-----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, I6smp0sdvDazsYbxPIw11sE3igpDV8km4JRQIFLPHG+FnHChDM1nSL8qrM9Owa/U IiIRB45QCV0BmtLex1PHig== 0000950130-97-003517.txt : 19970811 0000950130-97-003517.hdr.sgml : 19970811 ACCESSION NUMBER: 0000950130-97-003517 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970808 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: 1934 Act SEC FILE NUMBER: 000-26984 FILM NUMBER: 97654196 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 June 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 July 31, 1997, an aggregate of 30,919,752 shares of common stock were outstanding. NEUROMEDICAL SYSTEMS, INC. Table of Contents Form 10-Q for the Quarterly Period Ended June 30, 1997
PART I FINANCIAL INFORMATION PAGE - ------ --------------------- ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets at June 30, 1997 (unaudited) and December 31, 1996 3 Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 1997 and 1996 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the six months ended June 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 8 PART II OTHER INFORMATION - ------- ----------------- Item 1. Legal Proceedings 17 Item 2. Changes in Securities 18 Item 3. Defaults upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 20 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
June 30, December 31, 1997 1996 ----------- ------------ (unaudited) ASSETS Current assets: Cash and cash equivalents $ 31,950,000 $ 83,391,000 Short-term investments 30,182,000 -- Accounts receivable, net of allowance 2,095,000 1,650,000 Prepaid expenses 583,000 803,000 Other current assets 708,000 732,000 -------------- -------------- Total current assets 65,518,000 86,576,000 Restricted cash 819,000 1,000,000 Property and equipment 16,792,000 16,388,000 Intangible assets, net of accumulated amortization (1997-$575,000, 1996-$492,000) 1,443,000 166,000 Other assets 57,000 74,000 -------------- -------------- $ 84,629,000 $ 104,204,000 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of notes and bank loans payable-short-term $ 2,455,000 $ 1,200,000 Current portion of capital lease obligations 2,237,000 1,972,000 Accounts payable 1,643,000 2,256,000 Accrued liabilities 3,551,000 4,082,000 -------------- -------------- Total current liabilities 9,886,000 9,510,000 Notes and bank loans payable-long-term 3,739,000 4,704,000 Notes payable-stockholder -- 600,000 Capital lease obligations, less current portion 5,873,000 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 - 30,919,752 shares in 1997 and 29,795,049 shares in 1996 3,000 3,000 Additional paid-in capital 178,616,000 177,559,000 Deferred compensation (869,000) -- Accumulated deficit (113,002,000) (94,508,000) Foreign currency translation 383,000 474,000 -------------- -------------- Total stockholders' equity 65,131,000 83,528,000 -------------- -------------- $ 84,629,000 $ 104,204,000 ============== ============== See accompanying notes.
3 NEUROMEDICAL SYSTEMS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30 ------------------------------------- ---------------------------------------- 1997 1996 1997 1996 ------------ ------------ ------------- ------------- Revenues: Slide processing $ 2,230,000 $ 1,017,000 $ 3,881,000 $ 1,668,000 ------------ ------------ ------------- ------------- Total revenues 2,230,000 1,017,000 3,881,000 1,668,000 ------------ ------------ ------------- ------------- Costs and Expenses: Cost of sales 2,659,000 1,933,000 5,252,000 3,624,000 Sales and 4,833,000 3,856,000 10,311,000 7,373,000 Marketing Research and development 2,041,000 1,529,000 3,989,000 3,079,000 General and administrative 2,058,000 1,815,000 3,998,000 3,556,000 ------------ ------------ ------------- ------------- Total costs and expenses 11,591,000 9,133,000 23,550,000 17,632,000 ------------ ------------ ------------- ------------- Loss from operations (9,361,000) (8,116,000) (19,669,000) (15,964,000) Other income (expense): Interest income 996,000 1,325,000 1,997,000 2,808,000 Interest expense (411,000) (236,000) (800,000) (484,000) Foreign exchange 7,000 (351,000) (22,000) (585,000) ------------ ------------ ------------- ------------- Other income- net 592,000 738,000 1,175,000 1,739,000 ------------ ------------ ------------- ------------- Net loss $ (8,769,000) $ (7,378,000) $ (18,494,000) $ (14,225,000) ============ ============ ============= ============= Net loss per share $ (0.28) $ (0.25) $ (0.60) $ (0.49) ============ ============ ============= ============= Weighted average shares outstanding 30,916,000 29,089,000 30,871,000 28,949,000 ============ ============ ============= ============= See accompanying notes.
4 NEUROMEDICAL SYSTEMS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, -------------------------------- 1997 1996 --------------- ------------- Operating Activities Net Loss $ (18,494,000) $ (14,225,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,380,000 1,628,000 Foreign exchange (gain) (8,000) -- Amortization of deferred compensation 12,000 -- Changes in operating assets and liabilities: Increase in accounts receivable (250,000) (227,000) Decrease in accounts payable (725,000) (490,000) (Decrease) increase in accrued liabilities (536,000) 123,000 Decrease (increase) in prepaid expenses and other assets 320,000 (114,000) --------------- ------------- Net cash used in operating activities (17,301,000) (13,305,000) --------------- ------------- Investing Activities Purchases of short-term investments (30,182,000) -- Purchases of property and equipment (2,942,000) (5,126,000) Acquisition of a business (1,564,000) -- --------------- ------------- Net cash used in investing activities (34,688,000) (5,126,000) --------------- ------------- Financing Activities Restricted cash 181,000 (1,250,000) Issuance of common stock 176,000 325,000 Proceeds from notes and bank loans 456,000 595,000 Proceeds from capital lease financing 1,619,000 962,000 Payments of notes and bank loans (758,000) (735,000) Payments on capital leases (1,132,000) (378,000) --------------- ------------- Net cash provided by (used in) financing activities 542,000 (481,000) --------------- ------------- Effect of exchange rate changes on cash 6,000 596,000 --------------- ------------- Net (decrease) in cash and cash equivalents (51,441,000) (18,316,000) Cash and cash equivalents, beginning of period 83,391,000 114,143,000 --------------- ------------- Cash and cash equivalents, end of period $ 31,950,000 $ 95,827,000 =============== ============= See accompanying notes.
5 NEUROMEDICAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1997 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 (the "1996 Form 10-K"). Operating results for the interim periods ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. NOTE 2. COMMITMENTS AND CONTINGENCIES On April 15, 1997, the Company was served with a lawsuit filed by Cytyc Corporation ("Cytyc") in the United States District Court for the District of Massachusetts against the Company, certain of its officers and others, alleging false and misleading advertising, unfair and deceptive trade practices, theft of trade secrets, unfair competition, interference with relationships and defamation. On June 23, 1997, the court dismissed the Massachusetts lawsuit on the basis of lack of jurisdiction. On June 24, 1997, Cytyc reinstituted this lawsuit against the Company and two of its officers in the United States District Court for the District of New York, alleging substantially the same claims as the initial lawsuit. Cytyc is seeking preliminary and permanent injunctive relief as well as unspecified compensatory damages, including treble damages. The Company believes that Cytyc's claims are without merit and intends to vigorously defend this action. The Company also believes that an adverse judgment in this case would not likely have a material adverse effect on the Company's operations, financial position or cash flows, but there can be no assurance in this regard. On June 30, 1997, the Company announced that Mark R. Rutenberg submitted his resignation as President and Chief Executive Officer of the Company. Mr. Rutenberg will serve as non-executive Chairman of the Board of the Company until a new CEO and Chairman is selected. Subsequently, it is anticipated that Mr. Rutenberg will become 6 NEUROMEDICAL SYSTEM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (Continued) non-executive Vice-Chairman of the Board of the Company. Until a new CEO is selected, the Office of the Chief Executive will be filled jointly by Uzi Ish- Hurwitz and John B. Henneman, III. The Board of Directors has directed and empowered Mr. Ish-Hurwitz and Mr. Henneman to move forward on all key initiatives. 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 shall be secured by his pledge of 100,000 shares of Company common stock. The loan is repayable 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 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 of $781,000 over the term of the Revised Agreement. 