports and other confidential documents (and all copies thereof) relating to the business of NSI, which he may then possess or have under his control. 9. Restriction on Competition, Interference and Solicitation. --------------------------------------------------------- In recognition of the considerations described in Section 8 hereof, the Employee covenants and agrees that, during the Term and for a period of two (2) years after the termination of his employment hereunder, the Employee will not, directly or indirectly; (A) enter into the employ of, or render any services to, any person, firm or corporation engaged in any business competitive with the business of NSI in any part of the Territory; (B) engage in any such business for his account; (C) become interested in any such business as an individual, partner, shareholder, creditor, director, officer, principal, agent, employee, trustee, consultant advisor, franchisee or in any other relationship or capacity; or (D) interfere with NSI's relationship with, or endeavor to employ or entice away from NSI any person, firm, corporation, governmental entity or other business organization who or which is or was an employee, customer or supplier of, or maintained a business relationship with, NSI at any time (whether before, during or after the Term), or which NSI has solicited or prepared to solicit; provided, however, that nothing contained in this Section 9 -------- ------- shall be deemed to prohibit the Employee from acquiring or holding, solely for investment, publicly traded securities of any corporation some of the activities of which are competitive with the business of NSI so long as such securities do not, in the aggregate, constitute more than five percent (5%) of any class or series of outstanding securities of such corporation. -9- 10. Specific Remedies. ----------------- For purposes of Sections 7, 8 and 9 of this Agreement, references to NSI shall include all current and future majority-owned subsidiaries of NSI and all current and future joint ventures in which NSI may from time to time be involved. It is understood by the Employee and NSI that the covenants contained in this Section 10 and in Sections 7, 8, and 9 hereof are essential elements of this Agreement and that, but for the agreement of the Employee to comply with such covenants, NSI would not have agreed to enter into this Agreement. NSI and the Employee have independently consulted with their respective counsel and have been advised concerning the reasonableness and propriety of such covenants with specific regard to the nature of the business conducted by NSI and the interests of NSI and its stockholders. The Employee agrees that the covenants of Sections 7, 8, and 9 are reasonable and valid. If the Employee commits a breach of any of the provisions of Sections 7, 8, or 9, such breach shall be deemed to be grounds for termination for Cause. In addition, the Employee acknowledges that NSI may have no adequate remedy at law if he violates any of the terms hereof. The Employee therefore understands and agrees that NSI shall have: (i) the right to have such provisions specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach will cause irreparable injury to NSI and that money damages will not provide an adequate remedy to NSI, and (ii) the right to require the Employee to account for and pay over to NSI all compensation, profits, monies, accruals, increments and other benefits (collectively, the "Benefits") derived or received by the Employee as a result of any transaction constituting a willful breach of any of the provisions of Sections 7, 8, or 9 and the Employee hereby agrees to account for and pay over such Benefits to NSI. 11. Independence, Severability and Non-Exclusivity. ---------------------------------------------- Each of the rights enumerated in Section 10 hereof shall be independent of the others and shall be in addition to and not in lieu of any other rights and remedies -10- available to NSI at law or in equity. If any of the covenants contained in Sections 7, 8, or 9, or any part of any of them, is hereafter construed or adjudicated to be invalid or unenforceable, the same shall not affect the remainder of the covenant or covenants or rights or remedies which shall be given full effect without regard to the invalid portions. The parties intend to and do hereby confer jurisdiction to enforce the covenants contained in Sections 7, 8, or 9 and the remedies enumerated in Section 10 upon the federal and state courts of New York sitting in New York County. If any of the covenants contained in Sections 7, 8, or 9 is held to be invalid or unenforceable because of the duration of such provision or the area covered thereby, the parties agree that the court making such determination shall have the power to reduce the duration and/or area of such provision and in its reduced form said provision shall then be enforceable. No such holding of invalidity or unenforceability in one jurisdiction shall bar or in any way affect NSI's right to the relief provided in Section 10 or otherwise in the courts of any other state or jurisdiction within the geographical scope of such covenants as to breaches of such covenants in such other respective states of jurisdictions, such covenants being, for this purpose, severable into diverse and independent covenants. 12. Disputes. -------- If NSI or the Employee shall dispute any termination of the Employee's employment hereunder or if a dispute concerning any payment hereunder shall exist: (a) either party shall have the right (but not the obligation), in addition to all other rights and remedies provided by law, to compel arbitration of the dispute in the City of New York under the rules of the American Arbitration Association by giving written notice of arbitration to the other party within thirty (30) days after notice of such dispute has been received by the party to whom notice has been given; and (b) if such dispute (whether or not submitted to arbitration pursuant to Section 12(a) hereof) results in a determination that: (i) NSI did not have the right to terminate the Employee's employment under the provisions of this Agreement, or (ii) the -11- position taken by the Employee concerning payments to the Employee is correct, NSI shall promptly pay, or if theretofore paid by the Employee, shall promptly reimburse the Employee for, all costs and expenses (including attorney's fees) reasonably incurred by the Employee in connection with such dispute. 13. Successors; Binding Agreement. ----------------------------- In the event of a future disposition by NSI (whether direct or indirect, by sale of assets or stock, merger, consolidation or otherwise) of all or substantially all of its business and/or assets in a transaction to which the Employee consents, NSI will require any successor, by agreement in form and substance satisfactory to the Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that NSI would be required to perform if no such disposition had taken place. This Agreement and all rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, administrators c.t.a., successors, heirs, distributees, devisees and legatees. Unless otherwise provided herein, any amounts payable hereunder after the Employee's death shall be paid in accordance with the terms of this Agreement to the Employee's estate. 14. Notices. ------- All notices, consents or other communications required or permitted to be given by any party hereunder shall be in writing (including telecopy or other similar writing) and shall be given by personal delivery, certified or registered mail, postage prepaid, or telecopy (or other similar writing) as follows: To NSI: Attn: General Counsel Two Executive Boulevard Suffern, New York, 10901-4414 -12- To the Employee: Stephen K.C. Ng, M.D. C/O NSI (Hong Kong) Ltd. 1/f, 2 Biotechnology Ave. 12 Miles, Tai Po Road Shatin, N.T. Hong Kong or at such other address or telecopy number (or other similar number) as either party may from time to time specify to the other. Any notice, consent or other communication required or permitted to be given hereunder shall be deemed to have been given on the date of mailing, personal delivery or telecopy or other similar means thereof (provided the appropriate answer back is received) and shall be conclusively presumed to have been received on the second business day following the date of mailing or, in the case of personal delivery or telecopy or other similar means, the day of delivery thereof, except that a change of address shall not be effective until actually received. 15. Modifications and Waivers. ------------------------- No term, provision or condition of this Agreement may be modified or discharged unless such modification or discharge is authorized by the Board of Directors of NSI and is agreed to in writing and signed by the Employee. No waiver by either party hereto of any breach by the other party hereto of any term, provision or condition of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 16. Entire Agreement. ---------------- This Agreement constitutes the entire understanding between the parties hereto relating to the subject matter hereof, superseding all negotiations, prior discussions, preliminary agreements and agreements relating to the subject matter hereof made prior to the date hereof. -13- 17. Law Governing. ------------- Except as otherwise explicitly noted, this Agreement shall be governed by and construed in accordance with the laws of the State of New York (without giving effect to conflicts of law). 18. Invalidity. ---------- Except as otherwise specified herein, the invalidity or unenforceability of any term or terms of this Agreement shall not invalidate, make unenforceable or otherwise affect any other term of this Agreement which shall remain in full force and effect. 19. Headings. -------- The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. 20. Counterparts. ------------ This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. [Signature Page Follows] -14- IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year set forth above. NEUROMEDICAL SYSTEMS, INC. By: /s/ John B. Henneman, III Name: John B. Henneman, III Title: Co-CEO, Vice President of Corporate Development, Secretary and General Counsel /s/ Stephen K.C. Ng, M.D. Stephen K.C. Ng, M.D. -15- EX-10.35 5 EMPLOYMENT AGREEMENT Exhibit 10.35 EMPLOYMENT CONTRACT THE UNDERSIGNED: (1) NSI Netherlands B.V., (the "Company") whose registered office is in Amsterdam, The Netherlands and whose place of business is at Zekeringstraat 39 (1014 BV) for these presents lawfully represented by Mark Rutenberg; and (2) Henk Snyman (the "Employee") residing at The Hague, The Netherlands. HEREBY AGREE AS FOLLOWS: 1. Commencement and term of employment 1.1 As of November the Employee shall enter the service of the Company. 1.2 This Agreement has been entered into for an indefinite period of time and may be period as may be required by law, the term of notice to expire on the last day of a calendar month. terminated by either party by notice given in writing observing two (2) months' notice or such longer period as may be required by law, the term of notice to expire on the last day of as calendar month. This Agreement shall in any event end on the last day of the calendar month in which the Employee reaches the pensionable age applicable to him, without any prior notice of termination being required. 1.3 The first two (2) months of the Employee's employment hereunder shall be a trial period during which either party may terminate this Agreement with immediate effect without being required to give any reason and without incurring any liability for damages to the other party. 2. Position and duties 2.1 In the Company's service hereunder the Employee shall have the position of President. He shall perform all the work required thereto. The Employee shall act in his employment in accordance with the general and/or specific directions and instructions of the Company. 2.2 The Company reserves the right, within the limits of what is reasonable, to make changes to the Employee's position and to modify the conditions of employment of the Employee accordingly. 2.3 The Employee agrees that he shall do and omit anything which a good Executive ought to do or refrain from doing and the he shall devote all his energy and skill to the Company and shall promote the Company's interests to the best of his knowledge and ability. 2.4 The usual working time shall be forty (40) hours per week. The usual working days are Monday to Friday. 2.5 The Employee's work location shall be in Amsterdam, The Netherlands. Notwithstanding this the Employee agrees that he shall perform his work at a different location than the place where the work is normally done and/or at different days or hours than those which normally apply, unless due to special circumstances the Employee cannot be required to do so. 3. Salary holiday allowance stock options & sign on bonus 3.1 The Employee shall receive a salary of NLG 250,000 gross per month, payable in arrears no later than on the last day of every calendar month. At the end of each calendar year the Company shall decide whether or not to increase the Employee's salary. 3.2 The Employee shall be entitled to a holiday allowance of 8% of the gross total salary received by him in the twelve (12) months preceding the month of payment, that allowance to be paid on the last day of May of every calendar year. In the event of premature termination of this Agreement the Employee shall receive a pro rata part of the holiday allowance such as it has accrued due on the date of termination. 3.3 The Employee shall be entitled to receive 50,000 stock options to purchase NSI stock at fair market price on the date of grant per the terms & conditions outlined in Annex A. 3.4 The Employee shall receive a "sign on bonus" of NLG 38,149 "gross" within thirty (30) days after being employed (assuming employed not later than November 1996). 4. Business expenses 4.1 As compensation for business telephone charges incurred by the Employee during his actual work the Employee shall receive every two (2) months the amount of the telephone bill received by him over that period reduced by the minimum employee contribution as prescribed by the Dutch Inland Revenue at that time, if and to the extent that his private use does not exceed the fiscal maximum prescribed in this context. -2- 4.2 Any expenses which the Employee has reasonably incurred in the discharge of his duties shall be reimbursed to the Employee upon presentation of bills and proofs of payment. Expense claims are to be presented without thirty (30) days from the date when the expenses concerned were incurred. 5. Company Car For the purposes of performing his function the Employee shall be provided by the Company with a vehicle of a list value of NLG 75,000 maximum ("ex- VAT"). The Company shall pay all expenses relating to the use of the car, with the exception of the cost of fuel used on private travel of the Employee (including holidays) abroad and any tax and social security contributions levied on account of a company car being provided as part of an employee's remuneration, which costs, tax and contributions shall be paid by the Employee. 6. Pension The Employee and his surviving relations shall have the benefit of the Companies pension plan. The Company agrees to contribute 12% of the annual gross salary of the Employee to the individual pension plan and will be paid once a year at the end of each calendar year. 7. Other insurance Upon presentation of the bill concerned and of proof of payment the Company shall reimburse to the Employee a gross amount equivalent to 100% of the premium of a medical insurance policy to be taken out by him for the benefit of himself and his family, provided that the gross amount so contributed by the Company shall not exceed the maximum contribution which employers are required to pay under the State Health Insurance Fund Act ("Ziekenfondswet"). 8. Holidays For each full calendar year during which his employment hereunder continues, the Employee shall be entitled to twenty (20) work days' holiday on full pay; In addition to all Dutch public holidays, to be taken with the prior approval of the Company. Holidays not taken within two (2) years after the calendar year during which they have accrued shall be forfeited without any right of compensation therefore. 9. Illness or disablement 9.1 In the event of the Employee's incapacity to work on account of illness or disablement the Company shall for a maximum period of twelve months, but until no later than the date when the Employee's employment hereunder ends (if that -3- date is the earlier), continue to pay 100% of the salary as specified in Article 3 of this Agreement, such to deduction of any benefits to be received by the Employee under the social security laws and/or benefits under any other relevant insurance taken out by the Company. 9.2 During the period specified in paragraph 9.1 the Company shall continue to pay the premiums referred to Article (6) and (7) at any rate to the extend that such premiums are under said Articles to be borne by the Company and are not on any other account not payable. 9.3 For the purposes of this Article and Articles (4) and (5) periods of incapacity to work following each other at intervals of less than four weeks shall be regards as one consecutive period of incapacity to work. 9.4 On pain of forfeiture of his entitlement to continued payment of salary pursuant to this Article, the Employee must strictly comply with the guidelines and instructions given by or on behalf of the Company regarding sick leave and if so requested must co-operate in any medical examination with regard thereto. 10 Side activities/remuneration from third parties 10.1 During his employment hereunder the Employee shall not be permitted to perform any paid or unpaid side activities without prior written approval of the Company. 10.2 The Employee shall not accept any monies or other remuneration from third parties in connection with his work for the Company and/or the companies affiliated with the Company. 11. Confidentiality/non-disclosure and Intellectual property rights 11.1 During his employment hereunder as well as after its termination- irrespective of the manner in which and the reasons for which his employment maybe terminated-the Employee shall treat as strictly confidential and not disclose to third parties, whether directly or indirectly, in any form or manner whatsoever, any information which comes to his knowledge regarding the business and interest of the Company and/or the companies affiliated with the Company and/or its customer and other business relations, all this in the broadest sense, unless the discharge of his duties as President of the Company requires the disclosure of such information to third parties on a need-to-know basis. 11.2 In the event that the Employee is suspended and upon termination of his employment hereunder-irrespective of the manner in which and the reasons for which his employment may be terminated-the Employee shall at the Company's first request to that effect surrender to the Company all property of the Company in his possession as well as all documents which in any way whatever relate to the -4- Company and/or the companies affiliated with the company and/or its customer and other business relations, all this in the broadest sense, as well as all copies of such documents and property. 11.3 All intellectual property rights, including but not limited to copyright and patent, design and trade mark rights, in any products, work and/or services developed by the Employee during or in connection with his employment hereunder shall vest in the Company. 11.4 The Employee hereby, in so far as necessary, assigns to the Company, which assignment is hereby accepted by the Company, all intellectual property rights in any products, works and/or services developed (completely or in part) by the Employee during or in connection with his employment hereunder. The Employee agrees that where this assignment (or part thereof) should at any time prove to be legally invalid, he shall at such time assign said rights-without imposing any condition thereon-to the Company by a separate deed. 11.5 In respect of the products, works and/or services referred to in this Article, the Employee hereby waives any and all moral rights as defined in Section 25 of the Copyright Act. 11.6 The provisions of this Article imply that both during his employment hereunder and at any time thereafter the Employee shall not be permitted to commercially exploit or cause others to commercially exploit in whatever manner and/or to register or cause others to register to any products, works and/or services developed by him during or in connection with his employment hereunder. 11.7 The parties agree that the salary of the Employee is deemed to include compensation for deprivation (if any) of intellectual property rights. 12. Non-competition For two (2) years after termination of his employment hereunder- irrespective of the manner in which and the reasons for which his employment has been terminated-the Employee shall not without prior written approval of the Company be permitted to do any of the following in or outside of the Netherlands" (a) to work for or be involved with, in any manner, whether directly or indirectly and whether paid or unpaid, any person, organization, company, or enterprise pursuing activities in competition with or similar or related to the activities of the Company and/or the companies affiliated with the Company, or to have or take any interest in such organization, company or enterprise; -5- (b) to maintain in any manner whatsoever, whether directly or indirectly, business contacts with any person, organization, company or enterprise with whom during the last two (2) years preceding the termination of the Employee's employment the Company (c) to induce present employees of the Company and/or companies affiliated with the Company or persons who in the period of two years preceding the termination of the Employee's employment have been or were employed by the Company and/or the companies affiliated with the Company to terminate their employment and/or to hire such present or former employees. 13. Remedy for breach of contract 13.1 In the event that the Employee commits any breach of Article 10, Article 11 and/or Article 12 he shall forfeit to the Company an immediately payable penalty of NLG (100,000.00/10,000.00) for each such breach, to be increased by NLG (2,500/10,000) for each day that any such breach continues, without prior notice or judicial intervention being required and entirely without prejudice to the Company's right to demand full compensation for the loss actually suffered by it and/or to demand specific performance. 13.2 Payment of the penalty referred to in 13.1 shall not release the Employee from his obligations specified in Articles 10, 11 and 1. 14. Relocation expenses 14.1 The Company agrees to pay for "reasonable moving expenses". 15. Final provisions 15.1 This Agreement shall be governed by and construed in accordance with the laws of the Netherlands. 15.2 All income tax and social security contributions which an employer must by law deduct from his employees' salaries and pay to the relevant authorities shall be so deducted from and paid in respect of all amounts to be paid to the Employee under this Agreement, unless it follows from the nature of the payment that it may be made tax-free. 15.3 If at any time it is determined by the Dutch Inland Revenue and/or the National Insurance Authority that any of the payments to be made to the Employee under Articles (4) and (5) are (in part) subject to the levy of income tax and/or social security contributions, the compulsory deductions shall be made yet and charged to the debit of the Employee. As from such time the amounts of the relevant -6- future payments under Article (4) and (5) shall be reduced to the level at which such payments may be made tax-free. 15.4 The foregoing constitutes the entire agreement between the parties and supersedes all agreements and undertakings previously made and given by and between the Employee and the (bodies of the) Company and/or companies affiliated with the Company. Variations in or additions to this Agreement shall be valid only if recorded in a dated document signed by both parties. [Signature Page Follows] -7- In witness whereof this Agreement was executed and signed by the parties in Amsterdam, Netherlands on October 8, 1996. The Company By: /s/ Mark Rutenberg Mark Rutenberg Title: President The Employee /s/ Henk Snyman, M.D. Henk Snyman, M.D. -8- EMPLOYMENT AGREEMENT AMENDMENT ------------------------------ AMENDMENT, effective as of the 1st day of July, 1997, by and between NEUROMEDICAL SYSTEMS, INC., a Delaware corporation with principal executive offices at Two Executive Boulevard, Suffern, New York 10901-4114 (referred to herein as "NSI" or the "Company"), and Henk Snyman, M.D. (the "Employee"). W I T N E S S E T H : WHEREAS, NSI Netherlands B.V. is a wholly owned subsidiary of NSI; WHEREAS, the Employee is currently employed by NSI Netherlands B.V. as President pursuant to an employment contract between the Employee and NSI Netherlands B.V., dated October 8, 1996 (the "Existing Agreement"); WHEREAS, NSI is desirous of continuing to employ the Employee of NSI in such capacity, and the Employee is desirous of continuing to serve NSI in such capacity, all upon the terms and subject to the conditions hereinafter provided; and WHEREAS, NSI, NSI Netherlands B.V. and the Employee desire to amend the Existing Agreement so as to provide for the addition to the Existing Agreement of the terms and conditions contained herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto, intending to be legally bound, agree as follows: 1. Compensation. ------------ NSI shall pay to the Employee a base salary at a rate of not less than NLG250,000 per annum (Two Hundred Fifty Thousand Netherlands Guilders, referred to hereinafter as the "Base Salary"), in accordance with NSI's ordinary payroll practices as in effect from time to time during the term of the Existing Agreement (the "Term"). -9- 2. Indemnification. --------------- Subject to the provisions of NSI's Certificate of Incorporation and Bylaws, each as amended from time to time, NSI shall indemnify the Employee to the fullest extent permitted by the General Corporation Law of the State of Delaware, as amended from time to time, for all amounts (including without limitation, judgments, fines, settlement payments, expenses and attorney's fees) incurred or paid by the Employee in connection with any action, suit, investigation or proceeding arising out of or relating to the performance by the Employee of services for, or the acting by the Employee as an officer or employee of, NSI, or any other person or enterprise at NSI's request; provided, however, that NSI shall not be required to indemnify the Employee against any liability resulting from conduct which is willful, intentional or grossly negligent. NSI shall use its best efforts to obtain and maintain in full force and effect during the Term directors' and officers' liability insurance policies providing full and adequate protection to the Employee for his capacities, provided that the Board of Directors of NSI shall have no obligation to purchase such insurance if, in its opinion, coverage is available only on unreasonable terms. 3. Termination. ----------- The Employee's employment hereunder shall be terminated upon the Employee's death and may be terminated as follows: By NSI for "Cause". A termination for Cause is a termination upon a finding by NSI that the Employee has (i) intentionally failed to perform reasonably assigned duties, (ii) engaged in dishonest or willful misconduct in the performance of his duties, (iii) engaged in a transaction in connection with the performance of his duties to the Company or any of its Subsidiaries thereof which transaction is adverse to the interests of the Company or any of its Subsidiaries and which is engaged in for personal profit by the Employee or (iv) willfully violated any law, rule or regulation in connection with the performance of his duties (other than traffic violations or similar offenses). 4. Compensation Upon Termination. ----------------------------- (a) In the event of the termination of the Employee's employment as a result of the Employee's death, NSI shall (i) pay to the Employee's estate his Base Salary through the date of his death and (ii) for the shorter of one (1) year following his death or the balance of the Term (as if such termination had not occurred) provide continuation coverage to the members of the Employee's family under all major medical and other health, accident, life or other disability plans and programs in which such family members participated immediately prior to his death. (b) In the event of the termination of the Employee's employment by NSI for Cause or by the Employee for any reason, NSI shall pay to the Employee his Base Salary through the date of his termination and the Employee's entitlement to any other compensation or benefits shall be determined in accordance with NSI's plans, policies and practices as in effect from time to time. (c) In the event that the Employee's employment is terminated by NSI other than for Cause, for a period of one (1) year following any such termination, NSI shall (i) continue to pay the Employee the Base Salary in effect at the time of such termination and (ii) provide continuation coverage under all accident, life or other disability plans and programs in which the Employee participated immediately prior to -10- such termination, to the extent such benefits continue to be made available to active employees of NSI. The continuation of Base Salary provided for in clause (i) of the preceding sentence shall not be reduced by any compensation or other income that the Employee may earn from subsequent employment or otherwise. (d) This Section 3 sets forth the only obligations of NSI with respect to the termination of the Employee's employment with NSI and the Employee acknowledges that upon his termination of employment he shall not be entitled to any payments or benefits which are not explicitly provided in the Existing Agreement, herein above or as otherwise required by law. [Signature Page Follows] -11- IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year set forth above. NEUROMEDICAL SYSTEMS, INC. By: /s/ John B. Henneman, III ----------------------------------------- Name: John B. Henneman, III Title: Co-CEO, Vice President of Corporate Development, Secretary and General Counsel NSI NETHERLANDS B.V. By: Neuromedical Systems, Inc. By: /s/ John B. Henneman, III ----------------------------------------- John B. Henneman, III Co-CEO, Vice President of Corporate Development, Secretary and General Counsel /s/ Henk Snyman, M.D. ------------------------------------------- Henk Snyman, M.D. -12- EX-10.36 6 STOCK PURCHASE AGREEMENT Exhibit 10.36 STOCK PURCHASE AGREEMENT ------------------------ Stock Purchase Agreement dated effective as of June 1, 1997 (this "Agreement"), by and between NSI Asia Pacific Ltd. a Cayman Islands corporation (the "Buyer"), and Papnet (Far East) Ltd., a Cayman Islands corporation (the "Seller") and each of the stockholders of the Seller set forth on the signature page hereto (collectively the "PFEL Stockholders"). Capitalized terms in this Agreement shall have the meanings set forth in Section 9 herein. WHEREAS New System International, Ltd., a Hong Kong corporation (the "Company") is in the business of providing PAPNET (R) Pap smear testing services in Hong Kong WHEREAS the total authorized capital stock of the Company consists of 10,000 ordinary shares of HK$1 par value per share, all of which have been issued and are fully paid WHEREAS the Seller beneficially owns all 10,000 issued shares of the Company (the "Shares") of which 9,999 shares are registered in the name of the Seller and 1 share is registered in the name of Rose Beauty Ltd. which holds the same as nominee for the Seller WHEREAS the Company is indebted to the Seller in the amount of the Loan WHEREAS the Buyer desires to purchase from the Seller and the Seller desires to sell to the Buyer the Shares and the Loan on the terms and conditions of this Agreement Now, therefore, in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties, and covenants herein contained of which the adequacy and sufficiency of such consideration is expressly acknowledged by the Buyer and the Seller, the parties hereto agree as follows. 1. BASIC TRANSACTION. ------------------ (a) Purchase and Sale of Shares and Loan. ------------------------------------ On and subject to the terms and conditions of this Agreement, the Buyer agrees to purchase from the Seller the Shares and the Loan, and the Seller agrees to deliver and transfer to the Buyer, the Shares and the Loan free and clear of all claims, liens or encumbrances at the Closing for the consideration specified in paragraph (c) below in this Section 1. (b) Effective Time. -------------- The time of the Closing shall be "the Effective Time". (c) Purchase Price. --------------- (i) The amount payable by the Buyer shall be calculated in accordance with the following: the base value of the Shares and the Loan shall be US$1,409,000 (One Million Four Hundred 1 Thousand United States Dollars) (the "Base Purchase Price"), which shall be adjusted in accordance with the calculations set forth on the pro-forma balance sheet of the Company as at May 30, 1997 (the "Pro-Forma Closing Accounts") attached hereto as Exhibit A, to reflect (1) addition to the Base Purchase Price of amounts equal to operating losses of the Company since December 1, 1996, such amount not to exceed US$50,000 per month; (2) addition to the Base Purchase Price of amounts equal to cash balances remaining in the Hong Kong and Beijing bank accounts of the Seller; (3) deduction from the Base Purchase Price of Liabilities payable by the Company (excluding the Loan) and (4) addition or deduction, as the case may be, of the net increase or decrease in the Company's book value of its Accounts Receivable balance from December 1, 1996 through May 30, 1997. The Base Purchase Price as adjusted in accordance with Exhibit A shall be referred to hereinafter as the "Adjusted Purchase Price" which shall be apportioned US$10,000.00 to the Shares and US$1,765,113.00 to the Loan. (ii) The Buyer shall be entitled to retain a sum equal to the Outstanding Receivables or US$200,000, whichever is the lesser amount (the "Retention Fund") as security for the receipt by the Company of the Outstanding Receivables. The Buyer shall use its best endeavours to recover payment of the Outstanding Receivables within a 180 day period from Closing. Buyer shall render monthly statements to Seller as to the payment status of such Outstanding Receivables and shall with each such statement remit to the Seller any Outstanding Receivable amounts paid to the Company during the period covered by such statement. The Buyer shall not be obliged to take further action to recover any amount not paid within the period of 180 days from the Closing Date and shall be entitled to apply any remaining balance in the Retention Fund as consideration for the assignment of the remaining Outstanding Receivables from the Company to the Seller. The Company shall execute an assignment thereof to the Seller so that the Seller may take action to recover the same in its own name. (iii) In the event that the Company's year-end audit discloses that the Liabilities (excluding the Loan) are found to exceed those stated in the Pro- Forma Closing Accounts, there shall be a reduction of the Adjusted Purchase price by the total amount of such excess. The Seller shall promptly deliver to the Buyer any balance due thereof. If such audit discloses a greater cash balance and/or a lesser amount of Liabilities payable at Closing than as set forth in the Pro-Forma Closing Accounts, the Buyer shall promptly remit to the Seller the difference of any such amounts. (d) The Closing. ----------- The closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of the Company in Hong Kong upon the execution of this Agreement, but the rights of the Buyer to the Shares shall be deemed to have accrued as from 1st June 1997. (e) Deliveries at the Closing. ------------------------- At the Closing, (i) the Seller will execute, acknowledge and deliver to the Buyer the various Exhibits, Schedules, certificates, instruments, and documents referred to herein, such other instruments of sale, transfer and conveyance satisfactory to the Buyer as shall be effective for Buyer to take full, valid and enforceable right, title and ownership interest of the Shares and the Loan and such other documents that Buyer may reasonably request and (ii) Buyer will deliver to the Seller the consideration specified in Section 1(c) above. 