-----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, VLPm1nEgCo3rnrh9TRhOouNBJINJSI1KQv8bvToUJgepaYFVvvK3jY/59h7XvUzM QVysEAer9V6PdQ/Oz4ViVA== 0000950130-98-002682.txt : 19980518 0000950130-98-002682.hdr.sgml : 19980518 ACCESSION NUMBER: 0000950130-98-002682 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 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: 98624581 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 March 31, 1998 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 May 7, 1998, an aggregate of 31,055,846 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 March 31, 1998 PART I FINANCIAL INFORMATION PAGE - ------ --------------------- ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets at March 31, 1998 (unaudited) and December 31, 1997 3 Condensed Consolidated Statements of Operations for the three months ended March 31, 1998 and 1997 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997 (unaudited) 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II OTHER INFORMATION - ------- ----------------- Item 1. Legal Proceedings 14 Item 2. Changes in Securities 15 Item 3. Defaults upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 Safe Harbor Statement 16 Signature 17 NEUROMEDICAL SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31, 1998 1997 ----------------- ---------------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 12,514,000 $ 15,842,000 Short-term investments 24,999,000 30,094,000 Accounts receivable, net of allowance 2,515,000 2,119,000 Inventories 3,004,000 2,942,000 Prepaid expenses 708,000 617,000 Other current assets 801,000 525,000 ----------------- ---------------- Total current assets 44,541,000 52,139,000 Restricted cash 638,000 638,000 Property and equipment 11,156,000 12,092,000 Intangible assets, net of accumulated amortization (1998-$799,000, 1997-$753,000) 771,000 817,000 Note receivable from employee 600,000 600,000 Other assets 99,000 58,000 ----------------- ---------------- $ 57,805,000 $ 66,344,000 ================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of notes and bank loans payable $ 2,315,000 $ 2,705,000 Current portion of capital lease obligations 2,274,000 2,424,000 Accounts payable 1,423,000 1,149,000 Accrued liabilities 4,499,000 4,247,000 ----------------- ---------------- Total current liabilities 10,511,000 10,525,000 Notes and bank loans payable-long-term 3,386,000 3,762,000 Capital lease obligations, less current portion 4,060,000 4,583,000 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 - 31,054,860 shares in 1998 and 31,049,510 shares in 1997 3,000 3,000 Additional paid-in capital 178,821,000 178,801,000 Note receivable from officer (146,000) ---- Deferred compensation (430,000) (576,000) Accumulated deficit (138,746,000) (131,089,000) Accumulated other comprehensive income - foreign currency translation 346,000 335,000 ----------------- ---------------- Total stockholders' equity 39,848,000 47,474,000 ----------------- ---------------- $ 57,805,000 $ 66,344,000 ================= ================
See accompanying notes. -3- NEUROMEDICAL SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended March 31, -------------------------------- 1998 1997 -------------- -------------- Revenues: Slide processing and equipment sales $ 2,574,000 $ 1,651,000 -------------- -------------- Total revenues 2,574,000 1,651,000 -------------- -------------- Costs and Expenses: Cost of sales 3,120,000 2,593,000 Sales and marketing 2,147,000 5,478,000 Research and development 2,313,000 1,948,000 General and administrative 2,750,000 1,940,000 -------------- -------------- Total costs and expenses 10,330,000 11,959,000 -------------- -------------- Loss from operations (7,756,000) (10,308,000) Other income (expense): Interest income 547,000 992,000 Interest expense (371,000) (388,000) Foreign exchange (77,000) (21,000) -------------- -------------- Other income (expense) - net 99,000 583,000 -------------- -------------- Net loss $ (7,657,000) $ (9,725,000) ============== ============== Basic and diluted net loss per share $ (0.25) $ (0.32) ============== ============== Weighted average shares used in computation of net loss per share 31,055,000 30,825,000 ============== ==============
See accompanying notes. -4- NEUROMEDICAL SYSTEMS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, ---------------------------- 1998 1997 ----------- ------------ Operating Activities Net Loss $(7,657,000) $ (9,725,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,171,000 1,144,000 Non cash compensation related to issuance of common stock warrants and options 166,000 ---- Foreign exchange loss 90,000 11,000 Changes in operating assets and liabilities: Increase in accounts receivable (396,000) (46,000) Increase in inventory (62,000) ---- Increase in prepaid expenses and other assets (408,000) (126,000) Increase (decrease) in accounts payable 274,000 (622,000) Increase in accrued liabilities 252,000 608,000 ----------- ------------ Net cash used in operating activities (6,570,000) (8,756,000) ----------- ------------ Investing Activities Purchases of short-term securities ---- (25,138,000) Proceeds from maturing short-term securities 5,095,000 ---- Purchases of property and equipment (210,000) (2,040,000) ----------- ------------ Net cash used in investing activities 4,885,000 (27,178,000) ----------- ------------ Financing Activities Issuance of stock pursuant to exercise of options ---- 128,000 Proceeds from notes and bank loans ---- 212,000 Note receivable from officer (146,000) ---- Payment of notes and bank loans (767,000) (403,000) Payments on capital leases (686,000) (534,000) ----------- ------------ Net cash used in financing activities (1,599,000) (597,000) ----------- ------------ Effect of exchange rate changes on cash (44,000) 23,000 ----------- ------------ Net decrease in cash and cash equivalents (3,328,000) (36,508,000) Cash and cash equivalents, beginning of period 15,842,000 83,391,000 ----------- ------------ Cash and cash equivalents, end of period $12,514,000 $ 46,883,000 =========== ============