7 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 have been derived primarily from (i) sales of PAPNET(R) testing services, (ii) sales of license agreements (prior to 1992) to the Company's territorial licensees ("Licensees") and (iii) 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. 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 June 30, 1997 of $113,002,000 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 of the Company 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. 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. 8 From inception through June 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 need to establish these capabilities prior to FDA approval and the anticipated demand resulting from expansion of the Company's marketing and sales activities since such approval. 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 expects that its costs and expenses will increase 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 New System International, Ltd. acquired in June 1997. In addition, royalty payments will increase proportionate to increases in the Company's revenues in the sales territories of the Licensees. To establish PAPNET(R) testing in the United States as the standard of care in Pap smear analysis, the Company is executing a three-step sequential marketing approach that targets (i) its direct clients, the clinical laboratories that perform Pap smear testing, (ii) gynecologists and those primary care physicians and other clinicians who take Pap smears and can order PAPNET(R) testing and (iii) women, to encourage them to request PAPNET(R) testing or to agree to it if it is recommended by a clinician. The Company believes that significant revenue growth in the United States depends upon effective marketing to all three target audiences. The Company's sales and marketing efforts to date in the United States have generated considerable awareness about PAPNET(R) testing among pathologists, cytotechnologists, gynecologists and women. The Company believes support and interest has been highest among women. Medical specialities, however, are often reluctant to change clinical practice methods and procedures, and early stage resistance is being experienced in the adoption of PAPNET(R) testing. Among gynecologists and pathologists there has been, in general, a slow adoption of the PAPNET(R) technology and some reluctance to use it even if a woman inquires about or requests the test. The Company believes that this is due to several factors, including controversy within the medical profession about the public health consequences of Pap smear false negatives, the relative cost of PAPNET(R) testing to the Pap smear, limited reimbursement by third-party payers and confusion in the marketplace about alternative technologies for cervical cancer screening. In late 1996 and the first six months of 1997, the Company initiated medical and other communications designed to address each of these considerations. During 1997 the Company continued its efforts to accelerate the medical acceptance and commercial success of PAPNET (R) testing. In July 1997, the Company announced that it is establishing an advisory board of leading pathologists to advise the Company on medical communications, product development and clinical trials. The Company 9 believes this is an important step toward including members of the pathology community in the Company's product planning and communications efforts. The Pathology Advisory Board will be comprised of several leading pathologists from highly regarded institutions across the United States and chaired by a leading academic pathologist. The role of the Pathology Advisory Board will be to focus on building advocacy within the professional communities, to advise the Company on product development and clinical trials, and otherwise to accelerate the adoption of the PAPNET(R) test. In July 1997, the Company also announced it had formed a Laboratory Support Group to focus and improve customer support and service. The Laboratory Support Group includes cytotechnologists to work with the laboratory professionals directly performing the PAPNET(R) test, and engineers to help laboratories integrate PAPNET(R) testing into their routine flow of work. The ultimate objective is to improve customer satisfaction throughout the laboratory organization. During the second quarter of 1997, the Company received smears directly from 138 laboratories in the United States. This represents an increase of ten direct laboratory customers over the first quarter of 1997. (In addition there are approximately 120 laboratories that can refer smears for PAPNET(R) testing if requested by their customers.) NSI also continued to expand its international laboratory distribution. During the second quarter of 1997, the Company received smears for PAPNET(R) testing from 48 laboratories in Europe and South Africa and 11 laboratories in Australia. In Asia, the Company continued to expand its business in Hong Kong, and mainland China through the acquisition in June 1997 of New System International, Ltd. During the quarter, the Company received slide processing revenue from 47 laboratories and hospitals in Hong Kong, Taiwan and mainland China. 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 additional 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 expects that its interest income will decline in 1997, compared to 1996, because of the significant use of cash in 1996 and the anticipated use of cash in 1997. The impact of inflation and changing prices on the Company's revenues and costs has not been significant. Results For the Second Quarter Ending June 30, 1997 and 1996 Revenues for the second quarter of 1997 were $2,230,000, an increase of 119% from $1,017,000 during the second quarter of 1996. Of such revenues, $2,149,000 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 second quarter of 1996 was due to a significant increase in unit volume, average unit pricing, additional revenues from the sale or rental of Review Stations and 10 the acquisition of New System International, Ltd. Unit volume during the second quarter of 1997, compared to the second quarter 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 between the periods. For United States operations (which include Canada and South America), unit volume increased 136% over the second quarter of 1996. In International markets, unit volume increased 25% over the second quarter of 1996. Average unit pricing in the second quarter of 1997 increased by approximately 36% over the second quarter of 1996 due to a higher proportion of slide volume being generated in the United States and accounted for approximately 42% of the increase. Finally, the combined impact of the acquisition of New System International, Ltd. and higher revenue from the sale or rental of review stations accounted for the remaining 9% of the worldwide revenue increase. Total costs and expenses for the quarter ended June 30, 1997 were $11,591,000, an increase of $2,458,000 over the second quarter of 1996. This increase was due primarily to an increase in marketing and sales and research and development expenses and to an increase in cost of sales, primarily associated with increased royalty expenses and the expansion of slide processing and manufacturing capacity in anticipation of increased future demand for PAPNET(R) testing. Sales and marketing expenses increased to $4,833,000 during the second quarter of 1997 from $3,856,000 during the second quarter of 1996, an increase of $977,000. The increase in sales and marketing expenses was due primarily to costs associated with marketing the PAPNET(R) Testing System in the United States, including salaries for additional personnel and advertising and promotion costs of the PAPNET(R) Testing System, and to expanded sales and marketing operations in international markets. The Company's cost of sales increased to $2,659,000 in the second quarter of 1997, compared to $1,933,000 during the second quarter of 1996, an increase of $726,000. This increase was primarily associated with increased royalty expenses and the expansion of the Company's slide processing and manufacturing capacity. The increase in royalty expenses was the result of increases in the Company's revenues in the sales territories of the Licensees during 1997. Slide processing costs increased in 1997, compared to the second 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 $2,041,000 in the second quarter 1997, from $1,529,000 in the second 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 11 enhancements of the PAPNET(R) Testing System. The Company's general and administrative expenses also increased in the second quarter 1997, compared to the second quarter of 1996, although at a slower rate than other expenses. General and administrative expenses were $2,058,000 during the second quarter of 1997 compared to $1,815,000 during the second quarter of 1996. This increase was due primarily to the expansion of the administrative infrastructure of the Company to support expanded commercial activities