2 2. REPRESENTATIONS AND WARRANTIES OF THE SELLER. -------------------------------------------- The Seller represents and warrants to the Buyer as of the Closing Date, the following statements are correct and complete in all respects except where otherwise qualified or as may be set forth in a disclosure schedule arranged in paragraphs corresponding to the lettered and numbered paragraphs contained in this Section 2 and attached hereto (each, a "Disclosure Schedule") and the Seller has no Knowledge that any of the following statements contains a material misstatement or omission: (a) Organization and Authorization. ------------------------------ The Company is a corporation duly organized, validly existing, and in good standing under the laws of Hong Kong. The Company has the full corporate power and authority to conduct its business as and where such business has been and is now being conducted. (b) Authorization of Transaction. ---------------------------- The Seller has full power and authority (including full corporate power and authority) to execute and deliver this Agreement and all related documents and to perform its obligations hereunder and thereunder. Without limiting the generality of the foregoing, the board of directors of the Seller have duly authorized the execution, delivery, and performance of this Agreement by the Seller. This Agreement constitutes the valid and legally binding obligation of the Seller, enforceable in accordance with its terms and conditions. The Company and the Seller have obtained all waivers, consents and approvals, a list of which appear on the attached Schedule 2(b), which are required or necessary for the consummation of all aspects of this transaction. (c) Noncontravention. ----------------- The execution and the delivery of this Agreement and any related documents, and the consummation of the transactions contemplated hereby and thereby, and all waivers, consents and permits obtained in connection herewith and therewith, will not materially (i) violate any organizational, governmental or contractual obligation of the Seller or the Company or (ii) conflict with, result in a breach of, constitute a default under any agreement or other arrangement to which the Seller or the Company is a party or by which any of them is bound. (d) Title to Assets and Good Repair. -------------------------------- The Company owns or is otherwise legally entitled to the use and possession of the Assets, free and clear of any Security Interest other than those listed on Schedule 2(d) attached hereto and, with respect to tangible assets, the Assets are in good working order and repair, ordinary wear and tear excepted. (e) Joint Ventures and Operating Units. ----------------------------------- The Company has no subsidiary companies. There are no Partnerships or Joint Ventures in effect as of Closing Date as between the Company and any third party Persons. CompuScreen has all licenses, permits and authorizations necessary to carry on in Hong Kong the business in which it is engaged. The Company's representative offices in the People's Republic of China have all requisite licenses, permits and authorizations necessary for such representative offices. 3 (f) Financial Statements and Receivables. ------------------------------------- Attached hereto as Schedule 2(f) are the following financial statements of the Company: (i) Audited Financial Statements for the period ended February 28, 1997, including: Auditors' Report, Profits and Loss account, balance sheet and notes to financial statements, audited by E&Y, referred to herein as the "Most Recent Financial Statements"; (ii) Audited Financial Statements for the fiscal years ended September 30, 1995 and 1996 including: Auditors' Report, Profit and Loss account, balance sheet and notes to financial statements, audited by Y.L. Fung & Company, referred to herein as the "Most Recent Fiscal Year End"; and (iii) A Proforma Balance Sheet of the Company as of May 30, 1997, Proforma Profit and Loss account for the Month of May, Unaudited Financial Statements for the period March 1, 1997, through April 30, 1997, referred to herein as the "unaudited interim financial statements for the period up to the Closing Date". The documents referred to in the foregoing clauses (i), (ii) and (iii) of this paragraph (f) are collectively referred to hereinafter as the "Financial Statements". The Financial Statements (including the notes thereto) have been prepared in accordance with GAAP applied on a consistence basis throughout the periods covered thereby, present fairly the financial condition of the Company as of such dates. The results of operations of the Company for such periods are consistent with the books and records of the Company. All material notes and accounts receivable of the Company are reflected properly on their respective books and records, are valid receivables subject to no setoffs or counterclaims, are current and collectable in accordance with their terms at their recorded amounts. The Financial Statements including the unaudited interim financial statements for the period up to the Closing Date fairly present the information purported to be included therein. Such Financial Statements were prepared from the books and records of the Company in conformity with generally accepted accounting principles, in each case applied on the same basis unless otherwise indicated in the notes thereto, and reflect all adjustments necessary for a fair presentation of the interim financial statements. All material transactions have been properly recorded in the accounting records underlying these financial statements. There have been no significant changes in the internal control structure or manner in which transactions are recorded, classified, and summarized in the preparation of the interim financial information from internal control structure and accounting systems in effect during the preceding period up to the Closing Date. There have been no significant changes in the capital accounts, long-term debt, or net current assets (or liabilities) from the Most Recent Financial Statements date up to the Closing Date. No events or transactions have occurred since February 28, 1997, that would have a material effect on the interim financial statements up to the Closing Date that are such of significance in relation to the Company's affairs to require mention in a note to the audited financial statements in order to make them not misleading regarding the financial position, results of operation, or cash flows of the Company. 4 To the knowledge of Seller, all accounts receivable as of Closing Date are fully collectable. In accordance with the terms and conditions set forth under Section one herein with respect to the Adjusted Purchase Price, Seller undertakes to indemnify the Buyer for all Outstanding Receivables which are not collected within 180 days from the Closing Date. (g) Legal Compliance. ---------------- The Company has (i) complied and is in compliance with all applicable laws and regulations in Hong Kong, and (ii) no Material Adverse Consequences are known, filed or commenced against the Company with respect to any failure so to comply, unless singly or in the aggregate noncompliance would not have Material Adverse Consequences for the Company. (h) Tax Matters. ----------- The Company has filed all Tax Returns that it was required to file in Hong Kong. All such Tax Returns were correct and complete in all material respects. All Taxes owed by the Company (whether or not shown on any Tax Return) in Hong Kong have been paid. The Company is not currently the beneficiary of any extension of time within which to file any Tax Return. No Company director or officer (or employee responsible for Tax matters) of the Company expects any authority to assess any additional Taxes for any period for which Tax Returns have been filed. Except as set forth on Disclosure Schedule 2(h), there is no audit, dispute or claim concerning any Tax Liability of any of the Company and there is no Basis for any such action. The Company has delivered to the Buyer materially correct and complete copies of all income Tax Returns filed by the Company since December 31, 1994. The Company has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency. The Company has not entered into any tax sharing or similar agreements. (i) Business Operation and Preservation. ----------------------------------- Since September 30, 1996, the Company has operated its business in good faith in the Ordinary Course of Business; the Company has not engaged in any practice, taken any action, or entered into any transaction outside the Ordinary Course of Business. (j) Real Property. ------------- (i) Disclosure Schedule 2(j) lists all real property that any of the Company owns. (ii) Disclosure Schedule 2(j) lists and describes briefly all real property leased or subleased to the Company (including the duration of each such lease). The Company has delivered to the Buyer materially correct and complete copies of the leases and subleases listed in Disclosure Schedule 2(j). With respect to each lease and sublease listed in Disclosure Schedule 2(j): (a) the lease or sublease is legal, valid, binding, enforceable, and in full force and effect; (b) the lease or sublease will continue to be legal, valid, binding, enforceable, and in full force and effect on identical terms following the consummation of the transactions contemplated hereby; (c) all facilities leased or subleased thereunder have received all waivers, consents and approvals of any third parties or governmental authorities (including licenses and permits), as the case may be, required in connection with the operation thereof; (d) all such facilities have been operated and maintained in accordance with applicable laws, rules, and regulations in all material respects; and 5 (e) no party is in breach or default, and no event has occurred which with notice or lapse of time would constitute a breach or default, or permit termination, modification, or acceleration, under the lease agreement. (k) Intellectual Property. --------------------- (i) The Company owns or has the right to use pursuant to license, sublicense, agreement, or permission all Intellectual Property reasonably necessary for the operation of the businesses of the Company as presently conducted; (ii) The Company does not know of any Person who has, interfered with, infringed upon, misappropriated, or otherwise come into conflict with any Intellectual Property rights of third parties. (l) Contracts. ---------- Disclosure Schedule 2(l) lists all material contracts, agreements and other understandings to which any of the Company is a party (including oral agreements). The Company has delivered to the Buyer a materially correct and complete copy of each written agreement listed in Disclosure Schedule 2(l) (each, as amended to date) and a written summary setting forth the terms and conditions of each oral agreement referred to in Disclosure Schedule 2(l). In all material respects, each such agreement: (a) is legal, valid, binding, enforceable, and in full force and effect; (b) will continue to be legal, valid, binding, enforceable, and in full force and effect on identical terms following the consummation of the transactions contemplated hereby; (c) no party is in breach or default, and no event has occurred which with notice or lapse of time would constitute a breach or default, or permit termination, modification, or acceleration, under the agreement; and (d) all waivers, consents and approvals of any third parties or governmental authorities have been obtained (including any licenses and permits required directly or indirectly in connection therewith) with respect to any such agreements. (m) Insurance. ---------- Disclosure Schedule 2(m) briefly describes each material insurance policy (including policies providing property, casualty, liability, and workers' compensation coverage and bond and surety or similar arrangements) to which the Company is a party, a named insured, or otherwise the beneficiary of coverage at any time since inception. With respect to the material aspects of each such insurance policy: (a) the policy is legal, valid, binding, enforceable, and in full force and effect; (b) the policy will continue to be legal, valid, binding, enforceable, and in full force and effect on identical terms following the consummation of the transactions contemplated hereby; (c) the Company is not in breach or default (including with respect to the payment of premiums or the giving of notices), and no event has occurred which, with notice or the lapse of time, would constitute such a breach or default, or permit termination, modification, or acceleration, under the policy; and (d) all waivers, consents and approvals of any third parties and/or governmental authorities have been obtained (including any licenses and permits required directly or indirectly in connection therewith) with respect to the transfer and assumption of any such insurance. Disclosure Schedule 2(m) describes any self-insurance arrangements affecting the Company. 6 (n) Litigation. ----------- Disclosure Schedule 2(n) sets forth each instance in which any of the Company is subject to any material outstanding injunction, judgment, order, decree, ruling, or charge or (ii) is a party or, to the Knowledge of the Company, is threatened to be made a party to any material action, suit, proceeding, hearing, or investigation of, in, or before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction or before any arbitrator. (o) Employees and Employee Benefits. ------------------------------- Disclosure Schedule 2(o) sets forth the name of each employee, consultant, agent or representative of the Company and the principal place of business of such person. Disclosure Schedule 2(o) lists each material employee non-cash compensation plan, retirement plan, material fringe benefit plan or similar program, other than ordinary cash compensation, that the Company maintains or to which the Company contributes. (p) Environment, Health, and Safety. ------------------------------- Except as set forth on Disclosure Schedule 2(p), (i) the Company has materially complied with all Environmental, Health, and Safety Laws, and such has no Knowledge or Basis for Knowledge that any material action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand, or notice has been filed, commenced or is threatened against the Company alleging any failure so to comply. (q) Capitalization, Stock Ownership and Records ------------------------------------------- The authorized capital stock of the Company consists of 10,000 ordinary shares of HK$1 par value per share, all of which have been issued and are fully paid up. The Company's corporate minutes, books and records are complete and correct in all material respects and have been maintained in accordance with good business practice and all applicable material laws, regulations and other legal requirements. Prior to the execution and delivery of this Agreement, the Company has made available to Buyer all of these books and records and all other documents relating to the business of the Company. 3. REPRESENTATIONS AND WARRANTIES OF THE BUYER. ------------------------------------------------- The Buyer represents and warrants to the Company that the statements contained in this Section 3 are correct and complete in all respects as of the Closing Date except where qualified otherwise and the Buyer has no Knowledge that any of the following statements contains a material misstatement or omission: (a) Organization of the Buyer. ------------------------- The Buyer is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation. (b) Authorization of Transaction. ---------------------------- The Buyer has full power and authority (including full corporate power and authority) to execute and deliver this Agreement and all related documents and to perform its obligations hereunder 7 and thereunder. Without limiting the generality of the foregoing, the board of directors of the Buyer have duly authorized the execution, delivery, and performance of this Agreement by the Buyer. (c) Noncontravention. ----------------- The execution and the delivery of this Agreement, and the consummation of the transactions contemplated hereby, and all consents and permits obtained in connection herewith and therewith, will not materially (i) violate any organizational, governmental or contractual obligation of the Buyer (ii) conflict with, result in a breach of, constitute a default under any agreement or other arrangement to which the Buyer is a party or by which it is bound or to which any of its assets is subject or (iii) or result in Material Adverse Consequences with respect to the Buyer . 4. CONDITIONS TO OBLIGATION TO CLOSE. ------------------------------------- (a) Conditions to Obligation of the Buyer. --------------------------------------- The obligation of the Buyer to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions: (i) the representations and warranties of Section 2 above shall be true, correct and complete in all respects, except where otherwise qualified or as may be set forth in a Disclosure Schedule attached hereto and none of such statements or disclosures shall contain a material misstatement or omission as of the Closing Date; (ii) The Seller shall have performed and complied with all of their covenants hereunder through the Closing; (iii) the Seller shall have procured any and all material third party or governmental consents or authorizations required to consummate the transactions contemplated herein; (iv) no material action, suit, or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency of any jurisdiction against the Company; (v) The individuals listed on the attached Schedule A shall have entered into Employment Agreements and each of the same shall be in effect simultaneously at the Closing; (vi) the Company shall have paid any and all of its outstanding Liabilities except for the Loan and the accounts payable and accrued expenses recorded under Current Liabilities in the Closing Accounts; (vii) the Company shall have delivered to Buyer an officer's certificate in the form of Exhibit X attached hereto; (iix) the Seller shall have delivered such other documents as the Buyer may reasonably request on or prior to the Closing Date to consummate the Closing of this Agreement and the transactions contemplated herein including termination of the management services agreement between the Buyer and PFEL. (b) Conditions to Obligation of the Company. --------------------------------------- The obligation of the Seller to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions: 8 (i) the representations and warranties set forth in Section 3 above shall be true, correct and complete in all respects, except where otherwise qualified and none of such statements or disclosures shall contain a material misstatement or omission as of the Closing Date; (ii) the Buyer shall have performed and complied with all of its covenants hereunder in all material respects through the Closing; (iii) the Buyer shall deliver the Purchase Price; and (iv) the Buyer shall deliver such other documents as the Company may reasonably request on or prior to the Closing Date to consummate the Closing of this Agreement and the transactions contemplated herein. 5. REPRESENTATIONS AND WARRANTIES OF THE PFEL STOCKHOLDERS ------------------------------------------------------------ Each PFEL Stockholder warrants to the Buyer individually, not jointly, that as of Closing Date: (a) The PFEL Stockholder is not aware of any legal Liability of the Company that has not been disclosed in writing to the Buyer. (b) Where a PFEL Stockholder has acted in an executive capacity on behalf of the Company, he has not, except in the Ordinary Course of Business, taken any action to create any legal Liability on behalf of the Company. (c) Where a PFEL Stockholder has not acted in an executive capacity on behalf of the Company, he has not taken any action to create any legal Liability on behalf of the Company. (d) If the PFEL Stockholder is a corporation, the PFEL Stockholder is duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation. (e) In the event that any PFEL Stockholder breaches any of its representations, warranties or covenants contained in this Agreement, such PFEL Stockholder individually, not jointly, such that one PFEL Stockholder agrees to indemnify hold harmless and defend the Buyer from and against the entirety of any Material Adverse Consequences the Buyer may suffer so long as provided the Buyer makes a written claim for indemnification against such PFEL Stockholder and such Material Adverse Consequences arise during the survival period of this Agreement, resulting from, arising out of, relating to, in the nature of, or caused by the breach (or the alleged breach), provided, however, that such PFEL Stockholder shall not be liable for a breach of the warranty set forth in Section 5(a) herein except where there has been fraud or deliberate concealment on his part. (f) The PFEL Stockholder has full power and authority (including, if the PFEL Stockholder is a corporation, full corporate power and authority) to execute and deliver this Agreement and all related documents and to perform his or her obligations hereunder and thereunder. Without limiting the generality of the foregoing, for each PFEL Stockholder that is a corporation, the board of directors and the stockholders of such corporation have duly authorized the execution, delivery, and performance of this Agreement and such PFEL Stockholder has obtained all waivers, consents and approvals in respect of its corporate capacity which are required or necessary for the consummation of this transaction. This Agreement constitutes the valid and legally binding obligation of the PFEL Stockholder, enforceable in accordance with its terms and conditions. (g) The execution and the delivery of this Agreement and any related documents by the PFEL Stockholder, the performance by the PFEL Stockholder of his or her obligations hereunder and thereunder, the consummation of the transactions contemplated hereby and thereby, and all 9 consents and permits obtained in connection herewith and therewith, will not materially (i) violate any organizational, governmental or contractual obligation or (ii) conflict with, result in a breach of, constitute a default under, result in Material Adverse Consequences under any agreement or other arrangement to which any of such Persons is a party or by which it is bound or to which any of its assets is subject (or result in the imposition of any Security Interest upon any of its assets); Each PFEL Stockholder has obtained any and all waivers, consents or approvals required by any third parties or governmental authorities with respect to PFEL Stockholder's obligations under this Agreement and any related agreement executed by PFEL Stockholder. 6. POST-CLOSING COVENANTS. ------------------------ The Company and each PFEL Stockholder agrees as follows with respect to the period following the Closing. (a) General. -------- In case at any time after the Closing any further action is reasonably necessary or desirable to carry out the purposes of this Agreement and the transactions contemplated herein, as determined in Buyer's reasonable discretion, the Seller will take such further action (including the execution and delivery of such further instruments and documents), all at the sole cost and expense of the Buyer (unless the Buyer is entitled to indemnification as set forth below), including contesting or defending against any action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand, or similar circumstance. (b) Transition. ------------ The Seller and each PFEL Stockholder will not solicit or take any action that is designed or intended to have the effect of discouraging any employee lessor, licensor, customer, supplier, or other business associate of any of the Company from maintaining the same business relationships with the Company after the Closing as it maintained with the Company prior to the Closing. (c) Confidentiality. ---------------- The Seller and each PFEL Stockholder will treat and hold as such all of the Confidential Information, refrain from using any of the Confidential Information except in connection with this Agreement, and deliver promptly at Closing to the Buyer all tangible embodiments and all digital media copies of the Confidential Information which are in its, his or her possession. (d) Covenant Not to Compete. ----------------------- Except as provided in an Employment Agreement with Buyer, for a period of three years from and after the Closing Date, each PFEL Stockholder and the Seller will not engage directly or indirectly including managing, financing, consulting, owning or being in the employment of any business of automated or semi automated cytological testing (other than as a client of any company which is an Affiliate of the Buyer), provided, however, that (i) ownership of less than 5% of the outstanding stock of any publicly traded corporation and/or (ii) ownership of any amount of stock of Neuromedical Systems, Inc., or any or its Subsidiaries, shall in either case be deemed not to be engaged by reason thereof in any of the business above described. If the final 10 judgment of a court of competent jurisdiction declares that any term or provision of this paragraph is invalid or unenforceable, the Parties agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration, or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this provision shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed. 7. INDEMNIFICATION. --------------- (a) Survival. --------- All of the representations and warranties of the Buyer, the Company, the Seller and the PFEL Stockholders contained in this Agreement shall survive the Closing and continue in full force and effect for a period of three (3) years thereafter. (b) Indemnification of Buyer. ------------------------ In the event the Seller breaches any of its representations, warranties, and covenants contained in this Agreement provided that the Buyer makes a written claim for indemnification against the Seller, then the Seller agrees to indemnify hold harmless and defend the Buyer from and against the entirety of any Material Adverse Consequences the Buyer may suffer so long as such Material Adverse Consequences arise during the survival period of this Agreement, resulting from, arising out of, relating to, in the nature of, or caused by the breach (or the alleged breach); provided, however, that the Indemnification provided for herein shall be limited to the Purchase Price hereof, except the indemnity shall not be so limited in the case of any (x) fraud, (y) Material Adverse Consequences resulting from, arising out of, relating to, in the nature of, or caused by any disclosure set forth on a Disclosure Schedule which qualifies any of the representations and warranties of the Seller. (c) Indemnification of PFEL Stockholders. ------------------------------------ In the event the Buyer breaches any of its representations, warranties, and covenants contained in this Agreement, provided that the Seller makes a written claim for indemnification against the Buyer, then the Buyer agrees to indemnify the Seller from and against the entirety of any Material Adverse Consequences the Seller may suffer through and after the date of the claim for indemnification (including any Material Adverse Consequences the Seller may suffer so long as such Material Adverse Consequences arise during the survival period of this Agreement) resulting from, arising out of, relating to, in the nature of, or caused by the breach (or the alleged breach), provided, however, that the indemnification provided for herein shall be limited to the Purchase Price hereof. (d) Representation. --------------- (i) If any third party shall notify any of Buyer, the Seller or any PFEL Stockholder (each, an "Indemnified Party") with respect to any matter (a "Third Party Claim") which may give rise to a claim for indemnification against any other Party (the "Indemnifying Party"), then the 11 Indemnified Party shall promptly notify each Indemnifying Party thereof in writing; provided, however, that no delay on the part of the Indemnified Party in notifying any Indemnifying Party shall relieve the Indemnifying Party from any obligation hereunder unless (and then solely to the extent) the Indemnifying Party thereby is prejudiced. (ii) Any Indemnifying Party will have the right to defend the Indemnified Party against the Third Party Claim with counsel of its choice reasonably satisfactory to the Indemnified Party so long as (A) the Indemnifying Party notifies the Indemnified Party in writing within 15 days after notice of the Third Party Claim; and (B) the Third Party Claim involves only money damages and does not seek an injunction or other equitable relief. (iii) So long as the Indemnifying Party is conducting the defence of the Third Party Claim (A) the Indemnified Party may retain separate co-counsel at its sole cost and expense and participate in the defence of the Third Party Claim, (B) the Indemnified Party will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnifying Party (not to be withheld unreasonably), and (C) the Indemnifying Party will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnified Party (not to be withheld unreasonably). 8. MISCELLANEOUS. ------------- (a) No Third Party Beneficiaries. ---------------------------- This Agreement shall not confer any rights or remedies upon any Person other than the Parties and their respective successors and permitted assigns. (b) Entire Agreement. ---------------- This Agreement (including the Exhibits, Schedules and other documents referred to herein) constitutes the entire agreement between the Parties and supersedes any prior understandings, agreements, or representations by or between the Parties, written or oral, to the extent they related in any way to the subject matter hereof. (c) Succession and Assignment. ------------------------- This Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and permitted assigns. No Party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written approval of the other Party; provided, however, that without such written approval the Buyer may (i) assign any or all of its rights and interest hereunder to one or more Persons and (ii) designate one or more Persons to perform its obligations hereunder. (d) Execution and Counterparts. -------------------------- This Agreement may be executed via facsimile in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument, provided that actual execution exemplars of each such facsimile signature must be forwarded and delivered to the other Parties no later than ten (10) days following the Closing. 12 (e) Headings. -------- The Section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. (f) Notices. ------- All notices, requests, demands, claims, and other communications hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: If to the Buyer: NSI Asia Pacific Ltd. C/O Neuromedical Systems, Inc. Two Executive Blvd., Suffern, NY 10901 U.S.A. With a copy to: NEUROMEDICAL SYSTEMS, INC. Two Executive Boulevard Suffern, NY 10901; Attention: John B. Henneman, III Facsimile: (914) 368-4068 If to the PFEL: Papnet (Far East) Ltd. 2nd Floor, Zephyr House, Mary Street, PO Box 709. George Town, Cayman Islands If to Rose Beauty: Rose Beauty Ltd. PO Box 659, Road Town Tortola, British Virgin Islands 13 If to the PFEL Stockholders: Dr. Stephen Ng, M.D. Madam Marie Foo 18 La Costa, 18 La Costa, Apt.3B Apt. 3B Discovery Bay Discovery Bay Hong Kong Hong Kong Dr. Vincent Leung, M.D. Rose Beauty Ltd. Room 207, Sino Centre. PO Box 659, Road Town, 582 Nathan Road Tortola, British Virgin Islands Kowloon Hong Kong SCM Limited Five Peaks Limited 9B Cindic Tower 820 Swire House 128 Gloucester Road Chater Road Wanchai Central Hong Kong Hong Kong Any Party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including facsimile, personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any Party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other Party notice in the manner herein set forth. (g) Governing Law and Jurisdiction. ------------------------------ This Agreement shall be governed by and construed in accordance with the domestic laws of England without giving effect to any choice or conflict of law provision or rule (whether of England or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than England. Each of the Parties submits to the jurisdiction of the English courts in any action or proceeding arising out of or relating to this Agreement and agrees that all claims in respect of the action or proceeding may be heard and determined in any such court. Each of the Parties waives any defence of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety, or other security that might be required of any other Party with respect thereto. Any Party may make service on the other Party by sending or delivering a copy of the process to the Party to be served at the address and in the manner provided for the giving of notices in Section 9(f) above. (h) Amendments and Waivers. ---------------------- No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Buyer and the Company. No waiver by any Party of any default, 14 misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. (i) Severability. ------------ Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. (j) Construction. ------------- The Parties have participated jointly in the negotiation of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any of the provisions of this Agreement. The word "including" shall mean including without limitation. (k) Specific Performance. -------------------- Each of the Buyer, the Seller and the PFEL Stockholders acknowledges and agrees that each such Party may be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each of the Parties agrees that the other Parties, individually, shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any action instituted in any court of equity or law having jurisdiction over the Parties and the matter, at law or in equity. (l) Expenses. -------- The Parties shall each bear their own costs and expenses incurred in connection with the transactions contemplated in this Agreement including, without limitation, the fees and expenses of their counsel and accountants, provided, however, that Hong Kong stock transfer stamp duties shall be shared equally be each of PFEL (as agent for the Seller) and the Buyer. (m) Risk of Loss. -------------- The risk of loss of the Acquired Assets shall remain with the Company until the Closing. (n) Remedies Cumulative. ------------------- No remedy set forth in this Agreement or otherwise conferred upon or reserved to any party shall be considered exclusive of any other remedy available hereunder, at law or in equity to any party, but the same shall be distinct, separate and cumulative and may be exercised from time to time as often as occasion may arise or as may be deemed expedient. (o) Confidential Information and Publicity. -------------------------------------- No party hereto shall make any public disclosure of the specific terms of this Agreement, except as required by law. In connection with the negotiation of this Agreement and the preparation for 15 the consummation of the transactions contemplated hereby, each of the Parties acknowledges that certain confidential information relating to such Parties may be disclosed to another Party. Each Party shall treat such information as confidential, preserve the confidentiality thereof and not duplicate or use such information, except as reasonably necessary to discuss the transactions contemplated herein with attorneys, advisors, consultants, and Affiliates, and except as required to comply with any law or any provision of this Agreement or related documents necessary to consummate the transactions contemplated herein. 