See accompanying notes. -5- Neuromedical Systems, Inc. and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 (Unaudited) NOTE 1. BASIS FOR CONSOLIDATION 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 the fair presentation have been included. These condensed consolidated financial statements and footnotes thereto are included in the Neuromedical Systems, Inc. (the "Company" or "NSI") Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997 Form 10-K"). Operating results for the three month period ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. NOTE 2. RELATED PARTY TRANSACTION On March 13, 1998, the Company entered into a Note Agreement with its President and Chief Executive Officer in the amount of $146,000. The Note is due on March 13, 2003, bears interest at 5.61% per annum and is secured by 70,000 shares of the Company's common stock. NOTE 3. STOCK OPTIONS During March 1998 the number of shares authorized under the Neuromedical Systems, Inc. 1993 Stock Option Plan, as Amended and Restated October 25, 1995, and as further amended, was increased by 900,000 shares to 5,040,000 shares. NOTE 4. COMPREHENSIVE INCOME As of January 1, 1998, the Company adopted Statement 130, Reporting Comprehensive Income. Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net loss or shareholders' equity. Statement 130 requires unrealized gains or losses on the Company's foreign exchange translation adjustments, which prior to the adoption were reported separately in shareholders' equity to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of Statement 130. -6- NEUROMEDICAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (Continued) During the first quarter ended March 31, 1998 and 1997 total comprehensive loss amounted to $7,646,000 and $9,745,000, respectively. The components of comprehensive loss, net of related tax, for the three month periods ended March 31, 1998 and 1997 are as follows:
1998 1997 ---- ---- Net Loss (7,657,000) (9,725,000) Foreign currency translation adjustment 11,000 20,000 ----------- ----------- Comprehensive loss (7,646,000) (9,745,000) =========== ===========
The components of accumulated other comprehensive income at March 31, 1998 and December 31, 1997 are as follows:
1998 1997 ---- ---- Foreign currency translation adjustment and accumulated other comprehensive income 346,000 335,000 =========== ===========
-7- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW Neuromedical Systems, Inc., a Delaware corporation (the "Company") is a healthcare technology company focused on bringing intelligent vision to medicine. It is the Company's objective to become the premier supplier of cytology screening and anatomic pathology diagnostic equipment and services to laboratories. The Company's first, and to date, only product, the PapNet Testing System, is a sophisticated interactive system that assists the laboratory professional in the detection of abnormal cells on cervical cytology specimens (also known as Pap smears). Since its inception, the Company has been primarily engaged in the development, manufacturing and marketing of the PapNet Testing System, and the scanning of Pap smears at its slide processing facilities. The Company's revenues are currently being derived from sales of PapNet testing services, sales of PapNet Testing Systems under the PAPNET-on- CyteTM trade name, laboratory services and interest income. In the United States, the PapNet Testing System is promoted to assist the cytology professional in the examination of conventionally prepared smears that have first been assessed by standard manual microscopy to be "negative", "within normal limits", or evidencing "benign cellular changes." Outside of the United States, some of the Company's laboratory customers use the PapNet Testing System in a variety of different modes, including to assist in the interpretation of liquid-based Pap specimens and Pap smears that have not first been assessed by manual microscopic review. The PapNet system may be purchased or leased by the laboratory customer in its entirety or individual components, or accessed on a patient by patient basis. The PapNet 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 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. However, during that time the Company was selling PapNet testing services for commercial use outside of the United States. The Company established three scanning facilities (the "Scanning Centers"), one each in the United States, The Netherlands and Hong Kong. The Netherlands Scanning Center has scanned slides primarily from customers in Europe while the Hong Kong Scanning Center has scanned slides from Asia and Australia. During the third quarter of 1997, the Company announced a strategic shift in its European business approach from being a supplier of scanning services via a centralized scanning center to selling and leasing the PapNet Testing System equipment to laboratories under the PAPNET-on-Cyte trade name During the fourth quarter of 1997 the Company placed the first PAPNET-on-Cyte system to a customer. During the first quarter of 1998 the Company placed five PAPNET-on-Cyte systems, three as sales and two leased systems. -8- In addition, the Company announced plans to close its Netherlands Scanning Center during the second quarter ending June 30, 1998 and intends to lease or sell its existing PapNet Systems to laboratory customers. The charge to operations resulting from closure of the Netherlands Scanning Center is not expected to be material. In the United States, the Company continued laying the groundwork for a similar transition. However, due to differences in the laboratory marketplace, reimbursement practice and regulatory requirements, the Company expects this transition will extend until at least the end of 1999. In addition to slide scanning services, the Company's Asia Pacific operations provide PapNet-assisted screening for customers in Hong Kong, China and Taiwan through the Company's acquired laboratory business, New System International, Ltd. The Company has incurred net losses since inception through March 31, 1998 of $138,746,000 and has to date generated only limited commercial revenues. Since the approval of the PapNet Testing System by the FDA, the Company has been increasing the scale of operations to commercial levels in the United States and internationally. Management believes that its existing cash resources will be sufficient to fund operations and to meet its cash requirements through 1999, although there can be no assurance in this regard. The Company's past results of operations reflect its early commercial stage and are not necessarily indicative of the results from operations that may be expected in the future. RESULTS OF OPERATIONS The Company's results of operations have fluctuated significantly from year to year and quarter to quarter, principally due to the variations in the level of expenditures relating to its marketing and sales programs, clinical trials, research projects and international expansion. The Company's results of operations are expected to continue to fluctuate significantly and to result in substantial losses for the forseeable future. The Company believes that significant revenue growth during 1998 is dependent on the success of the strategic shift of its European business strategy to sell PAPNET-on-Cyte system directly to customers. The Company does not expect significant revenue growth in the United States until it obtains FDA approval