in both the United States and international markets. Interest income for the second quarter ended June 30, 1997 was $996,000 compared to $1,325,000 during the second 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 second quarter of 1997 as a result of the Company's continuing losses in 1996 and the first six months of 1997. Interest expense during the second quarter of 1997 was $411,000 compared to $236,000 during the second 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 in 1997 resulting from increased levels of debt and capital lease obligations. The Company incurred a net loss during the second quarter of 1997 of $8,769,000, or $0.28 per share, compared to a net loss of $7,378,000, or $0.25 per share during the second quarter of 1996. The increased net loss during the second quarter of 1997 was due to the factors discussed above. Results For the Six Month Period Ending June 30, 1997 and 1996 Revenues for the six month period ending June 30, 1997 were $3,881,000, an increase of 133% from $1,668,000 during the same period of 1996. The revenue increase over the corresponding period of 1996 was due to a significant increase in both unit volume and average unit pricing, additional revenues from the sale or rental of Review Stations and the acquisition of New System International, Ltd. in June 1997. Unit volume during the first six 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 51% of the revenue increase. For United States operations (includes Canada and South America), unit volume increased 148% over the same period of 1996. In international markets, unit volume increased 37% over 1996. Average unit pricing during the first six months of 1997 increased by approximately 37% over the same period of 1996 and accounted for approximately 41% of the increase due to a higher proportion of slide volume being generated in the United States. Finally, the combined impact of the acquisition of New System International, Ltd. and higher revenue from the sale or rental of review stations accounted for the remaining 12 8% of the worldwide revenue increase. Total costs and expenses for the period ended June 30, 1997 were $23,550,000, an increase of $5,918,000 over the same period of 1996. This increase was due primarily to an increase in marketing and sales expenses, research and development expenses and cost of sales, primarily associated with increased royalty expenses and the expansion of slide processing capacity in the United States in anticipation of increased future demand for PAPNET(R) testing. Sales and marketing expenses increased to $10,311,000 during 1997 from $7,373,000 during the same period of 1996, an increase of $2,938,000. The increase in sales and marketing expenses was due primarily to costs associated with marketing the PAPNET(R) Testing System in the United States, including salaries for additional personnel and advertising and promotion costs of the PAPNET(R) Testing System, and to expanded sales and marketing operations in international markets. The Company's cost of sales increased to $5,252,000 in 1997, compared to $3,624,000 during the same period of 1996, an increase of $1,628,000. As was the case for the quarter, this increase was primarily associated with increased royalty expenses and the expansion of the Company's slide processing and manufacturing capacity. The Company's research and development expenses increased to $3,989,000 in 1997, from $3,079,000 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 also increased during 1997, compared to the same period of 1996, although at a slower rate than other expenses. General and administrative expenses were $3,998,000 during the first six months of 1997 compared to $3,556,000 in the same period of 1996. This increase was due primarily to the expansion of the administrative infrastructure of the Company to support expanded commercial activities in both the United States and international markets. Interest income for the six month period ended June 30, 1997 was $1,997,000 compared to $2,808,000 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 six months of 1997. Interest expense during the first six months of 1997 was $800,000 compared to $484,000 during the same period 1996. As was the case for the second 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 six months of 1997 of $18,494,000, or 13 $0.60 per share, compared to a net loss of $14,225,000, or $0.49 per share during the same period 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. The Company's combined cash and cash equivalents, excluding short term investments of $30,182,000, totaled $31,950,000 at June 30, 1997, a decrease of $51,441,000 from December 31, 1996. During the first six months of 1997, the Company used $17,301,000 for operating activities, $34,688,000 for investing activities, including the purchase of $30,182,000 of short term investments, while generating $542,000 from financing activities. In addition, the effect of exchange rate changes on cash was $6,000, which accounted for the remaining change to the Company's cash balance. The primary uses of cash and cash equivalents during the first six months of 1997 were $18,494,000 (inclusive of $2,384,000 of non-cash expenses) to finance the Company's net loss, $30,182,000 to purchase short term investments, $2,942,000 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, $1,564,000 to acquire New Systems International, Ltd., $1,890,000 to repay notes, bank loans and capital lease obligations, and $1,191,000 for changes in operating assets and liabilities. The sources of cash and cash equivalents during the first six months of 1997 were proceeds of $456,000 from notes and bank loans, proceeds of $1,619,000 from capital lease financing transactions (sale/leaseback), a reduction in restricted cash of $181,000 and proceeds of $176,000 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 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, and research and development programs for additional clinical indications and claims. 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 and leasehold improvements and the acquisition cost of New System International, Ltd. Although funding for 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 of such capital expenditures through additional debt or capital lease obligations. 14 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 $6.8 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 these financings, or any other financings, will ultimately be obtained by the Company or, if they are 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 the continued capital expenditures, working capital requirements 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 June 30, 1997, the Company announced that Mark R. Rutenberg submitted his resignation as President and Chief Executive Officer of the Company. Mr. Rutenberg will serve as non-executive Chairman of the Board of the Company until a new CEO and Chairman is selected. Subsequently, it is anticipated that Mr. Rutenberg will become non-executive Vice-Chairman of the Board of the Company. Until a new CEO is selected, the Office of the Chief Executive will be filled jointly by Uzi Ish-Hurwitz and John B. Henneman, III. The Board of Directors has directed and empowered Mr. Ish-Hurwitz and Mr. Henneman to move forward on all key initiatives. 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 shall be secured by his pledge of 100,000 shares of Company common stock. The loan is repayable 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 15 for "Cause" (as defined in the Revised Agreement) or by either party to the Revised Agreement upon 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 of $781,000 over the term of the Revised Agreement. In an agreement effective as of June 1, 1997, the Company acquired New System International, Ltd., a Hong Kong corporation. New System International was 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. More than 40 hospitals and gynecology clinics in China are currently New System International clients, and they are expected to process all of their outpatient Pap smear slides with PAPNET(R) testing. New System International began marketing Neuromedical's PAPNET(R) Testing System in 1994 and currently has operations in Hong Kong and China. In addition to its Hong Kong office, New System International established offices in Beijing in July 1995 and recently opened offices in Shanghai, Guangzhou, Nanjing and Lanzhou. New System International also provides clinical laboratory services through its Hong Kong- based Compuscreen Medical Diagnostic Centre, a laboratory customer of Neuromedical Systems. During the second quarter of 1997, the Company acquired New System International, Ltd. for a net cost of $1,564,000. Dr. Stephen Ng, M.D., the president and a member of the board of directors of PFEL, was also a member of the Company's board of directors from 1994 until the Company's Annual Meeting of Stockholders on May 15, 1997 when his term of office expired. Dr. Ng served as president of New System International, Ltd. prior to its acquisition and the Company expects to shortly enter into an employment agreement providing for his continuation in such capacity. As part of the acquisition of New System International, Ltd., the Company expects to receive, during the third quarter of 1997, $800,000 from PFEL for the right to participate in a royalty of 3% to 4% based on sales in Hong Kong, China and Taiwan over a 15 year period (the "PFEL Royalty Agreement"). The Company has also reached an agreement in principal for the acquisition of the business of the Taiwan PAPNET(R) distributor for a purchase price of $391,000 which the Company expects to complete during the third quarter of 1997. Upon completion of the Hong Kong and Taiwan acquisitions, and the execution of the PFEL Royalty Agreement, the net aggregate purchase price for the acquisitions is estimated to be $1,155,000 plus future royalty payments of 3% to 4% of revenue from Hong Kong, China and Taiwan. The Company expects that it will invest additional cash in New System International and the Taiwan business to fund operations and expansion of their respective marketing and sales programs. To date, the Company has not implemented a program to hedge its foreign currency risk, but may do so in the future. 