9. DEFINITIONS. ----------- "Affiliate" has the meaning set forth in Rule 12b-2 of the regulations promulgated under the Securities Exchange Act of 1934. "Assets" means: (i) all of the assets of the Company, including, but not limited to the Company's (a) representative offices in the Peoples Republic of China; (b) CompuScreen, (c) real property and fixtures (d) personal property, (e) Intellectual Property, (f) equipment and real property leases, (g) agreements - and contracts, (h) accounts receivable for services rendered (i) claims, deposits, prepayments, and refunds, (j) approvals, permits, licenses, registrations, certificates and similar rights obtained from governments and governmental agencies, and (k) software, data, books, records, ledgers, files, documents, correspondence, lists (including customer lists), advertising and promotional materials, studies, reports, and any other printed, written or digital materials. "Basis" means any past or present fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction that forms or could form the basis for any specified consequence. "Buyer" has the meaning set forth in the Recitals of this Agreement above except with respect to Section 8 in which case it shall mean Buyer, its officers, directors, employees, agents, representatives, stockholders and their respective successors and assigns. "Closing Date" has the meaning set forth in Section 1(d). "Closing Financial Statement" has the meaning set forth in Section 5. "Closing" has the meaning set forth in Section 1(d). "Company Share" means any equity ownership share of the Company. "Company" has the meaning set forth in the Recitals of this Agreement. "CompuScreen" means the Company's Hong Kong medical diagnostic laboratory doing business under the name of CompuScreen. 16 "Confidential Information" means any information concerning the businesses and affairs of the Company that is not already generally available to the public. "Disclosure Schedule" has the meaning set forth in Section 2. "Effective Time" has the meaning set forth in Section 1(b). "Employment Agreements" shall mean the employment agreements entered into by each of the persons listed on the attached Schedule D. "Environmental, Health, and Safety Laws" means any one or more laws, statutes, rules, common law holdings, regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and charges thereunder of federal, state, local, and foreign governments (and all agencies thereof) concerning pollution or protection of the environment, public health and safety, or employee health and safety. "Financial Statements" has the meaning set forth in Section 2(f). "GAAP" means generally accepted accounting principles as in effect from time to time. "Indemnified Party" has the meaning set forth in Section 7(d). "Indemnifying Party" has the meaning set forth in Section 7(d). "Intellectual Property" means (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications, and patent disclosures, together with all reissuances, continuations, continuations-in-part, revisions, extensions, and reexaminations thereof, (b) all trademarks, service marks, trade dress, logos, trade names, and corporate names, together with all translations, adaptations, derivations, and combinations thereof and including all goodwill associated therewith, and all applications, registrations, and renewals in connection therewith, (c) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection therewith, (d) all mask works and all applications, registrations, and renewals in connection therewith, (e) all trade secrets and confidential business information (including ideas, research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals), (f) all computer software (including data and related documentation), (g) all other proprietary rights, and (h) all copies and tangible embodiments thereof (in whatever form or medium). "Joint Venture" means any contract, agreement or understanding between one or more of the Company and any other Persons to undertake, contribute to or engage in any activity, in either a direct, intermediary or indirect capacity, and share or allocate as between such parties or Persons any portion of the capital, financing, labor, material, Intellectual Property, real or personal 17 property, costs, expenses, profits, Liabilities or losses related either directly or indirectly to such activity. "Knowledge" means actual knowledge after reasonable investigation. "Liability" means any liability (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due), including any liability for Taxes, royalties or commissions. "Material Adverse Consequences" means any of one or more of the following which is subject in amount, singly or in the aggregate, to US$5,000 or more: any actions, suits, proceedings, hearings, investigations, charges, complaints, claims, demands, injunctions, judgments, orders, decrees, rulings, damages, dues, penalties, fines, costs, amounts paid in settlement, Liabilities, obligations, Taxes, liens, losses, expenses, and fees, including court costs and reasonable attorneys' fees and expenses. "Most Recent Financial Statements" has the meaning set forth in Section 2(f). "Most Recent Fiscal Year End" has the meaning set forth in Section 2(f). "Ordinary Course of Business" means the ordinary course of business consistent with past day-to-day custom and practice (including with respect to quantity and frequency) as such business has been conducted during the calendar years of 1995, 1996 and 1997. "Partnership" means any contract, agreement or understanding between one or more of the Company and any other Persons to undertake, contribute to or engage in any plan or activity, in either a direct, intermediary or indirect capacity, and share or allocate as between such parties or Persons any portion of the capital, financing, labor, material, Intellectual Property, real or personal property, costs, expenses, profits, Liabilities or losses related either directly or indirectly to such plan or activity. "Party" means, individually, each of the Buyer, the Company and each of the PFEL Stockholders, and collectively, "Parties" means all of the foregoing. "Payroll Expenses" means the aggregate of the Company's unpaid payroll expenses accrued from December 1, 1996 until the Closing Date (such expenses in accordance with the Financial Statements and the Closing Financial Statement). "Person" means an individual, partnership, corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, or a governmental entity (or any department, agency, or political subdivision thereof). "PFEL" has the meaning set forth in the Recitals of this Agreement. 18 "PFEL Stockholder " means any Person who holds any PFEL equity shares. "Pro-Forma Financial Statement" means a pro-forma balance sheet, statement of income, changes in stockholder's equity and cash flow of the Company as of March 28, 1997. "Purchase Price" has the meaning set forth in Section 1(c). "Retention Fund" has the meaning set forth in Section 1(c). "Rose Beauty" has the meaning set forth in the Recitals of this Agreement. "Securities Exchange Act" means the Securities Exchange Act of 1934, as amended. "Security Interest" means any material mortgage, pledge, claim, lien, encumbrance, charge, or other security interest. "Sellers" shall have the meaning set forth in the Recitals of this Agreement. "Shares" means all issued and outstanding stock of the Company as of the Closing. "Subsidiary" means any entity with respect to which a specified Person (or a Subsidiary thereof) owns 1% or more of the equity ownership thereof or has the power to vote, by ownership, agreement, understanding or otherwise, or direct the voting of sufficient securities to elect one or more directors. "Tax Liability" has the combined meanings of the definitions of "Tax" and "Liability." "Tax Return" means any return, declaration, report, claim for refund, or information return, examination reports, statements of deficiencies assessed against or agreed to, or any other statement relating to Taxes, any schedule or attachment to any such item and any amendment thereof. "Tax" means any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs, duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, bulk sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not. "Third Party Claim" has the meaning set forth in Section 7(d) 10. This Agreement may be executed by the parties on different copies and where all parties have executed this Agreement such executed copies shall together constitute a duly executed copy of this Agreement. [Signature Page Follows] 19 IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first written above. NSI ASIA PACIFIC LTD. By: /s/ Richard Or Title: General Manager PAPNET (FAR EAST) LTD. By: /s/ Stephen Ng, M.D. Title: President [Signatures Continue on the Following Page] 20 PFEL STOCKHOLDERS with respect to Sections 5, 6 and 7 and such of the definitions in this Agreement applicable to such Sections: /s/ Stephen Ng, M.D. Stephen Ng, M.D. /s/ Marie Foo Marie Foo /s/ Vincent Leung Vincent Leung ROSE BEAUTY By: /s/ Gabriel Yu Title: Director SCM LTD. By: /s/ Dan Souza Title: President FIVE PEAKS LTD. By: /s/ Laurence S. Fong Title: Director 21 EX-10.37 7 ASSET PURCHASE AGREEMENT Exhibit 10.37 ASSET PURCHASE AGREEMENT ------------------------ This Asset Purchase Agreement, dated as of August 1, 1997 ("this Agreement"), by and between New System Ltd., a Cayman Islands corporation (the "Buyer"), and Papnet Far East Ltd., a Taiwan corporation (referred to herein as the "Seller") and each of the stockholders of the Seller set forth on the signature page hereto (collectively the "Taiwan Stockholders"). Capitalized terms in this Agreement shall have the meanings set forth in Section 9 herein. WHEREAS the Seller is in the business of providing PAPNET(R) Testing Services in Taiwan; WHEREAS the Buyer desires to purchase the Assets from the Seller and the Seller desires to sell the Assets to the Buyer on the terms and conditions of this Agreement; NOW, THEREFORE, in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties, and covenants herein contained of which the adequacy and sufficiency of such consideration is expressly acknowledged by the Buyer and the Seller, the parties hereto agree as follows. 1. BASIC TRANSACTION. ------------------ (a) Purchase and Sale of the Assets. -------------------------------- On and subject to the terms and conditions of this Agreement, the Buyer agrees to purchase from the Seller the Assets, and the Seller agrees to sell, convey, deliver, assign and transfer to the Buyer, the Assets free and clear of all Encumbrances at the Closing for the consideration specified in paragraph (c) below in this Section 1. (b) Effective Time. -------------- This Asset Purchase Agreement, when executed by the parties hereto, shall be effective as of August 1, 1997, and such date shall be the "Effective Time." (c) Purchase Price. -------------- (i) At the Closing, upon the terms and subject to the conditions set forth herein, as full consideration for the sale, transfer, assignment, conveyance and delivery of the Assets, Buyer shall pay and deliver to the Seller US$391,000 (three hundred ninety one thousand United States Dollars, and referred to herein as the "Adjusted Purchase Price"). (ii) The Seller shall retain all outstanding receivables payable to the Business up to and including July 31, 1997. Buyer shall be entitled to and assume ownership of any and all receivables payable to the Business at the Effective Time. (d) The Closing. ----------- The closing of the transactions contemplated by this Agreement (the "Closing") shall take place simultaneously at the offices of the Seller in Taiwan and the Buyer in the State of New York upon the execution of this Agreement in counterpart by facsimile, and the actual execution exemplars of each such facsimile signature shall be immediately therewith forwarded and delivered to the other Parties hereto by express delivery service. (e) Deliveries At And Prior to the Closing. -------------------------------------- At the Closing, (i) the Seller will execute, acknowledge and deliver to the Buyer the various Exhibits, Schedules, certificates, instruments, and documents referred to herein, including but not limited to, (1) one or more bills of sale, in the form attached hereto as Exhibit A, conveying in the aggregate all of Seller's owned personal property included in the Assets; (2) a receipt for the delivery from Buyer to Seller of the consideration required herein in the form attached hereto as Exhibit B; (3) any other material third party consents required for the valid transfer of the Assets as contemplated by this Agreement; (4) resolutions adopted by the board of directors of Seller and resolutions or written consents of the Stockholders, certified by Seller's corporate secretary (as applicable), authorizing -2- and approving this Agreement, the ancillary agreements, the other documents and instruments described herein, and the transactions contemplated hereby and thereby, and such other documents and certificates of Seller's officers as Buyer may reasonably request to establish satisfaction of closing conditions or otherwise; and (5) such other instruments and documents as shall be reasonably requested by Buyer to vest in Buyer title in and to the Assets in accordance with the provisions hereof, such other instruments of sale, transfer and conveyance satisfactory to the Buyer as shall be effective for Buyer to take full, valid and enforceable right, title and ownership interest of the Assets and such other documents that Buyer may reasonably request, provided, however, that copies of all of the foregoing -------- ------- documents shall have been delivered in advance to Buyer for a reasonable period of time to allow for inspection thereof prior to Closing; and (ii) Buyer will deliver to the Seller the consideration specified in Section 1(c) above in accordance with the wire transfer instructions provided to Buyer by Seller. (f) Assumption of Liabilities. -------------------------- On and subject to the terms and conditions of this Agreement, the Buyer shall not assume any Liabilities of Seller with respect to the Business which have been recorded, accrued, or otherwise incurred on or prior to the Effective Time. (g) Excluded Liabilities. --------------------- Buyer shall not assume, or otherwise be responsible for, any Liabilities or obligations of Seller, whether actual or contingent, matured or unmatured, liquidated or unliquidated, or known or unknown, arising out of occurrences prior to the Effective Time ("Excluded Liabilities"). Seller hereby acknowledges that it is retaining all Excluded Liabilities and Seller shall pay, discharge and perform all Excluded Liabilities promptly when due. (h) The Parties agree to allocate the Adjusted Purchase Price (and all other capitalizable costs) among the Assets for all purposes (including financial accounting and tax purposes) in accordance with the allocation schedule attached hereto as Schedule C. -3- 2. REPRESENTATIONS AND WARRANTIES OF THE SELLER. -------------------------------------------- The Seller represents and warrants to the Buyer as of the Closing Date, the following statements are correct, true and complete in all respects except where otherwise qualified or as may be set forth in a disclosure schedule arranged in paragraphs corresponding to the lettered and numbered paragraphs contained in this Section 2 and attached hereto (each, a "Disclosure Schedule") and the Seller has no Knowledge that any of the following statements contains a material misstatement or omission: (a) Organization and Authorization. ------------------------------ The Seller is a corporation duly organized, validly existing, and in good standing under the laws of Taiwan. The Seller has the full corporate power and authority to conduct its Business as and where such Business has been and is now being [Agreement Continues on the Following Page] -4- conducted. Copies of the charter and organizational documents heretofore delivered to Buyer are accurate and complete as of the date hereof. (b) Authorization of Transaction. ---------------------------- The Seller has full power and authority (including full corporate power and authority) to execute and deliver this Agreement and all related documents and to perform its obligations hereunder and thereunder. Without limiting the generality of the foregoing, the board of directors of the Seller have duly authorized the execution, delivery, and performance of this Agreement by the Seller as set forth in the resolutions attached hereto. This Agreement constitutes the valid and legally binding obligation of the Seller, enforceable in accordance with its terms and conditions. The Seller has obtained all waivers, consents and approvals, a list of which appear on the attached Schedule 2(b), which are required or necessary for the consummation of all aspects of this transaction. (c) Noncontravention. ----------------- The execution and the delivery of this Agreement and any related documents, and the consummation of the transactions contemplated hereby and thereby, and all waivers, consents and permits obtained in connection herewith and therewith, will not materially (i) violate any charter, organizational, governmental or contractual document or obligation of the Seller, (ii) conflict with, result in a breach of, constitute a default under, or result in the termination, or accelerate the performance required by, or create any Encumbrance upon, any of the Assets, under the terms, conditions, or provisions of any agreement or other arrangement to which the Seller is a party or by which it is bound or which it is subject to, or (iii) result in Material Adverse Consequences with respect to any of the Assets. No consent or approval of, notice to, or filing with any governmental authority is required to be made by Seller to permit Seller to sell the Assets to Buyer and no consent of a notice to any person or entity is required for the assignment or sublease of any Contract or Lease to Buyer. -5- (d) Title to Assets and Good Repair. -------------------------------- The Seller owns or is otherwise legally entitled to the use and possession of the Assets, free and clear of any Encumbrance other than those listed on Schedule 2(d) attached hereto and, with respect to tangible assets, the Assets are in good working order and repair, ordinary wear and tear excepted. (e) Joint Ventures and Operating Units. ----------------------------------- The Seller has no subsidiary companies. There are no Partnerships or Joint Ventures in effect as of Closing Date as between the Seller and any third party Persons. (f) Financial Statements and Receivables ------------------------------------ Attached hereto as Schedule 2(f) are the following financial statements (collectively, the "Financial Statements"): (i) audited and unaudited balance sheets and statements of income, changes in stockholders' equity, and cash flow as of and for the fiscal years ended from inception of the Business to July 31, 1997 (the fiscal year ended December 31, 1996 referred to herein as the "Most Recent Fiscal Year End") for the Seller; and (ii) unaudited balance sheets and statements of income, changes in stockholders' equity, and cash flow as of and for the month ended July 31, 1997 (the "Most Recent Financial Statements") for the Seller. The Financial Statements and the Closing Financial Statement (including the notes thereto on each) have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby, present fairly the financial condition of the Seller as of such dates and the results of operations of the Seller for such periods, are correct and complete, and are consistent with the books and records of the Seller (which books and records are correct and complete). All material notes and accounts receivable of the Seller are reflected properly on their respective books and records, are valid receivables subject to no material setoffs or counterclaims, are current and collectible, and will be collected in accordance with their terms at their recorded amounts, subject only to the -6- reserve for bad debts set forth on the face of the Most Recent Financial Statements as adjusted for the passage of time through the Closing Date in accordance with the past custom and practice of the Seller. (g) Legal Compliance. ---------------- The Seller has (i) complied and is in compliance with all applicable laws and regulations in Taiwan, (ii) no Material Adverse Consequences are known, filed or commenced against the Seller with respect to any failure so to comply, unless singly or in the aggregate noncompliance would not have Material Adverse Consequences for the Seller, and (iii) Seller has all permits required to conduct the Business as now being conducted, such permits set forth on Schedule 2(g) hereto. (h) Tax Matters. ----------- The Seller has filed all Tax Returns that it was required to file in Taiwan. All such Tax Returns were correct and complete in all material respects. All Taxes owed by the Seller (whether or not shown on any Tax Return) in Taiwan have been paid. The Seller is not currently the beneficiary of any extension of time within which to file any Tax Return. No Seller director or officer (or employee responsible for Tax matters) of the Seller expects any authority to assess any additional Taxes for any period for which Tax Returns have been filed. Except as set forth on Disclosure Schedule 2(h), there is no audit, dispute or claim concerning any Tax Liability of any of the Seller and there is no Basis for any such action. The Seller has delivered to the Buyer materially correct and complete copies of all income Tax Returns filed by the Seller since inception. The Seller has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency. The Seller has not entered into any tax sharing or similar agreements. -7- (i) Business Operation and Preservation. ----------------------------------- The Assets constitute all of the assets used in the Ordinary Course of Business of the Seller. Since December 1, 1996, the Seller has operated its Business in good faith in the Ordinary Course of Business; the Seller has not engaged in any practice, taken any action, or entered into any transaction outside the Ordinary Course of Business. The Seller has kept its Business and properties intact, including its present operations, physical facilities, working conditions, and relationships with lessors, licensors, suppliers, customers, agents, Affiliates, contractors and employees; there has been no adverse change in the Business relationship of the Seller with any customer or supplier which is material to the Business or financial condition of the Seller. (j) Real Property. ------------- (i) Disclosure Schedule 2(j) lists all real property that any of the Seller owns. (ii) Disclosure Schedule 2(j) lists and describes briefly all real property leased or subleased to the Seller (including the duration of each such lease). The Seller has delivered to the Buyer materially correct and complete copies of the leases and subleases listed in Disclosure Schedule 2(j). With respect to each lease and sublease listed in Disclosure Schedule 2(j): (1) the lease or sublease is legal, valid, binding, enforceable, and in full force and effect; (2) the lease or sublease will continue to be legal, valid, binding, enforceable, and in full force and effect on identical terms following the consummation of the transactions contemplated hereby, including, but not limited to paragraph (g) of Section 6; (3) all facilities leased or subleased thereunder have received all waivers, consents and approvals of any third parties or governmental authorities (including licenses and permits), as the case may be, required in connection with the operation thereof; (4) all such facilities have been operated and maintained in accordance -8- with applicable laws, rules, and regulations in all material respects; and (5) no party is in breach or default, and no event has occurred which with notice or lapse of time would constitute a breach or default, or permit termination, modification, or acceleration, under the lease agreement. (k) Intellectual Property. --------------------- (i) The Seller owns or has the right to use pursuant to license, sublicense, agreement, or permission all Intellectual Property reasonably necessary for the operation of the Businesses of the Seller as presently conducted; (ii) The Seller does not know of any Person who has, interfered with, infringed upon, misappropriated, or otherwise come into conflict with any Intellectual Property rights of third parties. (l) Contracts. ---------- Disclosure Schedule 2(l) lists all material contracts, agreements and other understandings to which any of the Seller is a party (including oral agreements). The Seller has delivered to the Buyer a materially correct and complete copy of each written agreement listed in Disclosure Schedule 2(l) (each, as amended to date) and a written summary setting forth the terms and conditions of each oral agreement referred to in Disclosure Schedule 2(l). In all material respects, each such agreement: (1) is legal, valid, binding, enforceable, and in full force and effect; (2) will continue to be legal, valid, binding, enforceable, and in full force and effect on identical terms following the consummation of the transactions contemplated hereby; (3) no party is in breach or default, and no event has occurred which with notice or lapse of time would constitute a breach or default, or permit termination, modification, or acceleration, under the agreement; and -9- (4) all waivers, consents and approvals of any third parties or governmental authorities have been obtained (including any licenses and permits required directly or indirectly in connection therewith) with respect to any such agreements. (m) Insurance. ---------- Disclosure Schedule 2(m) briefly describes each material insurance policy (including policies providing property, casualty, liability, and workers' compensation coverage and bond and surety or similar arrangements) to which the Seller is a party, a named insured, or otherwise the beneficiary of coverage at any time since inception. With respect to the material aspects of each such insurance policy: (1) the policy is legal, valid, binding, enforceable, and in full force and effect; (2) the policy is assignable and will continue to be legal, valid, binding, enforceable, and in full force and effect on identical terms following the consummation of the transactions contemplated hereby; (3) the Seller is not in breach or default (including with respect to the payment of premiums or the giving of notices), and no event has occurred which, with notice or the lapse of time, would constitute such a breach or default, or permit termination, modification, or acceleration, under the policy; (4) all waivers, consents and approvals of any third parties and/or governmental authorities have been obtained (including any licenses and permits required directly or indirectly in connection therewith) with respect to the transfer and assumption of any such insurance. Disclosure Schedule 2(m) describes any self-insurance arrangements affecting the Seller; (5) the policy includes reasonable and customary tail coverage for similarly situated companies; and -10- (n) Litigation. ----------- Disclosure Schedule 2(n) sets forth each instance in which any of the Seller is subject to any material outstanding injunction, judgment, order, decree, ruling, or charge, or (ii) is a party or, to the Knowledge of the Seller, is threatened to be made a party to any material action, suit, proceeding, hearing, or investigation of, in, or before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction or before any arbitrator. (o) Employees and Employee Benefits. ------------------------------- Disclosure Schedule 2(o) sets forth the name of each employee, consultant, agent or representative of the Seller and the principal place of business of such person. Disclosure Schedule 2(o) lists each material employee non-cash compensation plan, retirement plan, material fringe benefit plan or similar program, other than ordinary cash compensation, that the Seller maintains or to which the Seller contributes. (p) Environment, Health, and Safety. ------------------------------- Except as set forth on Disclosure Schedule 2(p), (i) the Seller has materially complied with all Environmental, Health, and Safety Laws, and such has no Knowledge or Basis for Knowledge that any material action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand, or notice has been filed, commenced or is threatened against the Seller alleging any failure so to comply. (q) Capitalization, Stock Ownership and Records ------------------------------------------- The authorized capital stock of the Seller consists of [Chinese -------- Characters] shares of NT$ [Chinese Characters] par value per share, ----------- -------------------- all of which have been issued and are fully paid up. The Seller's corporate minutes, books and records are complete and correct in all material respects, and accurately and fairly reflects the activities of the Business in reasonable detail, and have been maintained in accordance with good business practice and all applicable material laws, -11- regulations and other legal requirements. Prior to the execution and delivery of this Agreement, the Seller has made available to Buyer all of these books and records and all other documents relating to the Business of the Seller. (r) Undisclosed Liabilities. ------------------------ Other than Excluded Liabilities, Seller has no material liabilities, obligations or commitments of any nature (whether absolute, accrued, contingent or otherwise and whether matured or unmatured), including without limitation Tax liabilities due or to become due, except (a) liabilities which are reflected and reserved against on the Most Recent Financial Statement which have not been paid or discharged since the date thereof, (b) liabilities arising under Contracts, Leases, letters of credit, purchase orders, licenses, permits, purchase agreements and other agreements, business arrangements and commitments described in the Disclosure Schedule (and under those Contracts which are not required to be disclosed on the Disclosure Schedule). 3. REPRESENTATIONS AND WARRANTIES OF THE BUYER. ------------------------------------------- The Buyer represents and warrants to the Seller that the statements contained in this Section 3 are correct and complete in all respects as of the Closing Date except where qualified otherwise and the Buyer has no Knowledge that any of the following statements contains a material misstatement or omission: (a) Organization of the Buyer. ------------------------- The Buyer is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation. (b) Authorization of Transaction. ---------------------------- The Buyer has full power and authority (including full corporate power and authority) to execute and deliver this Agreement and all related documents and to -12- perform its obligations hereunder and thereunder. Without limiting the generality of the foregoing, the board of directors of the Buyer have duly authorized the execution, delivery, and performance of this Agreement by the Buyer. (c) Noncontravention. ----------------- The execution and the delivery of this Agreement, and the consummation of the transactions contemplated hereby, and all consents and permits obtained in connection herewith and therewith, will not materially (i) violate any organizational, governmental or contractual obligation of the Buyer, (ii) conflict with, result in a breach of, constitute a default under any agreement or other arrangement to which the Buyer is a party or by which it is bound or to which any of its assets is subject, or (iii) or result in Material Adverse Consequences with respect to the Buyer. 4. CONDITIONS TO OBLIGATION TO CLOSE. --------------------------------- (a) Conditions to Obligation of the Buyer. --------------------------------------- The obligation of the Buyer to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions: (i) the representations and warranties of Section 2 above shall be true, correct and complete in all respects, except where otherwise qualified or as may be set forth in a Disclosure Schedule attached hereto and none of such statements or disclosures shall contain a material misstatement or omission as of the Closing Date; (ii) The Seller shall have performed and complied with all of their covenants hereunder through the Closing; (iii) the Seller shall have procured any and all material third party or governmental consents or authorizations required to consummate the transactions contemplated herein; -13- (iv) no material action, suit, or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency of any jurisdiction against the Seller; (v) The individuals listed on the attached Schedule D shall have entered into Employment Agreements and each of the same shall be in effect simultaneously at the Closing; (vi) the Seller shall have delivered to Buyer an officer's certificate and Secretary's Certificate, each in the form of Exhibit C and Exhibit D, respectively, attached hereto; and (vii) the Seller shall have delivered such other documents as the Buyer may reasonably request on or prior to the Closing Date to consummate the Closing of this Agreement and the transactions contemplated herein. (b) Conditions to Obligation of the Seller. -------------------------------------- The obligation of the Seller to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions: (i) the representations and warranties set forth in Section 3 above shall be true, correct and complete in all respects, except where otherwise qualified and none of such statements or disclosures shall contain a material misstatement or omission as of the Closing Date; (ii) the Buyer shall have performed and complied with all of its covenants hereunder in all material respects through the Closing; (iii) the Buyer shall deliver the Adjusted Purchase Price; and (iv) the Buyer shall deliver such other documents as the Seller may reasonably request on or prior to the Closing Date to consummate the Closing of this Agreement and the transactions contemplated herein. -14- 5. REPRESENTATIONS AND WARRANTIES OF THE TAIWAN STOCKHOLDERS --------------------------------------------------------- Each Taiwan Stockholder warrants to the Buyer individually, not jointly, that as of Closing Date: (a) The Taiwan Stockholder is not aware of any liability of the Seller that has not been disclosed to in writing to the Buyer. (b) Where a Taiwan Stockholder has acted in an executive capacity on behalf of the Seller he or she has not, except in the Ordinary Course of Business, taken any action to create any legal Liability on behalf of the Seller. (c) Where a Taiwan Stockholder has not acted in an executive capacity on behalf of the Seller he has not taken any action to create any legal Liability on behalf of the Seller. (d) If the Taiwan Stockholder is a corporation, the Taiwan Stockholder is duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation. (e) In the event that any Taiwan Stockholder breaches any of its representations, warranties or covenants contained in this Agreement, such Taiwan Stockholder individually, not jointly, such that one Taiwan Stockholder agrees to indemnify hold harmless and defend the Buyer from and against the entirety of any Material Adverse Consequences the Buyer may suffer so long as provided the Buyer makes a written claim for indemnification against such Taiwan Stockholder and such Material Adverse Consequences arise during the survival period of this Agreement, resulting from, arising out of, relating to, in the nature of, or caused by the breach (or the alleged breach), provided, however, that such Taiwan Stockholder shall not be liable -------- ------- for a breach of the warranty set forth in this Section -15- 5 except where there has been fraud or deliberate concealment on his part. (f) The Taiwan Stockholder has full power and authority (including, if the Taiwan Stockholder is a corporation, full corporate power and authority) to execute and deliver this Agreement and all related documents and to perform his or her obligations hereunder and thereunder. Without limiting the generality of the foregoing, for each Taiwan Stockholder that is a corporation, the board of directors and the stockholders of such corporation have duly authorized the execution, delivery, and performance of this Agreement and such Taiwan Stockholder has obtained all waivers, consents and approvals in respect of its corporate capacity which are required or necessary for the consummation of this transaction. This Agreement constitutes the valid and legally binding obligation of the Taiwan Stockholder, enforceable in accordance with its terms and conditions. (g) The execution and the delivery of this Agreement and any related documents by the Taiwan Stockholder, the performance by the Taiwan Stockholder of his or her obligations hereunder and thereunder, the consummation of the transactions contemplated hereby and thereby, and all consents and permits obtained in connection herewith and therewith, will not materially, (i) violate any organizational, governmental or contractual obligation, or (ii) conflict with, result in a breach of, constitute a default under, result in Material Adverse Consequences under any agreement or other arrangement to which any of such Persons is a party or by which it is bound or to which any of its assets is subject (or result in the imposition of any Encumbrance upon any of its assets); Each Taiwan Stockholder has obtained any and all waivers, consents or approvals required by any third parties or governmental authorities with respect to obligations under this Agreement and any related agreement executed by Taiwan Stockholder. 