<PAGE>
As filed with the Securities and Exchange Commission on July 16, 1996
Registration No. 333-
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------------
PAPNET OF OHIO, INC.
(Exact name of Registrant as specified in its charter)
Ohio 5047 31-1282391
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
-------------------
6059 Memorial Drive
Dublin, Ohio 43017
(614) 793-9356
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
-------------------
David J. Richards
President
Papnet of Ohio, Inc.
6059 Memorial Drive
Dublin, Ohio 43017
(614) 793-9356
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-------------------
Copies of Correspondence to:
William J. Kelly, Esq.
Porter, Wright, Morris & Arthur
41 South High Street
Columbus, Ohio 43215
(614)227-2136
Approximate date of commencement of proposed sale of the securities
to the public: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Amount to be Offering Price Aggregate Offering Registration
Securities to be Registered Registered Per Share* Price* Fee*
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock, without par value..... 4,850,033 $5,013,750 $1.03 $1,729.00
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Estimated solely for the purpose of calculating the registration fee based
on the book value of the securities to be acquired by the Registrant,
pursuant to Regulation 457 (f) (2) of the Securities Act of 1933, as
amended. The stockholders equity of ER Group, Inc. being $2,131,911, the
combined stockholders equity of Carolina Cytology, Inc. and CCWP Partners,
Inc. being $1,895,790, the stockholders equity of Indiana Cytology Review
Company being $330,693 and the stockholders equity of Cytology Indiana,
Inc. being $655,356.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE>
CROSS REFERENCE SHEET
Form S-4 Item Prospectus Caption
------------- ------------------
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus. . . . . . . . . . Facing Page of
Registration Statement;
Cross Reference Sheet;
Cover Page of
Prospectus.
2. Inside Front and Outside Back Cover Pages of
Prospectus. . . . . . . . . . . . . . . . . . . . Available Information;
Table of Contents.
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information . . . . . . . . . . Introduction; Summary;
Risk Factors.
4. Terms of the Transaction. . . . . . . . . . . . . The Merger; The
Company; Reasons for
the Merger;
Recommendation of the
Boards of Directors of
the Company and the
Predecessor Companies;
Comparison of Certain
Rights of the Company
and the Predecessor
Companies.
5. Pro Forma Financial Information . . . . . . . . . Summary; Unaudited Pro
Forma Condensed
Combined Financial
Information; Notes to
Unaudited Pro Forma
Condensed Combined
Financial Information.
6. Material Contracts with the Company Being
Acquired. . . . . . . . . . . . . . . . . . . . . The Merger; Certain
Related Transactions.
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to Be Underwriters. . . . . . . . . . . . . . . . Not Applicable.
8. Interests of Named Experts and Counsel. . . . . . Not Applicable.
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities . . . . . . . . . . . . . . . . . . . Not Applicable.
10. Information with Respect to S-3 Registrants . . . Not Applicable.
11. Incorporation of Certain Information by
Reference . . . . . . . . . . . . . . . . . . . . Not applicable.
12. Information with Respect to S-2 or S-3
Registrants . . . . . . . . . . . . . . . . . . . Not Applicable.
13. Incorporation of Certain Information by
Reference . . . . . . . . . . . . . . . . . . . . Not Applicable.
14. Information with Respect to Registrants
Other Than S-3 or S-2 Registrants . . . . . . . . Summary; The Merger;
The Company; Financial
Statements of the
Company.
<PAGE>
Form S-4 Item Prospectus Caption
------------- ------------------
15. Information with Respect to S-3 Companies . . . . Not Applicable.
16. Information with Respect to S-2 or S-3
Companies . . . . . . . . . . . . . . . . . . . . Not Applicable.
17. Information with Respect to Companies
Other than S-3 or S-2 Companies . . . . . . . . . Summary; The
Predecessor Companies;
The Merger .
18. Information if Proxies, Consents or
Authorizations are to be Solicited. . . . . . . . Introduction; Summary;
The Merger; Certain
Related Transactions;
Executive Officers and
Directors; Executive
Compensation .
19. Information if Proxies, Consents or
Authorizations are not to be Solicited or
in an Exchange Offer. . . . . . . . . . . . . . . Not Applicable.
<PAGE>
PAPNET OF OHIO, INC.
6059 Memorial Drive
Dublin, Ohio 43017
______, 1996
Dear Fellow Shareholders:
You are cordially invited to attend the Special Meeting of Shareholders
(the "Papnet Special Meeting") of Papnet of Ohio, Inc. ("Papnet"), which will be
held on _________, September __, 1996, at _____ _., local time. The Papnet
Special Meeting will be held at______________________________________________.
At the Papnet Special Meeting, shareholders of Papnet will be asked to
consider and vote on the Agreement and Plan of Merger, dated as of July 5, 1996
(the "Merger Agreement"), among Papnet and Cytology Indiana, Inc., Indiana
Cytology Review Company, ER Group, Inc., CCWP Partners, Inc. and Carolina
Cytology, Inc. (individually a "Predecessor Company" and collectively
"Predecessor Companies"), pursuant to which the Predecessor Companies would be
merged with and into Papnet (the "Merger"). In the Merger, the shareholders of
the Predecessor Companies will receive whole shares of Papnet common stock in
exchange for each share of Predecessor Company common stock held by them. The
actual number of shares of Papnet stock to be exchanged for each share of
Predecessor Company stock will be determined pursuant to Schedule 2.05(a) of
the Merger Agreement.
Each of the Predecessor Companies, except CCWP Partners, Inc., was
organized to acquire and exercise the right to market the PAPNET-Registered
Trademark- SYSTEM and PAPNET-Registered Trademark- SERVICE within their
respective licensed territories. However, until November 8, 1995, when the
United States Food and Drug Administration finally approved the marketing of the
PAPNET-Registered Trademark- technology, the technology could be used in the
United States only for investigational purposes in connection with the FDA
approval process. Consequently, the Predecessor Companies had only minor
business activities prior to November, 1995, and had no employees.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AS BEING IN THE
BEST INTEREST OF PAPNET SHAREHOLDERS AND RECOMMENDS THAT YOU VOTE IN FAVOR OF
THE APPROVAL OF THE AGREEMENT AND PLAN OF MERGER.
Additional information regarding the Merger and the parties thereto is set
forth in the attached Proxy Statement, which also serves as the Prospectus
regarding the common stock of Papnet to be issued in connection with the Merger.
Please read these materials and carefully consider the information contained in
them.
The affirmative vote of the holders of at least two-thirds of the
outstanding shares of Papnet Common Stock is required to approve the Merger and
the Amended and Restated Articles of Incorporation and Amended and Restated
Regulations pursuant thereto. An affirmative vote for the Merger Agreement will
act as an affirmative vote for the Amended and Restated Articles of
Incorporation and Amended and Restated Regulations. Accordingly, your vote is
important no matter how large or how small your holdings may be. Whether or not
you plan to attend the Papnet Special Meeting, you are urged to complete, sign,
and promptly return the enclosed proxy card to assure that your shares will be
voted at the Papnet Special Meeting. If you attend the Papnet Special Meeting,
you may vote in person if you wish and your proxy will not be used.
Very truly yours,
David J. Richards
PRESIDENT
<PAGE>
PAPNET OF OHIO, INC.
6059 Memorial Drive
Dublin, Ohio 43017
--------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
_________, 1996
--------------------
Notice is hereby given that a Special Meeting of Shareholders (the "Papnet
Special Meeting") of Papnet of Ohio, Inc. ("Papnet") has been called by the
Board of Directors and will be held at ________________________, on _________,
__________ __, 1996, at _____ _., local time, for the following purposes:
1. To consider and vote upon the approval of a certain Agreement and Plan of
Merger, dated as of July 5, 1996 (the "Merger Agreement"), and the
consummation of the merger contemplated therein. Pursuant to the Merger
Agreement, Cytology Indiana, Inc., Indiana Cytology Review Company, ER
Group, Inc., CCWP Partners, Inc. and Carolina Cytology, Inc. (collectively
the "Predecessor Companies"), will be merged with and into Papnet, and the
shareholders of the Predecessor Companies will receive whole shares of
Papnet common stock in exchange for their shares of Predecessor Company
common stock, as more fully described in the accompanying Proxy Statement.
In addition, Papnet's Articles of incorporation and Code or Regulations
will be amended and restated as provided in the Merger Agreement; and
2. To transact any other business which may properly come before the meeting
or any adjournment or adjournments thereof. (The Board of Directors is not
currently aware of any other business to come before the Papnet Special
Meeting.)
Only holders of Papnet common stock of record at the close of business on
_______, 1996, the record date for the Papnet Special Meeting, are entitled to
notice of and to vote at the Papnet Special Meeting and any adjournments
thereof. A holder of Papnet common stock who dissents from the Merger Agreement
and who complies with the provisions of applicable law relating to dissenters'
rights will be entitled to receive payment in cash of the appraised value of
only those shares held by the shareholder (a) which are voted against the
approval of the Merger Agreement at the Papnet Special Meeting, or (b) with
respect to which the holder thereof has given written notice to Papnet, at or
prior to the Papnet Special Meeting, that the shareholder intends to dissent
from the Merger Agreement and which are not voted in favor of approval of the
Merger Agreement.
THE BOARD OF DIRECTORS OF PAPNET UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS
VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT AND CONSUMMATION OF THE TRANSACTIONS
CONTEMPLATED THEREBY.
We urge you to execute and return the enclosed proxy as soon as possible in
order to ensure that your shares will be represented at the Papnet Special
Meeting. Your proxy may be revoked in the manner described in the accompanying
Proxy Statement at any time before it has been voted at the Papnet Special
Meeting. If you attend the Papnet Special Meeting, you may vote in person, and
your proxy will not be used.
Dated: __________ __, 1996 By Order of the Board of Directors
David J. Richards
PRESIDENT
------------------------------------------------------------------
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING,
PLEASE SIGN AND MAIL THE ENCLOSED PROXY IN THE ACCOMPANYING
ENVELOPE. NO POSTAGE NECESSARY IF MAILED IN THE UNITED STATES.
PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES AT THIS TIME.
------------------------------------------------------------------
<PAGE>
DAVID J. RICHARDS
CHAIRMAN OF ADVISORY BOARD
Dear Predecessor Company Shareholders:
On July__, 1996, Papnet of Ohio, Inc. ("Papnet") entered into an Agreement
and Plan of Merger (the "Merger Agreement") with Cytology Indiana, Inc.
("CIN"), Indiana Cytology Review Company ("INC"), ER Group, Inc. ("ERG"), CCWP
Partners, Inc. ("CCWP"), and Carolina Cytology, Inc. ("CCI") (individually
"Predecessor Company" collectively "Predecessor Companies"), pursuant to which
the Predecessor Companies will merge (the "Merger") with and into Papnet. As a
result of the Merger, all shareholders of a Predecessor Company will be entitled
to receive shares of Papnet common stock in exchange for the shares of
Predecessor Company stock held by them (the "Merger Consideration"). Under the
terms of the Merger Agreement, I have been selected as Chairman of the Advisory
Board, a board consisting of shareholders and officers of the Predecessor
Companies. It is in this capacity that I write you this letter.
The number of shares of Papnet common stock that will comprise the Merger
Consideration is calculated based on the conversion ratio contained in Schedule
2.05 of the Merger Agreement. Each share of Predecessor Company stock that is
held in treasury shall be extinguished.
THE BOARDS OF DIRECTORS OF PAPNET AND THE PREDECESSOR COMPANIES HAVE
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND BELIEVE THAT THE MERGER IS IN THE
BEST INTERESTS OF ALL PREDECESSOR COMPANIES SHAREHOLDERS. THE BOARD OF
DIRECTORS OF EACH PREDECESSOR COMPANY BELIEVES THAT THIS STRATEGIC COMBINATION
WITH PAPNET WILL CREATE AN EFFICIENT AND EFFECTIVE ENTITY.
Approval of the Merger and the Merger Agreement and the transactions
contemplated thereby requires the affirmative vote of the holders of common
stock of each ERG, CCWP, and CCI entitling them to exercise a majority of the
voting power of the respective corporations. Approval of the Merger and the
Merger Agreement and the transactions contemplated thereby requires the
affirmative vote of the holders of shares entitling them to exercise at least
two-thirds of the voting power of CIN and INC. In accordance with the General
Corporation Law of the State of Ohio, the Merger and the Merger Agreement may be
approved without a meeting of shareholders of the Predecessor Companies with the
affirmative vote, in a writing or writings, signed by all the shareholders who
would be entitled to notice of a meeting of the shareholders held for such
purpose. It is expected that all the shareholders of each Predecessor Company
will unanimously consent in writing to the Merger and therefore, at this time no
special meetings for the shareholders of the Predecessor Companies is planned.
The accompanying Prospectus explains in detail the terms of the Merger and
the Papnet common stock to be issued in the Merger. It also contains pro forma
financial information and other information concerning Papnet, the Predecessor
Companies and the Merger. Although you are not being asked for a proxy or
written consent, and are requested not to send a proxy or written consent,
please read the Prospectus carefully.
If unanimous consent of the shareholders of any Predecessor Company is not
obtained, then a special meeting of shareholders of that Predecessor Company
will be called. Shareholders who do not consent to the Merger Agreement are
entitled to dissenter's rights as described in the Prospectus. TO EXERCISE SUCH
DISSENTER'S RIGHTS, SHAREHOLDERS MUST TAKE CERTAIN ACTIONS WITHIN THE TIME
LIMITS PRESCRIBED BY OHIO LAW. The Prospectus describes the actions
shareholders must take and other relevant considerations to the exercise of such
rights.
Very truly yours,
David J. Richards
CHAIRMAN OF THE ADVISORY BOARD
<PAGE>
____________
PROSPECTUS
PAPNET OF OHIO, INC.
____________
COMMON STOCK, WITHOUT PAR VALUE
____________
This Prospectus is being furnished to the shareholders of Cytology Indiana,
Inc., an Ohio corporation ("CIN"), Indiana Cytology Review Company, an Ohio
corporation ("INC"), ER Group, Inc., an Ohio corporation ("ERG"), CCWP Partners,
Inc., an Ohio corporation ("CCWP"), and Carolina Cytology, Inc., an Ohio
corporation ("CCI"), in connection with the merger (the "Merger") of the
foregoing companies (individually, a "Predecessor Company" and collectively the
"Predecessor Companies") with and into Papnet of Ohio, Inc., an Ohio corporation
(the "Company"). This Prospectus is also being distributed to shareholders of
the Company in connection with the solicitation of proxies for the approval of
the Merger and certain amendments to the Company's Articles of Incorporation
(the "Company Articles") and Regulations (the "Company Regulations"). For
purposes of this Prospectus, any reference to the "Company" shall also include
NetMed, Inc., which will be the Company's name upon consummation of the Merger.
The Merger will be effected pursuant to the terms and conditions of an Agreement
and Plan of Merger, dated as of July 5, 1996, among the Company and the
Predecessor Companies (the "Merger Agreement").
Upon consummation of the Merger (the "Effective Time"), and without any
action on the part of the Company, the Predecessor Companies, or the holder of
any of the securities of the Predecessor Companies, each issued and outstanding
share of capital stock of each of the Predecessor Companies shall be converted
into the right to receive the number of fully paid and nonassessable shares of
the common stock, without par value, of the Company (the "Company Shares") as
set forth below:
Number of Company Shares
for each Predecessor
Predecessor Company Company Share
------------------- -------------
CIN 1,121.6652
INC 4,491.7064
ERG 3,237.2643
CCWP 37.3971
CCI 1,487.6186
Under the Articles of Incorporation of ERG, CCWP, and CCI, the affirmative
vote of the holders of common shares of each of ERG, CCWP, and CCI entitling
them to exercise a majority of the voting power of the respective corporations
is required to approve the Merger. Ohio law
<PAGE>
provides that the Merger must be approved by the affirmative vote of the holders
of common shares of each of CIN and INC entitling them to exercise at least
two-thirds of the voting power of the respective corporations.
The Company's shareholders must vote to approve the Merger and the
amendments to the Company Articles and Company Regulations, which will be
effective upon consummation of the Merger. Under the General Corporation Law
of Ohio, holders of record of the Company's common stock who follow the
procedures under Section 1701.85 will be entitled to exercise dissenter's rights
with respect to their shares and receive the "fair cash value" of such shares.
In addition, Section 1701.85 provides the holders of record of shares of
the Predecessor Companies' common stock, who properly exercise and perfect
dissenting shareholder rights with respect to the Merger, the right to obtain a
cash payment for the "fair cash value" of their shares (excluding any element of
value arising from the accomplishment or expectation of the Merger). In order
to exercise such rights, holders must comply with the procedural requirements of
the General Corporation Law of Ohio, a description of which is provided under
"THE MERGER - Dissenters' Rights" and the full text of which is attached to this
Prospectus as Appendix B. Failure to take any of the steps required under the
General Corporation Law of Ohio on a timely basis may result in the loss of
dissenters' rights. See "THE MERGER - Dissenters' Rights."
THE COMPANY SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" AT PAGE 13.
____________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
____________________________
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS AND ANY INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF
THE SECURITIES OFFERED BY THIS PROSPECTUS IN ANY JURISDICTION OR TO ANY PERSON
TO WHOM IT WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. THE
DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
____________________________
The date of this Prospectus is July 16, 1996.
<PAGE>
AVAILABLE INFORMATION
While the Company is not now subject to the informational requirements of
the Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder (the "Exchange Act"), it anticipates that it will be subject to these
rules and regulations following consummation of the Merger and, in accordance
therewith, will file reports, proxy statements, and other information with the
Securities and Exchange Commission (the "Commission"). Copies of such reports,
proxy statements, and other information, when filed by the Company, can be
inspected and copied at the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 or at the public reference facilities
of the regional offices of the Commission at Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of such material
will also be available by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
the fees prescribed by the rules and regulations of the Commission.
The Company has filed with the Commission under the Securities Act of 1933,
as amended, and the rules and regulations thereunder (the "Securities Act"), a
Registration Statement on Form S-4 (as it may be amended, the "Registration
Statement") with respect to the Company Shares issuable in connection with the
Merger. This Prospectus does not contain all of the information contained in
the Registration Statement, certain portions of which have been omitted pursuant
to the rules and regulations of the Commission and to which reference is hereby
made. Any statements contained herein or in any document incorporated by
reference herein concerning the provisions of any contract or other document are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement or other document, each such statement being qualified in its entirety
by such reference. The Registration Statement (and exhibits thereto) should be
available for inspection at the offices of the Commission at 450 Fifth Street,
N.W., Washington D.C. 20549, and copies thereof may be obtained from the
Commission at prescribed rates.
All information contained herein with respect to the Company was supplied
by the Company and all information contained herein with respect to the
Predecessor Companies was supplied by the Predecessor Companies. The Company
cannot warrant the accuracy or completeness of information relating to the
Predecessor Companies. No Predecessor Company can warrant the accuracy or
completeness of the information relating to the Company or any other
Predecessor Company.
-3-
<PAGE>
TABLE OF CONTENTS
PAGE
AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
TABLE OF CONTENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Predecessor Companies . . . . . . . . . . . . . . . . . . . . . . 5
The Merger; General Terms . . . . . . . . . . . . . . . . . . . . . . 7
Reasons for the Merger; Recommendation of the
Boards of Directors of the Company and
Predecessor Companies. . . . . . . . . . . . . . . . . . . . . . . . 10
Restrictions on Transfer of the Company Shares. . . . . . . . . . . . 11
Certain Related Transactions. . . . . . . . . . . . . . . . . . . . . 11
Dissenter's Rights. . . . . . . . . . . . . . . . . . . . . . . . . . 12
Comparative Per Share Information . . . . . . . . . . . . . . . . . . 12
Market Price Data . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Dividend History. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SELECTED HISTORICAL COMBINED FINANCIAL
DATA OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Background of the Merger. . . . . . . . . . . . . . . . . . . . . . . 19
Reasons for the Merger; Recommendation of the
Boards of Directors of the Company and the
Predecessor Companies. . . . . . . . . . . . . . . . . . . . . . . . 19
Required Vote . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
The Merger Agreement. . . . . . . . . . . . . . . . . . . . . . . . . 20
Exchange of Certificates. . . . . . . . . . . . . . . . . . . . . . . 23
Amendment to Articles of Incorporation. . . . . . . . . . . . . . . . 23
Dissenter's Rights. . . . . . . . . . . . . . . . . . . . . . . . . . 23
NASDAQ/NMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
UNAUDITED PRO FORMA CONDENSED COMBINING
FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . 25
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . 25
Resales by Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 27
CERTAIN RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . 28
THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
NSI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
The Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
The PAPNET System . . . . . . . . . . . . . . . . . . . . . . . . . . 30
The PAPNET Service. . . . . . . . . . . . . . . . . . . . . . . . . . 31
The License . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Executive Officers and Directors. . . . . . . . . . . . . . . . . . . 32
Committees of the Board of Directors. . . . . . . . . . . . . . . . . 34
Director Compensation . . . . . . . . . . . . . . . . . . . . . . . . 34
Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . 35
Stock Option Plans. . . . . . . . . . . . . . . . . . . . . . . . . . 35
Principal Stockholders. . . . . . . . . . . . . . . . . . . . . . . . 37
Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company
and the Predecessor Companies. . . . . . . . . . . . . . . . . . . . 37
Description of the Company Capital Stock. . . . . . . . . . . . . . . 41
THE PREDECESSOR COMPANIES. . . . . . . . . . . . . . . . . . . . . . . . . 44
Market Information. . . . . . . . . . . . . . . . . . . . . . . . . . 45
COMPARISON OF CERTAIN RIGHTS OF THE COMPANY
AND THE PREDECESSOR COMPANIES SHAREHOLDERS. . . . . . . . . . . . . . . . 47
Articles of Incorporation Provisions. . . . . . . . . . . . . . . . . 47
Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Voting Power. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Payment of Dividends and Other Distributions. . . . . . . . . . . . . 49
Regulation Provisions . . . . . . . . . . . . . . . . . . . . . . . . 49
Meetings of Stockholders. . . . . . . . . . . . . . . . . . . . . . . 50
Stockholder Nominations and Proposals . . . . . . . . . . . . . . . . 51
Amendment of Articles of Incorporation
and Regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Action by Written Consent . . . . . . . . . . . . . . . . . . . . . . 52
Size and Classification of Board of Directors; Removal
of Directors; Filling Vacancies. . . . . . . . . . . . . . . . . . . 52
Liability and Indemnification of Officers and Directors . . . . . . . 53
Interested Stockholder Transactions . . . . . . . . . . . . . . . . . 53
Preemptive Rights . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Repurchase and Redemption of Stock. . . . . . . . . . . . . . . . . . 54
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
INDEX TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . F-1
APPENDICES
Appendix A - Agreement and Plan of Merger
Appendix B - Section 1701.85 of the Ohio Revised Code - rights of
Dissenting Shareholders
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SUMMARY
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN INFORMATION WITH RESPECT TO THE
MERGER. THIS SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO, AND SHOULD BE READ IN CONJUNCTION WITH, THE DETAILED
INFORMATION AND FINANCIAL STATEMENTS CONTAINED HEREIN AND IN THE EXHIBITS
HERETO.
THE COMPANY
The Company is an Ohio corporation formed on October 25, 1989 for the
purpose of acquiring from Neuromedical Systems, Inc. ("NSI") the exclusive
rights to market the PAPNET-Registered Trademark- System and the
PAPNET-Registered Trademark- Service in the State of Ohio. The Company later
assigned its rights to Papnet Limited Partnership, an Ohio limited partnership
("PLP"). In January 1993, the Company acquired all of the issued and
outstanding units of limited partnership interest in both PLP and Papnet Midwest
Limited Partnership, an Ohio limited partnership ("PMLP"). PMLP owned the
rights to market the PAPNET-Registered Trademark- System and PAPNET-Registered
Trademark- Service in Kentucky and the Standard Metropolitan Area of Chicago,
Illinois. As a result of these acquisitions the Company has the marketing
rights to the PAPNET-Registered Trademark- System and the PAPNET-Registered
Trademark- Service in Ohio, Kentucky and the Standard Metropolitan Area of
Chicago.
The PAPNET-Registered Trademark- System is a semi-automated cancer
detection system for the review of cell, tissue or body fluid specimens,
including but not limited to, cervical cytology specimens ("Slides"). The
PAPNET-Registered Trademark- Service permits laboratories to submit Slides to
one of NSI's central facilities for image processing employing NSI's patented
neural network technology. NSI returns the Slides and digital tape containing
processed images for evaluation by NSI-trained cytotechnologists.
The Company's offices are located at 6059 Memorial Drive, Dublin, Ohio
43017 and its telephone number is (614) 793-9356.
THE PREDECESSOR COMPANIES
GENERAL
Each of the Predecessor Companies, other than CCWP, was organized to
acquire and exercise the right to market the PAPNET-Registered Trademark- System
and PAPNET-Registered Trademark- Service within its licensed territory.
However, until November 8, 1995, when the United States Food and Drug
Administration ("FDA") finally approved the marketing of the PAPNET-Registered
Trademark- technology, the technology could be used in the United States only
for investigational purposes in connection with the FDA approval process. CCWP
is an affiliate of CCI, and was organized for the purpose of holding certain
warrants for the purchase of NSI common stock. Consequently, the Predecessor
Companies had only minor levels of business activities prior to November 1995.
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CYTOLOGY INDIANA, INC.
CIN is an Ohio corporation formed on September 7, 1990 to serve as the
general partner of Papnet Indiana Limited Partnership, an Ohio limited
partnership, which was formed for the purpose of acquiring the rights to market
the PAPNET-Registered Trademark- System and the PAPNET-Registered
Trademark-Service in Indiana. Papnet Indiana Limited Partnership subsequently
exchanged its rights for the State of Indiana for the right to market the
PAPNET-Registered Trademark-System and the PAPNET-Registered Trademark- Service
in Missouri. In 1995, Papnet Indiana Limited Partnership distributed its assets
to its general and limited partners. CIN owns an approximate 65% interest in
the rights to market the PAPNET-Registered Trademark- System and
PAPNET-Registered Trademark- Service in Missouri. The former limited partners
of Papnet Indiana Limited Partnership are now shareholders of INC, which owns an
approximate 35% interest in the rights to market the PAPNET-Registered
Trademark- System and PAPNET-Registered Trademark- Service in Missouri.
CIN's offices are located at 6059 Memorial Drive, Dublin, Ohio 43017 and
its telephone number is (614) 793-9356.
INDIANA CYTOLOGY REVIEW COMPANY
INC is an Ohio corporation formed on December 1, 1995 by the former limited
partners of Papnet Indiana Limited Partnership for the purpose of owning an
approximate 35% interest in the rights to market the PAPNET-Registered
Trademark- System and the PAPNET-Registered Trademark- Service in Missouri.
INC's offices are located at 6059 Memorial Drive, Dublin, Ohio 43017 and
its telephone number is (614) 793-9356.
ER GROUP, INC.
ERG is an Ohio corporation formed on May 13, 1991 for the purpose of
acquiring the rights to market the PAPNET-Registered Trademark- System and the
PAPNET-Registered Trademark- Service in Georgia.
ERG's offices are located at 8595 Milmichael Court, Dublin, Ohio 43017 and
its telephone number is (614) 764-2501.
CCWP PARTNERS, INC.
CCWP is an Ohio corporation formed on December 1, 1995. Carolina Cytology
Partnership, an Ohio limited partnership, owned warrants for the purchase of NSI
common stock. In December 1995, immediately after the formation of CCWP, CCWP
acquired all of the outstanding units of limited partnership interest in
Carolina Cytology Partnership in exchange for stock in CCWP. CCWP now owns the
common stock issued upon exercise of the NSI warrant.
CCWP's offices are located at 8651 Gairloch Court, Dublin, Ohio 43017 and
its telephone number is (614) 889-1052.
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CAROLINA CYTOLOGY, INC.
CCI is an Ohio corporation formed on December 10, 1992 for the purpose of
acquiring the rights to market the PAPNET-Registered Trademark- System and the
PAPNET-Registered Trademark- Service in North Carolina.
CCI's offices are located at 8651 Gairloch Court, Dublin, Ohio 43017 and
its telephone number is (614) 889-1052.
THE MERGER; GENERAL TERMS
At the Effective Time of the Merger, the Predecessor Companies will be
merged with and into the Company, with the Company being the surviving
corporation. In connection with the Merger, and without further action by the
shareholders of the Company or the Predecessor Companies, the Company will amend
its Articles of Incorporation to, among other things, change its name to NetMed,
Inc. It is currently anticipated that, assuming all conditions to the Merger
have been satisfied or waived, the Effective Time will occur in September, 1996,
but in no event later than September 30, 1996. See "THE MERGER."
MERGER CONSIDERATION. In the Merger, all outstanding shares of the
Predecessor Companies' common stock, including shares of the Predecessor
Companies issuable upon the exercise of outstanding warrants and options, shall
be converted into the right to receive fully paid and nonassessable Company
Shares (the "Merger Consideration"). Shares of outstanding common stock of the
Predecessor Companies (other than Dissenting Shares) will be converted into
Company Shares based on a ratio of one Predecessor Company share for the
following number of shares of the Company: CIN (1,121.6652); INC (4,491.7064);
ERG (3,237.2643); CCWP (37.3971); and CCI (1,487.6186). See "THE MERGER - The
Merger Agreement (Merger Consideration Generally)."
VOTE REQUIRED. Approval of the Merger and the Merger Agreement and the
transactions contemplated thereby requires the affirmative vote of the holders
of common shares of each of ERG, CCWP, and CCI entitling them to exercise a
majority of the voting power of the respective corporations and the affirmative
vote of holders of shares entitling them to exercise at least two-thirds of the
voting power of the Company, CIN, and INC. In addition to the approval of the
Merger, the adoption of amendments to the Company's Articles of Incorporation
must be approved by the holders of at least two thirds of the outstanding stock
of the Company entitled to vote thereon. In the event that the shareholders of
the Company and each of the Predecessor Companies approve and adopt the Merger
and the Merger Agreement as required by their respective Articles of
Incorporation and the General Corporation Law of Ohio, and upon satisfaction or
waiver of all other conditions to the Merger, the Merger will be consummated
without any further vote of the shareholders of the Company or the Predecessor
Companies. See "THE MERGER - Required Vote."
CONDITIONS TO THE MERGER; TERMINATION. The respective obligations of the
Company and the Predecessor Companies to consummate the Merger are subject to
certain conditions, including among others the adoption of the Merger and the
Merger Agreement by the holders of the requisite number of shares of the Company
and Predecessor Companies' common stock; the compliance by
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each of the parties to the Merger Agreement with its material obligations
thereunder and the truth of the representations and warranties made by each of
the parties on the date of the Merger Agreement and at the Effective Time; the
Registration Statement shall have become effective under the Securities Act;
the Company shall have received all state securities or "Blue Sky" permits and
other authorizations necessary to issue the Company Shares pursuant to the
Merger and the Merger Agreement; the Company Shares shall have been admitted for
quotation on the National Market of the National Association of Securities
Dealers, Inc. Automated Quotation system ("NASDAQ NMS") upon official notice of
issuance; at the time of the consummation of the transactions contemplated by
the Merger Agreement (the "Closing"), the shareholders of the Company or any
Predecessor Company entitled to assert dissenter's rights shall own in the
aggregate less than 10% of the outstanding shares of the Company or the
Predecessor Company; and the Company and the Predecessor Companies having
received an opinion of Porter, Wright, Morris & Arthur, counsel to the Company,
to the effect that, among other things, the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code") and each Predecessor
Company will be a party to that reorganization within the meaning of Section
368(b) of the Code and that the holding period for the Company Shares received
in exchange for the Predecessor Company shares will include the period for which
the Predecessor Company shares were held, provided that the Predecessor Company
shares were held as a capital asset. See "THE MERGER - The Merger Agreement
(Conditions to Consummation of the Merger)."
The Merger Agreement may be terminated by mutual consent of all of the
parties; by any of the parties if the Merger shall not have been consummated
before September 30, 1996 (unless the failure to consummate the Merger by such
date shall be due to the action or failure to act of the party seeking to
terminate the Merger Agreement); by any party if any permanent injunction or
other order of a court or other competent authority shall have become final and
non-appealable; or by any party if any required approval of the shareholders of
such party or any other party shall not have been obtained. The Merger
Agreement may also be terminated by a vote of the majority of a seven member
interim advisory board (the "Advisory Board") appointed by the parties.
In the event that the Merger Agreement is terminated, the Merger Agreement
shall be void and have no effect, without any liability on the part of any party
or its affiliates, directors, officers, or shareholders. Notwithstanding the
foregoing, the parties to the Merger Agreement will continue to be bound by the
provisions of the Merger Agreement that relate to: (i) their respective
obligations as to confidentiality and the payment of any broker's or finder's
fees; (ii) a party's obligation to pay liquidated damages in the amount of
$500,000 to the other parties if the termination arises out of that party's
failure to obtain the required approval of the Merger and the Merger Agreement
or that party's breach of the Merger Agreement; and (iii) a party's obligation
to pay its share of all costs and expenses incurred by the parties in connection
with the Merger and the transactions contemplated by the Merger Agreement. A
party's share of any liquidated damages paid as a result of a termination of the
Merger or its share of costs and expenses required to be paid by it under the
Merger Agreement shall be in proportion to the number of Company Shares that are
or would have been owned by the party's shareholders immediately after the
Effective Time. See "THE MERGER - The Merger Agreement (Termination)."
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ACCOUNTING TREATMENT. The merger will be effected by an exchange of the
Company's common stock for the outstanding common shares of the Predecessor
Companies. The merger of the Company and the Predecessor Companies will be
accounted for at historical cost. For accounting purposes, the Company will be
the predecessor of the merged entity and its historical financial statements
will be those of the new entity NetMed, Inc. The results of operations of the
Predecessor Companies will be combined with those of the Company commencing at
the date of merger. See "THE MERGER - Anticipated Accounting Treatment."
FEDERAL INCOME TAX CONSEQUENCES. The following discussion is a general
summary of the principal federal income tax consequences of the Merger to
individual United States holders of the Predecessor Companies shares who hold
their shares as capital assets. The discussion is based on laws, regulations,
rulings and decisions currently in effect. It is for general information only,
and is not intended to be tax advice to any particular shareholder of the
Company or a Predecessor Company. The discussion does not take into account
rules that are applicable to shareholders of the Predecessor Companies that are
subject to special treatment under the Code, including without limitation,
insurance companies, dealers in securities, financial institutions, tax-exempt
investors, foreign investors, shareholders who do not hold their stock as a
capital asset and shareholders who acquired shares pursuant to the exercise of
an employee stock option, employee stock purchase plan or otherwise as
compensation. The discussion also does not address state, local or foreign tax
consequences of the Merger. No rulings have been or will be requested from the
Internal Revenue Service with respect to the tax consequences of the Merger.
Assuming the Merger is consummated in the manner set forth in the Merger
Agreement and qualifies as a reorganization under Section 368 of the Code, the
principal federal income tax consequences of the Merger under present federal
income tax law will be as described below.
(a) No gain or loss will be recognized by the Company or the Predecessor
Companies as a result of the Merger;
(b) No gain or loss will be recognized by the holders of Predecessor
Company shares upon the exchange of their shares of Predecessor
Company shares for Company Shares pursuant to the Merger (except for
any gain or loss attributable to cash received by a holder of
Predecessor Company stock in payment of appraisal or dissenters'
rights of appraisal or for fractional share interests to which they
may be entitled );
(c) The federal income tax basis of the Company Shares received by the
shareholders of the Predecessor Companies (including fractional share
interests to which they may be entitled) for their Predecessor Company
shares will be the same as the federal income tax basis of the
Predecessor Company shares surrendered in exchange therefor, increased
by any gain recognized; and
(d) The holding period for the Company Shares received by shareholders of
the Predecessor Companies in exchange for their Predecessor Company
shares will include the period for which the Predecessor Company
shares exchanged therefor were held,
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provided that the exchanged Predecessor Company shares were held as a
capital asset by such shareholder on the date of the exchange.
It is a condition to the closing that the Company and the Predecessor
Companies shall have received an opinion of Porter, Wright, Morris & Arthur
which will be based upon certain certificates, representations and assumptions,
substantially to the effect that, for federal income tax purposes the Merger
will constitute a reorganization within the meaning of section 368(a) of the
Code and will result in the tax consequences described above.
No opinion will be expressed with respect to any other tax consequences of
the exchange, including, without limitation, the tax consequences with respect
to any shares of Predecessor Company stock that were acquired in contemplation
of the Merger, were held by shareholders subject to special treatment under the
Code, were not held as capital assets or were acquired by the holder thereof
pursuant to any employee stock option, employee stock purchase plan or otherwise
as compensation or pursuant to the exercise of any warrants to purchase shares
of Predecessor Company stock. Further, no opinion will be expressed concerning
the effect of state, local and foreign tax laws. An opinion of counsel is not
binding upon the IRS, and there can be no assurance that the IRS will not take a
position contrary to the positions reflected in such opinion or that such
opinion will be upheld by the courts if challenged by the IRS.
THE SPECIFIC TAX TREATMENT OF EACH SHAREHOLDER WILL DEPEND ON THEIR
PARTICULAR FACTS AND CIRCUMSTANCES. EACH HOLDER OF COMPANY SHARES AND
PREDECESSOR COMPANY SHARES IS ADVISED TO CONSULT WITH SUCH STOCKHOLDER'S OWN TAX
ADVISER CONCERNING THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER, AS WELL AS
THE APPLICABLE STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES. See "THE MERGER
- - Certain Federal Income Tax Consequences."
REASONS FOR THE MERGER; RECOMMENDATION OF THE COMPANY'S AND THE PREDECESSOR
COMPANIES' BOARDS OF DIRECTORS
In evaluating the proposed Merger, the Boards of Directors of the Company
and the Predecessor Companies, with the assistance of outside counsel and other
advisors, considered a variety of factors, including the following: (i) the
efficiencies created through the combined entity; (ii) the relative market
positions of each of the Company and the Predecessor Companies and the increased
market penetration of the combined entity; (iii) the ability of management of
the combined entity to realize the full potential of the combined entity; (iv)
the opportunity that the combination would afford the Predecessor Companies'
shareholders to acquire an equity participation in a larger enterprise with
significantly larger equity value than any one of the Predecessor Companies; (v)
the terms of the Merger Agreement; and (vi) the potential for greater liquidity
for the shareholders of the Company and Predecessor Companies.
The directors of the Company and the Predecessor Companies have unanimously
determined that the Merger Agreement and the Merger are advisable and fair and
in the best interests of the Company and the Predecessor Companies and recommend
that their respective shareholders approve the Merger Agreement and the Merger.
See "THE MERGER - Background of the Merger," "-
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Reasons for the Merger" and "- Recommendation of the Predecessor Companies'
Boards of Directors."
RESTRICTIONS ON TRANSFER OF THE COMPANY SHARES
Certain persons who may be deemed "affiliates" of the Company or any of the
Predecessor Companies for purposes of Rule 145 under the Securities Act ("Rule
145") will not be permitted to transfer their Company Shares issued in the
Merger except (i) pursuant to an effective registration statement; (ii) in
compliance with Rule 145; or (iii) pursuant to an exemption from the
registration requirements of the Securities Act. This Prospectus does not cover
resales of Company Shares by affiliates of the Company or the Predecessor
Companies. In addition certain affiliates of the Company and the Predecessor
Companies have agreed not to sell their Company Shares for a specified period of
time. See "THE MERGER - Resales by Affiliates."
Under the terms of the Merger Agreement, the Predecessor Company
shareholders have, with respect to the Company shares that each receives in the
Merger, and David J. Richards, John P. Kennedy and Carl A. Genberg (the "Key
Company Shareholders") have, with respect to their shares of the Company, agreed
to certain additional restrictions on the transfer of their respective shares of
the Company. Except with respect to certain privately negotiated sales, the
Predecessor Company shareholders will be prohibited from selling more than an
aggregate of 625,000 Company Shares during the one year period commencing on the
closing date of the Merger. The number of Company Shares that each Predecessor
Company shareholder will be entitled to sell is equal to the product of (A) the
ratio of Company Shares received with respect to the conversion of the
shareholder's shares in a Predecessor Company to the number of Company Shares so
received by all shareholders of such Predecessor Company, times (B) the number
of shares allocated to such Predecessor Company in the Merger Agreement for the
relevant time period. Except with respect to certain privately negotiated sales
and certain transactions involving the pledge of the shares held by the Key
Company Shareholders, the Key Company Shareholders have agreed not to sell the
Company Shares they own immediately after the Merger for a period of one year
commencing on the closing of the Merger. See "Merger Agreement - Appendix A."
CERTAIN RELATED TRANSACTIONS
Each of the other Predecessor Companies and the Company entered into a Loan
Agreement, dated July 5, 1996 (the "Loan Agreement"), whereby the Company has
agreed to advance to the other Predecessor Companies the expenses incurred by
each in connection with the Merger. In addition, the Company will advance
funds necessary to pay reasonable expenses of ordinary business operations for
the Predecessor Companies pending consummation of the Merger (collectively, the
"Advances"). Advances made to the Predecessor Companies in connection with the
merger that was abandoned in June 1996 (the "Initial Advances") will be added to
the Advances. The Initial Advances and the Advances will be evidenced by a
promissory note bearing interest at an annual rate of 7%, payable 180 days after
the earlier of the consummation of the Merger or the termination of the Merger
Agreement. Promissory notes delivered by the Predecessor Companies will be
secured by their shares of NSI common stock.
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The Loan Agreement has been modified by a side-letter agreement among the
Company, ERG, CCI and CCWP, dated July 16, 1996, which provides, among other
things, terms relating to notice and cure periods for any defaults and credits
for certain expenses that are paid directly by these Predecessor Companies.
The Company entered into a loan agreement, dated March 14, 1996 with
Cytology West, Inc. ("CWI") and Papnet Utah, Inc. ("PUI"). CWI is licensed to
sell the PAPNET-Registered Trademark- System and the PAPNET-Registered
Trademark- Service in Arizona, Nevada and San Diego County California. PUI is
licensed to sell PAPNET-Registered Trademark- System and the PAPNET-Registered
Trademark- Service in Utah. Carl Genberg, President of CWI, owns 383,616
shares of the Company's common stock and may be deemed to be an affiliate of
the Company. CWI and PUI were originally to have been a parties to a merger
with the Company and the Predecessor Companies, but that transaction was
abandoned by the parties. The loan agreement provides for advances to CWI of
up to $585,000 to cover certain operating expenses, expenses associated with
the abandoned merger, and the acquisition of new technology. No specific
amount was established for advances to PUI. The advances will bear interest
at the rate of 7% per annum. As of June 15, 1996, the Company had advanced
approximately $146,320 to CWI and $14,315 to PUI under the terms of the loan
agreement, and no further advances will be made.
The Company, the Predecessor Companies and certain individual shareholders
of these companies entered into a Voting Agreement, dated July 5, 1996, pursuant
to which the individual shareholders appointed John P. Kennedy and Cecil J.
Petitti as their proxies and attorneys-in-fact for the purpose of voting their
shares in the Company or Predecessor Company, as the case may be, in favor of
the Merger, the Merger Agreement and the transactions contemplated thereby.
Pending completion of the Merger, the business operations of CIN, INC, ERG,
and CCI are being managed by the Company.
DISSENTER'S RIGHTS
Under Ohio General Corporation Law, holders of record of shares of the
Company and the Predecessor Companies who properly exercise and perfect
dissenter's rights with respect to the Merger will have the right to receive the
"fair cash value" of their shares (excluding any appreciation or depreciation in
market value resulting from the Merger). In order to exercise such rights,
holders must comply with the procedural requirements of Section 1701.85 of the
Ohio Revised Code, a description of which is provided under "THE MERGER -
Dissenter's Rights" and the full text of which is attached to this Prospectus as
Appendix B. Failure to take any of the steps required under Section 1701.85 on
a timely basis may result in the loss of dissenter's rights. See "THE MERGER -
Dissenter's Rights."
COMPARATIVE PER SHARE INFORMATION
The Predecessor Companies had only minor levels of business activities
prior to November 1995. In addition, there is no public market for the any
Predecessor Company's common stock. Accordingly, comparative share information
would not be meaningful.
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MARKET PRICE DATA
Currently, there is no public market for the common stock of any
Predecessor Company. There has been a limited over the counter public market
for the shares of the Company, which are quoted on the NASDAQ Bulletin Board.
The following are the high and low quarterly closing bid and asked prices per
Company share for 1994, 1995 and the first quarter of 1996, which have been
adjusted to reflect 2-for-1 stock splits in May 1994, May 1995 and December
1995. The prices shown represent quotations between dealers, without
adjustments for retail markups, markdowns or commissions and may not
represent actual transactions.
1994 High Low
---- ---- ---
2nd Qtr. 7.50 3.75
3rd Qtr. 6.875 3.625
4th Qtr. 4.25 3.50
1995
----
1st Qtr. 5.398 3.75
2nd Qtr. 8.094 7.875
3rd Qtr. 17.688 10.75
4th Qtr. 15.688 13.375
1996
----
1st Qtr. 13 9.375
DIVIDEND HISTORY
The Company has paid no cash dividends since its formation. The Company
presently anticipates that all of its future earnings will be retained for the
development of its business and does not anticipate paying cash dividends on the
Company common stock in the foreseeable future. The payment of any future
dividends will be at the discretion of the Company's Board of Directors and will
be based on the Company's future earnings, financial condition, capital
requirements and other relevant factors.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, SHAREHOLDERS OF
THE COMPANY AND THE PREDECESSOR COMPANIES SHOULD CAREFULLY CONSIDER THE
FOLLOWING FACTORS IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE MAKING A
DECISION REGARDING THEIR VOTE ON THE MERGER.
LIMITED OPERATING HISTORY. The Company was formed on October 25, 1989.
Because the Company is in the early stage of its operations it is subject to all
the risks incident to the creation and development of a new business, including
the absence of earnings and minimal net worth. The Company has to date had no
appreciable income from operations, and as of March 31, 1996 has an accumulated
deficit of $287,344. See INDEX TO FINANCIAL STATEMENTS.
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LICENSE AGREEMENT. The Company's rights to market the PAPNET-Registered
Trademark- System and PAPNET-Registered Trademark- Service and the revenues
generated by these activities are governed by the terms of a License Agreement
with NSI (the "License Agreement"). The License Agreement imposes significant
territorial and other restrictions on the Company's marketing rights, and places
certain limitations on the amounts of royalty revenues which the Company can
generate through the marketing of the PAPNET-Registered Trademark- System and
PAPNET-Registered Trademark- Service. See "THE COMPANY - The License."
RELIANCE ON NSI. The business of the Company is dependent upon a number of
factors, many of which are controlled by NSI. These factors include maintaining
the PAPNET-Registered Trademark- System's compliance with FDA and other
regulatory requirements, maintenance of the technological advantages of the
PAPNET-Registered Trademark- System, maintenance of product liability insurance,
the ability to manufacture and deliver the equipment required to operate the
PAPNET-Registered Trademark- System, and the ability to build and operate the
Scanning Station portion of the PAPNET-Registered Trademark- System. Further,
NSI is in a stage of development that may require additional funding for its
internal operations. In the event that NSI should fail to perform in any of
these areas, or in any others which could affect its licensees, such failure
could have an adverse effect on the Company and its business. The Company is
dependent and relies upon NSI for product information, support and marketing and
other pertinent information.
Further, NSI does not manufacture all of the equipment used in the
PAPNET-Registered Trademark- System, and is therefore dependent upon others to
do so. The failure of NSI's suppliers to perform could have an adverse effect
on the Company's business.
NEED FOR MARKET ACCEPTANCE OF THE PAPNET-Registered Trademark- SYSTEM. The
Company's future performance will depend to a substantial degree upon market
acceptance of the PAPNET-Registered Trademark- System. The extent of, and rate
at which, market acceptance and penetration are achieved by the
PAPNET-Registered Trademark- System are functions of many variables including,
but not limited to, price, effectiveness, acceptance by patients, physicians and
laboratories (including the ability of laboratories to hire additional
cytotechnologists), manufacturing, slide processing and training capacity,
reimbursement practice and marketing and sales efforts. There can be no
assurance that the PAPNET-Registered Trademark- System will achieve or maintain
acceptance in its target markets. See "THE COMPANY - The Market."
RELIANCE ON A SINGLE PRODUCT. While the Company intends to develop or
acquire other technologies, it has concentrated its efforts primarily on the
marketing of the PAPNET-Registered Trademark- System and will be dependent upon
the successful development of that product to generate revenues. Accordingly,
for the foreseeable future, the Company's success will be dependent upon the
marketing of the PAPNET-Registered Trademark- System.
DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY. The technology
underlying the PAPNET-Registered Trademark- System is protected by broad patent
protection granted to NSI with respect to the use of neural networks in
automated and semi-automated cytology. There can be no assurance that the NSI
patents will afford protection from material infringement or that such patents
will not be challenged. NSI and the Company will also rely on trade secrets and
proprietary know-how, which they will seek to protect, in part, through
confidentiality agreements with employees, consultants and other parties. There
can be no assurance that these agreements will not be breached, that there will
be adequate remedies for any breach or that trade secrets of NSI or the Company
will not otherwise become known to, or independently developed by, competitors.
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<PAGE>
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Although patent and
intellectual property disputes in the medical device area have often been
settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial and there can be no assurance that necessary
licenses would be available to NSI or the Company on satisfactory terms or at
all. Adverse determinations could limit the value of NSI's or the Company's
issued patents or result in invalidation of those patents, subject NSI or the
Company to significant liabilities to third parties, require NSI or the Company
to seek licenses from third parties or prevent NSI or the Company from
manufacturing and selling its products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
PRODUCT LIABILITY. The business of the Company could expose it to the
risks inherent in the production and distribution of medical diagnostic
equipment. Although NSI has attempted to reduce the exposure to product
liability risk by disclosing the demonstrated range of accuracy of the
PAPNET-Registered Trademark- System, there can be no assurance that the Company
will not be exposed to liability resulting from the failure or inaccuracy of the
PAPNET-Registered Trademark- System. Neither the Company nor any Predecessor
Company carries product liability insurance. However, NSI is required, under
the terms of the License Agreement, to name the Company and each Predecessor
Company as additional insureds on its product liability policy.
TECHNOLOGY RISKS. NSI, and consequently the Company, are dependent upon
the technological advantages of the PAPNET-Registered Trademark- System and its
patent protection. There can be no assurance that NSI will be able to maintain
such advantages, and the failure to do so could have adverse consequences on the
business of the Company.
GOVERNMENT REGULATION. NSI's services, products and manufacturing
activities are subject to extensive and rigorous government regulation,
including the provisions of the Medical Device Amendment to the Federal Food,
Drug and Cosmetic Act. Commercial distribution in certain foreign countries is
also subject to government regulations. The process of obtaining required
regulatory approvals can be lengthy, expensive and uncertain. Moreover,
regulatory approvals, if granted, may include significant limitations on the
indicated uses for which a product may be marketed. The FDA actively enforces
regulations prohibiting marketing without compliance with the premarket approval
provisions of products and conducts periodic inspections to determine compliance
with Good Manufacturing Practice regulations.
The FDA recently warned the Company that certain promotional materials
relating to the PAPNET-Registered Trademark- System appearing on the Company's
World Wide Web site failed to comply with certain FDA premarket approval
regulations. The FDA cited specific claims made in these materials and advised
the Company that it should review these and other promotional materials to
ensure compliance with the regulations. While the Company believes that the
materials comply in all respects with applicable regulations, it has suspended
access to these materials on its Web site pending FDA's evaluation of its
detailed response to the warning letter.
Failure to comply with applicable regulatory requirements can result in,
among other things, fines, suspensions of approvals, seizures or recalls of
products, operating restrictions and criminal prosecutions. Furthermore,
changes in existing regulations or adoption of new regulations could
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<PAGE>
prevent NSI from obtaining, or affect the timing of, future regulatory
approvals. The effect of governmental regulation may be to delay for a
considerable period of time or to prevent the marketing and/or full
commercialization of future products or services that NSI or the Company may
develop and/or impose costly requirements on NSI or the Company. There can be
no assurance that NSI or the Company will be able to obtain regulatory approvals
of any products on a timely basis or at all. Delays in receipt of or failure to
receive such approvals or loss of previously received approvals would adversely
affect the marketing of NSI's and the Company's proposed products. There can
also be no assurance that additional regulations will not be adopted or current
regulations amended in such a manner as will materially adversely effect NSI or
the Company.
RELIANCE ON MANAGEMENT. The success of the Company's operations is highly
dependent upon David J. Richards who has devoted much effort in marketing the
PAPNET-Registered Trademark- System. The loss of Mr. Richards as an employee
could have an adverse effect on the business of the Company. The Company has no
employment agreement with Mr. Richards and does not own any insurance policies
on his life.
COMPETITION. The Company is aware of several companies that either have
developed or are developing Pap smear classification systems that are
competitive with the PAPNET-Registered Trademark- System. Commercial
availability of such products could have a material adverse effect on the
Company's business, financial condition and results of operations. NSI's
competitors may have substantially greater financial, manufacturing, marketing
and technical resources than NSI and represent significant potential long-term
competition for NSI. NSI's competitors may succeed in developing products that
are more effective or less costly than any that may be developed by NSI. These
competitors may also prove to be more successful than NSI in production and
marketing. New developments are expected to continue at a rapid pace in both
industry and academia. There can be no assurance that research and development
by others will not render NSI's current and contemplated products obsolete.
Competition may increase further as a result of advances that may be made in the
commercial applicability of technologies and greater availability of capital for
investment in these fields. Since the Company was organized, competitors have
made strides in developing automated or semi-automated system that could
successfully compete with the PAPNET-Registered Trademark- System. See "THE
COMPANY - Competition."
LACK OF PROSPECTIVE DIVIDENDS. The Company does not contemplate the
payment of dividends on the Company Shares for the foreseeable future. The
Company has accumulated substantial losses since its inception and there can be
no assurance that the Company's operations will result in sufficient revenues to
enable the Company to operate at profitable levels or to generate positive cash
flow. Any earnings generated from the operations of the Company will be used to
finance the business and growth of the Company. See "DESCRIPTION OF SECURITIES
- - Dividends."
PUBLIC MARKET. To date, the Company's common stock has traded on a limited
over the counter market. Although the Company expects that a public market will
develop for its common stock upon consummation of the Merger, there can be no
assurance of that market. Also, there can be no assurance that, if a market
develops, that it will be an active, liquid or continuous trading market. The
stock market has experienced extreme price and volume fluctuations and
volatility that has particularly affected the market prices of many technology,
emerging growth and developmental
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<PAGE>
stage companies. Such fluctuations and volatility have often been unrelated or
disproportionate to the operating performance of such companies. Factors such
as announcements of the introduction of new or enhanced services or related
products by the Company or its competitors may have a significant impact on the
market price of the Company's common stock.
CONTROL BY PRINCIPAL SHAREHOLDERS. Upon completion of the Merger, the
directors, executive officers and principal shareholders of the Company and
their affiliates will collectively own approximately 31% of the outstanding
Company common stock. As a result, these shareholders will be able to exercise
significant influence over matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. Such
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company. See "The Company - Principal Shareholders."
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON MARKET PRICE.
Upon completion of the Merger, the Company will have 10,922,969 shares of common
stock outstanding. Of these shares, 7,734,437 shares will be held by
nonaffiliates of the Company or the Predecessor Companies and will be, subject
only to the Lock-up provisions of the Merger Agreement, freely tradeable without
restriction or further registration under the Securities Act. The remaining
3,519,552 shares are or will be held by affiliates of the Company or the
Predecessor Companies, who will be entitled to resell them, subject to the Lock-
up provisions of the Merger Agreement, only pursuant to a registration statement
under the Securities Act or an applicable exemption from registration thereunder
such as an exemption provided by Rule 144 under the Securities Act, or, in the
case of shares acquired in connection with the Merger by affiliates of the
Predecessor Companies, in compliance with the provisions of Rule 145
under the Securities Act.
Sales of substantial amounts of the Company common stock in the public
market or the prospect of such sales after the Merger could adversely affect the
market price of the Company common stock.
ANTI-TAKEOVER PROVISIONS; CERTAIN PROVISIONS OF OHIO LAW; ARTICLES OF
INCORPORATION AND REGULATIONS. Certain provisions of Ohio law, the Company's
Articles of Incorporation and Regulations could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, control of the Company. The Company's Articles of
Incorporation provide for the Board of Directors to be divided into three
classes of directors serving staggered three-year terms (unless there are
fewer than 9 Directors, in which case there will be two classes). Such
classification of the Board of Directors expands the time required to change
the composition of a majority of directors and may tend to discourage a proxy
contest or other takeover bid for the Company. See "THE COMPANY - Description
of Capital Stock." Certain provisions of Ohio law and the Company's Articles of
Incorporation allow the Company to issue preferred stock (the "Company Preferred
Stock") with rights senior to those of the Company common stock without any
further vote or action by the shareholders. The issuance of Company Preferred
Stock could decrease the amount of earnings and assets available for
distribution to the holders of the Company common stock or could adversely
affect the rights and powers, including voting rights, of the holders of the
Company common stock. In certain circumstances, such issuance could have the
effect of decreasing the market price of the Company common stock. See "THE
COMPANY - Description of Capital Stock." Additionally, upon completion of the
Merger, the directors, executive officers and existing principal shareholders of
the
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Company and their affiliates will collectively own approximately 31% of the
outstanding Company common stock. Such concentration of ownership may have the
effect of delaying or preventing a change in control of the Company. See "RISK
FACTORS - Control by Principal Shareholders" and "THE COMPANY - Principal
Shareholders."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING. If additional
funds are needed for the Company's operations, there can be no assurance that
such funds will be available on terms favorable to the Company, or at all. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of the then current shareholders of the Company may be
reduced and such equity securities may have rights, preferences or privileges
senior to those of the holders of the Company's common stock.
[The remainder of this page intentionally left blank.]
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SELECTED HISTORICAL FINANCIAL DATA OF THE COMPANY
The selected financial data which follows have been derived from the
financial statements of the Company included elsewhere in this Prospectus.
The selected combined financial data set forth below should be read in
conjunction with "THE COMPANY - Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company" and the
Financial Statements and Notes thereto included elsewhere in this Prospectus.
See "INDEX TO FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31 MARCH 31
1993 1994 1995 1995 1996
-----------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Royalty Revenue $ 4,322 $ 24,765 $ 48,000 $ 10,080 $ 13,533
Operating Expenses
Salaries and Benefits 180,909 184,113 284,041 46,456 60,368
Sales and Marketing 41,881 26,433 62,079 13,142 19,294
Professional 38,935 40,664 32,854 8,181 1,863
Payroll and franchise taxes 19,272 20,831 22,316 9,995 19,297
Depreciation and amortization 8,916 8,152 7,496 1,800 1,500
Office and other - 47,168 57,948 12,067 10,792
Merger - - 106,415 - 36,613
-----------------------------------------------------------------------
Total operating expenses 289,913 327,361 573,149 91,601 149,727
-----------------------------------------------------------------------
Operating loss (289,591) (302,596) (525,149) (81,521) (136,174)
Other income (expense)
Interest income 9,037 19,059 16,606 3,766 6,010
Interest expense (514) - (264) (39) -
Equity income in partnerships - - 49,638 - (1,275)
NSI settlement and common stock
transactions - - 1,715,399 - -
-----------------------------------------------------------------------
Total other income 8,523 19,059 1,781,379 3,727 4,735
-----------------------------------------------------------------------
Income (loss) before income taxes (277,068) (283,537) 1,256,230 (77,794) (131,439)
Income tax provision (benefit) - - (68,715) - (52,575)
-----------------------------------------------------------------------
Net income (loss) $(277,068) $(283,537) $1,324,945 (77,794) (78,864)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Net income (loss) per share $ (.05) $ (.05) $ .21 $ (.01) $ (.01)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Shares used in computation 5,623,000 5,860,336 6,349,594 5,860,336 6,073,136
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Balance Sheet Data:
Total assets 768,934 8,945,789 9,419,540
Total stockholders' equity 738,600 6,253,679 6,528,990
</TABLE>
THE MERGER
BACKGROUND OF THE MERGER
Management of the Company and the Predecessor Companies began discussing a
possible business combination in early 1995. These discussions culminated in
the signing of a letter of intent, dated February 1, 1995, summarizing the
discussions and understandings of the parties regarding a proposed merger of the
Company and the Predecessor Companies (the "Letter of Intent"). The Letter of
Intent did not contain specific terms or a specific structure for the
combination. The parties to the Letter of Intent had to agree on the relative
valuation of the combining entities and certain other issues. NSI's pending
initial public offering and disagreements with NSI involving the Company's and
the Predecessor Companies' rights under their respective license agreements with
NSI also contributed to the delay in finalizing the Merger Agreement.