16 On April 15, 1997, the Company was served with a lawsuit filed by Cytyc Corporation ("Cytyc") in the United States District Court for the District of Massachusetts against the Company, certain of its officers and others, alleging false and misleading advertising, unfair and deceptive trade practices, theft of trade secrets, unfair competition, interference with relationships and defamation. On June 23, 1997, the court dismissed the Massachusetts lawsuit on the basis of lack of jurisdiction. On June 24, 1997, Cytyc reinstituted this lawsuit against the Company and two of its officers in the United States District Court for the District of New York, alleging substantially the same claims as the initial lawsuit. Cytyc is seeking preliminary and permanent injunctive relief as well as unspecified compensatory damages, including treble damages. The Company believes that Cytyc's claims are without merit and intends to vigorously defend this action. The Company also believes that an adverse judgment in this case would not likely have a material adverse effect on the Company's operations, financial position or cash flows, but there can be no assurance in this regard. The Cytyc lawsuit against the Company was previously reported in the Company's Form 10-Q for the period ending March 31, 1997. The Company is a defendant in a civil lawsuit brought by Herbst et al. ("Herbst") and also a defendant in a patent infringement lawsuit filed by NeoPath, Inc. ("NeoPath"). Each of these lawsuits have been disclosed in the Company's Form 10-Q for the period ending March 31, 1997 and no material developments have occurred since that filing with the Securities and Exchange Commission. The Company intends to continue to vigorously defend each of these actions. The Company believes that, in any event, the damages claimed in the Herbst case bear no relation to the harm alleged, and the Company also believes that NeoPath's claims are without merit. The Company believes that an adverse judgment in either or both of these cases would not have a material adverse effect on the Company's operations, financial position or cash flows. On July 15, 1996, the Company filed a lawsuit against NeoPath for patent infringement and additional claims related to unfair business practices. NeoPath has filed counter-claims against the Company seeking damages and injunctive relief for false advertising and unfair competition. This lawsuit has been disclosed in the Company's Form 10-Q for the period ending March 31, 1997 and no material developments have occurred since that filing with the Securities and Exchange Commission. The Company believes that NeoPath's counter-claim assertions are without merit. Although the duration, costs and ultimate outcome of this lawsuit are unknown, the Company expects that the costs of pursuing this lawsuit will be significant during 1997. 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 17 proceedings, which information is incorporated herein by reference thereto. Item 2. Changes in Securities. Not applicable. Item 3. Defaults upon Senior Securities. Not applicable. 18 Item 4. Submission of Matters to a Vote of Security Holders. At the Annual Meeting of Stockholders of the Company, held on May 15, 1997, the following matters were submitted to a vote of the holders of the Company's common stock, $.0001 par value per share: 1. For the following persons to serve as directors of the Company until the year 2000 Annual Meeting of Stockholders and until their respective successors are duly elected and qualified: For Election Withheld Total Stuart M. Essig 21,054,526 46,064 21,100,590 C. Raymond Larkin, Jr. 21,054,526 46,064 21,100,590 No broker non-votes were submitted in the election balloting for the foregoing directors, nor were any abstentions received or recorded. 2. To ratify the appointment of Ernst & Young LLP by the Board of Directors as independent public accountants to audit the books and records of the Company for the fiscal year ending December 31, 1997: For the Against the Total Votes Resolution Resolution Abstaining 21,100,590 21,072,377 22,203 6,010 In addition to the foregoing directors duly elected at the Annual Meeting of Stockholders, the following directors are continuing in their capacity as directors of the Company for their respective terms of office: Mark R. Rutenberg, Chairman, Carl Genberg, Dr. Arthur L. Herbst, Uzi Ish-Hurwitz and Elizabeth Cogan Fascitelli. 19 Item 5. Other Information. MANAGEMENT CHANGES On June 30, 1997, the Company announced that Mark R. Rutenberg submitted his resignation as President and Chief Executive Officer of the Company. Mr. Rutenberg will serve as non-executive Chairman of the Board of the Company until a new CEO and Chairman is selected. Subsequently, it is anticipated that Mr. Rutenberg will become non-executive Vice-Chairman of the Board of the Company. Until a new CEO is selected, the Office of the Chief Executive will be filled jointly by Uzi Ish-Hurwitz and John B. Henneman, III. The Board of Directors has directed and empowered Mr. Ish-Hurwitz and Mr. Henneman to move forward on all key initiatives. Mr. Ish-Hurwitz, who joined the Company in April 1993, is Executive Vice- President and Chief of Technical Operations of the Company and President of Neuromedical Systems Israel, Ltd., a subsidiary of the Company. Mr. Ish-Hurwitz is a member of the Board of Directors. Prior to joining NSI, Mr. Ish-Hurwitz was the co-founder of Indigo Graphic Systems, Ltd. (Israel), and served as its President from 1987-1992. From 1973 to 1985, he served as Vice President - Operations of Scitex Corporation, Ltd. Mr. Henneman is Vice President of Corporate Development, General Counsel and Secretary of the Company and joined the Company in February 1994. Prior to joining NSI, Mr. Henneman practiced as a corporate and securities attorney with the law firm of Latham & Watkins in Chicago for more than seven years. ACQUISITION OF NEW SYSTEM INTERNATIONAL, LTD. In an agreement effective as of June 1, 1997, the Company acquired New System International, Ltd., a Hong Kong corporation. New System International was 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. More than 40 hospitals and gynecology clinics in China are currently New System International clients, and they are expected to process all of their outpatient Pap smear slides with PAPNET(R) testing. New System International began marketing Neuromedical's PAPNET(R) Testing System in 1994 and currently has operations in Hong Kong and China. In addition to its Hong Kong office, New System International established offices in Beijing in July 1995 and recently opened offices in Shanghai, Guangzhou, Nanjing and Lanzhou. New System International also provides clinical laboratory services through its Hong Kong- based Compuscreen Medical Diagnostic Centre, a laboratory customer of Neuromedical Systems. During the second quarter of 1997, the Company acquired New System International, Ltd. for a net cost of $1,564,000. Dr. Stephen Ng, M.D., the president and a member of the board of directors of PFEL, was also a member of the Company's board of directors from 1994 until the Company's Annual Meeting of Stockholders on May 15, 1997 when his term of office expired. Dr. Ng served as president of New System International, Ltd. prior to its acquisition and the Company 20 expects to shortly enter into an employment agreement providing for his continuation in such capacity. As part of the acquisition of New System International, Ltd., the Company expects to receive, during the third quarter of 1997, $800,000 from PFEL for the right to participate in a royalty of 3% to 4% based on sales in Hong Kong, China and Taiwan over a 15 year period (the "PFEL Royalty Agreement"). The Company has also reached an agreement in principal for the acquisition of the business of the Taiwan PAPNET(R) distributor for a purchase price of $391,000 which the Company expects to complete during the third quarter of 1997. Upon completion of the Hong Kong and Taiwan acquisitions, and the execution of the PFEL Royalty Agreement, the net aggregate purchase price for the acquisitions is estimated to be $1,155,000 plus future royalty payments of 3% to 4% of revenue from Hong Kong, China and Taiwan. The Company expects that it will invest additional cash in New System International and the Taiwan business to fund operations and expansion of their respective marketing and sales programs. 