6. POST-CLOSING COVENANTS. ----------------------- -16- The Seller and the Taiwan Stockholders agree as follows with respect to the period following the Closing. (a) General. -------- In case at any time after the Closing any further action is reasonably necessary or desirable to carry out the purposes of this Agreement and the transactions contemplated herein, as determined in Buyer's reasonable discretion, the Seller will take such further action (including the execution and delivery of such further instruments and documents), all at the sole cost and expense of the Buyer (unless the Buyer is entitled to indemnification as set forth below), including contesting or defending against any action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand, or similar circumstance. (b) Transition. ------------ The Seller and the Taiwan Stockholders will not solicit or take any action that is designed or intended to have the effect of discouraging any employee, lessor, licensor, customer, supplier, or other business associate of any of the Seller from maintaining the same business relationships with the Buyer after the Closing as such persons maintained with the Seller prior to the Closing, provided, however, -------- ------- that Seller may act in accordance with the provisions of the License Agreement without being deemed in breach of this clause (b). (c) Confidentiality. ---------------- The Seller and the Taiwan Stockholders will treat and hold as such all of the Confidential Information, refrain from using any of the Confidential Information except in connection with this Agreement, and deliver promptly at Closing to the Buyer all tangible embodiments and all digital media copies of the Confidential Information which are in its, his or her possession. -17- (d) Covenant Not to Compete. ----------------------- Except as provided in the License Agreement and/or an Employment Agreement with Buyer, for a period of three (3) years from and after the Closing Date, the Seller and the Taiwan Stockholders will not engage directly or indirectly including managing, financing, consulting, owning or being in the employment of any business of automated or semi-automated cytological testing (other than as a client of any company which is an Affiliate of Neuromedical Systems, Inc.), provided, however, that: (i) ownership of less than 5% of the -------- ------- outstanding stock of any publicly traded corporation, and/or (ii) ownership of any amount of stock of Neuromedical Systems, Inc., or any or its Subsidiaries, shall in either case be deemed not to be engaged by reason thereof in any of the business above described. If the final judgment of a court of competent jurisdiction declares that any term or provision of this paragraph is invalid or unenforceable, the Parties agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration, or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this provision shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed. (e) Bulk Transfer and Tax Compliance Laws. -------------------------------------- The parties agree to cooperate in taking such actions as may be necessary or appropriate to comply with applicable bulk sales law and/or sales or transfer Tax provisions in jurisdictions in which the Assets are situated or which may otherwise be applicable to the transactions contemplated hereby; provided, however, that Seller is -------- ------- liable for and shall pay in full any amount owed under such laws and agrees to indemnify Buyer in accordance with the provisions of Section 7 for any amount paid by Buyer pursuant to such laws and for any losses or -18- damages Buyer suffers as a result of any of the Parties failing to comply with any such laws. (f) Name Change. ------------ Seller shall take any and all action deemed reasonably necessary in the sole discretion of Buyer to establish new Chinese and English names for operation of the Business which shall be effective simultaneously upon termination of the License Agreement; such name changes shall include, but not be limited to, any and all required corporate, authorized, official, commercial, trade and/or assumed names, and any other name or mark of Seller or the Business that have a near resemblance thereto with respect to the Business. In addition, if deemed reasonably necessary by Buyer, Seller shall amend its Articles of Incorporation to change its corporate name. In accordance with the License Agreement, Buyer hereby grants to Seller, at the Effective Time, the right to continue to use any and all of Seller's authorized, official, commercial, trade and/or assumed names on existing packaging, stationery and purchase order forms and any other printed materials until the termination of the License Agreement or earlier if so notified by Buyer. Seller will take any and all further action reasonably necessary to carry out the foregoing name changes including, but not be limited to, the execution and delivery of such further instruments and documents, registration of such changed names with any and all required Taiwan legal authorities, and reasonable notice to each and every employee, lessor, licensor, customer, supplier, or other business associate of the Business so as to maintain the same business relationships with the Buyer after the name changes as such person maintained with the Business in the Ordinary Course of Business prior to such name changes. (g) Subleases, Sublicenses and Subcontracts. --------------------------------------- Immediately prior to the termination of the License Agreement, Seller shall promptly take any and all action necessary to legally sublease, sublicense or subcontract, as the case may be, to Buyer, (i) each of the lease and contract -19- agreements specified in paragraphs (j) and (l) of Section 2 above, each such sub-agreement to be legal, valid, binding, enforceable, and in full force and effect on identical terms to the respective agreement which is the subject of such sub-agreement. (h) Seller further covenants that it shall maintain itself as a corporation duly organized, validly existing, and in good standing under the laws of Taiwan, with full corporate power and authority to conduct business in Taiwan during the term of the License Agreement and during the terms of any and all sublicenses entered into pursuant to paragraph (g) above. (i) At or prior to the Closing, Seller shall procure reasonably adequate insurance for replacement of the Assets, such insurance to include coverage for continuation of the Business in the event of fire, flood, theft, or other similar event which would cause loss of the Assets or loss of use of the Business premises. Such insurance coverage shall be upon reasonable terms and conditions which are customary for similarly situated businesses purchasing similar types of risk coverage. The policy thereof shall be effective under the terms of the License Agreement, and shall be transferable to the Buyer upon termination of the License Agreement. Buyer shall reimburse Seller for the cost of such insurance policy in accordance with the terms of the License Agreement. 7. INDEMNIFICATION. --------------- (a) Survival. --------- All of the representations and warranties of the Buyer, the Seller, the Seller and the Taiwan Stockholders contained in this Agreement shall survive the Closing and continue in full force and effect for a period of three (3) years thereafter provided, however, that the -------- ------- representations and warranties set forth in Section 2(h) shall survive until the expiration of the applicable statute of limitations (with -20- extensions). (b) Indemnification of Buyer. ------------------------ In the event the Seller breaches any of its representations, warranties, and covenants contained in this Agreement provided that the Buyer makes a written claim for indemnification against the Seller, then the Seller agrees to indemnify hold harmless and defend the Buyer from and against the entirety of any Material Adverse Consequences the Buyer may suffer so long as such Material Adverse Consequences arise during the survival period of this Agreement, resulting from, arising out of, relating to, in the nature of, or caused by the breach (or the alleged breach); provided, however, that -------- ------- the Indemnification provided for herein shall be limited to the Adjusted Purchase Price hereof, except the indemnity shall not be so limited in the case of any (x) fraud or (y) Material Adverse Consequences resulting from, arising out of, relating to, in the nature of, or caused by any disclosure set forth, or omitted from, a Disclosure Schedule, which qualifies, or would qualify, any of the representations and warranties of the Seller. (c) Indemnification of Seller. ------------------------- In the event the Buyer breaches any of its representations, warranties, and covenants contained in this Agreement, provided that the Seller makes a written claim for indemnification against the Buyer, then the Buyer agrees to indemnify the Seller from and against the entirety of any Material Adverse Consequences the Seller may suffer through and after the date of the claim for indemnification (including any Material Adverse Consequences the Seller may suffer so long as such Material Adverse Consequences arise during the survival period of this Agreement) resulting from, arising out of, relating to, in the nature of, or caused by the breach (or the alleged breach), provided, however, that the indemnification provided for herein shall -------- ------- be limited to the Adjusted Purchase Price hereof. (d) Representation. --------------- -21- (i) If any third party shall notify any of Buyer, the Seller or any Taiwan Stockholder (each, an "Indemnified Party") with respect to any matter (a "Third Party Claim") which may give rise to a claim for indemnification against any other Party (the "Indemnifying Party"), then the Indemnified Party shall promptly notify each Indemnifying Party thereof in writing; provided, however, that no delay on the part of the Indemnified Party in notifying any Indemnifying Party shall relieve the Indemnifying Party from any obligation hereunder unless (and then solely to the extent) the Indemnifying Party thereby is prejudiced. (ii) Any Indemnifying Party will have the right to defend the Indemnified Party against the Third Party Claim with counsel of its choice reasonably satisfactory to the Indemnified Party so long as (A) the Indemnifying Party notifies the Indemnified Party in writing within fifteen (15) days after notice of the Third Party Claim; and (B) the Third Party Claim involves only money damages and does not seek an injunction or other equitable relief. (iii) So long as the Indemnifying Party is conducting the defense of the Third Party Claim, (A) the Indemnified Party may retain separate co-counsel at its sole cost and expense and participate in the defense of the Third Party Claim, (B) the Indemnified Party will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnifying Party (not to be withheld unreasonably), and (C) the Indemnifying Party will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnified Party (not to be withheld unreasonably). (e) Buyer's Right of Offset. ------------------------ Anything in this Agreement to the contrary notwithstanding, Buyer may withhold and set off against other amounts otherwise due Seller or a Taiwan Stockholder -22- any amount as to which Seller or a Stockholder is obligated to indemnify. 8. MISCELLANEOUS. ------------- (a) No Third Party Beneficiaries. ---------------------------- This Agreement shall not confer any rights or remedies upon any Person other than the Parties and their respective successors and permitted assigns. (b) Entire Agreement. ---------------- This Agreement (including the Exhibits and Schedules referred to herein) and the License Agreement in the form attached hereto as Exhibit E, constitute the entire agreement between the Parties and supersedes any prior understandings, agreements, or representations by or between the Parties, written or oral, to the extent they related in any way to the subject matter hereof. (c) Succession and Assignment. ------------------------- This Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and permitted assigns. No Party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written approval of the other Party; provided, however, that without such written approval the Buyer may: (i) assign any or all of its rights and interest hereunder to one or more Persons, and (ii) designate one or more Persons to perform its obligations hereunder. (d) Execution and Counterparts. -------------------------- This Agreement may be executed via facsimile in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument, provided that actual execution exemplars of each such facsimile signature must be forwarded and delivered to the other Parties no later than ten (10) days following the Closing. -23- (e) Headings. -------- The Section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. (f) Notices. ------- All notices, requests, demands, claims, and other communications hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two (2) business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: If to the Buyer: NEW SYSTEM LTD. C/O Neuromedical Systems, Inc. Two Executive Boulevard Suffern, NY 10901, USA Attn: John B. Henneman, III Facsimile: (914) 368-4068 If to the Seller: Papnet Far East, Ltd. 3F-2, NO. 482, SEC. 5, Chung Hsiao E. Road Taipei, Taiwan Tel : [002] 011+886 - 2 - 728-2296 Fax : [002] 011+886 - 2 - 759-2273 If to the Taiwan Stockholders: At the respective addresses set forth on the signature page hereto. Any Party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including facsimile, personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any -24- Party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other party notice in the manner herein set forth. (g) Governing Law and Jurisdiction. ------------------------------ This Agreement shall be governed by and construed in accordance with the domestic laws of the State of New York without giving effect to any choice or conflict of law provision or rule (whether of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. Each of the Parties submits to courts having jurisdiction in the State of New York, in any action or proceeding arising out of or relating to this Agreement and agrees that all claims in respect of the action or proceeding may be heard and determined in any such court. Each of the Parties waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety, or other security that might be required of any other Party with respect thereto. Any Party may make service on the other Party by sending or delivering a copy of the process to the Party to be served at the address and in the manner provided for the giving of notices in Section 9(f) above. (h) Amendments and Waivers. ---------------------- No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Buyer and the Seller. No waiver by any Party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. (i) Severability. ------------ -25- Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. (j) Construction. ------------- The Parties have participated jointly in the negotiation of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any of the provisions of this Agreement. The word "including" shall mean including without limitation. (k) Specific Performance. -------------------- Each of the Buyer, the Seller and the Taiwan Stockholders agrees that each such Party may be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each of the Parties agrees that the other Parties, individually, shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any action instituted in any court of equity or law having jurisdiction over the Parties and the matter, at law or in equity. (l) Expenses. -------- The Parties shall each bear their own costs and expenses incurred in connection with the transactions contemplated in this Agreement including, without limitation, the fees and expenses of their counsel and accountants. -26- (m) Risk of Loss. ------------ The risk of loss of the Assets of the Seller shall remain with the Seller until the termination of the License Agreement. (n) Remedies Cumulative. ------------------- No remedy set forth in this Agreement or otherwise conferred upon or reserved to any party shall be considered exclusive of any other remedy available hereunder, at law or in equity to any party, but the same shall be distinct, separate and cumulative and may be exercised from time to time as often as occasion may arise or as may be deemed expedient. (o) Confidential Information and Publicity. -------------------------------------- No party hereto shall make any public disclosure of the specific terms of this Agreement, except as required by law. In connection with the negotiation of this Agreement and the preparation for the consummation of the transactions contemplated hereby, each of the Parties acknowledges that certain confidential information relating to such Parties may be disclosed to another Party. Each Party shall treat such information as confidential, preserve the confidentiality thereof and not duplicate or use such information, except as reasonably necessary to discuss the transactions contemplated herein with attorneys, advisors, consultants, and Affiliates, and except as required to comply with any law or any provision of this Agreement or related documents necessary to consummate the transactions contemplated herein. 9. DEFINITIONS. ----------- "Adjusted Purchase Price" has the meaning set forth in Section 1(c). "Affiliate" has the meaning set forth in Rule 12b-2 of the regulations promulgated under the Securities Exchange Act. -27- "Assets" means: (i) all right, title and interest in and to the Business, properties, assets and rights of any kind of the Seller, whether tangible or intangible, real or personal, and constituting, or used or useful in connection with, related to, the Seller's Business, including, but not limited to the Seller's (a) real property and fixtures, (b) personal property, (c) Intellectual Property, (d) equipment and real property leases, (e) agreements and contracts, (f) accounts and notes receivable, (g) claims, deposits, prepayments, and refunds, (h) approvals, permits, licenses, registrations, certificates and similar rights obtained from governments and governmental agencies, (i) computers, software, data, books, records, ledgers, files, documents, correspondence, lists (including customer lists), advertising and promotional materials, studies, reports, and any other printed, written or digital materials, and (j) all Insurance Policies, to the extent assignable; provided, -------- however, that (ii) notwithstanding the foregoing, the Assets shall not include - ------- (a) Cash, (b) material relating uniquely to the corporate organization, maintenance, and existence of the Seller as a corporation, and (c) any of the rights of the Seller under this Agreement (or under any ancillary agreement between the Seller and the Buyer entered into on or after the date of this Agreement). "Basis" means any past or present fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction that forms or could form the basis for any specified consequence. "Buyer" has the meaning set forth in the Recitals of this Agreement above except with respect to Section 7 in which case it shall mean Buyer, its officers, directors, employees, agents, representatives, stockholders and their respective successors and assigns. "Business" means all of the business of Seller as conducted on the date hereof. "Closing Date" has the meaning set forth in Section 1(d). "Closing Financial Statement" has the meaning set forth in Section 2(f) "Closing" has the meaning set forth in Section 1(d). "Confidential Information" means any information concerning the Businesses and affairs of the Seller that is not already generally available to the public. "Disclosure Schedule" has the meaning set forth in Section 2. "Effective Time" has the meaning set forth in Section 1(b). -28- "Employment Agreements" shall mean the employment agreements entered into by each of the persons listed on the attached Schedule D. "Encumbrance" means any claim, lien, pledge, option, charge, easement, security interest, deed of trust, mortgage, right-of-way, encroachment, building or use restriction, conditional sales agreement, encumbrance, or other right of third parties, whether voluntarily incurred or arising by operation of law, and includes, without limitation, any agreement to give any of the foregoing in the future, and any contingent sale or other title retention agreement or lease in the nature thereof. "Environmental, Health, and Safety Laws" means any one or more laws, statutes, rules, common law holdings, regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and charges thereunder of federal, state, local, and foreign governments (and all agencies thereof) concerning pollution or protection of the environment, public health and safety, or employee health and safety. "Excluded Liabilities" has the meaning set forth in Section 1(g). "Financial Statements" has the meaning set forth in Section 2(f). "GAAP" means generally accepted accounting principles as in effect from time to time. "Indemnified Party" has the meaning set forth in Section 7(d). "Indemnifying Party" has the meaning set forth in Section 7(d). "Intellectual Property" means (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications, and patent disclosures, together with all reissuances, continuations, continuations-in-part, revisions, extensions, and reexaminations thereof, (b) all trademarks, service marks, trade dress, logos, trade names, and corporate names, together with all translations, adaptations, derivations, and combinations thereof and including all goodwill associated therewith, and all applications, registrations, and renewals in connection therewith, (c) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection therewith, (d) all mask works and all applications, registrations, and renewals in connection therewith, (e) all trade secrets and confidential business information (including ideas, research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals), (f) all computer software (including data and related documentation), (g) all other proprietary rights, and (h) all copies and tangible embodiments thereof (in whatever form or medium). "Joint Venture" means any contract, agreement or understanding between one or more of the Seller and any other Persons to undertake, contribute to or engage in any activity, in either a direct, intermediary or indirect capacity, and share or allocate as between such parties or Persons any portion of the capital, financing, labor, material, Intellectual Property, real or personal -29- property, costs, expenses, profits, Liabilities or losses related either directly or indirectly to such activity. "Knowledge" means actual knowledge after reasonable investigation. "Liability" means any liability (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due), including any liability for Taxes, royalties or commissions. "License Agreement" means the License and Management Services Agreement, dated as of even date hereof, between the Buyer and the Seller, the form of which is attached hereto as Exhibit E. "Material Adverse Consequences" means any of one or more of the following which is subject in amount, singly or in the aggregate, to US$5,000 or more: any actions, suits, proceedings, hearings, investigations, charges, complaints, claims, demands, injunctions, judgments, orders, decrees, rulings, damages, dues, penalties, fines, costs, amounts paid in settlement, Liabilities, obligations, Taxes, liens, losses, expenses, and fees, including court costs and reasonable attorneys' fees and expenses. "Most Recent Financial Statements" has the meaning set forth in Section 2(f). "Most Recent Fiscal Year End" has the meaning set forth in Section 2(f). "Ordinary Course of Business" means the ordinary course of business consistent with past day-to-day custom and practice (including with respect to quantity and frequency) as such business has been conducted during the calendar years of 1995, 1996 and 1997. "Partnership" means any contract, agreement or understanding between one or more of the Seller and any other Persons to undertake, contribute to or engage in any plan or activity, in either a direct, intermediary or indirect capacity, and share or allocate as between such parties or Persons any portion of the capital, financing, labor, material, Intellectual Property, real or personal property, costs, expenses, profits, Liabilities or losses related either directly or indirectly to such plan or activity. "Party" means, individually, each of the Buyer, the Seller and each of the Taiwan Stockholders, and collectively, "Parties" means all of the foregoing. "Person" means an individual, partnership, corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, or a governmental entity (or any department, agency, or political subdivision thereof). "Securities Exchange Act" means the United States Securities Exchange Act of 1934, as amended. -30- "Seller" has the meaning set forth in the Recitals of this Agreement. "Sellers" shall have the meaning set forth in the Recitals of this Agreement. "Seller Share" means any equity ownership share of the Seller. "Shares" means all issued and outstanding stock of the Seller as of the Closing. "Subsidiary" means any entity with respect to which a specified Person (or a Subsidiary thereof) owns 1% or more of the equity ownership thereof or has the power to vote, by ownership, agreement, understanding or otherwise, or direct the voting of sufficient securities to elect one or more directors. "Taiwan Stockholder " means any Person who holds any equity shares in the Seller. "Tax Liability" has the combined meanings of the definitions of "Tax" and "Liability." "Tax Return" means any return, declaration, report, claim for refund, or information return, examination reports, statements of deficiencies assessed against or agreed to, or any other statement relating to Taxes, any schedule or attachment to any such item and any amendment thereof. "Tax" means any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs, duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, bulk sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not. "Third Party Claim" has the meaning set forth in Section 8(d) * * * [Signature Page Follows] -31- IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first written above. NEW SYSTEM, LTD. By: /s/ David Duncan, Jr. Title: Vice President PAPNET FAR EAST LTD. By: /s/ David Chang Title: President [Signatures Continue on the Following Page] -32- TAIWAN STOCKHOLDERS with respect to Sections 6, 7, 8 and 9 and such of the definitions in this Agreement applicable to such Sections: [/s/ Chinese Characters] Name: [Chinese Characters] Address: [Chinese Characters] [/s/ Chinese Characters] Name: [Chinese Characters] Address: [Chinese Characters] [/s/ Chinese Characters] Name: [Chinese Characters] Address: [Chinese Characters] [/s/ Chinese Characters] Name: [Chinese Characters] Address: [Chinese Characters] [/s/ Chinese Characters] Name: [Chinese Characters] Address: [Chinese Characters] -33- SCHEDULES, EXHIBITS AND ANNEXES Schedule A [Intentionally Omitted] Schedule B [Intentionally Omitted] Schedule C Allocation Schedule Schedule D Employment Agreement Disclosure Schedules Exhibits: -------- Exhibit A Form of Bill of Sale Exhibit B Form of Receipt Exhibit C Form of Officer's Certificate Exhibit D Form of Secretary's Certificate Exhibit E Form of License Agreement Ancillary documents: ------------------- Seller's Resolutions Wire Payment Instructions -34- EX-10.38 8 LICENSE AND MANAGEMENT SERVICES AGREEMENT Exhibit 10.38 LICENSE AND MANAGEMENT SERVICES AGREEMENT ----------------------------------------- This LICENSE AND MANAGEMENT SERVICES AGREEMENT (hereinafter referred to as this "License Agreement") is entered into as of the 1st day of August, 1997, by and between New System Ltd., a Cayman Islands corporation ("Buyer") and Papnet Far East Ltd., a Taiwan corporation ("Seller"). Capitalized terms not defined herein have the meanings given them in the Asset Purchase Agreement dated as of even date herewith (the "Purchase Agreement") between Buyer, Seller and stockholders of the Seller. RECITALS -------- A. The Asset Purchase Agreement contemplates that Buyer will purchase the Assets from Seller and operate the Business after the Closing; B. Buyer and Seller are ready to proceed with the Closing, but one or more governmental approvals necessary for the operation of the Business as a branch office of the Buyer after the Closing ("Necessary Approvals") have not yet been obtained; and C. Buyer and Seller therefore wish to proceed with the Closing, and transfer title to the Assets to Buyer at the Closing, but simultaneously to enter into this License Agreement, pursuant to which Seller will operate the Business for the benefit of Buyer. AGREEMENT --------- NOW, THEREFORE, in consideration of the mutual covenants herein contained and other consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: 1. License. Buyer hereby grants to Seller a license to operate the ------- Business for the benefit of Seller (the "License Purpose") during the term of this Agreement; provided, however, that this license in no way constitutes a -------- ------- transfer of title or ownership of the Assets to Seller, nor a transfer to Seller of any intellectual property rights of Buyer. For purposes of operation of the Business, Buyer grants to Seller a limited license to use during the term of this License Agreement and solely for the purpose of Seller's operation of the Business in the Ordinary Course of Business, such of Buyer's intellectual property rights as may in the sole discretion of Buyer be deemed reasonably necessary for operation of the Business in the Ordinary Course of Business, with any and all such rights subject to revocation at any time by Buyer. 2. Powers and Duties of Seller. Seller shall have the following duties --------------------------- during the term of this License Agreement: a. To accept possession (but not title or ownership) of the Assets and to use them only in the Ordinary Course of Business for operation of the Business, and for purposes other than in the Ordinary Course of Business as may be specifically authorized in writing from time to time by the Buyer; b. To manage the Business for the benefit of Buyer, in accordance with the instructions and policies of Buyer, including, but not limited to, employment of a staff sufficient to operate the Business consistent with Ordinary Course of Business prior to the acquisition of the Assets by Buyer, and to maintain and operate the Business in such additional or modified manner as Buyer may direct from time to time; c. To distribute revenue of the Business to Buyer in such amounts as Buyer may direct from time to time; -2- d. To retain sufficient cash to pay operating expenses reasonably expected to be incurred by the Business, in such amounts as Buyer may direct from time to time; e. To maintain records with respect to the Business consistent with practice prior to the acquisition of the Assets by Buyer and in such additional or modified manner as Buyer may direct from time to time; f. To render to Buyer, monthly and as of the date of termination of this Agreement, an accounting and report which includes all information requested by Buyer and in such form as requested by Buyer; g. To grant full access to Buyer to inspect the Assets or records of the Business at any time and to permit Buyer to discuss any and all affairs of the Business with directors, officers, employees and agents of the Seller; and h. To execute any documents and perform any and all acts necessary or desirable to carry out the License Purpose. 3. Limitations. Seller shall not engage in any activities beyond those ----------- necessary or desirable for carrying out the License Purpose, shall not retain cash in excess of amounts deemed reasonably necessary by Buyer to satisfy the operating expenses referred to in clause 2 above, and shall at all times act solely for the benefit of Buyer. 4. Duties of Buyer. Buyer shall allocate a portion of the revenues of the --------------- Business for payment of employees of the Business and for expenses incurred in the Ordinary Course of Business, and, so long as Seller operates and maintains the Business in accordance with clause 2 above, Buyer shall reimburse Seller for expenses incurred in the Ordinary Course of Business which exceed revenues of the Business, provided, however, Buyer may modify such allocations -------- ------- -3- and/or reimbursements upon reasonable notice to Seller with respect to revision by Buyer of its policies governing the Ordinary Course of Business of the Business. 5. No Additional Fees. Seller will not be required to pay any additional ------------------ license or management fee hereunder. The consideration paid by Buyer to Seller at the Closing shall constitute full payment for Seller's management services hereunder and as manager under any long-term management agreement entered into pursuant to Section 5(b) below. 6. Termination. ----------- (a) This License Agreement shall terminate on the date that written notice of termination is given by Buyer to Seller (the "Termination Date"). Buyer may terminate this License Agreement at its sole discretion and for any reason whatsoever (including receipt of all Necessary Approvals). Promptly after the Termination Date, possession of all Assets of the Business as of the Termination Date shall be relinquished to or at the direction of Buyer. Seller hereby appoints Buyer as its attorney-in-fact for purposes of executing any document, or taking any action, necessary or desirable to effect or expedite such transfer. This appointment is irrevocable and coupled with an interest, the adequacy and sufficiency of which is expressly acknowledged by the Buyer and the Seller. (b) If the Termination Date occurs at a time when any Necessary Approvals have not yet been obtained, this License Agreement may, at the option of Buyer, automatically convert into a long-term management agreement containing the terms contained in this License Agreement and such additional terms as may be specified in writing with respect to additional specific management duties to be performed by Seller, and additional specific limitations on Seller's management power. If this License Agreement converts into a long-term management agreement, possession (but not title or ownership) of the Assets of the Business shall remain with -4- Seller under the terms of this License Agreement, as modified by the long-term management agreement. Notwithstanding the foregoing, if Necessary Approvals are not obtained or for other reasons Buyer is unable to operate as a branch office in Taiwan, Buyer may, at its sole discretion, direct Seller to sell, transfer, liquidate or dispose of the Assets, in whole or in part, and any and all additional or other property obtained, received, purchased or otherwise accrued to the Business since the Closing. Any and all of the proceeds and/or consideration received from such disposition shall be the property of the Buyer and shall be promptly remitted to the Buyer, without setoff of any kind or for any reason. 7. Indemnification. Seller shall indemnify and hold harmless Buyer and --------------- its affiliates for any and all claims, expenses or other losses (including attorneys' fees) arising out of any negligent or willful mismanagement of the operation of the Business or any breach of this License Agreement from the date of this License Agreement through and including the Termination Date. This indemnification provision shall survive the Termination Date. 8. Confidentiality. Seller will hold confidential, will not disclose to --------------- any third party and will not use for any purpose other than the License Purpose all confidential or proprietary information regarding the Business which it received prior to the Closing or receives pursuant to this License Agreement. This confidentiality provision shall survive the Termination Date. 9. Amendment. This License Agreement may be amended only by a writing --------- signed by Seller and Buyer. -5- 10. Representations, Warranties and Further Covenants of Seller. ----------------------------------------------------------- This License Agreement incorporates by reference provisions (a), (b), (c), (g), (h), (i), (j), (k), (l), (m), (n), (o), (p) and (r) under Section 2 of the Asset Purchase Agreement, and Seller hereby covenants that such representations and warranties shall remain correct, true and complete with respect to continued operation of the Business hereunder except as may be set forth in a revised Disclosure Schedule delivered via facsimile to Buyer within one (1) day of any exception to such representations and warranties. 