for use of the PapNet Testing System as an interactive primary screener of Pap smears and there is commercial acceptance for such use. From inception through March 31, 1998, the Company has experienced negative gross margins due to the significant underutilization of its scanning and manufacturing operations. Improvement in the Company's future gross margins will be dependent upon the level of commercial acceptance of the PapNet Testing System, and, in particular, during 1998, the degree of success of PAPNET-on-Cyte sales and leases in Europe. -9- The Company's costs and expenses decreased during the first quarter of 1998 compared to the first quarter of 1997. The Company anticipates that aggregate costs and expenses will decrease in 1998 compared to 1997, following the Company's decision to focus sales and marketing efforts on laboratory customers and opinion leading clinicians, sell equipment in Europe and consolidate product development in the United States. However, the Company does not expect total costs and expenses to decrease significantly in 1998 because of the expected increased costs of clinical studies for a primary screening indication in the United States, a full year of cost associated with the Company's Asia/Pacific operations versus a partial year of cost in 1997 associated with two mid year acquisitions, uncertainty over the level of costs associated with ongoing litigation, and higher royalty payments in sales territories of the Company's territorial licensees that will increase proportionate to increases in the Company's revenues in those territories. Interest expense is expected to decrease in 1998, compared to 1997, due to the scheduled repayment of existing debt. Interest income from the Company's investment of excess funds is expected to offset interest expense in 1998. The Company expects that interest income will decrease in 1998, compared to 1997, because of the significant use of cash during 1997, the first quarter of 1998 and the anticipated use of cash in the remainder of 1998. RESULTS FOR THE FIRST QUARTER ENDING MARCH 31, 1998. Revenues for the first quarter ended March 31, 1998 were $2,574,000, an increase of $923,000 or 56% from $1,651,000 during the first quarter ended March 31, 1997. Revenue from European operations increased to $1,059,000 during the first quarter ended March 31, 1998 compared to $280,000 in the first quarter ended March 31,1997. The increase was due primarily to the Company's continued implementation of its business strategy in Europe of selling and leasing PAPNET- on-Cyte systems directly to laboratory customers. Revenues from United States operations decreased to $890,000 in the first quarter ended March 31, 1998 compared to $993,000 in the first quarter ended March 31, 1997. The decrease reflected a number of factors which included the continued challenge surrounding cervical screening reimbursement. Revenues from Asia/Pacific operations increased to $625,000 in the quarter ended March 31, 1998 compared to $378,000 in the first quarter ended March 31, 1997. The increase primarily reflected the acquisition of a laboratory business in June 1997. Total costs and expenses for the first quarter ended March 31, 1998 were $10,330,000 compared to $11,959,000 for the quarter ended March 31, 1997, a decrease of $1,629,000 or 14%. The decrease was primarily due to decreased sales and marketing expenses offset by increases in research and development expense, general and administrative expense and cost of sales. Cost of sales expense increased to $3,120,000 during the quarter ended March 31, 1998, compared to $2,593,000 during the quarter ended March 31, 1997, an increase of $527,000. The increase primarily reflected costs associated with the cost of sales of -10- PAPNET-on-Cyte systems and costs associated with the acquired laboratory business in Hong Kong in June 1997. Sales and marketing expense decreased to $2,147,000 during the quarter ended March 31, 1998, compared to $5,478,000 during the quarter ended March 31, 1997, a decrease of $3,331,000. The decrease in sales and marketing expense was due primarily to a reduction of sales and marketing expense in the United States and Australia as a result of the Company's decision to suspend consumer advertising and channel communications through laboratories which was offset by higher marketing and sales expenses associated with acquired operations in the Asia/Pacific region in June of 1997 and Taiwan in August of 1997. Research and development expense increased to $2,313,000 during the quarter ended March 31, 1998, compared to $1,948,000 during the quarter ended March 31,1997, an increase of $365,000. The increase in research and development expense was due primarily to costs associated with preparation for clinical studies for an interactive primary screening indication in the United States and costs associated with consolidation of product development operations from Israel to the United States. General and administrative expense increased to $2,750,000 during the first quarter ended March 31,1998, compared to $1,940,000 during the first quarter ended March 31, 1997, an increase of $810,000. The increase in general and administrative expense was due primarily to severance costs related to two former executives and increased costs in Europe to support operations. Interest income decreased to $547,000 for the first quarter ended March 31, 1998, compared to $992,000 for the first quarter ended March 31, 1997, a decrease of $445,000. The decrease reflected the lower level of cash, cash equivalents and short-term investments available to the Company during the first quarter of 1998 as a result of the Company's continuing losses in 1997 and the first quarter of 1998. Interest expense decreased to $371,000 for the first quarter ended March 31, 1998, compared to $388,000 for the first quarter ended March 31, 1997, a decrease of $17,000. The Company incurred a net loss during the first quarter ended March 31, 1998 of $7,657,000, or $0.25 per share, compared to a net loss of $9,725,000, or $0.32 per share during the first quarter ended March 31, 1997. The decreased net loss was due primarily to the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations since its inception primarily through the issuance of equity securities; sales of PapNet Testing System services; sales of PAPNET-on-Cyte systems to laboratories in Europe; 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 agreements. -11- The Company expects to generate increased revenue from the sale and leases of PAPNET-on-Cyte systems to customers in 1998. The Company's combined cash, cash equivalents, and short-term investments totaled $37,513,000 at March 31, 1998, a decrease of $8,423,000 from December 31, 1997. During the first quarter