21 Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. Exhibit Number Exhibit ------- ------- 10.30 Restated Agreement between the Company and Mark R. Rutenberg, dated June 29, 1997 10.31 Secured Non-Recourse Promissory Note between the Company and Mark R. Rutenberg, dated July 9, 1997 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 Form 8-K filed by the Company with the Commission on July 31, 1997 and incorporated herein by reference thereto. ** Previously filed as an exhibit to the Company's 1996 Annual Report on Form 10-K and incorporated herein by reference thereto. (b) Reports on Form 8-K during the quarter for which this report is filed: May 1, 1997 June 30, 1997 22 Safe Harbor Statement Statements in this Form 10-Q, including but not limited to the Management Discussion and Analysis of Financial Condition and Results of Operations, 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(R) 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 1996 Form 10-K and Exhibit 99.1 attached thereto. 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: August 8, 1997 By: /s/ David Duncan, Jr. David Duncan, Jr. Vice President, Finance and Administration, Chief Financial Officer 24 EX-10.30 2 RESTATED AGREEMENT Exhibit 10.30 RESTATED EMPLOYMENT AGREEMENT -------------------- RESTATED AGREEMENT, dated this 29th 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 MARK R. RUTENBERG, ("Rutenberg"). W I T N E S S E T H : WHEREAS, Rutenberg has been employed by NSI as its President, Chief Executive Officer and Chairman of the Board pursuant to an employment agreement dated as of November 19, 1993, as amended October 25, 1995 (the "Original Employment Agreement"); and WHEREAS, by mutual agreement between NSI and Rutenberg, Rutenberg has resigned from his positions as President and Chief Executive Officer effective as of June 27, 1997 (the "Restatement Date"); and WHEREAS, the parties desire to restate the Original Employment Agreement to set forth the nature of their relationship and the compensation and benefits to be provided to Rutenberg from the Restatement Date until the expiration of the Restated Agreement; 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 Rutenberg, and Rutenberg agrees to be employed by NSI, upon the terms and subject to the conditions of this Restated Agreement. 2. TERM. ---- The employment of Rutenberg by NSI as provided in Section 1 will be for the period from the Restatement Date until November 19, 1998 (the "Term"). The Company and Rutenberg may mutually agree to extend the term. As used herein, the word "Term" shall include any such extension. The Term shall expire upon the termination of Rutenberg's employment as provided herein. 3. DUTIES; BEST EFFORTS; INDEMNIFICATION. ------------------------------------- (a) Effective as of the Restatement Date, Rutenberg hereby confirms his resignation from his positions as President and Chief Executive Officer of the Company and hereby resigns, effective as of the Restatement Date, as an employee, officer or director of each of its affiliates, except as provided herein. From and after the Restatement Date and until NSI appoints a new Chief Executive Officer and a new Chairman (which may be the same person), Rutenberg shall serve as Chairman of the Board of Directors of NSI (the "Board") and, upon such appointment of a new Chief Executive Officer and Chairman, Rutenberg shall serve as Vice-Chairman of the Board. In each case, Rutenberg shall serve as a non-executive employee and shall perform, under the supervision and control of the Board or the Chief Executive Officer of NSI, only such assignments as may reasonably and specifically be assigned to him by the Board or the Chief Executive Officer of NSI from time to time. In addition, until such time as the Board determines otherwise, Rutenberg shall serve as the Chairman of the Board of Directors of Neuromedical Systems Israel, Ltd. ("NSIL"). (b) Rutenberg will remain as a member of the Board following the Restatement Date and, provided Rutenberg's employment has not terminated for any -2- reason as of the date of the 1998 annual meeting of stockholders (the "1998 Meeting"), NSI agrees to renominate Rutenberg for election at the 1998 Meeting for a three (3) year term. If Rutenberg voluntarily terminates his employment prior to the expiration of the Term, he shall resign as a director of the Company. (c) Rutenberg shall devote such portion of his business time, attention and energies as may be necessary to perform his duties hereunder and 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, which would materially interfere with the performance of his duties hereunder, whether or not such business activity is pursued for gain, profit or other pecuniary advantage. (d) Subject to the provisions of NSI's Certificate of Incorporation and Bylaws, each as amended from time to time, NSI shall indemnify Rutenberg 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 Rutenberg in connection with any action, suit, investigation or proceeding arising out of or relating to the performance by Rutenberg of services for, or the acting by Rutenberg as a director, 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 Rutenberg 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 Rutenberg 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. -3- 4. PLACE OF PERFORMANCE. -------------------- In connection with his employment by NSI, during the Term, Rutenberg shall be provided, at NSI's expense (which expense shall be approved in advance by the Board) (a) at Rutenberg's election, with an office at NSI's New Jersey facility or an office not located in any NSI facility or in the same building as an NSI facility (an "Offsite Office"), provided that, if Rutenberg elects to have an office at NSI's New Jersey facility, the Board may, at any time in its discretion, require Rutenberg to have an Offsite Office, (b) with an office at NSIL's facility in Israel and (c) the services of one (1) full-time assistant. Rutenberg shall vacate NSI's principal executive offices within two (2) weeks of the Restatement Date. 5. COMPENSATION AND BENEFITS. ------------------------- (a) Base Salary. NSI shall pay to Rutenberg for his employment ----------- during the Term a base salary (the "Base Salary") at a rate of $200,000 per annum, payable in accordance with NSI's ordinary payroll practices as in effect from time to time. (b) Bonus. In addition to and separate from the Base Salary, ----- Rutenberg shall be eligible for an annual bonus in an amount to be determined in the sole discretion of the Board and subject to performance objectives established by the Board. (c) Out-of-Pocket Expenses. NSI shall promptly pay to Rutenberg ---------------------- the reasonable expenses (not in excess of $75,000 in any twelve (12) month period) 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 Rutenberg, shall promptly reimburse him for such payment, provided that in either case Rutenberg properly accounts therefor in accordance with NSI's policy. -4- (d) Participation in Benefit Plans. During the Term, Rutenberg ------------------------------ 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 employees generally. (e) Vacation. Rutenberg shall be entitled to such paid vacation -------- days in each calendar year as determined by NSI from time to time, but not less than four (4) weeks in any calendar year, prorated in any calendar year during which Rutenberg 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. Rutenberg 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. (f) Automobile. During the Term, NSI shall provide Rutenberg with ---------- the use of an automobile suitable and typical for a person occupying his position and similar to the automobile currently leased for Rutenberg by NSI and shall pay the costs of insurance, repairs and maintenance thereon. (g) Loan. Within ten (10) days after the Restatement Date, NSI ---- shall loan to Rutenberg, on a non-recourse basis, upon the execution of appropriate documentation, an amount equal to $600,000 repayable by Rutenberg on or before the earlier of November 30, 1999 or the date which is ten (10) days after his termination of employment for any reason. Such loan shall be secured by a pledge by Rutenberg of 100,000 shares of NSI common stock owned by Rutenberg and shall bear interest at the Citibank prime rate as in effect from time to time, which shall accrue and be payable upon the repayment of the principal of the loan. (h) NSI shall reimburse Rutenberg for properly documented expenses (not in excess of $50,000) to relocate his family to Israel at any time prior to November -5- 1, 1998; provided, however, that, if Rutenberg voluntarily terminates his employment with NSI, his entitlement to reimbursement under this Section 5(h) shall cease on the date of such termination. 