11. Miscellaneous. ------------- This License Agreement incorporates by reference provisions (a), (b), (c), (d), (e) (f), (g) (h), (i), (j), (k), (l), and (n) under Section 8 of the Asset Purchase Agreement, and each such provision shall have full force and effect with respect to this License Agreement as if fully set forth herein. [Signature Page Follows] -6- IN WITNESS WHEREOF, this Agreement shall be effective as of the date first above written. NEW SYSTEM LTD. By: /s/ David Duncan, Jr. Name: David Duncan, Jr. Title: Vice President PAPNET FAR EAST LTD. By: /s/ David Chang Name: David Chang Title: President EX-10.39 9 AMENDED AND RESTATED REPERESENTATION AGREEMENT Exhibit 10.39 AMENDED AND RESTATED REPRESENTATION AGREEMENT BETWEEN NEUROMEDICAL SYSTEMS, INC. AND PAPNET (FAR EAST) LTD. Dated as of September 30, 1997 This AMENDED AND RESTATED REPRESENTATION AGREEMENT (the "Third Agreement") is made this 30th day of September 1997, by and between Neuromedical Systems, Inc., a Delaware corporation ("NSI") and Papnet (Far East) Ltd., a Cayman Islands corporation ("PFEL"). WHEREAS, NSI has designed, developed and produces the PAPNET Testing System (referred to herein as, "PAPNET" or "PAPNET Testing"), which is a semi-automated system for the review of conventionally prepared cytological specimen slides (the "Slides"); WHEREAS, PAPNET consists of a scanning system (the "Scanner"), which processes Slides and stores digital images of certain portions of such Slides on a DAT tape or other digital media ("PAPNET Images"), and a proprietary review station (the "Review Station"), which, among other things, permits a NSI-trained cytotechnologist to review the images stored on the DAT tape or other digital media; WHEREAS, NSI markets and sells PAPNET Testing as a service, by which end- user laboratories submit Slides to one of NSI's central facilities for processing on a Scanner, and NSI returns such Slides and related DAT tape or other digital media containing PAPNET Images to such laboratories so that NSI- trained cytotechnologists employed by such laboratories may review the Slides and the related PAPNET Images using a licensed or leased Review Station (collectively referred to herein as, the "PAPNET(R) Service"); WHEREAS, NSI and PFEL are parties to an agreement dated July 13, 1993 providing for, among other things, the representation of NSI in certain markets by PFEL and the provision of the PAPNET Service to PFEL as an end-user laboratory (the "First Agreement"); WHEREAS, NSI and PFEL are parties to an agreement dated May 27, 1994, amending and restating the First Agreement, and providing for, among other things, the representation of NSI in certain markets by PFEL and the provision of the PAPNET Service to PFEL as an end-user laboratory (the "Second Agreement"); WHEREAS, NSI Asia Pacific Ltd., a Cayman Islands corporation and wholly owned subsidiary of NSI ("NSI-APL"), has acquired as of June 1, 1997 all of the issued and outstanding stock of New System International Ltd., a Hong Kong corporation, previously a wholly owned subsidiary of PFEL, and under the terms and conditions of the Royalty Agreement Term Sheet, dated as of June 1, 1997 (the "Royalty Agreement"), executed in connection with such acquisition, NSI and PFEL have agreed to renegotiate the Second Agreement in accordance with the conditions set forth therein; WHEREAS, NSI and PFEL desire that this Third Agreement supersede and replace the Second Agreement in accordance with the Royalty Agreement; -2- NOW, THEREFORE, in consideration of the mutual promises and in consideration of the representations, warranties and covenants herein contained, of which the adequacy and sufficiency of such consideration is expressly acknowledged by NSI and PFEL, the parties hereto agree as follows set forth in this Third Agreement: 1. Representation and Marketing. 1.1 Representation Rights. Upon the terms and subject to the conditions of this Third Agreement, NSI hereby grants to PFEL the following rights during the Term (as defined in Section 9 herein) of this Third Agreement: The non- exclusive right and license to market, sell and distribute the PAPNET Service (the "Representation Rights") in Hong Kong, Taiwan and the People's Republic of China (the "Territory"). 1.2 Intellectual Property. NSI hereby grants PFEL a non-exclusive, revocable right to use, for the limited purpose of PFEL's marketing and sale of the PAPNET Service, the copyrights, trademarks and trade names used by NSI to identify PAPNET or the PAPNET Service in accordance with such written specifications as NSI may from time to time make available to PFEL. PFEL agrees to comply with NSI's prevailing policies regarding use of NSI's copyrights, trademarks and trade names used by NSI's distributors and representatives, as such policies may be amended from time to time. PFEL shall not use NSI's copyrights, trademarks or trade names in a disparaging manner. Except as authorized in this Section 1.2, PFEL shall not otherwise use NSI's copyrights, trademarks or trade names without the prior written approval of NSI. PFEL shall not take any action which is inconsistent with NSI's ownership of its copyrights, trademarks and trade names. NSI agrees to include correct trademark, trade name, copyright, trade secrets and patent notices for the PAPNET System and the PAPNET Service on all materials and equipment where appropriate. PFEL shall not remove, alter, cover, obfuscate or otherwise deface any NSI trademark, trade name, patent, trade secret or copyright notice on the PAPNET System or any part thereof or any promotion or advertising material used in conjunction with or for the PAPNET System or the PAPNET Service. PFEL shall not represent that any product or system sold in conjunction with the PAPNET System or PAPNET Service is a product manufactured or endorsed by NSI. 1.3 Nature of appointment. Nothing contained in this Third Agreement shall (i) prohibit NSI from making, using, licensing, distributing, selling or granting any other rights in and to PAPNET Services in the Territory or (ii) operate to grant PFEL any rights in or to any product or service offered by NSI other than its rights expressly provided by this Third Agreement. 1.4 Field of use restriction. Except as otherwise contemplated by this Third Agreement, PFEL shall not market, distribute, sell or license, or permit any third party to market, distribute, sell or license, the PAPNET Service to any third party located outside of the Territory or for any use other than uses permitted in writing by NSI. PFEL -3- shall not, or shall not permit any third party to, encourage uses of PAPNET other than as permitted by NSI. 1.5 Regulatory approval. PFEL shall not market the PAPNET Service in a particular jurisdiction unless and until all regulatory approvals, licenses and permits required by such jurisdiction or any court of competent jurisdiction, governmental body or regulatory agency (a "Governmental Body"), if any, have been obtained. PFEL, at its sole cost and expense, shall prepare and submit any and all appropriate applications, data and other information required by such jurisdiction or Governmental Body to obtain all regulatory approvals, licenses and permits in such jurisdictions. NSI shall assist PFEL in filing all required documents with, and in obtaining any necessary approvals, permits or licenses from, any applicable Governmental Body. 1.6 Governmental restrictions. In the event that any Governmental Body restricts or prohibits the marketing, distribution, provision or licensing of the PAPNET Service or PAPNET, PFEL's rights hereunder shall be subject to and limited by any such restriction or prohibition without liability to NSI of any type or nature except as expressly provided herein to the contrary. 1.7 Marketing Obligation. PFEL, at its expense, will develop and implement a comprehensive marketing and sales program to promote successfully the PAPNET Service in the Territory. PFEL will develop, on an annual basis, market plans for each major segment of the Territory. These plans will be subject to review by NSI. Each plan will include an outline of PFEL's strategic objectives for the marketing of PAPNET in such Territory, as well as the specific steps PFEL proposes to execute. PFEL may delegate its duties and obligations of this Section 1.7, provided, however, that such delegation may be -------------------- made only upon express written consent obtained in advance from NSI. 2. Consideration. 2.1 Consideration for Representation Rights. In consideration of the Representation Rights granted herein, PFEL shall deliver to NSI at the execution hereof US$800,000 (Eight Hundred Thousand United States Dollars). 3. Representations and Warranties of NSI. NSI hereby represents and warrants to PFEL as follows: 3.1 Organization. NSI is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. NSI has the corporate power to own or lease its properties and assets and to carry on its business as now conducted. -4- 3.2 Authority relative to this Third Agreement. NSI has the right, power and authority to enter into this Third Agreement and to perform all of its obligations hereunder. This Third Agreement has been authorized by all necessary corporate action, has been duly executed and delivered and constitutes the valid and binding obligation of NSI, enforceable in accordance with its terms. 3.3 No Conflicts; No Consents. The execution, delivery and performance of this Third Agreement will not result in a breach in the terms or conditions of, or constitute a default under, or violate, or conflict with, or require, as the case may be: (i) any provision of any law, regulation or ordinance, (ii) the Certificate of Incorporation or Bylaws of NSI, (iii) any agreement, lease, mortgage or other instrument or undertaking, oral or written, to which NSI is a party or by which it or any of its properties or assets is or may be bound or affected, (iv) any judgment, order, writ, injunction or decree of any Governmental Body, or (v) any action of or by, or filing with, any Governmental Body. To the knowledge of NSI, the execution and delivery of this Third Agreement does not and, except for any approvals, permits and licenses required to market the PAPNET Service in the Territory, the performance of this Third Agreement will not, require any action, consent or approval of any person, entity or Governmental Body. 3.4 Litigation. Except as disclosed in its publicly filed documents pursuant to U.S. federal securities laws, there is no pending or, to the knowledge of NSI, threatened, legal, administrative, arbitration or other proceeding or governmental investigation which is likely to have a material adverse effect on NSI or the performance by NSI of this Third Agreement. 4. Representations and Warranties of PFEL. PFEL hereby represents and warrants to NSI as follows: 4.1 Organization. PFEL is a corporation duly organized, validly existing and in good standing under the laws of the Cayman Islands. PFEL has the corporate power to own or lease its properties and assets and to carry on its business as now conducted. 4.2 Authority relative to this Third Agreement. PFEL has the right, power and authority to enter into this Third Agreement and to perform all of its obligations hereunder. This Third Agreement has been authorized by all necessary corporate action, has been duly executed and delivered, and constitutes the valid and binding obligation of PFEL, enforceable in accordance with its terms. 4.3 No Conflicts: No Consents. The execution, delivery and performance of this Third Agreement will not result in a breach in the terms or conditions of, or constitute a default under, or violate, or conflict with, or require, as the case may be: (i) any provision of any law, regulation or ordinance, (ii) the charter and organizational documents of PFEL, (iii) any agreement, lease, mortgage or other instrument or undertaking, oral or written, to which PFEL is a party or by which it or any of its -5- properties or assets is or may be bound or affected, (iv) any judgment, order, writ, injunction or decree of any Governmental Body, or (v) any action of or by, or filing with, any Governmental Body. To the knowledge of PFEL, the execution and delivery of this Third Agreement does not, and except for any foreign approvals, permits and licenses required to market the PAPNET Service in the Territory, the performance of this Third Agreement will not, require any action, consent or approval of any person, entity or Governmental Body. 4.4 Litigation. There is no pending or, to the knowledge of PFEL, threatened, legal, administrative, arbitration or other proceeding or governmental investigation which is likely to have a material adverse effect on PFEL or the performance by PFEL of this Third Agreement. 5. Additional Covenants. 5.1 NSI Assurances. NSI shall cause any and all of its direct and/or indirect subsidiaries, as the case may be, to fully perform their respective duties and obligations under the terms of any assignment, transfer, sublicense and/or delegation, in whole or in part, of this Third Agreement to any such subsidiaries. NSI further covenants, and shall cause its direct and/or indirect subsidiaries to covenant, that PFEL shall receive substantially the same consideration as that which PFEL may receive pursuant to any assignment, transfer, sublicense and/or delegation, in whole or in part, of this Third Agreement, with respect to any other marketing and/or sales rights granted by NSI, or any of its subsidiaries, to any third party for the PAPNET(R) Testing System in any part of the Territory. 5.2 NSI and PFEL Further Assurances. Each of NSI and PFEL covenant that they shall, at any time during the Term of this License, take any further action that is reasonably necessary or desirable to carry out the purposes of this Third Agreement and the transactions contemplated herein and hereby, as may be determined in the reasonable discretion of the requesting party, and the other party will take any and all such further action thereof, including the execution and delivery of any further instruments and documents. 5.3 Business Practice. PFEL shall not solicit or take any action that is designed or intended to have the effect of discouraging any PAPNET(R) Testing System customer, supplier, or other business associate from maintaining its business relationships with NSI or any direct or indirect subsidiary of NSI, as the case may be, after execution hereof. -6- 6. Limitations on Warranties and Liability. 6.1 No warranties. Except as otherwise provided herein, neither NSI nor PFEL makes any representations or warranties with respect to the PAPNET System or the PAPNET Service, express or implied, including, but not limited to, implied warranties of merchantability and fitness for a particular purpose or that the PAPNET System or the PAPNET Service as developed and designed will met any requirements of or will perform error free or in conformance with the needs or requirements of PFEL or any PFEL customer. 6.2 Limitation of liability. Except as provided in Section 8 hereof, PFEL and/or NSI, as the case may be, shall have no liability with respect to their respective obligations under this Third Agreement or otherwise for indirect, special, incidental, consequential, punitive or exemplary damages, whether in contract, in tort or otherwise, including, but not limited to, loss of use, revenue or profit, even if PFEL or NSI, as the case may be, has been advised of the possibility of such damages. In no event shall PFEL's or NSI's liability, as the case may be, for any reason and upon any cause of action arising from or relating to this Third Agreement exceed the aggregate revenues derived by PFEL or NSI, as the case may be, from this Third Agreement, or any sublicense, assignment or delegation hereof, during the twelve month period immediately preceding the date such cause of action was commenced; provided, that nothing herein shall be construed to limit injunctive relief as may be ordered by any court or arbitrator. 7. Ownership and Intellectual Property Protection. 7.1 Ownership of PAPNET System. PFEL acknowledges and agrees that NSI is the sole and exclusive owner of all current and future worldwide patents and patent rights, copyrights, trademarks, trade names, trade secrets, know-how, utility models and other intellectual property rights (including without limitation, all applications and registrations with respect thereto) in and to the PAPNET System or the PAPNET Service (the "Intellectual Property") embodied in the PAPNET System, all information, materials, clinical and test data reports and filings produced in connection with any required regulatory approvals, permits and licenses, and all information, reports, specifications, source code, object code, documentation, diagrams, flow charts and any other tangible or intangible materials of any type whatsoever relating to the PAPNET System and derived or produced by any parties (collectively the "Proprietary Materials"). No provision contained in this Third Agreement shall be construed to transfer to PFEL any title or ownership interest in the Proprietary Materials or any Intellectual Property embodied in the PAPNET System or the PAPNET Service. PFEL hereby irrevocably assigns, transfers and quitclaims to NSI all rights, title and interest PFEL may at any time be deemed to have in and to the PAPNET System and all associated Intellectual Property and Proprietary Material thereof. -7- 7.2 Scope of use. PFEL shall not, and shall not permit any third party to, (a) modify or alter, create or attempt to create, by reverse engineering or otherwise, translate or decompile, translate or transfer, or otherwise attempt to derive the source code, structure or algorithms of, the PAPNET System or any part thereof, (b) use or adapt the PAPNET System or any part thereof in any way, including using or adapting the PAPNET System or any part thereof otherwise than in connection with the marketing or sale of the PAPNET Service, (c) use the PAPNET System or any part thereof to create a derivative work of the PAPNET System, or (d) rent, lease or otherwise provide temporary access to the PAPNET System or any part thereof. Unless otherwise agreed to, in the event that NSI, in its sole discretion, provides any modification, upgrades or enhancements to the PAPNET System, such modifications shall become a part of, and subject to, this Third Agreement. 7.3 Control of Intellectual Property protection. NSI shall at all times retain the sole and exclusive right to pursue, secure, maintain, protect and enforce its Intellectual Property in and to, or arising out of or related to, the PAPNET System or the PAPNET Service. 7.4 PAPNET System name. NSI shall have the right in its sole discretion to select and include any trademark or trade name to identify the PAPNET System. 7.5 Protection of Intellectual Property. PFEL shall use its best efforts, and shall cause Clients to use their best efforts, to protect and maintain the protection of the Intellectual Property in and to the PAPNET System or the PAPNET Service. Upon NSI's request, PFEL shall, at NSI's sole cost and expense, assist NSI in securing, maintaining and enforcing NSI's Intellectual Property in and to the PAPNET System or the PAPNET Service including, but not limited to, undertaking any and all necessary and appropriate actions in accordance with NSI's request. 7.6 Notice of Infringement. PFEL shall promptly notify, and shall require Clients to notify, NSI of any infringement of any Intellectual Property of NSI with respect to the PAPNET System or the PAPNET Service. Upon reasonable notice of infringement, NSI shall have the right, but not the obligation, to bring any suit or action for infringement of its Intellectual Property at its own expense. PFEL shall, if requested by NSI, actively assist in the prosecution of such action. In the event that NSI fails to take action with respect to such infringement within a reasonable time after notice of infringement, PFEL shall have the right to bring any appropriate suit or action against the infringer at PFEL's expense. In the event PFEL brings and prevails in such infringement action, any amount recovered from the infringer, whether by judgment, award, decree or settlement shall firstly be applied to pay for all losses and damages suffered by PFEL together with all reasonable legal costs and expenses incurred in such action, any balance thereafter be divided equally between PFEL and NSI. -8- 8. Indemnification. 8.1 Indemnification. PFEL or NSI, as the case may be (the "Indemnifying Party"), shall, at its sole cost and expense, indemnify and hold NSI or PFEL and their respective directors, officers, employees, agents, representatives and affiliates (each, an "Indemnified Party") harmless with respect to any liabilities, damages, loses, costs and expenses, including reasonable attorney's fees (any or all of the foregoing being hereinafter referred to as a "Loss"), insofar as such Loss arises out of or is based upon (i) a misrepresentation or breach (or alleged misrepresentation or breach) by the Indemnifying Party of its warranties, covenants and agreements contained herein or (ii) a claim that the PAPNET System or the PAPNET Service, as the case may be, as used within the scope of this Third Agreement, infringes or violates any proprietary rights of any third party. 8.2 Notice of claim; defense. No claim for indemnification hereunder shall be valid unless notice of the matter which may give rise to such claim is promptly provided to the Indemnifying Party in writing. The Indemnifying Party shall have the exclusive right to defend against any claim and control such defense. The Indemnified Party shall cooperate with the Indemnifying Party in defending against such claim. In no event shall the Indemnified Party settle any such claim, lawsuit or proceeding without the Indemnifying Party's prior written approval. 8.3 Infringement. If, as a result of any such claim of infringement, PFEL or NSI is permanently enjoined from selling the PAPNET Service or using the PAPNET System, as the case may be, by a final, nonappealable decree, of a court of competent jurisdiction, NSI at its sole option and expense, may procure for PFEL the right to continue to sell the PAPNET Service or use the PAPNET System that is subject to such decree or may replace or modify the PAPNET System or PAPNET Service so that the PAPNET Service or PAPNET System is non-infringing. The foregoing states the entire liability of PFEL or NSI, as the case may be, to the other with respect to infringement of any proprietary rights of any third party, and PFEL and NSI hereby expressly waive any other such liabilities that each may have against the other and its directors, officers, employees, agents, representatives and affiliates. 9. Term. 9.1 Term. The term of this Third Agreement shall commence on the date first set forth above and terminate at the end of the fifteenth (15th) year from such date (the "Term") unless terminated on an earlier date as provided below in this Section 9. 9.2 Termination by NSI. (a) Except as otherwise permitted in writing by NSI, this Third Agreement shall terminate automatically upon the termination of any assignment, transfer, sublicense or delegation hereof; and (b) except as otherwise provided, this Third Agreement may be terminated by NSI without notice to PFEL or further action on the part of NSI, upon the occurrence of any of the following events: (i) -9- a material violation or breach by PFEL of any term or provision of this Third Agreement not attributable to the default of NSI Asia Pacific Ltd. which is not cured within thirty (30) days of notice of such violation; (ii) the liquidation, dissolution, winding up or other termination, suspension, discontinuation or failure of the business of PFEL or its efforts to market the PAPNET Service; (iii) the insolvency of or admission by PFEL of its failure to pay debts as they mature, the making by PFEL of an assignment for the benefit of its creditors or the filing by PFEL of a petition in bankruptcy, the seeking by PFEL of reorganization or arrangement with creditors or PFEL otherwise taking advantage of any insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction whether now or hereafter in effect; (iv) upon PFEL being declared bankrupt or wound up by any court of competent jurisdiction; or (v) if PFEL is enjoined at any time from marketing and distributing the PAPNET(R) Service, or assigning, transferring and/or sublicensing its rights granted hereunder, or delegating its duties and obligations undertaken hereby. 9.3 Termination by PFEL. This Third Agreement may be terminated by PFEL without notice to NSI or further action on the part of PFEL, upon the occurrence of any of the following events: (i) a material violation or breach by NSI of any term or provision of this Third Agreement which is not cured within 30 days of notice of such violation; (ii) the liquidation, dissolution, winding up or other termination, suspension, discontinuation or failure of the business of NSI or its efforts to market the PAPNET Service; (iii) the insolvency of or admission by NSI of its failure to pay debts as they mature, the making by NSI of an assignment for the benefit of its creditors or the filing by NSI of a petition in bankruptcy, the seeking by NSI of reorganization or arrangement with creditors or NSI otherwise taking advantage of any insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction whether now or hereafter in effect; (iv) the filing of any bankruptcy petition against NSI, which petition is not dismissed within sixty (60) days; or (v) NSI being enjoined from licensing its representation, sales and/or distribution rights to the PAPNET Service within the entirety of the Territory. 9.4 Survival. The termination of this Third Agreement (whether pursuant to Section 9.2, 9.3 or upon the expiration of the Term) or any part hereof by either party shall not relieve either party of any obligations accruing prior to such termination. The representations, warranties, covenants and agreements of NSI and PFEL set forth herein shall survive any such termination. 9.5 Cessation. Upon the termination of this Third Agreement or any part hereof (i) PFEL shall destroy any of NSI's marketing literature, packaging or Confidential Information and all copies thereof in its possession and certify in writing that the same have been destroyed and deliver to NSI all information as is necessary and useful for NSI to market the PAPNET Service, (ii) PFEL shall immediately cease representing itself as a Licensee of NSI, and (iii) the parties shall otherwise cooperate in order to effect an orderly termination of this Third Agreement or any part hereof. -10- 10. Arbitration. Except as otherwise provided herein, the parties hereto agree that the sole and exclusive remedy for any dispute between the parties arising out of or relating to this Third Agreement shall be resolved by an arbitration procedure conducted in The City of New York, Borough of Manhattan in accordance with the rules then obtaining of the American Arbitration Association, except that the arbitrators shall have no power to alter or modify any express provision of this Third Agreement, or to render any award which by its terms, effects any such alteration or modification. Judgment upon the award rendered may be entered by any court having jurisdiction in the State of New York. If any action or proceeding is brought to enforce the decision of the arbitrators, the prevailing party shall be entitled to recover its reasonable attorney's fees and other costs incident to such action or proceeding. The provisions of this Section 10 shall not affect the right of any party to seek provisional legal or equitable remedies. 11. Miscellaneous. 11.1 Rules of Construction. As used in this Third Agreement, neutral pronouns and any variations thereof shall be deemed to include the feminine and masculine and all terms used in the singular shall be deemed to include the plural, and vice versa, as the context may require. The words "hereof", "herein" and "hereunder" and other words of similar import refer to this Third Agreement as a whole, including the Annexes hereto, as the same may from time to time be amended or supplemented, and not to any subdivisions contained in this Third Agreement. The world "including" when used herein is not intended to be exclusive and means "including, without limitation". References herein to "dollars", "U.S.$" and "$" are to United States dollars. References herein to Section, subsection or Annex shall refer to the appropriate Section, subsection or Annex in or to this Third Agreement. 11.2 No adverse actions. PFEL agrees to take no action that could materially adversely affect the business, operations or prospects of NSI. 11.3 Independent Contractors. It is expressly agreed that the parties hereto are acting hereunder as independent contractors and not joint venturers, and under no circumstances shall any of the employees of one party be deemed the employees of the other for any purpose. This Third Agreement shall not be construed as authority for either party to act for the other party in any agency or other capacity, or to make commitments of any kind for the account of or on behalf of the other except to the extent and for the purposes expressly provided for and set forth herein. 11.4 Assignment; Sublicense. This Third Agreement is not assignable, sublicensable, transferable or delegable by PFEL, in whole or in part, without the express prior written consent of NSI. Any such permitted assignment, sublicense, transfer or delegation of the rights, duties or obligations under this Third Agreement shall be irrevocable except in the case of express prior written consent of NSI. This Third -11- Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. 11.5 Waiver. No waiver by any party of any breach of any provision hereof shall constitute a waiver of any other breach of that or any other provision hereof. 11.6 Severability. If any provision of this Third Agreement is determined by a court of competent jurisdiction to be invalid or unenforceable, such determination shall not affect the validity or enforceability of any other party or provision of this Third Agreement. 11.7 Choice of law. This Third Agreement and the performance hereunder shall be governed by and construed in accordance with the laws of the State of New York (without giving affect to principles of conflicts of laws). 11.8 Notice. All notices, invoices, consents or other communications required or permitted to be given by either party to the other shall be in writing (including facsimile or similar writing) and shall be given by certified or registered mail, postage prepaid, with a copy by facsimile, as follows: (a) If to NSI: Neuromedical Systems, Inc. Two Executive Boulevard Suffern, New York 10901-4164 Attn: John B. Henneman, III Co-CEO, Vice President of Corporate Development and General Counsel Facsimile: (914) 368-4068 (b) If to PFEL: Papnet (Far East) Ltd. C/O Dr. Stephen K.C. Ng, President Papnet (Far East) Ltd. 2nd Floor, Zephyr House, Mary Street, PO Box 709. George Town, Cayman Islands or at such other address or facsimile number (or other similar number) as any party may from time to time specify to the other party hereto. Any notice, consent or other communication required or permitted to be given hereunder shall be deemed to have been given on the date of mailing, personal delivery or facsimile (provided the appropriate answerback is received) thereof and shall be conclusively presumed to have been received on the second business day following the date of mailing or, in case of personal delivery, -12- the actual day of personal delivery thereof, or, in the case of facsimile delivery, when such facsimile is transmitted, except that a change of address shall not be affective until actually received. 11.9 Entire Agreement. This Third Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all previous agreements, proposals, both oral and written, negotiations, representations, commitments, writings and all other communications between the parties, including, but not limited to, the Royalty Agreement. It may not be released, discharged, changed or modified except by an instrument in writing signed by a duly authorized representative of each of the parties. 11.10 Headings. The headings used in this Third Agreement are for reference purposes only and shall not be construed to limit or further define any term or provisions hereof. 11.11 Counterparts. This Third Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. [Signature Page Follows] -13- IN WITNESS WHEREOF, the parties hereto have executed this Third Agreement by a duly authorized representative as of the date first written above. NEUROMEDICAL SYSTEMS, INC. By: /s/ John B. Henneman, III John B. Henneman, III Co-CEO, Vice-President of Corporate Development, Secretary and General Counsel PAPNET (FAR EAST) LIMITED By: /s/ Stephen K.C. Ng, M.D. Stephen K.C. Ng, M.D. President -14- EX-10.40 10 SUBLICENSE AGREEMENT Exhibit 10.40 SUBLICENSE AGREEMENT BETWEEN NSI ASIA PACIFIC LTD. AND PAPNET (FAR EAST) LTD. Dated as of September 30, 1997 SUBLICENSE AGREEMENT This SUBLICENSE, made this 30th day of September, 1997, (This "Sublicense Agreement") by and between NSI Asia Pacific Ltd., a Cayman Islands corporation ("NSI-APL"), and PAPNET (Far East) Ltd., a Cayman Islands corporation ("PFEL"). WHEREAS, NSI-APL is a wholly owned subsidiary of Neuromedical Systems, Inc., a Delaware corporation ("NSI"); WHEREAS, NSI has designed, developed and produces the PAPNET Testing System ("PAPNET" or "PAPNET Testing"), which is a semi-automated system for the review of conventionally prepared cytological specimen slides ("Slides"); WHEREAS, PAPNET consists of a scanning system (the "Scanner"), which processes Slides and stores digital images of certain portions of such Slides on a DAT tape or other digital media ("PAPNET Images"), and a proprietary review station (the "Review Station"), which, among other things, permits a NSI-trained cytotechnologist to review the images stored on the DAT tape or other digital media; WHEREAS, NSI markets and sells PAPNET Testing as a service, by which end- user laboratories submit Slides to one of NSI's central facilities for processing on a Scanner, and NSI returns such Slides and related DAT tape or other digital media containing PAPNET Images to such laboratories so that NSI- trained cytotechnologists employed by such laboratories may review the Slides and the related PAPNET Images using a licensed or leased Review Station (collectively referred to as the "PAPNET Service"); WHEREAS, NSI and PFEL are parties to an agreement dated July 13, 1993 providing for, among other things, the representation of NSI in certain markets by PFEL and the provision of the PAPNET Service to PFEL as an end-user laboratory (the "First Agreement"); WHEREAS, NSI and PFEL are parties to an agreement dated May 27, 1994, amending and restating the First Agreement, and providing for, among other things, the representation of NSI in certain markets by PFEL and the provision of the PAPNET Service to PFEL as an end-user laboratory (the "Second Agreement"); WHEREAS, NSI-APL has acquired as of June 1, 1997 all of the issued and outstanding stock of New System International Ltd., a Hong Kong corporation, previously a wholly owned subsidiary of PFEL, and under the terms and conditions of the Royalty Agreement Term Sheet, dated as of June 1, 1997 (the "Royalty Agreement"), executed in connection with such acquisition, NSI and PFEL have agreed to renegotiate the Second Agreement in accordance with the terms and conditions set forth therein; -2- WHEREAS, NSI and PFEL have executed as even date herewith an Amended and Restated Representation Agreement (the "Third Agreement") in accordance with the terms and conditions set forth in the Royalty Agreement, which supersedes and replaces the Second Agreement; WHEREAS, subject to the terms and conditions of the Third Agreement, NSI has granted to PFEL a non-exclusive right and license to market, sell and distribute the PAPNET Service (the "Representation Rights") in Hong Kong, Taiwan and the People's Republic of China (the "Territory") for a term of fifteen (15) years; WHEREAS, PFEL now desires to assign and sublicense its Representation Rights for the Territory to NSI-APL, and NSI-APL desires to acquire such Representation Rights for the Territory. NOW, THEREFORE, in consideration of the mutual promises and upon the terms and subject to the conditions set forth herein, the parties agree as follows: 1. Assignment of Representation and Marketing Rights. 