of 1998, the Company used $6,570,000 for operating activities; $210,000 for investing activities (excluding proceeds of $5,095,000 from the sale of short-term investments); and $1,599,000 for financing activities. The primary uses of cash for operating activities during the first quarter ended March 31, 1998 were the net loss of $7,657,000, inclusive of non cash items totaling $1,427,000 and increased accounts receivable and other asset balances in Europe. These items were offset by increased accounts payable and accrued liabilities. The primary uses of cash for financing activities were payment of $300,000 under a note payable to stockholder, $467,000 of payments under bank and equipment loans, a loan of $146,000 to the President and Chief Executive Officer secured by 70,000 shares of the Company's common stock and $686,000 of payments under capital lease obligations. The Company anticipates that its use of cash will be substantial for the foreseeable future. In particular, the Company anticipates that expenditures will continue to be substantial in 1998 due to the cost of marketing and sales in both the United States and internationally, the expansion of research and development programs for potential additional clinical indications and claims, and the cost of ongoing litigation. The Company anticipates that during 1998 it will invest approximately $3.0 million for working capital purposes and approximately $2.0 million for capital expenditures and leasehold improvements. Although funding for these capital expenditures is expected to be available out of the Company's cash resources, management of the Company believes that it may be desirable for the Company to finance certain such capital expenditures through additional debt or capital lease obligations. There can be no assurance, however, that such financing can be obtained or, if obtained, that the terms thereof will be reasonable. During 1995, 1996 and 1997, the Company entered into a number of loan and equipment lease agreements with financing companies to provide the Company with lines of credit to finance certain of the Company's equipment purchases. Certain of these loan and lease lines of credit commitments expired on December 31, 1997. Under the terms of certain of these loan agreements, the loans are secured by a first priority interest in the financed equipment. These loan and lease agreements require that the Company maintain certain financial covenants throughout the duration of the repayment period. During the second quarter ending June 30, 1998 the Company will be required, under certain of these financial covenants, to provide a letter of credit and restricted cash of $812,000. Additionally, during 1998 the Company anticipates that it will be required, under certain of these financial covenants, to provide additional letters of credit or restricted cash estimated to be approximately $2,900,000. -12- The Company anticipates that its current cash, cash equivalents and short- term investments will be sufficient to enable it to meet its future operating requirements through 1999, although there can be no assurance in this regard. The Company does not expect to generate a positive cash flow in the foreseeable future due to continued working capital requirements and capital expenditures, repayment of debt and capital lease obligations and ongoing losses from operations during 1998. The Company may need to arrange additional equity or debt financing for future operation of its business. There can be no assurance that such financing can be obtained or, if it obtained, that the terms thereof will be reasonable. The Company plans to invest excess funds in short-term instruments, including money market funds. To date, the Company has not implemented a program to hedge its foreign currency risk, but may do so in the future. The Company is involved in several lawsuits. See "Legal Proceedings" under Item I of Part II herein for a complete discussion of the legal proceedings in which the Company is involved, which discussion is incorporated herein by reference thereto. -13- PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. As previously disclosed in the Company's reports filed with the Securities and Exchange Commission, on March 28, 1997, Neopath, Inc. ("Neopath") filed a patent infringement lawsuit against the Company in the United States District Court for the Western District of Washington. The lawsuit seeks to enjoin the Company from allegedly infringing three of Neopath's patents. Neopath is seeking preliminary and permanent injunctive relief as well as compensatory damages, including treble damages. On March 18, 1998, NeoPath and the Company filed a stipulated dismissal of two of the three NeoPath patents asserted against the Company in this case. Also on March 18, 1998, the Company filed a motion for summary judgment of non-infringement on the remaining NeoPath patent. That motion has since been denied by the Court. On April 14, 1998, the Court permitted NeoPath to amend its Complaint to add an allegation of infringement of a further NeoPath patent, which Neopath has done. The Company has filed an answer denying infringement of the patents and asserting that the patents are invalid. The Company believes that it has valid legal and factual defenses to NeoPath's allegations of infringement of the patents. The Company intends to continue to vigorously defend this action. The Company also believes that an adverse judgment in this case would not have a material effect on the Company's operations, financial position or cash flow. Also as previously disclosed in the Company's reports filed with the Securities and Exchange Commission, on March 18, 1998, NeoPath filed an additional patent infringement lawsuit against the Company in the United States District Court for the Western District of Washington. The lawsuit seeks to enjoin the Company from allegedly infringing two additional NeoPath patents. NeoPath is seeking preliminary and permanent injunctive relief as well as compensatory damages, including treble damages. The Company has filed an answer to the Complaint in the lawsuit denying infringement and asserting that the patents are invalid. The Company believes that it has valid legal and factual defenses and intends to vigorously defend this action. Except for the developments set forth above, no material developments occurred during the first quarter of 1998 with respect to legal proceedings in which the Company is involved. A complete discussion of such proceedings may be found in Item 3 of Part I of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. -14- ITEM 2. CHANGES IN SECURITIES. Not Applicable. 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. Not Applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits.