6. TERMINATION. ----------- Rutenberg's employment hereunder shall be terminated upon Rutenberg's death and may be terminated as follows: (a) By NSI for "Cause." A termination for Cause is a termination evidenced by a resolution adopted by a vote of the majority of the members of the Board finding that Rutenberg has (i) willfully failed to comply with any of the material terms of this Restated Agreement, (ii) willfully and continually failed to perform his duties hereunder, (iii) willfully engaged in misconduct materially injurious to NSI, or (iv) been convicted of a felony or a crime of moral turpitude; provided, however, that Rutenberg shall receive thirty (30) -------- ------- days' advance written notice that the Board intends to meet to consider Rutenberg's termination for Cause and Rutenberg shall be given a reasonable opportunity to be heard by the Board on the issue prior to the Board's vote on the matter. (b) By either party upon thirty (30) days' advance written notice to the other. 7. COMPENSATION UPON TERMINATION. ----------------------------- (a) In the event of the termination of Rutenberg's employment as a result of Rutenberg's death, NSI shall, within thirty (30) days after the date of his death, pay to Rutenberg's estate (i) his Base Salary through the date of his death and (ii) a lump sum of $598,000. (b) In the event that Rutenberg terminates his employment prior to November 19, 1998, or NSI terminates Rutenberg's employment for Cause, NSI shall pay to Rutenberg his Base Salary through the date of his termination and NSI shall, -6- within ten (10) days after the termination of his employment, pay Rutenberg a lump sum of $598,000. (c) In the event that Rutenberg's employment is terminated by NSI other than for Cause, NSI shall, within ten (10) days after his termination of employment, pay to Rutenberg, in a lump sum, the sum of (i) the amount of his Base Salary which he would have received through November 19, 1998 and (ii) $598,000. (d) Within ten (10) days after the expiration of the Term (including any extension thereof), if Rutenberg's employment has not previously terminated for any reason, NSI shall pay to Rutenberg a lump sum of $598,000. (e) Provided Rutenberg's employment has not terminated for any reason prior to November 19, 1998, the term of each outstanding option to purchase NSI stock held by Rutenberg as of such date shall, notwithstanding Rutenberg's termination of employment thereafter, be extended so that it expires eight and one-half (8 1/2) years after the expiration of the Term; provided, -------- however, that (i) the option granted to Rutenberg as of October 1, 1995 shall - ------- not be vested and exercisable unless the conditions to such option being vested and exercisable as set forth in the option agreement are satisfied during the term of the option (as so extended), (ii) if Rutenberg's employment terminates for any reason prior to November 19, 1998, his rights with respect to the outstanding stock options shall be determined in accordance with the terms thereof as in effect on the Restatement Date and (iii) if the options have been extended pursuant to this Section 7(e) and thereafter Rutenberg materially breaches his obligations under this Restated Agreement, including, without limitation, those covenants contained in Sections 8, 9 and 10 of this Restated Agreement, the options shall immediately terminate and Rutenberg shall have no further rights in respect of the options. -7- (f) Rutenberg shall not be required to mitigate the amount of the termination payment provided pursuant to this Section 7 nor will such payment be reduced by reason of Rutenberg's securing other employment. (g) Notwithstanding anything contained in this Restated Agreement to the contrary, to the extent that the payments and benefits provided under this Restated Agreement and benefits provided to, or for the benefit of, Rutenberg under any other NSI plan or agreement (such payments or benefits are collectively referred to as the "Payments") would be subject to the excise tax (the "Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), the Payments provided under this Agreement shall be reduced (but not below zero) if and to the extent necessary so that no Payment to be made or benefit to be provided to Rutenberg under this Agreement shall be subject to the Excise Tax (such reduced amount is hereinafter referred to as the "Limited Payment Amount"). Unless Rutenberg shall have given prior written notice specifying a different order to NSI to effectuate the Limited Payment Amount, NSI shall reduce or eliminate the Payments, by first reducing or eliminating those payments or benefits which are not payable in cash and then by reducing or eliminating cash payments, in each case in reverse order beginning with payments or benefits which are to be paid the farthest in time from the determination (as hereinafter defined). Any notice given by Rutenberg pursuant to the preceding sentence shall take precedence over the provisions of any other plan, arrangement or agreement governing Rutenberg's rights and entitlements to any benefits or compensation. An initial determination as to whether the Payments shall be reduced to the Limited Payment Amount pursuant to this Agreement and the amount of such Limited Payment Amount shall be made by an accounting firm at NSI's expense selected by NSI which is one of the five largest accounting firms in the United States (the "Accounting Firm"). The Accounting Firm shall provide its determination (the "Determination"), together with detailed supporting calculations and documentation to -8- NSI and Rutenberg within five (5) days of the date of termination of Rutenberg's employment, if applicable, or such other time as requested by NSI or by Rutenberg (provided Rutenberg reasonably believes that any of the Payments may be subject to the Excise Tax) and if the Accounting Firm determines that no Excise Tax is payable by Rutenberg with respect to a Payment or Payments, it shall furnish Rutenberg with an opinion reasonably acceptable to Rutenberg that no Excise Tax will be imposed with respect to any such Payment or Payments. Within ten (10) days of the delivery of the Determination to Rutenberg, Rutenberg shall have the right to dispute the Determination (the "Dispute"). If there is no Dispute, the Determination shall be binding, final and conclusive upon NSI and Rutenberg subject to the application of the remainder of this Section 7(g). As a result of the uncertainty in the application of Sections 4999 and 280G of the Code, it is possible that the Payments to be made to, or provided for the benefit of, Rutenberg either have been made or will not be made by NSI which, in either case, will be inconsistent with the limitations provided above in this Section 7(c) (hereinafter referred to as an "Excess Payment" or "Underpayment," respectively). If it is established pursuant to a final determination of a court or an Internal Revenue Service (the "IRS") proceeding, which has been finally and conclusively resolved, that an excess payment has been made, such Excess Payment shall be deemed for all purposes to be a loan to Rutenberg made on the date Rutenberg received the Excess Payment, and Rutenberg shall repay the Excess Payment to NSI on demand (but not less than ten (10) days after written notice is received by Rutenberg) together with interest on the Excess Payment at the "Applicable Federal Rate" (as defined in Section 1274(d) of the Code) from the date of Rutenberg's receipt of such Excess Payment until the date of such repayment. In the event that it is determined (i) by the Accounting Firm, NSI (which shall include the position taken by NSI, or together with its consolidated group, on its federal income tax return) or the IRS, (ii) pursuant to a -9- determination by a court, or (iii) upon the resolution to Rutenberg's satisfaction of the Dispute, that an Underpayment has occurred, NSI shall pay an amount equal to the Underpayment to Rutenberg within ten (10) days of such determination or resolution together with interest on such amount at the Applicable Federal Rate from the date such amount would have been paid to Rutenberg until the date of payment. (h) This Section 7 sets forth the only obligations of NSI with respect to the termination of Rutenberg's employment with NSI and Rutenberg acknowledges that upon his termination of employment he shall not be entitled to any payments or benefits which are not explicitly provided herein. 