On December 5, 1995, the Company and the Predecessor Companies entered into
a Settlement Agreement with NSI, which settled all disputes with NSI as of that
date. The Settlement Agreement included the License Agreement for the licensing
of rights to the PAPNET-Registered Trademark- System and the PAPNET-Registered
Trademark- Service that the Company and each of the Predecessor Companies
approved. NSI also closed its initial public offering on December 7, 1995.
In March 1996, the Company and the Predecessor Companies agreed to a merger
in which CWI and PUI were to have been parties. CWI would have been the
surviving corporation, but that transaction was abandoned in May 1996, and the
parties decided to proceed without the participation of CWI and PUI.
REASONS FOR THE MERGER; RECOMMENDATION OF THE COMPANY'S AND PREDECESSOR
COMPANIES' BOARD OF DIRECTORS
In evaluating the proposed Merger, the Boards of Directors of the Company
and the Predecessor Companies, with the assistance of outside counsel and other
advisors, considered a variety of factors, including the following: (i) the
efficiencies created through the combined entity; (ii) the relative market
positions of each of the Company and the Predecessor Companies and the increased
market penetration of the combined entity; (iii) the ability of management of
the combined entity to realize the full potential of the combined entity; (iv)
the opportunity that the combination would afford the Predecessor Companies'
shareholders to acquire an equity participation in a larger
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<PAGE>
enterprise with significantly larger equity value than any one of the
Predecessor Companies; (v) the terms of the Merger Agreement; and (vi) the
potential for greater liquidity for the shareholders of the Predecessor
Companies.
The directors of the Company and the Predecessor Companies have unanimously
determined that the Merger Agreement and the Merger are advisable and fair and
in the best interests of the Company and the Predecessor Companies and recommend
that their respective shareholders approve the Merger Agreement and the Merger.
REQUIRED VOTE
ERG, CCWP, and CCI are all Ohio corporations and their respective Articles
of Incorporation provide that where Ohio General Corporation Law requires the
affirmative vote of greater than a majority of the shares entitled to vote on a
matter, that matter can be approved by a majority of the shares entitled to vote
on the matter. Accordingly, approval of the Merger, Merger Agreement and the
transactions contemplated thereby requires the affirmative vote of the holders
of the issued and outstanding shares of ERG, CCWP, and CCI common stock
entitling them to exercise a majority of the voting power of the respective
corporations.
The Company, CIN, and INC are also Ohio corporations, but their respective
Articles of Incorporation do not provide for majority approval of transactions
like those contemplated by the Merger and the Merger Agreement. Accordingly,
the Merger, the Merger Agreement and the transactions contemplated thereby must
be approved by the affirmative vote of the holders of the issued and outstanding
shares of the Company, CIN, and INC common stock entitling them to exercise at
least two-thirds of the voting power of the respective corporations.
THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, a copy of which is attached as Appendix A to this Prospectus and is
incorporated herein by reference. Such summary is qualified in its entirety by
reference to the Merger Agreement. Shareholders are urged to read the Merger
Agreement carefully.
The Merger Agreement provides that, as promptly as practicable following
the approval of the Merger by the shareholders of the Company and the
Predecessor Companies and the satisfaction or waiver of the other conditions to
the Merger, but in no event later than two days thereafter, the Predecessor
Companies will be merged with and into the Company, with the Company continuing
as the surviving corporation under the name "NetMed, Inc."
Upon the satisfaction or waiver of all conditions to the Merger, the Merger
will become effective upon the filing of a certificate of merger by the Company
and the Predecessor Companies with the Secretary of State of Ohio in accordance
with Ohio General Corporation Law. The anticipated Effective Time is not until
September 1996.
MERGER CONSIDERATION GENERALLY. In the Merger, all outstanding shares of
the Predecessor Companies' common stock, including shares of Predecessor Company
common stock issuable upon
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the exercise of outstanding warrants and options, shall be converted into the
right to receive the Company Shares, based on the following conversion table:
Number of Company Shares
for each Predecessor
Predecessor Company Company Share
------------------- -------------
CIN 1,121.6652
INC 4,491.7064
ERG 3,237.2643
CCWP 37.3971
CCI 1,487.6186
FRACTIONAL SHARES. No fractional shares will be issued in the Merger.
CONDITIONS TO CONSUMMATION OF THE MERGER. The respective obligations of
the Company and the Predecessor Companies to consummate the Merger are subject
to certain conditions, including among others the adoption of the Merger and the
Merger Agreement by the holders of the requisite number of shares of the Company
and Predecessor Companies' common stock; the compliance by each of the parties
to the Merger Agreement with its material obligations thereunder and the truth
of the representations and warranties made by each of the parties on the date of
the Merger Agreement and at the Effective Time; the effectiveness of the
Registration Statement under the Securities Act; the receipt by the Company of
all state securities or "Blue Sky" permits and other authorizations necessary to
issue the Company Shares pursuant to the Merger and the Merger Agreement; the
admission of the Company for quotation on the National Market of the National
Association of Securities Dealers, Inc. Automated Quotation system ("NASDAQ
NMS") upon official notice of issuance; at the Closing, the shareholders of
the Company or any Predecessor Company entitled to assert dissenter's rights
shall own in the aggregate less than 10% of the outstanding shares of the
Company or such Predecessor Company; and the receipt by the Company and the
Predecessor Companies of an opinion of Porter, Wright, Morris & Arthur, counsel
to the Company, to the effect that, among other things that, the Merger will be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code and each Predecessor Company will be a party to
that reorganization within the meaning of Section 368(b) of the Code.
REPRESENTATIONS AND WARRANTIES. In the Merger Agreement, each of the
Predecessor Companies and the Company has made certain representations and
warranties relating to, among other things: (i) its corporate organization and
qualification; (ii) its capitalization; (iii) its corporate power and authority
relative to the Merger Agreement; (iv) the absence of conflicts with its
constituent documents and material agreements; (v) filings required to be made
with and consents required to be obtained from governmental entities in
connection with the transactions contemplated by the Merger Agreement; (vi)
the accuracy of the information supplied for this prospectus and the
Registration Statement; and (vii) the absence of changes that would have a
material adverse effect on the properties, assets, financial condition,
operating results or business.
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<PAGE>
CERTAIN AGREEMENTS AND COVENANTS. Pursuant to the Merger Agreement, each
of the Predecessor Companies and the Company agree that, without the consent of
the other parties, among other things: (i) each party will carry on its
respective businesses as usual, regular and ordinary course, consistent with
past practice; (ii) it will not amend its articles of incorporation or code of
regulations; (iii) it will not cause a split, combination, or re-classification
of any of its outstanding capital stock; (iv) it will not cause the declaration,
setting aside or payment of any dividend; (v) it will not cause the redemption,
purchase, acquisition, or offer to acquire, of any shares of capital stock; (vi)
it will not cause the issuance, sale, pledge, or disposition of, or agreement to
issue, sell, pledge, or dispose of, any stock of, or securities convertible or
exchangeable for, or any option, warrant or right of any kind to acquire any
shares of capital stock of any class of stock or other securities or equity
equivalents (other than pursuant to the exercise of currently outstanding
options or warrant); (vii) it will not incur or guarantee of any indebtedness
for borrowed money other than in the ordinary course of business consistent with
past practice; or (viii) no party shall change any of the accounting principles
or practices used by it (except as required by GAAP).
LOCK-UP AGREEMENT. Under the terms of the Merger Agreement, the
Predecessor Company shareholders have, with respect to the Company shares that
each receives in the Merger, and David J. Richards, John P. Kennedy and Carl A.
Genberg (the "Key Company Shareholders") have, with respect to their shares of
the Company, agreed to certain additional restrictions on the transfer of their
respective shares of the Company. Except with respect to certain privately
negotiated sales, the Predecessor Company shareholders will be prohibited from
selling more than an aggregate of 625,000 Company Shares during the one year
period commencing on the closing date of the Merger. The number of Company
Shares that each Predecessor Company shareholder will be entitled to sell is
equal to the product of (A) the ratio of Company Shares received with respect to
the conversion of the shareholder's shares in a Predecessor Company to the
number of Company Shares so received by all shareholders of such Predecessor
Company, times (B) the number of shares allocated to such Predecessor Company in
the Merger Agreement for the relevant time period. Except with respect to
certain privately negotiated sales and certain transactions involving the pledge
of the shares held by the Key Company Shareholders, the Key Company Shareholders
have agreed not to sell the Company Shares they own immediately after the Merger
for a period of one year commencing on the closing of the Merger. See "Merger
Agreement - Appendix A."
TERMINATION. The Merger Agreement may be terminated by mutual consent of
all of the parties; by any of the parties if the Merger shall not have been
consummated before September 30, 1996 (unless the failure to consummate the
Merger by such date shall be due to the action or failure to act of the party
seeking to terminate the Merger Agreement); by any party if any permanent
injunction or other order of a court or other competent authority shall have
become final and non-appealable; or by any party if any required approval of the
shareholders of such party or any other party shall not have been obtained. In
the event that the Merger Agreement is terminated, the Merger Agreement shall be
void and have no effect, without any liability on the part of any party or its
affiliates, directors, officers, or shareholders. Notwithstanding the
foregoing, the parties to the Merger Agreement will continue to be bound by the
provisions of the Merger Agreement that relate to: (i) their respective
obligations as to confidentiality and the payment of any broker's or finder's
fees; (ii) a party's obligation to pay liquidated damages in the amount of
$500,000 to the other parties if the termination arises out of that party's
failure to obtain the required approval of the Merger and
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<PAGE>
the Merger Agreement or that party's breach of the Merger Agreement; and (iii) a
party's obligation to pay its share of all costs and expenses incurred by the
parties in connection with the Merger and the transactions contemplated by the
Merger Agreement. A party's share of any liquidated damages paid as a result of
a termination of the Merger or its share of costs and expenses required to be
paid under the Merger Agreement shall be in proportion to the number of the
Company Shares that would have been owned by the party's shareholders
immediately after the Effective Time.
The Merger Agreement may also be terminated by a majority vote of the
members of the Advisory Board.
EXCHANGE OF CERTIFICATES
The Huntington National Bank, N.A., the Company's transfer agent (the
"Exchange Agent"), will mail to each holder of record of Predecessor Company
shares a letter of transmittal and instructions for use in effecting the
surrender of the Predecessor Company certificates (the "Certificates") in
exchange for certificates representing the Company's common stock. Upon
surrender of a Certificate to the Exchange Agent, together with a letter of
transmittal, duly executed, the holder of the Certificate shall be entitled to
receive in exchange therefor the certificates representing the shares of common
stock of the Company in accordance with the provisions of the Merger Agreement.
AMENDMENT TO ARTICLES OF INCORPORATION
At the Effective Time and upon the filing of the Certificate of Merger with
the Ohio Secretary of State, the Company's Articles of Incorporation will be
amended to, among other things: change the name of the Company to "NetMed,
Inc."; increase the Company's authorized capital stock to 15,500,000 shares,
consisting of 15,000,000 shares of common stock and 500,000 shares of preferred
stock; establish standards by which the Board of Directors must evaluate any
proposal that would result in a change of control; and provide that the
provisions of the Articles of Incorporation that relate to the powers, duties
and liabilities of the directors may only be amended by affirmative vote of 80%
of the outstanding shares entitled to vote on the matter.
DISSENTER'S RIGHTS
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW PERTAINING
TO DISSENTING SHAREHOLDER RIGHTS UNDER THE OHIO GENERAL CORPORATION LAW AND IS
QUALIFIED IN ITS ENTIRETY BY THE FULL TEXT OF SECTION 1701.85 WHICH IS REPRINTED
IN ITS ENTIRETY AS APPENDIX B TO THIS PROSPECTUS.
The Company, CIN, INC, ERG, CCWP, and CCI are all Ohio corporations.
Shareholders of any of the parties who (i) are shareholders of record on the
record date established for determining who is entitled to notice of the meeting
called for the purpose of approving the Merger, (ii) do not vote in favor of the
Merger, and (iii) who, within 10 days after the date of the vote on the Merger
is taken, deliver written demand in compliance with the provisions of Section
1701.85(A)(2) of the Ohio Revised Code, shall be entitled to receive the fair
cash value of the shares that were not voted in favor of the Merger (the
"Dissenting Shares"). The written demand must set forth the
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<PAGE>
shareholder's address, the number and class of stocks as to which the
stockholder seeks relief and the amount the shareholder claims as the fair cash
value of the Dissenting Shares.
If a constituent corporation receives a written demand from a shareholder
seeking the fair cash value of Dissenting Shares, it may request the certificate
or certificates that represent the Dissenting Shares. The dissenting
shareholder must deliver the certificate or certificates representing the
Dissenting Shares to the corporation within 15 days of the date of its request
therefor or the shareholder's rights with respect to the Dissenting Shares will
terminate. If the certificate or certificates representing the Dissenting
Shares are delivered to constituent corporation, it must promptly endorse the
certificates with a legend to the effect that a demand for the fair cash value
for the Dissenting Shares has been made and return the certificates to the
dissenting shareholder.
If the Company and the dissenting shareholder cannot agree on the fair cash
value of the Dissenting Shares, then either may, within three months after the
date of the service of the demand for fair cash value was made by the dissenting
shareholder file a complaint in the court of common pleas of the county in which
the principal office of the corporation that issued the Dissenting Shares is
located or was located when the Merger proposal was adopted by the shareholders
of that corporation. The court will first make a determination if the
dissenting shareholder is entitled to receive the fair cash value for the
Dissenting Shares. If the court determines that the dissenting shareholder is
entitled to fair cash value for the Dissenting Shares, the court will appoint an
appraiser or appraisers to make a finding as to the fair cash value of the
Dissenting Shares.
The fair cash value will be determined based on what a willing seller who
is under no compulsion to sell would be willing to accept and that which a
willing buyer who is under no compulsion to purchase would be willing to pay for
the Dissenting Shares. In no event will the fair cash value exceed the amount
stated in the written demand by the dissenting shareholder. In computing the
fair cash value, any appreciation or depreciation in the market value resulting
from the Merger shall be excluded.
The fair cash value that is agreed upon between the parties or that is
determined by the court shall be paid within 30 days after the date of the
final determination of such value or the consummation of the Merger, whichever
occurs last. Payment shall be made only upon and simultaneously with the
surrender to the Ohio Corporation of the certificate or certificates
representing the Dissenting Shares.
The costs of the action, including reasonable compensation to the
appraisers, will be fixed by the court and will be assessed or apportioned as
the court considers equitable.
A shareholder's right to receive the fair cash value for the Dissenting
Shares terminates if (i) the dissenting shareholder does not strictly comply
with the requirements of Section 1701.85, (ii) the Merger is abandoned, (iii)
the dissenting shareholder withdraws the demand for fair cash value, or (iv) the
Company and the dissenting shareholder have not come to an agreement regarding
the fair cash value of the Dissenting Shares and neither has filed a complaint
with the court of common pleas within the time period described in Section
1701.85(B).
-24-
<PAGE>
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 1701.85 OF THE OHIO GENERAL
CORPORATION LAW FOR PERFECTING DISSENTING SHAREHOLDER RIGHTS MAY RESULT IN THE
LOSS OF SUCH RIGHTS (IN WHICH EVENT AN OHIO CORPORATION SHAREHOLDER WILL BE
ENTITLED TO RECEIVE THE CONSIDERATION RECEIVABLE WITH RESPECT TO SUCH
SHARES IN ACCORDANCE WITH THE MERGER AGREEMENT).
NASDAQ/NMS
One of the conditions to the consummation of the Merger is that its common
stock will be admitted for quotation on NASDAQ/NMS, subject to official notice
of issuance.
UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
The merger will be effected by an exchange of the Company's common stock
for the outstanding common shares of the Predecessor Companies. This exchange
transaction will occur in connection with the initial registration of the
Company's common stock with the Securities and Exchange Commission and will
result in the public trading of the common stock which is expected to be on the
NASDAQ/NMS. The merger of the Company and the Predecessor Companies will be
accounted for at historical cost. This accounting reflects the level of common
ownership (shareholders) and common management (officers and directors) that
exists between the Company and Predecessor Companies. It also recognizes the
lack of objective criteria for valuing the merger transaction. For accounting
purposes, the Company will be the predecessor of the merged entity and its
historical financial statements will be those of the new entity NetMed, Inc.
The results of operations of the Predecessor Companies will be combined with
those of the Company commencing at the date of merger.
Pro Forma Combining Balance Sheet
March 31, 1996
<TABLE>
<CAPTION>
CCI
AND PRO FORMA COMBINED
PPNT ERG CCWP INC CIN ADJUSTMENTS NETMED
---------------------------------------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 599,550 $ 61,710 $ 26,397 $ - $ - $ - $ 687,657
Accounts receivable 58,962 3,173 3,255 6,861 12,742 - 84,993
Due from related entities 70,575 - - - - (70,575) (A) -
Net receivable form stockholder 50,000 - - - - (50,000) (C) -
Prepaid assets 1,021 - - - - - 1,021
--------------------------------------------------------------------------------------------
Total current assets 780,108 64,883 29,652 6,861 12,742 (120,575) 773,671
Investment in partnerships 183,524 - - - - (183,524) (B) -
Notes receivable - NSI 51,080 - - - - - 51,080
Investment in NSI-available
for sale 8,266,392 3,139,895 3,139,895 543,968 1,010,196 - 16,100,346
Furniture and equipment 15,816 - - - - - 15,816
Deferred taxes 121,290 - - 14,358 - 20,000 (C) 155,648
Deposits and other assets 1,330 69 2,065 - - - 3,464
--------------------------------------------------------------------------------------------
Total assets $9,419,540 $3,204,847 $3,171,612 $565,187 $1,022,938 $ (284,099) $17,000,025
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Liabilities and owners' equity
Current liabilities:
Accounts payable $ 108,966 $ - $ 11,818 $ - $ - $ - $ 120,784
Due to related entities - 13,603 37,946 6,389 12,637 (70,575) (A) -
Accrued expenses 34,968 16,798 - 36,976 - - 88,742
Other liabilities 860 - - 10,519 19,538 - 30,917
--------------------------------------------------------------------------------------------
Total current liabilities 144,794 30,401 49,764 53,884 32,175 (70,575) 240,443
Deferred taxes 2,745,756 1,042,535 1,042,534 180,610 335,407 - 5,346,842
Minority interest - - 183,524 - - (183,524) (B) -
Stockholders' equity:
Common stock 1,779,465 575,000 465,000 196,735 365,365 - 3,381,565
Additional paid-in capital 783,077 - - - - - 783,077
Unrealized gains on available-
for-sale securities net of
deferred taxes 4,253,792 1,563,802 1,428,641 270,915 503,111 - 8,020,261
Retained earnings (deficit) (287,344) (6,891) 2,149 (136,957) (213,120) (30,000) (C) (672,163)
--------------------------------------------------------------------------------------------
Total stockholders' equity 6,528,990 2,131,911 1,895,790 330,693 655,356 (30,000) 11,512,740
--------------------------------------------------------------------------------------------
Total liabilities and owners'
equity $9,419,540 $ 3,204,847 $ 3,171,612 $ 565,187 $ 1,022,938 $ (284,099) $17,100,025
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
</TABLE>
(A) Reflects accounts receivable and accounts payable between the Company
and the Predecessor Companies that will be eliminated upon the merger.
(B) Reflects PPNT's minority interest in partnerships consolidated into CCI
and CCWP that will be eliminated upon the merger.
(C) Note receivable from stockholder will be forgiven upon the merger, tax
effected at 40%.
<PAGE>
Combining Statement of Operations
Period ended March 31, 1996
<TABLE>
<CAPTION>
CCI
AND PRO FORMA COMBINED
PPNT ERG CCWP INC CIN ADJUSTMENTS NETMED
---------------------------------------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Royalty revenue $ 13,553 $ 3,630 $ 3,360 $ 1,140 $ 2,116 $ - $ 24,069
Operating expenses:
Salaries and benefits 60,368 9,279 - 4,767 8,852 50,000 (B) 133,266
Sales and marketing 19,294 2,716 - 4,010 7,447 - 33,467
Professional 1,863 750 6,150 643 1,967 - 11,373
Payroll and franchise taxes 19,297 2,392 - 392 728 - 22,809
Depreciation and
amortization 1,500 - - - - - 1,500
Office and other 10,792 - - - - - 10,792
Merger 36,613 11,054 11,076 2,667 4,956 - 66,366
--------------------------------------------------------------------------------------------
Total operating expense 149,727 26,191 17,226 12,479 23,950 50,000 279,573
--------------------------------------------------------------------------------------------
Operating loss (136,174) (22,561) (13,596) (11,339) (21,834) (50,000) (255,504)
Other income (expense):
Interest income 6,010 289 - - - - 6,299
Equity income in partnerships (1,275) - - - - 1,275 (A) -
--------------------------------------------------------------------------------------------
Total other income 4,735 289 - - - 1,275 6,299
Minority interest - - 1,275 - - (1,275) (A) -
--------------------------------------------------------------------------------------------
Loss before income taxes (131,439) (22,272) (12,321) (11,339) (21,834) (50,000) (249,205)
Income tax benefit (52,575) - - (4,536) - (20,000) (B) (77,111)
--------------------------------------------------------------------------------------------
Net loss $ (78,864) $ (22,272) $ (12,321) $ (6,803) $(21,834) $ (30,000) $ (172,094)
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Pro forma loss per share $ (.02) (C)
-------------
-------------
</TABLE>
(A) Refects the elimination of PPNT's equity income in its minority interest
in partnerships consolidated into CCI and CCWP.
(B) Note receivable from stock holder will be forgiven upon the merger, tax
effected at 40%.
(C) Pro forma loss per share calculated based upon 10,922,969 shares of common
stock assumed to be outstanding upon completion of the merger.
<PAGE>
Combining Statement of Operations
Year ended December 31, 1995
<TABLE>
<CAPTION>
CCI
AND PRO FORMA COMBINED
PPNT ERG CCWP INC CIN ADJUSTMENTS NETMED
---------------------------------------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Royalty revenue $ 48,000 $ 12,000 $ 12,000 $ 4,200 $ 7,800 $ - $ 84,000
Operating expenses:
Salaries and benefits 284,041 - - - - 50,000 (B) 334,041
Sales and marketing 62,079 - - - - - 62,079
Professional 32,854 2,042 535 3,331 6,186 - 44,948
Payroll and franchise taxes 22,316 - - - - - 22,316
Depreciation and amortization 7,496 166 953 70 130 - 8,815
Office and other 57,948 1,337 44 487 904 - 60,720
Merger 106,415 32,103 32,195 7,755 14,401 - 192,869
-------------------------------------------------------------------------------------------
Total operating expense 573,149 35,648 33,727 11,643 21,621 50,000 725,788
-------------------------------------------------------------------------------------------
Operating loss (525,149) (23,648) (21,727) (7,443) (13,821) (50,000) (641,788)
Other income (expense):
Interest income 16,606 1,346 - 158 293 - 18,403
Interest expense (264) - - - - - (264)
Equity income in partnerships 49,638 - - - - (49,638) (A) (641,788)
NSI settlement and common
stock transactions 1,715,399 533,558 533,558 92,442 171,677 - 3,046,634
-------------------------------------------------------------------------------------------
Total other income 1,781,379 534,904 533,558 92,600 171,970 (49,638) 3,064,773
Minority interest - - (49,638) - - 49,638 (A) -
-------------------------------------------------------------------------------------------
Income (loss) before income
taxes 1,256,230 511,256 462,193 85,157 158,149 (50,000) 2,422,985
Income tax (benefit)
provision (68,715) - - 27,154 - (20,000) (B) (65,561)
-------------------------------------------------------------------------------------------
Net income (loss) $1,324,945 $ 511,256 $ 462,193 $ 58,000 $ 158,149 $ (30,000) $2,484,546
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Pro forma earnings per share $ .23 (C)
------------
------------
</TABLE>
(A) Reflects the elimination of PPNT's equity income in its minority
interest in partnerships consolidated into CCI and CCWP.
(B) Note receivable from stockholder will be forgiven upon the merger, tax
effected at 40%.
(C) Pro forma earnings per share calculated based upon 10,922,969 shares of
common stock assumed to be outstanding upon completion of the merger.
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a general summary of the principal federal
income tax consequences of the Merger to individual United States holders of the
Predecessor Companies shares who hold their shares as capital assets. The
discussion is based on laws, regulations, rulings and decisions currently in
effect. It is for general information only, and is not intended to be tax
advice to any particular shareholder of the Company or a Predecessor Company.
The discussion does not take into account rules that are applicable to
shareholders of the Predecessor Companies that are subject to special treatment
under the Code, including without limitation, insurance companies, dealers in
securities, financial institutions, tax-exempt investors, foreign investors,
shareholders who do not hold their stock as a capital asset and shareholders who
acquired shares pursuant to the exercise of an employee stock option, employee
stock purchase plan or otherwise as compensation. The discussion also does not
address state, local or foreign tax consequences of the Merger. No rulings have
been or will be requested from the IRS with respect to the tax consequences of
the Merger.
-25-
<PAGE>
Assuming the Merger is consummated in the manner set forth in the Merger
Agreement and qualifies as a reorganization under Section 368 of the Code, the
principal federal income tax consequences of the Merger under present federal
income tax law will be as described below.
(a) No gain or loss will be recognized by the Company or the Predecessor
Companies as a result of the Merger;
(b) No gain or loss will be recognized by the holders of Predecessor
Company shares upon the exchange of their shares of Predecessor
Company shares for Company Shares pursuant to the Merger (except for
any gain or loss attributable to cash received by a holder of
Predecessor Company stock in payment of appraisal or dissenters'
rights of appraisal or for fractional share interests to which they
may be entitled );
(c) The federal income tax basis of the Company Shares received by the
shareholders of the Predecessor Companies (including fractional share
interests to which they may be entitled) for their Predecessor Company
shares will be the same as the federal income tax basis of the
Predecessor Company shares surrendered in exchange therefor, increased
by any gain recognized; and
(d) The holding period for the Company Shares received by shareholders of
the Predecessor Companies in exchange for their Predecessor Company
shares will include the period for which the Predecessor Company
exchanged therefor were held, provided that the exchanged Predecessor
Company shares were held as a capital asset by such shareholder on the
date of the exchange.
It is a condition to the closing that the Company and the Predecessor
Companies shall have received an opinion of Porter, Wright, Morris & Arthur
which will be based upon certain certificates, representations and assumptions,
substantially to the effect that, for federal income tax purposes the Merger
will constitute a reorganization within the meaning of section 368(a) of the
Code and will result in the tax consequences described above.
No opinion will be expressed with respect to any other tax consequences of
the exchange, including, without limitation, the tax consequences with respect
to any shares of Predecessor Company stock that were acquired in contemplation
of the Merger, were held by shareholders subject to special treatment under the
Code, were not held as capital assets or were acquired by the holder thereof
pursuant to any employee stock option, employee stock purchase plan or otherwise
as compensation or pursuant to the exercise of any warrants to purchase shares
of Predecessor Company stock. Further, no opinion is expressed concerning the
effect of state, local and foreign tax laws. An opinion of counsel is not
binding upon the IRS, and there can be no assurance that the IRS will not take a
position contrary to the positions reflected in such opinion or that such
opinion will be upheld by the courts if challenged by the IRS.
THE SPECIFIC TAX TREATMENT OF EACH SHAREHOLDER WILL DEPEND ON THEIR
PARTICULAR FACTS AND CIRCUMSTANCES. EACH HOLDER OF COMPANY SHARES AND
PREDECESSOR COMPANY SHARES IS ADVISED TO CONSULT WITH SUCH STOCKHOLDER'S OWN TAX
ADVISER CONCERNING THE FEDERAL INCOME TAX
-26-
<PAGE>
CONSEQUENCES OF THE MERGER, AS WELL AS THE APPLICABLE STATE, LOCAL, FOREIGN OR
OTHER TAX CONSEQUENCES.
BACKUP WITHHOLDING. Under federal income tax law concerning "backup
withholding," the Company will be required to withhold, and will withhold, 31%
of any cash payments to which a shareholder is entitled pursuant to the Merger
unless the holder provides its taxpayer identification number ("TIN") and
certifies that such number is correct or otherwise establishes that the holder
is an exempt holder (such as a corporation or certain foreign individuals,
partnerships or trusts). In general, the TIN of an individual shareholder is
that shareholder's social security number. Each holder should sign the
Substitute Form W-9 included as part of the Transmittal Letter (or in the case
of a nonresident alien or foreign entity, a Form W-8) to prevent backup
withholding.
RESALES BY AFFILIATES
The Company Shares issuable in the Merger will have been registered under
the Securities Act but will not be freely transferable if held by persons,
including directors and executive officers of the Predecessor Companies, who may
be deemed to be "affiliates" of the Predecessor Companies for purposes of Rule
145. Affiliates may not offer to sell, sell or otherwise dispose of Company
Shares issued to them in connection with the Merger, except (i) pursuant to an
effective registration statement under the Securities Act covering those shares,
(ii) in compliance with Rule 145, or (iii) pursuant to an exemption from the
registration requirements of the Securities Act. The Company intends to obtain
customary agreements with all affiliates of the Predecessor Companies under
which those persons shall agree not to dispose of the Company Shares received by
them in the Merger, except in compliance with the Securities Act and the rules
and regulations promulgated thereunder. The Company shall be entitled to place
appropriate legends on the certificates evidencing the Company Shares to be
received by such affiliate pursuant to the terms of the Merger, and to issue
appropriate stock transfer instructions to the transfer agent for Company
Shares, to the effect that the shares received or to be received by such
affiliate pursuant to the Merger may only be sold, transferred or otherwise
conveyed, and the holder thereof may only reduce his interest in or risks
related to such shares, pursuant to an effective registration statement under
the Securities Act or in accordance with the provisions of paragraph (d) of Rule
145 or pursuant to an exemption from registration provided under the Securities
Act. The foregoing restrictions on the transferability of the Company Shares
shall apply to all purported sales, transfers and other conveyances of the
shares received or to be received by such affiliate pursuant to the Merger and
to all purported reductions in the interest in or risks relating to such shares,
whether or not such affiliate has exchanged the certificates previously
evidencing shares of the Predecessor Company common stock. This Prospectus
does not cover any resales of the Company Shares received by affiliates of the
Predecessor Companies.
Under the terms of the Merger Agreement, the Predecessor Company
shareholders have, with respect to the Company shares that each receives in the
Merger, and the Key Company Shareholders have, with respect to their shares
of the Company, agreed to certain additional restrictions on the transfer of
their respective shares of the Company. Except with respect to certain
privately negotiated sales, the Predecessor Company shareholders will be
prohibited from selling more than an aggregate of 625,000 Company Shares during
the one year period commencing on the closing date of the Merger. The number
of Company
-27-
<PAGE>
Shares that each Predecessor Company shareholder will be entitled to sell is
equal to the product of (A) the ratio of Company Shares received with respect to
the conversion of the shareholder's shares in a Predecessor Company to the
number of Company Shares so received by all shareholders of such Predecessor
Company, times (B) the number of shares allocated to such Predecessor Company in
the Merger Agreement for the relevant time period. Except with respect to
certain privately negotiated sales and certain transactions involving the pledge
of the shares held by the Key Company Shareholders, the Key Company Shareholders
have agreed not to sell the Company Shares they own immediately after the Merger
for a period of one year commencing on the closing of the Merger. See "Merger
Agreement - Appendix A."
CERTAIN RELATED TRANSACTIONS
Each of the other Predecessor Companies and the Company entered into a
Loan Agreement, dated July 5, 1996 (the "Loan Agreement"), whereby the
Company has agreed to advance to the other Predecessor Companies the expenses
incurred by each in connection with the Merger. In addition, the Company
will advance funds necessary to pay reasonable expenses of ordinary business
operations for the Predecessor Companies pending consummation of the Merger
(collectively the "Advancer"). The advances made to the Predecessor
Companies in connection with the merger that was abandoned in June 1996 (the
"Initial Advances") will be added to the Advances. The Initial Advances and
the Advances will be evidenced by a promissory note bearing interest at an
annual rate of 7%, payable 180 days after the earlier of the consummation of
the Merger or the termination of the Merger Agreement. Promissory notes
delivered by the Predecessor Companies will be secured by their shares of NSI
common stock.
The Loan Agreement has been modified by a side-letter agreement among the
Company, ERG, CCI and CCWP, dated July 16, 1996, which provides, among other
things, terms relating to notice and cure periods for any defaults and credits
for certain expenses that are paid directly by these Predecessor Companies.
The Company entered into a loan agreement, dated March 14, 1996 with
Cytology West, Inc. ("CWI") and Papnet Utah, Inc. ("PUI") CWI is licensed to
sell the PAPNET-Registered Trademark- System and the PAPNET-Registered
Trademark- Service in Arizona, Nevada and San Diego County California. PUI
is licensed to sell PAPNET-Registered Trademark- System and the
PAPNET-Registered Trademark- Service in Utah. Carl Genberg, President of
CWI, owns 383,616 shares of the Company's common stock and may be deemed to
be an affiliate of the Company. CWI and PUI were originally to have been a
parties to a merger with the Company and the Predecessor Companies, but that
transaction was abandoned by the parties. The loan agreement provides for
advances to CWI of up to $585,000 to cover certain operating expenses,
expenses associated with the abandoned merger, and the acquisition of new
technology. No specific amount was established for advances to PUI. The
advances will bear interest at the rate of 7% per annum. As of June 15,
1996, the Company had advanced approximately $146,320 to CWI and $14,315 to
PUI under the terms of the loan agreement, and no further advances will be
made.
The Company, the Predecessor Companies and certain individual shareholders
of these companies entered into a Voting Agreement, dated July 5, 1996, pursuant
to which the individual shareholders appointed John P. Kennedy and Cecil J.
Petitti as their proxies and attorneys-in-fact for
-28-
<PAGE>
the purpose of voting their shares in the Company or Predecessor Company, as the
case may be, in favor of the Merger, the Merger Agreement and the transactions
contemplated thereby.
Pending completion of the Merger, the business operations of CIN, INC, ERG,
and CCI are being managed by the Company.
THE COMPANY
GENERAL
The Company is an Ohio corporation formed on October 25, 1989 for the
purpose of acquiring the exclusive rights to market certain proprietary products
of NSI in the State of Ohio. On December 29, 1989, Papnet Limited Partnership
("PLP") was formed with the Company as its general partner and the Company
assigned its marketing rights to the PAPNET-Registered Trademark- System to PLP.
Papnet Midwest Limited Partnership ("PMLP") was formed on April 6, 1990 with the
Company as its general partner and PMLP acquired the rights to market the
PAPNET-Registered Trademark- System in Kentucky and the Standard Metropolitan
Statistical Area of Chicago, Illinois. In January 1993, the Company acquired
all of the issued and outstanding units of limited partnership interest in both
PLP and PMLP and thereby acquired all of their respective rights to market the
PAPNET-Registered Trademark- System in Ohio, Kentucky and the Standard
Metropolitan Area of Chicago, Illinois.
NSI
Neuromedical Systems, Inc. ("NSI"), founded in 1988, is an emerging health
care service company focused on value-added diagnostic screening applications to
aid in the early detection of cancer of several body sites. NSI's first
product, the PAPNET-Registered Trademark- System, has been shown in a series of
controlled clinical trials to allow pathology laboratories to detect abnormal
cells on cervical Papanicolaou ("Pap") smears which were not detected by the
standard manual microscopic inspection. This improved detection can result in
more effective and less costly early treatment, reduced possibility of morbidity
and mortality for the patient, and reduced possibility of malpractice litigation
for the patient's doctor and laboratory. On September 21, 1994 NSI submitted an
application to the U.S. Food and Drug Administration ("FDA") to market the
PAPNET-Registered Trademark- System in the United States for routine clinical
use, supported by clinical trial data indicating that PAPNET-Registered
Trademark- System would have resulted in earlier detection of disease for many
patients (see below). The PAPNET-Registered Trademark- System can achieve these
improvements without requiring a modification of the standard Pap smear sample
due to its patented use of a combination of algorithmic and neural network
pattern recognition technology. By June 1996, PAPNET-Registered Trademark-
System was already in routine clinical use in 21 countries worldwide. Because
the PAPNET-Registered Trademark- System has now been approved by the FDA, NSI
intends to increase the scale of its operations to commercial levels. NSI is
required to register with the FDA and to submit device listing information for
products in commercial distribution, and is subject to periodic reinspection by
the FDA for compliance with Good Manufacturing Practice regulations.
-29-
<PAGE>
THE MARKET
Pap smears are widely used in North America, Europe and other developed
areas to aid in the early detection of cervical cancer with over 50 million
tests performed annually in the U.S. alone. Pap smears can reveal early changes
in cervical cells that precede or indicate the development of cancer, thereby
facilitating timely medical intervention. When cervical cancer or precancerous
conditions are detected early on a Pap smear, the disease is almost always
completely curable using a simple outpatient procedure. However, if abnormal
cells on the Pap smear are not noticed by the laboratory, the patient may be
falsely told that her Pap smear is negative (a "false negative"), with
significant morbidity or mortality occurring as a result. Failure to diagnose
cervical cancer is a significant and rapidly growing source of malpractice
litigation against laboratories and clinicians in both the U.S. and abroad.
Manual searching of routine Pap smears to spot abnormal cells is an
unavoidably tedious and error-prone task. This is primarily because a seriously
abnormal Pap smear can contain fewer than a dozen abnormal cells scattered among
hundreds of thousands of normal cells and other objects. The cytotechnologist's
job is thus very similar to proofreading a very long document to try to detect a
few misspelled words. Regardless of how conscientious and careful the laboratory
is, many of these "needles in a haystack" may be missed, and the patient falsely
informed that her Pap smear was negative. Manual screening false-negative rates
ranging from 10% to 40% have been reported in numerous published studies. The
PAPNET-Registered Trademark- System has been shown in several domestic and
international clinical studies published in peer-reviewed journals to detect
abnormal cells on Pap smears that were falsely diagnosed as "negative" by
conventional manual inspection. Indeed, in a number of such cases
PAPNET-Registered Trademark- System detected abnormal cells on archived,
supposedly "negative" Pap smears of women who were ultimately diagnosed with
advanced cervical cancer. A published review of six such studies which in the
aggregate evaluated 513 Pap smears known to contain precancerous or cancerous
abnormality reported a pooled average PAPNET-Registered Trademark- false
negative rate of 3%. These results compare extremely favorably to manual
screening's false negative rate, typically reported to be many times higher (10%
to 40%).
THE PAPNET-Registered Trademark- SYSTEM
The PAPNET-Registered Trademark- System is a computer-based system which
allows the cytotechnologist at the referring laboratory to review a slide by
viewing a small number of computer selected cells on a high resolution, color
video monitor. The PAPNET-Registered Trademark- System consists of a scanning
system (the "Scanner"), which processes slides and stores digital images of
certain portions of the slides on a digital tape, and a proprietary review
station (the "Review Station"), which, among other things, permits a
cytotechnologist trained by NSI to review the images stored on the digital tape.
The PAPNET-Registered Trademark- System is used as a supplement to
current practice and does not alter the clinician's or pathology laboratory's
existing smear preparation or manual screening procedures in any way. It
provides an additional and complementary level of screening for the purpose of
decreasing false negative Pap smear diagnosis.
-30-
<PAGE>
The PAPNET-Registered Trademark- System provides a semi-automated search
for abnormal cells which may have been missed on initial, manual screening. It
addresses those aspects of the cervical smear screening process which most
affect the false negative rate: the psychological habituation and fatigue
associated with the "needle in a haystack," repetitive search for a small number
of abnormal cells distributed among hundreds of thousands of normal cells. The
PAPNET-Registered Trademark- System is only used to aid in the rescreening of
slides which are diagnosed by manual inspection to be "negative" and which would
otherwise be sent to the laboratory's archive without further examination. The
system is semi-automated in that it does not attempt to provide a diagnosis, but
only points out potentially abnormal cells to the cytotechnologist, thus
retaining and enhancing the ability of trained cytotechnologists to evaluate and
interpret cytological evidence.
The Scanner operates continuously and virtually unattended, selecting 128
cells from each slide which appear most suspect to the system. The Review
Station is installed in the cytotechnologist's work area of the referring
laboratory. The Scanner includes an automated microscope, a primary high speed
image classifier, and a secondary neural network based classifier. The Review
Station includes a high resolution color video monitor, video display cards, and
an Intel compatible computer. NSI was granted a patent for technology used in
the PAPNET-Registered Trademark- System, which enables automated analysis of the
conventionally prepared smear. NSI and the Company enroll and train
laboratories to use the PAPNET-Registered Trademark- System as a rescreening
device in NSI's clinical investigation. The PAPNET-Registered Trademark- System
is in use in numerous foreign countries, where the scope of use permitted by
regulatory authorities is generally much broader than is currently the case in
the United States.
THE PAPNET-Registered Trademark- SERVICE
NSI markets and sells PAPNET-Registered Trademark- Testing as a service, by
which end-user laboratories submit slides to one of NSI's central facilities for
processing on a Scanner and NSI returns such slides and the related digital tape
containing the images to the laboratories so that NSI-trained cytotechnologists
employed by the laboratories may review the slides and images using the Review
Station. The Company is licensed to market the PAPNET-Registered Trademark-
Service.
THE LICENSE
On December 5, 1995 the Company, the Predecessor Companies and CWI and PUI
who are not parties to the Merger, entered into a Settlement Agreement with NSI
(the "Settlement Agreement"). The purpose of the Settlement Agreement was to
resolve and clarify certain issues relating to the license agreements which NSI
had with its regional licensees, and issues relating to warrants to purchase
shares of NSI common stock which were held by the Company and certain of the
Predecessor Companies. Pursuant to the Settlement Agreement, NSI and the
regional licensees (including the Company and all of the Predecessor Companies
except CCWP) agreed to the form of a license agreement to be executed upon the
merger of some or all of the regional licensees (the "License Agreement"), under
which the Company and the other regional licensees will continue to have the
rights to market the PAPNET-Registered Trademark- System and PAPNET-Registered
Trademark- Service, as well as certain other medical technologies which may be
developed by NSI ("NSI Technology"). In the event that the Merger is not
consummated as anticipated, NSI will enter into separate license agreements
which each of the regional licensees on substantially the same terms as the
License Agreement. NSI and the regional licensees have agreed to operate under
the terms of the License Agreement until such agreement or agreements are
executed following consummation of the Merger.
Upon consummation of the Merger, the Company will have the exclusive right
and license of sell the PAPNET-Registered Trademark- System, PAPNET-Registered
Trademark- Service and NSI Technology in the states of Ohio, Georgia, Kentucky,
Missouri, North Carolina and in the Standard Metropolitan Statistical Area of
Chicago, Illinois.
The License Agreement provides that the regional licensees will be paid
royalties as follows: (a) monthly royalties equal to 50% of the amount by which
NSI's gross revenues from sales in the licensed territories exceed the cost of
processing slides originating in the licensed territories (for purposes of which
calculation costs per slide may not exceed $1.00 per slide) and the cost of
transporting such slides, with the maximum amount of such monthly royalties in
any fiscal year capped at an amount derived by applying the royalty formula to
12,175,000 slides; (b) annual royalties equal to the difference, if any, by
which aggregate monthly royalties in any fiscal year are less than 4.15% of
NSI's worldwide gross revenues for such fiscal year, with the maximum annual
royalty amount in any fiscal year capped at $23,000,000, less the amount of
monthly royalties paid in such fiscal year calculated as described in clause
(a). For the purposes of calculating the numbers of slides attributable
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<PAGE>
to the licensed territories which are submitted by certain large laboratories
operating in multiple states ("Multistate National Laboratories"), there will be
attributed to each territory a proportionate number of slides submitted to NSI
for processing from all Multistate National Laboratories equal to the ratio that
the population of such territory bears to the population of the United States
(determined according to official U.S. Census data).
The royalty calculations described in the foregoing paragraph are
aggregate calculations for all of the territorial licensees. Following
consummation of the Merger, the amounts allocable to the Company will be
determined according to the population of the geographic areas exclusively
licensed to the Company. The applicable number of slides for the slide
royalty cap described in clause (a) in the foregoing paragraph, the worldwide
revenue percentage described in clause (b) in the foregoing paragraph, and
the $23,000,000 amount described in the same clause, will be adjusted based
upon the census data available at the time of the Merger.
The License Agreement has an initial term that expires on December 31,
2025. The Company has the right to extend the License Agreement for an
additional 20 year term upon written notice to NSI within six months preceding
the expiration of the initial term and upon payment of a renewal fee, which is
based on the net present value at the time of such notice of 20 years of
royalties.
The License Agreement may not be terminated or cancelled except upon
expiration of its initial or renewal term or by written agreement of the
parties.
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, current and prospective directors of the Company
are as follows:
NAME AGE POSITION
- ---- --- --------
David J. Richards 45 (1)(2)
Trevor M. Ferger 42 (2)(3)
Cecil J. Petitti 42 (2)(3)
Bryan Whipp 40 (2)(3)
John P. Kennedy 42 (2)(3)
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Rodney M. Kinsey 47 (2)(4)
Michael Blue, M.D. 41 (2)(4)
____________________
(1) Current President and director of the Company and nominee for Chairman,
President and director of the Company after consummation of the Merger.
(2) Members of the Advisory Board and nominees for directors of the Company
after consummation of the Merger.
(3) Messrs. Kennedy, Petitti, Ferger and Whipp are current members of the board
of directors of the Company.
(4) Messrs. Blue and Kinsey are members of the board of directors of CCI.
Mr. Richards, one of the founders of the Company, has served as President
and director of the Company since its inception. From 1981 until commencing
employment with the Company, Mr. Richards was a practicing attorney and, from
1983, a partner, in the law firm of Crabbe, Brown, Jones, Potts & Schmidt in
Columbus, Ohio. From 1985 through 1994, Mr. Richards was engaged in real estate
development as President of Sunset Development, a multi-family housing
developer.
Mr. Richards has an accounting degree from Wright State University, and
earned his Juris Doctor degree from The Ohio State University College of Law in
1977.
Mr. Kennedy is also a founder of the Company and has served as an officer
and director since its inception. Mr. Kennedy is currently of counsel with the
law firm of Crabbe, Brown, Jones, Potts & Schmidt in Columbus, Ohio, where he
was a partner from 1986 to 1994. In addition to practicing law, Mr. Kennedy has
been a Columbus, Ohio City Councilman since 1988, where he currently serves as
President.
Mr. Kennedy has a Bachelor of Arts in Finance from the University at
Bridgeport, Bridgeport, Connecticut and earned his Juris Doctor from The Ohio
Northern University College of Law in 1978.
S. Trevor Ferger is President of Ferger & Associates, a food brokerage
specializing in the sales and marketing of consumer goods to grocery stores.
Mr. Ferger has been active with Ferger & Associates since 1979. Prior to that
time he was a sales manager with Procter & Gamble. Mr. Ferger has a Bachelor of
Arts degree from Wake Forest University and a M.B.A. degree from Xavier
University. Mr. Ferger has been a director of the Company since June, 1994.
Cecil J. Petitti has been co-owner of Chaney & Petitti Insurance Agency
located in Dublin, Ohio since 1984. Chaney & Petitti specialize in multiple
insurance products, including medical insurance. Prior to merging with the
Chaney Group, Mr. Petitti was associated with the Burke, Kendall & Petitti
Insurance Agency. Mr. Petitti is also President of NetWalk, Inc., a Columbus-
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based Internet service provider. Mr. Petitti earned a Bachelor of Arts degree
in Education from The Ohio State University. Mr. Petitti has been a director of
the Company since June, 1994.
Bryan Whipp is President and owner of The Breakfast Club Cafe, an upstart
three unit restaurant chain based in Dayton, Ohio. Mr. Whipp was formerly a
manager of S.J. Associates, an electronics and computer manufacturer's
representative. Mr. Whipp is the brother-in-law of Mr. Richards. Mr. Whipp
earned a Bachelor of Science degree in Accounting from Park College. Mr. Whipp
has been a director of the Company since June, 1994.
Michael Blue, M.D. has been a practicing physician since 1980. Dr. Blue is
currently vice president of Immediate Health Associates.
Rodney M. Kinsey has been a self-employed manufacturers representative
since 1971.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has not established committees. It is
anticipated that after the consummation of the Merger, the Board of Directors
will establish a stock option committee, an audit committee and a compensation
committee.
DIRECTOR COMPENSATION
Directors of the Company have received stock options and have been entitled
to reimbursement of reasonable expenses incurred in connection with their
attendance at board meetings. No cash compensation has been paid to directors.
The Company anticipates that, following consummation of the Merger, it will be
necessary to pay directors for their service in order to attract and retain the
services of qualified directors, but the amount of such compensation has not
been established.
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EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
---------------------- ------------
Awards
------------
Securities
Underlying All Other
Salary Bonus Options Compensation
Name and Principal Position Year ($) ($) (#) ($)(1)
- --------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
DAVID J. RICHARDS 1995 125,000 50,000 0 12,228
President and Secretary 1994 108,333 0 0 11,959
1993 82,913 0 0 8,900
</TABLE>
____________________
(1) Includes matching contribution to the Company's 401(k) Plan and a 1994 and
1995 automobile allowance of approximately $270 per month.
The following table provides certain information regarding the number and
value of stock options held by the Company's President at December 31, 1995.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES (1)
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options at Fiscal
at Fiscal Year-End (#) Year-End ($)(2)
------------------------------ ------------------------------
Shares
Acquired
on Value
Exercise Realized
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
David J.
Richards 66,080 $1,983,357.50 287,020 -0- $3,535,914.90 -0-
</TABLE>
____________________
(1) Adjusted to reflect 2-for-1 stock splits in May 1994, May 1995 and
December 1995.
(2) Represents the total gain which would be realized if all in-the-money
options held at year end were exercised, determined by multiplying the
number of shares underlying the options by the difference between the per
share option exercise price and the per share fair market value at year end
($13.38 on December 29, 1995). An option is in-the-money if the fair
market value of the underlying shares exceeds the exercise price of the
option.
1995 STOCK OPTION PLAN
The Company's Amended 1995 Stock Option Plan (the "1995 Plan") has been
approved by the Company's Board of Directors and adopted by the shareholders
in September 1995. The 1995 Plan provides for the grant of options to key
associates, officers, directors, consultants and advisers who render services
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<PAGE>
to the Company for the purchase of up to 150,000 Company Shares. The options
may be either Incentive Options or Nonqualified Options.
The 1995 Plan is to be administered by the Board of Directors of the
Company, which may, to the fullest extent permitted by law, delegate all or any
of its powers under the 1995 Plan to a committee, consisting of not fewer than
two members of the Board of Directors (the "Committee"). If the Company Shares
are registered under Section 12 of the Exchange Act, all members of the
Committee will be "disinterested persons" as defined in Rule 16b-3(c)(2)(i)
promulgated under the Exchange Act, and "outside directors", as defined in
Section 162(m) of the Code. The Board of Directors or the Committee will be
authorized, subject to the provisions of the 1995 Plan, to determine to whom and
at what time the stock options may be granted, the designation of the option as
either an Incentive Option or Nonqualified Option, the per share exercise price,
the duration of each option, the number of shares subject to each option, any
restrictions on such shares, the rate and manner of exercise, and the timing and
form of payment.
Under the 1995 Plan, an Incentive Option may not have an exercise price
less than fair market value of the Company Shares on the date of grant or an
exercise period that exceeds ten years from the date of grant and is subject to
certain other limitations which allow the optionholder to qualify for favorable
tax treatment. None of these restrictions will apply to the grant of
Nonqualified Options, which may have an exercise price less than the fair market
value of the underlying Company Shares on the date of grant and may be
exercisable for an indeterminate period of time.
The exercise price of an option under the 1995 Plan may be paid in cash or,
with the consent of the Board of Directors or the Committee, (i) by tendering
previously acquired Company Shares valued at their fair market value on the date
they are tendered, (ii) by delivery of a full recourse promissory note for the
portion of the exercise price in excess of the par value of the shares subject
to the option, the terms and conditions of which will be determined by the Board
of Directors or the Committee, and in cash for the par value of the shares,
(iii) by any combination of the foregoing methods, or (iv) by delivery of
written instructions to forward the notice of exercise to a broker or dealer and
to deliver to a specified account a certificate for the shares purchased upon
exercise of the option and a copy of irrevocable instructions to the broker or
dealer to deliver the purchase price of the shares to the Company.
Under the 1995 Plan, an option is not transferable except by will or by the
laws of descent and distribution and may be exercised, during the lifetime of
the optionee, only by the optionee or by the optionee's guardian or legal
representative.
Any option granted under the 1995 Plan will terminate automatically (i) 30
days after the employee's termination of employment with the Company (other than
by reason of death or disability or for cause), (ii) one year after the
employee's death or termination of employment by reason of disability unless the
option expires earlier by its terms and (iii) on the effective date of a
termination for cause. Options not exercisable as of the date of a change in
control of the Company will become
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<PAGE>
exercisable immediately as of such date. The 1995 Plan will terminate on the
tenth anniversary of its effective date, unless earlier terminated by the Board
of Directors.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of March 31, 1996
regarding beneficial ownership of the Company's common stock by: (i) each person
known by the Company to own beneficially 5% or more of outstanding shares of the
Company's common stock; (ii) each director of the Company; (iii) the proposed
executive officers and directors; and (iv) all current directors and executive
officers as a group.
SHARES BENEFICIALLY OWNED (1)(2)
----------------------------------------
STOCKHOLDER NUMBER PERCENT
- ---------------------------- ----------- ----------
David J. Richards 1,065,052 16.64
John P. Kennedy 599,424 9.37
Cecil J. Petitti 51,750 *
S. Trevor Ferger 8,000 *
Michael S. Blue, M.D. 0 *
Rodney M. Kinsey 0 *
Bryan Whipp 4,000 *
Carl A. Genberg 383,616 6.0
____________________
* Represents beneficial ownership of less than 1% of the outstanding the
Company common stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting power
and/or investment power with respect to those shares.
(2) Includes shares purchasable within 60 days after March 31, 1996 pursuant to
the exercise of options covering 287,020 shares for Mr. Richards, 24,000
shares for Mr. Kennedy, 8,000 shares for Mr. Petitti, and 8,000 shares for
Mr. Ferger.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY AND THE PREDECESSOR COMPANIES
OVERVIEW
The Company is an Ohio corporation formed on October 25, 1989 for the
purpose of acquiring the exclusive rights to market certain proprietary products
of Neuromedical Systems, Inc., a Delaware corporation ("NSI"), including the
right to sell the PAPNET-Registered Trademark- System and PAPNET-Registered
Trademark- Service in the State
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<PAGE>
of Ohio. The Company later assigned its rights to Papnet Limited Partnership,
an Ohio limited partnership ("PLP"). In January 1993, the Company acquired all
of the issued and outstanding units of limited partnership interest in both PLP
and Papnet Midwest Limited Partnership, an Ohio limited partnership ("PMLP").
PMLP owned the rights to market the PAPNET-Registered Trademark- System and
PAPNET-Registered Trademark- Service in Kentucky and the Standard Metropolitan
Statistical Area of Chicago, Illinois. As a result of these acquisitions the
Company has the rights to the PAPNET-Registered Trademark- System and
PAPNET-Registered Trademark- Service in Ohio, Kentucky and the Standard
Metropolitan Statistical Area of Chicago.
The PAPNET-Registered Trademark- System was approved by the FDA for
commercial use in the United States on November 8, 1995. Prior to that time,
the PAPNET-Registered Trademark- System was permitted to be utilized in the
United States on an investigational basis only, and NSI was permitted to derive
revenue with respect thereto only to recover certain of its costs. NSI,
however, has sold PAPNET testing services for commercial use outside of the
United States. As a result, prior to FDA approval, the Company was able to earn
revenues based upon the worldwide revenue calculation as described below.
On December 5, 1995 the Company, the Predecessor Companies and CWI and PUI
who are not parties to the Merger, entered into a Settlement Agreement with NSI
(the "Settlement Agreement"). The purpose of the Settlement Agreement was to
resolve and clarify certain issues relating to the license agreements which NSI
had with its regional licensees, and issues relating to warrants to purchase
shares of NSI common stock which were held by the Company and certain of the
Predecessor Companies. Pursuant to the Settlement Agreement, NSI and the
regional licensees (including the Company and all of the Predecessor Companies
except CCWP) agreed to the form of a license agreement to be executed upon the
merger of some or all of the regional licensees (the "License Agreement"), under
which the Company and the other regional licensees will continue to have the
rights to market the PAPNET-Registered Trademark- System and PAPNET-Registered
Trademark- Service, as well as certain other medical technologies which may be
developed by NSI ("NSI Technology"). In the event that the Merger is not
consummated as anticipated, NSI will enter into separate license agreements
which each of the regional licensees on substantially the same terms as the
License Agreement. NSI and the regional licensees have agreed to operate under
the terms of the License Agreement until such agreement or agreements are
executed following consummation of the Merger.
Upon consummation of the Merger, the Company will have the exclusive right
and license of sell the PAPNET-Registered Trademark- System, PAPNET-Registered
Trademark- Service and NSI Technology in the states of Ohio, Georgia, Kentucky,
Missouri, North Carolina and in the Standard Metropolitan Statistical Area of
Chicago, Illinois.
The License Agreement provides that the regional licensees will be paid
royalties as follows: (a) monthly royalties equal to 50% of the amount by which
NSI's gross revenues from sales in the licensed territories exceed the cost of
processing slides originating in the licensed territories (for purposes of which
calculation costs per slide may not exceed $1.00 per slide) and the cost of
transporting such slides, with the maximum amount of such monthly royalties in
any fiscal year capped at an amount derived by applying the royalty formula to
12,175,000 slides; (b) annual royalties equal to the difference, if any, by
which aggregate monthly royalties in any fiscal year are less than 4.15% of
NSI's worldwide gross revenues for such fiscal year, with the maximum annual
royalty amount in any fiscal year capped at $23,000,000, less the amount of
monthly royalties paid in such fiscal year calculated as described in clause
(a). For the purposes of calculating the numbers of slides attributable
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<PAGE>
to the licensed territories which are submitted by certain large laboratories
operating in multiple states ("Multistate National Laboratories"), there will be
attributed to each territory a proportionate number of slides submitted to NSI
for processing from all Multistate National Laboratories equal to the ratio that
the population of such territory bears to the population of the United States
(determined according to official U.S. Census data).
The royalty calculations described in the foregoing paragraph are
aggregate calculations for all of the territorial licensees. Following
consummation of the Merger, the amounts allocable to the Company will be
determined according to the population of the geographic areas exclusively
licensed to the Company. The applicable number of slides for the slide
royalty cap described in clause (a) in the foregoing paragraph, the worldwide
revenue percentage described in clause (b) in the foregoing paragraph, and
the $23,000,000 amount described in the same clause, will be adjusted based
upon the census data available at the time of the Merger.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
Royalty revenue for the three months ended March 31, 1996 was $13,553
compared to $10,080 for the same period in 1995. The increase is a result of
increased worldwide sales at NSI due to NSI receiving FDA approval for the
PAPNET-Registered Trademark- System in November 1995. While revenue for the
quarters ending March 31, 1996 and 1995 has been accrued using the worldwide
revenue calculation, based on current information management anticipates that
revenue from slide volume from the Company's territory will exceed the revenue
from the worldwide revenue calculation for the 1996 calendar year.