Number Exhibit ------ ------- 10.45 Secured Promissory Note, dated March 13, 1998, between the Company and Paul R. Sohmer, M.D. 10.46 Amendment to the Neuromedical Systems, Inc. 1993 Stock Option Plan, as Amended and Restated October 25, 1995. 27.1 Financial Data Schedule
(b) Reports on Form 8-K during the quarter for which this report is filed:
Date Subject of Report ---- ----------------- February 10, 1998 Fourth Quarter 1997 and 1997 Year-End Financial Results March 9, 1998 Appointment of new Chief Financial Officer of the Company
-15- SAFE HARBOR STATEMENT Statements in this Quarterly Report of the Company on Form 10-Q which are not historical facts, including statements about the Company's confidence and strategies and its expectations about demand for and acceptance of the PapNet Testing System, are forward looking statements that involve risks and uncertainties. The forward looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially due to a variety of factors which include, but are 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 both products and advertising, limited marketing and sales history, the impact of third party reimbursement decisions, risk of litigation and other risks detailed in the Company's Securities and Exchange Commission filings, including its 1997 Form 10-K and Exhibit 99.1. -16- 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: May 15, 1998 By: /s/ Mark L. Smith ------------------------------ Mark L. Smith Vice President, Finance and Administration, Chief Financial Officer -17- EX-10.45 2 SECURED PROMISSORY NOTE Exhibit 10.45 SECURED PROMISSORY NOTE $145,689.85 MARCH 13, 1998 FOR VALUE RECEIVED, the undersigned, Paul Sohmer (the "Borrower"), -------- hereby agrees and promises to pay to the order of Neuromedical Systems, Inc., a Delaware corporation, and its transferees, successors and assigns (collectively, the "Lender"), the principal sum of One Hundred Forty-Five Thousand Six Hundred ------ Eighty-Nine and 85/100 Dollars ($145,689.85) in accordance with the terms and conditions set forth below together with interest on the unpaid principal balance hereof from time to time at the rate and on the dates set forth below. 1. Final Maturity. the Borrower shall pay the entire outstanding -------------- principal balance of this Note, together with all accrued and unpaid interest thereon, in full on March 13, 2003 (the "Maturity Date"). ------------- 2. Optional Prepayments. this Note may be prepaid at any time and -------------------- from time to time at the discretion of the Borrower, in whole or in part, without penalty or premium. 3. Interest Rate and Interest Payment Dates. ---------------------------------------- (a) Ordinary Interest. The Borrower shall pay interest on the ----------------- unpaid principal amount of this Note from the date of this Note until payment in full thereof at a rate equal to 5.61% per annum, compounded semi-annually, until paid in full. Interest on this Note shall be due and payable in arrears on the Maturity Date. (b) Default Interest; Maximum Legal Rate. If the Borrower shall ------------------------------------ fail to pay any principal amount of this Note when due and payable (whether at the Maturity Date, by acceleration or otherwise), such principal amount shall thereafter bear interest, payable on demand from time to time and upon payment in full of such overdue amount, until paid in full, at a rate of equal to 5.61%, plus two points. In no event shall the Borrower pay interest on this Note at a rate in excess of that permitted by applicable law, any such excess payments being deemed for all purposes a prepayment of principal. (c) Calculation. Interest shall be calculated on the basis of ----------- the actual number of days elapsed over a 365 day year. 4. Payments; Application to Interest and Principal. The Borrower ----------------------------------------------- shall make all payments of principal and interest and other amounts payable under this Note not later than 11:00 A.M., New York City time, on the date such payment is due, in lawful money of the United States of America by wire transfer of immediately available funds to the Lender's account (or by such other method or at such other bank account) as may be designated in writing from time to time by the Lender. Any prepayment pursuant to Section 2 shall be applied to reduce, first, the accrued and unpaid interest on the principal balance of this Note and, then, the unpaid principal balance hereof, in each case outstanding at the time of such prepayment. 5. Pledge of Collateral. -------------------- 5.1 Pledge. The Borrower hereby pledges, assigns and grants to the ------ Lender a security interest in the assets referred to in Section 5.2 (the "Collateral") to secure the prompt payment and performance of the Borrower's - ----------- obligations under this Note (the "Obligations"). ----------- 5.2 Collateral. The Collateral consists of the following types ---------- or items of property: (a) 70,000 shares of common stock, par value $.0001 per share ("Common Stock"), of Neuromedical Systems, Inc., a Delaware corporation ------------ (the "Issuer"), which shares are being purchased contemporaneously ------ herewith with the amount borrowed under this Note; and (b) (i) the certificates or instruments, if any, representing such securities, (ii) all dividends (cash, stock or otherwise), cash instruments, rights to subscribe, purchase or sell and all other rights and property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such securities, (iii) all replacements, additions to and substitutions for any of the property referred to in this Section 5.2, and (iv) the proceeds, interest, profits and other income of or on any of the property referred to in this Section 5.2. 