8. COVENANT REGARDING INVENTIONS AND COPYRIGHTS. -------------------------------------------- (a) Rutenberg shall disclose promptly to NSI any and all inventions, discoveries, improvements, 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 of NSI" (as defined below) and he assigns all of his interest therein to NSI or its nominee; whenever requested to do so by NSI, Rutenberg 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, patentable or copyrightable works initiated, conceived or made by Rutenberg during the Term and shall be binding upon Rutenberg's assigns, executors, administrators and other legal representatives. For purposes of this Agreement, the "Business of NSI" shall be deemed to refer to the cytological, histological, pathological, hematological or microbiological detection or diagnosis of conditions, diseases or other abnormalities. Notwithstanding the foregoing, any inventions, discoveries, improvements, patentable or copyrightable works conceived by Rutenberg -10- after the date hereof which are not communicated to any third party during the Term, and which are not referred to in any patent application or other application as having been invented, discovered or conceived during the Term, shall not be subject to the provisions of this Section 8(a). (b) If Rutenberg has a concept for an invention which is within the Business of NSI, and Rutenberg wishes NSI to support such invention, NSI will discuss the invention with Rutenberg in good faith, including reasonable compensation therefor. 9. PROTECTION OF CONFIDENTIAL INFORMATION. -------------------------------------- Rutenberg 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. Rutenberg further acknowledges that the services to be performed by him under this Restated 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 Rutenberg with NSI is such that Rutenberg is capable of competing with NSI from nearly any location in the Territory. In recognition of the foregoing, Rutenberg covenants and agrees during the Term and for a period of five (5) years thereafter: -11- (i) That he will keep secret all confidential matters of NSI and not 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, Rutenberg 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 Restated 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. 10. RESTRICTION ON COMPETITION, INTERFERENCE AND SOLICITATION. --------------------------------------------------------- In recognition of the considerations described in Section 9 hereof, Rutenberg covenants and agrees that, from the Restatement Date and until the date that is two (2) years after (i) the date of his termination of employment if NSI terminates Rutenberg without Cause or (ii) in all other events, November 1998, Rutenberg 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 -12- prepared to solicit; provided, however, that nothing contained in this Section -------- ------- 10 shall be deemed to prohibit Rutenberg from acquiring or holding, solely for investment, publicly traded securities of any corporation all or a portion 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. 11. SPECIFIC REMEDIES. ----------------- For purposes of Sections 8, 9 and 10 of this Restated 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 Rutenberg and NSI that the covenants contained in this Section 11 and in Sections 8, 9 and 10 hereof are essential elements of this Restated Agreement and that, but for the agreement of Rutenberg to comply with such covenants, NSI would not have agreed to enter into this Agreement. NSI and Rutenberg 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. Rutenberg agrees that the covenants of Sections 8, 9 and 10 are reasonable and valid. If Rutenberg commits a breach of any of the provisions of Sections 8, 9, or 10, such breach shall be deemed to be grounds for termination for Cause. In addition, Rutenberg acknowledges that NSI may have no adequate remedy at law if he violates any of the terms hereof. Rutenberg 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 Rutenberg to account for and pay -13- over to NSI all compensation, profits, monies, accruals, increments and other benefits (collectively, the "Benefits") derived or received by Rutenberg as a result of any transaction constituting a breach of any of the provisions of Sections 8, 9 or 10 and Rutenberg hereby agrees to account for and pay over such Benefits to NSI. 12. INDEPENDENCE, SEVERABILITY AND NON-EXCLUSIVITY. ---------------------------------------------- Each of the rights enumerated in Section 11 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 8, 9 or 10, 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 8, 9 or 10 and the remedies enumerated in Section 11 upon the federal and state courts of New York sitting in New York County. If any of the covenants contained in Sections 8, 9 or 10 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 11 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. -14- 13. DISPUTES. -------- If NSI or Rutenberg shall dispute any termination of Rutenberg'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 13(a) hereof) results in a determination that (i) NSI did not have the right to terminate Rutenberg's employment under the provisions of this Restated Agreement or (ii) the position taken by Rutenberg concerning payments to Rutenberg is correct, NSI shall promptly pay, or if theretofore paid by Rutenberg, shall promptly reimburse Rutenberg for, all costs and expenses (including attorney's fees) reasonably incurred by Rutenberg in connection with such dispute. 14. 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 Rutenberg consents, NSI will require any successor, by agreement in form and substance satisfactory to Rutenberg, to expressly assume and agree to perform this Restated 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 Restated Agreement and all rights of Rutenberg hereunder shall inure to the benefit of, and be enforceable by, Rutenberg's personal or legal -15- representatives, executors, administrators, administrators c.t.a., successors, heirs, distributees, devisees and legatees. Unless otherwise provided herein, any amounts payable hereunder after Rutenberg's death shall be paid in accordance with the terms of this Restated Agreement to Rutenberg's estate. 15. 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: To each of the members of the Board at their respective business addresses or at their respective primary residential address with a copy to the Secretary of NSI To Rutenberg: [Residential Address] 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. -16- 16. MODIFICATIONS AND WAIVERS. ------------------------- No term, provision or condition of this Restated 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 Rutenberg. No waiver by either party hereto of any breach by the other party hereto of any term, provision or condition of this Restated 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 Restated 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. 18. LAW GOVERNING. ------------- Except as otherwise explicitly noted, this Restated 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 Restated Agreement shall not invalidate, make unenforceable or otherwise affect any other term of this Restated Agreement which shall remain in full force and effect. -17- 20. HEADINGS. -------- The headings contained in this Restated Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Restated Agreement. 21. CONDUCT. ------- As of and after the date hereof, (a) Rutenberg will not publish or make any statement (except statements made by Rutenberg to his legal counsel that are subject to the attorney client privilege and with respect to which such privilege is not waived or lost) critical of NSI or any of its subsidiaries or affiliates, or in any way maligning the business or reputation of NSI or any of its subsidiaries or affiliates and (b) NSI shall use its best efforts to cause its executive officers and directors not to publish or make any statement (except statements made by any of them to NSI's or their legal counsel that are subject to the attorney client privilege and with respect to which such privilege is not waived or lost) critical of Rutenberg, or in any way maligning the business reputation of Rutenberg; provided, however, that neither party -------- ------- shall be deemed to have violated the provisions of this Section 21 by reason of statements published or made that the party publishing or making the statement reasonably believed were required by law to be published or made or otherwise disclosed; and provided further, that either party shall, prior to publishing or making any such statement, but only to the extent practicable, give notice to the other party of its intention to publish or make any such statement. 