Slide volume for the quarter ending March 31, 1996 was 1,590 slides
processed compared to 65 slides processed in the quarter ending March 331, 1995.
The increase in slide volume is the result of the FDA approval received in
November 1995 and increasing the number of laboratories offering the
PAPNET-Registered Trademark- testing. NSI has spent the first half of 1996
developing a laboratory distribution network for the PAPNET-Registered
Trademark- test so that it would be available for a consumer product launch
sometime during the third quarter of 1996.
Total operating expense was $149,727 for the three months ended March 31,
1996 compared to $81,601 for the same period the prior year. The increase is
primarily the result of higher expenses for (i) the addition of sale staff (in
certain territories) and (ii) merger expenses incurred during the three months
ended March 31, 1996.
Interest income for the three months ended March 31, 1996 was $6,010
compared to $3,766 for the same period the prior year. The increase was a
result of higher available cash balances to invest.
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
Royalty revenue for the year ended December 31, 1995 was $48,000 compared
to $24,755 for 1994. the increase is a result of increased worldwide revenue
for NSI as NSI established new marketing operations in Europe, Hong Kong, Canada
and Mexico. The 1994 royalty revenue was $24,765
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<PAGE>
compared to $4,332 for 1993. This increase was due to NSI expansion of sales to
European laboratories.
Total operating expense was $573,149 for the year ended December 31, 1995
compared to $327,361 for 1994. The increase is primarily the result of higher
expense for (i) the additional sales staff in certain territories in
anticipation of FDA approval of the PAPNET-Registered Trademark- System and (ii)
merger expenses incurred during 1995. Total operating expense was $327,301 in
1994 compared to $289,913 in 1993. This increase was primarily the result of
increases in sales and marketing and office expenses as the Company increased
the sales and marketing efforts for the PAPNET-Registered Trademark- System.
Interest income was $16,606 for the year ended December 31, 1995 compared
to $19,059 for 1994. Interest income totaled $19,059 for 1994 compared to
$9,037 in 1993. These fluctuations were due primarily to corresponding
fluctuations in cash and cash equivalents resulting from the issuance of equity
securities in such periods.
Other income was $1,715,399 for the year ended December 31, 1995. This
resulted from the exercise of warrants in NSI utilizing a cashless exercise
provision, the settlement of certain claims with NSI from which the Company
received 53,939 shares of NSI stock and the purchase and subsequent sale of
55,000 shares of NSI stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily by the issuance of equity
securities. The Company's combined cash and cash equivalents totaled $599,550
at March 31, 1996, a decrease of $211,808 from December 31, 1995. The decrease
was primarily the result of (i) funding the first quarter pretax loss of
$131,439 (ii) a decrease in current liabilities of $29,697 and (iii) an increase
in accounts receivable of $53,554. In addition, the company owns 380,064 shares
of NSI common stock which can be liquidated in an orderly fashion to fund future
operations. The market value of the NSI shares was $8,286,392 at March 31,
1996. These shares are currently unrestricted.
The Company anticipates that its capital requirements will be substantial
for the foreseeable future. In particular, the Company anticipates that
expenditures will increase significantly in the years 1996 through 1998 due to
the cost of the commercial launch of the Papnet System and the cost of investing
in similar technologies. The foregoing statements include forward-looking
statements which involve risks and uncertainties. The Company's actual
experience may differ materially from that discussed above. Factors that might
cause such a difference include, but are not limited to, those discussed in
"RISK FACTORS" as well as future events that have the effect of reducing the
Company's available cash balances, such as unexpected operating losses or
capital expenditures or cash expenditures related to possible future
acquisitions.
PREDECESSOR COMPANIES
Each of the Predecessor Companies, except for CCWP, was organized to
acquire and exercise the right to market the PAPNET-Registered Trademark- System
and PAPNET-Registered Trademark- Service within their respective licensed
territories. However, until November 6, 1995, when the FDA finally approved the
marketing of the PAPNET-Registered Trademark- technology, the technology could
be used in the United States only for investigational
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<PAGE>
purposes in connection with the FDA approval process. Consequently, the
Predecessor Companies had only minor levels of business activities prior to
November 1995. Minimal amounts of royalty revenue were earned prior to November
1995 from NSI under license arrangements identical to that described previously
for the Company. Beginning in late 1995, the Company began managing the
activities of the Predecessor Companies, including the hiring of employees,
pending the completion of the Merger. In the event the merger is not
consummated, the Predecessor Companies will need to develop their own
infrastructure to market the PAPNET-Registered Trademark- System and
PAPNET-Registered Trademark- Service or engage a third party to do so.
DESCRIPTION OF COMPANY CAPITAL STOCK
Upon consummation of the Merger, the Company's authorized capital stock
will consist of 15,000,000 shares of Company common stock, without par value,
and 500,000 shares of preferred stock, without par value (the "Company
Preferred Stock").
The following summary description of the Company's capital stock does not
purport to be complete and is qualified in its entirety by this reference to the
Company's Amended and Restated Articles of Incorporation (the "Company
Articles") and Amended and Restated Regulations (the "Company Regulations"),
copies of which have been filed as exhibits to the Registration Statement of
which this Prospectus forms a part.
COMPANY COMMON STOCK
As of March 31, 1996, there were 6,072,936 shares of Company common stock
outstanding and held of record by approximately 400 shareholders. All of the
issued and outstanding shares of Company common stock are fully paid and
nonassessable. Holders of validly issued and outstanding shares of Company
common stock are entitled to one vote per share of record on all matters to be
voted upon by shareholders.
At a meeting of shareholders at which a quorum is present, a majority of
the votes cast decides all questions, unless the matter is one upon which a
different vote is required by express provision of law or the Company Articles
or the Company Regulations. There is no cumulative voting with respect to the
election of directors.
Shareholders have no preemptive or other rights to subscribe for additional
shares nor any other rights to convert their Company common stock into any other
securities.
Subject to the preferences that may be applicable to the holders of any
outstanding shares of Company Preferred Stock, holders of Company common stock
are entitled to such dividends as may be declared by the Board of Directors out
of funds legally available therefor. The payment by the Company of dividends,
if any, rests within the discretion of its Board of Directors and will depend
upon the Company's operating results, financial condition and capital
expenditure plans, as well as other factors considered relevant by the Board of
Directors. The Company may enter into bank credit agreements which include
financial covenants restricting the payment of dividends. See "SUMMARY - Market
Price Data."
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<PAGE>
Upon liquidation, dissolution or winding-up of the Company, the assets
legally available for distribution to shareholders are distributable ratably
among the holders of Company common stock at that time outstanding, subject to
prior distribution rights of creditors of the Company and preferential rights of
any outstanding shares of Company Preferred Stock.
COMPANY PREFERRED STOCK
Upon effectiveness of the Merger the Company Certificate will authorize
the Board of Directors to issue up to 500,000 shares of Company Preferred Stock
in one or more series and to establish such relative voting, dividend,
redemption, liquidation, conversion and other powers, preferences, rights,
qualifications, limitations and restrictions as the Board of Directors may
determine without further approval of the shareholders of the Company. The
issuance of Company Preferred Stock by the Board of Directors could be used,
under certain circumstances, as a method of delaying or preventing a change in
control of Company and could permit the Company Board of Directors, without any
action by holders of Company common stock, to issue Company Preferred Stock
which could have a detrimental effect on the rights of holders of Company common
stock, including loss of voting control. In certain circumstances, this could
have the effect of decreasing the market price of the Company common stock.
The issuance of any series of Company Preferred Stock, and the relative
powers, preferences, rights, qualifications, limitations and restrictions of
such series, if and when established, will depend upon, among other things, the
future capital needs of the Company, the then-existing market conditions and
other factors that, in the judgment of the Company Board of Directors, might
warrant the issuance of Company Preferred Stock. At the date of this
Prospectus, there are no plans, agreements or understandings relative to the
issuance of any shares of Company Preferred Stock.
OHIO LAW AND CERTAIN ARTICLE AND REGULATIONS PROVISIONS
Certain provisions of the General Corporation Law of Ohio and of the
Company Articles and the Company Regulations, summarized in the following
paragraphs, may be considered to have an anti-takeover effect and may delay,
deter or prevent a tender offer, proxy contest or other takeover attempt that a
shareholder might consider to be in such shareholder's best interest, including
such an attempt as might result in payment of a premium over the market price
for shares held by shareholders.
CLASSIFIED BOARD OF DIRECTORS. The Company Regulations provide for the
Company Board of Directors to be divided into three classes (unless there are
fewer than 9 directors in which case there will be two classes) of directors
serving staggered three-year terms. As a result, approximately one-third of the
Company Board of Directors will be elected each year. Classification of the
Company Board of Directors expands the time required to change the composition
of a majority of directors and may tend to discourage a proxy contest or other
takeover bid for the Company. The Company Regulations provide that any
director or the entire Company Board of Directors may be removed from office at
any time, but only for cause and only by the affirmative vote of the holders of
at least 80% of all of the outstanding shares of capital stock of the Company
entitled to vote on the election of directors at a meeting of shareholders
called for that purpose, except that if the Company Board of Directors, by an
affirmative vote of at least 66 2/3% of the entire Company Board of Directors,
recommends removal of a director to the shareholders, such removal may be
effected by the affirmative vote of the holders of at least a majority of the
outstanding shares of capital stock of the Company present in person or
-42-
<PAGE>
represented by proxy and entitled to vote on the election of directors at a
meeting of shareholders called for that purpose. These provisions, when coupled
with provisions of the Company Regulations authorizing only the Company Board of
Directors to fill vacant directorships, will preclude shareholders of the
Company from removing incumbent directors without cause, and simultaneously
gaining control of the Company Board of Directors by filling the vacancies with
their own nominees.
SPECIAL MEETINGS OF SHAREHOLDERS. The Company Regulations provide that
special meetings of shareholders may be called by the Chairman of the Board,
President or Chief Executive Officer or by the Board of Directors by action at a
meeting or a majority of the directors without a meeting or by shareholders
holding 50% or more of the voting power entitled to elect directors.
ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. The Company Regulations provide that shareholders seeking to bring
business before a meeting of shareholders, or to nominate candidates for
election as directors at a meeting of shareholders, must provide timely notice
thereof in writing. To be timely, a shareholder's notice must be delivered to,
or mailed and received at, the principal executive office of the Company, not
less than 30 days nor more than 60 days prior to the scheduled meeting (or, if
less than 40 days' notice of the meeting is given to shareholders not later than
the close of business on the tenth day following the earlier of (i) the day on
which such notice of the date of the meeting was mailed, or (ii) the day on
which public disclosure of the date of the special meeting was made). The
Company Regulations also specify certain requirements pertaining to the form and
substance of a shareholder's notice. These provisions may preclude some
shareholders from making nominations for directors at an annual or special
meeting or from bringing other matters before the shareholders at a meeting.
ACTION BY WRITTEN CONSENT OF THE SHAREHOLDERS. The Ohio General
Corporation Law provides that, unless otherwise provided in the Articles of
Incorporation, any action that is required to be taken at any annual or special
meeting of shareholders, or any action which may be taken at any annual or
special meeting of shareholders, may be taken without a meeting, with the
affirmative vote, or approval, and in a writing signed by all shareholders who
would be entitled to notice of a meeting of the shareholders held for such
purpose.
DIRECTORS' RESPONSE TO ACQUISITION PROPOSALS. The Company Articles
provides that the Company Board of Directors must base the response of the
Company to any "Acquisition Proposal" on the Company Board of Directors'
evaluation of what is in the best interest of the Company. In evaluating what
is in the best interest of the Company, the Company Board of Directors must
consider all relevant factors including, without limitation, the best interest
of the shareholders which, for this purpose, requires the Company Board of
Directors to consider, among other factors, not only the consideration offered
in the Acquisition Proposal in relation to the then current market price of the
Company's stock, but also in relation to the current value of the Company in a
freely negotiated transaction and in relation to the Company Board of Directors'
then estimate of the future value of the Company as an independent entity or as
the subject of a future Acquisition Proposal; and such other factors as the
Company Board of Directors determines to be relevant, including, among other
factors, the long-term and short-term interests of the Company and its
subsidiaries and their businesses and properties and the social, legal and
economic effects upon the employees, suppliers, customers, creditors and other
affected persons, firms and corporations and on the communities and geographical
areas in which the Company and its subsidiaries operate or are located.
"Acquisition Proposal" is
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<PAGE>
defined in the Company Articles as any proposal for the consolidation or merger
of the Company with another corporation, any share exchange involving the
Company's outstanding capital stock, any liquidation or dissolution of the
Company, any transfer of all or a material portion of the assets of the Company
and any tender offer or exchange offer for any of the Company's outstanding
stock.
VOTING REQUIREMENTS. The Company Regulations provide that certain
provisions in the Company Regulations may not be altered, amended or repealed in
any respect, and new provisions inconsistent therewith may not be adopted unless
such action is approved by the affirmative vote of the holders of at least 80%
of all of the outstanding shares of capital stock of the Company entitled to
vote on such matter at a meeting of shareholders called for that purpose.
DIRECTOR LIABILITY AND INDEMNIFICATION
The Company Articles provides that the Corporation may indemnify any
director, officer, incorporator or any former director or officer of the
Corporation and any person who is or has served at the request of the
Corporation as a director, officer or trustee of another corporation,
partnership, joint venture, trust or other enterprise (and his or hers heirs,
executors and administrators) against expenses, including attorney fees,
judgments, fines and amounts paid in settlement, actually and reasonably
incurred by him by reason of the fact that he is or was such director, officer,
incorporator or trustee in connection with any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative, or
investigative, to the full extent and according to the procedures and
requirements set forth in the Ohio General Corporation Law as the same may be in
effect from time to time. The indemnification provided herein shall not be
deemed to restrict the right of the Corporation to (i) indemnify employees,
agents and others as permitted by law, (ii) purchase and maintain insurance or
provide similar protection on behalf of the directors, officers or such other
persons against liabilities asserted against them or expenses incurred by them
arising out of their service to the Corporation as contemplated herein, and
(iii) enter into agreements with such directors, officers, incorporators,
employees, agents or others indemnifying them against any and all liabilities
asserted against them or incurred by them arising out of their service to the
Corporation as contemplated herein.
TRANSFER AGENT
The transfer agent and registrar for the Company common stock is Huntington
National Bank N.A., Columbus, Ohio.
THE PREDECESSOR COMPANIES
CYTOLOGY INDIANA, INC.
CIN is an Ohio corporation formed on September 7, 1990 to serve as the
general partner of Papnet Indiana Limited Partnership, an Ohio limited
partnership, which was formed for the purpose of acquiring the rights to market
the PAPNET-Registered Trademark-System and the PAPNET-Registered
Trademark-Service in Indiana. Papnet Indiana Limited Partnership subsequently
exchanged its rights for the State of Indiana for the right to market
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<PAGE>
the PAPNET-Registered Trademark-System and the PAPNET-Registered
Trademark-Service in Missouri. In 1995, Papnet Indiana Limited Partnership
distributed its assets to its general and limited partners. CIN owns an
approximate 65% interest in the rights to market the PAPNET-Registered
Trademark- System and Service in Missouri. The former limited partners of
Papnet Indiana Limited Partnership are now shareholders of INC, which owns an
approximate 35% interest in the rights to market the PAPNET-Registered
Trademark-System and Service in Missouri.
As of December 31, 1995, CIN had 10 shareholders.
INDIANA CYTOLOGY REVIEW CORPORATION
INC is an Ohio corporation formed on December 1, 1995 by the former limited
partners of Papnet Indiana Limited Partnership for the purpose of owning an
approximate 35% interest in the rights to market the PAPNET-Registered
Trademark- System and the PAPNET-Registered Trademark- Service in Missouri.
As of December 31, 1995, INC had 15 shareholders.
ER GROUP, INC.
ERG is an Ohio corporation formed on May 13, 1991 for the purpose of
acquiring the rights to market the PAPNET-Registered Trademark- System and the
PAPNET-Registered Trademark- Service in Georgia.
As of December 31, 1995, ERG had nine shareholders.
CCWP PARTNERS, INC.
CCWP is an Ohio corporation formed on December 1, 1995. Carolina Cytology
Partnership, an Ohio limited partnership, owned warrants for the purchase of NSI
common stock. In December 1995, immediately after the formation of CCWP, CCWP
acquired all of the outstanding units of limited partnership interest in
Carolina Cytology Partnership in exchange for stock in CCWP. CCWP now owns the
common stock issued upon exercise of the NSI warrant.
As of December 31, 1995, CCWP had 12 shareholders.
CAROLINA CYTOLOGY, INC.
CCI is an Ohio corporation formed on December 10, 1992 for the purpose of
acquiring the rights to market the PAPNET-Registered Trademark- System and the
PAPNET-Registered Trademark- Service in North Carolina.
As of December 31, 1995, CCI had 15 shareholders.
MARKET INFORMATION
There is no public market for the common stock of CIN, INC, ERG, CCWP or
CCI. There is only a limited public market for the Company's common stock, with
five securities dealers acting as market makers. The Company's common stock is
quoted on the National Association of Securities
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<PAGE>
Dealers, Inc. "Bulletin Board." The following table sets forth the quarterly
high and low bid quotations for 1994, 1995 and the first quarter of 1996
which have been adjusted to reflect 2-for-1 stock splits in May 1994, May
1995 and December 1995. The prices shown represent quotations between
dealers, without adjustments for retail markups, markdowns or commissions and
may not represent actual transactions.
1994 High Low
---- ---- ---
2nd Qtr. 7.50 3.75
3rd Qtr. 5.875 3.625
4th Qtr. 4.25 3.50
1995
----
1st Qtr. 5.398 3.75
2nd Qtr. 8.094 1.875
3rd Qtr. 17.688 10.75
4th Qtr. 15.688 13.375
1996
----
1st Qtr. 13 9.375
DIVIDENDS
The Predecessor Companies have not paid dividends on their common stock.
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<PAGE>
COMPARISON OF CERTAIN RIGHTS OF THE COMPANY AND THE PREDECESSOR
COMPANY SHAREHOLDERS
ARTICLES OF INCORPORATION PROVISIONS
The following chart (the "Chart") provides a comparison of certain
provisions of the Company's and the Predecessor Companies' Articles of
Incorporation, and compares certain other rights the shareholders of the
Company and the Predecessor Companies may have.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Auth/Out Auth/Out
State of Common Preferred Majority Cumulative Preemptive
Entity Organization Shares(1) Shares(2) Vote Voting Rights
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
The 8,000,000/
Company Ohio 6,072,936 N/A no yes no
- ---------------------------------------------------------------------------------------------------------
CIN Ohio 750/750 N/A no yes yes
- ---------------------------------------------------------------------------------------------------------
INC Ohio 100/100 N/A no(3) yes no
- ---------------------------------------------------------------------------------------------------------
ERG Ohio 750/578 N/A yes yes yes
- ---------------------------------------------------------------------------------------------------------
CCWP Ohio 10,000/9,150 N/A yes yes no
- ---------------------------------------------------------------------------------------------------------
CCI Ohio 1,500/905 N/A yes yes no
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) This column represents authorized and outstanding common shares prior
to the Effective Time of the Merger. The Company's Articles of
Incorporation will be amended as described under "THE COMPANY -
Articles of Incorporation."
(2) This column represents authorized and outstanding preferred shares
prior to the Effective Time of the Merger.
(3) INC's Articles of Incorporation provide that if a merger is approved
by the directors of INC, it can be adopted by a vote of a majority of
the outstanding shares entitled to vote on the Merger. Otherwise the
approval of a merger would require the affirmative vote of two-thirds
of the outstanding shares entitled to vote the merger. The Merger has
been unanimously recommended by the directors of INC.
The rights of the shareholders of the Predecessor Companies are currently
governed and defined by the laws of the State of Ohio and by their respective
Articles of Incorporation and or Regulations. Upon consummation of the Merger,
the shareholders of the Predecessor Companies will become shareholders of the
Company and their rights will cease to be governed and defined by Articles of
Incorporation and Codes of Regulation and will be defined and governed by the
Ohio General Corporation Law, the Company Articles and the Company Regulations.
Certain provisions of the Company Articles and the Company Regulations provide
different rights of shareholders from those that the shareholders of the
Predecessor Companies currently have. Certain of these provisions are
summarized below. This summary is not intended to be complete and is qualified
in its entirety by reference to applicable provisions of the Ohio General
Corporation Law and to the respective corporate documents of the Company and the
Predecessor Companies. For information as to how such corporate documents may
be obtained, see "AVAILABLE INFORMATION."
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<PAGE>
CAPITAL STOCK
The Ohio General Corporation Law requires a corporation's Articles of
Incorporation to set forth the total number of shares of all classes of stock
that the corporation has authority to issue, and, for each class, the
designations, powers, preferences, rights, qualifications, limitations and
restrictions thereof.
The Company Articles currently authorizes 8,000,000 shares of the Company
common stock of which 6,072,936 shares were issued and outstanding on December
31, 1995. The Company Articles will be amended in connection with the Merger
and will authorize 15,000,000 shares of the Company common stock of which
10,930,449 will be issued and outstanding immediately after the Merger and
500,000 shares of the Company Preferred Stock of which no shares will be
outstanding immediately after the Merger.
The authorized and issued and outstanding shares of the Predecessor
Companies' capital stock, as of March 31, 1996, is set forth in the Chart.
The provisions of the Company Articles setting the terms of the Company
common stock are compared in the Chart and differ in certain respects. Holders
of Company common stock and Predecessor Company common stock, respectively, are
entitled to one vote per share on all matters submitted to a vote of
shareholders. The Company's shareholders have no preemptive rights, but the
shareholders of ERG and CIN do. The shareholders of the Company are entitled to
cumulative voting (the Company Articles will be amended to eliminate cumulative
voting) as are the shareholders of the Predecessor Companies.
The rights, preferences and privileges of holders of Company common stock
are subject to, and may be adversely affected by, the rights of the holders of
shares of any series of Company Preferred Stock that the Company may designate
and issue in the future. In addition, the right of holders of Company common
stock to receive ratably any dividends that may be declared by the Company Board
of Directors is subject to preferential dividend rights of any Company Preferred
Stock then outstanding. None of the Predecessor Company Articles of
Incorporation authorize any class of preferred stock.
Although no shares of the Company Preferred Stock will be outstanding
immediately following the Merger, the Company Board of Directors has the
authority, without any further vote or action by the shareholders, to issue
Company Preferred Stock in one or more classes or series and to fix the number
of shares, designations, powers, preferences, rights, qualifications,
limitations and restrictions thereof. The ability of the Company Board to so
issue Company Preferred Stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire (or of discouraging a
third party from acquiring) a majority of the outstanding voting stock of the
corporation. The Company currently has no plan to issue any Company Preferred
Stock.
VOTING POWER
Holders of Company common stock and Predecessor Company common stock,
respectively, are entitled to one vote per share.
-48-
<PAGE>
PAYMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS
The Ohio General Corporation Law generally allows dividends to be paid in
cash, property, or shares of the corporation. The dividend shall not exceed the
combination of the surplus of the Corporation and the difference between (i) the
reduction in surplus that results from the immediate recognition of the
transition obligation under the statement of financial accounting standards No.
106; and (2) the aggregate amount of the transition obligation that would have
been recognized as of the date of the declaration of a dividend if the
corporation had elected to amortize its recognition of the transition obligation
under statement of financial accounting standards No. 106. However, no
dividends may be paid to the holders of shares of any class in violation of the
rights of the holders of shares of any other class, or when the corporation is
solvent or there is reasonable ground to believe that by such payment it would
be rendered insolvent. Holders of both the Company common stock and the
Predecessor Company common stock are entitled to receive dividends in such
amounts and at such times as declared by their respective Boards of Directors.
Neither the Company nor any Predecessor Company has paid cash dividends. The
Company presently anticipates that all of its future earnings will be retained
for the development of its business and does not anticipate paying cash
dividends on the Company common stock in the foreseeable future. The payment of
any future dividends will be at the discretion of the Company's Board of
Directors and will be based on the Company's future earnings, financial
condition, capital requirements and other relevant factors.
REGULATION PROVISIONS
The following chart (the "Chart") provides a comparison of certain
provisions of the Company's and the Predecessor Companies Codes of Regulation
and compares certain other rights the shareholders of the Company and the
Predecessor Companies may have.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Entity Meetings Directors Officers Committees Indemnification
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
The Annual meeting Not less than President, Board may Each director,
Company held on first three, and Secretary, designate officer and member
first Tuesday number can and directors of committee
in the third be fixed or Treasurer to serve on shall be indemnified
month following changed at a and in the an against all expenses
the end of the meeting of discretion executive incurred in
fiscal year, shareholders. of the committee, connection with any
within or without Board, a and other action from position
the State of Ohio. Chairman of committees held at the Company.
Action may be the Board, at its
taken without vice- discretion.
meeting if written presidents
consent of all and other
holders entitled such
to notice of a officers as
meeting for such the Board
purpose. may decide.
- -----------------------------------------------------------------------------------------------
</TABLE>
-49-
<PAGE>
<TABLE>
<CAPTION>
Entity Meetings Directors Officers Committees Indemnification
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ERG Annually, as the Not less than President, Executive Committee For officer or director
directors may three, with number Secretary, specifically director against
decide within or determined by Treasurer and provided for expenses incurred in
without the vote of in the and the Board any action resulting
State of Ohio. shareholders. discretion of has authority to from position held at
the Board, a elect other committees. the Company.
Chairman of
the Board.
- ------------------------------------------------------------------------------------------------------------------------
CCWP Annually as the Not less than President, For officer or Executive
Directors may three, with the Secretary, director against Committee
decide within or number Treasurer and in expenses incurred specifically
without the State determined by the discretion in connection with provided for
of Ohio. a vote of of the Board, any action resulting and the Board
shareholders. a Chairman of from position held has authority to
the Board. at the Company. elect other
committees.
- ------------------------------------------------------------------------------------------------------------------------
CCI Annually as the Not less than President, Executive For officer or
Directors may number Secretary, Committee director against
decide within determined by Treasurer and in specifically expenses incurred
or without the a vote of the discretion of provided for in connection with
State of Ohio. shareholders. the Board, a and the Board any action resulting
Chairman of the has authority to from position held
Board. elect other at the Company.
committees.
- ------------------------------------------------------------------------------------------------------------------------
CIN Annual meeting Not less than President, Vice Board of Directors may Each director
held on second three, and President, designate directors to indemnified to the
Tuesday of April, number can be Secretary, and in serve on an executive fullest extent of
within or fixed or changed the discretion of committee, audit Ohio law.
without the State at a meeting the Board, a committee or
of Ohio. Action of shareholders. Chairman of the compensation committee.
may be taken Board.
without meeting
if written
consent of all
holders entitled
to vote.
- ------------------------------------------------------------------------------------------------------------------------
INC Annually as the Not less than President, Executive Committee For officer or
Directors may three, and Secretary, specifically provided director against
decide within or number can be Treasurer and in for and the Board has expenses incurred
without the State fixed or changed the discretion of authority to elect other in connection with
of Ohio. at a meeting the Board, a committees. any action resulting
of shareholders. Chairman of the from position held
Board. at the Company.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
MEETINGS OF SHAREHOLDERS
The Company Regulations provide that special meetings of shareholders may be
called by the Chairman of the Board, President or Chief Executive Officer, or by
the Board of Directors by action
-50-
<PAGE>
or a majority of the Directors without a meeting or by shareholders holding 80%
or more of the voting power of the then outstanding shares entitled to vote in
an election of Directors. Except as otherwise provided by law or by the Company
Articles, a quorum for any meeting of the Company shareholders is a majority of
the capital stock issued and outstanding and entitled to vote at the meeting.
SHAREHOLDER NOMINATIONS AND PROPOSALS
The Company Regulations also specify certain requirements pertaining to the
form and substance of a shareholder's notice. These provisions may preclude
some shareholders from making nominations for directors at an annual or special
meeting or from bringing other matters before the shareholders at a meeting.
See "COMPANY - Description of Capital Stock."
Although the Company corporate documents do not give the Company Board any
power to approve or disapprove shareholder nominations for the election of
directors or proposals for action, the foregoing provisions may have the effect
of precluding a contest for the election of directors or the consideration of
shareholder proposals if the proper procedures are not followed, and of
discouraging or deterring a third party from conducting a solicitation of
proxies to elect its own slate of directors or to approve its own proposal,
without regard to whether consideration of such nominees or proposals might be
harmful or beneficial to the Company and its shareholders. On the other hand,
by requiring advance notice of nominations by shareholders, these shareholder
notice procedures afford the Company Board of Directors an opportunity to
consider the qualifications of the proposed nominees and, to the extent deemed
necessary or desirable by the Company Board of Directors, to inform shareholders
about such qualifications. By requiring advance notice of other proposed
business, the shareholder notice procedures provide a more orderly procedure for
conducting annual meetings of shareholders and, to the extent deemed necessary
or desirable by the Company Board of Directors, provide the Board with an
opportunity to inform shareholders, prior to such meeting, of any business
proposed to be conducted at the meeting, together with any recommendations by
the Company Board of Directors or statements as to the Company Board of
Director's position regarding action to be taken with respect to such business,
so that shareholders can better decide whether to attend the meeting or to grant
a proxy regarding the disposition of any such business.
AMENDMENT OF ARTICLES OF INCORPORATION AND REGULATIONS
The Ohio General Corporation Law provides that an amendment to a
corporation's Articles of Incorporation requires the approval of the Board of
Directors in certain instances and the affirmative vote of the holders of shares
entitling them to exercise two-thirds of the voting power of the corporation in
other instances.
The Company Articles and the Company Regulations provide that certain
provisions in the Company Articles and the Company Regulations may not be
altered, amended or repealed in any respect, and new provisions inconsistent
therewith may not be adopted unless such action is approved by the affirmative
vote of the holders of at least 80% of all of the outstanding shares of capital
stock of the Company entitled to vote on such matter at a meeting of
shareholders called for that purpose, except that if the Company Board of
Directors, by an affirmative vote of at least 66 2/3% of the entire Company
Board of Directors, recommends approval of such amendment to the Company
Articles to the shareholders, such approval may be effected by the affirmative
vote of the holders of at least a
-51-
<PAGE>
majority of the outstanding shares of capital stock of the Company present in
person or represented by proxy and entitled to vote on such matter at a meeting
of shareholders called for that purpose. See "COMPANY - Description of Capital
Stock."
ACTION BY WRITTEN CONSENT
The Ohio General Corporation Law provides that, unless otherwise provided
in the Articles of Incorporation, any action that is required to be taken at any
annual or special meeting of shareholders, or any action which may be taken at
any annual or special meeting of shareholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by all the shareholders who would be
entitled to notice of a meeting of the shareholders held for such purpose. See
"THE COMPANY - Description of Capital Stock."
SIZE AND CLASSIFICATION OF BOARD OF DIRECTORS; REMOVAL OF DIRECTORS; FILLING
VACANCIES
The Company Regulations provide for the Company Board of Directors to be
divided into three classes (unless there are fewer than 9 directors in which
case there will be two classes) of directors serving staggered two-year terms.
As a result, approximately one-half of the Company Board of Directors will be
elected each year. Classification of the Company Board of Directors expands the
time required to change the composition of a majority of directors and may tend
to discourage a proxy contest or other takeover bid for the Company. The
Company Regulations provide that any director or the entire Company Board of
Directors may be removed from office at any time, but only for cause and only by
the affirmative vote of the holders of at least 80% of all of the outstanding
shares of capital stock of the Company entitled to vote on the election of
directors at a meeting of shareholders called for that purpose, except that if
the Company Board of Directors, by an affirmative vote of at least 66 2/3% of
the entire Company Board of Directors, recommends removal of a director to the
shareholders, such removal may be effected by the affirmative vote of the
holders of at least a majority of the outstanding shares of capital stock of the
Company present in person or represented by proxy and entitled to vote on the
election of directors at a meeting of shareholders called for that purpose.
These provisions, when coupled with provisions of the Company Regulations
authorizing only the Company Board of Directors to fill vacant directorships,
will preclude shareholders of the Company from removing incumbent directors
without cause, and simultaneously gaining control of the Company Board of
Directors by filling the vacancies with their own nominees. See "THE COMPANY-
Description of Capital Stock."
Although the Articles of Incorporation of all the Predecessor Companies,
permit cumulative voting, the Company Articles does not. See COMPARISON OF
CERTAIN RIGHTS OF THE COMPANY AND THE PREDECESSOR COMPANY SHAREHOLDERS - Chart.
Accordingly, with respect to both corporations, holders of a majority of the
shares of common stock entitled to vote in any election of directors of such
corporation may elect all of the directors standing for election.
Classification of the Company directors has the effect of making it more
difficult for shareholders to change the composition of the Company Board of
Directors. At least two annual meetings of shareholders, instead of one,
generally will be required to effect a change in the majority of a classified
board. Such a delay may help ensure that incumbent directors, if confronted by
a holder attempting to force a proxy contest, a tender or exchange offer, or any
other extraordinary corporate transaction, would have sufficient time to review
the proposal as well as any available alternatives to the proposal
-52-
<PAGE>
and to act in what they believe to be the best interests of the shareholders.
See "RISK FACTORS - Anti-Takeover Provisions; Certain Provisions of Ohio Law;
Articles of Incorporation and Regulations."
The term "cause" is not defined in the Company Articles or the Ohio General
Corporation Law. Consequently, any question concerning the legal standard for
"cause" would have to be judicially determined and such a determination could be
difficult, expensive and time consuming.
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 1701.59 of the Ohio General Corporation Law provides that a
director shall not be found to have violated his duties under the Ohio General
Corporation Law unless it is proved by clear and convincing evidence that the
director has not acted in good faith, in a manner he reasonably believes to be
in or not opposed to the best interests of the corporation, or with the care
that an ordinary prudent person in a like position would use under similar
circumstances.
Section 1701.13 of the Ohio General Corporation Law allows for corporations
to indemnify officers and directors from actions, suits or proceedings arising
out of their service to the corporation. The Company's Articles provide that
the Corporation may indemnify any director, officer, incorporator or any former
director or officer of the Corporation and any person who is or has served at
the request of the Corporation as a director, officer or trustee of another
corporation, partnership, joint venture, trust or other enterprise (and his or
hers heirs, executors and administrators) against expenses, including attorney
fees, judgments, fines and amounts paid in settlement, actually and reasonably
incurred by him by reason of the fact that he is or was such director, officer,
incorporator or trustee in connection with any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative, or
investigative, to the full extent and according to the procedures and
requirements set forth in the Ohio General Corporation Law as the same may be in
effect from time to time. The indemnification provided herein shall not be
deemed to restrict the right of the Corporation to (i) indemnify employees,
agents and others as permitted by law, (ii) purchase and maintain insurance or
provide similar protection on behalf of the directors, officers or such other
persons against liabilities asserted against them or expenses incurred by them
arising out of their service to the Corporation as contemplated herein, and
(iii) enter into agreements with such directors, officers, incorporators,
employees, agents or others indemnifying them against any and all liabilities
asserted against them or incurred by them arising out of their service to the
Corporation as contemplated herein.
INTERESTED SHAREHOLDER TRANSACTIONS
Chapter 1704 of the Ohio General Corporation Law prohibits certain
transactions between a Ohio corporation and an "interested shareholder" Chapter
1704 allows for a corporation to exclude itself from Chapter 1204 by exempting
itself in its Articles of Incorporation. The Company has not included such an
exemptive provision in the Company Articles. See "THE COMPANY - Description of
Capital Stock."
PREEMPTIVE RIGHTS
The Company shareholders do not have preemptive rights to purchase or
subscribe for additional securities of the Company upon any future issuance by
such corporation of such securities.
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<PAGE>
REPURCHASE AND REDEMPTION OF STOCK
Ohio corporations may generally purchase or redeem their own shares of
capital stock. The Company Articles provide that its Board of Directors have the
right and power to repurchase any of its outstanding shares upon such terms and
conditions agreed upon by the corporation and the selling shareholder.
EXPERTS
The financial statements of Papnet of Ohio, Inc. at December 31, 1995 and
1994 and for each of the three years in the period ended December 31, 1995; the
financial statements of ER Group, Inc. at December 31, 1995 and the year then
ended; the combined financial statements of Carolina Cytology, Inc. and CCWP
Partners, Inc. at December 31, 1995 and the year then ended; the financial
statements of Indiana Cytology Review Company at December 31, 1995 and the year
then ended; and the financial statements of Cytology Indiana, Inc. at December
31, 1995 and the year then ended; appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein, and are included in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
LEGAL OPINIONS
The validity of the Company Shares to be issued to the Predecessor Company
shareholders pursuant to the Merger and certain other legal matters in
connection with the Merger, including certain tax matters, will be passed upon
by Porter, Wright, Morris & Arthur, Columbus, Ohio.
-54-
<PAGE>
Index to Financial Statements
Papnet of Ohio, Inc.
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . F - 3
Balance Sheets at December 31, 1994 and 1995 and
March 31, 1996 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . F - 4
Statements of Operations for each of the three years ended
December 31, 1993, 1994 and 1995 and for the three-month
periods ended March 31, 1995 and 1996 (Unaudited). . . . . . . . . . . F - 5
Statements of Stockholders' Equity for each of the three years ended
December 31, 1993, 1994 and 1995 and for the three-month
period ended March 31, 1996 (Unaudited). . . . . . . . . . . . . . . . F - 6
Statements of Cash Flows for each of the three years ended
December 31, 1993, 1994 and 1995 and for the three-month
periods ended March 31, 1995 and 1996 (Unaudited). . . . . . . . . . . F - 7
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . F - 8
ER Group, Inc.
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . F - 15
Balance Sheets at December 31, 1995 and
March 31, 1996 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . F - 16
Statements of Operations for the year ended December 31, 1995
and for the three-month period ended March 31, 1996 (Unaudited). . . . F - 17
Statements of Cash Flows for the year ended December 31, 1995
and for the three-month period ended March 31, 1996 (Unaudited). . . . F - 18
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . F - 19
Carolina Cytology, Inc. and CCWP Partners, Inc.
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . F - 22
Combined Balance Sheets at December 31, 1995 and
March 31, 1996 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . F - 23
Combined Statements of Operations for the year
ended December 31, 1995 and for the three-month
period ended March 31, 1996 (Unaudited). . . . . . . . . . . . . . . . F - 24
Combined Statements of Cash Flows for the year
ended December 31, 1995 and for the three-month
period ended March 31, 1996 (Unaudited). . . . . . . . . . . . . . . . F - 25
Notes to Combined Financial Statements . . . . . . . . . . . . . . . . . F - 26
F-1
<PAGE>
Index to Financial Statements (continued)
Indiana Cytology Review Corporation
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . F - 29
Balance Sheets at December 31, 1995 and
March 31, 1996 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . F - 30
Statements of Operations for the period December 1
through December 31, 1995 and for the three-month period
ended March 31, 1996 (Unaudited) . . . . . . . . . . . . . . . . . . . F - 31
Statements of Cash Flows for the period December 1
through December 31, 1995 and for the three-month period
ended March 31, 1996 (Unaudited) . . . . . . . . . . . . . . . . . . . F - 32
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . F - 33
Cytology Indiana, Inc.
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . F - 37
Balance Sheets at December 31, 1995 and
March 31, 1996 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . F - 38
Statements of Operations for the year ended December 31, 1995
and for the three-month period ended March 31, 1996 (Unaudited). . . . F - 39
Statements of Cash Flows for the year ended December 31, 1995
and for the three-month period ended March 31, 1996 (Unaudited). . . . F - 40
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . F - 41
F-2
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Papnet of Ohio, Inc.
We have audited the accompanying balance sheets of Papnet of Ohio, Inc. (the
Company) as of December 31, 1995 and 1994, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at December 31,
1995 and 1994, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Columbus, Ohio
March 22, 1996, except for
Note 8 as to which the date
is July 15, 1996
F-3
<PAGE>
Papnet of Ohio, Inc.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31,
1994 1995 1996
----------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 535,545 $ 811,359 $ 599,550
Accounts receivable 33,445 75,993 58,962
Due from related entities (NOTE 8) - - 70,575
Note receivable from stockholder (NOTE 6) 50,000 50,000 50,000
Prepaid assets 1,021 1,021 1,021
----------------------------------------
Total current assets 620,011 938,373 780,108
Notes receivable - NSI 126,041 51,080 51,080
Investment in NSI--available for sale - 7,696,296 8,266,392
Investment in partnerships - 172,679 183,524
Furniture and equipment (net of accumulated
depreciation of $17,127 -- 1994 and $24,623 -- 1995) 20,552 17,316 15,816
Deferred taxes - 68,715 121,290
Deposits and other assets 2,330 1,330 1,330
----------------------------------------
Total assets $ 768,934 $8,945,789 $9,419,540
----------------------------------------
----------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ - $ 49,931 $ 108,966
Accrued expenses 30,334 81,630 34,968
Other liabilities - 42,831 860
----------------------------------------
Total current liabilities 30,334 174,392 144,794
Deferred taxes - 2,517,718 2,745,756
Stockholders' equity:
Common stock no par value, 8,000,000 shares
authorized, 5,864,916 and 6,072,936 issued
and outstanding at December 31, 1994 and 1995 1,488,948 1,779,465 1,779,465
Additional paid-in capital 783,077 783,077 783,077
Unrealized gains on available-for-sale securities
net of deferred taxes of $2,517,718 in 1995 and
$2,745,756 in 1996 - 3,899,617 4,253,792
Retained deficit (1,533,425) (208,480) (287,344)
----------------------------------------
Total stockholders' equity 738,600 6,253,679 6,528,990
----------------------------------------
Total liabilities and stockholders' equity $ 768,934 $8,945,789 $9,419,540
----------------------------------------
----------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Papnet of Ohio, Inc.
Statements of Operations
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
1993 1994 1995 1995 1996
------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Royalty revenue $ 4,322 $ 24,765 $ 48,000 $ 10,080 $ 13,553
Operating expenses:
Salaries and benefits 180,909 184,113 284,041 46,456 60,368
Sales and marketing 41,881 26,433 62,079 13,142 19,294
Professional 38,935 40,664 32,854 8,181 1,863
Payroll and franchise taxes 19,272 20,831 22,316 9,955 19,297
Depreciation and amortization 8,916 8,152 7,496 1,800 1,500
Office and other - 47,168 57,948 12,067 10,792
Merger (NOTE 8) - - 106,415 - 36,613
------------------------------------------------------------------------
Total operating expense 289,913 327,361 573,149 91,601 149,727
------------------------------------------------------------------------
Operating loss (285,591) (302,596) (525,149) (81,521) (136,174)
Other income (expense):
Interest income 9,037 19,059 16,606 3,766 6,010
Interest expense (514) - (264) (39) -
Equity income (loss) in partnerships - - 49,638 - (1,275)
NSI settlement and common stock
transactions (NOTE 3) - - 1,715,399 - -
------------------------------------------------------------------------
Total other income 8,523 19,059 1,781,379 3,727 4,735
------------------------------------------------------------------------
Income (loss) before income taxes (277,068) (283,537) 1,256,230 (77,794) (131,439)
Income tax provision (benefit) - - (68,715) - (52,575)
------------------------------------------------------------------------
Net income (loss) $(277,068) $(283,537) $1,324,945 (77,794) (78,864)
------------------------------------------------------------------------
Net income (loss) per share $(.05) $(.05) $.21 $(.01) $(.01)
------------------------------------------------------------------------
------------------------------------------------------------------------
Shares used in computation 5,623,000 5,860,336 6,349,594 5,860,336 6,073,136
------------------------------------------------------------------------
------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
Papnet of Ohio, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
ADJUSTMENTS
ADDITIONAL TO UNREALIZED RETAINED
COMMON PAID-IN GAINS EARNINGS
STOCK CAPITAL (LOSSES) (DEFICIT) TOTAL
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 $ 602,000 $783,077 $ - $ (972,820) $ 412,257
Stock issued 401,802 - - - 401,802
Stock subscribed 386,837 - - - 386,837
Net loss - - - (277,068) (277,068)
-------------------------------------------------------------------------------
Balance, December 31, 1993 1,390,639 783,077 - (1,249,888) 923,828
Stock issued and warrants exercised 98,309 - - - 98,309
Net loss - - - (283,537) (283,537)
-------------------------------------------------------------------------------
Balance, December 31, 1994 1,488,948 783,077 - (1,533,425) 738,600
Stock issued and warrants exercised 290,517 - - - 290,517
Adjustment to unrealized gains net of tax
(unaudited) - - 3,899,617 - 3,899,617
Net income - - - 1,324,945 1,324,945
-------------------------------------------------------------------------------
Balance, December 31, 1995 1,779,465 783,077 3,899,617 (208,480) 6,253,679
Net loss (unaudited) - - - (78,864) (78,864)
Adjustment to unrealized gains net of tax
(unaudited) - - 354,175 - 354,175
-------------------------------------------------------------------------------
Balance, March 31, 1996 (unaudited) $1,779,465 $783,077 $4,253,792 $(287,344) $6,528,990
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
Papnet of Ohio, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
1993 1994 1995 1995 1996
------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(277,068) $(283,537) $1,324,945 $(77,794) $ (78,864)
Adjustments to reconcile net income
(loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization 8,916 8,152 7,496 1,800 1,500
Recognition of deferred tax assets - - (68,715) - (52,575)
Gain on settlement and exercise of
warrants with NSI - - (1,402,002) - -
Equity (income) loss in partnership - - (49,638) - 1,275
Changes in operating assets and
liabilities:
Accounts receivable (5,121) (24,765) (42,548) (9,363) 17,031
Note receivable from stockholder - (50,000) - - -
Prepaid assets (1,021) - - - -
Accounts payable 18,969 (23,905) 49,931 - 59,035
Due from related entities - - - - (112,223)
Accrued expenses and other
liabilities 2,179 15,574 94,127 (8,272) (46,988)
------------------------------------------------------------------------
Net cash used in operating activities (253,146) (358,481) (86,404) (93,629) (211,809)
INVESTING ACTIVITIES
Notes receivable - NSI 27,012 70,717 74,961 (717) -
Purchase of furniture and equipment (7,179) (7,200) (4,260) - -
Other assets (126) (172) 1,000 - -
------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 19,707 63,345 71,701 (717) -
FINANCING ACTIVITIES
Proceeds from stock subscription
receivable 95,862 290,975 - - -
Issuance of common stock and warrants
exercised - 98,309 290,517 - -
------------------------------------------------------------------------
Net cash provided by financing activities 95,862 389,284 290,517 - -
Net increase (decrease) in cash (137,577) 94,148 275,814 (94,346) (211,809)
Cash and cash equivalents at beginning
of period 578,974 441,397 535,545 535,545 811,359
------------------------------------------------------------------------
Cash and cash equivalents at end of
period $ 441,397 $ 535,545 $ 811,359 $441,199 $ 599,550
------------------------------------------------------------------------
------------------------------------------------------------------------
Supplemental non-cash transactions:
Assets acquired in acquisition of
minority interests in exchange for
common stock $ 401,802 $ - $ - $ - $ -
------------------------------------------------------------------------
------------------------------------------------------------------------
Stock subscriptions received from
stock offering $ 290,975 $ - $ - $ - $ -
------------------------------------------------------------------------
------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
Papnet of Ohio, Inc.
Notes to Financial Statements
December 31, 1995
1. ORGANIZATION AND BASIS OF PRESENTATION
Papnet of Ohio, Inc. (the Company) holds a long-term territorial license
agreement ("License Agreement") issued by Neuromedical Systems, Inc. (NSI),
which provides the right to sell the "PAPNET-Registered Trademark- System" and
the "PAPNET-Registered Trademark- Service", as described below, in Ohio,
Kentucky and the Standard Metropolitan Area of Chicago.
NSI, founded in 1988, is a healthcare technology company focused on diagnostic
screening applications to aid in the early detection of certain cancers. NSI's
first and to date only product, the PAPNET-Registered Trademark- System, was
approved for commercial use in the United States by the Food and Drug
Administration (the "FDA") on November 8, 1995. The PAPNET-Registered Trademark-
Service permits laboratories to submit slides to one of NSI's central facilities
for processing by the PAPNET-Registered Trademark- System. NSI's objective is
to establish the use of its PAPNET-Registered Trademark- System as the new
standard of care in cervical cancer screening.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from these estimates.
CASH EQUIVALENTS
Cash equivalents include investments in highly liquid debt instruments with a
maturity of three months or less at date of acquisition. The carrying amounts
reported in the balance sheets for cash equivalents approximate fair value.
INVESTMENT IN PARTNERSHIPS
The Company accounts for its minority interest in two partnerships on the equity
method because the Company exercises significant influence over the
partnerships. The majority owners of these partnerships are parties to the
Merger Agreement described in Note 8.
F-8
<PAGE>
Papnet of Ohio, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FURNITURE AND EQUIPMENT
Furniture and equipment consists of office furniture and computer equipment
recorded at cost which is being depreciated on an accelerated method over
estimated useful lives ranging from five to seven years.
LICENSE AGREEMENT
The License Agreement expires in 2025, but provide for a 20 year renewal option.
Amounts paid by the Company to NSI in exchange for the License Agreement have
been expensed in the years paid. This accounting reflects the uncertainty as to
the recoverability of amounts paid for the License Agreement, which was
contingent on FDA approval of the PAPNET-Registered Trademark- System and the
ability of NSI and the Company to develop a profitable market for the
technology. The Company treated these payments as an intangible asset in its
previously issued financial statements. The Company's historical financial
statements have been restated to conform with the accounting practices of the
other NetMed Entities, as described in Note 8, so there is consistent
application for the merger also described in Note 8. The effect of this change
on the Company's historical financial statements was to increase income in each
of the three years ended December 31, 1993, 1994 and 1995, by approximately
$43,000, $43,000 and $31,000, respectively, in addition to reducing assets and
retained earnings by the unamortized balance of the intangible asset.
ROYALTY REVENUE
Pursuant to the License Agreements, the Company is entitled to receive a
calculated royalty or a specified percentage of NSI's annual slide processing
revenues less certain expenses, up to specific annual monetary limits for each
licensee. Royalty revenue is recognized as earned based on the License
Agreements.
INCOME TAXES
The Company accounts for income taxes using the liability method under Statement
of Financial Accounting Standards No. 109 "Accounting for Income Taxes."
Deferred items are determined based on differences between the financial
reporting and tax basis of assets and liabilities, and are measured using the
enacted rates and laws that will be in effect when the differences are expected
to reverse.
STOCK OPTIONS AND WARRANTS
The Company accounts for stock options and warrants under APB 25 "Accounting for
Stock Issued to Employees."
F-9
<PAGE>
Papnet of Ohio, Inc.
Notes to Financial Statements (continued)
3. INVESTMENT IN NSI
The Company owns stock in NSI as a result of the exercise of warrants and
settlement of certain claims with NSI. The investment is classified as
available-for-sale and is carried at fair value, with the unrealized gains and
losses, net of tax, reported as a separate component of stockholders' equity.
NSI trades publicly on the NASDAQ NMS under the symbol "NSIX." As of December
31, 1995, the Company owned 380,064 shares of NSI stock at a cost of $1,402,002.
The exercise of the warrants in NSI was completed utilizing a cashless exercise
provision in the warrant agreement. This resulted in a gain of $652,250 which
has been reported as other income. As a result of settling certain claims with
NSI in December 1995, the Company received 53,939 shares of NSI stock resulting
in a gain of $749,752 which is recorded in other income. In addition, the
Company was allocated the right to purchase 65,000 shares of NSI stock at NSI's
initial public offering. The Company purchased and sold the entire 65,000
shares for $1,292,363 during 1995 resulting in a realized gain of $313,397 which
has been recorded as other income.
4. STOCK OPTIONS AND WARRANTS
The Company adopted a stock option plan in 1995 under which qualified or
nonqualified options may be granted. No options are currently outstanding under
the Plan.
As of December 31, 1995, there were outstanding 47,020 warrants for the
President of the Company and 24,000 for a former consultant to purchase stock at
exercise prices of $.875 per share and $1.25 per share, respectively.
SHARES VALUE
-----------------------------------------
Outstanding at December 31, 1993 339,040 $.875 to $1.25
Exercised (84,000) $1.25
--------------
Outstanding at December 31, 1994 255,040
Exercised (184,020) $.875 to $1.25
--------------
Outstanding at December 31, 1995 71,020 $.875 to $1.25
--------------
--------------
F-10
<PAGE>
Papnet of Ohio, Inc.
Notes to Financial Statements (continued)
4. STOCK OPTIONS AND WARRANTS (CONTINUED)
The Company has outstanding options to issue 365,600 of the Company's shares
under a non-qualified stock option plan at exercise prices ranging from $1.09 to
$12.00 per share. As of December 31, 1995 and 1994, respectively, the
outstanding shares and respective exercise prices were as follows:
SHARES VALUE
-----------------------------------------
Outstanding at December 31, 1993 397,600 $1.09 to $1.56
Issued 32,000 $2.25 to $3.25
Expired 24,000 $1.38
--------------
Outstanding at December 31, 1994 429,600 $1.09 to $3.25
Issued 16,000 $12.00
Expired 56,000 $1.38
--------------
Outstanding at December 31, 1995 365,600 $1.09 to $12.00
--------------
--------------
All options and warrants were issued at prices that equaled or exceeded fair
market value at date of grant.
F-11
<PAGE>
Papnet of Ohio, Inc.
Notes to Financial Statements (continued)
5. INCOME TAXES
Significant components of deferred tax assets and liabilities are as follows:
1994 1995
-------------------------------------
Loss carryforwards $ 259,000 $ 68,715
License fees 312,000 -
Unrealized gains on investments - (2,517,718)
-------------------------------------
571,000 (2,449,003)
Valuation allowance (571,000) -
-------------------------------------
Net deferred tax liability $ - $(2,449,003)
-------------------------------------
-------------------------------------
At December 31, 1995, the Company had unused NOL carryforwards for tax purposes
of approximately $172,000 which expire in 2009.
At December 31, 1993 and 1994, a full valuation allowance was recorded due to
the lack of deferred tax liabilities, historical income and tax planning
strategies. During 1995, due to the recognition of a significant deferred tax
liability, a valuation allowance was not required.
The reconciliation of income tax computed at the statutory rate to the recorded
tax provision (benefit) is:
1993 1994 1995
-------------------------------------
Tax provision (benefit) at statutory rate $(94,203) $(96,402) $ 427,118
Recognition of previously reserved tax
assets - - (495,833)
Valuation allowance provided 94,203 96,402 -
-------------------------------------
Total tax provision (benefit) $ - $ - $ (68,715)
-------------------------------------
-------------------------------------
6. NOTE RECEIVABLE FROM STOCKHOLDER
On October 14, 1994, the Company loaned one of its officers and stockholders
$50,000, at prime plus 1/2% interest. The loan is due June 1, 1996. Under the
loan agreement, effective with the merger described in Note 8, the loan will be
deemed a bonus and converted into compensation.
F-12
<PAGE>
Papnet of Ohio, Inc.
Notes to Financial Statements (continued)
7. LEASES
The Company leases facilities and equipment under operating leases. Rent
expense for the years ended December 31, 1993, 1994 and 1995 was $12,250,
$15,526 and $19,537, respectively.
8. SUBSEQUENT EVENTS
MERGER AGREEMENT
Certain entities with a degree of common ownership interest also hold long-term
territorial License Agreements for the PAPNET-Registered Trademark- System.
These entities consist of Cytology Indiana, Inc. ("CIN"), Indiana Cytology
Review Corporation ("INC"), ER Group, Inc. ("ERG") and Carolina Cytology, Inc.
("CCI"). These entities, along with the Company and CCWP Partners, Inc.
("CCWP"), have signed an agreement to merge into the Company, which will be
renamed NetMed, Inc. (NetMed). The entities party to the merger are
collectively referred to as the NetMed Entities.
NetMed will hold the License Agreements previously held by the individual NetMed
Entities. The business purpose of NetMed will be to market the proprietary
products of NSI, including the PAPNET-Registered Trademark- System, in the
territories encompassed under the License Agreements. These territories include
Ohio, Kentucky, the Standard Metropolitan Area of Chicago, Missouri, Georgia and
North Carolina.
LOAN AGREEMENT WITH NETMED ENTITIES
The Company has entered into Loan Agreements with the individual NetMed
Entities, dated July 5, 1996 (the "Loan Agreement"), whereby the Company has
agreed to advance to the individual NetMed Entities the expenses incurred in
connection with the Merger. In addition, the Company will advance funds
necessary to pay reasonable expenses of ordinary business operations for the
individual NetMed Entities. Advances will be evidenced by a promissory note
bearing interest at an annual rate of 7% payable 180 days after the earlier of
the consummation of the merger or the termination of the Merger Agreement.
Promissory notes delivered by the individual NetMed Entities will be secured by
their shares of NSI common stock.
F-13
<PAGE>
Papnet of Ohio, Inc.
Notes to Financial Statements (continued)
8. SUBSEQUENT EVENTS (CONTINUED)
LOAN AGREEMENT WITH NETMED ENTITIES (CONTINUED)
Pending completion of the merger, the business operations of the NetMed Entities
are being managed by the Company.
COMMITMENT
The Company has also entered into a Loan Agreement, dated March 14, 1996, (the
"Loan Agreement"), with Cytology West, Inc. ("CWI") and Papnet Utah, Inc.
("PUI"). CWI is licensed to sell the PAPNET System and the PAPNET Service in
Arizona, Nevada and San Diego County California. The President of CWI, owns
383,616 shares of the Company's common stock. The Loan Agreement provides for
advances to CWI of up to $585,000 to cover certain operating expenses and the
acquisition of new technology. PUI is licensed to sell the PAPNET System and
the PAPNET Service in Utah. No specific amount was established for advances to
PUI. The advances will bear interest at the rate of 7% per annum. As of June
15, 1996, the Company has advanced $146,320 to CWI and $14,315 to PUI under the
terms of the Loan Agreements.
INVESTMENT IN NSI
On July 15, 1996, NSI Common Stock closed trading on the NASDAQ NMS at $13.25
per share compared to a closing price of $21.75 at March 31, 1996.
9. UNAUDITED FINANCIAL STATEMENTS
The financial statements as of March 31, 1996 and for the three months ended
March 31, 1995 and 1996 are unaudited; however, in the opinion of management,
all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation of the financial statements for these interim periods have
been included. The results for the interim period ended March 31, 1996 are
not necessarily indicative of the results to be obtained for the full fiscal
year ending December 31, 1996.
F-14
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
ER Group, Inc.
We have audited the accompanying balance sheet of ER Group, Inc. (the Company)
as of December 31, 1995, and the related statements of operations and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at December 31,
1995, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Columbus, Ohio
March 22, 1996, except for
Note 4 as to which the date
is July 15, 1996
F-15
<PAGE>
ER Group, Inc.
Balance Sheets
DECEMBER 31, MARCH 31,
1996 1996
-----------------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 53,273 $ 61,710
Accounts receivable 18,190 3,173
-----------------------------
Total current assets 71,463 64,883
Investment in NSI--available for sale 2,923,351 3,139,895
Deposits and other assets 69 69
-----------------------------
Total assets $2,994,883 $3,204,847
-----------------------------
-----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,710 $ -
Due to related entities (NOTE 4) - 13,603
Accrued expenses - 16,798
-----------------------------
Total current liabilities 14,710 30,401
Deferred taxes 955,917 1,042,535
Stockholders' equity:
Common stock 575,000 575,000
Unrealized gains on available-for-sale
securities net of deferred taxes of
$955,917 in 1995 and $1,042,535 in 1996 1,433,876 1,563,802
Retained earnings (deficit) 15,380 (6,891)
-----------------------------
Total stockholders' equity 2,024,256 2,131,911
-----------------------------
Total liabilities and stockholders' equity $2,994,883 $3,204,847
-----------------------------
-----------------------------
SEE ACCOMPANYING NOTES.
F-16
<PAGE>
ER Group, Inc.