5.3 Transfer of Collateral. All certificates or instruments ---------------------- representing or evidencing any of the securities referred to in Section 5.2(a) and all additional securities, if any, constituting Collateral (the "Pledged ------- Securities") shall be delivered to and held pursuant hereto by the Lender and - ---------- shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank. The Lender shall have the right, at any time during the continuance of an Event of Default to transfer to or to register in the name of the Lender or any of its nominees any or all of the Pledged Securities, subject only to the revocable rights specified in the fourth sentence of Section 8. -2- 5.4 Representations, Warranties and Agreements. The Borrower ------------------------------------------ represents and warrants to and agrees with the Lender that: (a) Ownership of Collateral; Encumbrances. The Borrower is ------------------------------------- the legal and beneficial owner of the Pledged Securities owned from time to time by the Borrower free and clear of any adverse claim or lien except for the security interest created by this Note, and the Borrower has full right, power and authority to pledge, assign and grant a security interest in the Collateral to the Lender. (b) No Required Consent. No authorization, consent, approval ------------------- or other action by, and no notice to or filing with, any governmental authority is required for (i) the due execution, delivery and performance by the Borrower of this Note, (ii) the grant by the Borrower of the security interest granted by this Note, (iii) the perfection of such security interest or (iv) the exercise by the Lender of its rights and remedies under this Note, except that filings may be required to perfect such security interest (to the extent such security interest cannot be perfected by possession) and sale of the Collateral must be made in accordance with applicable law. (c) Pledged Securities. The Pledged Securities have been ------------------ duly authorized and validly issued, and are fully paid and non- assessable. (d) First Priority Security Interest. The pledge of Pledged -------------------------------- Securities pursuant to this Note creates a valid and perfected first priority security interest in such Collateral, enforceable against the Borrower and all third parties and securing payment of the Obligations. (e) Sale, Disposition or Encumbrance of Collateral. The ---------------------------------------------- Borrower will not in any way encumber any of the Collateral (or permit or suffer any of the Collateral to be encumbered) or sell, pledge, assign, lend or otherwise dispose of or transfer any of the Collateral to or in favor of any person or entity other than the Lender. (f) Dividends or Distributions. So long as no Event of -------------------------- Default (as defined in Section 6 hereof) shall have occurred and be continuing, the Borrower shall be entitled to receive and retain any and all dividends and interest paid in respect of the Collateral; provided, however, that any and all -------- ------- (i) dividends and interest paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for (including, without limitation, any certificate or share -3- purchased or exchanged in connection with a tender offer or merger agreement), any Collateral, (ii) dividends and other distributions paid or payable in cash in respect of any Collateral in connection with total liquidation or dissolution, and (iii) cash paid, payable or otherwise distributed in redemption of, or in exchange for, any Collateral, shall be, and shall be forthwith delivered to the Lender to hold as, Collateral and shall, if received by the Borrower, be received in trust for the benefit of the Lender, be segregated from the other property or funds of the Borrower, and be forthwith delivered to the Lender as Collateral in the same form as so received (with any necessary endorsement). Upon the occurrence and during the continuance of an Event of Default, all rights of the Borrower to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to this clause (f) shall cease, and all such rights shall thereupon become vested in the Lender who shall thereupon have the sole right to receive and hold as Collateral such dividends and interest payments, but the Lender shall have no duty to receive and hold such dividends and interest payments and shall not be responsible for any failure to do so or delay in so doing. (g) Stock Powers. The Borrower shall furnish to the Lender ------------ such stock powers and other instruments as may be required by the Lender to assure the transferability of the Collateral when and as often as may be requested by the Lender. (h) Voting and Other Consensual Rights. The Borrower shall ---------------------------------- be entitled to exercise any and all voting and other consensual rights pertaining to the Collateral or any part thereof for any purpose not inconsistent with the terms of this Note. 6. Events of Default. If any of the following events (each, an ----------------- "Event of Default") shall occur and be continuing: - ----------------- (i) the Borrower shall fail to pay any principal of, or interest on, this Note when the same becomes due and payable in accordance with the terms hereof; -4- (ii) the Borrower shall fail to comply in any material respect with any other agreement in this Note and such failure shall continue for 30 days after notice from the Lender; or (iii) the Borrower shall generally not pay his debts as such debts become due, or shall admit in writing his inability to pay his debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower seeking to adjudicate him a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of him or his