1.1 Representation Rights. Upon the terms and subject to the conditions of this Sublicense Agreement, PFEL hereby assigns exclusively to NSI-APL during the Term hereof (as defined in Section 10 herein) any and all of PFEL's Representation Rights with respect to the PAPNET Service in the Territory to the full extent granted by NSI to PFEL pursuant to the Third Agreement. 1.2 Intellectual Property. PFEL hereby assigns to NSI-APL any and all of its non-exclusive intellectual property rights, for the limited purpose of NSI- APL's marketing and sale of the PAPNET(R) Service, the copyrights, trademarks and trade names used by NSI to identify PAPNET(R) or the PAPNET Service in accordance with such written specifications as NSI may from time to time make available to NSI-APL. NSI-APL agrees to comply with NSI's prevailing policies regarding use of NSI's copyrights, trademarks and trade names used by NSI's distributors and representatives, as such policies may be amended from time to time. NSI-APL shall not use NSI's copyrights, trademarks or trade names in a disparaging manner. Except as authorized in this Section 1.2, NSI-APL shall not otherwise use NSI's copyrights, trademarks or trade names without the prior written approval of NSI. NSI-APL shall not take any action which is inconsistent with NSI's ownership of its copyrights, trademarks and trade names. NSI agrees to include correct trademark, trade name, copyright, trade secrets and patent notices for the PAPNET System and the PAPNET Service on all materials and equipment where appropriate. NSI-APL shall not remove, alter, cover, obfuscate or otherwise deface any NSI trademark, trade name, patent, trade secret or copyright notice on the PAPNET System or any part thereof or any promotion or advertising material used in conjunction with or for the PAPNET System or the PAPNET Service. -3- 1.3 Nature of appointment. Nothing contained in this Sublicense Agreement shall (i) prohibit NSI from making, using, licensing, distributing, selling or granting any other rights in and to PAPNET in the Territory, or (ii) operate to grant NSI-APL any rights in or to any product or service offered by NSI or PFEL other than its rights expressly provided by this Sublicense Agreement. 1.4 Field of use restriction. Except as otherwise contemplated by this Sublicense Agreement, NSI-APL shall not market, distribute, sell or license, or permit any third party to market, distribute, sell or license, the PAPNET Service to any third party located outside of the NSI-APL Territory other than as permitted by NSI. NSI-APL shall not, or shall not permit any third party to, encourage uses of PAPNET other than as permitted by NSI. 1.5 Regulatory approval. NSI-APL shall not market the PAPNET Service in a particular jurisdiction unless and until all regulatory approvals, licenses and permits required by such jurisdiction or any court of competent jurisdiction, governmental body or regulatory agency (a "Governmental Body"), if any, have been obtained. NSI-APL, at its sole cost and expense, shall prepare and submit any and all appropriate applications, data and other information required by such jurisdiction or Governmental Body to obtain all regulatory approvals, licenses and permits in such jurisdictions. NSI shall assist NSI-APL in filing all required documents with, and in obtaining any necessary approvals, permits or licenses from, any applicable Governmental Body. 1.6 Governmental restrictions. In the event that any Governmental Body restricts or prohibits the marketing, distribution, provision or licensing of the PAPNET Service or PAPNET, NSI-APL's rights hereunder shall be subject to and limited by any such restriction or prohibition without liability to NSI or PFEL of any type or nature except as expressly provided herein to the contrary. 1.7 Marketing. NSI-APL hereby expressly assumes PFEL's marketing obligations under the Third Agreement, and, at its expense will develop and implement a comprehensive marketing and sales program to promote successfully the PAPNET Service in the Territory. NSI-APL will develop, on an annual basis, market plans for each major segment of the Territory. These plans will be subject to review by NSI. Each plan will include an outline of NSI-APL's strategic objectives for the marketing of PAPNET in such Territory, as well as the specific steps NSI-APL proposes to execute. 2. Consideration. 2.1 Royalties for Sales in the Territory. In consideration of the Representation Rights assigned hereunder, NSI-APL will pay PFEL a royalty expressed as a specified percentage of NSI-APL's consolidated revenues derived from PAPNET(R) Testing System Slides which originate in the Territory (the "Base Consolidated Revenue"), provided, however, that the Base Consolidated Revenue ------------------ shall not include revenues derived from the processing of Slides within the Territory with respect to Slides which originate from -4- geographic areas outside the Territory (for example, Slides originating in Australia and processed in the NSI Hong Kong scanning facility shall not be included in the calculation of Base Consolidated Revenue). The "specified percentage" referred to in the first sentence of this Section 2.1 will be 4% of Base Consolidated Revenue per year during the first four years until the fourth anniversary of the date hereof, and 3% of Base Consolidated Revenue per year for each of the following eleven (11) years after the fourth anniversary of the date hereof (collectively, the "Royalties"), in each case as set forth on the attached Annex A. Notwithstanding the foregoing provisions of this Section 2.1, any Royalties payable from the consolidated revenues from the Territory, shall include revenues originating in Taiwan only from and after the closing of the purchase of substantially all of the assets of New System Taiwan Ltd. by NSI- APL (or a duly delegated affiliate). 2.2 Timing and manner of payment of Royalties. Royalties will be paid by NSI-APL to PFEL within fifteen (15) days of the last day of the calendar quarter in which the applicable revenues are actually received by NSI-APL. Such payment of Royalties shall be accompanied by a statement setting forth the calculation thereof. Any other provision of this Sublicense Agreement notwithstanding, PFEL shall not be entitled to receive any Royalties with respect to which NSI-APL has not actually received payment of the related revenues. 2.3 Right to verify the calculation of Royalties. NSI-APL will maintain records and bank statements for the purpose of calculating Base Consolidated Revenues received by NSI-APL from clients in the Territory. PFEL will have the right to inspect such records and NSI-APL will provide upon request such other information as may be reasonably requested by PFEL to confirm the calculation of the Royalties paid by NSI-APL to PFEL pursuant to this Sublicense Agreement. 3. Representations and Warranties of NSI-APL. NSI-APL hereby represents and warrants to PFEL as follows: 3.1 Organization. NSI-APL is a corporation duly organized, validly existing and in good standing under the laws of Cayman Islands. NSI-APL has the corporate power to own or lease its properties and assets and to carry on its business as now conducted. 3.2 Authority relative to this Sublicense Agreement. NSI-APL has the right, power and authority to enter into this Sublicense Agreement and to perform all of its obligations hereunder. This Sublicense Agreement has been authorized by all necessary corporate action, has been duly executed and delivered, and constitutes the valid and binding obligation of NSI-APL, enforceable in accordance with its terms. 3.3 No Conflicts; No Consents. The execution, delivery and performance of this Sublicense Agreement will not result in a breach in the terms or conditions of, or -5- constitute a default under, or violate, or conflict with, or require, as the case may be: (i) any provision of any law, regulation or ordinance, (ii) the charter and organizational documents of NSI-APL, (iii) any agreement, lease, mortgage or other instrument or undertaking, oral or written, to which NSI-APL is a party or by which it or any of its properties or assets is or may be bound or affected, (iv) any judgment, order, writ, injunction or decree of any Governmental Body, or (v) any action of or by, or filing with, any Governmental Body. To the knowledge of NSI-APL, the execution and delivery of this Sublicense Agreement does not and, except for any approvals, permits and licenses required to market the PAPNET Service in the Territory, the performance of this Sublicense Agreement will not, require any action, consent or approval of any person, entity or Governmental Body. 3.4 Litigation. There is no pending or, to the knowledge of NSI-APL, threatened, legal, administrative, arbitration or other proceeding or governmental investigation which is likely to have a material adverse effect on NSI or the performance by NSI-APL of this Sublicense Agreement. 4. Representations and Warranties of PFEL. PFEL hereby represents and warrants to NSI-APL as follows: 4.1 Organization. PFEL is a corporation duly organized, validly existing and in good standing under the laws of the Cayman Islands. PFEL has the corporate power to own or lease its properties and assets and to carry on its business as now conducted. 4.2 Authority relative to this Sublicense Agreement. PFEL has the right, power and authority to enter into this Sublicense Agreement and to perform all of its obligations hereunder. This Sublicense Agreement has been authorized by all necessary corporate action, has been duly executed and delivered, and constitutes the valid and binding obligation of PFEL, enforceable in accordance with its terms. 4.3 No Conflicts: No Consents. The execution, delivery and performance of this Sublicense Agreement will not result in a breach in the terms or conditions of, or constitute a default under, or violate, or conflict with, or require, as the case may be: (i) any provision of any law, regulation or ordinance, (ii) the Certificate of Incorporation or Bylaws of PFEL, (iii) any agreement, lease, mortgage or other instrument or undertaking, oral or written, to which PFEL is a party or by which it or any of its properties or assets is or may be bound or affected, (iv) any judgment, order, writ, injunction or decree of any Governmental Body, or (v) any action of or by, or filing with, any Governmental Body. To the knowledge of PFEL, the execution and delivery of this Sublicense Agreement does not, and except for any foreign approvals, permits and licenses required to market the PAPNET Service in the PFEL Territory, the performance of this Sublicense Agreement will not, require any action, consent or approval of any person, entity or Governmental Body. -6- 4.4 Litigation. There is no pending or, to the knowledge of PFEL, threatened, legal, administrative, arbitration or other proceeding or governmental investigation which is likely to have a material adverse effect on PFEL or the performance by PFEL of this Sublicense Agreement. 5. Additional Covenants. 5.1 Further Assurances. Each of NSI, PFEL and NSI-APL covenant that they shall, at any time during the Term of this Sublicense Agreement, take any further action that is reasonably necessary or desirable to carry out the purposes of this Sublicense Agreement and the transactions contemplated hereby, as may be determined in the reasonable discretion of the requesting party, and the other party, or parties as the case may be, will take any and all such further action thereof, including the execution and delivery of any further instruments and documents. NSI shall cause NSI-APL to fully perform its respective duties and obligations under the terms of this Sublicense Agreement and/or any delegation to NSI-APL of the duties required by NSI under the Third Agreement. NSI further covenants, and shall cause NSI-APL and their respective direct and/or indirect subsidiaries to covenant, that PFEL shall receive substantially the same consideration as it would otherwise receive under this Sublicense for use of the PAPNET(R) Testing System in any part of the Territory in the event that NSI or any of its subsidiaries assigns, transfers or sublicenses any other NSI marketing and/or sales rights to any third party for use of the PAPNET(R) Testing System in any part of the Territory. 5.2 Business Practice. PFEL shall not solicit or take any action that is designed or intended to have the effect of discouraging any PAPNET(R) Testing System customer, supplier, or other business associate from maintaining the same business relationships after execution hereof as PFEL maintained prior to such date. 5.3 Exclusivity. Except for the rights granted exclusively to NSI-APL under this Sublicense Agreement and except as expressly permitted in writing by NSI-APL, PFEL will not assign, transfer, license or sublicense, or convey in any manner, to any person or entity, any other rights under the Third Agreement. 6. Limitations on Warranties and Limitation of Liability. 6.1 No warranties. Except as otherwise provided herein, PFEL makes no representations or warranties with respect to the PAPNET System or the PAPNET Service, express or implied, including, but not limited to, implied warranties of merchantability and fitness for a particular purpose or that the PAPNET System or the PAPNET Service as developed and designed will met any requirements of or will perform error free or in conformance with the needs or requirements of NSI-APL or any NSI-APL customer. -7- 6.2 Limitation of liability. Except as provided in Section 8 herein, PFEL and NSI-APL, as the case may be, shall have no liability with respect to their respective obligations under this Sublicense Agreement or otherwise for indirect, special, incidental, consequential, punitive or exemplary damages, whether in contract, in tort or otherwise, including, but not limited to, loss of use, revenue or profit, even if PFEL or NSI-APL, as the case may be, has been advised of the possibility of such damages, provided, however, that NSI-APL agrees to indemnify and hold PFEL free and harmless from and against any liabilities, damages, losses, costs and expenses, including reasonable attorney's fees incurred by PFEL due to the negligence of NSI-APL in handling and scanning of Pap smear slides. In no event shall PFEL's or NSI-APL's liability, as the case may be, for any reason and upon any cause of action arising from or relating to this Sublicense Agreement exceed the gross revenues derived by PFEL or NSI-APL, as the case may be, from this Sublicense Agreement for the twelve (12) month period immediately preceding the date such cause of action was commenced; provided, that nothing herein shall be construed to limit injunctive relief as may be ordered by any court or arbitrator. 7. Ownership and Intellectual Property Protection. 7.1 Ownership of PAPNET System. NSI-APL acknowledges and agrees that NSI is the sole and exclusive owner of all current and future worldwide patents and patent rights, copyrights, trademarks, trade names, trade secrets, know-how, utility models and other intellectual property rights (including without limitation, all applications and registrations with respect thereto) in and to the PAPNET System or the PAPNET Service (the "Intellectual Property") embodied in the PAPNET System, all information, materials, clinical and test data reports and filings produced in connection with any required regulatory approvals, permits and licenses, and all information, reports, specifications, source code, object code, documentation, diagrams, flow charts and any other tangible or intangible materials of any type whatsoever relating to the PAPNET System and derived or produced by any parties (collectively the "Proprietary Materials"). No provision contained in this Sublicense Agreement shall be construed to transfer to NSI-APL any title or ownership interest in the Proprietary Materials or any Intellectual Property embodied in the PAPNET System or the PAPNET Service. NSI-APL hereby irrevocably assigns, transfers and quitclaims to NSI all rights, title and interest NSI-APL may at any time be deemed to have in and to the PAPNET System and all associated Intellectual Property and Proprietary Material thereof. 7.2 Scope of use. NSI-APL shall not, and shall not permit any third party to, (a) modify or alter, create or attempt to create, by reverse engineering or otherwise, translate or decompile, translate or transfer, or otherwise attempt to derive the source code, structure or algorithms of, the PAPNET System or any part thereof, (b) use or adapt the PAPNET System or any part thereof in any way, including using or adapting the PAPNET System or any part thereof otherwise than in connection with the marketing or sale of the PAPNET Service, (c) use the PAPNET System or any part thereof to create a derivative work of the PAPNET System, or (d) rent, lease or otherwise provide temporary access to the PAPNET System or any part thereof. Unless -8- otherwise agreed to, in the event that NSI, in its sole discretion, provides any modification, upgrades or enhancements to the PAPNET System, such modifications shall become a part of, and subject to, this Sublicense Agreement. 7.3 Control of Intellectual Property protection. NSI shall at all times retain the sole and exclusive right to pursue, secure, maintain, protect and enforce its Intellectual Property in and to, or arising out of or related to, the PAPNET System. 7.4 PAPNET System name. NSI shall have the right in its sole discretion to select and include any trademark or trade name to identify the PAPNET System. 7.5 Protection of Intellectual Property. NSI-APL shall use its best efforts, and shall cause clients to use their best efforts, to protect and maintain the protection of the Intellectual Property in and to the PAPNET System or the PAPNET Service. Upon NSI's request, NSI-APL shall, at NSI's sole cost and expense, assist NSI-APL in securing, maintaining and enforcing NSI's Intellectual Property in and to the PAPNET System or the PAPNET Service including, but not limited to, undertaking any and all necessary and appropriate actions in accordance with NSI's request. 7.6 Notice of infringement. NSI-APL shall promptly notify, and shall require clients to notify, NSI of any infringement of any Intellectual Property of NSI with respect to the PAPNET System or the PAPNET Service. Upon reasonable notice of infringement, NSI shall have the right, but not the obligation, to bring any suit or action for infringement of its Intellectual Property at its own expense. NSI-APL shall, if requested by NSI, actively assist in the prosecution of such action. In the event that NSI fails to take action with respect to such infringement within a reasonable time after notice of infringement, NSI-APL shall have the right to bring any appropriate suit or action against the infringer at NSI-APL expense. In the event NSI-APL brings and prevails in such infringement action, any amount recovered from the infringer, whether by judgment, award, decree or settlement shall firstly be applied to pay for all losses and damages suffered by NSI-APL together with all reasonable legal costs and expenses incurred in such action, any balance thereafter be divided equally between NSI-APL and NSI. 8. Indemnification. 8.1 Indemnification. NSI-APL or PFEL, as the case may be (the "Indemnifying Party"), shall, at its sole cost and expense, indemnify and hold NSI-APL or PFEL and their respective directors, officers, employees, agents, representatives and affiliates (each, an "Indemnified Party") harmless with respect to any liabilities, damages, loses, costs and expenses, including reasonable attorney's fees (any or all of the foregoing being hereinafter referred to as a "Loss"), insofar as such Loss arises out of or is based upon: (i) a misrepresentation or breach (or alleged misrepresentation or breach) by the Indemnifying Party of its warranties, covenants and agreements contained herein, or (ii) a claim that the PAPNET System or the PAPNET Service, as the case may be, as used -9- within the scope of this Sublicense Agreement, infringes or violates any proprietary rights of any third party. 8.2 Notice of claim; defense. No claim for indemnification hereunder shall be valid unless notice of the matter which may give rise to such claim is promptly provided to the Indemnifying Party in writing. The Indemnifying Party shall have the exclusive right to defend against any claim and control such defense. The Indemnified Party shall cooperate with the Indemnifying Party in defending against such claim. In no event shall the Indemnified Party settle any such claim, lawsuit or proceeding without the Indemnifying Party's prior written approval. 8.3 Infringement. If, as a result of any such claim of infringement, PFEL or NSI-APL is permanently enjoined from selling the PAPNET Service or using the PAPNET(R) System, as the case may be, by a final, nonappealable decree, of a court of competent jurisdiction, (i) NSI-APL at its sole option and expense, may procure from NSI the right to continue to sell the PAPNET Service or use the PAPNET System that is subject to such decree or may replace or modify the PAPNET System or PAPNET Service so that the PAPNET Service or PAPNET System is non- infringing, (ii) NSI-APL may terminate this Sublicense Agreement with respect to the PAPNET Service or PAPNET(R) System, as the case may be, that is subject to such decree, or (iii) if PFEL is enjoined from marketing and distributing the PAPNET Service, NSI-APL may terminate this Sublicense Agreement in accordance with Section 10 hereof. The foregoing states the entire liability of PFEL or NSI-APL, as the case may be, to the other with respect to infringement of any proprietary rights of any third party, and PFEL and NSI-APL hereby expressly waive any other such liabilities that each may have against the other and its directors, officers, employees, agents, representatives and affiliates. 9. Confidentiality. 9.1 Confidentiality. During the term of this Sublicense Agreement and thereafter, each of NSI-APL and PFEL shall keep strictly confidential all proprietary information, sales statistics, customer lists, customer account information, this Sublicense Agreement and its terms and other confidential information concerning the business of the other party, however obtained, and shall not reveal or disclose the same to any person or entity without the prior written consent of the other party; provided, however, that either party may -------- ------- disclose such information pursuant to a subpoena, order, statute, rule or other legal requirement promulgated or imposed by a court or by a judicial, regulatory or legislative body or agency in which such party is involved; and provided, -------- further, that either party may disclose the terms of this Sublicense Agreement - ------- to the extent its counsel determines in good faith that such disclosure is necessary to comply with applicable securities laws. In the event that either party discloses such confidential information in accordance with the previous sentence, such party shall immediately notify the other party. -10- 10. Term. 10.1 Term. The term of this Sublicense Agreement shall commence on the date first set forth above and terminate at the end of the fifteenth (15th) year from the date of execution hereof (the "Term") unless terminated on an earlier date as provided below in this Section 10. 10.2 Termination Fee. In the event of cessation of business related to the Representation Rights by NSI-APL or its affiliates in the entirety of the Territory prior to the end of the Term, a termination fee shall be due and payable to PFEL by NSI-APL in an amount equal to US$800,000 (the "Termination Fee"), provided, however, that payment of the Termination Fee shall be --------- ------- subordinate to all other creditors of NSI-APL, including, but limited to, any interest due with regard to any indebtedness thereto, and further provided that ------- -------- the Termination Fee shall diminish in amount equal to the aggregate amount of Royalties received by PFEL (for example, if the business of NSI-APL terminated at the end of year one, and as of such date PFEL had received an aggregate of US$200,000 in royalties from NSI-APL, the Termination Fee would be reduced by US$200,000). 10.3 Purchase Option. During the period commencing four years after execution of this Sublicense Agreement, and ending eight years after such execution, as set forth on the attached Annex A, PFEL may, at its option, require NSI-APL to purchase the entirety of PFEL's interest as a party to the Third Agreement (including any and all rights obtained by assignment or sublicense thereof) for an aggregate price equal to five times the trailing year's Royalty (the "Purchase Option" and the price paid pursuant thereto, the "Purchase Price"). The Purchase Price may be payable at the option of NSI-APL in either cash or in NSI common stock, par value $.0001 per share ("Common Stock"). For purposes of this provision, "trailing year" shall mean the most recent twelve (12) month period measured at the end of the most recently completed calendar quarter (for example, if PFEL exercises the Purchase Option at the end of the second (2nd)calendar quarter during year six of this Sublicense Agreement, the Purchase Price would be five (5) times the amount of Royalties recorded as paid or payable during the twelve (12) month period immediately preceding the end of the second (2nd) calendar quarter of year six (6)). If the Purchase Price is paid in NSI Common Stock, (i) the value of the NSI Common Stock will be determined based on the average closing price of the Common Stock on the most recent thirty (30) calendar days immediately prior to the exercise date of such Purchase Option; (ii) PFEL shall execute a Subscription Agreement substantially in the form set forth in the attached Annex B and (iii) PFEL shall execute a Registration Rights agreement substantially in the form set forth in the attached Annex C and NSI shall provide registration rights with respect to such NSI Common Stock in accordance with the terms thereunder. The Termination Fee shall not be due or payable if the Purchase Option is exercised by PFEL. Exercise and consummation of the Purchase Option shall terminate this Sublicense Agreement. For purposes of clarity, this Purchase Option may only be exercised by PFEL and not by NSI or NSI-APL. -11- 10.4 Termination. (a) This Sublicense Agreement shall be terminated prior to the end of the Term upon performance by NSI-APL of its duties and obligations in accordance with the terms of paragraphs 10.2 or 10.3. (b) Except as otherwise provided in this Sublicense Agreement, this Sublicense Agreement may be terminated by NSI-APL without notice to PFEL or further action on the part of NSI-APL, upon the occurrence of any of the following events: (i) the liquidation, dissolution, winding up or other termination, suspension, discontinuation or failure of the business of PFEL; (ii) the insolvency of or admission by PFEL of its failure to pay debts as they mature, the making by PFEL of an assignment for the benefit of its creditors or the filing by PFEL of a petition in bankruptcy, the seeking by PFEL of reorganization or arrangement with creditors or PFEL otherwise taking advantage of any insolvency, readjustment of debt, dissolution or liquidation law, or any similar law, of any jurisdiction whether now or hereafter in effect; (iii) upon PFEL being declared bankrupt or wound up by any court of competent jurisdiction; (iv) if PFEL is enjoined at any time from marketing and distributing the PAPNET(R) Service, or assigning and/or sublicensing its rights under the Third Agreement or delegating its duties and obligations undertaken thereby; (v) any assignment, sublicense, delegation, or any other transfer, in whole or in part, of the Third Agreement by PFEL without the express prior written consent of NSI; or (vi) upon termination of the Third Agreement by reason of the default of PFEL. (c) Except as otherwise provided in this Sublicense Agreement, this Sublicense Agreement may be terminated by PFEL without notice to NSI-APL OR further action on the part of PFEL, upon the occurrence of any of the following events (each, an "NSI-APL Termination Event"): (i) The liquidation, dissolution, winding up or other termination, suspension, discontinuation or failure of the business of NSI-APL or its efforts to market the PAPNET Service; (ii) the insolvency of or admission by NSI-APL of its failure to pay debts as they mature, the making by NSI-APL of an assignment for the benefit of its creditors or the filing by NSI-APL of a petition in bankruptcy, the seeking by NSI-APL of reorganization or arrangement with creditors or NSI-APL otherwise taking advantage of any insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction whether now or hereafter in effect; or (iii) the filing of any bankruptcy petition against NSI-APL, which petition is not dismissed within sixty (60) days. Termination of this sublicense agreement due to an nsi- apl termination event shall not absolve or excuse performance of NSI-APL'S duties and obligations in accordance with SECTIONS 10.2 OR 10.3. (D) Except as otherwise provided herein, the termination of this Sublicense AGREEMENT (whether pursuant to Section 10.4 or upon the expiration of the Term) or any part hereof by either party shall not relieve either party of any obligations accruing prior to such termination. The representations, warranties, covenants and agreements of NSI and PFEL set forth herein shall survive any such termination. -12- 11. Arbitration. 11.1 Arbitration. Except as otherwise provided herein, the parties hereto agree that the sole and exclusive remedy for any dispute between the parties arising out of or relating to this Sublicense Agreement shall be resolved by an arbitration procedure conducted in The City of New York, Borough of Manhattan in accordance with the rules then obtaining of the American Arbitration Association, except that the arbitrators shall have no power to alter or modify any express provision of this Sublicense Agreement, or to render any award which by its terms, effects any such alteration or modification. Judgment upon the award rendered may be entered by any court having jurisdiction in the State of New York. If any action or proceeding is brought to enforce the decision of the arbitrators, the prevailing party shall be entitled to recover its reasonable attorney's fees and other costs incident to such action or proceeding. The provisions of this Section 11 shall not affect the right of any party to seek provisional legal or equitable remedies. 12. Miscellaneous. 12.1 Rules of Construction. As used in this Sublicense Agreement, neutral pronouns and any variations thereof shall be deemed to include the feminine and masculine and all terms used in the singular shall be deemed to include the plural, and vice versa, as the context may require. The words "hereof", "herein" and "hereunder" and other words of similar import refer to this Sublicense Agreement as a whole, including the Annexes hereto, as the same may from time to time be amended or supplemented, and not to any subdivisions contained in this Sublicense Agreement. The world "including" when used herein is not intended to be exclusive and means "including, without limitation". References herein to "dollars", "U.S.$" and "$" are to United States dollars. References herein to Section, subsection or Annex shall refer to the appropriate Section, subsection or Annex in or to this Sublicense Agreement. 12.2 No adverse actions. PFEL agrees to take no action that could materially adversely affect the business, operations or prospects of NSI-APL. 12.3 Independent Contractors. It is expressly agreed that the parties hereto are acting hereunder as independent contractors and not joint venturers, and under no circumstances shall any of the employees of one (1) party be deemed the employees of the other for any purpose. This Sublicense Agreement shall not be construed as authority for either party to act for the other party in any agency or other capacity, or to make commitments of any kind for the account of or on behalf of the other except to the extent and for the purposes expressly provided for and set forth herein. 12.4 Assignment; Sublicense. The rights, duties and obligations of NSI- APL under the terms and conditions of this Sublicense Agreement, are not further assignable, sublicensable, transferable or delegable by NSI-APL without the prior written consent of NSI and PFEL. The rights, duties and obligations of PFEL under the terms and conditions of this Sublicense Agreement are not assignable, sublicensable, transferable or -13- delegable without the prior written consent of NSI and NSI-APL. This Sublicense Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. 12.5 Waiver. No waiver by any party of any breach of any provision hereof shall constitute a waiver of any other breach of that or any other provision hereof. 12.6 Severability. If any provision of this Sublicense Agreement is determined by a court of competent jurisdiction to be invalid or unenforceable, such determination shall not affect the validity or enforceability of any other party or provision of this Sublicense Agreement. 12.7 Choice of law. This Sublicense Agreement and the performance hereunder shall be governed by and construed in accordance with the laws of the State of New York (without giving affect to principles of conflicts of laws). 12.8 Notice. All notices, invoices, consents or other communications required or permitted to be given by either party to the other shall be in writing (including facsimile or similar writing) and shall be given by certified or registered mail, postage prepaid, with a copy by facsimile, as follows: (a) If to NSI: Neuromedical Systems, Inc. Two Executive Boulevard Suffern, New York 10901-4164 John B. Henneman, III Co-CEO, Vice President of Corporate Development and General Counsel Facsimile: (914) 368-4068 -14- (a) If to NSI-APL: Neuromedical Systems, Inc. Two Executive Boulevard Suffern, New York 10901-4164 John B. Henneman, III Co-CEO, Vice President of Corporate Development and General Counsel Facsimile: (914) 368-4068 (b) If to PFEL: Papnet (Far East) Ltd. C/O Dr. Stephen K.C. Ng, President Papnet (Far East) Ltd. 2nd Floor, Zephyr House, Mary Street, PO Box 709. George Town, Cayman Islands or at such other address or facsimile number (or other similar number) as any party may from time to time specify to the other party hereto. Any notice, consent or other communication required or permitted to be given hereunder shall be deemed to have been given on the date of mailing, personal delivery or facsimile (provided the appropriate answerback is received) thereof and shall be conclusively presumed to have been received on the second business day following the date of mailing or, in case of personal delivery, the actual day of personal delivery thereof, or, in the case of facsimile delivery, when such facsimile is transmitted, except that a change of address shall not be affective until actually received. 12.9 Entire Agreement. This Sublicense Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all previous proposals, both oral and written, negotiations, representations, commitments, writings and all other communications between the parties, including, but not limited to, the Royalty Agreement. It may not be released, discharged, changed or modified except by an instrument in writing signed by a duly authorized representative of each of the parties. 12.10 Headings. The headings used in this Sublicense Agreement are for reference purposes only and shall not be construed to limit or further define any term or provisions hereof. 12.11 Counterparts. This Sublicense Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. [Signature Page Follows] -15- IN WITNESS WHEREOF, the parties hereto have executed this Sublicense Agreement by a duly authorized representative as of the date first written above. NSI ASIA PACIFIC LTD. By: /s/ John B. Henneman, III John B. Henneman, III Vice President PAPNET FAR EAST LIMITED By: /s/ Stephen K.C. Ng, M.D. Stephen K.C. Ng, M.D. President -16- Annex A