Statements of Operations
THREE
YEAR ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
1995 1996
-----------------------------
(UNAUDITED)
Royalty revenue $ 12,000 $ 3,630
Operating expenses:
Salaries and benefits - 9,279
Sales and marketing - 2,716
Payroll and franchise taxes - 2,392
Professional 2,042 750
Depreciation and amortization 166 -
Office 1,337 -
Merger (NOTE 4) 32,103 11,054
-----------------------------
Total operating expense 35,648 26,191
-----------------------------
Operating loss (23,648) (22,561)
Other income:
Interest income 1,346 289
NSI settlement and common stock transactions
(NOTE 3) 533,558 -
-----------------------------
Total other income 534,904 289
-----------------------------
Net income (loss) $511,256 $(22,272)
-----------------------------
-----------------------------
SEE ACCOMPANYING NOTES.
F-17
<PAGE>
ER Group, Inc.
Statements of Cash Flows
THREE
YEAR ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
1995 1996
-----------------------------
(UNAUDITED)
OPERATING ACTIVITIES
Net income (loss) $ 511,256 $(22,272)
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 166 -
Gain on settlement and exercise of warrants
with NSI (533,558) -
Changes in operating assets and liabilities:
Accounts receivable (7,331) 15,017
Accounts payable 14,710 (14,710)
Due to related entities - 13,603
Accrued expenses - 16,798
-----------------------------
Net cash used in operating activities (14,757) 8,437
Cash and cash equivalents at beginning of period 68,030 53,273
-----------------------------
Cash and cash equivalents at end of period $ 53,273 $ 61,710
-----------------------------
-----------------------------
SEE ACCOMPANYING NOTES.
F-18
<PAGE>
ER Group, Inc.
Notes to Financial Statements
December 31, 1995
1. ORGANIZATION AND BASIS OF PRESENTATION
ER Group, Inc. (the Company) holds a long-term territorial license agreement
("License Agreement") issued by Neuromedical Systems, Inc. (NSI), which
provides the right to sell the "PAPNET-Registered Trademark- System" and the
"PAPNET-Registered Trademark- Service" , as described below, in Georgia.
NSI, founded in 1988, is a healthcare technology company focused on diagnostic
screening applications to aid in the early detection of certain cancers. NSI's
first and to date only product, the PAPNET-Registered Trademark- System, was
approved for commercial use in the United States by the Food and Drug
Administration (the "FDA") on November 8, 1995. The PAPNET-Registered
Trademark- Service permits laboratories to submit slides to one of NSI's central
facilities for processing by the PAPNET-Registered Trademark- System. NSI's
objective is to establish the use of its PAPNET-Registered Trademark- System as
the new standard of care in cervical cancer screening.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from these estimates.
LICENSE AGREEMENT
The License Agreement expires in 2025, but provides for a 20 year renewal
option. Amounts paid by the Company to NSI in exchange for the License
Agreement have been expensed in the years paid. This accounting reflects the
uncertainty as to the recoverability of amounts paid for the License Agreement,
which is contingent on FDA approval of the PAPNET-Registered Trademark- System
and the ability of NSI and the Company to develop a profitable market for the
technology.
F-19
<PAGE>
ER Group, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ROYALTY REVENUE
Pursuant to the License Agreement, the Company is entitled to receive a
calculated royalty or a specified percentage of NSI's annual slide processing
revenues less certain expenses, up to specific annual monetary limits for each
licensee. Royalty revenue is recognized as earned based on the License
Agreement.
INCOME TAXES
The shareholders of the Company have elected to report the taxable income of the
Company on their individual federal and state income tax returns (Subchapter S
corporation election). Accordingly, the financial statements include no
provisions for federal or state income taxes. A deferred tax liability relating
to the gain on investment in NSI stock has been recorded using a 34% rate. This
liability has been recorded to recognize the obligation that would arise for
distributions to the S Corporation shareholders to pay their tax liabilities
that would arise upon the realization of the gain.
3. INVESTMENT IN NSI
The Company owns stock in NSI as a result of the exercise of warrants and
settlement of certain claims with NSI. The investment is classified as
available for sale and is carried at fair value, with the unrealized gains and
losses, net of tax, reported as a separate component of stockholders' equity.
NSI trades publicly on the NASDAQ NMS under the symbol "NSIX." As of
December 31, 1995, the Company owned 144,363 shares of NSI stock at a cost of
$533,558.
The exercise of the warrants in NSI was completed utilizing a cashless exercise
provision in the warrant agreement. This resulted in a gain of $247,750 which
has been reported as other income. As a result of settling certain claims with
NSI in December 1995, the Company received 20,488 shares of NSI stock resulting
in a gain of $285,808 which is recorded in other income.
F-20
<PAGE>
ER Group, Inc.
Notes to Financial Statements (continued)
4. SUBSEQUENT EVENTS
MERGER AGREEMENT
Certain entities with a degree of common ownership interest also hold long-term
territorial License Agreements for the PAPNET-Registered Trademark- System.
These entities consist of Papnet of Ohio, Inc. ("PPNT"), Cytology Indiana, Inc.
("CIN"), Indiana Cytology Review Corporation ("INC") and Carolina Cytology, Inc.
("CCI"). These entities, along with the Company and CCWP Partners, Inc.
("CCWP"), have signed an agreement to merge into PPNT which will be renamed
NetMed, Inc. (NetMed). The entities party to the merger are collectively
referred to as the NetMed Entities.
NetMed will hold the License Agreements previously held by the individual NetMed
Entities. The business purpose of NetMed will be to market the proprietary
products of NSI, including the PAPNET-Registered Trademark- System, in the
territories encompassed under the License Agreements. These territories include
Ohio, Kentucky, the Standard Metropolitan Area of Chicago, Missouri, Georgia and
North Carolina.
LOAN AGREEMENT WITH PPNT
The Company has entered into a Loan Agreement with PPNT, dated July 5, 1996 (the
"Loan Agreement"), whereby PPNT has agreed to advance to the Company the
expenses incurred in connection with the Merger. In addition, PPNT will advance
funds necessary to pay reasonable expenses of ordinary business operations for
the Company. Advances will be evidenced by a promissory note bearing interest
at an annual rate of 7%, payable 60 days after the earlier of the consummation
of the merger or the termination of the Merger Agreement. Promissory notes
delivered by the Company will be secured by its shares of NSI common stock.
Advances made to the Company may be repaid, at PPNT's option, in shares of the
Company's common stock.
Pending completion of the merger, the business operations of the Company are
being managed by PPNT.
INVESTMENT IN NSI
On July 15, 1996, NSI common stock closed trading on the NASDAQ NMS at $13.25
per share compared to a closing price of $21.75 at March 31, 1996.
5. UNAUDITED FINANCIAL STATEMENTS
The financial statements as of March 31, 1996 and for the three months ended
March 31, 1996 are unaudited; however, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of the financial statements for the interim period have been
included. The results for the interim period ended March 31, 1996 are not
necessarily indicative of the results to be obtained for the full fiscal year
ending December 31, 1996.
F-21
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Carolina Cytology, Inc. and CCWP Partners, Inc.
We have audited the accompanying combined balance sheet of Carolina Cytology,
Inc. and CCWP Partners, Inc. (the Company) as of December 31, 1995, and the
related combined statements of operations and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the Company
at December 31, 1995, and the combined results of their operations and their
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Columbus, Ohio
March 22, 1996, except for
Note 4 as to which the date
is July 15, 1996
F-22
<PAGE>
Carolina Cytology, Inc. and CCWP Partners, Inc.
Combined Balance Sheets
DECEMBER 31, MARCH 31,
1996 1996
-----------------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 5,990 $ 26,397
Accounts receivable 18,190 3,255
-----------------------------
Total current assets 24,180 29,652
Investment in NSI--available for sale 2,923,351 3,139,895
Deposits and other assets 2,065 2,065
-----------------------------
Total assets $2,949,596 $3,171,612
-----------------------------
-----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,906 $ 11,818
Due to related entities (NOTE 4) - 37,946
Other liabilities 23,289 -
-----------------------------
Total current liabilities 32,195 49,764
Deferred taxes 955,918 1,042,534
Minority interest 172,679 183,524
Stockholders' equity:
Common stock 463,500 465,000
Unrealized gains on available-for-sale
securities net of deferred taxes of
$955,918 in 1995 and $1,042,534 in 1996 1,310,834 1,428,641
Retained earnings 14,470 2,149
-----------------------------
Total stockholders' equity 1,788,804 1,895,790
-----------------------------
Total liabilities and owners' equity $2,949,596 $3,171,612
-----------------------------
-----------------------------
SEE ACCOMPANYING NOTES.
F-23
<PAGE>
Carolina Cytology, Inc. and CCWP Partners, Inc.
Combined Statements of Operations
THREE
YEAR ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
1995 1996
-----------------------------
(UNAUDITED)
Royalty revenue $ 12,000 $ 3,630
Operating expenses:
Professional 535 6,150
Depreciation and amortization 953 -
Office 44 -
Merger (SEE NOTE 4) 32,195 11,076
-----------------------------
Total operating expense 33,727 17,226
-----------------------------
Operating loss (21,727) (13,596)
NSI settlement and common stock transactions
(SEE NOTE 3) 533,558 -
Minority interest (49,638) 1,275
-----------------------------
Net income (loss) $462,193 $(12,321)
-----------------------------
-----------------------------
SEE ACCOMPANYING NOTES.
F-24
<PAGE>
Carolina Cytology, Inc. and CCWP Partners, Inc.
Combined Statements of Cash Flows
THREE
YEAR ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
1995 1996
-----------------------------
(UNAUDITED)
OPERATING ACTIVITIES
Net income (loss) $462,193 $(12,321)
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 953 -
Gain on settlement and exercise of warrants
with NSI (533,558) -
Minority interest 49,638 (1,275)
Changes in operating assets and liabilities:
Accounts receivable (8,412) 14,935
Accounts payable 8,906 2,912
Due to related entities - 37,946
Other liabilaities 23,289 (23,289)
-----------------------------
Net cash provided by operating activities 3,009 18,907
FINANCING ACTIVITIES
Sale of common stock - 1,500
-----------------------------
Net cash provided by financing activities - 1,500
Net increase in cash - 20,407
Cash and cash equivalents at beginning of period 2,981 5,990
-----------------------------
Cash and cash equivalents at end of period $ 5,990 $ 26,397
-----------------------------
-----------------------------
SEE ACCOMPANYING NOTES.
F-25
<PAGE>
Carolina Cytology, Inc. and CCWP Partners, Inc.
Notes to Combined Financial Statements
December 31, 1995
1. ORGANIZATION AND BASIS OF PRESENTATION
Carolina Cytology, Inc. (CCI) holds (through its majority interest in a
partnership) a long-term territorial license agreement ("License Agreement")
issued by Neuromedical Systems, Inc. (NSI), which provides the right to sell the
"PAPNET-Registered Trademark- System" and the "PAPNET-Registered Trademark-
Service", as described below, in North Carolina. CCWP Partners, Inc. (CCWP) was
formed on December 1, 1995 for the sole purpose of holding an interest in a
partnership that held certain warrants for the purchase of NSI common stock.
These warrants were exercised in December 1995. The accompanying financial
statements include the accounts of CCI and CCWP and their consolidated
partnerships. CCI and CCWP are hereinafter referred to collectively as the
"Company".
NSI, founded in 1988, is a healthcare technology company focused on diagnostic
screening applications to aid in the early detection of certain cancers. NSI's
first and to date only product, the PAPNET-Registered Trademark- System, was
approved for commercial use in the United States by the Food and Drug
Administration (the "FDA") on November 8, 1995. The PAPNET-Registered
Trademark- Service permits laboratories to submit slides to one of NSI's central
facilities for processing by the PAPNET-Registered Trademark- System. NSI's
objective is to establish the use of its PAPNET-Registered Trademark- System as
the new standard of care in cervical cancer screening.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from these estimates.
LICENSE AGREEMENT
The License Agreement expires in 2025, but provide for a 20 year renewal option.
Amounts paid by the Company to NSI in exchange for the License Agreement has
been expensed in the years paid. This accounting reflects the uncertainty as to
the recoverability of amounts paid for the License Agreement, which is
contingent on FDA approval of the PAPNET-Registered Trademark- System and the
ability of NSI and the Company to develop a profitable market for the
technology.
F-26
<PAGE>
Carolina Cytology, Inc. and CCWP Partners, Inc.
Notes to Combined Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ROYALTY REVENUE
Pursuant to the License Agreement, the Company is entitled to receive a
calculated royalty or a specified percentage of NSI's annual slide processing
revenues less certain expenses, up to specific annual monetary limits for each
licensee. Royalty revenue is recognized as earned based on the License
Agreement.
INCOME TAXES
The shareholders of the Company have elected to report the taxable income of the
Company on their individual federal and state income tax returns (Subchapter S
corporation election). Accordingly, the financial statements include no
provisions for federal or state income taxes. A deferred tax liability relating
to the gain on investment in NSI stock has been recorded using a 34% rate. This
liability has been recorded to recognize the obligation that would arise for
distributions to the S Corporation shareholders to pay their tax liabilities
that would arise upon the realization of the gain.
3. INVESTMENT IN NSI
The Company owns stock in NSI as a result of the exercise of warrants and
settlement of certain claims with NSI. The investment is classified as
available-for-sale and is carried at fair value, with the unrealized gains and
losses, net of tax, reported as a separate component of stockholders' equity.
NSI trades publicly on the NASDAQ NMS under the symbol "NSIX." As of December
31, 1995, the Company owned 144,363 shares of NSI stock at a cost of $533,558.
The exercise of the warrants in NSI was completed utilizing a cashless exercise
provision in the warrant agreement. This resulted in a gain of $247,750 which
has been reported as other income. As a result of settling certain claims with
NSI in December 1995, the Company received 20,488 shares of NSI stock resulting
in a gain of $285,808 which is recorded in other income.
F-27
<PAGE>
Carolina Cytology, Inc. and CCWP Partners, Inc.
Notes to Combined Financial Statements (continued)
4. SUBSEQUENT EVENTS
MERGER AGREEMENT
Certain entities with a degree of common ownership interest also hold long-term
territorial License Agreements for the PAPNET-Registered Trademark- System.
These entities consist of Papnet of Ohio, Inc. ("PPNT"), Cytology Indiana, Inc.
("CIN"), Indiana Cytology Review Corporation ("INC") and ER Group, Inc. ("ERG").
These entities, along with the Company, have signed an agreement to merge into
PPNT which will be renamed NetMed, Inc. ("NetMed"). The entities party to the
merger are collectively referred to as the NetMed Entities.
NetMed will hold the License Agreements previously held by the individual NetMed
Entities. The business purpose of NetMed will be to market the proprietary
products of NSI, including the PAPNET-Registered Trademark- System, in the
territories encompassed under the License Agreements. These territories include
Ohio, Kentucky, the Standard Metropolitan Area of Chicago, Missouri, Georgia and
North Carolina.
LOAN AGREEMENT WITH PPNT
The Company has entered into Loan Agreements with PPNT, dated July 5, 1996 (the
"Loan Agreement"), whereby PPNT has agreed to advance to the Company the
expenses incurred in connection with the Merger. In addition, PPNT will advance
funds necessary to pay reasonable expenses of ordinary business operations for
the Company. Advances will be evidenced by a promissory note bearing interest
at an annual rate of 7%, payable 60 days after the earlier of the consummation
of the merger or the termination of the Merger Agreement. Promissory notes
delivered by the Company will be secured by its shares of NSI common stock.
Advances made to the Company may be repaid, at PPNT's option, in shares of the
Company's common stock.
Pending completion of the merger, the business operations of the Company are
being managed by PPNT.
INVESTMENT IN NSI
On July 15, 1996, NSI common stock closed trading on the NASDAQ NMS at $13.25
per share compared to a closing price of $21.75 at March 31, 1996.
5. UNAUDITED FINANCIAL STATEMENTS
The financial statements as of March 31, 1996 and for the three months ended
March 31, 1996 are unaudited; however, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of the financial statements for the interim period have been
included. The results for the interim period ended March 31, 1996 are not
necessarily indicative of the results to be obtained for the full fiscal year
ending December 31, 1996.
F-28
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Indiana Cytology Review Corporation
We have audited the accompanying balance sheet of Indiana Cytology Review
Corporation (the Company) as of December 31, 1995, and the related statements of
operations and cash flows for the period December 1 through December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at December 31,
1995, and the results of its operations and its cash flows for the period
December 1 through December 31, 1995, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Columbus, Ohio
March 22, 1996, except for
Note 5 as to which the
date is July 15, 1996
F-29
<PAGE>
Indiana Cytology Review Corporation
Balance Sheets
DECEMBER 31, MARCH 31,
1996 1996
-----------------------------
(UNAUDITED)
ASSETS
Current assets:
Accounts receivable $ 6,366 $ 6,861
Due from related entities 2,778 -
-----------------------------
Total current assets 9,144 6,861
Investment in NSI--available for sale 506,437 543,968
Deferred taxes 9,822 14,358
-----------------------------
Total assets $ 525,403 $ 565,187
-----------------------------
-----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Due to related entities (NOTE 5) $ - $ 6,389
Accrued liabilities 36,976 36,976
Other liabilities 7,851 10,519
-----------------------------
Total current liabilities 44,827 53,884
Deferred taxes 165,598 180,610
Stockholders' equity:
Common stock 196,735 196,735
Unrealized gains on available-for-sale
securities net of deferred taxes of
$165,598 in 1995 and $196,735 in1996 248,397 270,915
Retained deficit (130,154) (136,957)
-----------------------------
Total stockholders' equity 314,978 330,693
-----------------------------
Total liabilities and stockholders' equity $ 525,403 $ 565,187
-----------------------------
-----------------------------
SEE ACCOMPANYING NOTES.
F-30
<PAGE>
Indiana Cytology Review Corporation
Statements of Operations
FOR THE PERIOD
DECEMBER 1 THREE
THROUGH MONTHS ENDED
DECEMBER 31, MARCH 31,
1995 1996
-----------------------------
(UNAUDITED)
Royalty revenue $ 4,200 $ 1,140
Operating expenses:
Salaries and benefits - 4,767
Sales and marketing - 4,010
Payroll and franchise taxes - 392
Professional 3,331 643
Depreciation and amortization 70 -
Office 487 -
Merger (NOTE 5) 7,755 2,667
-----------------------------
Total operating expense 11,643 12,479
-----------------------------
Operating loss (7,443) (11,339)
Other income:
Interest income 158 -
NSI settlement and common stock
transactions (NOTE 3) 92,442 -
-----------------------------
Total other income 92,600 -
-----------------------------
Income before income taxes 85,157 (11,339)
Income tax provision (benefit) 27,154 (4,536)
-----------------------------
Net income (loss) $58,003 $ (6,803)
-----------------------------
-----------------------------
SEE ACCOMPANYING NOTES.
F-31
<PAGE>
Indiana Cytology Review Corporation
Statements of Cash Flows
FOR THE
PERIOD
DECEMBER 1 THREE
THROUGH MONTHS ENDED
DECEMBER 31, MARCH 31,
1995 1996
-----------------------------
(UNAUDITED)
OPERATING ACTIVITIES
Net income (loss) $58,003 $ (6,803)
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating
activities:
Depreciation and amortization 70 -
Gain on settlement and exercise of warrants
with NSI (92,442) -
Changes in operating assets and liabilities:
Accounts receivable (2,943) (495)
Due to/from related entities (2,778) 9,168
Deferred taxes and taxes payable 27,154 (4,536)
Other liabilities 7,755 2,668
-----------------------------
Net cash used in operating activities (5,181) -
Cash and cash equivalents at beginning of period 5,181 -
-----------------------------
Cash and cash equivalents at end of period $ - $ -
-----------------------------
-----------------------------
SEE ACCOMPANYING NOTES.
F-32
<PAGE>
Indiana Cytology Review Corporation
Notes to Financial Statements
December 31, 1995
1. ORGANIZATION AND BASIS OF PRESENTATION
Indiana Cytology Review Corporation (the Company) was formed on December 1, 1995
and holds an approximate 35% interest in a long-term territorial license
agreement ("License Agreement") issued by Neuromedical Systems, Inc. (NSI),
which provides the right to sell the "PAPNET-Registered Trademark- System" and
the "PAPNET-Registered Trademark- Service" , as described below, in Missouri.
NSI, founded in 1988, is a healthcare technology company focused on diagnostic
screening applications to aid in the early detection of certain cancers. NSI's
first and to date only product, the PAPNET-Registered Trademark- System, was
approved for commercial use in the United States by the Food and Drug
Administration (the "FDA") on November 8, 1995. The PAPNET-Registered
Trademark- Service permits laboratories to submit slides to one of NSI's central
facilities for processing by the PAPNET-Registered Trademark- System. NSI's
objective is to establish the use of its PAPNET-Registered Trademark- System as
the new standard of care in cervical cancer screening.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from these estimates.
LICENSE AGREEMENT
The License Agreement expires in 2025, but provides for a 20 year renewal
option. Amounts paid by the Company to NSI in exchange for the License
Agreement has been expensed in the years paid. This accounting reflects the
uncertainty as to the recoverability of amounts paid for the License Agreement,
which was contingent on FDA approval of the PAPNET-Registered Trademark- System
and the ability of NSI and the Company to develop a profitable market for the
technology.
F-33
<PAGE>
Indiana Cytology Review Corporation
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ROYALTY REVENUE
Pursuant to the License Agreement, the Company is entitled to receive a
calculated royalty or a specified percentage of NSI's annual slide processing
revenues less certain expenses, up to specific annual monetary limits for each
licensee. Royalty revenue is recognized as earned based on the License
Agreement.
INCOME TAXES
The Company, accounts for income taxes using the liability method under
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes." Deferred items are determined based on differences between the
financial reporting and tax basis of assets and liabilities, and are measured
using the enacted rates and laws that will be in effect when the differences are
expected to reverse.
3. INVESTMENT IN NSI
The Company owns stock in NSI as a result of the exercise of warrants and
settlement of certain claims with NSI. The investment is classified as
available-for-sale and is carried at fair value, with the unrealized gains and
losses, net of tax, reported as a separate component of stockholders' equity.
NSI trades publicly on the NASDAQ NMS under the symbol "NSIX." As of December
31, 1995, the Company owned 25,010 shares of NSI stock at a cost of $92,442.
The exercise of the warrants in NSI was completed utilizing a cashless exercise
provision in the warrant agreement. This resulted in a gain of $42,924 which
has been reported as other income. As a result of settling certain claims with
NSI in December 1995, the Company received 3,550 shares of NSI stock resulting
in a gain of $49,518 which is recorded in other income.
F-34
<PAGE>
Indiana Cytology Review Corporation
Notes to Financial Statements (continued)
4. INCOME TAXES
Significant components for the deferred tax assets and liabilities at December
31, 1995 are as follows:
License fees $ 9,822
Unrealized gains on investments (165,598)
--------------
Net deferred tax asset (liability) $(155,776)
--------------
--------------
5. SUBSEQUENT EVENTS
MERGER AGREEMENT
Certain entities with a degree of common ownership interest also hold long-term
territorial License Agreements for the PAPNET-Registered Trademark- System.
These entities consist of Papnet of Ohio, Inc. ("PPNT"), Cytology Indiana, Inc.
("CIN"), ER Group, Inc. ("ERG") and Carolina Cytology, Inc. ("CCI"). These
entities, along with the Company and CCWP Partners, Inc. ("CCWP"), have signed
an agreement to merge into PPNT which will be renamed NetMed, Inc. (NetMed).
The entities party to the merger are collectively referred to as the NetMed
Entities.
NetMed will hold the License Agreements previously held by the individual NetMed
Entities. The business purpose of NetMed will be to market the proprietary
products of NSI, including the PAPNET-Registered Trademark- System, in the
territories encompassed under the License Agreements. These territories include
Ohio, Kentucky, the Standard Metropolitan Area of Chicago, Missouri, Georgia and
North Carolina.
F-35
<PAGE>
Indiana Cytology Review Corporation
Notes to Financial Statements (continued)
5. SUBSEQUENT EVENTS (CONTINUED)
LOAN AGREEMENT WITH PPNT
The Company has entered into a Loan Agreement with PPNT, dated July 5, 1996 (the
"Loan Agreement"), whereby PPNT has agreed to advance to the Company the
expenses incurred in connection with the Merger. In addition, PPNT will advance
funds necessary to pay reasonable expenses of ordinary business operations for
the Company. Advances will be evidenced by a promissory note bearing interest
at an annual rate of 7%, payable 60 days after the earlier of the consummation
of the merger or the termination of the Merger Agreement. Promissory notes
delivered by the Company will be secured by its shares of NSI common stock.
Advances made to the Company may be repaid, at PPNT's option, in shares of the
Company's common stock.
Pending completion of the merger, the business operations of the Company are
being managed by PPNT.
INVESTMENT IN NSI
On July 15, 1996, NSI common stock closed trading on the NASDAQ NMS at $13.25
per share compared to a closing price of $21.75 at March 31, 1996.
6. UNAUDITED FINANCIAL STATEMENTS
The financial statements as of March 31, 1996 and for the three months ended
March 31, 1996 are unaudited; however, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of the financial statements for the interim period have been
included. The results for the interim period ended March 31, 1996 are not
necessarily indicative of the results to be obtained for the full fiscal year
ending December 31, 1996.
F-36
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Cytology Indiana, Inc.
We have audited the accompanying balance sheet of Cytology Indiana, Inc. (the
Company) as of December 31, 1995, and the related statements of operations and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at December 31,
1995, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Columbus, Ohio
March 22, 1996, except for
Note 4 as to which the date
is July 15, 1996
F-37
<PAGE>
Cytology Indiana, Inc.
Balance Sheets
DECEMBER 31, MARCH 31,
1996 1996
-----------------------------
(UNAUDITED)
ASSETS
Current assets:
Accounts receivable $ 11,824 $ 12,742
Due from related entities 5,158 -
-----------------------------
Total current assets 16,982 12,742
Investment in NSI--available for sale 940,527 1,010,196
-----------------------------
Total assets $ 957,509 $1,022,938
-----------------------------
-----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Due to related entities (NOTE 4) $ - $ 12,637
Other liabilities 14,580 19,538
-----------------------------
Total current liabilities 14,580 32,175
Deferred taxes 307,540 335,407
Stockholders' equity:
Common stock 365,365 365,365
Unrealized gains on available-for-sale
securities net of deferred taxes of
$307,540 in 1995 and $335,407 in 1996 461,310 503,111
Retained deficit (191,286) (213,120)
-----------------------------
Total stockholders' equity 635,389 655,356
-----------------------------
Total liabilities and stockholders' equity $ 957,509 $1,022,938
-----------------------------
-----------------------------
SEE ACCOMPANYING NOTES.
F-38
<PAGE>
Cytology Indiana, Inc.
Statements of Operations
THREE
YEAR ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
1995 1996
-----------------------------
(UNAUDITED)
Royalty revenue $ 7,800 $ 2,116
Operating expenses:
Salaries and benefits - 8,852
Sales and marketing - 7,447
Payroll and franchise taxes - 728
Professional 6,186 1,967
Depreciation and amortization 130 -
Office 904 -
Merger (NOTE 4) 14,401 4,956
-----------------------------
Total operating expense 21,621 23,950
-----------------------------
Operating loss (13,821) (21,834)
Other income:
Interest income 293 -
NSI settlement and common stock transactions
(NOTE 3) 171,677 -
-----------------------------
Total other income 171,970 -
-----------------------------
Net income (loss) $158,149 $(21,834)
-----------------------------
-----------------------------
SEE ACCOMPANYING NOTES.
F-39
<PAGE>
Cytology, Indiana, Inc.
Statements of Cash Flows
THREE
YEAR ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
1995 1996
-----------------------------
(UNAUDITED)
OPERATING ACTIVITIES
Net income (loss) $158,149 $(21,834)
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 130 -
Gain on settlement and exercise of warrants
with NSI (171,677) -
Changes in operating assets and liabilities:
Accounts receivable (5,468) (918)
Due to/from related entities (5,337) 17,794
Other liabilities 14,580 4,958
-----------------------------
Net cash used in operating activities (9,623) -
Cash and cash equivalents at beginning of period 9,623 -
-----------------------------
Cash and cash equivalents at end of period $ - $ -
-----------------------------
-----------------------------
SEE ACCOMPANYING NOTES.
F-40
<PAGE>
Cytology, Indiana, Inc.
Notes to Financial Statements
December 31, 1995
1. ORGANIZATION AND BASIS OF PRESENTATION
Cytology Indiana, Inc. (the Company) holds an approximate 65% interest in a
long-term territorial license agreement ("License Agreement") issued by
Neuromedical Systems, Inc. (NSI), which provides the right to sell the
"PAPNET-Registered Trademark- System" and the "PAPNET-Registered Trademark-
Service" , as described below, in Missouri.
NSI, founded in 1988, is a healthcare technology company focused on diagnostic
screening applications to aid in the early detection of certain cancers. NSI's
first and to date only product, the PAPNET-Registered Trademark- System, was
approved for commercial use in the United States by the Food and Drug
Administration (the "FDA") on November 8, 1995. The PAPNET-Registered
Trademark- Service permits laboratories to submit slides to one of NSI's central
facilities for processing by the PAPNET-Registered Trademark- System. NSI's
objective is to establish the use of its PAPNET-Registered Trademark- System as
the new standard of care in cervical cancer screening.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from these estimates.
LICENSE AGREEMENT
The License Agreement expires in 2025, but provide for a 20 year renewal option.
Amounts paid by the Company to NSI in exchange for the License Agreement have
been expensed in the years paid. This accounting reflects the uncertainty as to
the recoverability of amounts paid for the License Agreement, which was
contingent on FDA approval of the PAPNET-Registered Trademark- System and the
ability of NSI and the Company to develop a profitable market for the
technology.
F-41
<PAGE>
Cytology, Indiana, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ROYALTY REVENUE
Pursuant to the License Agreement, the Company is entitled to receive a
calculated royalty or a specified percentage of NSI's annual slide processing
revenues less certain expenses, up to specific annual monetary limits for each
licensee. Royalty revenue is recognized as earned based on the License
Agreements.
INCOME TAXES
The shareholders of the Company have elected to report the taxable income of the
Company on their individual federal and state income tax returns (Subchapter S
corporation election). Accordingly, the financial statements include no
provisions for federal or state income taxes. A deferred tax liability relating
to the gain on investment in NSI stock has been recorded using a 34% rate. This
liability has been recorded to recognize the obligation that would arise for
distributions to the S Corporation shareholders to pay their tax liabilities
that would arise upon the realization of the gain.
3. INVESTMENT IN NSI
The Company owns stock in NSI as a result of the exercise of warrants and
settlement of certain claims with NSI. The investment is classified as
available for sale and is carried at fair value, with the unrealized gains and
losses, net of tax, reported as a separate component of stockholders' equity.
NSI trades publicly on the NASDAQ NMS under the symbol "NSIX." As of December
31, 1995, the Company owned 46,446 shares of NSI stock at a cost of $171,677.
The exercise of the warrants in NSI was completed utilizing a cashless exercise
provision in the warrant agreement. This resulted in a gain of $79,700 which
has been reported as other income. As a result of settling certain claims with
NSI in December 1995, the Company received 6,593 shares of NSI stock resulting
in a gain of $91,977 which is recorded in other income.
F-42
<PAGE>
Cytology, Indiana, Inc.
Notes to Financial Statements (continued)
4. SUBSEQUENT EVENTS
MERGER AGREEMENT
Certain entities with a degree of common ownership interest also hold long-term
territorial License Agreements for the PAPNET-Registered Trademark- System.
These entities consist of Papnet of Ohio, Inc. ("PPNT"), Indiana Cytology Review
Corporation ("INC"), ER Group, Inc. ("ERG") and Carolina Cytology, Inc. ("CCI").
These entities, along with the Company and CCWP Partners, Inc. ("CCWP"), have
signed an agreement to merge into PPNT, which will be renamed NetMed, Inc.
(NetMed). The entities party to the merger are collectively referred to as the
NetMed Entities.
NetMed will hold the License Agreements previously held by the individual NetMed
Entities. The business purpose of NetMed will be to market the proprietary
products of NSI, including the PAPNET-Registered Trademark- System, in the
territories encompassed under the License Agreements. These territories include
Ohio, Kentucky, the Standard Metropolitan Area of Chicago, Missouri, Georgia and
North Carolina.
LOAN AGREEMENT WITH PPNT
The Company has entered into a Loan Agreement with PPNT, dated July 5, 1996 (the
"Loan Agreement"), whereby PPNT has agreed to advance to the Company the
expenses incurred in connection with the Merger. In addition, PPNT will advance
funds necessary to pay reasonable expenses of ordinary business operations for
the Company. Advances will be evidenced by a promissory note bearing interest
at an annual rate of 7%, payable 60 days after the earlier of the consummation
of the merger or the termination of the Merger Agreement. Promissory notes
delivered by the Company will be secured by its shares of NSI common stock.
Advances made to the Company may be repaid, at PPNT's option, in shares of the
Company's common stock.
Pending completion of the merger, the business operations of the Company are
being managed by PPNT.
INVESTMENT IN NSI
On July 15, 1996, NSI common stock closed trading on the NASDAQ NMS at $13.25
per share compared to a closing price of $21.75 at March 31, 1996.
5. UNAUDITED FINANCIAL STATEMENTS
The financial statements as of March 31, 1996 and for the three months ended
March 31, 1996 are unaudited; however, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of the financial statements for the interim period have been
included. The results for the interim period ended March 31, 1996 are not
necessarily indicative of the results to be obtained for the full fiscal year
ending December 31, 1996.
F-43
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by the Ohio General Corporation Law, Article NINTH of
Registrant's Articles provides that a director, officer, incorporator, or
any former officer or director of the Registrant shall be indemnified by
the Registrant to the fullest extent permitted by the Ohio General
Corporation Law.
Indemnification of directors, officers, employees and agents is required
under Section 1701.13 of the Ohio General Corporation Law in those cases where
the person to be indemnified has been successful on the merits or otherwise in
defense of a lawsuit. Indemnification is permitted in third party actions where
the indemnified person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation and in
criminal actions where he had no reasonable cause to believe his conduct was
unlawful. Indemnification is also permitted in lawsuits brought by or on behalf
of the corporation if the standards of conduct described above are met, except
that no indemnification is permitted in respect to any matter in which the
person is adjudged to be liable for negligence or misconduct in the performance
of his duty to the corporation unless a court shall determine that
indemnification is fair and reasonable in view of all the circumstances of the
case. In cases where indemnification is permissive, a determination as to
whether the person met the applicable standard of conduct must be made either by
the court, disinterested directors, by independent legal counsel, or by the
shareholders. Such indemnification rights are specifically not deemed to be
exclusive of other rights of indemnification by agreement or otherwise and the
corporation is authorized to advance expenses incurred prior to the final
disposition of a matter upon receipt of an undertaking to repay such amounts on
a determination that indemnification was not permitted in the circumstances of
the case.
Under Section 1701.13 of the Ohio General Corporation Law, a corporation
may purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee, or agent of the corporation, or who, while serving
in such capacity, is or was at the request of the corporation, a director,
officer, employee or agent of another corporation or legal entity or of an
employee benefit plan, against liability asserted against or incurred by such
person in any such capacity whether or not the corporation would have the power
to provide indemnity under Section 1701.13 of the Ohio General Corporation Law.
The Registrant has not applied for directors' and officers' liability insurance.
The above discussion of the Registrant's Articles and of Section 1701.13 of
the Ohio General Corporation Law is not intended to be exhaustive and is
respectively qualified in its entirety by such Articles of Incorporation and
statute.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
------- -----------
2 Agreement and Plan of Merger, dated as of July 5, 1996, as
amended, among the Registrant, Cytology Indiana, Inc., Indiana
Cytology Review Company, ER Group, Inc., CCWP Partners, Inc.,
and Carolina Cytology, Inc., (filed as Appendix A hereto, and
incorporated herein by reference).
3(a) * Articles of Incorporation of the Registrant.
3(b) * Code of Regulations of the Registrant.
3(c) Proposed Amended and Restated Articles of Incorporation of the
Registrant, (filed as part of Appendix A hereto, and
incorporated herein by reference).
3(d) Proposed Amended and Restated Regulations of the Registrant,
(filed as part of Appendix A hereto, and incorporated herein by
reference).
3(e) * Form of Specimen Stock Certificate.
4(a) Articles FOURTH and FIFTH of the Registrant's Articles of
Incorporation (contained in the Registrant's Articles of
Incorporation filed as Exhibit 3(a) hereto)
Articles II, VII and XI of the Registrant's Code of
Regulations (contained in the Registrant's Code of Regulations
filed as Exhibit 3(b) hereto).
4(b) Articles FOURTH, SIXTH, SEVENTH, EIGHTH, TENTH, and ELEVENTH,
of the Registrant's Amended and Restated Articles of
Incorporation (contained in the Registrant's Amended and
Restated Articles of Incorporation filed as part of Appendix A
hereto) and Articles I, V and VII of the Registrant's Amended
and Restated Regulations (contained in the Registrant's Amended
and Restated Code of Regulations filed as part of Appendix A
hereto).
5 * Opinion of Porter, Wright, Morris & Arthur regarding legality.
8 * Opinion of Porter, Wright, Morris & Arthur regarding tax
matters.
10(a) * Settlement Agreement among Neuromedical Systems, Inc. and the
Registrant, Cytology Indiana, Inc., Indiana Cytology Review
Company, ER Group, Inc., Cytology West, Inc., Carolina Cytology
Licensing Company, Papnet Utah, Inc., Carolina Cytology Warrant
Partnership, and GRK Partners, dated as of December 5, 1995.
10(b) * Letter of Intent among the Registrant and Cytology West, Inc.,
Cytology Indiana, Inc., Indiana Cytology Review Company, ER
Group, Inc., CCWP Partners, Inc., Carolina Cytology, Inc., and
Papnet Utah, Inc., dated February 1, 1995.
10(c) * Voting Agreement among the Registrant, Cytology Indiana, Inc.,
Indiana Cytology Review Company, ER Group, Inc., CCWP Partners,
Inc., and Carolina Cytology, Inc., and certain shareholders of
these entities dated July 5, 1996.
10(d) * Loan Agreement among the Registrant, Cytology Indiana, Inc.,
Indiana Cytology Review Company, ER Group, Inc., CCWP Partners,
Inc., and Carolina Cytology, Inc., dated July 5, 1996, and
the Side Letter thereof, dated July 16, 1996.
II-2
<PAGE>
10(e) * Loan Agreement between the Registrant and Cytology West, Inc.
and Papnet Utah, Inc., dated March 14, 1996.
10(f) * Promissory Note and Security Agreement among Cytology West,
Inc. and the Registrant dated April 5, 1996 and April 4, 1996
respectively.
10(g) * Guaranty executed by Carl Genberg, guaranteeing all obligation
of Cytology West, Inc., dated April 4, 1996.
10(h) * Security Agreement granting a security interest in Neuromedical
Systems, Inc. stock to the Registrant, executed by Carl Genberg
on April 4, 1996.
10(i) * Amended and Restated 1995 Stock Option Plan of the Registrant.
23(a) Consent of Porter, Wright, Morris & Arthur (included in
Exhibits 5 and 8).
23(b) * Consent of Ernst & Young, LLP.
24 * Powers of Attorney.
27 * Financial Data Schedule.
99 * Proxy Card.
- ---------------------
* Filed with this Registration Statement.
(b) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the required information is
included in the financial statements or the notes thereto.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of the Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed pursuant
to the immediately preceding paragraph, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act of 1933 and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the Registration Statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
II-3
<PAGE>
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Registration Statement, within one business
day of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information contained
in documents filed subsequent to the effective date of the Registration
Statement through the date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
companies being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Columbus, State of Ohio,
on July 16, 1996.
PAPNET OF OHIO, INC.
By: /s/ David J. Richards
-----------------------------------
David J. Richards, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ David J. Richards President, Secretary and July 16, 1996
- ------------------------- Director
David J. Richards
*John P. Kennedy Vice President, Treasurer, July 16, 1996
- ------------------------- Assistant Secretary, and Director
John P. Kennedy
*S. Trevor Ferger Director July 16, 1996
- -------------------------
S. Trevor Ferger
*Cecil J. Petitti Director July 16, 1996
- -------------------------
Cecil J. Petitti
*Bryan Whipp Director July 16, 1996
- -------------------------
Bryan Whipp
*By: /s/ David J. Richards
----------------------------------------------
David J. Richards, attorney-in-fact
for each of the persons indicated
II-5
<PAGE>
AGREEMENT AND PLAN OF MERGER
AMONG
PAPNET OF OHIO, INC.
AND
CYTOLOGY INDIANA, INC.
INDIANA CYTOLOGY REVIEW COMPANY
ER GROUP, INC.
CCWP PARTNERS, INC.
CAROLINA CYTOLOGY, INC.
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS
Section 1.01 Definitionst 1
Section 1.02 Interpretation 5
ARTICLE II
THE MERGER
Section 2.01 The Merger 6
Section 2.02 Effects of the Merger 6
Section 2.03 Articles of Incorporation and Regulations 6
Section 2.04 Directors and Officers 6
Section 2.05 Conversion; Lockup 6
Section 2.06 Tax Consequences 8
Section 2.07 Absence of Control 8
ARTICLE III
EXCHANGE OF SHARES
Section 3.01 Exchange of Certificates 8
Section 3.02 Dissenting Predecessor Company Shares 9
Section 3.03 Adjustments 9
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PREDECESSOR COMPANIES
Section 4.01 Organization 10
Section 4.02 Capitalization 10
Section 4.03 Authority Relative to this Agreement 11
Section 4.04 Consents and Approvals; No Violations 11
Section 4.05 Financial Statements 11
Section 4.06 Absence of Certain Changes 11
Section 4.07 No Undisclosed Liabilities 12
ii
<PAGE>
Section 4.08 Information in Registration Statement 12
Section 4.09 No Default 12
Section 4.10 Litigation 12
Section 4.11 Compliance with Applicable Law 12
Section 4.12 Taxes 13
Section 4.13 ERISA 13
Section 4.14 Intellectual Property 14
Section 4.15 Change in Control 14
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 5.01 Organization 14
Section 5.02 Capitalization 14
Section 5.03 Authority Relative to this Agreement 15
Section 5.04 Consents and Approvals; No Violations 15
Section 5.05 Financial Statements 15
Section 5.06 Absence of Certain Changes 16
Section 5.07 No Undisclosed Liabilities 16
Section 5.08 Information in Registration Statement 16
Section 5.09 No Default 16
Section 5.10 Litigation 17
Section 5.11 Compliance with Applicable Law 17
Section 5.12 Taxes 17
Section 5.13 ERISA 17
Section 5.14 Intellectual Property 18
Section 5.15 Change in Control 18
ARTICLE VI
COVENANTS
Section 6.01 Covenants of the Predecessor Companies and the Company 18
Section 6.02 Additional Covenants of the Parties 20
Section 6.03 No Solicitation 21
Section 6.04 Access to Information 21
Section 6.05 Best Efforts 21
Section 6.06 Shareholders Meetings 21
Section 6.07 Affiliates 22
Section 6.08 [Reserved] 22
Section 6.09 Indemnification and Insurance 22
iii
<PAGE>
Section 6.10 [Reserved] 23
Section 6.11 [Reserved} 23
Section 6.12 Brokers or Finders 23
Section 6.13 Advisory Board 23
ARTICLE VII
CONDITIONS
Section 7.01 Conditions to Each Party's Obligation to Close and
Effect the Merger 23
ARTICLE VIII
TERMINATION AND AMENDMENT
Section 8.01 Termination 26
Section 8.02 Effect of Termination 27
Section 8.03 Amendment 27
Section 8.04 Extension; Waiver 27
Section 8.05 Termination Payment 27
ARTICLE IX
MISCELLANEOUS
Section 9.01 Nonsurvival of Representations and Warranties 28
Section 9.02 Notices 28
Section 9.03 Descriptive Headings 29
Section 9.04 Counterparts 29
Section 9.05 Entire Agreement; Assignment 29
Section 9.06 Governing Law 29
Section 9.07 Specific Performance 29
Section 9.08 Expenses 30
Section 9.09 Publicity 30
Section 9.10 Parties in Interest 30
EXHIBITS
2.03(a) Articles of Incorporation of Surviving Corporation
2.03(b) Regulations of Surviving Corporation
iv
<PAGE>
SCHEDULES
2.05(a) Conversion Ratios
2.05(c) Lockup Shares Table
4.02(a) Authorized and Issued Shares and Stock Rights of Predecessor Companies
4.02(b) Equity Interests Owned by Predecessor Companies; Voting Agreements
4.06 Certain Predecessor Company Changes Since March 31, 1996
4.14 Pending or Threatened Predecessor Company Intellectual Property Claims
5.02(a) Authorized and Issued Shares and Stock Rights of Company
5.02(b) Equity Interests Owned by Company; Voting Agreements
5.06 Certain Company Changes Since March 31, 1996
5.14 Pending or Threatened Company Intellectual Property Claims
v
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of July 5, 1996, by and among
Papnet of Ohio, Inc., an Ohio corporation (the "Company"), Cytology Indiana,
Inc., an Ohio corporation ("CIN"), Indiana Cytology Review Company, an Ohio
corporation ("INC"), ER Group, Inc., an Ohio corporation ("ERG"), CCWP Partners,
Inc., an Ohio corporation ("CCWP"), and Carolina Cytology, Inc., an Ohio
corporation ("CCI"), CIN, INC, ERG, CCWP, and CCI are hereinafter sometimes
referred to collectively as the "Predecessor Companies" and individually as a
"Predecessor Company."
RECITALS
A. The Boards of Directors of each of the Predecessor Companies and the
Company have determined that it is in the best interests of their respective
corporations and shareholders for them to enter into a business combination by
which each of the Predecessor Companies shall simultaneously merge with and into
the Company.
B. The parties wish to set forth herein the terms and conditions upon
which the Merger will be effected.
STATEMENT OF AGREEMENT
In consideration of the foregoing, and of their mutual representations,
warranties, covenants and agreements contained herein, the parties agree as
follows:
ARTICLE I
DEFINITIONS
1.01 DEFINITIONS. The following terms shall have the following meanings
for the purposes of this Agreement:
"ADVISORY BOARD" has the meaning specified in Section 6.13.
"AFFILIATE" means, with respect to any specified Person, any other Person
which, directly or indirectly, owns or controls, is under common ownership or
control with, or is owned or controlled by, such specified Person.
"AGREEMENT" means this Agreement and Plan of Merger, all Exhibits and
Schedules hereto, and all amendments made hereto and thereto by written
agreement among the parties.
"BUSINESS DAY" means any day of the year other than (i) any Saturday or
Sunday or (ii) any other day on which commercial banks located in New York City
are generally closed for business.
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"CCI" has the meaning specified in the introductory paragraph.
"CCI TRANSACTION" means the transaction involving CCI described in a letter
which counsel for CCI has provided to counsel for the Company.
"CERTIFICATE OF MERGER" has the meaning specified in Section 2.01.
"CERTIFICATES" has the meaning specified in Section 3.01(a).
"CIN" has the meaning specified in the introductory paragraph.
"CLOSING" means the consummation and closing of the transactions
contemplated herein.
"CLOSING DATE" means the date on which the Closing occurs.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMPANY" has the meaning specified in the introductory paragraph.
"COMPANY BENEFIT PLANS" has the meaning specified in Section 5.13(a).
"COMPANY FINANCIAL STATEMENTS" has the meaning specified in Section 5.05.
"COMPANY PERMITS" has the meaning specified in Section 5.11.
"COMPANY SHARES" has the meaning specified in Section 5.02(a).
"CONTRACT" means any contract, lease, commitment, understanding, sales
order, purchase order, agreement, indenture, mortgage, note, bond, right,
option, warrant, instrument, plan, permit or license, whether written or oral,
which is intended or purports to be binding and enforceable.
"DEFAULTING PARTY" has the meaning specified in Section 8.05.
"DESIGNATED DIRECTORS" means David J. Richards, John P. Kennedy, Cecil J.
Petitti, S. Trevor Ferger, Rodney M. Kinsey and Michael Blue, M.D.
"DISSENTER'S RIGHTS" means rights, if any, of any shareholder of a
Predecessor Company as a dissenter to the Merger under Section 1701.85 of the
OGCL.
"EFFECTIVE TIME" has the meaning specified in Section 2.01.
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"ENFORCEABILITY EXCEPTIONS" means the limitations which may be placed on
enforceability by bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance and other laws of general applicability relating to or affecting
creditors' rights and by general principles of equity.
"ERG" has the meaning specified in the introductory paragraph.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"EXCHANGE ACT" means the Securities Exchange Act of 1934 as amended and
the rules and regulations thereunder.
"FINANCIAL STATEMENTS" has the meaning specified in Section 4.05.
"GAAP" means United States generally accepted accounting principles in
effect at the time.
"GOVERNMENTAL AUTHORITY" means the government of the United States or any
state or political subdivision thereof and any entity, body or authority
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
"INFORMATION/PROXY STATEMENT" has the meaning specified in Section 4.08.
"INTELLECTUAL PROPERTY" means any and all trademarks, trade names, service
marks, patents, copyrights (including any registrations, applications, licenses
or rights relating to any of the foregoing), technology, trade secrets,
inventions, know-how, designs, computer programs, processes, and other
intangible assets, properties and rights. "COMPANY INTELLECTUAL PROPERTY"
means any and all Intellectual Property used by the Company in the conduct of
its business and "PREDECESSOR INTELLECTUAL PROPERTY" means any and all
Intellectual Property used by a Predecessor Company in the conduct of its
business.
"IRS" means the Internal Revenue Service.
"KEY COMPANY SHAREHOLDERS" means David J. Richards, John P. Kennedy and
Carl A. Genberg.
"KNOWLEDGE" means, with respect to an individual making a representation to
his or her "Knowledge," those facts and circumstances personally known by such
individual; and with respect to an entity making a representation to its
"Knowledge," those facts and circumstances personally known by any officer of
such entity.
"MANAGERS" has the meaning specified in Section 6.09.
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"MATERIAL ADVERSE EFFECT" means, with respect to a party, a material
adverse change in the business, operations, assets, liabilities, results of
operations, cash flows or condition (financial or otherwise) of such party.
"MERGER" means the Merger of the Predecessor Companies with and into the
Company pursuant to the terms of this Agreement.
"NASDAQ NMS" has the meaning specified in Section 6.05.
"OGCL" means the Ohio General Corporation Law, Chapter 1701, OHIO REV.
CODE.
"PERSON" means an individual, firm, partnership, association,
unincorporated organization, trust, corporation, or any other entity, including
a government or any department, agency or instrumentality thereof.
"PREDECESSOR BENEFIT PLANS" has the meaning specified in Section 4.13(a).
"PREDECESSOR COMPANY" and "PREDECESSOR COMPANIES" have the meanings
specified in the introductory paragraph.
"PREDECESSOR COMPANY SHARES" has the meaning specified in Section 2.05(a).
"PREDECESSOR PERMITS" has the meaning specified in Section 4.11.
"REGISTRATION STATEMENT" has the meaning specified in Section 4.08.
"RESTRICTED KCS SHARES" means the Surviving Corporation Shares which the
Key Company Shareholders own immediately after the Merger in respect of their
Company Shares owned immediately prior to the Merger.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933 as amended and the rules
and regulations thereunder.
"STOCK RIGHTS" means, with respect to a party, any subscriptions, options,
warrants, calls, rights, convertible securities or other agreements or
commitments of any character obligating it to issue, transfer or sell any of its
securities.
"SURVIVING CORPORATION" means the Company as the surviving corporation in
the Merger following the Effective Time.
"SURVIVING CORPORATION SHARES" has the meaning specified in Section
2.05(a).
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"TAX" or "TAXES" means all taxes, charges, fees, duties, levies or other
assessments, including income, gross receipts, net proceeds, ad valorem,
turnover, real and personal property (tangible and intangible), sales, use,
franchise, excise, value added, stamp, leasing, lease, user, transfer, fuel,
excess profits, occupational, interest equalization, windfall profits,
severance, employee's income withholding, other withholding, unemployment and
Social Security taxes, which are imposed by any Governmental Authority, and such
term shall include any interest, penalties or additions to tax attributable
thereto.
1.02 INTERPRETATION. The following provisions shall govern the
interpretation of this Agreement:
(a) "Herein" and "hereunder" and other words of similar import refer
to this Agreement as a whole and not to any particular Article, Section,
Schedule or Exhibit.
(b) Words importing the singular number only shall include the plural
and vice versa and words importing the masculine gender shall include the
feminine and neuter genders and vice versa and words importing individuals shall
include Persons and vice versa.
(c) The calculation of time within which or following which any act
is to be done or step is to be taken pursuant to this Agreement excludes the
date which is the reference day in calculating such period.
(d) Whenever anything is required to be done or any action is
required to be taken hereunder on or by a day which is not a Business Day, then
such thing may be validly done and such action may be validly taken on or by the
next succeeding day that is a Business Day.
(e) Accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with GAAP.
(f) As used in this Agreement reference to dollar amounts, unless
otherwise specifically indicated, shall mean the lawful money of the United
States of America.
(g) The term "including" means including without limiting the
generality of any description preceding such term, and, for purposes of this
Agreement, the parties hereto agree that the rule of EJUSDEM GENERIS shall not
be applicable to limit a general statement, which is followed by or referable to
an enumeration of specific matters, to matters similar to the matters
specifically mentioned.
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ARTICLE II
THE MERGER
Section 2.01 THE MERGER. Upon the terms and subject to the conditions
hereof, as promptly as practicable following the satisfaction or waiver of the
conditions set forth in Article VII but in no event later than two days
thereafter, unless the parties shall otherwise agree, a certificate of merger
(the "Certificate of Merger") providing for the simultaneous merger of the
Predecessor Companies with and into the Company shall be duly prepared, executed
and filed by the Company, in accordance with the relevant provisions of the
OGCL, and the parties hereto shall take any other actions required by law to
make the Merger effective.
Following the Merger, the Surviving Corporation, with all its purposes,
objects, rights, privileges, powers and franchises, shall continue, and the
Predecessor Companies shall cease to exist. The time the Merger becomes
effective is referred to herein as the "Effective Time." Prior to the filing of
the Certificate of Merger, the Closing shall take place at the offices of
Porter, Wright, Morris & Arthur, 41 South High Street, Columbus, Ohio 43215.
Section 2.02 EFFECTS OF THE MERGER. The Merger shall have the effects set
forth in the OGCL.
Section 2.03 ARTICLES OF INCORPORATION AND REGULATIONS. The Articles of
Incorporation of the Surviving Corporation shall be as set forth in
Exhibit 2.03(a). The Regulations of the Surviving Corporation shall be as set
forth in Exhibit 2.03(b).
Section 2.04 DIRECTORS AND OFFICERS. The directors and officers of the
Company immediately prior to the Effective Time shall be the initial directors
and officers of the Surviving Corporation. Any Designated Director who is not
already a director of the Company immediately prior to the Effective Time shall
be elected as a director of the Surviving Corporation. The Designated Directors
shall serve until their successors shall have been duly elected or appointed and
shall have qualified or until their earlier death, resignation or removal in
accordance with the Articles of Incorporation and Regulations of the Surviving
Corporation.
Section 2.05 CONVERSION; LOCKUP. At the Effective Time, by virtue of the
Merger and without any action on the part of the Surviving Corporation, any of
the Predecessor Companies, or the holder of any of the securities of the
Predecessor Companies (other than the approval and adoption of this Agreement by
the shareholders of each party in conformity with the law of the State of Ohio):
(a) Each share of capital stock of each of the Predecessor Companies
("Predecessor Company Shares") issued and outstanding shall be converted into
the right to receive the number of fully paid and nonassessable shares of common
stock, without par value, of the Surviving Corporation (the "Surviving
Corporation Shares") as set forth on Schedule 2.05(a).
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(b) Each Predecessor Company Share which is held in the treasury of a
Predecessor Company shall be cancelled and retired and cease to exist.
(c) Shareholders of the Predecessor Companies receiving Surviving
Corporation Shares shall be prohibited from transferring or selling the
Surviving Corporation Shares during the one-year period commencing on the
Closing Date; provided, however, that each shareholder shall be permitted to
make sales (i) without limitation in privately negotiated transactions not
required to be reported through NASDAQ NMS to persons who agree to be bound by
these restrictions to which the transferor Shareholder is subject and (ii) in
transactions required to be reported through NASDAQ NMS for that number of
Surviving Corporation Shares received with respect to the conversion of the
shareholder's shares in a particular Predecessor Company equal to the product of
(A) the ratio of Surviving Corporation Shares received with respect to the
conversion of the shareholder's shares in such Predecessor Company to the
number of Surviving Corporation Shares so received by all shareholders of such
Predecessor Company, times (B) the applicable number of Shares shown in the
table set forth on Schedule 2.05(c) with respect to such Predecessor Company;
and provided, further, that any such shareholder may at any time assign to any
other such shareholder of any of the Predecessor Companies all or a portion of
his rights to sell Surviving Corporation Shares provided for in clause (ii)
above.
(d) The Key Company Shareholders shall be prohibited from
transferring or selling the Restricted KCS Shares during the one-year period
commencing on the Closing Date; provided, however, that each Key Company
Shareholder may (i) pledge up to 100,000 Restricted KCS Shares as security for
loans subject to the limitation that the pledgee(s) shall agree not to sell more
than an aggregate of 10,000 Restricted KCS Shares which have been pledged in any
one of the four consecutive 90-day periods immediately following the Closing
Date except for sales described in clause (ii) below and (ii) sell Restricted
KCS Shares in privately negotiated transactions not required to be reported
through NASDAQ NMS to persons who agree to be bound by these restrictions to
which the Key Company Shareholder is subject.
(e) Certificates representing the Surviving Corporation Shares held
by the shareholders of the Predecessor Companies and by the Key Company
Shareholders shall bear the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS
ON TRANSFERABILITY THAT ARE CONTAINED IN AN INSTRUMENT IN WRITING TO WHICH THE
CORPORATION IS A PARTY (AN AGREEMENT AND PLAN OF MERGER DATED JULY __, 1996).
THE CORPORATION WILL MAIL TO THE SHAREHOLDER A COPY OF SUCH RESTRICTIONS WITHIN
FIVE DAYS AFTER RECEIPT OF WRITTEN REQUEST THEREFOR.
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Section 2.06 TAX CONSEQUENCES. It is intended that the Merger shall
constitute a reorganization within the meaning of Section 368(a)(1)(A) of the
Code, and that this Agreement shall constitute a "plan of reorganization" for
the purposes of Section 368 of the Code.
Section 2.07 ABSENCE OF CONTROL. Subject to any specific provisions of
this Agreement, it is the intent of the parties that the Company by reason of
this Agreement shall not (until consummation of the transactions contemplated
hereby) control, and shall not be deemed to control, directly or indirectly, any
of the Predecessor Companies and shall not exercise, or be deemed to exercise,
directly or indirectly, a controlling influence over the management or policies
of any of the Predecessor Companies.
ARTICLE III
EXCHANGE OF SHARES
Section 3.01 EXCHANGE OF CERTIFICATES.
(a) At the Effective Time, the Surviving Corporation shall mail to
each holder of record of a certificate or certificates which immediately prior
to the Effective Time represented Predecessor Company Shares (the
"Certificates") a letter of transmittal (which shall specify that delivery shall
be effected, and risk of loss and title to the Certificates shall pass, only
upon delivery of the Certificates to the Surviving Corporation) and instructions
for use in effecting the surrender of the Certificates in exchange for
certificates representing Surviving Corporation Shares. Upon surrender of a
Certificate to the Surviving Corporation, together with such letter of
transmittal, duly executed, the holder of such Certificate shall be entitled to
receive in exchange therefor the certificates representing the whole Surviving
Corporation Shares which such holder has the right to receive pursuant to the
provisions of this Agreement, and the Certificate so surrendered shall forthwith
be cancelled. If a certificate representing Surviving Corporation Shares is to
be issued in a name other than that in which the Certificate surrendered in
exchange therefor is registered, it shall be a condition to the issuance that
such Certificate be properly endorsed (or accompanied by an appropriate
instrument of transfer) and accompanied by evidence that any applicable stock
transfer taxes have been paid or provided for. Until surrendered as
contemplated by this Section, each Certificate shall be deemed at any time after
the Effective Time to represent only the right to receive the consideration
specified herein; provided that in the event any holder of a Certificate
exercises his Dissenter's Rights and becomes entitled to receive payment for his
Predecessor Company Shares instead of the Surviving Corporation Shares into
which such Predecessor Company Shares shall have been converted, the Surviving
Corporation shall pay such holder the amount to which he is entitled for such
Predecessor Company Shares, together with any other sums which it may owe him as
a result of the Dissenter's Rights proceeding, upon his surrender to the
Surviving Corporation of the certificate or certificates which immediately prior
to the Effective Time represented the Predecessor Company Shares as to which his
Dissenter's Rights were asserted, and the Surviving Corporation shall not
thereafter be required to deliver to such holder any Surviving Corporation
Shares.