debts under any law relating to bankruptcy, insolvency or relief or the appointment of a receiver, trustee, or other similar official for him or for any substantial part of his property; then, and in any such event, the Lender may, by notice to the Borrower, (a) Declare the entire unpaid principal amount of this Note and all interest thereon to be forthwith due and payable, whereupon the entire unpaid principal amount of this Note and all such interest shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower. (b) Sell, in one or more sales and in one or more parcels, or otherwise dispose of any or all of the Collateral in any commercially reasonable manner as the Lender may elect, in a public or private transaction, at any location as deemed reasonable by the Lender either for cash or credit or for future delivery at such price at the Lender may deem fair, and (unless prohibited by the Uniform Commercial Code, as adopted in any applicable jurisdiction, the "Code") the Lender may be the purchaser of ---- any or all Collateral so sold and may apply the purchase price therefor against any Obligations secured hereby. Reasonable notification of the time and place of any public sale of the Collateral, or reasonable notification of the time after which any private sale or other intended disposition of the Collateral is to be made, shall be sent to the Borrower and to any other person or entity entitled to notice under the Code; provided that, if any of the Collateral threatens to decline speedily in value or is of the type customarily sold on a recognized market, the Lender may sell or otherwise dispose of the Collateral without notification, advertisement or other notice of any kind. Any such sale or transfer by the Lender either to itself or to any other person or entity shall be absolutely free from any claim of right by the Borrower, including any equity or right of redemption, stay or appraisal which the Borrower has or may have under any rule of law, regulation or statute now existing or hereafter adopted. Upon any such sale or transfer, the Lender shall have the right to deliver, assign and transfer to the purchaser or transferee thereof the Collateral so sold or transferred. If the -5- Lender deems it advisable to do so, it may restrict the bidders or purchasers of any such sale or transfer to persons or entities who will represent and agree that they are purchasing the Collateral for their own account and not with the view to the distribution or resale of any of the Collateral. The Borrower agrees that private sales so made may be at prices and on other terms less favorable to the seller than if the Collateral were sold at public sale, and that the Lender has no obligation to delay the sale of the Collateral for the period of time necessary to permit the registration of the Collateral for public sale under the Securities Act of 1933 and under applicable state securities or "blue sky" laws. The Borrower agrees that a private sale or sales made under the foregoing circumstances shall be deemed to have been made in a commercially reasonable manner. The Lender may, at its discretion, provide for a public sale, and any such public sale shall be held at such time or times within ordinary business hours and at such place or places as the Lender may fix in the notice of such sale. The Lender shall not be obligated to make any sale pursuant to any such notice. The Lender may, without notice or publication, adjourn any public or private sale by announcement at any time and place fixed for such sale, and such sale may be made at any time or place to which the same may be so adjourned. If only part of the Collateral is sold or transferred such that the Obligations remain outstanding (in whole or in part), the Lender's rights and remedies hereunder shall not be exhausted, waived or modified, and the Lender is specifically empowered to make one or more successive sales or transfers until all the Collateral shall be sold or transferred and all the Obligations are paid. In the event that the Lender elects not to sell the Collateral, the Lender retains its rights to dispose of or utilize the Collateral or any part or parts thereof in any manner authorized or permitted by law or in equity, and to apply the proceeds of the same towards payment of the Obligations. Each and every method of disposition of the Collateral described in this clause (b) shall constitute disposition in a commercially reasonable manner. (c) Apply proceeds of the disposition of the Collateral to the Obligations in any manner elected by the Lender and permitted by the Code or otherwise permitted by law or in equity. (d) Appoint any person as agent to perform any act or acts necessary or incident to any sale or transfer by the Lender of the Collateral. (e) Exercise all other rights and remedies permitted by law or in equity. The Borrower hereby irrevocably appoints the Lender as the Borrower's attorney-in-fact, with full authority in the place and stead of the Borrower and in the name of the Borrower or otherwise, from time to time during the continuance of an Event of Default to take any action and to execute any assignment, certificate, financing statement, stock power, notification, document or instrument which the Lender may deem necessary -6- or advisable to accomplish the purposes of this Agreement, including, without limitation, to receive, endorse and collect all instruments made payable to the Lender representing any dividend, interest payments or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. If any applicable provision of any law requires the Lender to give reasonable notice of any sale or disposition or other action, the Borrower hereby agrees that fifteen days' prior written notice shall constitute reasonable notice thereof. Such notice, in the case of public sale, shall state the time and place fixed for such sale and, in the case of private sale, the time after which such sale is to be made. The Lender may enforce its rights hereunder without prior judicial process or judicial hearing, and to the extent permitted by law the Borrower expressly waives any and all legal rights which might otherwise require the Lender to enforce its rights by judicial process. The Borrower shall pay on demand all reasonable costs and expenses of Lender in connection with the enforcement of this Note including the reasonable fees and expenses of counsel with respect thereto. 