Contract Purchase Year Effective Date Royalty Option Periods Year 1 September 30, 1997-September 29, 1998 4% of Base Consolidated Revenue Year 2 September 30, 1998-September 29, 1999 4% of Base Consolidated Revenue Year 3 September 30, 1999-September 29, 2000 4% of Base Consolidated Revenue Year 4 September 30, 2000-September 29, 2001 4% of Base Consolidated Revenue Year 5 September 30, 2001-September 29, 2002 3% of Base Consolidated Purchase Option Period Revenue Year 6 September 30, 2002-September 29, 2003 3% of Base Consolidated Purchase Option Period Revenue Year 7 September 30, 2003-September 29, 2004 3% of Base Consolidated Purchase Option Period Revenue Year 8 September 30, 2004-September 29, 2005 3% of Base Consolidated Purchase Option Period Revenue Year 9 September 30, 2005-September 29, 2006 3% of Base Consolidated Revenue Year 10 September 30, 2006-September 29, 2007 3% of Base Consolidated Revenue Year 11 September 30, 2007-September 29, 2008 3% of Base Consolidated Revenue Year 12 September 30, 2008-September 29, 2009 3% of Base Consolidated Revenue Year 13 September 30, 2009-September 29, 2010 3% of Base Consolidated Revenue Year 14 September 30, 2010-September 29, 2011 3% of Base Consolidated Revenue Year 15 September 30, 2011-September 29, 2012 3% of Base Consolidated Revenue
-17- CONSENT WHEREAS, Neuromedical Systems, Inc., a Delaware corporation ("NSI") and PAPNET (Far East) Ltd., a Cayman Islands corporation ("PFEL") have executed as of even date herewith an Amended and Restated Representation Agreement (the "Third Agreement") granting to PFEL a non-exclusive right and license to market, sell and distribute certain PAPNET Services (the "Representation Rights") in Hong Kong, Taiwan and the People's Republic of China (the "Territory") for a term of fifteen (15) years; WHEREAS, PFEL now desires to assign and sublicense its Representation Rights for the Territory to NSI Asia Pacific Ltd., a Cayman Islands corporation ("NSI-APL"), and NSI-APL desires to acquire such Representation Rights for the Territory. WHEREAS, the Third Agreement is not assignable, sublicensable, transferable or delegable by PFEL, in whole or in part, without the express prior written consent of NSI. NOW, THEREFORE, NSI hereby acknowledges and consents to the assignment and sublicense of the Third Agreement upon the terms and conditions of the Sublicense Agreement between NSI-APL and PFEL, dated as of even date herewith, in the form attached hereto. NEUROMEDICAL SYSTEMS, INC. By: /s/ John B. Henneman, III September 30, 1997 John B. Henneman, III Date Co-CEO, Vice-President, Secretary and General Counsel -18- EX-10.41 11 EMPLOYMENT AGREEMENT Exhibit 10.41 ------------- EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT, effective as of the 4th day of November, 1997, by and between NEUROMEDICAL SYSTEMS, INC., a Delaware corporation with principal executive offices at Two Executive Boulevard, Suffern, New York 10901-4114 ("NSI"), and PAUL SOHMER residing at ____________________________________ ___________ (the "Employee"). W I T N E S S E T H : WHEREAS, NSI is desirous of employing the Employee as President and Chief Executive Officer of NSI, and the Employee is desirous to serve NSI in such capacity, all upon the terms and subject to the conditions hereinafter provided. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto, intending to be legally bound, agree as follows: 1. Employment. ---------- NSI agrees to employ the Employee, and the Employee agrees to be employed by NSI, upon the terms and subject to the conditions of this Agreement. 2. Term. ---- The employment of the Employee by NSI as provided in Section 1 will be for the period commencing on the date hereof (the "Commencement Date") and ending on the third anniversary of the Commencement Date (the "Term"); provided, however, on the third anniversary of the Commencement Date and on each anniversary thereafter, the Term shall be automatically extended for an additional period of one (1) year, unless either party gives written notice to the other at least ninety (90) days prior thereto that the Term of this Agreement shall not be so extended, provided, further, however, that the Term may be earlier terminated as hereinafter provided. 3. Duties; Best Efforts; Indemnification. ------------------------------------- The Employee shall serve as the President and Chief Executive Officer of NSI and shall perform and discharge well and faithfully the duties which may from time to time be prescribed by the Board of Directors of NSI ( the "Board"). During the Term, NSI shall nominate the Employee for election to, and use its best efforts to cause the Employee to be elected to the Board. The Employee shall devote all of his business time, attention and energies to the business and affairs of NSI, shall use his best efforts to advance the best interests of NSI and shall not during the Term be actively engaged in any other business activity, whether or not such business activity is pursued for gain, profit or other pecuniary advantage. Subject to the provisions of NSI's Certificate of Incorporation and Bylaws, each as amended from time to time, NSI shall indemnify the Employee to the fullest extent permitted by the General Corporation Law of the State of Delaware, as amended from time to time, for all amounts (including without limitation, judgments, fines, settlement payments, expenses and attorney's fees) incurred or paid by the Employee in connection with any action, suit, investigation or proceeding arising out of or relating to the performance by the Employee of services for, or the acting by the Employee as an officer or employee of, NSI, or any other person or enterprise at NSI's request; provided, however, that NSI shall not be required to indemnify the Employee against any liability resulting from conduct which is willful, intentional or grossly negligent. NSI shall use its best efforts to obtain and maintain in full force and effect during the Term directors' and officers' liability insurance policies providing full and adequate protection to the Employee for his capacities, provided that the Board shall have no obligation to purchase such insurance if, in its opinion, coverage is available only on unreasonable terms. 4. Compensation and Benefits. ------------------------- (a) Base Salary. NSI shall pay to the Employee a base salary (the "Base ----------- Salary") at a rate of not less than $350,000 per annum, payable in accordance with NSI's ordinary payroll practices as in effect from time to time during the Term. The Board at least annually will review the Base Salary and other compensation during the Term with a view to the increase thereof based upon the Employee's performance, the performance of NSI, inflation, then prevailing industry salary scales and other relevant factors. Base Salary will not include any bonus paid to the Employee from time to time. (b) Bonus. In respect of each fiscal year beginning during the Term, the ----- Employee shall have the opportunity to earn a bonus of up to 50% of his annual Base Salary (the "Bonus") upon the attainment of financial or other performance goals mutually agreed to by the Employee and the Board not later than 90 days after the commencement of the applicable fiscal year; provided, however, that for the 1998 fiscal year, the Employee shall be entitled to receive a Bonus of $175,000 without regard to performance; provided, further, however, that any bonus payable in respect of a fiscal year that ends after the Term shall be prorated based on the portion of the fiscal year that has elapsed during the Term. Any bonus payable hereunder shall be paid in accordance with NSI's practice with respect to the payment of bonuses to its other senior executives. (c) Stock Options. As of the Commencement Date, NSI shall grant the ------------- Employee stock options to acquire (i) an aggregate of 750,000 shares of NSI common stock (the "Common Stock") at an exercise price equal to the closing price of the Common Stock on -2- the last trading day prior to the Commencement Date; and (ii) an aggregate of 250,000 shares of Common Stock at an exercise price of $10.00 per share. The stock options shall become vested and exercisable with respect to 25% of the aggregate number of shares of Common Stock covered by each stock option as of the first, second, third and fourth anniversaries of the date of grant and shall be subject to such other terms and conditions as set forth in the stock option agreements attached hereto as Exhibits A and B. (d) Out-of-Pocket Expenses. NSI shall promptly pay to the Employee ---------------------- the reasonable expenses incurred by him in the performance of his duties hereunder, including, without limitation, those incurred in connection with business related travel or entertainment, or, if such expenses are paid directly by the Employee, shall promptly reimburse him for such payment, provided that the Employee properly accounts therefor in accordance with NSI's policy. (e) Relocation Expenses. In accordance with NSI's relocation policy, NSI ------------------- shall reimburse the Employee for up to $75,000 in moving expenses incurred by him in his relocation to the Suffern, New York area, closing costs in connection with the sale of his residence in Phoenix, Arizona and reasonable air travel for the Employee to and from Phoenix, Arizona. (f) Housing Allowance. NSI shall pay to the Employee a housing allowance ----------------- in the amount of $2,500 per month through June 30, 1998. (g) Participation in Benefit Plans. The Employee shall be entitled to ------------------------------ participate in or receive benefits under any pension plan, profit sharing plan, health and accident plan or any other employee benefit plan or arrangement made available in the future by NSI to its executives and key management employees, subject to the terms and conditions applicable to executives and key management generally. (h) Vacation. The Employee shall be entitled to such paid vacation -------- days in each calendar year as determined by NSI from time to time, but not less than three (3) weeks in any calendar year, prorated in any calendar year during which the Employee is employed hereunder for less than an entire year in accordance with the number of days in such year during which he is so employed. The Employee shall also be entitled to all paid holidays given by NSI to its executives and key management employees. Such vacation and holiday allowance shall otherwise be subject to the policies and practices of NSI. 5. Termination. ----------- The Employee's employment hereunder shall be terminated upon the Employee's death and may be terminated as follows: (a) By NSI for "Cause." A termination for Cause is a termination upon a finding by NSI that the Employee has (i) intentionally failed to perform reasonably assigned duties, (ii) engaged in dishonest or willful misconduct in the performance of his duties, -3- (iii) engaged in a transaction in connection with the performance of his duties to the Company or any of its Subsidiaries thereof which transaction is adverse to the interests of the Company or any of its Subsidiaries and which is engaged in for personal profit by the Employee or (iv) willfully violated any law, rule or regulation in connection with the performance of his duties (other than traffic violations or similar offenses). (b) By NSI due to the Employee's "Disability." For purposes of this Agreement a termination for Disability shall occur (i) upon the thirtieth (30th) day after the issuance of a written termination notice to the Employee in the event that the Employee shall have become so incapacitated as to be unable to resume, within the ensuing six (6) months, his employment hereunder by reason of physical or mental illness or injury, or (ii) upon the issuance of a written termination notice after the Employee has been unable to substantially perform his duties hereunder for three (3) consecutive months by reason of any physical or mental illness. (c) By NSI without Cause. 6. Compensation Upon Termination. ----------------------------- (a) In the event of the termination of the Employee's employment as a result of the Employee's death, NSI shall (i) pay to the Employee's estate his Base Salary through the date of his death, and (ii) for the shorter of one (1) year following his death or the balance of the Term (as if such termination had not occurred) provide continuation coverage to the members of the Employee's family under all Blue Cross/Blue Shield, major medical and other health, accident, life or other disability plans and programs in which such family members participated immediately prior to his death. (b) In the event of the termination of the Employee's employment by NSI for Cause or by the Employee for any reason NSI shall pay to the Employee his Base Salary through the date of his termination, and the Employee's entitlement to any other compensation or benefits shall be determined in accordance with NSI's plans, policies and practices as in effect from time to time. (c) In the event of the termination of the Employee's employment by NSI due to Disability, NSI shall pay to the Employee his Base Salary through the date of his termination. In addition, for the shorter of one (1) year following any such termination or the balance of the Term (as if such termination had not occurred), NSI shall (i) continue to pay the Employee the Base Salary in effect at the time of such termination less the amount, if any, then payable to the Employee under any disability benefits of NSI and (ii) provide the Employee continuation coverage under all Blue Cross/Blue Shield, major medical and other health, accident, life or other disability plans and programs in which the Employee participated immediately prior to such termination, to the extent that such benefits continue to be made available to active employees of NSI. -4- (d) In the event that the Employee's employment is terminated by NSI other than for Cause or Disability, for a period of eighteen (18) months following any such termination, NSI shall (i) continue to pay the Employee the Base Salary in effect at the time of such termination and (ii) provide continuation coverage under all Blue Cross/Blue Shield, accident, life or other disability plans and programs in which the Employee participated immediately prior to such termination, to the extent such benefits continue to be made available to active employees of NSI. The continuation of Base Salary provided for in clause (i) of the preceding sentence shall not be reduced by any compensation or other income that the Employee may earn from subsequent employment or otherwise. (e) The continuation coverage under any Blue Cross/Blue Shield, major medical and other health, accident, life or other disability plans and programs for the periods provided in Sections 6(a), 6(c) and 6(d) shall be provided (i) at the expense of NSI and (ii) in satisfaction of NSI's obligation under Section 4980B of the Code (and any similar state law) with respect to the period of time such benefits are continued hereunder. Notwithstanding anything to the contrary contained herein, NSI's obligation to provide such continuation coverage under Sections 6(a), 6(c) or 6(d) shall cease immediately upon the date any covered individual becomes eligible for similar benefits under the plans or policies of another employer. (f) This Section 6 sets forth the only obligations of NSI with respect to the termination of the Employee's employment with NSI and the Employee acknowledges that upon his termination of employment he shall not be entitled to any payments or benefits which are not explicitly provided herein. 7. Covenant Regarding Inventions and Copyrights. -------------------------------------------- The Employee shall disclose promptly to NSI any and all inventions, discoveries, improvements and patentable or copyrightable works initiated, conceived or made by him, either alone or in conjunction with others, during the Term and related to the business or activities of NSI and he assigns all of his interest therein to NSI or its nominee; whenever requested to do so by NSI, the Employee shall execute any and all applications, assignments or other instruments which NSI shall deem necessary to apply for and obtain letters patent or copyrights of the United States or any foreign country or otherwise protect NSI's interest therein. These obligations shall continue beyond the conclusion of the Term with respect to inventions, discoveries, improvements or copyrightable works initiated, conceived or made by the Employee during the Term and shall be binding upon the Employee's assigns, executors, administrators and other legal representatives. 8. Protection of Confidential Information. -------------------------------------- The Employee acknowledges that he will be provided with information about, and his employment by NSI will, throughout the Term, bring him into close contact with, many confidential affairs of NSI and its subsidiaries, including proprietary information about costs, profits, markets, sales, products, key personnel, pricing policies, operational methods, -5- technical processes and other business affairs and methods, plans for future developments and other information not readily available to the public, all of which are highly confidential and proprietary and all of which were developed by NSI at great effort and expense. The Employee further acknowledges that the services to be performed by him under this Agreement are of a special, unique, unusual, extraordinary and intellectual character, that the business of NSI will be conducted throughout the world (the "Territory"), that its products will be marketed throughout the Territory, that NSI competes and will compete in nearly all of its business activities with other organizations which are located in nearly any part of the Territory and that the nature of the relationship of the Employee with NSI is such that the Employee is capable of competing with NSI from nearly any location in the Territory. In recognition of the foregoing, the Employee covenants and agrees during the Term and thereafter: (i) That he will keep secret all confidential matters of NSI and not copy them or disclose them to anyone outside of NSI, either during or after the Term, except with NSI's prior written consent or, if during the Term, in the performance of his duties hereunder, the Employee makes a good faith determination that it is in the best interest of NSI to disclose such matters; (ii) That he will not make use of any of such confidential matters for his own purposes or the benefit of anyone other than NSI; and (iii) That he will deliver promptly to NSI on termination of this Agreement, or at any time NSI may so request, all confidential memoranda, notes, records, reports and other confidential documents (and all copies thereof) relating to the business of NSI, which he may then possess or have under his control. 9. Restriction on Competition, Interference and Solicitation. --------------------------------------------------------- In recognition of the considerations described in Section 8 hereof, the Employee covenants and agrees that, during the Term and for a period of two (2) years after the termination of his employment hereunder, the Employee will not, directly or indirectly, (A) enter into the employ of, or render any services to, any person, firm or corporation engaged in any business competitive with the business of NSI in any part of the Territory; (B) engage in any such business for his account; (C) become interested in any such business as an individual, partner, shareholder, creditor, director, officer, principal, agent, employee, trustee, consultant advisor, franchisee or in any other relationship or capacity; or (D) interfere with NSI's relationship with, or endeavor to employ or entice away from NSI any person, firm, corporation, governmental entity or other business organization who or which is or was an employee, customer or supplier of, or maintained a business relationship with, NSI at any time (whether before, during or after the Term), or which NSI has solicited or prepared to solicit; provided, however, that nothing contained in this Section 9 -------- ------- shall be deemed to prohibit the Employee from acquiring or holding, solely for investment, publicly traded securities of any corporation some of the activities of which are competitive with the business of NSI so -6- long as such securities do not, in the aggregate, constitute more than five percent (5%) of any class or series of outstanding securities of such corporation. 10. Specific Remedies. ----------------- For purposes of Sections 7, 8 and 9 of this Agreement, references to NSI shall include all current and future majority-owned subsidiaries of NSI and all current and future joint ventures in which NSI may from time to time be involved. It is understood by the Employee and NSI that the covenants contained in this Section 10 and in Sections 7, 8, and 9 hereof are essential elements of this Agreement and that, but for the agreement of the Employee to comply with such covenants, NSI would not have agreed to enter into this Agreement. NSI and the Employee have independently consulted with their respective counsel and have been advised concerning the reasonableness and propriety of such covenants with specific regard to the nature of the business conducted by NSI and the interests of NSI and its stockholders. The Employee agrees that the covenants of Sections 7, 8, and 9 are reasonable and valid. If the Employee commits a breach of any of the provisions of Sections 7, 8, or 9, such breach shall be deemed to be grounds for termination for Cause. In addition, the Employee acknowledges that NSI may have no adequate remedy at law if he violates any of the terms hereof. The Employee therefore understands and agrees that NSI shall have (i) the right to have such provisions specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach will cause irreparable injury to NSI and that money damages will not provide an adequate remedy to NSI, and (ii) the right to require the Employee to account for and pay over to NSI all compensation, profits, monies, accruals, increments and other benefits (collectively, the "Benefits") derived or received by the Employee as a result of any transaction constituting a willful breach of any of the provisions of Sections 7, 8, or 9 and the Employee hereby agrees to account for and pay over such Benefits to NSI. 11. Independence, Severability and Non-Exclusivity. ---------------------------------------------- Each of the rights enumerated in Section 10 hereof shall be independent of the others and shall be in addition to and not in lieu of any other rights and remedies available to NSI at law or in equity. If any of the covenants contained in Sections 7, 8, or 9, or any part of any of them, is hereafter construed or adjudicated to be invalid or unenforceable, the same shall not affect the remainder of the covenant or covenants or rights or remedies which shall be given full effect without regard to the invalid portions. The parties intend to and do hereby confer jurisdiction to enforce the covenants contained in Sections 7, 8, or 9 and the remedies enumerated in Section 10 upon the federal and state courts of New York sitting in New York County. If any of the covenants contained in Sections 7, 8, or 9 is held to be invalid or unenforceable because of the duration of such provision or the area covered thereby, the parties agree that the court making such determination shall have the power to reduce the duration and/or area of such provision and in its reduced form said provision shall then be enforceable. No such holding of invalidity or unenforceability in one jurisdiction shall bar or in any way affect NSI's right to the relief provided in Section 10 or otherwise in the courts of -7- any other state or jurisdiction within the geographical scope of such covenants as to breaches of such covenants in such other respective states of jurisdictions, such covenants being, for this purpose, severable into diverse and independent covenants. 12. Disputes. -------- If NSI or the Employee shall dispute any termination of the Employee's employment hereunder or if a dispute concerning any payment hereunder shall exist: (a) either party shall have the right (but not the obligation), in addition to all other rights and remedies provided by law, to compel arbitration of the dispute in the City of New York under the rules of the American Arbitration Association by giving written notice of arbitration to the other party within thirty (30) days after notice of such dispute has been received by the party to whom notice has been given; and (b) if such dispute (whether or not submitted to arbitration pursuant to Section 12(a) hereof) results in a determination that (i) NSI did not have the right to terminate the Employee's employment under the provisions of this Agreement or (ii) the position taken by the Employee concerning payments to the Employee is correct, NSI shall promptly pay, or if theretofore paid by the Employee, shall promptly reimburse the Employee for, all costs and expenses (including attorney's fees) reasonably incurred by the Employee in connection with such dispute. 13. Successors; Binding Agreement. ------------------------------ This Agreement shall be binding upon and shall inure to the benefit of NSI, its successors and assigns and NSI shall require any successor or assign to expressly assume and agree to perform this Agreement in the same manner and to the same extent that NSI would be required to perform it if no such succession or assignment had taken place. "NSI" as used herein shall include any such successors and assigns to NSI's business and/or assets. The term "successors and assigns" as used herein shall mean a corporation or other entity acquiring or otherwise succeeding to, directly or indirectly, all or substantially all the stock or assets and business of NSI (including this Agreement) whether by operation of law or otherwise. This Agreement and all rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, administrators c.t.a., successors, heirs, distributees, devisees and legatees. Unless otherwise provided herein, any amounts payable hereunder after the Employee's death shall be paid in accordance with the terms of this Agreement to the Employee's estate. 14. Notices. ------- All notices, consents or other communications required or permitted to be given by any party hereunder shall be in writing (including telecopy or other similar writing) and -8- shall be given by personal delivery, certified or registered mail, postage prepaid, or telecopy (or other similar writing) as follows: To NSI: Attn: General Counsel Two Executive Boulevard Suffern, New York, 10901-4414 To the Employee: Paul Sohmer __________________________ __________________________ __________________________ or at such other address or telecopy number (or other similar number) as either party may from time to time specify to the other. Any notice, consent or other communication required or permitted to be given hereunder shall be deemed to have been given on the date of mailing, personal delivery or telecopy or other similar means thereof (provided the appropriate answer back is received) and shall be conclusively presumed to have been received on the second business day following the date of mailing or, in the case of personal delivery or telecopy or other similar means, the day of delivery thereof, except that a change of address shall not be effective until actually received. 15. Employee Representation. ----------------------- Employee represents and warrants that his execution of this Agreement and performance of his duties pursuant to this Agreement will not constitute a breach of any contract or obligation he has or may have to any other party. 16. Modifications and Waivers. ------------------------- No term, provision or condition of this Agreement may be modified or discharged unless such modification or discharge is authorized by the Board and is agreed to in writing and signed by the Employee. No waiver by either party hereto of any breach by the other party hereto of any term, provision or condition of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 17. Entire Agreement. ---------------- This Agreement constitutes the entire understanding between the parties hereto relating to the subject matter hereof, superseding all negotiations, prior discussions, preliminary agreements and agreements relating to the subject matter hereof made prior to the date hereof. -9- 18. Law Governing. ------------- Except as otherwise explicitly noted, this Agreement shall be governed by and construed in accordance with the laws of the State of New York (without giving effect to conflicts of law). 19. Invalidity. ---------- Except as otherwise specified herein, the invalidity or unenforceability of any term or terms of this Agreement shall not invalidate, make unenforceable or otherwise affect any other term of this Agreement which shall remain in full force and effect. 20. Headings. -------- The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year set forth above. NEUROMEDICAL SYSTEMS, INC. By: /s/ John B. Henneman, III --------------------------------- John B. Henneman, III Vice President and General Counsel /s/ Paul Sohmer --------------------------------- Paul Sohmer -10- EX-10.42 12 OPTION AGREEMENT (A) Exhibit 10.42 ------------- NEUROMEDICAL SYSTEMS, INC. NONQUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT, effective as of the 4th day of November, 1997 (the "Grant Date"), between NEUROMEDICAL SYSTEMS, INC., a Delaware corporation (the "Company"), and PAUL SOHMER (the "Optionee"). WHEREAS, the Company has previously determined to grant an option to the Optionee as provided herein and the Company and the Optionee hereby wish to memorialize the terms and conditions applicable to the Option; NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Option. --------------- 1.1 Effective as of the Grant Date the Company granted to the Optionee the right and option (the "Option") to purchase all or any part of an aggregate of 750,000 whole shares of common stock, par value $.0001 per share, of the Company. (the "Shares") subject to, and in accordance with, the terms and conditions set forth in this Agreement. 1.2 The Option is not intended to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code. 1.3 Certain capitalized terms used herein shall have the meanings ascribed to them in Section 19 hereof. 2. Purchase Price. -------------- The price at which the Optionee shall be entitled to purchase Shares upon the exercise of the Option shall be $4 9/16 per Share. 3. Duration of Option. ------------------ Subject to the terms and conditions of this Agreement, the Option shall be exercisable to the extent and in the manner provided herein for a period of ten (10) years from the Grant Date (the "Exercise Term"); provided, -------- however, that the Option may be earlier terminated as provided in Section 6 - ------- hereof. 4. Exercisability of Option. ------------------------ Subject to the terms and conditions of this Agreement, the Option shall be exercisable as follows: (a) The Option shall become vested and exercisable with respect to 25% of the aggregate number of Shares covered by the Option as of each of the first, second, third and fourth anniversaries of the Grant Date. (b) Any fractional number of shares resulting from the application of the percentages set forth above in this Section 4 shall be rounded to the next higher whole number of Shares. (c) Notwithstanding the vesting provisions set forth above in this Section 4, the Option shall immediately become fully (100%) vested and exercisable upon a Change in Control. 5. Manner of Exercise and Payment. ------------------------------ 5.1 Subject to the terms and conditions of this Agreement, the Option may be exercised by delivery of written notice to the Company, at its principal executive office. Such notice shall state that the Optionee is electing to exercise the Option and the number of Shares in respect of which the Option is being exercised and shall be signed by the person or persons exercising the Option. If requested by the Board of Directors of the Company (the "Board"), such person or persons shall (i) deliver this Agreement to the Secretary of the Company who shall endorse thereon a notation of such exercise and (ii) provide satisfactory proof as to the right of such person or persons to exercise the Option. 5.2 The notice of exercise described in Section 5.1 shall be accompanied by (x) either (i) payment of the full purchase price for the Shares in respect of which the Option is being exercised, in cash, by check or, at the sole discretion of the Board, by transferring Shares to the Company having a Fair Market Value on the day preceding the date of exercise equal to the cash amount for which such Shares are substituted or (ii) subject to the consent of the Board, instructions from the Optionee to the Company directing the Company to deliver a specified number of Shares directly to a designated broker or dealer pursuant to a cashless exercise election which is made in accordance with such requirements and procedures as are acceptable to the Board in its sole discretion and (y) full payment of all applicable Withholding Taxes (as defined in Section 11) pursuant to Section 11 hereof. 5.3 Upon receipt of the notice of exercise and any payment or other documentation as may be necessary pursuant to Section 5.2 relating to the Shares in respect of which the Option is being exercised, the Company shall, subject to this Agreement, take such action as may be necessary to effect the transfer to the Optionee of the number of Shares as to which such exercise was effective. No fractional Shares (or cash in lieu thereof) shall be issued 2 upon exercise of an Option and the number of Shares that may be purchased upon exercise shall be rounded to the nearest number of whole Shares. 5.4 The Optionee shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to any Shares subject to the Option until (i) the Option shall have been exercised pursuant to the terms of this Agreement and the Optionee shall have paid the full purchase price for the number of Shares in respect of which the Option was exercised, (ii) the Company shall have issued and delivered the Shares to the Optionee, and (iii) the Optionee's name shall have been entered as a stockholder of record on the books of the Company, whereupon the Optionee shall have full voting and other ownership rights with respect to such Shares. 6. Termination of Employment. ------------------------- 6.1 Death or Disability. In the event the employment of the ------------------- Optionee is terminated as a result of Disability or death, the Optionee may at any time within one (1) year after such termination of employment (but in no event beyond the expiration of the stated term of the Option), exercise the Option to the extent, but only to the extent, that the Option or portion thereof was exercisable on the date of such termination of employment, after which time the Option shall terminate in full. In the event of the Optionee's death, the Option shall be exercisable, to the extent provided in this Agreement, by the legatee or legatees under the Optionee's will, or by the Optionee's personal representatives or distributees and such person or persons shall be substituted for the Optionee each time the Optionee is referred to herein. 6.2 Cause. In the event the employment of the Optionee is ----- terminated for Cause, the Option shall terminate on the date of the Optionee's termination of employment whether or not exercisable. 6.3 Other Termination of Employment. If the employment of the ------------------------------- Optionee is terminated for any reason other Disability, death or Cause, the Optionee may at any time within three (3) months after such termination of employment (but in no event beyond the expiration of the stated term of the Option), exercise the Option to the extent, but only to the extent, that the Option or portion thereof was exercisable on the date of the termination of employment, after which time the Option shall terminate in full. 6.4 Following a Change in Control. Notwithstanding the ----------------------------- foregoing provisions of Section 6, in the event the Optionee's employment with the Company is terminated by the Company following a Change in Control, the Option shall remain exercisable until the first anniversary of the termination of the Optionee's employment (but in no event beyond the expiration of the stated term of the Option.) 