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Any certificates for Surviving Corporation Shares which remain
unclaimed by the holders of Certificates for twelve months after the Effective
Time shall be held by the Surviving Corporation, and any holders of Certificates
who have not theretofore complied with this Section 3.01(a) shall thereafter
receive delivery (subject to abandoned property, escheat or other similar laws)
of the Surviving Corporation Shares issuable upon the conversion of their
Certificates and any dividends payable on such Surviving Corporation Shares,
without any interest thereon, only after delivering their Certificates and
letters of transmittal to the Surviving Corporation, and otherwise complying
with this Section 3.01(a).
(b) No dividends or other distributions declared or made after the
Effective Time with respect to Surviving Corporation Shares with a record date
after the Effective Time shall be paid to the holder of any unsurrendered
Certificate with respect to the Surviving Corporation Shares represented thereby
until the holder of record of such Certificate shall surrender such Certificate.
Following surrender of any such Certificate, there shall be paid to the record
holder of the certificates representing whole Surviving Corporation Shares
issued in exchange therefor, without interest, at the appropriate payment date
(or promptly after surrender if the payment date has already occurred), the
amount of dividends or other distributions with a record date after the
Effective Time but prior to surrender.
(c) Following the Effective Time, there shall be no further
registration of transfers on the stock transfer books of any party of
Predecessor Company Shares which were outstanding immediately prior to the
Effective Time. If, after the Effective Time, Certificates are presented to the
Surviving Corporation for any reason, they shall be cancelled and exchanged as
provided in this Article III.
(d) No certificate or scrip representing fractional Surviving
Corporation Shares shall be issued upon the surrender for exchange of
Certificates, such fractional share interests will not entitle the owner thereof
to vote or to any rights of a shareholder of the Surviving Corporation, and no
cash shall be paid in respect of any fractional shares.
Section 3.02 DISSENTING PREDECESSOR COMPANY SHARES. If any holder of
Predecessor Company Shares shall exercise Dissenter's Rights with respect to his
Predecessor Company Shares, the affected Predecessor Company shall give the
Surviving Corporation notice thereof and the Surviving Corporation shall have
the right to participate in all negotiations and proceedings with respect to any
such Dissenter's Rights. No Predecessor Company shall, except with the prior
written consent of the Surviving Corporation, voluntarily make any payment with
respect to, or settle or offer to settle, any such Dissenter's Rights.
Section 3.03 ADJUSTMENTS. If, between the date of this Agreement and the
Effective Time, any Company Shares or Predecessor Company Shares shall have been
exchanged into a different number of shares or a different class by reason of
any reclassification, recapitalization, split-up, combination, exchange of
shares or readjustment, or a stock dividend thereon shall be declared with a
record date within such period, the amount of Surviving Corporation Shares into
which any
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affected Predecessor Company Shares will be converted in the Merger shall be
correspondingly adjusted.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PREDECESSOR COMPANIES
Each of the Predecessor Companies represents and warrants to the Company
and each of the other Predecessor Companies as follows:
Section 4.01 ORGANIZATION. It is a corporation duly organized, validly
existing and in good standing under the laws of the State of Ohio and has all
requisite power and authority to own, lease and operate its properties and to
carry on its business as now being conducted. It is duly qualified or licensed
and in good standing to do business in each jurisdiction in which the property
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification or licensing necessary, except in such jurisdictions
where the failure to be so duly qualified or licensed and in good standing would
not in the aggregate have a Material Adverse Effect. It has heretofore
delivered to the Company accurate and complete copies of the Articles of
Incorporation and Regulations, as currently in effect, of such Predecessor
Company, and the partnership agreement or other organizational documents of any
Affiliate.
Section 4.02 CAPITALIZATION.
(a) Its authorized capital stock consists of the number and classes
of shares set forth on Schedule 4.02(a), and as of the date hereof the number of
shares of each such class which are issued and outstanding are as shown on
Schedule 4.02(a). All of its issued and outstanding shares are duly
authorized, validly issued, fully paid and nonassessable and free of preemptive
rights. As of the date hereof, the number of its shares of any class issuable
upon exercise of Stock Rights and the exercise price(s) thereof are as set forth
on Schedule 4.02(a). Except as set forth on Schedule 4.02(a), since March 31,
1996, it has not issued any shares of its capital stock (nor securities
substantially equivalent to capital stock) except upon exercise of Stock Rights
granted prior to such date. Except as set forth in Schedule 4.02(a), and
except for shares hereafter issued pursuant to the exercise of Stock Rights
described in Schedule 4.02(a), there are not now, and at the Effective Time
there will not be, any shares of capital stock (or securities substantially
equivalent to capital stock) of such Predecessor Company issued and outstanding,
or any outstanding Stock Rights.
(b) Except for common shares of Neuromedical Systems, Inc. and except
as shown on Schedule 4.02(b), it does not own, directly or indirectly, any
capital stock or other equity securities of any corporation or have any direct
or indirect equity or ownership interest in any business. Except as shown on
Schedule 4.02(b), there are not now, and at the Effective Time there will not
be, any voting trusts or other agreements or understandings to which it is a
party or is bound with respect to the voting of its capital stock.
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Section 4.03 AUTHORITY RELATIVE TO THIS AGREEMENT. It has full corporate
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly authorized by its Board of Directors and no other corporate proceedings
on the part of such Predecessor Company are necessary to authorize this
Agreement or to consummate the transactions so contemplated (other than, with
respect to the Merger, the approval and adoption of this Agreement by its
shareholders in conformity with the OGCL). This Agreement has been duly and
validly executed and delivered by such Predecessor Company and constitutes its
valid and binding agreement, enforceable against such Predecessor Company in
accordance with its terms, subject to the Enforceability Exceptions.
Section 4.04 CONSENTS AND APPROVALS; NO VIOLATIONS. Except for applicable
requirements of the Securities Act, and the filing and recordation of the
Certificate of Merger as required by the OGCL, no filing with, and no permit,
authorization, consent or approval of, any Governmental Authority is necessary
for the consummation by such Predecessor Company of the transactions
contemplated by this Agreement. None of the execution and delivery of this
Agreement by such Predecessor Company, the consummation by it of the
transactions contemplated hereby, or compliance by it with any of the provisions
hereof will (a) conflict with or result in any breach of any provision of the
Articles of Incorporation or Regulations of such Predecessor Company, (b) result
in a violation or breach of, or constitute (with or without due notice or lapse
of time or both) a default (or give rise to any right of termination,
cancellation or acceleration) under, any of the terms, conditions or provisions
of any Contract to which such Predecessor Company is a party or by which it or
any of its properties or assets may be bound, or (c) violate any order, writ,
injunction, decree, statute, treaty, rule or regulation applicable to such
Predecessor Company or any of its properties or assets.
Section 4.05 FINANCIAL STATEMENTS. It has delivered to the other parties
copies of its balance sheets as at March 31, 1996 and December 31 in each of the
years 1993 through 1995, and the related statements of income for each of the
three-months' period and fiscal years, respectively, then ended (its "Financial
Statements"). All of its Financial Statements fairly present the financial
condition and the results of operations of such Predecessor Company as at the
respective dates thereof and for the periods referred to therein, all in
accordance with GAAP (except for the absence of notes thereto and statements of
changes in stockholders' equity and cash flow). Its Financial Statements
reflect the consistent application of GAAP throughout the periods involved
(except for the absence of notes thereto and statements of changes in
stockholders' equity and cash flow). The representations and warranties in this
Section 4.05 as they pertain to CCI are qualified to the extent they may be
affected by the CCI Transaction.
Section 4.06 ABSENCE OF CERTAIN CHANGES. Except as set forth in Schedule
4.06, since March 31, 1996, it has not taken any of the actions set forth in
Sections 6.01(b) to (h), suffered any Material Adverse Effect, or entered into
any transaction, or conducted its business or operations, other than in the
ordinary and usual course of business and consistent with past practice.
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Section 4.07 NO UNDISCLOSED LIABILITIES. At March 31, 1996, it did not
have any material liabilities except those reflected in its Financial Statements
for the period ending on such date. Since March 31, 1996, such Predecessor
Company has not incurred any liabilities material to its business, operations or
financial condition, except liabilities incurred in the ordinary and usual
course of business and consistent with past practice and liabilities incurred in
connection with this Agreement and the transactions contemplated herein.
Section 4.08 INFORMATION IN REGISTRATION STATEMENT. None of the
information supplied by it in writing for inclusion or incorporation by
reference in the registration statement on Form S-4 to be filed with the SEC by
the Company in connection with the issuance of Surviving Corporation Shares
pursuant to the transactions contemplated hereby (the "Registration Statement")
will, at the time the Registration Statement is filed with the SEC and at the
time it becomes effective under the Securities Act, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading. Any
information statement or proxy statement of such Predecessor Company used in
connection with any meeting of shareholders to be held in connection with the
Merger (an "Information/Proxy Statement") will, at the date mailed to
shareholders and at the time of the meeting of shareholders to be held in
connection with the Merger, not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading.
Section 4.09 NO DEFAULT. It is not in default or violation (and no event
has occurred which with notice or the lapse of time or both would constitute a
default or violation) of any term, condition or provision of (a) its Articles of
Incorporation or Regulations, (b) any Contract to which it is a party or by
which it or any of its properties or assets may be bound, or (c) any order,
writ, injunction, decree, statute, rule or regulation applicable to it, which
defaults or violations would, in the aggregate, have a Material Adverse Effect
or which would prevent or delay the consummation of the transactions
contemplated hereby.
Section 4.10 LITIGATION. There is no action, suit, or proceeding pending,
or to the best Knowledge of such Predecessor Company threatened, involving it,
at law or in equity, or before any Governmental Authority.
Section 4.11 COMPLIANCE WITH APPLICABLE LAW. It holds all permits,
licenses, variances, exemptions, orders and approvals of all Governmental
Authorities necessary for the lawful conduct of its businesses (the "Predecessor
Permits"), except for failures to hold such Predecessor Permits which would not,
in the aggregate, have a Material Adverse Effect. It is in compliance with the
terms of the Predecessor Permits, except where the failure so to comply would
not have a Material Adverse Effect. Its businesses are not being conducted in
violation of any applicable law, ordinance, rule, regulation, decree or order of
any Governmental Authority, except for violations which in the aggregate do not
and would not have a Material Adverse Effect.
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Section 4.12 TAXES. It has duly filed all material federal, state, local
and foreign tax returns required to be filed by it, and it has duly paid, caused
to be paid or made adequate provision for the payment of all Taxes required to
be paid in respect of the periods covered by such returns and has made adequate
provision for payment of all Taxes anticipated to be payable in respect of all
fiscal periods since the periods covered by such returns. All deficiencies and
assessments asserted as a result of such examinations or other audits by
federal, state, local or foreign taxing authorities have been paid, fully
settled or adequately provided for in its Financial Statements, and no issue or
claim has been asserted for Taxes by any taxing authority for any prior period,
other than those heretofore paid or provided for. There are no outstanding
agreements or waivers extending the statutory period of limitation applicable to
any federal income tax return of such Predecessor Company.
Section 4.13 ERISA.
(a) With respect to each employee benefit plan (including any
"employee benefit plan," as defined in Section 3(3) of ERISA), and any material
bonus, pension, profit sharing, deferred compensation, incentive compensation,
stock ownership, stock purchase, stock option, phantom stock, retirement,
vacation, severance, disability, death benefit, hospitalization, insurance or
other plan, arrangement or understanding (whether or not legally binding) (all
the foregoing being herein called "Predecessor Benefit Plans"), maintained or
contributed to by it, such Predecessor Company has made available to the other
parties a true and correct copy of, where applicable, (i) the most recent annual
report (Form 5500) filed with the IRS, (ii) such Predecessor Benefit Plan, (iii)
each trust agreement and group annuity contract, if any, relating to such
Predecessor Benefit Plan and (iv) the most recent actuarial report or valuation
relating to a Predecessor Benefit Plan subject to Title IV of ERISA. None of
its Predecessor Benefit Plans are multiemployer plans within the meaning of
Section 3(37) of ERISA. Each of the Predecessor Benefit Plans covered by ERISA
(i) has been operated in all material respects in accordance with ERISA, (ii)
has not engaged in any prohibited transactions (as such term is defined in
Section 406 of ERISA) and (iii) has met the minimum funding standards of
Section 412 of the Code. No material Reportable Event (within the meaning of
Section 4043 of ERISA) has occurred and is continuing with respect to any of its
Predecessor Benefit Plans. It has not terminated any pension plan or withdrawn
from any multiemployer pension plan.
(b) With respect to its Predecessor Benefit Plans, in the aggregate,
no event has occurred, and to the Knowledge of such Predecessor Company there
exists no condition or set of circumstances which are reasonably likely to
occur, in connection with which it would be subject to any liability, that would
have a Material Adverse Effect (except liability for benefits claims and funding
obligations payable in the ordinary course), under ERISA, the Code or any other
applicable law.
(c) With respect to its Predecessor Benefit Plans, in the aggregate,
there are no funded benefit obligations for which contributions have not been
made or properly accrued and there are no unfunded benefit obligations which
have not been accounted for by reserves, or
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otherwise properly footnoted in accordance with GAAP, on its financial
statements referenced in Section 4.05, which obligations are reasonably likely
to have a Material Adverse Effect.
Section 4.14 INTELLECTUAL PROPERTY. Except as shown on Schedule 4.14, no
claim is pending or, to its Knowledge is threatened, to the effect that its
present or past operations infringe upon or conflict with the rights of others
with respect to any Intellectual Property necessary to permit it to conduct its
businesses as now operated, and no claim is pending or threatened to the effect
that any of its Predecessor Intellectual Property is invalid or unenforceable.
No Contract with any party exists which would impede or prevent the continued
use by the Surviving Corporation of the entire right, title and interest of such
Predecessor Company in and to its Predecessor Intellectual Property.
Section 4.15 CHANGE IN CONTROL. It is not a party to any Contract which
contains a "change in control" provision or "potential change in control"
provision.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF
THE COMPANY
The Company represents and warrants to each of the Predecessor Companies as
follows:
Section 5.01 ORGANIZATION. It is a corporation duly organized, validly
existing and in good standing under the laws of Ohio and has all requisite power
and authority to own, lease and operate its properties and to carry on its
business as now being conducted. It is duly qualified or licensed and in good
standing to do business in each jurisdiction in which the property owned, leased
or operated by it or the nature of the business conducted by it makes such
qualification or licensing necessary, except in such jurisdictions where the
failure to be so duly qualified or licensed and in good standing would not in
the aggregate have a Material Adverse Effect.
Section 5.02 CAPITALIZATION.
(a) The authorized capital stock of the Company consists of
8,000,000 shares of common stock, without par value ("Company Shares"), of
which, as of the date hereof, 6,072,936 are issued and outstanding. All
issued and outstanding shares of the Company are duly authorized, validly
issued, fully paid and nonassessable and free of preemptive rights. As of the
date hereof, the number of its shares of any class issuable upon exercise of
Stock Rights and the exercise price(s) thereof are as set forth on Schedule
5.02(a). All Surviving Corporation Shares which are to be issued pursuant to
the Merger or the other transactions contemplated hereby will be, when issued in
accordance with the respective terms thereof, duly authorized, validly issued,
fully paid and nonassessable and free of any preemptive rights in respect
thereto. Except as set forth in Schedule 5.02(a), since March 31, 1996, the
Company has not issued any shares of its capital stock (nor securities
substantially equivalent to capital stock) except upon exercise of Stock Rights
granted prior to such date. Except for Company Shares (Surviving Corporation
Shares after the
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Effective Time) hereafter issued pursuant to the exercise of Stock Rights
described in Schedule 5.02(a), and except as contemplated hereby, there are not
now, and at the Effective Time there will not be, any shares of capital stock
(or securities substantially equivalent to capital stock) of the Company issued
or outstanding or any outstanding Stock Rights.
(b) Except for common shares of Neuromedical Systems, Inc. and except
as shown on Schedule 5.02(b), the Company does not own, directly or indirectly,
any capital stock or other equity securities of any corporation or have any
direct or indirect equity or ownership interest in any business. There are not
now, and at the Effective Time there will not be, any voting trusts or other
agreements or understandings to which the Company is a party or is bound with
respect to the voting of the capital stock of the Company.
Section 5.03 AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has full
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly and validly authorized by the Board of Directors of the Company and no
other corporate proceedings on the part of the Company are necessary to
authorize this Agreement or to consummate the transactions so contemplated
(other than, with respect to the Merger, the approval and adoption of this
Agreement by its shareholders in conformity with the OGCL). This Agreement has
been duly and validly executed and delivered by the Company and constitutes a
valid and binding agreement of the Company, enforceable against the Company in
accordance with its terms, subject to the Enforceability Exceptions.
Section 5.04 CONSENTS AND APPROVALS; NO VIOLATIONS. Except for applicable
requirements of the Securities Act, and the filing and recordation of the
Certificate of Merger as required by the OGCL, no filing with, and no permit,
authorization, consent or approval of, any Governmental Authority is necessary
for the consummation by the Company of the transactions contemplated by this
Agreement. None of the execution and delivery of this Agreement by the Company,
the consummation by the Company of the transactions contemplated hereby or
compliance by the Company with any of the provisions hereof will (a) conflict
with or result in any breach of any provision of the Articles of Incorporation
or Regulations of the Company, (b) result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation or acceleration) under, any
of the terms, conditions or provisions of any Contract to which the Company is a
party or by which it or any of its properties or assets may be bound, or
(c) violate any order, writ, injunction, decree, statute, treaty, rule or
regulation applicable to the Company or any of its properties or assets.
Section 5.05 FINANCIAL STATEMENTS. The Company has delivered to each of
the Predecessor Companies copies of its balance sheets as at March 31, 1996 and
December 31 in each of the years 1993 through 1995, and the related statements
of income for each of the three-months' period and fiscal years, respectively,
then ended (the "Company Financial Statements"). All of the Company Financial
Statements fairly present the financial condition and the results of operations
of the Company as at the respective dates thereof and for the periods referred
to therein, all in accordance
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with GAAP (except for the absence of notes thereto and statements of changes in
stockholders' equity and cash flow). The Company Financial Statements reflect
the consistent application of GAAP throughout the periods involved (except for
the absence of notes thereto and statements of changes in stockholders' equity
and cash flow).
Section 5.06 ABSENCE OF CERTAIN CHANGES. Except as set forth in Schedule
5.06, since March 31, 1996, it has not taken any of the actions set forth in
Sections 6.01(b) to (h), suffered any Material Adverse Effect, or entered into
any transaction, or conducted its business or operations, other than in the
ordinary and usual course of business and consistent with past practice.
Section 5.07 NO UNDISCLOSED LIABILITIES. At March 31, 1996, the Company
did not have any material liabilities except those reflected in the Company
Financial Statements for the period ending on such date. Since March 31, 1996,
the Company has not incurred any liabilities material to its business,
operations or financial condition, except liabilities incurred in the ordinary
and usual course of business and consistent with past practice and liabilities
incurred in connection with this Agreement and the transactions contemplated
herein.
Section 5.08 INFORMATION IN REGISTRATION STATEMENT. None of the
information with respect to the Company referenced in the Registration Statement
will, at the time the Registration Statement is filed with the SEC and at the
time it becomes effective under the Securities Act, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading. Any
Information/Proxy Statement of the Company used in connection with any meeting
of shareholders to be held in connection with the Merger will, at the date
mailed to shareholders and at the time of the meeting of shareholders to be held
in connection with the Merger, not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading. The Registration Statement will
comply in all material respects with the provisions of the Securities Act
(including that it will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make statements therein not misleading), except that no representation is made
by the Company with respect to statements made therein based on information
supplied by any Predecessor Company in writing for inclusion or incorporation by
reference in the Registration Statement.
Section 5.09 NO DEFAULT. The Company is not in default or violation (and
no event has occurred which with notice or the lapse of time or both would
constitute a default or violation) of any term, condition or provision of
(a) its Articles of Incorporation or Regulations (b) any Contract to which the
Company is a party or by which it or any of its properties or assets may be
bound or (c) any order, writ, injunction, decree, statute, rule or regulation
applicable to the Company, which defaults or violations would, in the aggregate,
have a Material Adverse Effect or which would prevent or delay the consummation
of the transactions contemplated hereby.
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Section 5.10 LITIGATION. There is no action, suit, or proceeding pending,
or to the best Knowledge of the Company threatened, involving it, at law or in
equity, or before any Governmental Authority.
Section 5.11 COMPLIANCE WITH APPLICABLE LAW. The Company holds all
permits, licenses, variances, exemptions, orders and approvals of all
Governmental Entities necessary for the lawful conduct of its businesses (the
"Company Permits"), except for failures to hold such Company Permits which
would not, in the aggregate, have a Material Adverse Effect. The Company is in
compliance with the terms of the Company Permits, except where the failure so to
comply would not have a Material Adverse Effect. The businesses of the Company
are not being conducted in violation of any applicable law, ordinance, rule,
regulation, decree or order of any Governmental Authority, except for violations
which in the aggregate do not and would not have a Material Adverse Effect.
Section 5.12 TAXES. The Company has duly filed all material federal,
state, local and foreign tax returns required to be filed by it, and it has duly
paid, caused to be paid or made adequate provision for the payment of all Taxes
required to be paid in respect of the periods covered by such returns and has
made adequate provision for payment of all Taxes anticipated to be payable in
respect of all fiscal periods since the periods covered by such returns. All
deficiencies and assessments asserted as a result of such examinations or other
audits by federal, state, local or foreign taxing authorities have been paid,
fully settled or adequately provided for in the Company Financial Statements,
and no issue or claim has been asserted for Taxes by any taxing authority for
any prior period, other than those heretofore paid or provided for. There are
no outstanding agreements or waivers extending the statutory period of
limitation applicable to any federal income tax return of the Company.
Section 5.13 ERISA.
(a) With respect to each employee benefit plan (including any
"employee benefit plan", as defined in Section 3(3) of ERISA), and any material
bonus, pension, profit sharing, deferred compensation, incentive compensation,
stock ownership, stock purchase, stock option, phantom stock, retirement,
vacation, severance, disability, death benefit, hospitalization, insurance or
other plan, arrangement or understanding (whether or not legally binding) (all
the foregoing being herein called "Company Benefit Plans"), maintained or
contributed to by it, the Company has made available to the Predecessor
Companies a true and correct copy of, where applicable, (i) the most recent
annual report (Form 5500) filed with the IRS, (ii) such Company Benefit Plan,
(iii) each trust agreement and group annuity contract, if any, relating to such
Company Benefit Plan and (iv) the most recent actuarial report or valuation
relating to a Company Benefit Plan subject to Title IV of ERISA. None of the
Company Benefit Plans are multiemployer plans within the meaning of
Section 3(37) of ERISA. Each of the Company Benefit Plans covered by ERISA (i)
has been operated in all material respects in accordance with ERISA, (ii) has
not engaged in any prohibited transactions (as such term is defined in
Section 406 of ERISA) and (iii) has met the minimum funding standards of
Section 412 of the Code. No material Reportable Event (within the meaning
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of Section 4043 of ERISA) has occurred and is continuing with respect to any of
the Company Benefit Plans. The Company has not terminated any pension plan or
withdrawn from any multiemployer pension plan.
(b) With respect to the Company Benefit Plans, in the aggregate, no
event has occurred, and to the Knowledge of the Company there exists no
condition or set of circumstances which are reasonably likely to occur, in
connection with which it would be subject to any liability, that would have a
Material Adverse Effect (except liability for benefits claims and funding
obligations payable in the ordinary course), under ERISA, the Code or any other
applicable law.
(c) With respect to the Company Benefit Plans, in the aggregate, there
are no funded benefit obligations for which contributions have not been made or
properly accrued and there are no unfunded benefit obligations which have not
been accounted for by reserves, or otherwise properly footnoted in accordance
with GAAP, on its financial statements referenced in Section 5.05, which
obligations are reasonably likely to have a Material Adverse Effect.
Section 5.14 INTELLECTUAL PROPERTY. Except as shown on Schedule 5.14, no
claim is pending or, to the Knowledge of the Company is threatened, to the
effect that the present or past operations of the Company infringe upon or
conflict with the rights of others with respect to any Intellectual Property,
and no claim is pending or threatened to the effect that any of the Company
Intellectual Property is invalid or unenforceable. No Contract with any party
exists which would impede or prevent the continued use by the Surviving
Corporation of the entire right, title and interest of the Company in and to the
Company Intellectual Property.
Section 5.15 CHANGE IN CONTROL. The Company is not a party to any
Contract which contains a "change in control" or "potential change in control"
provision.
ARTICLE VI
COVENANTS
Section 6.01 COVENANTS OF THE PREDECESSOR COMPANIES AND THE COMPANY.
During the period from the date of this Agreement and continuing until the
Effective Time, the Predecessor Companies and the Company each agree that,
except as expressly contemplated or permitted by this Agreement, or to the
extent that the other parties shall otherwise consent in writing:
(a) Each party shall carry on its respective businesses in the usual,
regular and ordinary course, consistent with past practice, and use its best
efforts to preserve intact its present business organization, keep available the
services of its present officers and employees and preserve its relationships
with customers, suppliers and others having business dealings with it.
(b) No party shall, nor shall any party propose to, (i) declare, set
aside or pay any dividend or other distribution (whether in cash, stock or
property or any combination thereof) in
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respect of any of its capital stock, (ii) split, combine or reclassify any of
its capital stock or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock, (iii) repurchase, redeem or otherwise acquire any of its
securities, or (iv) purchase any equity security of any other corporation.
Notwithstanding the foregoing restrictions contained in this Section 6.01(b), a
Predecessor Company may repurchase Predecessor Company Shares pursuant to and in
accordance with a buy/sell agreement in effect on the date hereof, in which
event the Surviving Corporation Shares allocated for such repurchased
Predecessor Company Shares under Section 2.05(a) shall be reallocated pro-rata
among the remaining outstanding Predecessor Company Shares of the relevant
Predecessor Company.
(c) No party shall authorize for issuance, issue, sell, deliver or
agree or commit to issue, sell or deliver (whether through the issuance or
granting of options, warrants, commitments, subscriptions, rights to purchase or
otherwise) any stock of any class or any other securities (including
indebtedness having the right to vote) or equity equivalents (including stock
appreciation rights), except pursuant to the exercise of Stock Rights
outstanding on the date hereof and disclosed in Schedules 4.02(a) and 5.02(a),
or amend in any material respect any of the terms of any such securities or
agreements outstanding on the date hereof.
(d) No party shall amend or propose to amend its Articles of
Incorporation or Regulations.
(e) No party shall acquire, sell, lease, encumber, transfer or
dispose of any assets outside the ordinary course of business, consistent with
past practice, or any assets which are material to such party, except pursuant
to obligations in effect on the date hereof, or enter into any commitment or
transaction outside the ordinary course of business, consistent with past
practice.
(f) No party shall incur (which shall not be deemed to include
entering into credit agreements, lines of credit or similar arrangements until
borrowings are made under such arrangements) any indebtedness for borrowed money
or guarantee any such indebtedness or issue or sell any debt securities or
warrants or rights to acquire any debt securities of such party or guarantee (or
become liable for) any debt of others or make any loans, advances or capital
contributions or mortgage, pledge or otherwise encumber any material assets or
create or suffer any material lien thereupon other than in each case in the
ordinary course of business consistent with prior practice.
(g) No party shall pay, discharge or satisfy any claims, liabilities
or obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the ordinary
course of business consistent with past practice or in accordance with their
terms, of liabilities reflected or reserved against in, or contemplated by, the
financial statements (or the notes thereto) of any party or incurred in the
ordinary course of business consistent with past practice.
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(h) No party shall change any of the accounting principles or
practices used by it (except as required by GAAP).
(i) No party shall agree to take any of the foregoing actions or take
or agree to take any action that would or is reasonably likely to result in any
of its representations and warranties set forth in this Agreement being untrue
or in any of the conditions to the Merger set forth in Article VII not being
satisfied.
(j) Each of the parties shall give prompt notice to the other parties
of: (i) any notice of, or other communication relating to, a default or event
which, with notice or the lapse of time or both, would become a default,
received by it subsequent to the date of this Agreement and prior to the
Effective Time, under any Contract material to its financial condition,
properties, businesses or results of operations; (ii) any notice or other
communication from any third party alleging that the consent of such third party
is or may be required in connection with the transactions contemplated by this
Agreement, which consent, if required, would breach the representations
contained in Articles IV and V; and (iii) any event or circumstance which may
have a Material Adverse Effect.
(k) The parties shall consult with each other before issuing any
press releases or otherwise making public statements with respect to the
transactions contemplated hereby and in making any filings with any federal or
state governmental or regulatory agency or with any national securities exchange
with respect thereto, and shall also comply with Section 9.09 with respect
thereto.
(l) None of the parties hereto or the Surviving Corporation shall at
any time hereafter take or agree to take any action that (without giving effect
to any action taken or agreed to be taken by the other parties hereto or any of
their Affiliates) would prevent the Surviving Corporation from accounting for
the business combination to be effected by the Merger as a reorganization or a
pooling of interests.
Section 6.02 ADDITIONAL COVENANTS OF THE PARTIES. During the period from
the date of this Agreement and continuing until the Effective Time, each of the
parties agrees that it will not, without the prior written consent of the other
parties, except as contemplated by this Agreement or required by law, (a) enter
into, adopt, amend or terminate any Predecessor Company Benefit Plan or Company
Benefit Plan or other employee benefit plan or any agreement, arrangement, plan
or policy between such party and one or more of its directors or executive
officers, or (b) except for normal increases in the ordinary course of business
consistent with past practice that, in the aggregate, do not result in a
material increase in benefits or compensation expense to such party, increase in
any manner the compensation or fringe benefits of any director, officer or
employee or pay any benefit not required by any plan and arrangement as in
effect as of the date hereof or enter into any Contract to do any of the
foregoing.
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Section 6.03 NO SOLICITATION. No party nor any of its Affiliates,
officers, directors, representatives or agents shall, directly or indirectly,
solicit, initiate or encourage (including by way of furnishing information) any
person, entity or group concerning any merger, sale of substantial assets
outside the ordinary course of business, sale of shares of capital stock or
similar transaction involving it other than the transactions contemplated by
this Agreement. Each party shall promptly advise the other parties of any such
inquiries or proposals.
Section 6.04 ACCESS TO INFORMATION. Upon reasonable notice and subject to
restrictions contained in confidentiality agreements to which such party is
subject (from which such party shall use reasonable efforts to be released), the
Predecessor Companies and the Company shall each afford to the officers,
employees, accountants, counsel and other representatives of the other parties,
access, during normal business hours during the period prior to the Effective
Time, to all its properties, books, Contracts, commitments and records and,
during such period, each of the Predecessor Companies and the Company shall
furnish promptly to another party all information concerning its business,
properties and personnel as such other party may reasonably request. Unless
otherwise required by law or court order, the parties will hold any such
information which is nonpublic in confidence until such time as such information
otherwise becomes publicly available through no wrongful act of the parties, and
in the event of termination of this Agreement for any reason each party shall
promptly return all nonpublic documents obtained from any other party, and any
copies or summaries made of such documents, to such other party.
Section 6.05 BEST EFFORTS. Subject to the terms and conditions of this
Agreement, each of the parties hereto agrees to use its best efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement
including (a) the prompt preparation and filing with the SEC of the Registration
Statement, (b) such actions as may be required to have the Registration
Statement declared effective under the Securities Act as promptly as
practicable, including by consulting with each other as to, and responding
promptly to, any SEC comments with respect thereto, (c) such actions as may be
required to be taken under applicable state securities or Blue Sky laws in
connection with the issuance of Surviving Corporation Shares contemplated
hereby, (d) the preparation and filing of all other forms, registrations and
notices required to be filed to consummate the transactions contemplated hereby
and the taking of such actions as are necessary to obtain any requisite
approvals, consents, orders, exemptions or waivers by any public or private
third party, and (e) the Company using its best efforts to cause the Surviving
Corporation Shares to be admitted for quotation on the NASDAQ National Market
System ("NASDAQ NMS"), subject to official notice of issuance. Each party shall
promptly consult with the other parties with respect to, provide any necessary
information with respect to and provide the other parties (or their counsel)
copies of, all filings made by such party with any Governmental Authority in
connection with this Agreement and the transactions contemplated hereby.
Section 6.06 SHAREHOLDERS MEETINGS. Each of the Predecessor Companies and
the Company shall duly call, give notice of, convene and hold a meeting of its
shareholders (or, in the case of
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each party other than the Company, obtain the unanimous written consent of its
shareholders) as promptly as practicable for the purpose of approving this
Agreement and related matters and, in the case of the Company, approving the
issuance of Surviving Corporation Shares pursuant hereto. Each of the parties
will, through its respective Board of Directors, recommend to its respective
shareholders approval of such matters and will coordinate and cooperate with
respect to the timing of such meetings and written consents as soon as
practicable after the date hereof, and shall use its best efforts to secure the
approval of its shareholders for the transactions contemplated herein.
Section 6.07 AFFILIATES. Prior to the Closing Date, each party shall
deliver to the other parties a letter identifying all Persons who are, at the
time this Agreement is submitted for approval to the shareholders of such party,
"affiliates" of such party for purposes of Rule 145 under the Securities Act.
Section 6.08 [Reserved]
Section 6.09 INDEMNIFICATION AND INSURANCE. (a) In the event of any
threatened or actual claim, action, suit, proceeding or investigation, whether
civil, criminal or administrative, including any such claim, action, suit,
proceeding or investigation in which any of the present or former officers or
directors (the "Managers") of the Predecessor Companies is, or is threatened to
be, made a party by reason of the fact that he is or was a director, officer,
employee or agent of a Predecessor Company or an Affiliate thereof, or is or was
serving at the request of a Predecessor Company or an Affiliate thereof as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, whether before or after the Effective Time,
the parties hereto agree to cooperate and use their best efforts to defend
against and respond thereto. It is understood and agreed that (i) prior to the
Effective Time a Manager's Predecessor Company shall indemnify and hold him
harmless, and from and after the Effective Time the Surviving Corporation shall
indemnify and hold him harmless, as and to the full extent permitted by
applicable law (including by advancing expenses promptly as statements therefor
are received), against any losses, claims, damages, liabilities, costs, expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
connection with any claim, action, suit, proceeding or investigation described
in the first sentence of this Section 6.09, and (ii) in the event of any such
claim, action, suit, proceeding or investigation (whether arising before or
after the Effective Time), the Managers may retain counsel satisfactory to them,
and the relevant Predecessor Company prior to the Effective Time, or the
Surviving Corporation after the Effective Time, shall pay all fees and expenses
of such counsel for the Managers promptly, as statements therefor are received,
and will use its respective best efforts to assist in the vigorous defense of
any such matter; provided that no Predecessor Company nor the Surviving
Corporation shall be liable for any settlement effected without its prior
written consent (which consent shall not be unreasonably withheld); and provided
further that no party shall have any obligation hereunder to any Manager when
and if a court of competent jurisdiction shall ultimately determine, and such
determination shall have become final and non-appealable, that indemnification
of such Manager in the manner contemplated hereby is prohibited by applicable
law. Any Manager wishing to claim indemnification under this Section 6.09(a),
upon learning of any such claim, action, suit, proceeding or investigation,
shall notify the relevant
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Predecessor Company and the Company prior to the Effective Time, and after the
Effective Time the Surviving Corporation, thereof (provided that the failure to
give such notice shall not affect any obligations hereunder, unless the
indemnifying party is actually and materially prejudiced thereby).
(b) The Company agrees that all rights to indemnification existing in
favor of any Manager as provided in a Predecessor Company's Articles of
Incorporation or Regulations, as in effect as of the date hereof, and in any
agreement between such Predecessor Company and the Manager with respect to
matters occurring prior to the Effective Time shall survive the Merger and shall
continue in full force and effect for a period of not less than six years.
(c) The provisions of this Section 6.09 are intended to be for the
benefit of, and shall be enforceable by, each indemnified party and his or her
heirs and representatives.
Section 6.10 [Reserved].
Section 6.11 [Reserved].
Section 6.12 BROKERS OR FINDERS. Each of the Predecessor Companies and
the Company represents, as to itself and its Affiliates, that no agent, broker,
investment banker, financial advisor or other firm or person is or will be
entitled to any broker's or finder's fee or any other commission or similar fee
in connection with any of the transactions contemplated by this Agreement, and
each of them agree to indemnify and hold the others harmless from and against
any and all claims, liabilities or obligations with respect to any other fees,
commissions or expenses asserted by any person on the basis of any act or
statement alleged to have been made by such party or its Affiliate.
Section 6.13. ADVISORY BOARD. In order to coordinate the activities of
the parties in taking all actions necessary or advisable to effect the Merger,
the parties hereby appoint an interim advisory board (the "Advisory Board")
consisting of the following persons: David J. Richards (Chairman), S. Trevor
Ferger, Cecil J. Petitti, Thomas J. Kelley, Michael Blue, M.D., Rodney M. Kinsey
and John P. Kennedy. The Advisory Board will meet periodically at the call of
its Chairman or any other member of the Advisory Board, will review progress
toward effecting the Merger and will use its best efforts to assist in the
resolution of any issues which arise. However, the Advisory Board shall not
have any authority to amend this Agreement or waive any party's obligations
hereunder, except that this Agreement may be terminated by the vote of a
majority of the Advisory Board as provided in Section 8.01.
ARTICLE VII
CONDITIONS
Section 7.01 CONDITIONS TO EACH PARTY'S OBLIGATION TO CLOSE AND EFFECT THE
MERGER. The respective obligation of each party to close the transactions
contemplated herein and effect the
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Merger shall be subject to the satisfaction at or prior to the Closing Date of
the following conditions unless waived by all of the parties:
(a) This Agreement shall have been approved and adopted by the
shareholders of each party in accordance with the OGCL, and the issuance of
Surviving Corporation Shares pursuant to the Merger and the other terms of this
Agreement shall have been approved by the shareholders of the Company in
accordance with the OGCL.
(b) Other than the filing provided for by Section 2.01, all
authorizations, consents, orders or approvals of, or declarations or filings
with, or expirations or terminations of waiting periods imposed by, any
Governmental Authority, and all required third party consents, the failure of
which to obtain would have a Material Adverse Effect on the Surviving
Corporation, taken as a whole, shall have been filed, occurred or obtained. The
Company shall have received all state securities or "Blue Sky" permits and other
authorizations necessary to issue the Surviving Corporation Shares pursuant to
the Merger and the other terms of this Agreement.
(c) The Registration Statement shall have become effective under the
Securities Act and shall not be the subject of any stop order or proceedings
seeking a stop order.
(d) No statute, rule, regulation, executive order, decree or
injunction shall have been enacted, entered, promulgated or enforced by any
court or Governmental Authority which prohibits the consummation of the Merger
and shall be in effect.
(e) The representations and warranties of each party set forth in
this Agreement shall be true and correct as of the date of this Agreement, and
shall also be true in all material respects (except for such changes as are
contemplated by the terms of this Agreement and such changes as would be
required to be made in the Schedules to this Agreement if such Schedules were to
speak as of the Closing Date) on and as of the Closing Date with the same force
and effect as though made on and as of the Closing Date, except if and to the
extent any failures to be true and correct would not, in the aggregate, have a
Material Adverse Effect on the party.
(f) From the date of this Agreement through the Closing Date no party
shall have suffered any Material Adverse Effect (other than changes relating to
the transactions contemplated by this Agreement).
(g) Each party shall have performed all obligations required to be
performed by it under this Agreement at or prior to the Closing Date, except
where any failures to perform would not, in the aggregate, have a Material
Adverse Effect on such party.
(h) The opinion, based on representations of the Predecessor
Companies and the Company, of Porter, Wright, Morris & Arthur, counsel to the
Company, to the effect that:
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(i) The Merger of the Predecessor Companies with and into the
Company will constitute a reorganization within the meaning of Section
368(a)(1)(A) of the Code;
(ii) No gain or loss will be recognized by the Predecessor
Companies or the Company as a consequence of the Merger;
(iii) No gain or loss will be recognized by the shareholders of
the Predecessor Companies on the exchange of their Predecessor Company
Shares for Surviving Corporation Shares (except for any gain or loss
attributable to any cash received pursuant to the exercise of
Dissenter's Rights or for fractional share interests to which they may
be entitled);
(iv) The federal income tax basis of the Surviving Corporation
Shares received by the shareholders of the Predecessor Companies
(including fractional share interests to which they may be entitled)
for their Predecessor Company Shares will be the same as the federal
income tax basis of the Predecessor Company Shares surrendered in
exchange therefor; and
(v) The holding period for the Surviving Corporation Shares
received by shareholders of the Predecessor Companies in exchange for
their Predecessor Company Shares will include the period for which the
Predecessor Company exchanged therefor were held, provided that the
exchanged Predecessor Company Shares were held as a capital asset by
such shareholder on the date of the exchange.
(i) At the Closing, each party shall have furnished the other parties
with copies of (i) the resolutions duly adopted by its Board of Directors
approving the execution and delivery of this Agreement and all other necessary
or proper corporate action to enable it to comply with the terms of this
Agreement, (ii) the resolutions duly adopted by its shareholders approving and
adopting this Agreement and the Merger and (iii) the resolutions duly adopted by
the Company's shareholders approving the issuance of Surviving Corporation
Shares, such resolutions to be certified by the President or a Vice President
and Secretary or an Assistant Secretary of the applicable party.
(j) At the Closing, each party shall have furnished each of the other
parties with an opinion, dated the Closing Date, of counsel to such party, to
the effect that:
(i) Such party is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Ohio;
(ii) Such party has the corporate power to carry on its
businesses as they are being conducted on the Closing Date; and
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(iii) Such party has taken all required corporate action to
approve and adopt this Agreement and this Agreement is a valid and
binding obligation of such party, enforceable in accordance with its
terms, subject to the Enforceability Exceptions.
In rendering the foregoing opinion, such counsel may rely on
certificates of officers and other agents of the party and public officials as
to matters of fact provided such reliance is expressly noted in the opinion and
the certificates of such officers, agents and public officials relied on are
attached to the opinion.
(k) At the time of the Closing, the shareholders of any Predecessor
Company entitled to assert Dissenter's Rights shall own in the aggregate less
than 10% of the outstanding shares of such Predecessor Company, and the
shareholders of the Company entitled to assert Dissenter's Rights shall own in
the aggregate less than 10% of the outstanding shares of the Company.
(l) At the time of the Closing, the Company and Neuromedical Systems,
Inc. shall have entered into a license agreement in substantially the form of
the license agreement previously agreed to between Neuromedical Systems, Inc.
and the parties for use with the Surviving Corporation, which license agreement
provides that it shall become effective at the Effective Time.
(m) At the time of the Closing, the Surviving Corporation Shares
shall have been admitted for quotation on the NASDAQ NMS, subject to official
notice of issuance.
All actions, proceedings, instruments and documents required to carry
out this Agreement, or incidental hereto, and all other legal matters shall have
been approved by counsel to each party, and such counsel shall have received all
documents, certificates and other papers reasonably requested by it in
connection therewith.
ARTICLE VIII
TERMINATION AND AMENDMENT
Section 8.01 TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval of the matters
presented in connection with the Merger, by the shareholders of the Company or
any or all of the Predecessor Companies:
(a) by mutual consent of all of the parties;
(b) by any of the parties if the Merger shall not have been
consummated before September 30, 1996 (unless the failure to consummate the
Merger by such date shall be due to the action or failure to act of the party
seeking to terminate this Agreement);
26
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(c) by any party if any permanent injunction or other order of a
court or other competent authority preventing the consummation of the Merger
shall have become final and non-appealable;
(d) by any party if any required approval of the shareholders of such
party or any other party shall not have been obtained by reason of the failure
to obtain the required vote upon a vote held at a duly held meeting of
shareholders or at any adjournment thereof for the purpose of obtaining such
vote; or
(e) by a vote of a majority of the Advisory Board.
Section 8.02 EFFECT OF TERMINATION. In the event of the termination and
abandonment of this Agreement pursuant to Section 8.01, this Agreement shall
forthwith become void and have no effect, without any liability on the part of
any party hereto or its Affiliates, directors, officers or shareholders, other
than the provisions of Sections 6.04, 6.12, 8.05 and 9.08. Nothing contained in
this Section 8.02 shall relieve any party from liability for any breach of this
Agreement.
Section 8.03 AMENDMENT. This Agreement may be amended by the parties
hereto, by action taken or authorized by their respective Boards of Directors,
at any time before or after approval of the matters presented in connection with
the Merger by the shareholders of the parties but, after any such approval, no
amendment shall be made which by law requires further approval by such
shareholders without such further approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
Section 8.04 EXTENSION; WAIVER. At any time prior to the Effective Time,
the parties hereto may, to the extent legally allowed, (a) extend the time for
the performance of any of the obligations or other acts of the other parties
hereto, (b) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto and (c) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in a written instrument signed on behalf of such party.
Section 8.05 TERMINATION PAYMENT. In the event that (a) the Merger is not
consummated by reason of a party's breach of this Agreement, or (b) a party
fails to obtain the required approval of the Merger by the shareholders of such
party (in either case, a "Defaulting Party), and this Agreement is thereafter
terminated by any party hereto, in addition to bearing its pro-rata share of
expenses pursuant to Section 9.08 of this Agreement, the Defaulting Party shall
within thirty (30) days of the termination of this Agreement pay to the other
parties the sum of Five Hundred Thousand Dollars ($500,000.00), which shall be
shared among the other parties in proportion to the number of Surviving
Corporation Shares which would have been owned by the shareholders of each such
party immediately after the Effective Time had the Merger been consummated. The
parties agree that such payment shall constitute liquidated damages, and not a
penalty, and that such
27
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payment shall be in lieu of any money damages suffered by any party by reason of
the Defaulting Party's breach of this Agreement or failure to obtain shareholder
approval.
ARTICLE IX
MISCELLANEOUS
Section 9.01 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties made herein shall not survive beyond the
Effective Time.
Section 9.02 NOTICES. All notices and other communications hereunder
shall be in writing (and shall be deemed given upon receipt) if delivered
personally, telecopied (which is confirmed) or mailed by registered or certified
mail (return receipt requested) to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice):
(a) if to the Company, to
Papnet of Ohio, Inc.
6059 Memorial Drive
Dublin, Ohio 43017
Attn: David J. Richards, President
Facsimile: (614) 793-9376
with a copy to
Porter, Wright, Morris & Arthur
41 South High Street
Columbus, Ohio 43215
Attn: William J. Kelly, Jr., Esq.
Facsimile: (614) 227-2100
and
(b) if to the Predecessor Companies, to
Carolina Cytology, Inc.
CCWP Partners, Inc.
c/o Rodney M. Kinsey
8651 Gairloch Court
Dublin, Ohio 43017
Facsimile: (614) 889-1052
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ER Group, Inc.
c/o Thomas J. Kelley
8595 Milmichael Court
Dublin, Ohio 43017
Facsimile: (614) 764-2501
Cytology Indiana, Inc.
Indiana Cytology Review Company
c/o Mr. Cecil J. Petitti
Chaney & Petitti Insurance Agency
4266 Tuller Road
Dublin, Ohio 43017
Facsimile: (614)764-1455
with a copy to
Squire, Sanders & Dempsey
41 South High Street
Suite 1300
Columbus, Ohio 43215
Attn: Daniel M. Maher, Esq.
Facsimile: (614) 365-2499
Section 9.03 DESCRIPTIVE HEADINGS. The descriptive headings herein are
inserted for convenience only and are not intended to be part of or to affect
the meaning or interpretation of this Agreement.
Section 9.04 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
Section 9.05 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement (a) constitutes
the entire agreement and supersedes all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof (other than the loan documents referenced in Section 9.08 below) and (b)
shall not be assigned by operation of law or otherwise.
Section 9.06 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Ohio without regard to any
applicable principles of conflicts of law.
Section 9.07 SPECIFIC PERFORMANCE. The parties hereto agree that if any
of the provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise
29
<PAGE>
breached, irreparable damage would occur, no adequate remedy at law would exist
and damages would be difficult to determine, and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or equity.
Section 9.08 EXPENSES. Whether or not the Merger is consummated, all
costs and expenses incurred by the parties in connection with this Agreement and
the transactions contemplated hereby shall be shared by each of the parties in
proportion to the number of Surviving Corporation Shares which are or would be
owned by its shareholders immediately after the Effective Time. By separate
loan documents, the parties have agreed upon the manner and terms of advances to
be made by the Company for such expenses and certain other expenses, and upon
the manner and terms of repayment of such advances in the event of the
termination of this Agreement.
Section 9.09 PUBLICITY. Except as otherwise required by law or the rules
of any national securities exchange, for so long as this Agreement is in effect,
no party shall issue or cause the publication of any press release or other
public announcement with respect to the transactions contemplated by this
Agreement without prior approval of the other parties, which approval shall not
be unreasonably withheld.
Section 9.10 PARTIES IN INTEREST. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
person or persons any rights, benefits or remedies of any nature whatsoever
under or by reason of this Agreement, except pursuant to Section 6.09.
[The remainder of this page is intentionally left blank]
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IN WITNESS WHEREOF, the Company and each of the Predecessor Companies have
caused this Agreement to be signed by their respective officers thereunto duly
authorized as of the date first written above.
PAPNET OF OHIO, INC.
By: /s/ David J. Richards
---------------------------------------
David J. Richards, President
CYTOLOGY INDIANA, INC.
By: /s/ S. Trevor Ferger
---------------------------------------
S. Trevor Ferger, President
INDIANA CYTOLOGY REVIEW COMPANY
By: /s/ Cecil J. Petitti
---------------------------------------
Cecil J. Petitti, President
ER GROUP, INC.
By: /s/ Thomas J. Kelley
---------------------------------------
Thomas J. Kelley, President
CAROLINA CYTOLOGY, INC.
By: /s/ Rodney M. Kinsey
---------------------------------------
Rodney M. Kinsey, President
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CCWP PARTNERS, INC.
By: /s/ Rodney M. Kinsey
---------------------------------------
Rodney M. Kinsey, President
32
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EXHIBIT 2.03(a)
CERTIFICATE OF
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
PAPNET OF OHIO, INC.
(adopted ________, 1996)
David J. Richards, President, and John P. Kennedy, Assistant Secretary,
of Papnet of Ohio, Inc. (the "Corporation"), with its principal offices
located at Dublin, Franklin County, Ohio, do hereby certify that at a duly
called meeting of all shareholders of the Corporation, such shareholders
approved by the affirmative vote of at least sixty-six and two-thirds percent
(66-2/3%) of the shares entitled to vote thereon, the below resolution
adopting the below Amended and Restated Articles of Incorporation, pursuant
to Section 1701.72 of the Ohio Revised Code:
RESOLVED, that the Amended and Restated Articles of Incorporation of the
Corporation set forth below are hereby adopted as the amended and restated
articles of incorporation of the Corporation:
AMENDED AND RESTATED ARTICLES OF INCORPORATION
FIRST: The name of said Corporation shall be NetMed, Inc.
SECOND: The place in Ohio where its principal office is to be located
is the City of Dublin, Franklin County, Ohio.
THIRD: The purposes for which it is formed are to engage in any
business or activity for which corporations may be formed under Sections
1701.01 through 1701.99, inclusive, of the Ohio Revised Code, as now enacted
and as the same may hereafter be amended from time to time.
<PAGE>
FOURTH:
A. AUTHORIZED SHARES.
The total number of shares of all classes of stock which the
Corporation shall have the authority to issue is Fifteen Million
Five Hundred Thousand (15,500,000) consisting of:
1. Fifteen Million (15,000,000) shares of Common Stock,
without par value (the "Common Stock");
2. Two Hundred Fifty Thousand (250,000) shares of Voting
Preferred Stock, without par value (the "Voting Preferred
Stock"); and
3. Two Hundred Fifty Thousand (250,000) shares of
Non-Voting Preferred Stock, without par value (the
"Non-Voting Preferred Stock").
B. COMMON STOCK
The holders of the Common Stock are entitled at all times to one vote
for each share of Common Stock and to such dividends as the Board of
Directors may in its discretion from time to time legally declare,
subject, however, to the voting and dividend rights, if any, of the
holders of the Voting Preferred Stock and the Non-Voting Preferred
Stock. In the event of any liquidation, dissolution or winding up of
the Corporation, the remaining assets of the Corporation after the
payment of all debts and necessary expenses shall be distributed among
the holders of the Common Stock pro rata in accordance with their
respective holdings, subject, however, to the rights of the holders of
the Voting Preferred Stock and the Non-Voting Preferred Stock then
outstanding. The Common Stock is subject to all of the terms and
provisions of the Voting Preferred Stock and the Non-Voting Preferred
Stock as fixed by the Board of Directors as hereinafter provided.
C. VOTING PREFERRED STOCK
The Board of Directors is hereby expressly authorized to adopt
amendments to the Articles of Incorporation to provide for the
issuance of one or more series of Voting Preferred Stock, and to
establish from time to time the number of shares to be included in
each such series, to fix the designation, powers, preferences and
rights of the shares of each such series and any qualifications,
limitations or restrictions
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thereof, including without limitation the following, and the shares
of each series may vary from the shares of any other series in the
following respects:
(a) the division of such shares into series and the designation
and authorized number of shares of each series;
(b) the annual dividend rate on the shares;
(c) the dates of payment of dividends, whether the dividends
shall be cumulative and, if cumulative, the dates from which
dividends shall accumulate;
(d) the redemption price or prices for the particular series,
if redeemable, and the terms and conditions of such redemption;
(e) sinking fund requirements, if any;
(f) the preference, if any, of the shares of such series in the
event of any voluntary or involuntary liquidation, dissolution,
or winding up of the affairs of the Corporation;
(g) the right, if any, of the shares of such series to be
converted into shares of any other series or class and the terms
and conditions of such conversion; and
(h) any other relative rights, preferences, and limitations of
that series.
The holders of Voting Preferred Stock shall be entitled at all times
to one vote for each share of Voting Preferred Stock, voting as a
class.
D. NON-VOTING PREFERRED STOCK
The Board of Directors is hereby expressly authorized to adopt
amendments to the Articles of Incorporation to provide for the
issuance of one or more series of Non-Voting Preferred Stock, and to
establish from time to time the number of shares to be included in
each such series, to fix the designation, powers, preferences and
rights of the shares of each such series and any qualifications,
limitations or restrictions thereof, including without limitation the
following, and the shares of each series may vary from the shares of
any other series in the following respects:
(a) the division of such shares into series and the designation
and authorized number of shares of each series;
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<PAGE>
(b) the annual dividend rate on the shares;
(c) the dates of payment of dividends, whether the dividends
shall be cumulative and, if cumulative, the dates from which
dividends shall accumulate;
(d) the redemption price or prices for the particular series, if
redeemable, and the terms and conditions of such redemption;
(e) sinking fund requirements, if any;
(f) the preference, if any, of the shares of such series in the
event of any voluntary or involuntary liquidation, dissolution,
or winding up of the affairs of the Corporation;
(g) the right, if any, of the shares of such series to be
converted into shares of any other series or class and the terms
and conditions of such conversion; and
(h) any other relative rights, preferences, and limitations of
that series.
Except as otherwise required by law, no holders of Non-Voting
Preferred Stock shall be entitled to vote on any matter submitted to
the shareholders of the Corporation.
FIFTH: The Corporation, through its Board of Directors, shall have the
right and power to repurchase any of its outstanding shares at such times, for
such considerations and upon such terms and conditions as may be agreed upon
between the Corporation and the selling shareholder or shareholders.
SIXTH: No holders of shares of the Corporation shall have any pre-
emptive right to subscribe for or to purchase any shares of the Corporation of
any class, whether now or hereafter authorized.
SEVENTH: The affirmative vote of the holders of the shares entitling
them to exercise two-thirds of the voting power of the Corporation shall be
required for the approval or authorization of any (i) merger or consolidation
or (ii) sale, lease, exchange or other disposition of all or substantially
all of the assets of the Corporation to or with any other corporation, person
or other entity; provided, however, that such two-thirds voting requirement
shall not be applicable if the Board of Directors of the Corporation shall
have approved such a transaction described in clause (i) or (ii) by
resolutions adopted by two-thirds of the members of the Board of Directors.
Except as otherwise expressly provided in this Article Seventh, or elsewhere
in these Articles, or in the Regulations of the Corporation, and
notwithstanding any provision of the Ohio Revised Code now
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<PAGE>
or hereafter in force, requiring for any purpose the vote or consent of the
holders of shares entitling them to exercise two-thirds, or any other
proportion, of the voting power of the Corporation or of any class or classes
of shares thereof, such action may be taken by the vote or consent of the
holders of shares entitling them to exercise a majority of the voting power
of the Corporation or of such class or classes of shares thereof.
EIGHTH: The Board of Directors shall base the response of the
Corporation to any "Acquisition Proposal" on the Board of Directors'
evaluation of what is in the best interest of the Corporation. In evaluating
what is in the best interest of the Corporation, the Board of Directors shall
consider all relevant factors including, without limitation:
(1) The best interest of the shareholders which, for this purpose,
requires the Board of Directors to consider, among other factors, not only
the consideration offered in the Acquisition Proposal in relation to the
then current market price of the Corporation's shares, but also in relation
to the current value of the Corporation in a freely negotiated transaction
and in relation to the Board of Directors' then estimate of the future
value of the Corporation as an independent entity or as the subject of a
future Acquisition Proposal; and
(2) Such other factors as the Board of Directors determines to be
relevant, including, among other factors, the long-term and short-term
interests of the Corporation and its subsidiaries and their businesses and
properties and the social, legal, and economic effects upon the employees,
suppliers, customers, creditors, and other affected persons, firms, and
corporations and on the communities and geographical areas in which the
Corporation and its subsidiaries operate or are located.
"Acquisition Proposal" means any proposal for the consolidation or
merger of the Corporation with or into another corporation, any share
exchange involving the Corporation's outstanding capital stock, any
liquidation or dissolution of the Corporation, any transfer of all or a
material portion of the assets of the Corporation, and any tender offer or
exchange offer for any of the Corporation's outstanding capital stock.
NINTH: The Corporation shall indemnify any director, officer,
incorporator or any former director or officer of the Corporation and any person
who is or has served at the request of the Corporation as a director, officer or
trustee of another corporation, partnership, joint venture, trust or other
enterprise (and his or her heirs, executors and administrators) against
expenses, including attorney fees, judgments, fines and amounts paid in
settlement, actually and reasonably incurred by him or her by reason of the fact
that he or she is or was such director, officer, incorporator or trustee in
connection with any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative, or investigative, to the full extent
and according to the procedures and requirements set forth in the Ohio General
Corporation Law as the same may be in effect from time to time. The
indemnification provided herein shall not be deemed to restrict the right of the
Corporation to (i) indemnify employees, agents and others as permitted by law,
(ii) purchase and maintain insurance or provide similar protection on behalf of
the directors, officers or
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such other persons against liabilities asserted against them or expenses
incurred by them arising out of their service to the Corporation as
contemplated herein, and (iii) enter into agreements with such directors,
officers, incorporators, employees, agents or others indemnifying them
against any and all liabilities asserted against them or incurred by them
arising out of their service to the Corporation as contemplated herein.