7. Notices. All notices and other communications provided for ------- hereunder shall be in writing (including telecopy communication) and mailed, telecopied, or delivered if to the Lender: Neuromedical Systems, Inc. Two Executive Boulevard Suffern, New York 10901-4164 Telecopy No.: (914) 368-3894 Attention: Chief Financial Officer if to the Borrower: Paul Sohmer c/o Neuromedical Systems, Inc. Two Executive Boulevard Suffern, New York 10901-4164 Telecopy No.: (914) 368-3896 or at such other address or telecopy number as shall be designated by a party in a written notice to the other party. 8. No Waivers; Cumulative Remedies; Amendment; Survival of Covenants; ------------------------------------------------------------------ Headings; Governing Law; Submission to Jurisdiction; Express Waiver. No action, - ------------------------------------------------------------------- delay or omission by the Lender shall constitute a waiver of any of the rights or privileges of the Lender under this Note nor shall any single or partial exercise of any such right or privilege preclude any other or further exercise thereof or the exercise of any other right or privilege. Such rights are cumulative and not exclusive of any rights -7- provided by law. This Note may not be amended or otherwise modified except by a written instrument signed by the Lender. Upon the complete payment of the Obligations, the Lender will release, reassign and transfer the Collateral to the Borrower and this Note shall be of no further force or effect. Section headings herein shall have no legal effect. THIS NOTE SHALL BE DEEMED MADE UNDER, AND BE GOVERNED BY, THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAWS RULES. THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NON- EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR NEW YORK STATE COURT SITTING IN THE COUNTY AND STATE OF NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE LENDER OR ANY AFFILIATE OF THE LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THE NOTE SHALL BE BROUGHT ONLY IN A COURT IN THE COUNTY AND STATE OR A FEDERAL COURT IN SUCH COUNTY OF NEW YORK SO LONG AS SUCH COURT HAS PERSONAL JURISDICTION. THE BORROWER AND THE LENDER HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THE NOTE. Except as expressly provided in this Note, the Borrower expressly waives diligence, presentment, demand for payment, any other demand, protest, notice of dishonor, notice of presentment, notice of demand or notice of protest and all other notices of any kind in connection with this Note and any payment due hereunder. -8- IN WITNESS WHEREOF, the Borrower has executed this Note as of the date first above written. /s/ __________________________ Paul Sohmer Agreed and Accepted: NEUROMEDICAL SYSTEMS, INC. By:/s/ ------------------------- -9- EX-10.46 3 1993 STOCK OPTION PLAN Exhibit 10.46 NEUROMEDICAL SYSTEMS, INC. 1993 STOCK OPTION PLAN AS AMENDED AND RESTATED OCTOBER 25, 1995 AMENDMENT This AMENDMENT of the Neuromedical Systems, Inc. 1993 Stock Option Plan, as Amended and Restated on October 25, 1995, as further amended (the "Plan") is effective as of March 24, 1998. Capitalized terms not otherwise defined herein shall have the meanings assigned thereto in the Plan. WHEREAS, under the terms of the Plan, 4,140,000 shares of the Company's Common Stock (such amount taking account of the reverse split of Common Stock in December 1995) were made available for issuance for the purpose of providing an incentive to Company employees, officers, consultants and directors (the "Original Allotment"); WHEREAS, the Original Allotment remaining available as of the date hereof is no longer sufficient to provide for grants of Company securities in accordance with the purposes of the Plan; WHEREAS, the Board of Directors of the Company (the "Board") has authorized this Amendment to the Plan, whereby additional shares of Company Common Stock, par value $.0001 per share, shall be made available for issuance for the purpose of providing an incentive to Company employees, officers, consultants and directors; WHEREAS, the Board has taken such action to benefit the Company as a whole and has acted in accordance with the authority permitted under the 1996 Amendments to the Securities Exchange Act of 1934, as amended. NOW THEREFORE, the Plan is hereby amended as follows: the first clause of the first sentence of Section 4.1 of the Plan, providing that, "The maximum number of Shares that may be made the subject of Options and Awards granted under the Plan is 4,140,000;" is hereby deleted, and replaced with the following clause: "The maximum number of Shares that may be made the subject of Options and Awards granted under the Plan is 5,040,000;" All other provisions of the Plan, including without limitation, the other provisions of Section 4.1, shall remain in full force and effect. * * * EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1998 MAR-31-1998 37,513 0 2,879 (364) 3,004 44,541 26,480 (15,324) 57,805 10,511 7,446 0 0 3 39,845 57,805 0 2,574 0 3,120 0 0 371 (7,657) 0 (7,657) 0 0 0 (7,657) (0.25) 0.0
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