7. Nontransferability. ------------------ 3 The Option shall not be transferable other than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Code or by such other means explicitly permitted pursuant to Rule 16b-3 under the Exchange Act. During the lifetime of the Optionee, the Option shall be exercisable only by the Optionee, except in the case of an Option transferred pursuant to a qualified domestic relations order. 8. No Right to Continued Employment. -------------------------------- Nothing in this Agreement shall be interpreted or construed to confer upon the Optionee any right with respect to continuance of employment by the Company, nor shall this Agreement interfere in any way with the right of the Company to terminate the Optionee's employment at any time. 9. Adjustments. ----------- In the event of a Change in Capitalization, the Board may make appropriate adjustments to the number and class of Shares or other stock or securities subject to the Option and the purchase price for such Shares or other stock or securities. The Board's adjustment shall be final and binding for all purposes of this Agreement. 10. Effect of a Liquidation, Merger or Consolidation. ------------------------------------------------ Upon the effective date of (i) the liquidation or dissolution of the Company or (ii) a merger or consolidation of the Company (a "Transaction"), the Option shall continue in effect in accordance with its terms and the Optionee shall be entitled to receive in respect of each Share subject to the Option, upon exercise of the Option, the same number and kind of stock, securities, cash, property or other consideration that each holder of a Share was entitled to receive in the Transaction in respect of a Share. 11. Withholding of Taxes. -------------------- The Company shall have the right to deduct from any distribution of cash to the Optionee an amount equal to the federal, state and local income taxes and other amounts as may be required by law to be withheld (the "Withholding Taxes") with respect to the Option. If the Optionee is entitled to receive Shares upon exercise of the Option, the Optionee shall pay the Withholding Taxes to the Company in cash prior to the issuance of such Shares. In satisfaction of the Withholding Taxes, the Optionee may make a written election (the "Tax Election"), which may be accepted or rejected in the discretion of the Committee, to have withheld a portion of the Shares issuable to him or her upon exercise of the Option, having an aggregate Fair Market Value, on the date preceding the date of such issuance, equal to the Withholding Taxes, provided that if the Optionee may be subject to liability under Section 16(b) of the Exchange Act either (i) (A) the Tax Election is made at least six (6) months prior to the date the Option is exercised and (B) the Tax Election is irrevocable with respect to the exercise of all Options which are exercised prior to the expiration of six (6) months following a revocation of the Tax Election or (ii) (A) the 4 Optionee makes the Tax Election at least six (6) months after the Grant Date, (B) the Option is exercised during the ten-day period beginning on the third business day and ending on the twelfth business day following the release for publication of the Company's quarterly or annual statement of sales and earnings (a "Window Period") and (C) the Tax Election is made during the Window Period in which the Option is exercised or prior to such Window Period and subsequent to the immediately preceding Window Period. 12. Modification of Agreement. ------------------------- This Agreement may be modified, amended, suspended or terminated, and any terms or conditions may be waived, but only by a written instrument executed by the parties hereto. 13. Severability. ------------ Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms. 14. Governing Law. ------------- The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware without giving effect to the conflicts of laws principles thereof. 15. Successors in Interest. ---------------------- This Agreement shall inure to the benefit of and be binding upon any successor to the Company. This Agreement shall inure to the benefit of the Optionee's legal representatives. All obligations imposed upon the Optionee and all rights granted to the Company under this Agreement shall be final, binding and conclusive upon the Optionee's heirs, executors, administrators and successors. 16. Resolution of Disputes. ---------------------- Any dispute or disagreement which may arise under, or as a result of, or in any way relate to, the interpretation, construction or application of this Agreement shall be determined by the Committee. Any determination made hereunder shall be final, binding and conclusive on the Optionee and Company for all purposes. 17. No Assignment. ------------- 5 Except as otherwise provided herein, the rights of the Optionee hereunder may not be assigned or otherwise transferred to any other party. 18. Entire Agreement. ---------------- This Agreement constitutes the entire agreement, and supersedes all prior agreements and understandings, oral and written, between the parties hereto with respect to the subject matter hereof. 19. Definitions. ----------- (a) "Beneficial Ownership" of Shares means (i) direct or indirect beneficial ownership of such Shares; (ii) the right to acquire such Shares (whether such right is exercisable immediately or only after the passage of time or under specific conditions) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; or (iii) the right to vote such Shares pursuant to any agreement, arrangement or understanding; provided, -------- however, that a person shall not be deemed to have Beneficial Ownership of any - ------- Share if the agreement, arrangement or understanding to vote such Share arises solely from a revocable proxy or consent given to such person. (b) "Cause" as used in this Agreement shall have the meaning set forth in Section 5(a) of the employment agreement by and among the parties hereto, effective November 4, 1997 (the "Employment Agreement"). (c) "Change in Capitalization" means any increase or reduction in the number of Shares, or any change (including, but not limited to, a change in value) in the Shares or exchange of Shares for a different number or kind of shares or other securities of the Company or another corporation, by reason of a reclassification, recapitalization, merger, consolidation, reorganization, spin- off, split-up, issuance of warrants or rights or debentures, stock dividend, stock split or reverse stock split, cash dividend, property dividend, combination or exchange of shares, repurchase of shares, change in corporate structure or otherwise. (d) "Change in Control" means (i) the acquisition (by means of purchase, merger or otherwise) by any person or any two or more persons acting as a partnership, syndicate or other group for the purpose of acquiring, holding or disposing of such securities of Beneficial Ownership of forty percent (40%) or more of the sum of the amount of the Shares then outstanding, plus any Shares which may be issued pursuant to the conversion or exercise of all outstanding options, rights or warrants; or (ii) the sale of all or substantially all of the assets of the Company. Notwithstanding anything to the contrary, for purposes of this Section 2.7, a person shall not be deemed to have made an acquisition of Beneficial Ownership of Shares if such person: (a) acquires Beneficial Ownership of such Shares directly from the Company; (b) assumes Beneficial Ownership of more than the permitted percentage of Shares solely as a result of the acquisition of Beneficial Ownership of Shares by the Company which, by reducing the 6 proportional Beneficial Ownership of Shares by other security holders, increases the proportional Beneficial Ownership of Shares by such person; or (c) is (1) the Company or any corporation or other person of which a majority of its voting power or its equity securities or equity interest is owned directly or indirectly by the Company (a "Controlled Entity") or is owned directly or indirectly by the stockholders of the Company in the same proportion as their Beneficial Ownership of Shares or (2) a trustee or other fiduciary holding securities under one or more employee benefit plans or arrangements (or any trust forming a part thereof) maintained by the Company or any Controlled Entity. (e) "Disability" as used in this Agreement shall have the meaning set forth in Section 5(b) of the Employment Agreement. (f) "Fair Market Value" on any date means the average of the high and low sales prices of the Shares on such date on the principal national securities exchange on which such Shares are listed or admitted to trading, or, if such Shares are not so listed or admitted to trading, the arithmetic mean of the per Share closing bid price and per Share closing asked price on such date as quoted on the National Association of Securities Dealers Automated Quotation System or such other market in which such prices are regularly quoted, or, if there have been no published bid or asked quotations with respect to Shares on such date, the Fair Market Value shall be the value established by the Board in good faith. IN WITNESS WHEREOF the parties hereto have executed this Agreement to be effective as of the day and year first set forth above. NEUROMEDICAL SYSTEMS, INC. Attest: By: /s/ David Duncan, Jr. ---------------------------- /s/ John B. Henneman, III Vice President Finance - --------------------------------- and Administration, CFO Secretary /s/ Paul Sohmer ---------------------------- Optionee 7 EX-10.43 13 OPTION AGREEMENT (B) Exhibit 10.43 ------------- NEUROMEDICAL SYSTEMS, INC. NONQUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT, effective as of the 4th day of November, 1997 (the "Grant Date"), between NEUROMEDICAL SYSTEMS, INC., a Delaware corporation (the "Company"), and PAUL SOHMER (the "Optionee"). WHEREAS, the Company has previously determined to grant an option to the Optionee as provided herein and the Company and the Optionee hereby wish to memorialize the terms and conditions applicable to the Option; NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Option. --------------- 1.1 Effective as of the Grant Date the Company granted to the Optionee the right and option (the "Option") to purchase all or any part of an aggregate of 250,000 whole shares of common stock, par value $.0001 per share, of the Company. (the "Shares") subject to, and in accordance with, the terms and conditions set forth in this Agreement. 1.2 The Option is not intended to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code. 1.3 Certain capitalized terms used herein shall have the meanings ascribed to them in Section 19 hereof. 2. Purchase Price. -------------- The price at which the Optionee shall be entitled to purchase Shares upon the exercise of the Option shall be $10.00 per Share. 3. Duration of Option. ------------------ Subject to the terms and conditions of this Agreement, the Option shall be exercisable to the extent and in the manner provided herein for a period of ten (10) years from the Grant Date (the "Exercise Term"); provided, -------- however, that the Option may be earlier terminated as provided in Section 6 - ------- hereof. 4. Exercisability of Option. ------------------------ Subject to the terms and conditions of this Agreement, the Option shall be exercisable as follows: (a) The Option shall become vested and exercisable with respect to 25% of the aggregate number of Shares covered by the Option as of each of the first, second, third and fourth anniversaries of the Grant Date. (b) Any fractional number of shares resulting from the application of the percentages set forth above in this Section 4 shall be rounded to the next higher whole number of Shares. (c) Notwithstanding the vesting provisions set forth above in this Section 4, the Option shall immediately become fully (100%) vested and exercisable upon a Change in Control. 5. Manner of Exercise and Payment. ------------------------------ 5.1 Subject to the terms and conditions of this Agreement, the Option may be exercised by delivery of written notice to the Company, at its principal executive office. Such notice shall state that the Optionee is electing to exercise the Option and the number of Shares in respect of which the Option is being exercised and shall be signed by the person or persons exercising the Option. If requested by the Board of Directors of the Company (the "Board"), such person or persons shall (i) deliver this Agreement to the Secretary of the Company who shall endorse thereon a notation of such exercise and (ii) provide satisfactory proof as to the right of such person or persons to exercise the Option. 5.2 The notice of exercise described in Section 5.1 shall be accompanied by (x) either (i) payment of the full purchase price for the Shares in respect of which the Option is being exercised, in cash, by check or, at the sole discretion of the Board, by transferring Shares to the Company having a Fair Market Value on the day preceding the date of exercise equal to the cash amount for which such Shares are substituted or (ii) subject to the consent of the Board, instructions from the Optionee to the Company directing the Company to deliver a specified number of Shares directly to a designated broker or dealer pursuant to a cashless exercise election which is made in accordance with such requirements and procedures as are acceptable to the Board in its sole discretion and (y) full payment of all applicable Withholding Taxes (as defined in Section 11) pursuant to Section 11 hereof. 5.3 Upon receipt of the notice of exercise and any payment or other documentation as may be necessary pursuant to Section 5.2 relating to the Shares in respect of which the Option is being exercised, the Company shall, subject to this Agreement, take such action as may be necessary to effect the transfer to the Optionee of the number of Shares as to which such exercise was effective. No fractional Shares (or cash in lieu thereof) shall be issued 2 upon exercise of an Option and the number of Shares that may be purchased upon exercise shall be rounded to the nearest number of whole Shares. 5.4 The Optionee shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to any Shares subject to the Option until (i) the Option shall have been exercised pursuant to the terms of this Agreement and the Optionee shall have paid the full purchase price for the number of Shares in respect of which the Option was exercised, (ii) the Company shall have issued and delivered the Shares to the Optionee, and (iii) the Optionee's name shall have been entered as a stockholder of record on the books of the Company, whereupon the Optionee shall have full voting and other ownership rights with respect to such Shares. 6. Termination of Employment. ------------------------- 6.1 Death or Disability. In the event the employment of the ------------------- Optionee is terminated as a result of Disability or death, the Optionee may at any time within one (1) year after such termination of employment (but in no event beyond the expiration of the stated term of the Option), exercise the Option to the extent, but only to the extent, that the Option or portion thereof was exercisable on the date of such termination of employment, after which time the Option shall terminate in full. In the event of the Optionee's death, the Option shall be exercisable, to the extent provided in this Agreement, by the legatee or legatees under the Optionee's will, or by the Optionee's personal representatives or distributees and such person or persons shall be substituted for the Optionee each time the Optionee is referred to herein. 6.2 Cause. In the event the employment of the Optionee is ----- terminated for Cause, the Option shall terminate on the date of the Optionee's termination of employment whether or not exercisable. 6.3 Other Termination of Employment. If the employment of the ------------------------------- Optionee is terminated for any reason other Disability, death or Cause, the Optionee may at any time within three (3) months after such termination of employment (but in no event beyond the expiration of the stated term of the Option), exercise the Option to the extent, but only to the extent, that the Option or portion thereof was exercisable on the date of the termination of employment, after which time the Option shall terminate in full. 6.4 Following a Change in Control. Notwithstanding the ----------------------------- foregoing provisions of Section 6, in the event the Optionee's employment with the Company is terminated by the Company following a Change in Control, the Option shall remain exercisable until the first anniversary of the termination of the Optionee's employment (but in no event beyond the expiration of the stated term of the Option.) 3 7. Nontransferability. ------------------ The Option shall not be transferable other than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Code or by such other means explicitly permitted pursuant to Rule 16b-3 under the Exchange Act. During the lifetime of the Optionee, the Option shall be exercisable only by the Optionee, except in the case of an Option transferred pursuant to a qualified domestic relations order. 8. No Right to Continued Employment. -------------------------------- Nothing in this Agreement shall be interpreted or construed to confer upon the Optionee any right with respect to continuance of employment by the Company, nor shall this Agreement interfere in any way with the right of the Company to terminate the Optionee's employment at any time. 9. Adjustments. ----------- In the event of a Change in Capitalization, the Board may make appropriate adjustments to the number and class of Shares or other stock or securities subject to the Option and the purchase price for such Shares or other stock or securities. The Board's adjustment shall be final and binding for all purposes of this Agreement. 10. Effect of a Liquidation, Merger or Consolidation. ------------------------------------------------ Upon the effective date of (i) the liquidation or dissolution of the Company or (ii) a merger or consolidation of the Company (a "Transaction"), the Option shall continue in effect in accordance with its terms and the Optionee shall be entitled to receive in respect of each Share subject to the Option, upon exercise of the Option, the same number and kind of stock, securities, cash, property or other consideration that each holder of a Share was entitled to receive in the Transaction in respect of a Share. 11. Withholding of Taxes. -------------------- The Company shall have the right to deduct from any distribution of cash to the Optionee an amount equal to the federal, state and local income taxes and other amounts as may be required by law to be withheld (the "Withholding Taxes") with respect to the Option. If the Optionee is entitled to receive Shares upon exercise of the Option, the Optionee shall pay the Withholding Taxes to the Company in cash prior to the issuance of such Shares. In satisfaction of the Withholding Taxes, the Optionee may make a written election (the "Tax Election"), which may be accepted or rejected in the discretion of the Committee, to have withheld a portion of the Shares issuable to him or her upon exercise of the Option, having an aggregate Fair Market Value, on the date preceding the date of such issuance, equal to the Withholding Taxes, provided that if the Optionee may be subject to liability under Section 16(b) of the Exchange Act either (i) (A) the Tax Election is made at least six (6) months prior to the date the Option is exercised and (B) the Tax 4 Election is irrevocable with respect to the exercise of all Options which are exercised prior to the expiration of six (6) months following a revocation of the Tax Election or (ii) (A) the Optionee makes the Tax Election at least six (6) months after the Grant Date, (B) the Option is exercised during the ten-day period beginning on the third business day and ending on the twelfth business day following the release for publication of the Company's quarterly or annual statement of sales and earnings (a "Window Period") and (C) the Tax Election is made during the Window Period in which the Option is exercised or prior to such Window Period and subsequent to the immediately preceding Window Period. 12. Modification of Agreement. ------------------------- This Agreement may be modified, amended, suspended or terminated, and any terms or conditions may be waived, but only by a written instrument executed by the parties hereto. 13. Severability. ------------ Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms. 14. Governing Law. ------------- The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware without giving effect to the conflicts of laws principles thereof. 15. Successors in Interest. ---------------------- This Agreement shall inure to the benefit of and be binding upon any successor to the Company. This Agreement shall inure to the benefit of the Optionee's legal representatives. All obligations imposed upon the Optionee and all rights granted to the Company under this Agreement shall be final, binding and conclusive upon the Optionee's heirs, executors, administrators and successors. 16. Resolution of Disputes. ---------------------- Any dispute or disagreement which may arise under, or as a result of, or in any way relate to, the interpretation, construction or application of this Agreement shall be determined by the Committee. Any determination made hereunder shall be final, binding and conclusive on the Optionee and Company for all purposes. 5 17. No Assignment. ------------- Except as otherwise provided herein, the rights of the Optionee hereunder may not be assigned or otherwise transferred to any other party. 18. Entire Agreement. ---------------- This Agreement constitutes the entire agreement, and supersedes all prior agreements and understandings, oral and written, between the parties hereto with respect to the subject matter hereof. 19. Definitions. ----------- (a) "Beneficial Ownership" of Shares means (i) direct or indirect beneficial ownership of such Shares; (ii) the right to acquire such Shares (whether such right is exercisable immediately or only after the passage of time or under specific conditions) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; or (iii) the right to vote such Shares pursuant to any agreement, arrangement or understanding; provided, -------- however, that a person shall not be deemed to have Beneficial Ownership of any - ------- Share if the agreement, arrangement or understanding to vote such Share arises solely from a revocable proxy or consent given to such person. (b) "Cause" as used in this Agreement shall have the meaning set forth in Section 5(a) of the employment agreement by and among the parties hereto, effective November 4, 1997 (the "Employment Agreement"). (c) "Change in Capitalization" means any increase or reduction in the number of Shares, or any change (including, but not limited to, a change in value) in the Shares or exchange of Shares for a different number or kind of shares or other securities of the Company or another corporation, by reason of a reclassification, recapitalization, merger, consolidation, reorganization, spin- off, split-up, issuance of warrants or rights or debentures, stock dividend, stock split or reverse stock split, cash dividend, property dividend, combination or exchange of shares, repurchase of shares, change in corporate structure or otherwise. (d) "Change in Control" means (i) the acquisition (by means of purchase, merger or otherwise) by any person or any two or more persons acting as a partnership, syndicate or other group for the purpose of acquiring, holding or disposing of such securities of Beneficial Ownership of forty percent (40%) or more of the sum of the amount of the Shares then outstanding, plus any Shares which may be issued pursuant to the conversion or exercise of all outstanding options, rights or warrants; or (ii) the sale of all or substantially all of the assets of the Company. Notwithstanding anything to the contrary, for purposes of this Section 2.7, a person shall not be deemed to have made an acquisition of Beneficial Ownership of Shares if such person: (a) acquires Beneficial Ownership of such Shares directly from the Company; (b) assumes Beneficial Ownership of more than the permitted percentage of Shares solely as a result of the 6 acquisition of Beneficial Ownership of Shares by the Company which, by reducing the proportional Beneficial Ownership of Shares by other security holders, increases the proportional Beneficial Ownership of Shares by such person; or (c) is (1) the Company or any corporation or other person of which a majority of its voting power or its equity securities or equity interest is owned directly or indirectly by the Company (a "Controlled Entity") or is owned directly or indirectly by the stockholders of the Company in the same proportion as their Beneficial Ownership of Shares or (2) a trustee or other fiduciary holding securities under one or more employee benefit plans or arrangements (or any trust forming a part thereof) maintained by the Company or any Controlled Entity. (e) "Disability" as used in this Agreement shall have the meaning set forth in Section 5(b) of the Employment Agreement. (f) "Fair Market Value" on any date means the average of the high and low sales prices of the Shares on such date on the principal national securities exchange on which such Shares are listed or admitted to trading, or, if such Shares are not so listed or admitted to trading, the arithmetic mean of the per Share closing bid price and per Share closing asked price on such date as quoted on the National Association of Securities Dealers Automated Quotation System or such other market in which such prices are regularly quoted, or, if there have been no published bid or asked quotations with respect to Shares on such date, the Fair Market Value shall be the value established by the Board in good faith. IN WITNESS WHEREOF the parties hereto have executed this Agreement to be effective as of the day and year first set forth above. NEUROMEDICAL SYSTEMS, INC. Attest: By: /s/ David Duncan, Jr. ---------------------------------------------- Vice President Finance and Administration, CFO /s/ John B. Henneman III - ------------------------------- Secretary /s/ Paul Sohmer ----------------------------------- Optionee 7 EX-10.44 14 FORM OF AMENDMENT TO CO. STOCK OPTION AGREEMENT Exhibit 10.44 ------------- Form of Amendment to Employee Stock Option Agreements ----------------------------------------------------- NEUROMEDICAL SYSTEMS, INC. 1993 STOCK OPTION PLAN AS AMENDED AND RESTATED OCTOBER 25, 1995 NONQUALIFIED STOCK OPTION AGREEMENTS AMENDMENT This AMENDMENT, effective as of September 18, 1997, (the "Amendment") between Neuromedical Systems, Inc., a Delaware corporation (the "Company"), and each Optionee as such term is defined below, with respect to any and all agreements between the Company and Optionee made pursuant to and in accordance with the Neuromedical Systems, Inc. 1993 Stock Option Plan (the "Original Plan") and/or the Neuromedical Systems, Inc. 1993 Stock Option Plan, as amended and restated on October 25, 1995 (the "Amended Plan" and collectively with the Original Plan, the "Plan") governing one or more grants of an Option by the Company to Optionee prior to the date hereof (each such agreement, an "Option Agreement"; other capitalized terms not otherwise defined herein shall have the meanings assigned thereto in the respective Plan and/or the respective Option Agreement(s) executed thereunder). WHEREAS, under the current terms and conditions of each Option Agreement, upon Optionee's cessation of employment by the Company (whether voluntarily or involuntarily), Optionee must exercise any vested and exercisable options within 90 days of such departure; WHEREAS, the Board of Directors of the Company (the "Board") has authorized an amendment to each Option Agreement permitting an extension to such departing exercise period upon observance by Optionee of certain additional terms and conditions; WHEREAS, the Board has taken such action to benefit both Optionee and the Company as a whole; NOW THEREFORE, Company and Optionee agree as follows: Exercise Period. If Optionee is terminated from employment by a --------------- Termination Event, as such term is defined below, the Optionee may at any time within three (3) months after such termination of employment, exercise the Option to the extent, but only to the extent, that the Option or portion thereof was exercisable on the date of the termination of employment, after which time the Option shall terminate in full, provided, however, that so long as (i) -------- ------- Optionee remains an employee through the earlier of (a) six months after the first day the new Chief Executive Officer (successor to Co-Chief Executives John B. Henneman, III and Uzi Ish-Hurwitz) is present in his capacity as Chief Executive Officer of the Company at the offices of the Company and (b) December 31, 1998, or (ii) Optionee is discharged without Cause on or after September 4, 1997 but prior to the dates set forth in clause (i) above, then the Optionee may at any time within - 1 - two (2) years after the date of such Termination Event exercise the Option to the extent, but only to the extent, that the Option or portion thereof was exercisable on the date of such Termination Event, after which time the Option shall terminate in full. Optionee Acknowledgment. Optionee acknowledges that, to the extent ----------------------- Optionee has entered into any agreement with the Company with respect to Replacement Options, dated July 28, 1997 (each, a "Replacement Option Agreement"), this document constitutes due notice of amendment in accordance with the terms of such Replacement Option Agreement, which provides for unilateral amendment to the Option Agreement by the Company so long as (i) the result of such amendment does not adversely affect Optionee's rights under the Option Agreement or the Plan, and (ii) reasonable notice of any such unilateral amendment is provided to Optionee. Company Waiver. Notwithstanding the terms and conditions of any -------------- Option Agreement providing for amendment only by written instrument signed by all of the parties thereto, the Company waives such requirement with respect to Optionee and hereby intends that this Amendment be a valid and binding obligation of the Company, enforceable in accordance with the terms and conditions set forth herein, and the Company further waives any and all right to contest the validity or enforceability of this Amendment on grounds of absence of Optionee's signature hereto. Definition of "Optionee". For purposes of this Amendment, the term ------------------------ "Optionee" shall mean, individually, each employee of the Company and any Subsidiary who has entered into an Option Agreement(s) with the Company on or prior to the date first set forth above, provided, however, that such term shall -------- ------- not include any present or former (a) Chief or Co-Chief Executive Officers of the Company, (b) consultants of the Company and any Subsidiary, and (c) members of the Company Board of Directors, and this Amendment shall not be applicable to any of the foregoing at any time by reason of cessation of affiliation with the Company in any such capacity. Definition of "Termination Event". For purposes of this Amendment, ---------------------------------- the term "Termination Event" shall mean voluntary or involuntary termination from employment of Optionee by the Company or any Subsidiary for any reason other than Disability, death or Cause, including the Optionee's ceasing to be employed by a Subsidiary or division of the Company or any Subsidiary as a result of the sale of such Subsidiary or division or an interest in such Subsidiary or division. Entire Agreement. This Amendment and Optionee's respective Option ---------------- Agreement(s) (including the Exhibits, Schedules and other documents referred to herein and therein) constitute the entire agreement between the Company and the Optionee, and supersede any prior understandings, agreements, or representations by or between the parties, written or oral, to the extent they related in any way to the subject matter hereof. This Amendment amends Optionee's respective Option Agreement(s) only to the extent set forth herein and does not otherwise amend, waive or modify such Option Agreement(s), and all other terms and conditions of the respective Option Agreement(s) shall remain fully operative. [Signature Page Follows] IN WITNESS WHEREOF, the Company has duly executed this Amendment to be effective as of the date first written above, NEUROMEDICAL SYSTEMS, INC. By: ______________________________ Name: Title: Schedule -------- Pursuant to the General Instructions to Item 601 of Regulation SK of the Securities Act of 1933, as amended, the Company has filed only the form of the Company's Amendment to Employee Stock Option Agreements (the "Amendment") because the executed exemplars of such document are substantially identical in all material respects, except as to the parties thereto, and certain substituted terms, in each case as set forth as follows:
Employee Party to Amendment Substituted Terms - ------------------------------------------------------------------------------------------ David Duncan, Jr. Vice President Finance and Administration and CFO None Zeev Hadass, Ph.D. Vice President, Processing Operations None John B. Henneman, III "Optionee" definition contains no exclusions Co-CEO, Vice President of Corporate and includes John B. Henneman, III Development, Secretary and General Exercise Period paragraph extends Option Counsel exercise to three (3) years upon satisfaction of clause (i) or (ii) of such paragraph James M. Herriman, Vice President of Product Development None Uzi Ish-Hurwitz "Optionee" definition contains no exclusions Co-CEO, Executive Vice President, Chief and includes Uzi Ish-Hurwitz of Technical Operations and President, Exercise Period paragraph extends Option Neuromedical Systems Israel Ltd. exercise to three (3) years upon satisfaction of clause (i) or (ii) of such paragraph Laurie J. Mango, M.D. Vice President and Medical Director None Stephen Ng, M.D. President, NSI Asia Pacific Ltd. None Andrew C. Panagy Vice President, Marketing and Sales None Henk Snyman, M.D. President, NSI Europe B.V. None Howard M. Solomon, M.D. Vice President Medical Operations None
EX-11 15 COMPUTATION OF PRIMARY EARNINGS PER SHARE EXHIBIT 11. 0 NEUROMEDICAL SYSTEMS, INC. COMPUTATION OF PRIMARY EARNINGS PER SHARE
Three Months Ended September 30, Nine Months Ended September 30, ------------------------------- ----------------------------------- 1997 1996 1997 1996 --------------- --------------- ----------------- ----------------- Weighted average number of common shares outstanding 30,930,953 29,450,247 30,891,052 29,117,267 Net loss for period $ (9,244,000) $ (9,588,000) $ (27,738,000) $ (23,813,000) ------------ ------------ ------------- -------------- Net loss per share $ (0.30) $ (0.33) $ (0.90) $ (0.82) ============ ============ ============= ==============
1 NEUROMEDICAL SYSTEMS, INC. COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
Three Months Ended September 30, Nine Months Ended September 30, ------------------------------ ------------------------------- 1997 1996 1997 1996 --------------- -------------- --------------- --------------- Weighted average number of common shares outstanding 30,930,953 29,450,247 30,891,052 29,117,267 Assumed exercise of stock options and warrants using the treasury stock method (1) 534,931 3,110,686 919,447 3,420,283 ------------- ------------ ------------- --------------- Weighted average number of common and common equivalent shares outstanding 31,465,884 32,560,933 31,810,499 32,537,550 ============= ============ ============= =============== Net loss for period $ (9,244,000) $ (9,588,000) $ (27,738,000) $ (23,813,000) ------------- ------------ ------------- --------------- Net loss per share $ (0.29) $ (0.29) $ (0.87) $ (0.73) ============= ============ ============= ===============
(1) For purposes of calculating the number of shares issuable upon exercise of outstanding stock options and warrants, the daily average closing stock price of $7.22 was used for nine months of 1997, the closing stock price of $5.13 was used for three months of 1997, and the closing stock price of $18.63 was used for 1996. 2 EX-27 16 FINANCIAL DATA SCHEDULE
5 1000 9-MOS DEC-31-1997 SEP-30-1997 22,642 30,182 2,865 (315) 0 56,609 29,561 (13,150) 75,375 9,721 9,484 0 0 3 56,167 75,375 0 6,407 0 8,390 0 0 1,213 (27,738) 0 (27,738) 0 0 0 (27,738) (.90) (.87)
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