TENTH: No shareholder shall have the right to vote cumulatively in the
election of directors pursuant to and in accordance with Section 1701.69(B)(10)
of the Ohio Revised Code.
ELEVENTH: These Articles may be amended by the affirmative vote of the
holders of shares entitling them to exercise a majority of the voting power of
the Corporation on the proposal; provided, however, that the provisions set
forth in Articles Eighth, Ninth, and Tenth, and this Article Eleventh, may not
be altered, repealed or amended in any respect, and any new provisions
inconsistent therewith may not be adopted, unless such action is approved by the
affirmative vote of the holders of at least eighty percent (80%) of the
outstanding shares of capital stock of the Corporation present in person or
represented by proxy and entitled to vote on such matter at a meeting of
shareholders called for that purpose, except that if the Board of Directors, by
an affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of
the entire Board of Directors, recommends approval of such amendment to these
Articles to the shareholders, such approval may be effected by the affirmative
vote of the holders of at least a majority of the Corporation's outstanding
shares of capital stock of the Corporation present in person or represented by
proxy and entitled to vote on such matter at a meeting of shareholders called
for that purpose.
TWELFTH: These Amended and Restated Articles of Incorporation take the
place of and supersede the existing Articles of Incorporation of the
Corporation.
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<PAGE>
IN WITNESS WHEREOF, David J. Richards, President, and John P. Kennedy,
Assistant Secretary, acting for and on behalf of the Corporation, have hereunto
subscribed their names this ____ day of ______, 1996.
PAPNET OF OHIO, INC.
By: __________________________________
David J. Richards, President
By: __________________________________
John P. Kennedy, Assistant Secretary
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<PAGE>
Exhibit 2.03(b)
AMENDED AND RESTATED
REGULATIONS
OF
NETMED, INC.
(the "Corporation")
(adopted on ______, 1996)
ARTICLE I
Meetings of Shareholders
Section 1.01. ANNUAL MEETINGS. The annual meeting of shareholders of
the Corporation shall be held at such time and on such business day as the
Board of Directors may determine each year. The annual meeting shall be held
at the principal office of the Corporation or at such other place within or
without the State of Ohio as the Board of Directors may determine. The
directors shall be elected thereat and such other business transacted as may
properly be brought before the meeting.
Section 1.02. SPECIAL MEETINGS. Special meetings of the shareholders
of the Corporation may be called at any time by the Chairman of the Board,
President or Chief Executive Officer or, in cases of such officers' absence
from the United States, death or disability, any Vice President who is
authorized in such circumstances to exercise the authority of the President,
or by the Board of Directors by action at a meeting or by a majority of the
directors acting without a meeting, or by shareholders holding fifty percent
(50%) or more of the voting power of the then-outstanding shares entitled to
vote in an election of directors. Such meetings may be held within or
without the State of Ohio at such time and place as may be specified in the
notice thereof.
Section 1.03. NOTICE OF MEETINGS. Written notice of every annual or
special meeting of the shareholders of the Corporation stating the time,
place and purposes thereof shall be given to each shareholder entitled to
notice as provided by law, not less than seven (7) nor more than ninety (90)
days before the date of the meeting. Such notice may be given by or at the
direction of the Chairman of the Board or Secretary of the Corporation, or
such other officer as is designated by the Board of Directors, by personal
delivery or by mail addressed to the shareholder at his last address as it
appears on the records of the Corporation. Any shareholder may waive in
writing notice of any meeting, either before or after the holding of such
meeting, and, by attending any meeting without protesting the lack of proper
notice prior to or at the commencement of the meeting, shall be deemed to
have waived notice thereof.
<PAGE>
Section 1.04. PERSONS BECOMING ENTITLED BY OPERATION OF LAW OR
TRANSFER. Every person who, by operation of law, transfer or any other means
whatsoever, shall become entitled to any shares, shall be bound by every
notice in respect of such shares which previously to the entering of his name
and address on the records of the Corporation shall have been duly given to
the persons from whom he derives his title to such shares.
Section 1.05. QUORUM AND ADJOURNMENTS. Except as may be otherwise
required by law or by the Articles of Incorporation or these Regulations, the
holders of a majority of the shares entitled to vote at a meeting, present in
person or by proxy, shall constitute a quorum; provided that any meeting duly
called, whether a quorum is present or otherwise, may, by vote of the holders
of the majority of the shares represented and entitled to vote thereat,
adjourn from time to time, in which case no further notice of any such
adjourned meeting need be given.
Section 1.06. PRESIDING OFFICER. The Chairman of the Board, or such
other member of the Board or officer as is designated by the Board of
Directors, shall preside over meetings of the shareholders. The Secretary of
the Corporation shall act as Secretary of the shareholders' meeting and shall
record all of the proceedings of such shareholders' meeting provided that, in
the absence of such officer, the presiding officer shall appoint another
officer of the Corporation to act as Secretary of the meeting.
Section 1.07. SHAREHOLDER PROPOSALS. At an annual or special meeting
of shareholders, only such business shall be conducted, and only such
proposals shall be acted upon, as shall have been properly brought before
such meeting. To be properly brought before a meeting of shareholders,
business must be (i) in the case of a special meeting, specified in the
notice of the special meeting (or any supplement thereto), (ii) properly
brought before the meeting by or at the direction of the Board of Directors,
or (iii) otherwise properly brought before the meeting by a shareholder. For
business to be properly brought before a meeting of shareholders by a
shareholder, the shareholder must have given timely notice thereof in writing
to the Secretary of the Corporation. To be timely, a shareholder's notice
must be delivered to or mailed and received at the principal executive
offices of the Corporation not less than thirty (30) days nor more than sixty
(60) days prior to the meeting of shareholders; provided, however, that, if
less than forty (40) days' notice or prior public disclosure of the date of
the meeting is given or made to the shareholders, notice by the shareholder
to be timely must be so delivered or received not later than the close of
business on the tenth day following the earlier of (i) the day on which such
notice of the date of the meeting was mailed, or (ii) the day on which such
public disclosure was made.
A shareholder's notice to the Secretary shall set forth, as to
each matter the shareholder proposes to bring before a meeting of
shareholders, (i) a brief description of the business desired to be brought
before the meeting and the reasons for conducting such business at the
meeting, (ii) the name and address, as they appear on the Corporation's
books, of the shareholder proposing such business and any shareholders known
by such shareholder to be supporting such proposal, (iii) the class and
number of shares of the Corporation which are beneficially owned by the
shareholder on the date of such shareholder's notice and by any other
shareholders known by
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such shareholder to be supporting such proposal on the date of such
shareholder's notice, and (iv) any material interest of the shareholder in
such proposal.
Notwithstanding anything in these Regulations to the contrary,
no business shall be conducted at a meeting of shareholders except in
accordance with the procedures set forth in this Section 1.07. The presiding
officer of the meeting of shareholders shall, if the facts warrant,
determine and declare to the meeting that the business was not properly
brought before the meeting in accordance with the procedures prescribed by
these Regulations, and if he should so determine, he shall so declare to the
meeting and any such business not properly brought before the meeting shall
not be transacted.
Section 1.08. CONDUCT OF VOTING. At all meetings of shareholders,
unless the voting is conducted by inspectors, the proxies and ballots shall
be received, and all questions relating to the qualification of voters, the
validity of proxies and the acceptance or rejection of votes shall be
decided, by the presiding officer of the meeting. If demanded by
shareholders, present in person or by proxy, entitled to cast ten percent
(10%) in number of votes entitled to be cast, or if ordered by the presiding
officer of the meeting, the vote upon any election or question shall be taken
by ballot and, upon like demand or order, the voting shall be conducted by
two inspectors appointed by the presiding officer, in which event the proxies
and ballots shall be received, and all questions relating to the
qualification of voters, the validity of proxies and the acceptance or
rejection of votes shall be decided, by such inspectors. Unless so demanded
or ordered, no vote need be by ballot and voting need not be conducted by
inspectors. No candidate for election as a director at a meeting shall serve
as an inspector.
Section 1.09. ACTION WITHOUT A MEETING. Anything contained in the
Regulations to the contrary notwithstanding, any action which may be
authorized or taken at a meeting of the shareholders may be authorized or
taken without a meeting with the affirmative vote, or approval, and in a
writing or writings signed by, all of the shareholders who would be entitled
to notice of a meeting of the shareholders held for such purpose, which
writings shall be filed with or entered upon the records of the Corporation.
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ARTICLE II
Directors
Section 2.01. AUTHORITY. The business and affairs of the Corporation
shall be managed by and under the direction of the Board of Directors. The
Board of Directors may exercise all such authority and powers of the
Corporation and do all such lawful acts and things as are not by statute or
these Regulations directed or required to be exercised or done by the
shareholders.
Section 2.02. NUMBER. The number of directors may be determined by the
vote of the holders of a majority of the voting power of the shares
represented at any annual meeting or special meeting called for the purpose
of electing directors or by resolutions adopted at a meeting of the Board of
Directors by affirmative vote of a majority of the directors then in office,
provided that: (i) the number of directors shall in no event be fewer than
six (6) nor more than fifteen (15); (ii) no decrease in the number of
directors shall have the effect of shortening the terms of any incumbent
director and the class of directors to which he is elected; and (iii) no
action shall be taken (whether through amendment of these Regulations or
otherwise) to increase the number of directors provided in these Regulations
from time to time unless at least sixty-six and two-thirds percent (66-2/3%)
of the entire Board of Directors shall concur in such action.
Section 2.03. CLASSES AND TERMS OF DIRECTORS. The directors shall be
classified in respect of the time for which they severally hold office by
dividing them into three (3) classes, each class consisting of one-third of
the whole number of the board of directors with any number not evenly
divisible by three (3) assigned to such class as the board of directors may
direct. At the first election at which directors are divided into three (3)
classes, the directors of the first class shall be elected for a term of one
(1) year, the directors of the second class shall be elected for a term of
two (2) years, and the directors of the third class shall be elected for a
term of three (3) years.
If at any time the full authorized board of directors should consist of
less than nine (9) persons, the directors shall be classified into two (2)
classes, each class consisting of one-half of the whole number of the board
of directors, with a number not evenly divisible by two (2) assigned to such
class as the board of directors may direct. At the first election at which
directors are divided into two (2) classes, the directors of the first class
shall be elected for a term of one (1) year and the directors of the second
class shall be elected for a term of two (2) years.
At each annual election thereafter at which directors are elected
by class, the successors to the directors of the class whose terms expire in
that year shall be elected to hold office for a term of years equal to the
number of classes that there are to be, so that the term of office of one
class of directors expires in each year. Each director shall serve until his
successor shall be elected, or until his earlier resignation, removal from
office or death.
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In the event a change in the authorized number of directors causes a
disparity to exist in the number of persons in the classes of directors, the
board of directors shall designate the classes to which directors shall be
elected so as to equalize the classes as nearly as feasible.
Section 2.04. NOMINATION. Only persons who are nominated in accordance
with the following procedures shall be eligible for election as directors.
Nominations of persons for election as directors of the Corporation may be
made at a meeting of shareholders by or at the direction of the directors, by
any nominating committee or person appointed by the directors, or by any
shareholder of the Corporation entitled to vote for the election of directors
at the meeting who complies with the notice procedures set forth in this
Section 2.04. Such nominations, other than those made by or at the direction
of the directors, shall be made pursuant to timely notice in writing to the
Secretary of the Corporation. To be timely, a shareholder's notice shall be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than thirty (30) days nor more than sixty (60) days
prior to the meeting; provided, however, that ,in the event that less than
forty (40) days' notice or prior public disclosure of the date of the meeting
is given or made to shareholders, notice by the shareholder to be timely must
be so received not later than the close of business on the tenth day
following the earlier of the day on which such notice of the date of the
meeting was mailed or such public disclosure was made. Such shareholder's
notice shall set forth (i) as to each person who is not an incumbent director
whom the shareholder proposes to nominate for election as a director, (a) the
name, age, business address and residence address of such person; (b) the
principal occupation or employment of such person; (c) the class and number
of shares of the Corporation which are beneficially owned by such person; and
(d) any other information relating to such person that is required to be
disclosed in solicitations for proxies for election of directors pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended, or any
successor provision; and (ii) as to the shareholder giving the notice, (a)
the name and record address of such shareholder and (b) the class and number
of shares of the Corporation which are beneficially owned by such
shareholder. Such notice shall be accompanied by the written consent of each
proposed nominee to serve as a director of the Corporation, if elected. The
Corporation may require any proposed nominee to furnish such other
information as may be reasonably required by the Corporation to determine the
qualifications of such proposed nominee to serve as a director of the
Corporation.
The presiding officer of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the provisions of this Section 2.04; and if he should so
determine, the defective nomination shall be disregarded.
Section 2.05. REMOVAL OF DIRECTORS. Notwithstanding any other provision
of the Articles of Incorporation or these Regulations (and notwithstanding the
fact that some lesser percentage may be specified by the General Corporation
Law of the State of Ohio, the Articles of Incorporation or these Regulations),
any director or the entire Board of Directors of the Corporation may be removed
from office at any time, but only for cause and only by the affirmative vote of
the holders of at least eighty percent (80%) of the outstanding shares of
capital stock of the Corporation present in person
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or represented by proxy and entitled to vote on the election of directors at
a meeting of shareholders called for that purpose, except that if the Board
of Directors, by an affirmative vote of at least sixty-six and two-thirds
percent (66-2/3%) of the entire Board of Directors, recommends removal of a
director to the shareholders, such removal may be effected by the affirmative
vote of the holders of at least a majority of the outstanding shares of
capital stock of the Corporation present in person or represented by proxy
and entitled to vote on the election of directors at a meeting of
shareholders called for that purpose.
Section 2.06. VACANCIES AND NEWLY-CREATED DIRECTORSHIPS. Vacancies and
newly-created directorships resulting from any increase in the authorized
number of directors may be filled by a majority of the directors then in
office, although less than a quorum, or by a sole remaining director, and the
directors so chosen shall hold office for a term expiring at the annual
meeting of shareholders at which the term of the class to which they have
been elected expires and until their successors are duly elected and
qualified. If there are no directors in office, then an election of
directors may be held in the manner provided by the General Corporation Law
of the State of Ohio.
Section 2.07. QUORUM AND ADJOURNMENT. A majority of the directors in
office at the time shall constitute a quorum, provided that any meeting duly
called, whether a quorum is present or otherwise, may, by vote of a majority
of the directors present, be adjourned. At any meeting at which a quorum is
present, all questions and business shall be determined by the affirmative
vote of not less than a majority of the directors present, except as
otherwise provided in the Articles of Incorporation or these Regulations or
as otherwise authorized by law. Any action required or permitted to be taken
at a meeting of the Board of Directors may be taken without a meeting if a
unanimous written consent which sets forth the action is signed by each
member of the Board of Directors and filed with the minutes of the
proceedings of the Board of Directors.
Section 2.08. REGULAR MEETINGS. After each annual meeting of
shareholders at which directors shall have been elected, the Board of
Directors shall meet as soon as practicable for the purpose of organization
and the transaction of other business. Such first regular meeting shall be
held at any place as may be designated by the Chairman of the Board or by
action of the Board of Directors, or in default of such designation at the
place of the holding of the immediately preceding meeting of shareholders.
Any other regular meeting of the Board of Directors shall be held on such
date and at any place as may be designated from time to time by the Chairman
of the Board or by action of the Board of Directors. No notice of such
regular meetings shall be necessary if held as hereinabove provided.
Section 2.09. SPECIAL MEETINGS. Special meetings of the directors may
be held at any time within or without the State of Ohio upon call by the
Chairman of the Board, President, or Chief Executive Officer or, in the case
of such officers' absence from the United States, death or disability, such
other officer who is authorized in such circumstances to exercise the
authority of the President, or by action of the Board of Directors or any
three (3) members thereof.
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Section 2.10. NOTICE OF MEETING. Except as provided in Section 2.09,
the Secretary shall give or cause to be given to each director notice of each
regular and special meeting of the Board of Directors. The notice shall
state the time and place of the meeting. Notice is given to a director when
it is delivered personally to him, left at his residence or usual place of
business, or sent by telegraph or telephone or via overnight delivery, at
least three (3) days before the time of the meeting or, in the alternative,
by mail to his address as it shall appear on the records of the Corporation,
at least five (5) days before the time of the meeting; provided, however,
that notice of a special meeting which is called by the Chairman of the
Board, President or Chief Executive Officer is given to a director when it is
delivered personally to him or sent by telegraph or telephone at least
twenty-four (24) hours before the time of the meeting. Unless these
Regulations or a resolution of the Board of Directors provides otherwise, the
notice need not state the business to be transacted at or the purposes of any
regular or special meeting of the Board of Directors. No notice of any
meeting of the Board of Directors need be given to any director who attends,
or to any director who, in a writing executed and filed with the records of
the meeting either before or after the holding thereof, waives such notice.
Any regular or special meeting of the Board of Directors may be adjourned
from time to time and be reconvened at the same or some other place and no
notice need be given of any such adjourned meeting.
Section 2.11. MEETING BY CONFERENCE TELEPHONE. Members of the Board of
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting
can hear each other at the same time. Participation in a meeting by these
means constitutes presence in person at a meeting.
Section 2.12. COMPENSATION. The Board of Directors shall have the
authority to fix the compensation of the directors. The directors may be
paid their expenses, if any, of attendance at each regular and special
meeting of the Board of Directors or committees thereof. In addition, by
resolution of the Board of Directors, a stated annual retainer and/or a fixed
sum for attendance at each regular or special meeting of the Board of
Directors or committees thereof, and other compensation for their services as
such, may be paid to directors. A director who serves the Corporation in any
other capacity also may receive compensation for such other services if
approved by the Board of Directors.
ARTICLE III
Committees
Section 3.01. COMMITTEES. The Board of Directors may appoint from
among its members an executive committee and other committees composed of
three (3) or more directors and delegate to these committees any of the
powers of the Board of Directors, except the power to declare dividends or
other distributions on stock, elect directors or members of any committee,
recommend to the shareholders any action which requires shareholder approval,
or approve any merger or share exchange.
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Section 3.02. COMMITTEE PROCEDURE. The Board of Directors shall have
the power to prescribe the manner in which proceedings of each committee
shall be held. Unless the Board of Directors shall otherwise provide, the
actions of each committee shall be governed by the following rules of
procedure. A majority of the members of a committee shall constitute a
quorum for the transaction of business and the act of a majority of those
present at a meeting at which a quorum is present shall be the act of the
committee. The members of a committee present at any meeting, whether or not
they constitute a quorum, may appoint a director to act in the place of an
absent member. Any action required or permitted to be taken at a meeting of
a committee may be taken without a meeting, if a unanimous written consent
which sets forth the action is signed by each member of the committee and
filed with the minutes of the committee. The members of a committee may
conduct any meeting thereof by conference telephone or similar communications
equipment if all persons participating in the meeting can hear each other at
the same time. Participation in a meeting by these means constitutes
presence in person at a meeting. In the absence of any prescription by the
Board of Directors or any applicable provision of these Regulations, each
committee may prescribe the manner in which its proceedings shall be
conducted.
Section 3.03. DELEGATION. The Board of Directors may delegate to
officers, employees or agents the performance of duties not specifically
required by law or these Regulations to be performed by the Board of
Directors.
ARTICLE IV
Officers
Section 4.01. ELECTION. The officers of the Corporation shall include
a Chairman of the Board, a President, a Chief Executive Officer (who shall
also be either the Chairman of the Board or President of the Corporation), a
Secretary, a Treasurer, and such number of Vice Presidents (which may include
one or more Executive Vice Presidents and/or Senior Vice Presidents),
Assistant Secretaries, Assistant Treasurers, and other officers as are, in
the judgment of the Board, required to transact the business of the
Corporation. All officers of the Corporation shall be elected and the
compensation of all such officers may be fixed by the Board. Any two or more
offices may be held by the same person. Any officers may, but no officer
except the Chairman of the Board must, be chosen from among the Board of
Directors. The officers of the Corporation shall have the authority, perform
the duties and exercise the powers in the management of the Corporation
usually incident to the offices held by them respectively, and/or such other
authority, duties and powers as may be assigned to them from time to time by
the Board of Directors or the Chief Executive Officer.
Section 4.02. TERM. The officers of the Corporation shall be elected
annually at the organizational meeting of the Board of Directors, or
otherwise as determined by the Board of Directors, and shall hold office at
the discretion of the Board of Directors. Any officer may be removed at any
time, with or without cause, by the Board of Directors. A vacancy in any
office, however created, may be filled by the Board of Directors at any
regular or special meeting.
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Section 4.03. CHAIRMAN OF THE BOARD. The Chairman of the Board, who
shall be a member of the Board of Directors, shall be such officer who from
time to time is so designated by the Board of Directors. The Chairman of the
Board shall preside at all meetings of the shareholders and the Board of
Directors and shall perform all duties incident to the office. He may sign
and execute, in the name of the Corporation, all authorized deeds, mortgages,
bonds, contracts, licenses and other instruments of every description. The
Chairman of the Board shall have general and active management of the
business of the Corporation and shall see that all orders and resolutions of
the Board of Directors are carried into effect.
Section 4.04. PRESIDENT. The President shall have the authority,
perform the duties and exercise the powers usually incident to the office of
President and/or assigned to him from time to time by the Board of Directors,
the Chairman of the Board or the Chief Executive Officer. In the absence of
the Chairman of the Board and the Chief Executive Officer, the President
shall preside at all meetings of the shareholders and the Board of Directors.
He may sign and execute, in the name of the Corporation, all authorized
deeds, mortgages, bonds, contracts, licenses and other instruments of every
description.
Section 4.05. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer,
who shall be either the Chairman or President of the Corporation, shall have
full right, authority and power to control the personnel of the Corporation,
and, except to the extent that the duties of an elected officer are
prescribed or otherwise limited by the Board of Directors, by law or by these
Regulations, to prescribe the duties of all officers of the Corporation, with
such limitations thereon as he deems proper. He may sign and execute, in
the name of the Corporation, all authorized deeds, mortgages, bonds,
contracts, licenses and other instruments of every description. In the
absence of the Chairman of the Board, the Chief Executive Officer shall
preside at all meetings of the shareholders and the Board of Directors. The
Chief Executive Officer shall perform all duties incident to the office of
Chief Executive Officer and such other duties as are assigned to him by the
Board of Directors.
Section 4.06. VICE PRESIDENTS. The Vice President or Vice Presidents,
at the request of the Chairman of the Board, President or Chief Executive
Officer, or in the President's absence or during his inability to act, shall
perform the duties and exercise the functions of the President, and when so
acting shall have the powers of the President. If there be more than one
Vice President, the Board of Directors may determine which one or more of the
Vice Presidents shall perform any of such duties or exercise any of such
functions, or if such determination is not made by the Board of Directors,
Chairman of the Board, President or Chief Executive Officer may make such
determination. The Vice President or Vice Presidents shall have such other
powers and perform such other duties, and have such additional descriptive
designations in their titles, if any, as are from time to time assigned to
them by the Board of Directors, Chairman of the Board, President or Chief
Executive Officer.
Section 4.07. SECRETARY. The Secretary shall have the authority, perform
the duties and exercise the powers usually incident to the office of the
Secretary and/or assigned to him from time to time by the Board of Directors,
the Chairman of the Board or the Chief Executive Officer. The
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Secretary or such other officer of the Corporation as is designated by the
Chairman of the Board or the Chief Executive Officer shall record the
proceedings of the meetings of the shareholders and of the directors in a
minute book maintained for such purpose. The Secretary shall see that all
notices are duly given in accordance with the provisions of these Regulations
or as required by law; and he shall be the custodian of the records of the
Corporation and may witness any document on behalf of the Corporation, the
execution of which is duly authorized. The Secretary shall see that the
corporate seal is affixed to any document where required or desired.
Section 4.08. TREASURER. The Treasurer shall have the authority,
perform the duties and exercise the powers usually incident to the office of
the Treasurer and/or assigned to him from time to time by the Board of
Directors, the Chairman of the Board or the Chief Executive Officer. The
Treasurer shall have charge of and be responsible for all funds, securities,
receipts and disbursements of the Corporation, and shall deposit, or cause to
be deposited, in the name of the Corporation, all monies or other valuable
effects in such banks, trust companies or other depositories as shall, from
time to time, be selected by the Board of Directors, Chairman of the Board,
Chief Executive Officer or President. The Treasurer shall render to the
Board of Directors, Chairman of the Board, President or Chief Executive
Officer, whenever requested, an accounting of the financial condition of the
Corporation.
ARTICLE V
Capital Stock
Section 5.01. STOCK CERTIFICATES. The shares of the Corporation shall
be represented by certificates signed by the Chairman of the Board, the
President or a Vice President and by a second officer who may be the
Secretary, an Assistant Secretary, the Treasurer, or an Assistant Treasurer,
certifying the number of shares evidenced thereby. Such certificates may be
sealed with the seal of the Corporation or a facsimile thereof. The
signatures of the officers of the Corporation upon a certificate may be
facsimiles if the certificate is countersigned by a transfer agent or by a
registrar other than the Corporation itself or its employee. In case any
officer who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer before such certificate is
issued, it may be issued by the Corporation with the same effect as if he
were such officer at the date of issue. Each certificate shall set forth
such information as is required by law.
Section 5.02. SHARE LEDGER. The Corporation shall maintain a share
ledger which contains the name and address of each shareholder and the number
of shares of stock of each class which the shareholder holds. The share
ledger may be in written form or in any other form which can be converted
within a reasonable time into written form for visual inspection. The
original or a duplicate of the share ledger shall be kept at the offices of a
transfer agent for the particular class of stock, or, if none, at the
executive offices of the Corporation.
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Section 5.03. TRANSFERS. The shares of the Corporation shall be
transferable in the manner prescribed by law. Transfers of shares shall be
made on the share transfer books of the Corporation only by the person named
in the certificate or by attorney lawfully constituted in writing and upon
the surrender of the certificate therefor, which shall be canceled when the
new certificate shall be issued. The Board of Directors shall have the power
and authority to make such rules and regulations as it may deem expedient
concerning the issue, transfer and registration of certificates of stock and
may appoint transfer agents and registrars thereof. The duties of transfer
agent and registrar may be combined.
Section 5.04. NEW CERTIFICATES. The Corporation may issue a new
certificate representing a share or shares of the Corporation in the place of
any certificate theretofore issued by it alleged to have been lost, stolen or
destroyed, and the Corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the Corporation a
bond sufficient to indemnify the Corporation and any transfer agent and/or
registrar against any claim that may be made against it or them on account of
the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate. A new certificate may be issued without
requiring any bond when it is proper to do so.
Section 5.05. UNCERTIFICATED SHARES. Anything contained in this
Article V to the contrary notwithstanding, the directors may provide by
resolution that some or all of any or all classes and series of shares of the
Corporation shall be uncertificated shares, provided that such resolution
shall not apply to (i) shares of the Corporation represented by a certificate
until such certificate is surrendered to the Corporation in accordance with
applicable provisions of Ohio law or (ii) any certificated security of the
Corporation issued in exchange for an uncertificated security in accordance
with applicable provisions of Ohio law. The rights and obligations of the
holders of uncertificated shares and the rights and obligations of the
holders of certificates representing shares of the same class and series
shall be identical, except as otherwise expressly provided by law.
ARTICLE VI
Finances
Section 6.01. CHECKS, DRAFTS. ETC. All checks, drafts and orders for
the payment of money, notes and other evidences of indebtedness, issued in
the name of the Corporation, shall be signed by such agents as may be
designated from time to time by the Board of Directors or authorized officers
of the Corporation.
Section 6.02. ANNUAL STATEMENT OF AFFAIRS. The Chairman of the Board,
Chief Executive Officer, President, a Vice President or Treasurer shall
prepare or cause to be prepared annually a full and correct statement of the
affairs of the Corporation, including a balance sheet and a financial
statement of operations for the preceding fiscal year.
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Section 6.03. FISCAL YEAR. The fiscal year of the Corporation shall be
a calendar year end, with such fiscal year ending each year on December 31,
unless otherwise provided by the Board of Directors.
Section 6.04. DIVIDENDS. If declared by the Board of Directors at any
meeting thereof, the Corporation may pay dividends on its shares in cash,
property, or shares of the capital stock of the Corporation, unless such
dividend is contrary to law or to a restriction contained in the Articles of
Incorporation.
ARTICLE VII
Miscellaneous
Section 7.01. BOOKS AND RECORDS. The Corporation shall keep correct
and complete books and records of its accounts and transactions and minutes
of the proceedings of its shareholders and Board of Directors and of any
executive or other committee when exercising any of the powers of the Board
of Directors. The books and records of the Corporation may be in written form
or in any other form which can be converted within a reasonable time into
written form for visual inspection. Minutes shall be recorded in written
form but may be maintained in the form of a reproduction. The original or a
certified copy of these Regulations shall be kept at the principal office of
the Corporation.
Section 7.02. CORPORATE SEAL. The Board of Directors shall provide a
suitable seal, bearing the name of the Corporation, which shall be in the
charge of the Secretary. The Board of Directors may authorize one or more
duplicate seals and provide for the custody thereof. If the Corporation is
required to place its corporate seal to a document, it is sufficient to meet
the requirement of any law, rule, or regulation relating to a corporate seal
to place the word "Seal" adjacent to the signature of the person authorized
to sign the document on behalf of the Corporation.
Section 7.03. VOTING UPON SHARES IN OTHER CORPORATIONS. Stock of other
corporations which is registered in the name of, or beneficially owned by,
the Corporation may be voted by the Chairman of the Board, the President, any
Vice President, or a proxy appointed by any of them. The Board of
Directors, however, may by resolution appoint some other person to vote such
shares, in which case such person shall be entitled to vote such shares upon
the production of a certified copy of such resolution.
Section 7.04. EXECUTION OF DOCUMENTS. A person who holds more than one
office in the Corporation may not act in more than one capacity to execute,
acknowledge, or verify an instrument required by law to be executed,
acknowledged, or verified by more than one officer.
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Section 7.05. PROVISIONS IN ARTICLES OF INCORPORATION. These
Regulations are at all times subject to the provisions of the Articles of
Incorporation of the Corporation as the same may be in effect from time to
time.
Section 7.06. RECORD DATES. For any lawful purpose, including, without
limitation, the determination of the shareholders who are entitled to: (i)
receive notice of or to vote at a meeting of shareholders; (ii) receive
payment of any dividend or distribution; (iii) receive or exercise rights of
purchase of or subscription for, or exchange or conversion of, shares or
other securities, subject to contract rights with respect thereto; or (iv)
participate in the execution of written consents, waivers, or releases, the
directors may fix a record date, which shall not be a date earlier than the
date on which the record date is fixed and, in the cases provided for in
clauses (i), (ii) and (iii) above, shall not be more than ninety (90) nor
fewer than seven (7) days, unless the Articles of Incorporation or these
Regulations specify a shorter or a longer period for such purpose, preceding
the date of the meeting of the shareholders, or the date fixed for the
payment of any dividend or distribution, or the date fixed for the receipt or
the exercise of rights, as the case may be.
Section 7.07. AMENDMENTS. These Regulations may be altered, changed or
amended in any respect or superseded by new Regulations, in whole or in part,
by the affirmative vote of the holders of shares entitling them to exercise a
majority of the voting power of the Corporation on the proposal; provided,
however, that: (i) the provisions set forth in this Section 7.07 (except with
respect to clause (ii)) and in Sections 1.02, 1.07, 2.02, 2.03, 2.04, and
2.12 herein may not be repealed or amended in any respect unless such action
is approved by the affirmative vote of the holders of shares entitling them
to exercise at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of the Corporation on the proposal; and (ii) the provisions set forth
in this Section 7.07 (with respect to this clause (ii) only) and in Section
2.05 may not be repealed or amended in any respect unless such action is
approved by the affirmative vote of the holders of shares entitling them to
exercise at least eighty percent (80%) of the voting power of the Corporation
on the proposal.
-13-
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2.05(a)
CONVERSION RATIOS
Predecessor Number of Surviving Corporation
Company Shares for Each Predecessor Company Share
- ------- -----------------------------------------
<S> <C>
Cytology Indiana, Inc. 1,121.6652
Indiana Cytology Review Company 4,491.7064
ER Group, Inc. 3,237.2643
CCWP Partners, Inc. 37.3971
Carolina Cytology, Inc. 1,487.6186
</TABLE>
<PAGE>
SCHEDULE 2.05(c)
LOCKUP SHARES TABLE
<TABLE>
<CAPTION>
Shares Shares Shares Shares Shares
eligible eligible eligible eligible eligible
for sale for sale for sale for sale for sale
from 0-90 from 91-180 from 181- from 271- from 366
days* days* 270 days* 365 days* +*
--------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CIN 16,297 32,595 43,460 43,460 all
INC 8,703 17,405 23,206 23,206 all
CCI 19,955 39,910 53,214 53,214 all
CCWP 5,045 10,090 13,453 13,453 all
ERG 25,000 50,000 66,667 66,667 all
Total 75,000 150,000 200,000 200,000
Shares
</TABLE>
* Measured from Closing Date of Merger
<PAGE>
SCHEDULE 4.02(a)
AUTHORIZED AND ISSUED SHARES AND STOCK RIGHTS
OF
PREDECESSOR COMPANIES
<TABLE>
<CAPTION>
Shares Issuable
Predecessor Issued since Issued and Upon Exercise
Company Authorized(1) 3/31/96 Outstanding(1) of Stock Rights
- ------- ------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C>
Cytology Indiana, Inc. 750(2) 0 750 0
Indiana Cytology
Review Company 100 0 100 0
ER Group, Inc. 750 0 578 0
CCWP Partners, Inc. 10,000 0 9,150 0
Carolina Cytology, Inc. 1,500 0 905 0
</TABLE>
- -----------------------
(1) Common stock. Unless otherwise indicated, all common stock is without par
value.
(2) $.10 par value
<PAGE>
SCHEDULE 4.02(b)
EQUITY INTERESTS OWNED BY PREDECESSOR COMPANIES;
VOTING AGREEMENTS
<TABLE>
<CAPTION>
Voting
Trust or
Predecessor Name of Type of Nature of Similar
Company Entity Entity Ownership Agreements
- ------- ------- ------- --------- ----------
<S> <C> <C> <C> <C>
Cytology Indiana, Inc. None n/a n/a none
Indiana Cytology None n/a n/a none
Review Corporation
ER Group, Inc. None n/a n/a *
CCWP Partners, Inc. Carolina Cytology General General none
Warrant Partnership Partnership Partner
Carolina Cytology,
Inc. Carolina Cytology General General none
Licensing Company Partnership Partner
</TABLE>
* ER Group, Inc. is a party to an agreement regarding the voting of the shares
of one of its shareholders, Lorraine B. Rothrauff, who owns 100 shares.
<PAGE>
SCHEDULE 4.06
CERTAIN PREDECESSOR COMPANY CHANGES
SINCE MARCH 31, 1996
<TABLE>
<CAPTION>
Predecessor
Company Nature of Action Date of Action
- ------- ---------------- ---------------
<S> <C> <C>
Cytology Indiana, Inc. None n/a
Indiana Cytology None n/a
Review Company
ER Group, Inc. * 7/1/96 or later
CCWP Partners, Inc. None n/a
Carolina Cytology, Inc. None n/a
</TABLE>
*Proposed and/or actual stock sales by Daniel Lee Thompson
<PAGE>
SCHEDULE 4.14
PENDING OR THREATENED PREDECESSOR COMPANY
INTELLECTUAL PROPERTY CLAIMS
<TABLE>
<CAPTION>
Predecessor
Company Nature of Claims
- ----------- ----------------
<S> <C>
All As licensees for the Papnet Testing
System (the "System"), all of the
Predecessor Companies are subject to the
United States Patent and Trademark Office
(the "Office") re-examination of the
patents which relate to the System. On
May 2, 1995, the Office granted a request
to re-examine three of the four patents
relating to the System. The Office is
relying on a third party's claim that
prior patents and printed publications
raise substantial new questions of
patentability. Office actions dealing
with two of the three patents have been
received. For one patent, a number of
claims were confirmed patentable and
other claims were initially rejected.
With respect to the other patent, all
claims were initially rejected. There
has been no action to date on the third
patent. There is no certainty as to the
ultimate outcome of any re-examination by
the Office.
</TABLE>
<PAGE>
SCHEDULE 5.02(a)
AUTHORIZED AND ISSUED SHARES
AND
STOCK RIGHTS OF COMPANY
<TABLE>
<CAPTION>
Capital Stock Capital Stock Shares Issuable
Not Stated in Issued Since Upon Exercise
Section 5.02 3/31/96 of Stock Rights
- ------------- ------------- ---------------
<S> <C> <C>
None None *436,620 common shares
</TABLE>
*Exercise price range from $0.88 to $11.00
<PAGE>
SCHEDULE 5.02(b)
EQUITY INTERESTS OWNED BY COMPANY;VOTING AGREEMENTS
<TABLE>
<CAPTION>
Voting
Trust or
Name of Type of Nature of Similar
Entity Entity Ownership Agreements
- ------- ------- --------- ----------
<S> <C> <C> <C>
Carolina Cytology General General none
Warrant Partnership Partnership Partner
Carolina Cytology General General none
Licensing Company Partnership Partner
</TABLE>
<PAGE>
SCHEDULE 5.06
CERTAIN COMPANY CHANGES
SINCE MARCH 31, 1996
<TABLE>
<CAPTION>
Nature of Action Date of Action
- ---------------- --------------
<S> <C>
None n/a
</TABLE>
<PAGE>
SCHEDULE 5.14
PENDING OR THREATENED COMPANY
INTELLECTUAL PROPERTY CLAIMS
NATURE OF CLAIMS
As a licensee for the Papnet Testing System (the "System"), the Company
is subject to the United States Patent and Trademark Office (the "Office")
re-examination of the patents which relate to the System. On May 2, 1995,
the Office granted a request to re-examine three of the four patents relating
to the System. The Office is relying on a third party's claim that prior
patents and printed publications raise substantial new questions of
patentability. Office actions dealing with two of the three patents have
been received. For one patent, a number of claims were confirmed patentable
and other claims were initially rejected. With respect to the other patent,
all claims were initially rejected. There has been no action to date on the
third patent. There is no certainty as to the ultimate outcome of any
re-examination by the Office.
The FDA recently warned the Company that certain promotional materials
relating to the PAPNET-Registered Trademark-System appearing on the
Company's World Wide Web site failed to comply with certain FDA premarket
approval regulations. The FDA cited specific claims made in these materials
and advised the Company that it should review these and other promotional
materials to ensure compliance with the regulations. While the Company
believes that the materials comply in all respects with applicable
regulations, it has suspended access to these materials on its Web site
pending FDA's evaluation of its detailed response to the warning letter.
<PAGE>
APPENDIX B
SECTION 1701.85 OF THE OHIO GENERAL CORPORATION LAW
@ 1701.85 QUALIFICATION AND PROCEDURES FOR DISSENTING SHAREHOLDERS
(A)(1) A shareholder of a domestic corporation is entitled to relief as a
dissenting shareholder in respect of the proposals described in sections
1701.74, 1701.76, and 1701.84 of the Revised Code, only in compliance with
this section.
(2) If the proposal must be submitted to the shareholders of the
corporation involved, the dissenting shareholder shall be a record holder of
the shares of the corporation as to which he seeks relief as of the date
fixed for the determination of shareholders entitled to notice of a meeting
of the shareholders at which the proposal is to be submitted, and such shares
shall not have been voted in favor of the proposal. Not later than ten days
after the date on which the vote on the proposal was taken at the meeting of
the shareholders, the dissenting shareholder shall deliver to the corporation
a written demand for payment to him of the fair cash value of the shares as
to which he seeks relief, which demand shall state his address, the number
and class of such shares, and the amount claimed by him as the fair cash
value of the shares.
(3) The dissenting shareholder entitled to relief under division (C) of
section 1701.84 of the Revised Code in the case of a merger pursuant to
section 1701.80 of the Revised Code and a dissenting shareholder entitled to
relief under division (E) of section 1701.84 of the Revised Code in the case
of a merger pursuant to section 1701.801 [1701.80.1] of the Revised Code
shall be a record holder of the shares of the corporation as to which he
seeks relief as of the date on which the agreement of merger was adopted by
the directors of that corporation. Within twenty days after he has been sent
the notice provided in section 1701.80 or 1701.801 [1701.80.1] of the Revised
Code, the dissenting shareholder shall deliver to the corporation a written
demand for payment with the same information as that provided for in division
(A)(2) of this section.
(4) In the case of a merger or consolidation, a demand served on the
constituent corporation involved constitutes service on the surviving or the
new entity, whether the demand is served before, on, or after the effective
date of the merger or consolidation.
(5) If the corporation sends to the dissenting shareholder, at the address
specified in his demand, a request for the certificates representing the shares
as to which he seeks relief, the dissenting shareholder, within fifteen days
from the date of the sending of such request, shall deliver to the corporation
the certificates requested so that the corporation may forthwith endorse on them
a legend to the effect that demand for the fair cash value of such shares has
been made. The corporation promptly shall return such endorsed certificates to
the dissenting shareholder. A dissenting shareholder's failure to deliver such
certificates terminates his rights as a dissenting shareholder, at the option of
the corporation, exercised by written notice sent to the dissenting
B-1
<PAGE>
shareholder within twenty days after the lapse of the fifteen-day period,
unless a court for good cause shown otherwise directs. If shares represented
by a certificate on which such a legend has been endorsed are transferred,
each new certificate issued for them shall bear a similar legend, together
with the name of the original dissenting holder of such shares. Upon
receiving a demand for payment from a dissenting shareholder who is the
record holder of uncertificated securities, the corporation shall make an
appropriate notation of the demand for payment in its shareholder records. If
uncertificated shares for which payment has been demanded are to be
transferred, any new certificate issued for the shares shall bear the legend
required for certificated securities as provided in this paragraph. A
transferee of the shares so endorsed, or of uncertificated securities where
such notation has been made, acquires only such rights in the corporation as
the original dissenting holder of such shares had immediately after the
service of a demand for payment of the fair cash value of the shares. A
request under this paragraph by the corporation is not an admission by the
corporation that the shareholder is entitled to relief under this section.
(B) Unless the corporation and the dissenting shareholder have come to an
agreement on the fair cash value per share of the shares as to which the
dissenting shareholder seeks relief, the dissenting shareholder or the
corporation, which in case of a merger or consolidation may be the surviving
or new entity, within three months after the service of the demand by the
dissenting shareholder, may file a complaint in the court of common pleas of
the county in which the principal office of the corporation that issued the
shares is located or was located when the proposal was adopted by the
shareholders of the corporation, or, if the proposal was not required to be
submitted to the shareholders, was approved by the directors. Other
dissenting shareholders, within that three-month period, may join as
plaintiffs or may be joined as defendants in any such proceeding, and any two
or more such proceedings may be consolidated. The complaint shall contain a
brief statement of the facts, including the vote and the facts entitling the
dissenting shareholder to the relief demanded. No answer to such a complaint
is required. Upon the filing of such a complaint, the court, on motion of the
petitioner, shall enter an order fixing a date for a hearing on the complaint
and requiring that a copy of the complaint and a notice of the filing and of
the date for hearing be given to the respondent or defendant in the manner in
which summons is required to be served or substituted service is required to
be made in other cases. On the day fixed for the hearing on the complaint or
any adjournment of it, the court shall determine from the complaint and from
such evidence as is submitted by either party whether the dissenting
shareholder is entitled to be paid the fair cash value of any shares and, if
so, the number and class of such shares. If the court finds that the
dissenting shareholder is so entitled, the court may appoint one or more
persons as appraisers to receive evidence and to recommend a decision on the
amount of the fair cash value. The appraisers have such power and authority
as is specified in the order of their appointment. The court thereupon shall
make a finding as to the fair cash value of a share and shall render judgment
against the corporation for the payment of it, with interest at such rate and
from such date as the court considers equitable. The costs of the proceeding,
including reasonable compensation to the appraisers to be fixed by the court,
shall be assessed or apportioned as the court considers equitable. The
proceeding is a special proceeding and final orders in it may be vacated,
modified, or reversed on appeal
B-2
<PAGE>
pursuant to the Rules of Appellate Procedure and, to the extent not in
conflict with those rules, Chapter 2505. of the Revised Code. If, during the
pendency of any proceeding instituted under this section, a suit or
proceeding is or has been instituted to enjoin or otherwise to prevent the
carrying out of the action as to which the shareholder has dissented, the
proceeding instituted under this section shall be stayed until the final
determination of the other suit or proceeding. Unless any provision in
division (D) of this section is applicable, the fair cash value of the shares
that is agreed upon by the parties or fixed under this section shall be paid
within thirty days after the date of final determination of such value under
this division, the effective date of the amendment to the articles, or the
consummation of the other action involved, whichever occurs last. Upon the
occurrence of the last such event, payment shall be made immediately to a
holder of uncertificated securities entitled to such payment. In the case of
holders of shares represented by certificates, payment shall be made only
upon and simultaneously with the surrender to the corporation of the
certificates representing the shares for which the payment is made.
(C) If the proposal was required to be submitted to the shareholders of
the corporation, fair cash value as to those shareholders shall be determined
as of the day prior to the day on which the vote by the shareholders was
taken and, in the case of a merger pursuant to section 1701.80 or 1701.801
[1701.80.1] of the Revised Code, fair cash value as to shareholders of a
constituent subsidiary corporation shall be determined as of the day before
the adoption of the agreement of merger by the directors of the particular
subsidiary corporation. The fair cash value of a share for the purposes of
this section is the amount that a willing seller who is under no compulsion
to sell would be willing to accept and that a willing buyer who is under no
compulsion to purchase would be willing to pay, but in no event shall the
fair cash value of a share exceed the amount specified in the demand of the
particular shareholder. In computing such fair cash value, any appreciation
or depreciation in market value resulting from the proposal submitted to the
directors or to the shareholders shall be excluded.
(D)(1) The right and obligation of a dissenting shareholder to receive
such fair cash value and to sell such shares as to which he seeks relief, and
the right and obligation of the corporation to purchase such shares and to
pay the fair cash value of them terminates if any of the following applies:
(a) The dissenting shareholder has not complied with this section,
unless the corporation by its directors waives such failure;
(b) The corporation abandons the action involved or is finally enjoined
or prevented from carrying it out, or the shareholders rescind their adoption
of the action involved;
(c) The dissenting shareholder withdraws his demand, with the consent of
the corporation by its directors;
B-3
<PAGE>
(d) The corporation and the dissenting shareholder have not come to an
agreement as to the fair cash value per share, and neither the shareholder
nor the corporation has filed or joined in a complaint under division (B) of
this section within the period provided in that division.
(2) For purposes of division (D)(1) of this section, if the merger or
consolidation has become effective and the surviving or new entity is not a
corporation, action required to be taken by the directors of the corporation
shall be taken by the general partners of a surviving or new partnership or
the comparable representatives of any other surviving or new entity.
(E) From the time of the dissenting shareholder's giving of the demand
until either the termination of the rights and obligations arising from it or
the purchase of the shares by the corporation, all other rights accruing from
such shares, including voting and dividend or distribution rights, are
suspended. If during the suspension, any dividend or distribution is paid in
money upon shares of such class or any dividend, distribution, or interest is
paid in money upon any securities issued in extinguishment of or in
substitution for such shares, an amount equal to the dividend, distribution,
or interest which, except for the suspension, would have been payable upon
such shares or securities, shall be paid to the holder of record as a credit
upon the fair cash value of the shares. If the right to receive fair cash
value is terminated other than by the purchase of the shares by the
corporation, all rights of the holder shall be restored and all distributions
which, except for the suspension, would have been made shall be made to the
holder of record of the shares at the time of termination.
B-4
<PAGE>
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
PAPNET OF OHIO, INC.
EXHIBITS
<PAGE>
EXHIBIT INDEX
EXHIBIT EXHIBIT EXHIBIT INDEX
NUMBER DESCRIPTION PAGE NUMBER
------- ----------- -----------
2(a) Agreement and Plan of Merger,
dated as of July 5, 1996,
among the Registrant, Cytology
Indiana, Inc., Indiana
Cytology Review Company, ER
Group, Inc., CCWP Partners,
Inc., and Carolina Cytology,
Inc.,(filed as Appendix A
hereto, and incorporated
herein by reference).
3(a) * Articles of Incorporation of
the Registrant.
3(b) * Code of Regulations of the
Registrant.
3(c) Proposed Amended and Restated
Articles of Incorporation of
the Registrant, (filed as part
of Appendix A hereto, and
incorporated herein by
reference).
3(d) Proposed Amended and Restated
Regulations of Registrant,
(filed as part of Appendix A
hereto, incorporated herein by
reference).
3(e) * Form of Specimen Stock
Certificate.
4(a) Articles FOURTH and FIFTH of
the Registrant's Articles of
Incorporation (contained in
the Registrant's Articles of
Incorporation filed as Exhibit
3(a) hereto) and Articles II,
VII and XI of the Registrant's
Code of Regulations (contained
in the Registrant's Code of
Regulations filed as Exhibit
3(b) hereto).
4(b) Articles FOURTH, SIXTH,
SEVENTH, EIGHT, TENTH, and
ELEVENTH, of the Registrant's
Restated Articles of
Incorporation (contained in
the Registrant's Restated
Articles of Incorporation
filed as part of Appendix A hereto
and Articles I, V, and VII of
the Registrant's Amended and
Restated Regulations
(contained in the Registrant's
Amended and Restated
Regulations filed as part of
Appendix A hereto.
5 * Opinion of Porter, Wright,
Morris & Arthur regarding
legality.
8 * Opinion of Porter, Wright,
Morris & Arthur regarding tax
matters.
<PAGE>
10(a) * Settlement Agreement among
Neuromedical Systems, Inc. and
the Registrant, Cytology
Indiana, Inc., Indiana
Cytology Review Company, ER
Group, Inc., Cytology West,
Inc., Carolina Cytology
Licensing Company, Papnet
Utah, Inc., Carolina Cytology
Warrant Partnership and GRK
Partners dated as of
December 5, 1995.
10(b) * Letter of Intent among the
Registrant and Cytology West,
Inc., Cytology Indiana, Inc.,
Indiana Cytology Review
Company, ER Group, Inc., CCWP
Partners, Inc., Carolina
Cytology, Inc., and Papnet
Utah, Inc., dated February 1,
1995.
10(c) * Voting Agreement among the
Registrant, Cytology Indiana,
Inc., Indiana Cytology Review
Company, ER Group, Inc., CCWP
Partners, Inc., and Carolina
Cytology, Inc., and certain
shareholders of these entities
dated July 5, 1996.
10(d) * Loan Agreement between the
Registrant, Cytology Indiana,
Inc., Indiana Cytology Review
Company, ER Group, Inc., CCWP
Partners, Inc., and Carolina
Cytology, Inc., dated July 5,
1996, and the Side Letter thereof,
dated July 16, 1996.
10(e) * Loan Agreement between the
Registrant and Cytology West,
Inc. and Papnet Utah, Inc.
dated March 14, 1996.
10(f) * Promissory Note and Security
Agreement among Cytology West,
Inc. and the Registrant dated
April 5, 1996 and April 4,
1996 respectively.
10(g) * Guaranty executed by Carl
Genberg, guaranteeing all
obligations of Cytology West,
Inc., dated April 4, 1996.
10(h) * Security Agreement, granting a
security interest in
Neuromedical Systems, Inc.
stock to the Registrant,
executed by Carl Genberg on
April 4, 1996.
10(i) * Amended and Restated 1995
Stock Option Plan of the
Registrant.
<PAGE>
23(a) * Consent of Porter, Wright,
Morris & Arthur (included in
Exhibits 5 and 8(a)).
23(b) * Consent of Ernst & Young, LLP.
24 * Powers of Attorney.
27 * Financial Data Schedule.
99 * Proxy Card.
- -----------------------
* Filed with this Registration Statement.
<PAGE>
ARTICLES OF INCORPORATION
OF
PAPNET OF OHIO, INC.
The undersigned, a citizen of the United States, desiring to form a
corporation, for profit, under Sections 1701.01 et seq. of the Revised Code
of Ohio, does hereby certify:
FIRST: NAME. The name of the corporation shall be PAPNET OF OHIO, INC.
SECOND: PRINCIPAL OFFICE. The place in Ohio where its, principal
office is to be located is 6472 Moors Place West, Dublin, Franklin County,
Ohio, 43226.
THIRD: PURPOSE. The purpose for which it is formed is to engage in any
lawful act or activity for which corporations may be formed under Sections
1701.01 to 1701.98, inclusive, of the Ohio Revised Code.
FOURTH: Shares. The maximum number of shares which the corporation is
authorized to have outstanding is nine hundred (900) shares, all of which
shall be common shares without par value.
FIFTH: REPURCHASE OF SHARES. The corporation, through its Board of
Directors, shall have the right and power to repurchase any of its
outstanding shares at such price and upon such terms as may be agreed upon
between the corporation and the selling shareholder or shareholders.
SIXTH: CONFLICT OF INTEREST. A director or officer of the corporation
shall not be disqualified by his office from dealing or contracting with the
corporation as a vendor, purchaser, employee, agent or otherwise; nor shall
any transaction, contract or act of the corporation be void or voidable or in
any way affected or invalidated by reason of the fact that any director or
officer or any firm of which of which such director or officer is a
shareholder, director or officer, is in any way interested in such
transaction, contract or act, provided the fact that such director, officer,
firm or corporation
<PAGE>
is so interested shall be disclosed or shall be known to the Board of
Directors or such members thereof as shall be present at any meeting of the
Board of Directors, at which action upon any such contract, transaction or
act shall be taken; nor shall any such director or officer be accountable or
responsible to the corporation for or in respect of any such transaction,
contract or act of the corporation, or for any gains or profits realized him
by reason of the fact that he or any firm of which he is a member, or any
corporation of which he is a shareholder, officer or director, is interested
in such transaction, contract or act and any such director or officer, if
such officer is a director, may be counted in determining the existence of a
quorum at any meeting of the Board of Directors of the corporation which
shall authorize or take action in respect of any such contract, transaction
or act and may vote thereat to authorize, ratify or approve any such
contract, transaction or act, with like force and effect as if he or any firm
of which he is a member, or any corporation of which he is a shareholder,
officer or director, were not interested in such transaction, contract or act.
SEVENTH: INDEMNIFICATION. Every person who is director, officer, or
employee of the corporation or a former director, officer or employee of the
corporation, or a person who is serving or has served at the request of the
corporation as a director, officer or employee of another corporation is
hereby indemnified against expenses, judgments, decrees, fines, penalties or
amounts paid in settlement in connection with the defense of any pending or
threatened action, suit, or proceeding, criminal or civil, to which he is or
may be made a party by reason of being or having been such director, officer
or employee, provided he is determined by the directors of the corporation
acting at a meeting at which a quorum consisting of directors who are not
parties to or threatened with any such action, suit or proceeding is present
(a) not to have been negligent or guilty of misconduct in the performance of
his duty to the corporation of which he is such director, officer or
2
<PAGE>
employee; (b) to have acted in good faith in what he reasonably believed to
be the best interest of such corporation; and (c) in any matter the subject
of a criminal action, suit, or proceeding, to have had no reasonable cause to
believe that his conduct was unlawful; provided, however, no director who is
a party to or threatened with any such action, suit or proceeding shall be
qualified to vote on such matter. Alternatively such determinations may be
made (a) by a court of competent jurisdiction, (b) by the shareholders of the
corporation at a meeting held for such purpose by the affirmative vote of the
holders of shares entitling them to exercise a majority of voting power of
the corporation on such proposal or (c) adopted by the shareholders of the
corporation without a meeting by the written consent of the holders of share
entitling them to exercise two-thirds of the voting power on such proposal.
Such indemnification shall not be deemed exclusive of any other rights
to which such director, officer or employee may be entitled including,
without limiting the generality of the foregoing, any insurance purchased by
the corporation.
EIGHTH: STATED CAPITAL. The amount of stated capital with which the
corporation shall begin business is not less than Five Hundred Dollars
($500.00).
IN WITNESS WHEREOF, I have hereunto subscribed my name this 25th day of
October, 1989.
/s/ David J. Richards
-------------------------------------------
DAVID J. RICHARDS
Incorporator
End of Articles of Incorporation
3
<PAGE>
ORIGINAL APPOINTMENT OF AGENT
The undersigned, being the sole incorporator of PAPNET OF OHIO, INC.
hereby appoints the below named, a natural person and resident in the county
in which notice or demand required or permitted by statute to be served upon
the corporation may be served:
DAVID J. RICHARDS
5472 Moors Place West
Dublin, Ohio 43220
Dated:October 25, 1989 /s/ David J. Richards
-------------------------------------------
DAVID J. RICHARDS
Incorporator
4
<PAGE>
Presented by
Sherrod Brown Charter No: 759614
Secretary of State ---------------
Approved BB
----------------
Date 6/5/90
---------------------
Fee $45.00
----------------------
94071534601
CERTIFICATE OF AMENDMENT
BY SHAREHOLDERS TO THE ARTICLES OF INCORPORATION OF
PAPNET OF OHIO, INC.
- ------------------------------------------------------------------------------
(NAME OF CORPORATION)
David J. Richards ,who is:
- --------------------------------
/ / Chairman of the Board /x/ President / / Vice President (check one)
and
Carl Genberg ,who is:
- -----------------------
/X/ Secretary / / Assistant Secretary (check one)
of the above named Ohio corporation for profit do hereby certify that: (check
the appropriate box and complete the appropriate statements)
/X/ a meeting of the shareholders was duly called for the purpose of adopting
this amendment and held on 1/1/90 at which meeting a quorum of the
------
shareholders was present in person or by proxy, and by the affirmative
vote of the holders of shares entitling them to exercise 100% of the
----
voting power of the corporation.
/ / in a writing signed by all of the shareholders who would be entitled to
notice of a meeting held for that purpose, the following resolution to
amend the articles was adopted:
To issue 100 additional shares of stock.
IN WITNESS WHEREOF, the above named officers, acting for and on the behalf
of the corporation, have hereto subscribed their names this 4th day of June,
---- ----
1990.
--
By /s/ David J. Richards
-----------------------------------
(Chairman, President, Vice President)
David J. Richards
By /s/ Carl Genberg
-----------------------------------
(Secretary, Assistant Secretary)
Carl Genberg
NOTE: Ohio law does not permit one officer to sign in two capacities. Two
separate signatures are secured, even if this necessitates the election of a
second officer before the filing can be made.
5
<PAGE>
Presented by
Sherrod Brown Charter No. 759614
---------------
Approved RB
----------------
Date 5/28/92
---------------------
Fee 8,535.00
----------------------
CERTIFICATE OF AMENDMENT
BY SHAREHOLDERS TO THE ARTICLES OF INCORPORATION OF
PAPNET OF OHIO, INC.
- ------------------------------------------------------------------------------
(NAME OF CORPORATION)
David J. Richards ,who is:
- --------------------------------
/ / Chairman of the Board /x/ President / / Vice President (check one)
and
Carl Genberg ,who is:
- -----------------------
/X/ Secretary / / Assistant Secretary (check one)
of the above named Ohio corporation for profit do hereby certify that: (check
the appropriate box and complete the appropriate statements)
/x/ a meeting of the shareholders was duly called for the purpose of adopting
this amendment and held on May 7 1992 at which meeting a quorum of
----------
the shareholders was present in person or by proxy, and by the affirmative
vote of the holders of shares entitling them to exercise 87.2% of the
-----
voting power of the corporation.
/ / in a writing signed by all of the shareholders who would be entitled to
notice of a meeting held for that purpose, the following resolution to
amend the articles was adopted:
RESOLVED: that the Articles of Incorporation of the Corporation, as
heretofore amended from time to time, be amended in order to increase the
number of authorized shares of the Corporation from 1,000 to 2,400,000.
RESOLVED: that the Articles of Incorporation of the Corporation, as
heretofore amended from time to time, be amended in order to eliminate the
pre-emptive rights of the shareholders of the Corporation set forth in
Section 1701.75 of the Ohio Revised Code.