22. RELEASE. ------- Except as otherwise provided herein, effective as of the Restatement Date, Rutenberg does hereby release, remise, acquit and forever discharge NSI and its present and former officers, directors, executives, agents, attorneys, employees, affiliated companies, divisions, subsidiaries, successors, predecessors and assigns -18- (collectively, the "Released Parties"), of and from any and all claims, actions, causes of action, demands, rights, damages, debts, sums of money, accounts, financial obligations, suits, expenses, attorneys' fees and liabilities of whatever kind or nature in law, equity or otherwise, whether now known or unknown, suspected or unsuspected, which Rutenberg, individually or as a member of a class, now has, owns or holds, or has at any time heretofore had, owned or held, against any Released Party arising out of or in any way connected with Rutenberg's employment relationship with NSI, its subsidiaries, predecessors or affiliated entities, or any event occurring or state of facts existing on or before the Restatement Date, including, without limitation, any claims for severance or vacation benefits, unpaid wages, salary or incentive payment, breach of contract, wrongful discharge, impairment of economic opportunity, intentional infliction of emotional harm or other tort, or employment discrimination under any applicable federal, state or local statute, provision, order or regulation including, but not limited to, any claim under Title VII of the Civil Rights Act ("Title VII"), the Federal Age Discrimination in Employment Act ("ADEA") and any similar or analogous state statute excepting only: (a) those liabilities and obligations that this Restated Agreement expressly creates or expressly provides which will continue in force in accordance with this Restated Agreement; and (b) any claims for benefits under any employee benefit plan of the Company (within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended). Rutenberg acknowledges and agrees no provision of this Restated Agreement is to be construed in any way as an admission of any liability whatsoever by any Released Party under any federal or state statute or the principles of common law, any such liability having been expressly denied. -19- Rutenberg acknowledges and agrees that he has not, with respect to any transaction or state of facts existing prior to the date of execution of this Restated Agreement, filed any complaints, charges or lawsuits against any of the Released Parties with any governmental agency or any court or tribunal, and that he will not do so at any time hereafter. 23. KNOWLEDGE OF CLAIMS. ------------------- As of the date hereof, the executive officers and directors of NSI do not have any actual knowledge of any claims, actions or causes of action that NSI may have against Rutenberg. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year set forth above. NEUROMEDICAL SYSTEMS, INC. By:/s/ Uzi Ish-Hurwitz ------------------- Uzi Ish-Hurwitz Executive Vice President /s/ Mark R. Rutenberg --------------------- Mark R. Rutenberg -20- EX-10.31 3 SECURED NON-RECOURSE PROMISSORY NOTE Exhibit 10.31 SECURED NON-RECOURSE PROMISSORY NOTE $600,000.00 July 9, 1997 FOR VALUE RECEIVED, the undersigned, Mark R. Rutenberg (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 Six Hundred Thousand ------ and No/100 Dollars ($600,000.00) in accordance with the terms and conditions set forth below (including, without limitation, Section 8), 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 November 30, 1999 (the "Maturity Date"). ------------- 2. Mandatory Prepayments. If, as and when the Borrower's --------------------- employment pursuant to the terms of that certain Restated Employment Agreement, dated June 29, 1997, between the Lender and the Borrower, is terminated for any reason, prior to the Maturity Date, then the Borrower shall prepay this Note on or before the date which is ten (10) days after such termination of employment (or 30 days, after such termination of employment in the case of the Borrower's death). 3. 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. 4. 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 the prime rate of interest of Citibank, N.A. in New York City as publicly announced and in effect on the first day of each calendar month, from month to month (the "Prime Rate"). Interest on this Note shall be due and payable in arrears on the Maturity Date. -1- (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 the Prime Rate, 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. 5. 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 Sections 2 or 3 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. 6. Pledge of Collateral. -------------------- 6.1 Pledge. The Borrower hereby pledges, assigns and ------ grants to the Lender a security interest in the assets referred to in Section 6.2 (the "Collateral") to secure the prompt payment and performance of the Borrower's obligations under this Note (the "Obligations"). ----------- 6.2 Collateral. The Collateral consists of the following ---------- types or items of property: (a) 100,000 shares of common stock, par value $.0001 per share ("Common Stock"), of Neuromedical Systems, Inc., ------------ a Delaware corporation (the "Issuer"); 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 6.2, and (iv) the proceeds, interest, profits and other income of or on any of the property referred to in this Section 6.2. -2- 6.3 Transfer of Collateral. All certificates or ---------------------- instruments representing or evidencing any of the securities referred to in Section 6.2(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 10. 6.4 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 shall have occurred and be continuing, the Borrower shall be entitled -3- 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 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. 7. Events of Default. If any of the following events (each, an ----------------- "Event of Default") shall occur and be continuing: ---------------- -4- (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; (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 -5- 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 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. 8. No Personal Liability. Neither Borrower nor any of his heirs, --------------------- legal representatives, successors or assigns shall have any personal liability for the payment or performance of any of Borrower's obligations hereunder. Lender may enforce its rights in, to, or against only the Collateral, and Lender shall have full recourse to and the right to proceed against, only such Collateral. In all events, no monetary or deficiency judgment shall be sought or enforced against Borrower or any of his heirs, legal representatives, successors or assigns. 9. 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 if to the Borrower: Mark R. Rutenberg [Residential Address] or at such other address or telecopy number as shall be designated by a party in a written notice to the other party. 10. 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 -7- other right or privilege. Such rights are cumulative and not exclusive of any rights 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. Notwithstanding the foregoing, the provisions of Section 8 shall survive payment of the principal of, and interest on, this Note. 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/ Mark R. Rutenberg --------------------------- Mark R. Rutenberg Agreed and Accepted: NEUROMEDICAL SYSTEMS, INC. By: /s/ John B. Henneman, III ------------------------- John B. Henneman, III Vice President, Secretary and General Counsel -9- EX-11 4 STATEMENT REGARDING COMPUTATION OF PER SHARE EXHIBIT 11. 0 NEUROMEDICAL SYSTEMS, INC. COMPUTATION OF PRIMARY EARNINGS PER SHARE THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 1997 1996 1997 1996 ----------- ----------- ----------- --------- Weighted average number of common shares outstanding 30,915,718 29,089,407 30,870,768 28,948,946 Net loss for period $(8,769,000) $(7,378,000) $(18,494,000) $(14,225,000) ------------ ------------ ------------- ------------- Net loss per share $ (0.28) $ (0.25) $ (0.60) $ (0.49) ============ ============ ============= ============= NEUROMEDICAL SYSTEMS, INC. COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------------- ---------------------------------- 1997 1996 1997 1996 ---------------- -------------- --------------- ---------------- Weighted average number of common shares outstanding 30,915,718 29,089,407 30,870,768 28,948,946 Assumed exercise of stock options and warrants using the treasury stock method (1) 849,186 3,456,202 1,064,228 3,676,781 ------------ ------------ ------------ ------------ Weighted average number of common and common equivalent shares outstanding 31,764,824 32,545,609 31,934,996 32,625,727 ============ ============ ============ ============ Net loss for period $(8,769,000) $(7,378,000) $(18,494,000) $(14,225,000) ------------ ------------ ------------- ------------- Net loss per share $ (0.28) $ (0.23) $ (0.58) $ (0.44) ============ ============ ============= =============
(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 $8.82 WAS USED FOR SIX MONTHS OF 1997, $7.52 WAS USED FOR THREE MONTHS OF 1997, $19.94 WAS USED FOR SIX MONTHS OF 1996, AND $18.57 WAS USED FOR THREE MONTHS OF 1996. -----END PRIVACY-ENHANCED MESSAGE-----