IN WITNESS WHEREOF, the above named officers, acting for and on the behalf
of the corporation, have hereto subscribed their names this 28th day of
--
May, 1992.
- ---- --
By /s/ David J. Richards
-----------------------------------
(Chairman, President, Vice President)
David J. Richards
By /s/ Carl Genberg
-----------------------------------
(Secretary, Assistant Secretary)
Carl Genberg
NOTE: Ohio law does not permit one officer to sign in two capacities. Two
separate signatures are secured, even if this necessitates the election of a
second officer before the filing can be made.
6
<PAGE>
CERTIFICATE OF AMENDMENT
Presented by
BOB TAFT, Secretary of State Charter No. 759614
30 East Broad Street, 14th Floor ---------------
Columbus, Ohio 43266-0418 Approved BB
Form SH-AMD (January 1991) 04206-1380 ----------------
Date 7/15/94
---------------------
Fee $6,535.00
----------------------
94071534601
CERTIFICATE OF AMENDMENT
BY SHAREHOLDERS TO THE ARTICLES OF INCORPORATION OF
PAPNET OF OHIO, INC.
- ------------------------------------------------------------------------------
(NAME OF CORPORATION)
David J. Richards ,who is:
- --------------------------------
/ / Chairman of the Board /x/ President / / Vice President (check one)
and
John P. Kennedy ,who is:
- -----------------------
/X/ Secretary / / Assistant Secretary (check one)
of the above named Ohio corporation for profit do hereby certify that: (check
the appropriate box and complete the appropriate statements)
/X/ a meeting of the shareholders was duly called for the purpose of adopting
this amendment and held on June 30, 1994 at which meeting a quorum of the
------- --
shareholders was present in person or by proxy, and by the affirmative
vote of the holders of shares entitling them to exercise 74% of the
--
voting power of the corporation.
/ / in a writing signed by all of the shareholders who would be entitled to
notice of a meeting held for that purpose, the following resolution to
amend the articles was adopted:
BE IT RESOLVED, that Article FOURTH of the Articles of Incorporation of the
Corporation as heretofore amended, be amended in order to increase the
number of shares the Corporation is authorized to have outstanding, from
2,400,000 to 5,000,000 shares, all of which shall be common shares without
par value.
IN WITNESS WHEREOF, the above named officers, acting for and on the behalf
of the corporation, have hereto subscribed their names this 14th day of July,
---- ----
1994.
--
By /s/ David J. Richards
-----------------------------------
(Chairman, President, Vice President)
David J. Richards
By /s/ John P. Kennedy
-----------------------------------
(Secretary, Assistant Secretary)
John P. Kennedy
NOTE: Ohio law does not permit one officer to sign in two capacities. Two
separate signatures are secured, even if this necessitates the election of a
second officer before the filing can be made.
7
<PAGE>
CERTIFICATE OF AMENDMENT
Presented by
BOB TAFT, Secretary of State Charter No.
30 East Broad Street, 14th Floor ---------------
Columbus, Ohio 43266-0418 Approved
Form SH-AMD (January 1991) 05377-0109 ----------------
Date
---------------------
Fee
----------------------
CERTIFICATE OF AMENDMENT [(stamp)
Received
BY SHAREHOLDERS TO THE ARTICLES OF INCORPORATION OF Dec 14, 1995]
TAFT
PAPNET OF OHIO, INC. Secretary of State
- ------------------------------------------------------------------------------
(NAME OF CORPORATION)
David J. Richards ,who is:
- --------------------------------
/ / Chairman of the Board /x/ President / / Vice President (check one)
and
John P. Kennedy ,who is:
- -----------------------
/X/ Secretary / / Assistant Secretary (check one)
of the above named Ohio corporation for profit do hereby certify that: (check
the appropriate box and complete the appropriate statements)
/ / a meeting of the shareholders was duly called for the purpose of adopting
this amendment and held on September 28, 1995 at which meeting a quorum of
------------ --
the shareholders was present in person or by proxy, and by the affirmative
vote of the holders of shares entitling them to exercise 67% of the
--
voting power of the corporation.
/ / in a writing signed by all of the shareholders who would be entitled to
notice of a meeting held for that purpose, the following resolution to
amend the articles was adopted:
BE IT RESOLVED, that Article Fourth of the Articles of Incorporation of the
Corporation as heretofore amended, be amended in order to increase the
number of shares the Corporation is authorized to have outstanding, from
5,000,000 shares to 8,000,000, all of which shall be common shares without
par value.
IN WITNESS WHEREOF, the above named officers, acting for and on the behalf
of the corporation, have hereto subscribed their names this 14th day of
--
December, 1995.
- -------- --
By /s/ David J. Richards
-----------------------------------
(Chairman, President, Vice President)
David J. Richards
By /s/ John P. Kennedy
-----------------------------------
(Secretary, Assistant Secretary)
John P. Kennedy
NOTE: Ohio law does not permit one officer to sign in two capacities. Two
separate signatures are secured, even if this necessitates the election of a
second officer before the filing can be made.
8
<PAGE>
CODE OF REGULATIONS
OF
PAPNET OF OHIO, INC.
ARTICLE I
FISCAL YEAR
Unless otherwise designated by resolution of the Board of Directors,
the first fiscal year of the corporation after the adoption of this Code of
Regulations shall end on December 31. Subsequently, the fiscal year of the
corporation shall commence on the first day of January in each year and end on
the last day of December, or by such other period as the Board of Directors may
designate by resolution.
ARTICLE II
SHAREHOLDERS
Section 1. MEETINGS OF SHAREHOLDERS
(a) ANNUAL MEETING. The annual meeting of the shareholders
of this corporation, for the election of Directors, the consideration of
financial statements and other reports, and the transaction of such other
business as may properly be brought before such meeting, shall be held at 9:30
a.m., on the first Tuesday in the third month following the end of the fiscal
year in each year after 1989. The first annual meeting shall be held in 1990.
Upon due notice, there may also be considered and acted upon at an annual
meeting any matter which could properly be considered and acted upon at a
special meeting, in which and for which purpose the annual meeting shall also be
<PAGE>
considered as, and shall be, a special meeting. In the event the annual meeting
is not held or if Directors are not elected thereat, a special meeting may be
called and held for that purpose.
(b) SPECIAL MEETING. Special meetings of the shareholders
may be held on any business day when called by any person or persons who may be
authorized by law to do so. Calls for special meetings shall specify the
purpose or purposes thereof, and no business shall be considered at any such
meeting other than that specified in the call therefore.
(c) PLACE OF MEETINGS. Any meeting of shareholders may be
held at such place within or without the State of Ohio as may be designated in
the Notice of said meeting.
(d) NOTICE OF MEETING AND WAIVER OF NOTICE.
(1) NOTICE. Written notice of the time, place and
purposes of any meeting of shareholders shall be given to each shareholder
entitled thereto not less than seven (7) days nor more than sixty (60) days
before the date fixed for the meeting and as prescribed by law. Such notice
shall be given either by personal delivery or mailed to each shareholder
entitled to notice of or to vote at such meeting. If such notice is mailed, it
shall be directed, postage prepaid, to the shareholders at their respective
addresses as they appear upon the records of the corporation, and notice shall
be deemed to have been given on the day so mailed. If any meeting is adjourned
to another time or place, no notice as to such adjourned meeting need be given
other than by announcement at the meeting at which such an adjournment is taken.
No business shall be transacted at any such adjourned meeting except as might
have been lawfully transacted at the meeting at which such adjournment was
taken.
(2) NOTICE TO JOINT OWNERS. All notices with respect to
any shares tb which persons are entitled by joint or common ownership may be
given to that one of such persons who
2
<PAGE>
is named first upon the books of this corporation, and notice so given shall
be sufficient notice to all the holders of such shares.
(3) WAIVER. Notice of any meeting, however, may be
waived in writing by any shareholder either before or after any meeting of
shareholders, or by attendance at such meeting without protest prior to the
commencement thereof.
(e) SHAREHOLDERS ENTITLED TO NOTICE AND TO VOTE. If a
record date shall not be fixed or the books of the corporation shall not be
closed against transfers of shares pursuant to statutory authority, the record
date for the determination of shareholders entitled to notice of or to vote at
any meeting of shareholders shall be the close of business on the twentieth day
prior to the date of the meeting, and only shareholders of record at such record
date shall be entitled to notice of and to vote at such meeting. Such record
date shall continue to be the record date for all adjournments of such meeting
unless a new record date shall be fixed and notice thereof and of the date of
the adjourned meeting be given to all shareholders entitled to notice in
accordance with the new record date so fixed.
(f) QUORUM. At any meeting of shareholders, the holders of
shares entitling them to exercise a majority of the voting power of the
corporation, present in person or by proxy, shall constitute a quorum for such
meeting; provided, however, that no action required by law, the Articles, or
these Regulations to be authorized or taken by the holders of a designated
proportion of the shares of the corporation may be authorized or taken by a
lesser proportion. The shareholders present in person or by proxy, whether or
not a quorum be present, may adjourn the meeting from time to time without
notice other than by announcement at the meeting.
3
<PAGE>
(g) ORGANIZATION OF MEETINGS.
(1) PRESIDING OFFICER. The Chairman of the Board, or in
his absence, the President, or in the absence of both of them, a Vice-President
of the corporation shall call all meetings of the shareholders to order and
shall act as Chairman thereof; if all are absent the shareholders shall elect a
Chairman.
(2) MINUTES. Tim Secretary of the corporation, or, in
his absence, an Assistant Secretary, or, in the absence of both, a person
appointed by the Chairman of the meeting, shall act as Secretary of the meeting
and shall keep and make a record of the proceedings thereat.
(h) ORDER OF BUSINESS. The order of business at all
meetings of the shareholders, unless waived or otherwise determined by a vote of
the holder or holders of the majority of the number of shares entitled to vote
present in person or represented by proxy, shall be as follows:
1. Call meeting to order;
2. Selection of Chairman and/or Secretary, if
necessary;
3. Proof of notice of meeting and presentment of
affidavit thereof;
4. Roll call, including filing of proxies with
Secretary;
5. Upon appropriate demand, appointment of inspector&
of election;
6. Reading, correction and approval of previously
unapproved minutes;
7. Reports of officers and committees;
8. If annual meeting, or meeting called for that
purpose, election of Directors;
9. Unfinished business, if adjourned meeting;
10. Consideration in sequence of all other matters set
forth in the call for and written notice of the
meeting;
4
<PAGE>
11. Adjournment.
(i) VOTING. Except as provided by statute or in the
Articles, every shareholder entitled to vote shall be entitled to cast one vote
on each proposal submitted to the meeting for each share held of record by him
on the record date for the determination of the shareholders entitled to vote at
the meeting. At any meeting at which a quorum is present, all questions and
business which may come before the meeting shall be determined by a majority of
votes cast, except when a greater proportion is required by law, the Articles,
or these Regulations.
(j) PROXIES. A person who is entitled to attend a
shareholders' meeting, to vote thereat, or to execute consents, waivers and
releases, may be represented at such meeting or vote thereat, and execute
consents, waivers, and releases, and exercise any of his rights, by proxy or
proxies appointed by a writing signed by such person, or by his duly authorized
attorney, as provided by the laws of the State of Ohio.
(k) LIST OF SHAREHOLDERS. At any meeting of
shareholders, a list of shareholders, alphabetically arranged, showing the
number and classes of shares held by each on the record date applicable to such
meeting, shall be produced on the request of any shareholder.
Section 2. ACTION OF SHAREHOLDERS WITHOUT A MEETING.
Any action which may be taken at a meeting of shareholders
may be taken without a meeting if authorized by a writing or writing signed by
all of the holders of shares who would be entitled to notice of a meeting for
such purpose, which writing or writings shall be filed or entered upon the
records of the corporation.
5
<PAGE>
ARTICLE III
DIRECTORS
Section 1. GENERAL POWERS
The business, power and authority of this corporation shall
be exercised, conducted and controlled by a Board of Directors, except where the
law, the Articles or these Regulations require action to be authorized or taken
by the shareholders.
Section 2. ELECTION, NUMBER AND QUALIFICATION OF DIRECTORS
(a) ELECTION. The Directors shall be elected at the annual
meeting of shareholders, or if not so elected, at a special meeting of
shareholders called for that purpose. At any meeting of shareholders at which
Directors are to be elected, only persons nominated as candidates shall be
eligible for election.
(b) NUMBER. The number of Directors, which shall not be
less than the lesser of three (3) or the number of shareholders or record, may
be fixed or changed at a meeting of the shareholders called for the purpose of
electing Directors at which a quorum is present, by the affirmative vote of the
holders of a majority of the shares represented at the meeting and entitled to
vote on such proposal. The number of Directors elected shall be deemed to be
the number of Directors fixed unless otherwise fixed by resolution adopted at
the meeting at which such Directors are elected.
(c) QUALIFICATION. Directors need not be shareholders of
the corporation.
6
<PAGE>
Section 3. TERM OF OFFICE OF DIRECTORS
(a) TERM. Each Director shall hold office until the next
annual meeting of the shareholders and until his successor has been elected or
until his earlier resignation, removal from office, or death. Directors shall
be subject to removal as provided by statute or by other lawful procedures and
nothing herein shall be construed to prevent the removal of any or all Directors
in accordance therewith.
(b) RESIGNATION. A resignation from the Board of Directors
shall be deemed to take effect immediately upon its being received by any
incumbent corporate officer other than an officer who is also the resigning
Director, unless some other time is specified therein.
(c) VACANCY. In the event of any vacancy in the Board of
Directors for any cause, the remaining Directors, though less than a majority of
the whole Board, may fill any such vacancy for the unexpired term.
Section 4. MEETINGS OF DIRECTORS
(a) REGULAR MEETINGS. A regular meeting of the Board of
Directors shall be held immediately following the adjournment of the annual
meeting of the shareholders or a special meeting of the shareholders at which
Directors are elected. The holding of such shareholders' meeting shall
constitute notice of such Directors' meeting and such meeting may be held
without further notice. Other regular meetings shall be held at such other
times and places as may be fixed by the Directors.
(b) SPECIAL MEETINGS. Special meetings of the Board of
Directors may be held at any time upon call of the Chairman of the Board, the
President, any Vice-President, or any two (2) Directors.
7
<PAGE>
(c) PLACE OF MEETING. Any meeting of Directors may be held
at such place within or without the State of Ohio as may be designated in the
Notice of said meeting.
(d) NOTICE OF MEETING AND WAIVER OF NOTICE. Notice of the
time and place of any regular or special meeting of the Board of Directors
(other than the regular meeting of Directors following the adjournment of the
annual meeting of the shareholders or following any special meeting of the
shareholders at which Directors are elected) shall be given to each Director by
personal delivery, telephone, mail, telegram or cablegram at least forty-eight
(48) hours before the meeting, which notice need not specify the purpose of the
meeting. Such notice, however, may be waived in writing by any Director either
before or after any such meeting, or by attendance at such meeting without
protest prior to the commencement thereof.
Section 5. QUORUM AND VOTING
At any meeting of Directors, not less than one-half of the
whole authorized number of Directors is necessary to constitute a quorum for
such meeting, except that a majority of the remaining Directors in office
constitutes a quorum for filling a vacancy in the Board. At any meeting at
which a quorum is present, all acts, questions and business which may come
before the meeting shall be determined by a majority of votes cast by the
Directors present at such meeting, unless the vote of a greater number is
required by the Articles, Regulations or By-Laws.
Section 6. COMMITTEES
(a) APPOINTMENT. The Board of Directors may from time to
time appoint certain of its members (but in no event less than ,three) to act as
a committee or committees in the intervals between meetings of the Board and may
delegate to such committee or committees powers to be
8
<PAGE>
exercised under the control and direction of the Board. Each such committee
and each member thereof, shall serve at the pleasure of the Board.
(b) EXECUTIVE COMMITTEE. In particular, the Board of
Directors may create from its membership and define the powers and duties of an
Executive Committee. During the intervals between meetings of the Board of
Directors, the Executive Committee shall possess and may exercise all of the
powers of the Board of Directors in the management and control of the business
of the corporation to the extent permitted by law. All action taken by the
Executive committee shall be reported to the Board of Directors at its first
meeting thereafter.
(c) COMMITTEE ACTION. Unless otherwise provided by the
Board of Directors, a majority of the members of any committee appointed by the
Board of Directors pursuant to this Section, shall constitute a quorum at any
meeting thereof, and the act of a majority of the members. present at a meeting
at which a quorum is present shall be the act of such committee. Action may be
taken by any such committee without a meeting by a writing signed by all its
members. Any such committee shall prescribe its own rules for calling and
holding meetings and its method or procedure, subject to any rules prescribed by
the Board of Directors, and shall keep a written record of all action taken by
it.
Section 7. ACTION OF DIRECTORS WITHOUT A MEETING
Any action which may be taken at a meeting of Directors may
be taken without a meeting if unauthorized by a writing or writings signed by
all the Directors, which writing or writings shall be filed or entered upon the
records of the corporation.
9
<PAGE>
Section 8. COMPENSATION OF DIRECTORS
The Board of Directors may allow compensation for attendance
at meetings or for any special services, may allow compensation to members of
any committee, and may reimburse any Director for his expenses in connection
with attending any Board of Committee meeting.
Section 9. ATTENDANCE AT MEETINGS OF PERSONS WHO ARE NOT DIRECTORS
Unless waived by a majority of Directors in attendance, not
less than twenty-four (24) hours before any regular or special meeting of the
Board of Directors, any Director who desires the presence at such meeting of not
more than one (1) person who is not a Director, shall so notify all other
Directors, request the presence of such person at the meeting, and state the
reason in writing. Such person will not be permitted to attend the Directors'
meeting unless a majority of the Directors in attendance vote to admit such
person to the meeting. Such vote shall constitute the first order of business
for any such meeting of the Board of Directors. Such right to attend, whether
granted by waiver or vote, may be revoked at any time during any such meeting by
the vote of a majority of the Directors in attendance.
ARTICLE IV
OFFICERS
Section 1. GENERAL PROVISIONS
The Board of Directors shall elect a President,, a Secretary
and a Treasurer, and may elect a Chairman of the Board, one or more
Vice-Presidents, and such other officers and assistant officers as the Board
may, from time to time, deem necessary. The Chairman of the Board, if any, and
the President shall be Directors, but none of the other officers need be a
Director. Any two or
10
<PAGE>
more offices may be held by the same person, but no officer shall execute,
acknowledge or verify any instrument in more than one capacity if such
instrument is required to be executed, acknowledged or verified by two or
more officers.
Section 2. POWERS AND DUTIES
All officers as between themselves and the corporation, shall
respectively have such authority and perform such duties as are customarily
incident to their respective offices, and as may be specified from time to time
by the Board of Directors, regardless of whether such authority and duties are
customarily incident to such office. In the absence of any officer of the
corporation, or for any other reason the Board of Directors may deem sufficient,
the Board of Directors may delegate for the time being, the powers or duties of
such officer, or any of them, to any other officer or to any Director. The
Board of Directors may, from time to time, delegate to any officer authority to
appoint and remove subordinate officers and to prescribe their authority and
duties. Since the lawful purposes of this corporation include the acquisition
and ownership of real property, personal property and property in the nature of
patents, copyrights, and trademarks and the protection of the corporation's
property rights in its patents, copyrights and trademarks, each of the officers
of this corporation is empowered to execute any power of attorney necessary to
protect, secure, or vest the corporation's interest in and to real property,
personal property and its property protectable by patents, trademarks and
copyrights registrations and to secure such patents, copyrights and trademark
registrations.
Section 3. TERM OF OFFICE AND REMOVAL
(a) TERM. Each officer of the corporation shall hold office
during the pleasure of the Board of Directors, and unless sooner removed by the
Board of Directors, until the meeting of
11
<PAGE>
the Board of Directors following the date of their election and until his
successor is elected and qualified.
(b) REMOVAL. The Board of Directors may remove any officer
at any time, with or without cause by the affirmative vote of a majority of
Directors in office.
Section 4. COMPENSATION OF OFFICERS
Unless compensation is otherwise determined by a majority of
the Directors at a regular or special meeting of the Board of Directors, or
unless such determination is delegated by the Board of Directors to another
officer or officers, the President of the corporation from time to time shall
determine the compensation to be paid to all officers and other employees for
services rendered to the corporation.
ARTICLE V
INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) RIGHT AND INDEMNIFICATION. Each Director, officer and
member of a committee of this corporation, and any person who may have served at
the request of this corporation as a Director, officer or member of a committee
of any other corporation in which this corporation is a creditor, his heirs,
executors and administrators, shall be indemnified by the corporation against
all costs and expenses reasonably incurred by him concerning, or in connection
with, the defense of any claim asserted or suit or proceeding brought against
him by reason of his conduct or actions as a Director, officer or member of a
committee of this corporation, or a Director, officer or member of a committee
of such other corporation, whether or not he continues to be a Director, officer
or member of a committee at the time of incurring such costs or expenses, except
costs and expenses
12
<PAGE>
incurred in relation to matters as to which such Director, officer or member
of a committee shall have been willfully derelict in the performance of his
duty as such Director, officer or member of a committee. Such costs and
expenses shall include the costs of reasonable settlements (with or without
suit), judgments, attorneys' fees, costs of suit, fines and penalties and
other liabilities (other than amounts paid by any such person to this
corporation or any such other corporation).
(b) DEFINITION OF PERFORMANCE. For the purposes of this
Article, a Director, officer or member of a committee shall conclusively be
deemed not to have been willfully derelict in the performance of his duty as
such Director, officer or member of a committee:
(1) DETERMINATION BY SUIT. In a matter which shall have
been the subject of a suit or proceeding in which he was a party which is
disposed of by adjudication on the merits, unless he shall have been finally
adjudged in such suit or proceeding to have been willfully derelict in the
performance of his duty as such Director, officer or member of a committee; or
(2) DETERMINATION BY COMMITTEE. In a matter not falling
within (1) next preceding if either a majority of disinterested members of the
Board of Directors or a majority of a committee of disinterested shareholders of
the corporation, (excluding therefrom any Director, officer or member of a
committee) selected as hereinafter provided shall determine that he was not
willfully derelict. Such determination shall be made by the disinterested
members of the Board of Directors except where such members shall determine that
such matter should be referred to said committee of disinterested shareholders.
(c) SELECTION OF COMMITTEE. The selection of a
committee of shareholders provided above may be made by the Majority vote of the
disinterested Directors or, if there be no disinterested Director or Directors,
by the chief executive officer of the corporation. A Director or
13
<PAGE>
shareholder shall be deemed disinterested in a matter if he has no interest
therein other than as a Director or shareholder of the corporation as the
case may be. The corporation shall pay the fees and expenses of the
shareholders or Directors, as the case may be, incurred in connection with
making a determination as above provided.
(d) NON-COMMITTEE DETERMINATION. In the event that a
Director, officer or member of a committee shall be found by some other method
not to have been willfully derelict in the performance of his duty as such
Director, officer or member of a committee, then such determination as to
dereliction shall not be questions on the ground that it was made otherwise than
as provided above.
ARTICLE VII
SHARE CERTIFICATES
Section 1. TRANSFER AND REGISTRATION OF CERTIFICATES
The Board of Directors shall have authority to make such
rules and regulations, not inconsistent with law, the Articles or these
Regulations, as it deems expedient concerning the issuance, transfer and
registration of certificates for shares and the shares represented thereby and
may appoint transfer agents and registrars thereof.
Section 2. SUBSTITUTED CERTIFICATES
Any person claiming that a certificate for shares has been
lost, stolen or destroyed, shall make an affidavit or affirmation of that fact
and, if required, shall give the corporation (and its registrar or registrars
and its transfer agent or agents, if any) a bond of indemnity, in such form and
with one or more sureties satisfactory to the Board, and, if required by the
Board of Directors, shall
14
<PAGE>
advertise the same in such manner as the Board of Directors may require,
whereupon a new certificate may be executed and delivered of the same tenor
and for the same number of shares as the one alleged to have been lost,
stolen or destroyed.
ARTICLE VIII
SEAL
The Directors may adopt a seal for the corporation which
shall be in such form and of such style as is determined by the Directors.
Failure to affix any such corporate seal shall not affect the validity of any
instrument.
ARTICLE IX
CONSISTENCY WITH ARTICLES OF INCORPORATION
If any provision of these Regulations shall be inconsistent
with the corporation's Articles of Incorporation (and as they may be amended
from time to time), the Articles of Incorporation (as so amended at the time)
shall govern.
ARTICLE X
SECTION HEADINGS
The headings contained in-this code of Regulations are for
reference purposes only and shall not be construed to be part of and/or shall
not affect, in any way, the meaning or interpretation of this Code of
Regulations.
15
<PAGE>
ARTICLE XI
AMENDMENTS
This Code of Regulations of the corporation (and as it may be
amended from time to time) may be amended or added to by the affirmative vote or
the written consent of the shareholders of record entitled to exercise a
majority of the voting power on such proposal; provided, however, that if an
amendment or addition is adopted by written consent without a meeting of the
shareholders, it shall be the duty of the Secretary to enter the amendment or
addition in the records of the corporation, and to mail a copy of such amendment
or addition to each shareholder of record who would be entitled to vote thereon
and did not participate in the adoption thereof.
(End of Code of Regulations)
16
<PAGE>
CERTIFICATE NO. SHARES
[Crest]
INCORPORATED UNDER THE LAWS OF THE STATE OF OHIO
AUTHORIZED SHARES SHARES WITHOUT PAR VALUE
---------
THIS CERTIFIES THAT IS THE HOLDER OF
--------------------------------------------
SHARES WITHOUT PAR VALUE OF
- -----------------------------------------------------
PAPNET OF OHIO, INC.
FULLY PAID AND NON-ASSESSABLE, TRANSFERABLE ONLY ON THE BOOKS OF THE COMPANY BY
THE HOLDER HEREOF IN PERSON OR BY ATTORNEY UPON SURRENDER OF THIS CERTIFICATE
PROPERLY ENDORSED.
DATED THIS DAY OF , 19
----------------- ---------------------------------- ---
- ----------------------------------- ----------------------------------------
Secretary President
Dayton Legal Blank Co.
<PAGE>
CERTIFICATE
NO.
FOR
SHARES
WITHOUT PAR VALUE
OF
PAPNET OF OHIO, INC.
ISSUED TO
---------------------------------------
DATED
---------------------------------------
FOR VALUE RECEIVED, HEREBY SELL, ASSIGN AND TRANSFER UNTO
-------------------
- ----------------------------------------------------------------------------
SHARES BENEFICIALLY
- -------------------------------------------------------
REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY IRREVOCABLY CONSTITUTE AND
APPOINT
-----------------------------------------------------------------------
TO TRANSFER THE SAID SHARES ON THE BOOKS OF THE WITHIN NAMED CORPORATION, WITH
FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED 19
----------------------- ---
IN PRESENCE OF
---------------------------------
- -------------------------------------------------------------------------------
NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THIS CERTIFICATE, IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE>
[LETTERHEAD]
41 South High Street
Columbus, Ohio 43215-6194
Telephone: 614-227-2000
Facsimile: 614-227-2100
Nationwide: 800-533-2794
______, 1996
Papnet of Ohio, Inc.
6059 Memorial Drive
Dublin, Ohio 43017
Re:Merger of Predecessor Companies Into Papnet of Ohio, Inc.
Gentlemen:
This opinion is furnished with respect to the Registration Statement on
Form S-4 (the "Registration Statement") being filed by Papnet of Ohio, Inc.
("Papnet") with the Securities and Exchange Commission related to the
registration of 4,850,033 shares of Papnet common stock, no par value (the
"Stock"), to be issued in connection with the proposed merger (the "Merger") of
Cytology Indiana, Inc., Indiana Cytology Review Company, ER Group, Inc., CCWP
Partners, Inc., and Carolina Cytology, Inc. (collectively "Predecessor
Companies"), with and into Papnet.
We are counsel for Papnet and have participated in the preparation of the
Registration Statement. We have reviewed the Agreement and Plan of Merger,
dated as of July 5, 1996, among Papnet and the Predecessor Companies (the
"Merger Agreement"), Papnet's Articles of Incorporation and Code of Regulations,
the proposed Amended and Restated Articles of Incorporation and Regulations of
Papnet, the corporate action taken to date in connection with the Registration
Statement and the issuance and sale of the Stock, and such other documents and
authorities as we deem relevant for the purpose of this opinion.
Based upon the foregoing, we are of the opinion that:
(a) upon the proper approval of the Merger Agreement by the shareholders
of Papnet and the Predecessor Companies and its filing with the Ohio
Secretary of State;
(b) upon the proper approval of the Amended and Restated Articles of
Incorporation of Papnet by the shareholders of Papnet and its filing
with the Ohio Secretary of State;
<PAGE>
Papnet of Ohio, Inc.
______, 1996
Page -2-
(c) upon compliance with the Securities Act of 1933, as amended, and with
the Securities or "blue sky" laws of the states in which the Stock is
to be offered for sale; and
(d) upon satisfaction of all of the conditions stated in the Merger
Agreement and at the "Effective Time," as defined in the Merger
Agreement;
the Stock, when issued and delivered as provided in the Merger Agreement in
accordance with the resolutions heretofore adopted by the Board of Directors and
shareholders of Papnet, will be legally issued, fully paid, and nonassessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
PORTER, WRIGHT, MORRIS & ARTHUR
<PAGE>
[LETTERHEAD]
__________, 1996
Papnet of Ohio, Inc.
6059 Memorial Drive
Dublin, Ohio 43017
Gentlemen:
We have acted as counsel in connection with the proposed merger (the
"Merger") of Cytology Indiana, Inc., an Ohio corporation, Indiana Cytology
Review Corporation, an Ohio corporation, ER Group, Inc., an Ohio corporation,
CCWP Partners, Inc., an Ohio corporation, and Carolina Cytology, Inc., an Ohio
corporation, (the foregoing companies referred to individually as a
"Predecessor Company" and collectively as the "Predecessor Companies") with and
into Papnet of Ohio, Inc., an Ohio corporation (the "Company"), pursuant to
which the stockholders of the Predecessor Companies will receive shares of
common stock, without par value, of the Company ("Company Shares") subject to
the Agreement and Plan of Merger, dated as of July 5, 1996, by and among the
Predecessor Companies and the Company (the "Merger Agreement") in exchange for
their shares of the outstanding common stock of the Predecessor Companies. At
your request, and pursuant to Section 7.01(h) of the Merger Agreement, we are
rendering our opinion concerning certain federal income tax consequences of the
Merger.
In that connection, we have examined and relied upon originals, or copies
certified or otherwise identified to our satisfaction, of such records,
documents and other instruments, and such other matters of fact and law, as we
have considered necessary or appropriate for the purposes of this opinion,
including an examination of: (i) the Merger Agreement and the other documents
and agreements referred to therein; and (ii) the Information
Statement/Prospectus (the "Prospectus") relating to the Merger and included in
the Registration Statement of the Company on Form S-4 filed by the Company with
the Securities and Exchange Commission. In our examination, we have assumed the
legal capacity of all natural persons, the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, the conformity to
the original documents of all documents submitted to us as certified or
photostatic copies, and the authenticity of the originals of such latter
documents.
For purposes of the opinions set forth below, we have assumed the accuracy
and completeness of the statements and representations (which statements and
representations we have neither investigated nor verified and upon which we are
entitled to rely) contained, respectively, in certain certificates of the
officers of the Company and the Predecessor Companies and certain stockholders
of the Predecessor Companies, and that the certificates will be executed as of
the Effective Time as defined in the Merger Agreement. We have also assumed
that the transactions
<PAGE>
Papnet of Ohio, Inc.
______________, 1996
Page 2
contemplated by the Merger Agreement have been consummated in accordance with
the Merger Agreement, the Merger constitutes a merger pursuant to the applicable
provisions of the laws of the State of Ohio, and the facts, statements and other
information contained in the Prospectus relating to the Merger are true, correct
and complete in all material respects.
The opinions set forth below are based upon, and the section numbers cited
herein refer to, the Internal Revenue Code of 1986, as amended (the "Code"), the
Treasury Regulations promulgated thereunder, the administrative interpretations
thereof and the judicial decisions with respect thereto, all as currently in
effect, and are further based upon the assumption that the documents,
certifications and representations referred to in the two preceding paragraphs
have been finalized and executed at the Effective Time.
In reliance on the assumptions and the representations set forth above and
the continued accuracy and completeness of the statements and certifications
identified above, and further assuming that the stockholders of the Predecessor
Companies do not, for a sufficient period of time to meet the continuity of
interest requirements for a reorganization, sell, exchange, transfer by gift or
otherwise dispose of a number of Company Shares received in the Merger that
would reduce the ownership of Company Shares by the former stockholders of the
Predecessor Companies to a number of shares having a value, as of the date of
the Merger, of less than 50 percent of the total value of all the formerly
outstanding stock of the Predecessor Companies as of the same date, we are of
the opinion that:
(1) The Merger of the Predecessor Companies with and into the Company will
constitute a reorganization within the meaning of Section 368(a) of
the Code.
(2) The Predecessor Companies and the Company will each be "a party to a
reorganization" within the meaning of Section 368(b) of the Code.
(3) None of the Predecessor Companies nor the Company will recognize gain
or loss (except for the inclusion in income of amounts resulting from
any required change in accounting methods or similar items) as a
result of the Merger.
(4) No gain or loss will be recognized by the stockholders of the
Predecessor Companies upon the exchange of their respective shares of
a Predecessor Company stock for Company Shares pursuant to the Merger,
except that a stockholder of a Predecessor Company will recognize
gain, if any, upon receipt of cash in payment of dissenter's rights of
appraisal.
<PAGE>
Papnet of Ohio, Inc.
______________, 1996
Page 3
(5) The federal income tax basis of the Company Shares received by the
stockholders of the Predecessor Companies in exchange for their
Predecessor Company stock will be the same federal income tax basis of
the Predecessor Company stock surrendered in the exchange therefor.
(6) The holding period for the Company Shares received by the stockholders
of the Predecessor Companies in exchange for their Predecessor Company
stock will include the period for which the Predecessor Company stock
exchanged therefor were held, provided the exchanged Predecessor
Company stock was held as a capital asset by such stockholder on the
date of the Merger.
We have given this opinion pursuant to Section 7.01(h) of the Agreement in
connection with the transactions contemplated thereby and such opinion is not to
be relied upon for any other purpose. This opinion may not be applicable to:
(1) a Predecessor Company stockholder whose Predecessor Company stock is not
held as a capital asset; (2) a Predecessor Company stockholder who is subject
to special treatment under the Code, including without limitation, insurance
companies, dealers in securities, financial institutions, tax-exempt investors
or non-United States citizens; or (3) the extent that the Company and/or the
Predecessor Companies are investment companies within the meaning of Section 368
of the Code. This opinion assumes that no Predecessor Company was formed, and
no stockholder acquired stock in any Predecessor Company, in contemplation of or
to effectuate the Merger.
In addition to the assumptions and exclusions above, no opinion is
expressed herein concerning the tax treatment of the Merger under other
provisions of the Code and the Treasury Regulations issued thereunder,
including, without limitation: (1) the exchange of any shares of a Predecessor
Company in the Merger that were acquired by the holder thereof pursuant to any
employee stock option or employee stock purchase plan or otherwise as
compensation; (2) the effect of Section 731(c) on any subsequent distribution of
the Company Shares by a Predecessor Company stockholder; and (3) the effect of
state, local, and foreign tax laws. Furthermore, no opinion is expressed herein
about the tax treatment of any conditions existing at the time of, or effects
resulting from, the transaction that are not specifically addressed by the
foregoing opinion.
You should be aware that this opinion represents our conclusions as to the
application of existing law and is based on the certifications and
representations given as of the date hereof. The statutory provisions,
regulations, interpretations, and other authorities upon which our opinion is
based are subject to change, and such changes could apply retroactively. In
addition, no advance ruling has been obtained from the Internal Revenue Service,
and there can be no assurance that positions contrary to those stated in our
opinion will not be taken by the Internal Revenue Service. No person other than
the addressee named herein may rely on this opinion for any purpose.
<PAGE>
Papnet of Ohio, Inc.
______________, 1996
Page 4
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement. By giving this consent, however, we do not admit that
we come within the category of persons whose consent is required under Section 7
of the Securities Act of 1933, as amended, or the rules and regulations of the
Commission thereunder.
Very truly yours,
PORTER, WRIGHT, MORRIS & ARTHUR
<PAGE>
SETTLEMENT AGREEMENT
This SETTLEMENT AGREEMENT ("Agreement"), dated as of December 5,1995, is by
and between NEUROMEDICAL SYSTEMS, INC., a Delaware corporation ("NSI"), with its
principal place of business at Two Executive Boulevard, Suffern, New York 10901,
and Papnet of Ohio, Inc., an Ohio corporation ("Papnet Ohio"), Cytology Indiana,
Inc., an Ohio corporation, Indiana Cytology Review Corporation, an Ohio
corporation, ER Group, Inc., an Ohio corporation, Cytology West, Inc., a
Delaware corporation, Carolina Cytology Licensing Company, an Ohio general
partnership, Papnet Utah, Inc., a Nevada corporation (individually, a "Licensee"
and, collectively, the "Licensees"), Carolina Cytology Warrant Partnership, an
Ohio general partnership "CCWP"), and GRK Partners, an Ohio general
partnership ("GRK")
WHEREAS, NSI has entered into the following licensing agreements: (i)
Agreement by and between NSI and Papnet Ohio (Kentucky and Standard
Metropolitan Statistical Area For Chicago, Illinois), dated March 23, 1990, as
amended February 3, 1992 and March 30, 1992; (ii) Agreement by and between NSI
and Papnet Ohio, dated October 29, 1989, as amended March 22, 1990, December 4,
1990, January 31, 1991 and March 30, 1992; (iii) Agreement by and between NSI
and Cytology West, Inc. dated June 27, 1990, as amended February 4, 1992 and May
18, 1992; (iv) Agreement by and between NSI and ER Group, Inc., dated May 20,
1991, as amended January 30, 1992 and August 31, 1992; (v) Agreement by and
between NSI and I-A Cytology (now named Cytology Indiana, Inc. and Indiana
Cytology Review Company), dated August 29,1990, as amended February 3, 1992 and
August 26, 1992; (vi) Agreement by and between NSI and Carolina Cytology
Licensing Company, not dated, as amended March 1, 1993; and (vii) an Agreement
by and between NSI and Papnet Utah, Inc. (collectively, the "Previous License
Agreements"); and
WHEREAS, the Licensees, CCWP, and any partners therein are considering
whether to effect a combination by merger or otherwise of some or ALL of them
(the "Merger"), with a single entity to be the surviving corporation (the
"Surviving Corporation"); and
WHEREAS, NSI and the Licensees desire that NSI and each Licensee (or the
Surviving Corporation, immediately following the effectiveness of the Merger),
enter into an Amended and Restated Agreement, in the form attached hereto as
Exhibit A (the "Amended License Agreement"), to amend and restate NSI's previous
license agreements with Licensees to provide for the licensing of the PAPNET-
REGISTERED TRADEMARK- System, NSI Technology, and other Intellectual Property of
NSI as defined in the Amended License Agreement; and
WHEREAS, Papnet Ohio, Cytology Indiana, Inc., Indiana Cytology Review
Company, ER Group, Inc., CCWP, and GRK (collectively, the "Holders") each own
Warrants ("Warrants") to purchase shares of NSI's $.0001 par value Common Stock
("Common Stock"), and have elected to exercise such Warrants effective upon the
completion of an offering to the public by NSI of the Common Stock (the "Initial
Public Offering"); and
WHEREAS, the parties now desire to clarify certain issues and to settle and
compromise certain matters between them.
<PAGE>
NOW THEREFORE, in consideration of the foregoing and of the mutual covenants
herein contained, it is hereby agreed and acknowledged as follows:
1. THE MERGER.
Subject to the terms and conditions contained herein, NSI hereby consents
to the Merger.
2. USE OF CORPORATE NAME.
The Licensees hereby acknowledge and agree that NSI is the sole and
exclusive owner of all current, pending and future worldwide patents and patent
rights, copyrights, trademarks, trade names, trade secrets, know-how, utility
models, improvements thereon and other intellectual property rights (including,
without limitation, all applications and registrations with respect thereto) in
and to, and the use of, PAPNET-REGISTERED TRADEMARK-, the PAPNET-REGISTERED
TRADEMARK- System, and the PAPNET-REGISTERED TRADEMARK- Service (as those terms
are defined in the Amended License Agreement). The Licensees further agree
that, within ninety (90) days following the effective date of the Merger, the
Surviving Corporation shall forever thereafter cease use of "PAPNET" in its
corporate name, and shall release to NSI all rights and claims to the use of the
"PAPNET" name which it may previously have had or asserted, except as such use
is permitted under the Amended License Agreement. In the event that the Merger
has not become effective by September 30, 1996, each Licensee shall forever
thereafter cease use of "PAPNET" in its corporate or partnership name, and each
Licensee shall release to NSI all rights and claims to the use of the "PAPNET"
name which it may previously have had or asserted, except as such use is
permitted under the Amended License Agreement.
3. AMENDED LICENSE AGREEMENT.
NSI and the Licensees each hereby agree that NSI and the Surviving
Corporation shall enter into the Amended License Agreement on the effective date
of the Merger, or immediately thereafter, and that the Amended License Agreement
will supersede and replace all Previous License Agreements made between NSI and
the Licensees. Upon the occurrence of an Execution Event (as defined below)
with respect to any Licensee, NSI and such Licensee agree to execute a separate
license agreement in substantially the form of the Amended License Agreement,
with appropriate changes with respect to such matters as each Licensee's
Licensed Territory, and proportionate share of Revenue and related Slide and
additional Royalty caps under Article 3 of the Amended License Agreement. For
this purpose, an "Execution Event" with respect to any Licensee is the earliest
to occur of the following events: (i) written notice given by such Licensee to
NSI that such Licensee will not participate in the Merger, (ii) the occurrence
of the Merger without the participation of such Licensee, or (iii) the failure
of such Licensee to participate in and effect the Merger by September 30,1996.
2
<PAGE>
4. PAST DUE ROYALTIES AND PAYMENTS.
NSI agrees to pay to Licensees or the Surviving Corporation, at or
before the time of execution of the Amended License Agreement, all royalty
payments due under the Previous License agreements which have been accrued
and remain unpaid at the time of execution of the Amended License Agreement.
All royalties accruing subsequent to execution of the Amended License
Agreement shall be payable in accordance with the terms and provisions of the
Amended License Agreement. Licensees will pay, at or before the time of
execution of the Amended License Agreement, all advances from NSI or accounts
payable to NSI under the Previous License Agreements which have been accrued
and remain unpaid at the time of execution of the Amended License Agreement.
The mutual releases contained in Section 5 of this Agreement shall not alter
the obligations contained in this Section 4.
5. MUTUAL RELEASES; WAIVER.
5.1. Subject to performance of all material obligations of NSI under this
Agreement, the Licensees, CCWP and GRK hereby forever discharge and release NSI
and its officers, directors, employees, agents, advisors, representatives and
controlling persons from any and all manner of claims, demands, damages,
actions, causes of action, suits or liabilities whatsoever of every name and
nature, both in law or in equity by the Licensees, CCWP, GRK or any of their
predecessors in interest or of their affiliates arising out of facts or
circumstances occurring or existing on or prior to the date of this Agreement;
PROVIDED, HOWEVER, that the licensees, CCWP and GRK do not release any claims
against any such persons for any breach of NSI's obligations or representations
and warranties under this Agreement or with respect to matters otherwise subject
to indemnification pursuant to the Previous License Agreements for liability to
third parties.
5.2. Subject to performance of all material obligations of a Licensee, of
CCWP, or of GRK under this Agreement, NSI hereby forever discharges and releases
each such person, and its respective officers, directors, employees, agents,
advisors, representatives, partners and controlling persons from any and all
manner of claims, demands, damages, actions, causes of action, suits or
liabilities whatsoever of every name and nature, both in law or in equity by NSI
or any of its affiliates arising out of facts or circumstances occurring or
existing on or prior to the date of this Agreement; PROVIDED, HOWEVER, that NSI
does not release any claims against any such person for any breach of such
person's obligations or representations and warranties under this Agreement or
with respect to matters otherwise subject to indemnification pursuant to the
Previous License Agreements for liability to third parties.
5.3 Subject to the Performance of all material obligations of NSI under
this Agreement, on the one hand, and the performance of all material obligations
of Licensees on the other, and except as provided in Section 4 hereof, from the
date hereof and continuing until the execution and delivery of the Amended
License Agreement, NSI hereby waives any breaches by Licensees of the Previous
License Agreements, and Licensees waive any breaches by NSI of the Previous
License Agreements, but in each case only to the extent that the breach would
not also be a breach the Amended
3
<PAGE>
License Agreement If the Amended License Agreement Were in Effect at the Time.
6. ADDITIONAL NSI SHARES.
As further consideration for the agreements of the Holders under this
Agreement, in the event that NSI commences the Initial Public Offering on or
before December 30, 1995, NSI agrees to pay to the Holders the amounts listed on
Exhibit B hereto, which in the case of the Holders who are also Licensees, shall
be deemed to be a rebate of license fees previously paid by them to NSI. Such
amounts shall be payable in shares of Common Stock (the "Shares"), valued at
the price to the public per share of Common Stock in the Initial Public
Offering, less any underwriting discounts or commissions. At each Holder's
option, to be exercised by written notice to NSI during the ten-day period
following the closing of the Initial Public Offering, the Holder may elect to
receive some or all of the amount listed on Exhibit B in cash. In the event a
Holder does not provide such written notice to NSI during such ten-day period,
the entire amount payable to such Holder shall be payable in shares. All
amounts payable under this Section 6 shall be payable by NSI within ten days
after the end of such ten-day election period. Upon issuance to the Holders,
the shares shall be fully paid and nonassessable, free of any liens or
encumbrances, and shall not be subject to any restrictions on transfer by the
Holders. In the event that the Initial Public Offering has not been commenced
on or before December 30, 1995, in lieu of the payments provided in this Section
6, the exercise price of each Holder's Warrants will be reduced to $.0001 per
share of Common Stock on such date, and the Warrants shall be amended
accordingly, Without further act or deed by the Holder or NSI.
7. FURTHER ASSURANCES.
Each party hereto shall do and perform or cause to be done and performed
all further acts and things and shall execute and deliver all other agreements,
certificates, instruments, and documents as any other party hereto reasonably
may request in order to carry out the intent and accomplish the purposes of this
Agreement and the consummation of the transactions contemplated hereby.
8. REPRESENTATIONS AND WARRANTIES OF LICENSEES.
Each Licensee hereby represents and warrants to NSI (each Licensee
representing and warranting as to itself only) as follows:
8.1. ORGANIZATION. the licensee is a corporation or partnership duly
organized and validly existing under the laws of its state of incorporation or
organization, and if the Licensee is a corporation, it is in good standing under
the laws of its state of organization. The Licensee has the requisite corporate
or partnership power to own or lease its properties and assets and to carry on
its business as now conducted.
8.2. AUTHORITY RELATIVE TO THIS AGREEMENT. The Licensee has the right,
power and authority to enter into this Agreement and to perform all of its
obligations hereunder. This Agreement has been authorized by all necessary
corporate or partnership action of, has been duly executed and
4
<PAGE>
delivered by, and constitutes the valid and binding obligation of, the Licensee,
enforceable in accordance with its terms.
8.3. NO CONFLICTS; NO CONSENTS. Except for filings necessary to effect the
Merger and the registration of shares of the Surviving Corporation to be issued
in the Merger, the execution, delivery and performance of this Agreement by the
Licensee will not result in a breach in the terms or conditions of, or
constitute a default under, or violate, or conflict with, or require, as the
case may be: (i) any provision of any law, regulation or ordinance applicable to
the Licensee, (ii) the Partnership Agreement or the Articles of Incorporation,
Certificate of Incorporation, Bylaws or Regulations of the Licensee, (iii) any
material agreement, lease, mortgage or other instrument or undertaking, oral or
written, to which the Licensee is a party or by which it or any of its
properties or assets is or may be bound or affected, or (iv) any judgment,
order, writ, injunction or decree of any governmental authority.
9. REPRESENTATIONS AND WARRANTIES OF CCWP AND GRK.
Each of CCWP and GRK hereby represents and warrants to NSI (each of them
representing and warranting as to itself only) as follows:
9.1. ORGANIZATION. Each of CCWP and GRK is a partnership duly organized
and validly existing under the laws of Ohio, and has the requisite partnership
power to own or lease its properties and assets and to carry on its business as
now conducted.
9.2. AUTHORITY RELATIVE TO THIS AGREEMENT. Each of CCWP and GRK has the
right, power and authority to enter into this Agreement and to perform all of
its obligations hereunder. This Agreement has been duly and validly executed
and delivered by, and constitutes the valid and binding obligation of, each of
CCWP and GRK, enforceable in accordance with its terms.
9.3. NO CONFLICTS; NO CONSENTS. The execution, delivery and performance of
this Agreement by each of CCWP and GRK will not result in a breach in the terms
or conditions of, or constitute a default under, or violate, or conflict with,
or require, as the case may be: (i) any provision of any law, regulation or
ordinance applicable to each of CCWP and GRK, (ii) the Partnership Agreement of
each of CCWP and GRK, (iii) any material agreement, lease, mortgage or other
instrument or undertaking, oral or written, to which each of CCWP and GRK is a
party or by which it or any of its properties or assets is or may be bound or
affected, or (iv) any judgment, order, writ, injunction or decree of any
governmental authority.
1O. REPRESENTATIONS AND WARRANTIES OF NSI.
NSI hereby represents and warrants to Licensees, CCWP and GRK as follows:
10.1. ORGANIZATION. NSI is a corporation duly organized, validly existing
and in good standing under the laws of Delaware. NSI has the requisite
corporate power to own or lease its
5
<PAGE>
properties and assets and to carry on its business as now conducted.
10.2. AUTHORITY RELATIVE TO THIS AGREEMENT. NSI has the right, power and
authority to enter into this Agreement and to perform all of its obligations
hereunder. This Agreement has been authorized by all necessary corporate
action of, has been duly executed and delivered by, and constitutes the valid
and binding obligation of, NSI, enforceable in accordance with its terms.
10.3. NO CONFLICTS; NO CONSENTS. The execution, delivery and performance
of this Agreement by NSI will not result in a breach in the terms or
conditions of, or constitute a default under, or violate, or conflict with, or
require, as the case may be: (i) any provision of any law, regulation or
ordinance applicable to NSI, (ii) the Certificate of Incorporation or Bylaws of
NSI, (iii) any material agreement, lease, mortgage or other instrument or
undertaking, oral or written, to which NSI is a party or by which it or any of
its properties or assets is or may be bound or affected, or (iv) any judgment,
order, writ, injunction or decree of any governmental authority.
11. MISCELLANEOUS.
11.1. RULES OF CONSTRUCTION. As used in this Agreement, neutral pronouns
and any variations thereof shall be deemed to include the feminine and masculine
and all terms used in the singular shall be deemed to include the plural, and
vice versa, as the context may require. The words "hereof", "herein" and
"hereunder" and other words of similar import refer to this Agreement as a
whole, including the Exhibits hereto, as the same may from time to time be
amended or supplemented, and not to any subdivisions contained in this
Agreement. The word "including" when used herein is not intended to be
exclusive and means "including, without limitation." References herein to
"dollars," "U.S. $," and "I" are to United States dollars. References herein to
Paragraph, Section, subsection or Exhibit shall refer to the appropriate
Paragraph, Section, subsection or Exhibit in or to this Agreement.
11.2. ASSIGNMENT. This Agreement is not assignable by any party without
the prior written consent of the other parties, which consent shall not be
unreasonably withheld. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors and permitted assigns.
11.3. WAIVER; REMEDIES. No failure on the part of any party to exercise,
and no delay in exercising, any right hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any right hereunder
preclude any other or further exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.
11.4. SEVERABILITY. If any provision of this Agreement is determined by a
court of competent jurisdiction to be invalid or unenforceable, such
determination shall not affect the validity or enforceability of any other part
or provision of this Agreement.
6
<PAGE>
11.5. CHOICE OF LAW. This Agreement and the performance hereof shall be
governed by and construed in accordance with the laws of the State of Ohio
(without giving effect to principles of conflicts of laws).
11.6. NOTICE. All notices, invoices, consents or other communications
required or permitted to be given by any party to another shall be in writing
(including facsimile or similar writing) and shall be given by facsimile,
Federal Express or similar courier service, or by certified or registered mail,
postage prepaid as follows:
(a) If to NSI, to:
Neuromedical Systems, Inc.
Two Executive Boulevard
Suffern, New York 10901-4164
Attn.: John B. Henneman, III
Vice President of Corporate Development and General Counsel
Facsimile: (914) 368-3896
With a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Attn.: Paul M. Reinstein, Esq.
Facsimile: (212) 859-8686
(b) If to the Licensees, to GRK or to the Surviving Corporation, to:
Papnet of Ohio, Inc.
6059 Memorial Drive
Dublin, Ohio 43017
Attn: David M. Richards, President
Cytology West, Inc.
3753 Howard Hughes Parkway
Suite 200
Las Vegas, Nevada 89109
Attn: Carl Genberg, President
Facsimile: (702) 892-3940
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Carolina Cytology
c/o Rodney M. Kinsey, Sr.
8651 Gairloch Court
Dublin, Ohio 43017
Facsimile: (614) 889-1052
ER Group, Inc.
c/o Mr. Thomas Kelley
8598 Milmichael Court
Dublin, Ohio 43017
Facsimile: (614) 764-2501
Cytology Indiana, Inc.
Indiana Cytology Review Company
c/o Mr. Cecil J. Petitti
Chaney & Petitti Insurance Agency
4266 Tuller Road
Dublin, Ohio 43017
Facsimile: (614) 764-1455
Papnet Utah, Inc.
c/o Mr. Kent Dawson
626 South Third Street
Las Vegas, Nevada 89101
Facsimile: (702) 383-8495
With copies to:
Porter, Wright, Morris & Arthur
41 South High Street
Columbus, Ohio 43215
Attn: William J. Kelly, Jr., Esq.
Facsimile: (614) 227-2100
Gallagher & Kennedy
2600 North Central Avenue
Phoenix, Arizona 85004-3020
Attn: Michael Ahearn, Esq.
Facsimile: (602) 257-4959
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Squire, Sanders & Dempsey
1300 Huntington Center
41 South High Street
Columbus, Ohio 43215
Attn: Daniel M. Maher, Esq.
Facsimile: (614) 365-2499
or at such other address or facsimile number (or other similar number) as any
party may from time to time specify to the other parties hereto. Any notice,
consent or other communication required or permitted to be given hereunder shall
be deemed to have been given on the date of mailing, personal delivery or
facsimile (provided the appropriate answer back is received) thereof and shall
be conclusively presumed to have been received on the second business day
following the date of mailing or, in case of personal delivery, the actual day
of personal delivery thereof, or, in the case of facsimile delivery, when such
facsimile is transmitted, except that a change of address shall not be effective
until actually received.
11.7. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all previous proposals, both oral and written, negotiations,
representations, commitments, writings and all other communications between the
parties. It may not be released, discharged, changed or modified except by an
instrument in writing signed by a duly authorized representative of each of the
parties.
11.8. HEADINGS. The headings used in this Agreement are for reference
purposes only and shall not be construed to limit or further define any term or
provisions hereof.
11.9. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by
a duly authorized representative as of the date first written above.
NEUROMEDICAL SYSTEMS, INC.
By: /s/ Mark R. Rutenberg
-----------------------------
Mark R. Rutenberg, President
and Chief Executive Officer
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PAPNET OF OHIO, INC.
By: /s/ David Richards
-----------------------------
David R. Richards, President
CYTOLOGY INDIANA, INC.
By: /s/ S. Trevor Ferger
----------------------------
President
INDIANA CYTOLOGY REVIEW COMPANY
By: /s/ Cecil J. Petitti
----------------------------
President
PAPNET WEST LIMITED PARTNERSHIP
By: /s/ Carl Genberg
----------------------------
General Partner
ER GROUP, INC.
By: /s/ Thomas J. Kelley
----------------------------
President
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CAROLINA CYTOLOGY LICENSING COMPANY
By: /s/ Rodney Kinsey
----------------------------
President
CAROLINA CYTOLOGY WARRANT COMPANY
By: /s/ Rodney Kinsey
----------------------------
President
CYTOLOGY WEST, INC.
By: /s/ Carl Genberg
----------------------------
President
PAPNET UTAH, INC.
By: /s/ Kent Dawson
----------------------------
President
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GRK PARTNERSHIP
By: /s/ David J. Richards
----------------------------
David J. Richards, a Partner
By: /s/ Carl Genberg
----------------------------
Carl Genberg, a Partner
By: /s/ John P. Kennedy
----------------------------
John Kennedy, a Partner
12
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Exhibit A
AMENDED AND RESTATED AGREEMENT
THIS AMENDED AND RESTATED AGREEMENT, dated as of _________________,
1995, is by and between NEUROMEDICAL SYSTEMS, INC., a Delaware corporation
("NSI"), with its principal place of business at Two Executive Boulevard,
Suffern, New York 10901, and ____________, a Delaware corporation
("Licensee"), with its principal place of business at ____________________
(this "Agreement"). This Agreement supersedes and replaces any and all prior
agreements by and between NSI and Licensee and any of its
predecessors-in-interest, including, without limitation, Papnet of Ohio,
Inc., an Ohio corporation ("Papnet of Ohio"), Papnet Indiana Limited
Partnership, an Ohio limited partnership, Papnet West Limited Partnership, an
Ohio limited partnership, ER Group, Inc., an Ohio corporation, Carolina
Cytology Licensing Company, an Ohio general partnership, Cytology West, Inc.,
a Delaware corporation, and Papnet Utah, Inc., a Nevada corporation.
WHEREAS, NSI has designed, developed and produces the PAPNET-Registered
Trademark- Testing System ("PAPNET-Registered Trademark-," "PAPNET-Registered
Trademark- System" or "PAPNET-Registered Trademark- Testing"), which is a
semi-automated system for the review of cell, tissue or body fluid specimens
("Slides") including, but not limited to, cervical cytology specimens;
WHEREAS, the PAPNET-Registered Trademark- System consists of a scanning
system (the "Scanner"), which processes Slides and stores digital images of
certain portions of such Slides on a digital tape ("PAPNET-Registered
Trademark-Images"), and a proprietary review station (the "Review Station"),
which, among other things, permits a cytotechnologist trained by NSI to
review the images stored on the digital tape;
WHEREAS, NSI markets and sells PAPNET-Registered Trademark- Testing as a
service, by which end-user laboratories submit Slides to one of NSI's central
facilities for processing on a Scanner ("Scanning Centers"), and NSI returns
such Slides and the related digital tape containing PAPNET-Registered
Trademark-Images to such laboratories so that NSI-trained cytotechnologists
employed by such laboratories may review the Slides and the related
PAPNET-Registered Trademark- Images using a licensed, leased or purchased
Review Station (the scanning of Slides and the use of the Review Station
(whether by license, lease or purchase) are collectively referred to herein
as the "PAPNET-Registered Trademark- Service");
WHEREAS, NSI has been granted patents #4,965,725, #5,287,182,
#5,287,272, and _______ by the United States government, covering the use of
neural networks for the classification of cell, tissue or body fluid
specimens, and has certain other patents and patent applications issued and
pending in the United States and elsewhere and has or will have certain other
patents in development relating to the PAPNET-Registered Trademark- System or
the PAPNET-Registered Trademark-Service (the "Patents"); and
WHEREAS, NSI has used the trademarks and trade names "Neuromedical
Systems", "NSI", "PAPNET-Registered Trademark-" and its "box" logo and may
use other names or marks to identify or describe the PAPNET-Registered
Trademark-Service (the Patents and all pending and future worldwide patents
and patent rights, copyrights, trademarks, trade names, trade secrets,
know-how, utility models, improvements thereon
<PAGE>
and other intellectual property rights in and to the PAPNET-Registered
Trademark- System or the PAPNET-Registered Trademark-Service, including
without limitation, all applications and registrations with respect thereto,
are collectively referred to as the "Intellectual Property"); and
WHEREAS, Licensee acknowledges NSI's exclusive right in and to the
Intellectual Property and the use thereof and NSI acknowledges Licensee's
limited rights to use the Intellectual Property as provided herein; and
WHEREAS, NSI wishes to enter into this Agreement with Licensee to amend
and restate its previous agreement with Licensee and any of its
predecessors-in-interest and to reflect the business combination into
Licensee of Papnet of Ohio, Inc. Papnet Indiana Limited Partnership, Papnet
West Limited Partnership, Cytology West, Inc., Carolina Cytology Licensing
Company, ER Group, Inc., and Papnet Utah, Inc., which were formerly licensees
of NSI; and
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants herein contained, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, it is hereby
agreed as follows:
1. DEFINITIONS.
For purposes of this Agreement, capitalized terms shall have the meanings
set forth below:
"Agreement" shall have the meaning set forth under the preamble hereto.
"Client" shall mean the ultimate laboratory purchaser of the PAPNET-
Registered Trademark- Service from NSI and the Licensee.
"End User License" shall mean the form of agreement attached hereto as
Exhibit A, as the same may be amended from time to time.
"FDA" shall mean the United States Food and Drug Administration.
"Indemnifying Party" shall have the meaning set forth under Section 10.3 of
this Agreement.
"Indemnified Person" shall have the meaning set forth under Section 10.3 of
this Agreement.
"Intellectual Property" shall have the meaning set forth under the fifth
recital of this Agreement.
"Lease Service Costs" shall mean the charges to Licensee per Slide for all
service provided by NSI in processing slides from Clients in the Licensed
Territory. This charge will cover all costs of NSI related to the processing of
Slides by the laboratory, including but not limited to Slide processing, review
stations, DATs, upgrades, software, hardware, transportation costs (except Slide
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Transportation Costs), training costs and all other such costs. The charge
shall be the lower of: a) $1.00 per Slide, or b) NSI's average actual
equipment cost per Slide for the acquisition of Scanners and related
equipment used in rendering the PAPNET-Registered Trademark- Service. The
per Slide charge under this paragraph in any year shall be calculated by
dividing the average capitalized cost to NSI as recorded on its books of
account of the Scanners and related equipment (i) by the average useful life
thereof for depreciation purposes and (ii) then by the actual annual average
processing volume of such equipment. The foregoing calculation shall be made
annually, based upon cost, depreciation and processing volume data from the
preceding fiscal year. This method will be the same method used to determine
the cost to Licensee of any future equipment or service.
"Licensed Territory" shall mean the States of Ohio, Arizona, Georgia,
Kentucky, Missouri, Nevada, North Carolina and Utah and San Diego County,
California and the standard metropolitan statistical area of Chicago,
Illinois.
"Licensee" shall have the meaning set forth under the preamble of this
Agreement.
"Loss" shall have the meanings set forth under Section 10.1 and 10.2 of
this Agreement.
"Multistate National Laboratories" shall mean any clinical laboratory
companies that process more than 750,000 Slides annually, and which either
(i) have Slide processing laboratories both within and without the Licensed
Territory, or (ii) are located outside the Licensed Territory and have ten
percent (10%) or more of their annual Slide volume originating from patients
located within the Licensed Territory. The parties will annually evaluate
the Slide volumes of clinical laboratory companies in the United States to
identify the laboratory companies that meet this definition.
"Notice" shall have the meaning set forth under Section 10.3 of this
Agreement.
"Notice of Defense" shall have the meaning set forth under Section 10.3 of
this Agreement.
"NSI" shall mean Neuromedical Systems, Inc. and its subsidiaries.
"NSI Technology" shall mean any and all applications, modifications,
refinements and improvements of the Patents and Intellectual Property,
whether or not patented, including but not limited to the application of
neural network technology to the classification of Slides and any patents,
patent rights, copyrights, trademarks, trade names, trade secrets, know-how,
utility models, improvements thereon and other intellectual property rights
developed or acquired by NSI to assist in the sale, processing or enhancement
of the PAPNET-Registered Trademark- System or the PAPNET-Registered
Trademark- Service or products related thereto.
"PAPNET-Registered Trademark-" shall have the meaning set forth under
the first recital of this Agreement.
"PAPNET-Registered Trademark- Images" shall have the meaning set forth
under the second recital of this Agreement.
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"Papnet of Ohio" shall have the meaning set forth under the preamble to
this Agreement.
"PAPNET-Registered Trademark- Service" shall have the meaning set forth
under the third recital of this Agreement.
"PAPNET-Registered Trademark- System" shall have the meaning set forth
under the first recital of this Agreement.
"PAPNET-Registered Trademark- Testing" shall have the meaning set forth
under the first recital of this Agreement.
"Patents" shall have the meaning set forth under the fourth recital of this
Agreement.
"Person" shall have the meaning ascribed to such term under Section 13(d)
of the Securities Exchange Act of 1934.
"Proprietary Materials" shall have the meaning set forth under Section 9.1
of this Agreement.
"Revenue Slide" shall mean a Slide processed using the PAPNET-Registered
Trademark- System or the PAPNET-Registered Trademark- Service for which any
charge is made by NSI.
"Review Station" shall have the meaning set forth under the second recital
of this Agreement.
"Royalties" shall have the meaning set forth under Section 3.1 of this
Agreement.
"Scanner" shall have the meaning set forth under the second recital of this
Agreement.
"Scanning Centers" shall have the meaning set forth under the third recital
of this Agreement.
"Slides" shall have the meaning set forth under the first recital of this
Agreement.
"Slide Transportation Costs" shall mean the actual costs to NSI of
transporting Revenue Slides between the Clients in the Licensed Territory and
the applicable Scanning Center.
"Term" shall have the meaning set forth under Section 12(a) of this
Agreement.
"Territory Gross Revenues" shall mean all sales, revenues or receipts
recognized by NSI as sales or revenue under generally accepted accounting
principles consistently applied, arising directly or indirectly from the
sale, licensing or use of the PAPNET-Registered Trademark- System,
PAPNET-Registered Trademark- Service, and/or any NSI Technology within the
Licensed Territory, without any allowances, credits or deductions (other than
such as would constitute price rebates, in the form of discounts or other
reductions in the effective price per Slide charged to Clients), regardless
of whether such sales, revenues or
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<PAGE>
receipts are attributable to Licensee's activities within the Licensed
Territory.
"Worldwide Gross Revenues" shall mean all sales, revenues (regardless of
whether such revenues are characterized as operating or non-operating
revenues on NSI's consolidated financial statements) or receipts recognized
by NSI as sales or revenue under generally accepted accounting principles
consistently applied (and expressed in U.S. Dollars), without any allowances,
credits or deductions (other than such as would constitute price rebates, in
the form of discounts or other reductions in the effective price per Slide
charged to Clients).
2. DISTRIBUTION AND MARKETING.
2.1 DISTRIBUTION RIGHTS. Upon the terms and subject to the conditions
of this Agreement, NSI hereby grants to Licensee during the Term of this
Agreement an exclusive right and license to sell the PAPNET-Registered
Trademark- Service and any and all other NSI Technology in the Licensed
Territory. Notwithstanding the foregoing, the grant of exclusive rights to
Licensee hereunder shall not prohibit NSI from conducting sales activities in
the Licensed Territory directly through NSI's national sales force and
marketing in the Licensed Territory, provided that NSI gives Licensee
reasonable advance notice of such activities.
2.2 MARKETING AND SALES.
(a) Licensee agrees to use reasonable efforts to promote and sell the
PAPNET-Registered Trademark- Service within the Licensed Territory. Licensee
will conduct such activities as it undertakes in accordance with marketing
and sales policies and procedures of uniform national application promulgated
from time to time by NSI's Vice President of Marketing and Sales, its
Director of Sales, or such other person as NSI shall appoint for such
purpose. Licensee will provide periodic sales reports and other sales-related
information and internal reports to NSI as provided in such uniform policies
adopted by NSI from time to time, and otherwise on the same basis as such
information and reports are provided to Licensee's management, including
assistance to NSI's Director of Sales in the preparation of monthly master
production schedules. Licensee's Sales Manager shall also have access to
such NSI sales data on the same basis as NSI's Director of Sales and shall
promptly receive copies of internal NSI reports related to same.
Notwithstanding the foregoing, NSI data relating to regions outside of the
Licensed Territory (including aggregate national data) for any fiscal period
of NSI shall not be required to be made available to Licensee until after NSI
has filed its applicable periodic report as required under Section 13 of the
Securities Exchange Act of 1934, and any material nonpublic sales
information of Licensee for any fiscal period of Licensee shall not be
required to be made available to NSI until after Licensee has filed its
applicable periodic report as required under Section 13 of the Securities
Exchange Act of 1934. All data and reports of a party provided to the other
under this Section 2.2(a) shall be received by such other party subject to
reasonable policies of the providing party regarding the use and disclosure
of confidential information as the same are applicable to the providing
party's officers and employees.
(b) NSI shall have authority over the marketing and selling materials and
methods relating
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to the PAPNET-Registered Trademark- Service. Licensee shall provide only
NSI-approved marketing materials to Clients. NSI shall make available to
Licensee, for a charge not to exceed NSI's actual per-unit incremental cost
(exclusive of charges for design and other creative services), all such
brochures, pamphlets, reprints and other marketing and sales materials as are
available to NSI, in sufficient quantities for Licensee to conduct efficient
marketing activities in the Licensed Territory; provided, however, that if
use of any such materials is mandated by NSI, NSI shall bear the entire costs
thereof. Licensee may also reproduce marketing materials obtained from NSI
for use in conducting Licensee's marketing activities, provided that such
reproduction shall be of equal or better quality. As requested by Licensee,
NSI will use reasonable efforts to make available to Licensee other
information, data, reprints and public speakers to aid in the promotion of
the PAPNET-Registered Trademark- Service within the Licensed Territory, on
reasonable terms and conditions.
(c) Licensee shall obtain prior written approval from NSI for the use of
any marketing materials for the PAPNET-Registered Trademark- Service which
may be independently developed by Licensee. Any such request shall be made
in writing to NSI's Vice President of Marketing, with a copy to NSI's General
Counsel. NSI will promptly respond in writing to any such request; failure
to respond within 30 days of receipt of any such request which has been
delivered by certified mail shall constitute approval by NSI of such
materials. NSI will have the ability to approve or deny use of such
materials in the exercise of its reasonable discretion. All marketing
materials independently developed by Licensee incorporating the Intellectual
Property or relating to the PAPNET-Registered Trademark- System or the
PAPNET-Registered Trademark- Service shall clearly indicate Licensee's
relationship with NSI.
(d) Should NSI engage in advertising in visual, audio or print media or
direct mail or direct response campaigns, or other similar methods of
promoting the PAPNET-Registered Trademark- Service, which are substantially
national in scope and tenor, NSI shall conduct a level of such promotional
efforts in the Licensed Territory proportionate to the level of population
within the Licensed Territory. NSI shall bear the cost of any such
advertising or promotional activities which it conducts within the Licensed
Territory.
(e) NSI agrees to use reasonable efforts to inform Licensee of its
marketing and sales efforts in the Licensed Territory. NSI will use
reasonable efforts to provide Licensee the opportunity to participate in the
implementation of marketing policies, strategies, and programs and will use
its reasonable efforts to provide a representative of Licensee the
opportunity to attend, either by phone or in person, all relevant meetings
and other programs of NSI that relate to implementation of such policies,
strategies and programs, or to any marketing, sales or customer relations
activities in the Licensed Territory.
(f) NSI agrees to cooperate with Licensee and to provide without charge
its facilities and employees in arranging and conducting product
demonstrations, tours of NSI facilities, meetings with NSI executives, and
similar activities in connection with Licensee's marketing, sales and public
relations efforts, upon reasonable prior notice and during normal business
hours.
2.4 SALES PERSONNEL. Licensee will consult with and give reasonable
consideration to NSI's
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evaluations and recommendations regarding the employment and retention of
sales representatives of Licensee who market and sell the PAPNET-Registered
Trademark- Service, and such evaluations and recommendations will be based
upon criteria similar to those employed by NSI in the hiring and retention of
its own sales force. NSI shall provide without cost to Licensee initial and
periodic training of Licensee's sales personnel to the same extent and on the
same basis that such training is provided to NSI's sales personnel, and shall
keep Licensee's sales personnel updated with appropriate sales materials and
other information. Licensee agrees to cause its sales personnel to
participate in periodic marketing or sales meetings and conference calls
conducted by NSI for its national sales force, and NSI will bear the costs of
travel and lodging for meetings or other programs at which attendance by
Licensee's sales personnel is requested by NSI.
2.5 INTELLECTUAL PROPERTY. NSI hereby grants Licensee an irrevocable
right to use during the Term of this Agreement, for the purpose of Licensee's
marketing and sale of the PAPNET-Registered Trademark- Service in accordance
with and subject to the terms of this Agreement, the copyrights, trademarks,
and trade names used by NSI to identify PAPNET-Registered Trademark- or the
PAPNET-Registered Trademark- Service. Licensee agrees to comply with such
written policies of general application which NSI shall from time to time
adopt concerning the use of NSI's copyrights, trademarks and trade names by
NSI personnel, distributors and other representatives. Licensee shall have
the right to reproduce NSI's trademarks and logos on its business cards,
letterhead stationery, and corporate communications, provided that such
materials indicate Licensee's relationship with NSI. Licensee shall not use
NSI's copyrights, trademarks or trade names in a disparaging manner.
Licensee shall not take any action which is inconsistent with NSI's ownership
of its copyrights, trademarks and trade names, and agrees that each of the
foregoing shall inure to the benefit of NSI. NSI agrees to include correct
trademark, trade name, copyright, trade secret and patent notices for the
PAPNET-Registered Trademark- System and the PAPNET-Registered Trademark-
Service on all materials and equipment where appropriate. Licensee shall not
remove, alter, cover, obfuscate or otherwise deface any NSI trademark, trade
name, patent, trade secret or copyright notice on the PAPNET-Registered
Trademark- System or any part thereof or on any promotional or advertising
material used in conjunction with or for the PAPNET-Registered Trademark-
System or the PAPNET-Registered Trademark- Service. The foregoing provisions
shall also apply to any other NSI Technology licensed to Licensee hereunder.
Licensee agrees not to represent that any product or service sold by it in
conjunction with the PAPNET-Registered Trademark- System or the
PAPNET-Registered Trademark- Service, and which is not licensed by NSI, is a
product or service manufactured, provided or endorsed by NSI.
2.6 NATURE AND SCOPE OF APPOINTMENT. Licensee shall not knowingly
market, distribute, sell or license the PAPNET-Registered Trademark- System
or the PAPNET-Registered Trademark- Service outside of the Licensed Territory
or for any use, other than as permitted by NSI; provided, however, that
activities of Licensee outside the Licensed Territory reasonably incidental
to marketing and sales activities within the Licensed Territory shall not be
a violation of this Section 2.6. Licensee shall not, nor shall it encourage
or assist any third party to, make use of the PAPNET-Registered Trademark-
System other than as permitted or recommended by NSI and indicated by the
PAPNET-Registered Trademark- System's labeling. Nothing contained in this
Agreement shall prohibit NSI from making, using, licensing, distributing,
selling or granting any rights in and to the PAPNET-Registered Trademark-
System or the PAPNET-Registered Trademark- Service outside of the Licensed
Territory so long as there is no material effect on Licensee's exclusive
rights within the Licensed Territory.
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2.7 REGULATORY COMPLIANCE. NSI agrees to promptly advise Licensee in
writing of its policies with regard to governmental regulations affecting the
PAPNET-Registered Trademark- System or the PAPNET-Registered Trademark-
Service and any changes in such policies which may occur from time to time.
Licensee agrees that any marketing or use of the PAPNET-Registered Trademark-
System or the PAPNET-Registered Trademark- Service shall conform to NSI's
practices or policies with respect to compliance with governmental
regulations. Licensee agrees to use its reasonable efforts to cause its
sales force to operate in strict compliance with NSI's policies and
practices, and generally with all applicable governmental regulations
applicable to their activities.
2.8 GOVERNMENTAL RESTRICTIONS. To the extent that any court,
governmental body or regulatory agency with jurisdiction over NSI or Licensee
restricts or prohibits the marketing, distribution, provision or licensing of
the PAPNET-Registered Trademark- System or the PAPNET-Registered Trademark-
Service, Licensee's rights hereunder shall be subject to and limited by any
such restriction or prohibition without liability to NSI of any type or
nature except as expressly provided herein to the contrary.
2.9 UPGRADES; IMPROVEMENTS. The provisions of this Agreement and the
marketing and royalty rights of Licensee hereunder shall apply to any and all
upgrades and improvements of the PAPNET-Registered Trademark- System or the
PAPNET-Registered Trademark- Service, whether or not patented, as well as any
other product or service marketed or sold by NSI which is defined as "NSI
Technology" hereunder.
3. ROYALTIES.
3.1 AMOUNT AND PAYMENT.
(a) With respect to each fiscal month during the Term of this
Agreement NSI shall be obligated to pay Licensee Royalties equal to fifty
percent (50%) of the amount by which Territory Gross Revenues recognized by
NSI during such month exceeds the sum of the Lease Service Costs and Slide
Transportation Costs associated with the Slides processed during such month;
provided, however, that the total amount of Royalties payable under this
Section 3.1(a) with respect to any fiscal year of NSI shall not exceed the
amount of Royalties determined with respect to Territory Gross Revenues
recognized by NSI from the processing of the first 12,175,000 Revenue Slides
for such fiscal year which originate in the Licensed Territory.
(b) Notwithstanding the provisions of Section 3.1(a), in the event
that the aggregate amount of monthly Royalties paid with respect to any
fiscal year of NSI shall be less than four and fifteen hundredths percent
(4.15%) of NSI's Worldwide Gross Revenues for such fiscal year, NSI shall pay
to Licensee as additional Royalties the amount of such difference; provided,
however, that the total amount of Royalties payable under this Section
3.1(b) with respect to any fiscal year of NSI shall not exceed an amount
equal to (i) Twenty Three Million Dollars ($23,000,000), less (ii) the total
amount of Royalties payable under Section 3.1(a) with respect to such fiscal
year.
(c) The Royalties due with respect to any fiscal month shall be
reported by NSI to Licensee within fifteen (15) days after the conclusion of
such month, and shall be paid by NSI to
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Licensee as soon as possible, but not later than thirty (30) days, after the
conclusion of such month. Any additional Royalties payable pursuant to
Section 3.1(b) shall be reported and paid by NSI to Licensee not later than
ninety (90) days after the end of the fiscal year with respect to which such
additional Royalties are due. Royalty reports furnished by NSI to Licensee
pursuant to this Section 3.1(c) shall set forth the calculation of the
Royalties in reasonable detail so that Licensee can determine the accuracy
thereof. Royalties shall be paid by check or wire transfer.
(d) NSI's obligation to pay any Royalties due under this Section
3.1 shall not be subject to any conditions or limitations other than as
provided in this Section.
(e) For purposes of determining Licensee's share of Territory
Gross Revenues during any applicable period, there shall be included in
Territory Gross Revenues during such period a proportionate share of gross
revenues recognized by NSI arising directly or indirectly from the sale,
licensing or use of the PAPNET-Registered Trademark- System,
PAPNET-Registered Trademark-Service, and/or any NSI Technology to Multistate
National Laboratories, without any allowances, credits or deductions (other
than such as would constitute price rebates, in the form of discounts or
other reductions in the effective price per Slide charged to Clients),
regardless of whether the Revenue Slides attributable to such Multistate
National Laboratories actually originate in the Licensed Territory. Such
proportionate share shall be equal to the ratio which the population of the
Licensed Territory bears to the population of the United States, as
determined from time to time from the most recently available United States
census data. As of the date of this Agreement, such ratio is ___ percent.
In determining the amount of Royalties payable during any applicable period
with respect to such proportionate share of gross revenues, an amount
representing Lease Service Costs and Slide Transportation Costs will be
deducted from Territory Gross Revenues. Such costs shall be determined by
multiplying the average per Revenue Slide Lease Service Costs and Slide
Transportation Costs in the Licensed Territory times the number of Revenue
Slides represented by the proportionate share of gross revenues from
Multistate National Laboratories included in the Territory Gross Revenues.
(f) In the event that the PAPNET-Registered Trademark- System,
PAPNET-Registered Trademark- Service, and/or any NSI Technology is ever
applied by NSI to the processing of Slides other than cervical cytology
specimens (I.E.,"PAP" smears), the parties will in good faith negotiate an
increase in the Royalties cap contained in Section 3.1(a) above to accord
Licensee a share of the additional Territory Gross Revenues attributable to
such new Slide processing business, which is proportionate to the ratio which
the population in the Licensed Territory bears to the total population of the
United States at the time.
3.2 BOOKS AND RECORDS. NSI agrees to keep full and accurate books and
records showing all billings, Territory Gross Revenues, Worldwide Gross
Revenues. Lease Service Costs, Slide Transportation Costs and Revenue Slide
geographic origin in sufficient detail to enable Royalties to be determined
and paid by it under this Article 3. NSI further agrees that Licensee and
its representatives shall be permitted to inspect such books and records from
time to time during regular business hours and to make such copies thereof as
reasonably appropriate. Licensee shall be entitled to have such books and
records audited by a certified public accountant at Licensee's expense, and
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NSI agrees to place at the disposal of Licensee's accountant all books and
records necessary or desirable in connection with such audit and to give such
auditor reasonable assistance and cooperation. The cost of any such
inspection or audit shall be borne by Licensee.
3.3 CALCULATION OF GROSS REVENUES. The determination of NSI's
independent auditor as to Worldwide Gross Revenues for any fiscal year shall
be deemed presumptively correct. If disputed, Licensee shall have the right
to make reasonable inquiry as to the method by which Worldwide Gross Revenues
have been calculated and NSI shall instruct its auditor to provide a prompt
and thorough response to such inquiry. Any and all disputes concerning the
determination of Territory Gross Revenues or Worldwide Gross Revenues shall
be subject to arbitration as provided in Section 13 of this Agreement.
3.4 REMEDY FOR NON-PAYMENT OF ROYALTIES. Without limiting any other
rights or remedies to which Licensee may be entitled hereunder, in the event
of the failure of NSI to pay Licensee any Royalties when required to be paid
under Section 3.1(c), interest thereon shall accrue monthly at the rate of
1.5% (18% per annum).
4. CONTRACT TERMS AND PROCEDURES; CLIENT TRAINING AND SERVICE.
4.1 GENERAL. NSI shall provide Licensee with its standard form or forms
of End User License and other forms of contracts to be executed between NSI
and Clients, which shall be used by Licensee and NSI in the Licensed
Territory. Licensee and NSI shall cooperate in negotiating the definitive
terms of such contracts between NSI and Clients in the Licensed Territory.
NSI agrees to comply with the terms of any End User License it enters into
with Clients.
4.2 CONTRACTING OBLIGATIONS OF NSI. NSI shall enter into contracts with
Clients in the Licensed Territory under the same terms, conditions, charges,
added customer benefits, and exceptions as it does in the remainder of the
United States. NSI shall not refuse to enter into or delay entering into any
contract with a Client in the Licensed Territory except upon grounds stated
in NSI's written policies and procedures of uniform national application
which have been provided to Licensee. In the event of such a delay or
refusal, NSI shall promptly provide written notice to Licensee of such delay
or refusal and the detailed grounds therefor, and shall cooperate with
Licensee's efforts to remedy any noted deficiencies.
4.3 NONDISCRIMINATION. NSI agrees that pricing, discounts and
concessions, delivery schedules, and other contract terms of the PAPNET-
Registered Trademark- Service provided to Clients within the Licensed Territory,
as well as the quality and timeliness of service to them, will be no less
favorable to such Clients than for laboratories, insurance companies or other
purchasers in any other region or locality within the United States, except to
the extent that NSI can demonstrate that any variance in pricing, discounts and
concessions, or other contract terms is proportionate to differences in the cost
of servicing a particular customer. Notwithstanding the foregoing, if NSI shall
enter into agreements with laboratories, insurance companies or other purchasers
on economic or business terms materially different than provided to Clients
within the Licensed Territory, at Licensee's
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request, NSI shall extend such differing terms to Clients in the Licensed
Territory with comparable costs of service. In order to assess NSI's
compliance with this Section 4.3, NSI will permit Licensee to inspect, during
normal business hours, NSI's contract files for Clients located outside of
the Licensed Territory. The provisions of this Section 4.3 shall not impose
any obligation on NSI to extend pricing, discounts, concessions, or other
contract terms applicable to Multistate National Laboratories to Clients in
the Licensed Territory.
4.4 TRAINING AND REVIEW STATIONS. NSI shall provide training in the
operation and maintenance of the Review Station and the evaluation of
PAPNET-Registered Trademark- Images to personnel of Clients in the Licensed
Territory, on terms and schedules comparable to those offered to Clients
outside the Licensed Territory. NSI will notify Licensee of any anticipated
delays in the delivery of Review Stations or in training of Client personnel
of greater than thirty (30) days after execution and delivery of the End User
License and other standard contract forms required by NSI.
6. REPRESENTATIONS AND WARRANTIES OF NSI.
NSI (which term, for purposes of this Article 6, does not include
subsidiaries) hereby represents and warrants to Licensee as follows:
6.1 ORGANIZATION. NSI is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. NSI
has the corporate power to own or lease its properties and assets and to
carry on its business as now conducted.
6.2 AUTHORITY RELATIVE TO THIS AGREEMENT. NSI has the right, power and
authority to enter into this Agreement and to perform all of its obligations
hereunder. This Agreement has been authorized by all necessary corporate
action of, has been duly executed and delivered by, and constitutes the valid
and binding obligation of, NSI, and is enforceable in accordance with its
terms.
6.3 NO CONFLICTS; NO CONSENTS. The execution, delivery and performance
of this Agreement will not result in a breach in the terms or conditions of,
or constitute a default under, or violate, or conflict with, or require, as
the case may be: (i) any provision of any law, regulation or ordinance; (ii)
the Certificate of Incorporation or Bylaws of NSI; (iii) any agreement,
lease, mortgage or other instrument or undertaking, oral or written, to which
NSI is a party or by which it or any of its properties or assets is or may be
bound or affected; (iv) any judgment, order, writ, injunction or decree of
any governmental authority, or (v) any action of or by, or filing with, any
governmental authority. The execution and delivery of this Agreement do not
and, except for any approvals, permits and licenses required to market the
PAPNET-Registered Trademark- Service in the Licensed Territory, the
performance of this Agreement will not, require any action, consent or
approval of any person, entity or governmental authority.
6.4 LITIGATION. Except as disclosed in Schedule 6.4 hereto, there is no
pending or, to the knowledge of NSI, threatened legal, administrative,
arbitration or other proceeding or governmental investigation which is likely
to have a material adverse effect on NSI or the performance by NSI of
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its obligations under this Agreement.
7. REPRESENTATIONS AND WARRANTIES OF LICENSEE.
Licensee hereby represents and warrants to NSI as follows:
7.1 ORGANIZATION. Licensee is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
Licensee has the corporate power to own or lease its properties and assets
and to carry on its business as now conducted.
7.2 AUTHORITY RELATIVE TO THIS AGREEMENT. Licensee has the right,
power and authority to enter into this Agreement and to perform all of its
obligations hereunder. This Agreement has been authorized by all necessary
corporate action of, has been duly executed and delivered by, and constitutes
the valid and binding obligation of, Licensee, enforceable in accordance with
its terms.
7.3 NO CONFLICTS; NO CONSENTS. The execution, delivery and performance
of this Agreement will not result in a breach in the terms or conditions of,
or constitute a default under, or violate, or conflict with, or require, as
the case may be: (i) any provision of any law, regulation or ordinance, (ii)
the Certificate of Incorporation or Bylaws of Licensee, (iii) any agreement,
lease, mortgage or other instrument or undertaking, oral or written, to which
Licensee is a party or by which it or any of its properties or assets is or
may be bound or affected, (iv) any judgment, order, writ, injunction or
decree of any governmental authority, or (v) any action of or by, or filing
with, any governmental authority. The execution and delivery of this
Agreement do not, and except for any approvals, permits and licenses required
to market the PAPNET-Registered Trademark- Service in the Licensed Territory,
the performance of this Agreement will not, require any action, consent or
approval of any person, entity or governmental authority.
7.4 LITIGATION. There is no pending or, to the knowledge of Licensee,
threatened legal, administrative, arbitration or other proceeding or
governmental investigation which is likely to have a material adverse effect
on Licensee or the performance by Licensee of its obligations under this
Agreement.
8. LIMITATIONS ON WARRANTIES AND LIABILITY.
8.1 NO WARRANTIES. EXCEPT AS OTHERWISE PROVIDED HEREIN, NEITHER NSI NOR
LICENSEE MAKES ANY REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE
PAPNET-Registered Trademark- SYSTEM OR THE PAPNET-Registered Trademark-
SERVICE, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE OR THAT
THE PAPNET-Registered Trademark- SYSTEM OR THE PAPNET-Registered Trademark-
SERVICE AS DEVELOPED AND DESIGNED WILL MEET ANY REQUIREMENTS OF OR WILL
PERFORM ERROR FREE OR IN CONFORMANCE WITH THE NEEDS OR REQUIREMENTS OF
LICENSEE OR ANY CLIENT.
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8.2 INSURANCE COVERAGE. NSI agrees to obtain and maintain insurance
coverage as is appropriate to cover any claims arising out of any injury to
person or property resulting from use of the PAPNET-Registered
Trademark-System, the PAPNET-Registered Trademark- Service, or other NSI
Technology. NSI shall maintain coverage in the amount of __________________
per claim and ________________ in the aggregate. NSI agrees to name Licensee
as an additional insured under the terms of the insurance policy or policies
and to provide a copy of the insurance policy or policies to Licensee.
9. OWNERSHIP AND INTELLECTUAL PROPERTY PROTECTION.
9.1 OWNERSHIP OF PAPNET-Registered Trademark- SYSTEM. Licensee
acknowledges and agrees that NSI is the sole and exclusive owner of the
Intellectual Property embodied in the PAPNET-Registered Trademark- System,
all information, materials, clinical and test data reports and filings
produced in connection with any required regulatory approvals, permits and
licenses, and all information, reports, specifications, source code, object
code, documentation, diagrams, flow charts and any other tangible or
intangible materials of any type whatsoever relating to the PAPNET-Registered
Trademark- System and derived or produced by or on behalf of NSI
(collectively, the "Proprietary Materials"). No provision contained in this
Agreement shall be construed to transfer to Licensee any title or ownership
interest in the Proprietary Materials or any Intellectual Property embodied
in the PAPNET-Registered Trademark- System or the PAPNET-Registered
Trademark- Service.
9.2 SCOPE OF USE. Licensee shall not, and shall not knowingly assist
any third party to, (a) modify or alter, create or attempt to create, by
reverse engineering or otherwise, translate or decompile, translate or
transfer, or otherwise attempt to derive the source code, structure or
algorithms of, the PAPNET-Registered Trademark- System or any part thereof,
(b) use or adapt the PAPNET-Registered Trademark- System or any part thereof
in any way, otherwise than in connection with the marketing or sale of the
PAPNET-Registered Trademark- Service, (c) use the PAPNET-Registered
Trademark- System or any part thereof to create a derivative work of the
PAPNET-Registered Trademark- System or (d) rent, lease or otherwise provide
temporary access to the PAPNET-Registered Trademark- System or any part
thereof, except as incidental to marketing and sales activities otherwise
permitted under this Agreement.
9.3 CONTROL OF INTELLECTUAL PROPERTY PROTECTION. NSI shall at all
times retain the sole and exclusive right to pursue, secure, maintain,
protect and enforce its Intellectual Property rights in and to, or arising
out of or related to, the PAPNET-Registered Trademark- System or the
PAPNET-Registered Trademark-Service.
9.4 PAPNET-Registered Trademark- SYSTEM NAME. NSI shall have the right
in its sole discretion to select and include any trademark or trade name to
identify the PAPNET-Registered Trademark- System, provided that Licensee will
have only the same rights with respect to any such trademark or trade name as
it does to other trademarks and trade names of NSI hereunder.
9.5 PROTECTION OF INTELLECTUAL PROPERTY. Licensee shall use its
reasonable efforts to protect and maintain the protection of the Intellectual
Property, as the same may be modified, upgraded or enhanced from time to time.
Upon NSI's request, Licensee shall, at NSI's sole cost and expense, assist NSI
in securing, maintaining and enforcing NSI's Intellectual Property rights in and
to the
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PAPNET-Registered Trademark- System or the PAPNET-Registered
Trademark-Service, including, but not limited to, undertaking any and all
necessary and appropriate actions in accordance with NSI's requests.
9.6 NOTICE OF INFRINGEMENT. Licensee shall promptly notify NSI of any
infringement of any Intellectual Property right of NSI with respect to the
PAPNET-Registered Trademark- System or the PAPNET-Registered Trademark-
Service which is known to Licensee. Upon reasonable notice of infringement,
NSI shall have the right, but not the obligation, to bring any suit or action
for infringement of its Intellectual Property at its own expense. Licensee
shall, if requested by NSI, actively assist in the prosecution of such
action. All costs for such assistance shall be paid by NSI.
9.7 INFRINGEMENT. If, as a result of any claim of infringement,
Licensee or NSI is permanently enjoined from selling the PAPNET-Registered
Trademark-Service or using the PAPNET-Registered Trademark- System, as the
case may be, by a final, nonappealable decree of a court of competent
jurisdiction, NSI shall, if possible, replace or modify the PAPNET-Registered
Trademark- System or PAPNET-Registered Trademark- Service so that the
PAPNET-Registered Trademark-Service or PAPNET-Registered Trademark- System is
non-infringing, or procure for Licensee the right to continue to sell the
PAPNET-Registered Trademark- Service or use the PAPNET-Registered Trademark-
System that is subject to such decree. In the event that Licensee or NSI is
either preliminarily or permanently enjoined from marketing and distributing
the PAPNET-Registered Trademark-Service in the Licensed Territory, but NSI is
legally free to offer the PAPNET-Registered Trademark- Service in other parts
of the United States or the world, then Licensee shall continue to be
entitled for the period it is so enjoined during the Term of this Agreement
to Royalties as provided in Section 3.1(b) of this Agreement. Except for the
indemnification provided in Section 10.1(ii), the foregoing states the entire
liability of Licensee or NSI, as the case may be, to the other with respect
to infringement of any proprietary rights of any third party, and Licensee
and NSI hereby expressly waive any other such liabilities that each may have
against the other and its directors, officers, employees, agents,
representatives and affiliates.
10. INDEMNIFICATION.
10.1 INDEMNIFICATION BY NSI. NSI shall, at its sole cost and expense,
indemnify and hold Licensee and its directors, officers, employees, agents,
representatives and affiliates harmless with respect to any liabilities,
damages, losses, costs and expenses, including reasonable attorney's fees
(any or all of the foregoing being hereinafter referred to as a "Loss"),
insofar as such Loss arises out of or is based upon (i) a misrepresentation
or breach (or alleged misrepresentation or breach) by NSI of its warranties,
covenants and agreements contained herein, (ii) a claim that the
PAPNET-Registered Trademark-System, the PAPNET-Registered Trademark- Service,
the Intellectual Property, the Patents, or the NSI Technology licensed
hereunder, as used within the scope of this Agreement, infringes or violates
any proprietary rights of any third party; or (iii) any injury to person or
property resulting from use of the PAPNET-Registered Trademark- System, the
PAPNET-Registered Trademark- Service, or other NSI Technology, except to the
extent that such injury is proximately caused by the gross negligence or
intentional misconduct of Licensee or Licensee's employees.
10.2 INDEMNIFICATION BY LICENSEE. Licensee shall, at its sole cost
and expense, indemnify and hold NSI and its directors, officers, employees,
agents, representatives and affiliates harmless
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with respect to any liabilities, damages, losses, costs and expenses,
including reasonable attorney's fees (any or all of the foregoing being
hereinafter referred to as a "Loss"), insofar as such Loss arises out of or
is based upon a misrepresentation or breach (or alleged misrepresentation or
breach) by the Licensee of its warranties, covenants and agreements contained
herein.
10.3 NOTICE OF CLAIM; DEFENSE. Each person indemnified under Sections
10.1 and 10.2 above (an "Indemnified Person") agrees that, upon the service
of a summons or other initial legal process upon the Indemnified Person in
any action or proceeding, or upon the Indemnified Person's receipt of written
notification of the commencement of any investigation, inquiry, or proceeding
in respect of which indemnity may be sought by the Indemnified Person under
Section 10.1 or 10.2 above, the Indemnified Person will promptly give written
notice (the "Notice") of such service or notification to the party from whom
indemnification may be sought hereunder (the "Indemnifying Party"). No
indemnification provided for in Section 10.1 or 10.2 above shall be available
to any Indemnified Person who shall fail so to give the Notice, if the
Indemnifying Party to whom such Notice was not given was unaware of the
action, suit, investigation, inquiry or proceeding to which the Notice would
have related, to the extent the Indemnifying Party was prejudiced by the
failure to give the Notice; but the omission so to notify such Indemnifying
Party of any such service or notification shall not relieve such Indemnifying
Party from any liability which it may have to any Indemnified Person for
contribution or otherwise than on account of such Sections. An Indemnifying
Party shall be entitled at its own expense to participate in the defense of
any action, suit or proceeding against, or investigation or inquiry of, an
Indemnified Person. An Indemnifying Party shall be entitled, if it so elects
within a reasonable amount of time after receipt of the Notice, by giving
written notice (herein called the "Notice of Defense") to all Indemnified
Persons, to assume the entire defense of such action, suit, investigation,
inquiry or proceeding, in which event such defense shall be conducted, at the
expense of the Indemnifying Party, by counsel chosen by the Indemnifying
Party reasonably satisfactory to the Indemnified Persons; PROVIDED, HOWEVER,
that (i) if any Indemnified Person reasonably determines that there may be a
conflict between the positions of the Indemnifying Party and of such
Indemnified Person in conducting the defense of such action, suit,
investigation, inquiry or proceeding or that there may be legal defenses
available to such Indemnified Person different from or in addition to those
available to the Indemnifying Party, then counsel for the Indemnified Person
shall be entitled to conduct the defense to the extent reasonably determined
by such counsel to be necessary to protect the interests of the Indemnified
Person and (ii) in any event, the Indemnified Person shall be entitled to
have counsel chosen by such Indemnified Person participate in, but not
conduct, the defense. If, within a reasonable time after receipt of the
Notice, an Indemnifying Party gives a Notice of Defense and the counsel
chosen by the Indemnifying Party is reasonably satisfactory to the
Indemnified Person, the Indemnifying Party will not be liable under Section
10.1 or 10.2 for any legal or other expenses subsequently incurred by the
Indemnified Person in connection with the defense of the action, suit,
investigation, inquiry or proceeding, except that (A) the Indemnifying Party
shall bear the legal and other expenses incurred in connection with the
conduct of the defense as referred to in clause (i) of the proviso to the
preceding sentence and (B) the Indemnifying Party shall bear such other
expenses as it has authorized to be incurred by the Indemnified Person. If,
within a reasonable time after receipt of the Notice, no Notice of Defense
has been given, the Indemnifying Party shall be responsible for any
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legal or other expenses incurred by the Indemnified Persons in connection
with the defense of the action, suit, investigation, inquiry or proceeding.
No Indemnifying Party will, without the prior written consent of an
Indemnified Person, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder unless such
settlement, compromise or consent includes an unconditional release of such
Indemnified Person and each controlling person thereof from all liability
arising out of such claim, action, suit or proceeding.
11. CONFIDENTIALITY.
During the Term of this Agreement and thereafter, each of NSI and
Licensee shall keep strictly confidential all information of the other which
is secret and proprietary. The parties shall not reveal or disclose the same
to any person or entity without the prior written consent of the other party;
provided, however, that either party may disclose such information pursuant
to a subpoena, order, statute, rule or other legal requirement promulgated or
imposed by a court or by a judicial, regulatory or legislative body or agency
in which such party is involved; and provided, further, that either party may
disclose to the extent its counsel determines in good faith that such
disclosure is necessary to comply with applicable securities laws. In the
event that either party discloses such confidential information in accordance
with the previous sentence, such party shall immediately notify the other
party.
12. TERM AND TERMINATION.
(a) The initial Term of this Agreement shall continue from the date
hereof until December 31, 2025. The Term of this Agreement may be extended
by the Licensee for an additional twenty (20) year Term upon written notice
to NSI within six (6) months preceding the expiration of the initial Term,
and the payment to NSI of a renewal fee equal to the net present value of
twenty (20) years of annual Royalties at the average monthly rate payable in
the twelve months immediately preceding the date of the notice, determined by
using a discount rate equal to the prevailing prime rate on the date of the
notice, as published in the Wall Street Journal.
(b) This Agreement may not be terminated or cancelled except upon the
expiration of its initial or additional Term other than by written agreement
of the parties.
(c) Upon termination of this Agreement (i) Licensee shall, at its
expense, return to NSI any of NSI's marketing literature, packaging or
Confidential Information and all copies thereof in its possession and certify
in writing that the same have been returned and deliver to NSI all
information as is necessary and useful for NSI to market the
PAPNET-Registered Trademark- Service, including, without limitation,
information in possession of Licensee relating to Clients, (ii) Licensee
shall immediately cease representing itself as authorized to sell NSI
products and services, and (iii) the parties shall otherwise cooperate in
order to effect an orderly termination.
13. ARBITRATION.
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Except as otherwise provided herein, the parties hereto agree that the
sole and exclusive remedy for any dispute between the parties arising out of
or relating to this Agreement shall be resolved by arbitration conducted in
The City of Columbus, Ohio in accordance with the Commercial Arbitration
Rules then obtaining of the American Arbitration Association, except that the
arbitrators shall have no power to alter or modify any express provision of
this Agreement, or to render any award which by its terms effects any such
alteration or modification. Judgment upon the award rendered may be entered
by any court having jurisdiction in the State of Ohio. If any action or
proceeding is brought to enforce the decision of the arbitrators, the
prevailing party shall be entitled to recover its reasonable attorney's fees
and other costs incident to such action or proceeding. The provisions of
this Article 13 shall not affect the right of any party to seek provisional
legal or equitable remedies. The law of Ohio shall be applied to any dispute
under arbitration. The parties warrant and represent that the filing of an
arbitration demand will not prevent, allow, or excuse the parties from
meeting their obligations under this Agreement during the time any such
dispute is being resolved. Day to day business functions will continue
uninterrupted during the arbitration period.
14. MISCELLANEOUS.
14.1 RULES OF CONSTRUCTION.
(a) As used in this Agreement, neutral pronouns and any variations
thereof shall be deemed to include the feminine and masculine and all terms
used in the singular shall be deemed to include the plural, and vice versa,
as the context may require. The words "hereof", "herein" and "hereunder" and
other words of similar import refer to this Agreement as a whole, including
the Annexes hereto, as the same may from time to time be amended or
supplemented, and not to any subdivisions contained in this Agreement. The
word "including" when used herein is not intended to be exclusive and means
"including, without limitation". References herein to "dollars", "United
States $" and "$" are to United States dollars. References herein to
Article, Section, subsection or Exhibit shall refer to the appropriate
Article, Section, subsection or Exhibit in or to this Agreement.
(b) The following guiding and primary rules of construction shall be
applied to this Agreement and to any dispute hereunder:
(i) that the terms of this Agreement will be construed against
termination of this Agreement or forfeiture of any right hereunder;
(ii) that the terms of this Agreement will be construed in favor of
providing Licensee the opportunity to maximize the economic benefits
available hereunder from the promotion of the PAPNET-Registered Trademark-
System, the PAPNET-Registered Trademark- Service and the NSI Technology in
the Licensed Territory, and to realize its proportionate share under
Section 3.1(b) hereof of the worldwide market for the PAPNET-Registered
Trademark- System, the PAPNET-Registered Trademark- Service and the NSI
Technology;
(iii) that each term of this Agreement will be construed, wherever
reasonable, in a
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manner consistent with the understanding of the term by the parties as
manifested by their established course of dealing; and
(iv) that each term of this Agreement imposes on the parties an
obligation of good faith and fair dealing in its performance and
enforcement.
14.2 NO ADVERSE ACTIONS. Licensee agrees to take no action that could
materially adversely affect the business, operations or prospects of NSI. NSI
agrees to take no action that could materially adversely affect the business,
operations or prospects of Licensee.
14.3 INDEPENDENT CONTRACTORS. It is expressly agreed that the parties
hereto are acting hereunder as independent contractors and not joint
venturers, and under no circumstances shall any of the employees of one party
be deemed the employees of the other for any purpose. This Agreement shall
not be construed as authority for either party to act for the other party in
any agency or other capacity, or to make commitments of any kind for the
account of or on behalf of the other except to the extent and for the
purposes expressly provided for and set forth herein.
14.4 ASSIGNMENT; SUBLICENSING. This Agreement and the licenses herein
granted are not assignable by either party (nor are the licenses
sublicensable by Licensee) without the prior written consent of the other
party, which consent shall not be unreasonably withheld; provided, however,
that Licensee may assign this Agreement to any corporation which is a
wholly-owned subsidiary of Licensee without such consent. Neither party may
pledge or otherwise grant a security interest in this Agreement or the
licenses granted hereby, but may grant a security interest in any payments to
which it is entitled hereunder. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and
permitted assigns.
14.5 WAIVER; REMEDIES. No failure on the part of any party to
exercise, and no delay in exercising, any right hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any right
hereunder preclude any other or further exercise thereof or the exercise of
any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
14.6 SEVERABILITY. If any provision of this Agreement is determined by
a court of competent jurisdiction to be invalid or unenforceable, such
determination shall not affect the validity or enforceability of any other
part or provision of this Agreement.
14.7 CHOICE OF LAW. This Agreement and the performance hereof shall be
governed by and construed in accordance with the laws of the State of Ohio
(without giving effect to principles of conflicts of laws).
14.8 NOTICE. All notices, invoices, consents or other communications
required or permitted to be given by either party to the other shall be in
writing (including facsimile or similar writing) and shall be given by
facsimile, Federal Express or similar courier service, or by certified or
registered
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mail, postage prepaid as follows:
(a) If to NSI:
Neuromedical Systems, Inc.
Two Executive Boulevard
Suffern, New York 10901-4164
Attn: John B. Henneman, III
Vice President of Corporate Development and General Counsel
Facsimile: (914) 368-3896
With a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Attn: Paul M. Reinstein
Facsimile: (212) 859-4000
(b) If to Licensee:
. . . . . . . . . .
. . . . . . . . . .
. . . . . . . . . .
. . . . . . . . . .
or at such other address or facsimile number (or other similar number) as any
party may from time to time specify to the other party hereto. Any notice,
consent or other communication required or permitted to be given hereunder
shall be deemed to have been given on the date of mailing, personal delivery
or facsimile (provided the appropriate answer back is received) thereof and
shall be conclusively presumed to have been received on the second business
day following the date of mailing or, in case of personal delivery, the
actual day of personal delivery thereof, or, in the case of facsimile
delivery, when such facsimile is transmitted, except that a change of address
shall not be effective until actually received.
14.9 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersedes all
previous proposals, both oral and written, negotiations, representations,
commitments, writings and all other communications between the parties with
respect to such subject matter. It may not be released, discharged, changed or
modified except by an instrument in writing signed by a duly authorized
representative of each of the parties.
14.10 HEADINGS. The headings used in this Agreement are for reference
purposes only and
19
<PAGE>
shall not be construed to limit or further define any term or provisions
hereof.
14.11 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by a
duly authorized representative as of the date first written above.
NEUROMEDICAL SYSTEMS, INC.
By: . . . . . . . . . .
Mark R. Rutenberg,
President and Chief Executive Officer
. . . . . . . . . . . .
By: . . . . . . . . . .
President
20
<PAGE>
EXHIBIT B
AMOUNTS PAYABLE TO HOLDERS
<TABLE>
<CAPTION>
HOLDERS AMOUNT
------- ------
<S> <C>
Papnet of Ohio, Inc. $752,445
Cytology Indiana, Inc. $ 96,029
Indiana Cytology Review $ 45,460
Company
ER Group, Inc. $285,808
Carolina Cytology Warrant $285,808
Partnership
GRK Partners $186,211
</TABLE>
<PAGE>
CYTOLOGY WEST, INC.
3753 Howard Hughes Parkway
Suite 200
Las Vegas, Nevada 89109
February 1, 1995
To: Each of the Target Entities
(as identified on Exhibit A annexed hereto)
Gentlemen:
This letter of intent summarizes the understanding reached in discussions
which have occurred among Cytology West, Inc., a Delaware corporation ("CWI"),
and each of the Licensee Corporations and Licensee Partnerships identified on
EXHIBIT A annexed hereto (collectively, the "Target Entities") concerning a
proposed acquisition (the "Proposed Acquisition") by CWI of the Target Entities.
1. PROPOSED ACQUISITION. CWI will issue shares of its common stock as
the consideration in the Proposed Acquisition, with the specific form and
structure of the Proposed Acquisition (e.g., stock for assets, stock for equity
interests, merger) to be agreed upon by CWI and each of the Target Entities
(collectively, the "Parties") after review of tax, accounting, regulatory,
contract, consent, diligence and other appropriate issues. An S-4 Registration
Statement will be filed by CWI with, and be declared effective by, the
Securities and Exchange Commission (the "SEC") in connection with the Proposed
Acquisition as required by the Securities Act of 1933, as amended (the "1933
Act"), and applicable state Blue Sky laws. The common stock of CWI will
concurrently be registered under the Securities Exchange Act of 1934, as amended
(the "1934 Act"). It is contemplated that the common stock of CWI will, upon
declaration by the SEC of the effectiveness of the registrations and the
consummation of the Proposed Acquisition, be traded on NASDAQ.
2. VALUATION. Upon consummation of the Proposed Acquisition, the then
existing equity holders of CWI will then own, and the holders of each of the
Target Entities will receive in exchange for their equity interests In their
respective Target Entity and thereafter own, common stock of CWI in an aggregate
amount for CWI and each Target Entity which reflects the relative values of each
of the Parties immediately prior to the consummation of the Proposed Acquisition
(the "Relative Values"). The Parties have preliminarily determined their
Relative Values by the following formula (the "Relative Valuation Formula"):
RV = LV + AV + WV
---------------
TLV + TAV + TWV
Where: RV = the Relative Value in dollars of a Party;
<PAGE>
February 1, 1995
Page 2
LV = the dollar value of a Party's license with
Neuromedical Systems, Inc. (an "NSI License"),
determined by multiplying $0.81 times the
population (based on 1994 census data) of the
territory covered by the NSI License, which dollar
value in shown in column 3 of the table on EXHIBIT
B annexed hereto (the "License Value");
AV = the dollar value of the sum of the following
assets and liabilities of a Party immediately
existing prior to the consummation of the Proposed
Acquisition and which are in the case of a Target
Entity, acquired by CWT upon consummation of the
Proposed Acquisition: (a) the cash of the Party
plus (b) the book value of all other assets of the
Party other than the NSI License and NSI Warrants
(as defined below), if any, and any other
intangible assets of the Party, less (c) the
amount of any liabilities of the Party (the
"Assets Value");
WV = the dollar value of any warrants to purchase
shares of common stock of Neuromedical Systems,
Inc. ("NSI") ("NSI Warrants") held by a Party
immediately existing prior to the consummation of
the Proposed Acquisition and which are in the case
of a Target Entity, acquired by CWI upon
consummation of the Proposed Acquisition (the
"Warrant Value"). The Warrant Value is determined
by multiplying (a) the aggregate number of shares
of NSI common stock into which the NSI warrants
are exercisable by (b) an amount equal to the
difference between (i) $2.50, the agreed per share
fair market value of NSI common stock (the "NSI
Per Share Value,), and (ii) the warrant exercise
price for each share of NSI common stock into
which the NSI Warrants are exercisable;
TLV = the total License Values of the Parties, as shown
in column 3 of the table on EXHIBIT B;
TAV = the total Assets Values of the Parties; and
TWV = the total Warrant Values of the Parties.
<PAGE>
February 1, 1995
Page 3
The Parties' preliminary determination of Relative Values is set forth in
column 11 of the table on EXHIBIT B, and assumes for purposes of such
preliminary determination that the represented territory populations are
accurate and that the Warrant Values and Assets Values with respect to each of
the Parties will be as set forth in columns 8 and 9, respectively, of such
table.
The Definitive Agreements (as hereinafter defined) will get forth the
agreed Assets Value of each of the Parties for purposes of determining the Final
Formula Derived Relative Values (as provided below), which agreed upon Assets
Value shall also be the minimum Assets Value actually acquired by CWI from the
Party at the time of the consummation of the Proposed Acquisition. The
Definitive Agreements will permit each Target Entity to determine, prior to
consummation of the Proposed Acquisition, whether or not to include any NSI
Warrants held by such Target Entity in the assets to be acquired by CWI.
However, each Target Entity presently anticipates that it would so include all
of its NSI Warrants.
The Relative Values of the Target Entities will be determined as of the
consummation of the Proposed Acquisition (and following the determination with
regard to the Assets Values and NSI Warrants to be included in the Proposed
Acquisition) by the Relative Valuation Formula, using the License Values and
the NSI Per Share Value as set forth on EXHIBIT B and the then actual warrant
exercise price in effect for the applicable NSI Warrants (the "Final Formula
Derived Relative Values").
Prior to the consummation of the Proposed Acquisition, CWI and Papnet of
Ohio, Inc. will retain an investment banking firm acceptable to each of the
parties to render an opinion to CWI and Papnet of Ohio, Inc. that the terms of
the Proposed Acquisition, it based upon the Final Formula Derived Relative
Values, are fair from the standpoint of the equity holders of CWI and Papnet of
Ohio, Inc. (the "Fairness Opinion"). Subject to the rendering of the Fairness
Opinion, the Relative Values for purposes of allocating ownership of the CWI
common stock shall be the Final Formula Derived Relative Values and not the
Final Formula Derived Relative Values, shall be a final and conclusive
determination binding upon all of the parties to the Proposed Acquisition. If
the Fairness Opinion is not rendered without material qualification, any Party
will be permitted to withdraw from the Proposed Acquisition.
The Proposed Acquisition will be structured from a tax standpoint so that
(a) the existing equity holders of the Target Entities will not recognize gain
or loss for income tax purposes upon consummation of the Proposed Acquisition
and (b) the consummation of the Proposed Acquisition will not result in the
imposition of any material tax liability on CWI. From an accounting standpoint,
consideration will be given to structuring the Proposed Acquisition to account
for it as a "pooling of interests."
3. CONDITIONS. The obligation of each of the Parties to consummate the
Proposed Acquisition will be subject to satisfaction of the requirements set
forth in sections 1 and 2 and to the
<PAGE>
February 1, 1995
Page 4
following conditions precedent, in addition to any other conditions contained
herein or in the Definitive Agreements:
(a) POST-CLOSING GOVERNANCE OF CWI. The Certificate of Incorporation
and Bylaws of CWI will be in a form mutually acceptable to the Parties (as
reflected in exhibits to the Definitive Agreements). The Board of Directors of
CWI an of the Closing will consist of seven persons, and will include Richards,
Dawson, Genberg and Kennedy, and three additional persons chosen one each by
Carolina Cytology, ER Group and Missouri from among Kelley, Petitti, Ferger and
Kinsey. CWI will attempt to obtain Directors' and Officers' insurance in
amounts and containing coverage acceptable to the Board of Directors of CWI.
Genberg shall have agreed to be employed by and serve as the Chief Executive
officer of CWI on terms and conditions mutually acceptable to Genberg and CWI.
(b) MARKET MAKER. Each of the Parties shall be reasonably assured
that at least one reputable investment banking firm acceptable to each of the
Parties will make a market in CWI common stock upon consummation of the Proposed
Acquisition. The Ohio Company, McDonald & Company and Advest each has been
deemed acceptable by each of the Parties.
(c) NSI MATTERS. NSI shall have consented to the Proposed
Acquisition and agreed to modify its license agreements with each of the
Parties, effective on or before consummation of the Proposed Acquisition, into
either a single license agreement with CWI (if modified upon consummation of the
Proposed Acquisition) or separate modified license agreements with each of the
Parties (if modified before consummation of the Proposed Acquisition)
(collectively, the "Modified License Agreement"). The Modified License
Agreement shall be acceptable in form and substance to each of the Parties. The
Parties contemplate that the Modified License Agreement will improve business
relations without materially changing the aggregate economics of the license
agreements presently in effect.
(d) DEFINITIVE AGREEMENTS. All of the Parties shall have entered
into definitive agreements among all of them (the "Definitive Agreements") with
respect to the Proposed Acquisition containing mutually acceptable
representations, warranties, covenants, closing conditions and other provisions.
(e) BOARD AND SHAREHOLDER APPROVALS. The Boards of Directors (or
comparable governing bodies) of each of the Parties shall have approved the
execution and delivery of the Definitive Agreements and the consummation of the
Proposed Acquisition. In addition, all requisite approvals of the shareholders
(or other equity holders) of each of the Parties shall have been obtained and no
dissenters, rights (or comparable rights) shall have been asserted by any such
shareholder or other such equity holder.
<PAGE>
February 1, 1995
Page 5
(f) ACQUISITION OF ALL TARGET ENTITIES. The Proposed Acquisition
shall be consummated simultaneously with respect to each of the Target Entities.
(g) NSI WARRANTS. The Parties shall have reached mutual agreement
regarding the timing and method for exercise of the NSI Warrants to be held by
CWI following consummation of the Proposed Acquisition.
4. INTERIM PERIOD; EXECUTION OF DEFINITIVE AGREEMENTS.
(a) PRELIMINARY NSI MATTERS. Following execution of this letter of
intent, each of the Parties, through Genberg, Richards and Kinsey, each of whom
is hereby appointed by the Parties for such purposes, shall exercise reasonable
efforts to obtain, prior to February 28, 1995, preliminary consent from NSI to
the Proposed Acquisition and to undertake negotiations with NSI with regard to
the form of Modified License Agreement.
(b) DEFINITIVE AGREEMENT. Upon receipt of the preliminary approval
of NSI described in subsection (a) above, the Parties will use reasonable
efforts to complete their negotiations and due diligence with respect to the
Proposed Acquisition. Subject to the mutual satisfaction of the Parties with
the results of such due diligence, the Parties will prepare and execute
Definitive Agreements with regard to the Proposed Acquisition, with the
intention of entering into the Definitive Agreements as promptly as practicable.
(c) DUE DILIGENCE. Prior to the execution of Definitive Agreements,
the Parties will complete their review of any and all matters that any of them
deem necessary or appropriate, including, without limitation, all material
contracts, books and records, title to and condition of assets, legal and
regulatory issues, environmental compliance and labor and employment matters.
The Parties recognize that certain financial and non-financial information will
be required of each of them in connection with the contemplated registrations
and agree to provide such information and other cooperation which may he
reasonably requested in connection therewith.
(d) CONFIDENTIALITY. None of the Parties shall disclose to any
person (other than its employees, officers, directors, equity holders and
representatives who need to know such information for purposes of pursuing the
Proposed Acquisition) (i) the fact that discussions or negotiations are taking
place concerning a Proposed Acquisition, (ii) any of the terms, conditions or
other facts with respect to the Proposed Acquisition, including the status
thereof, or (iii) any other non-public information furnished to any of the
Parties pursuant to this letter of intent; provided, however, that Papnet of
Ohio, Inc. may make such disclosures as it determines in good faith are required
to be made under applicable federal and state securities laws. Prior to
delivery, by any of the Parties to any of the other Parties, of information for
which the delivering Party seeks confidential treatment, the Parties receiving
such information shall, at the request of the delivering
<PAGE>
February 1, 1995
Page 6
Party, enter into a non-disclosure agreement containing additional terms and
conditions relating to confidentiality.
5. COSTS AND EXPENSES. Certain costs and expenses will be incurred by or
on behalf of some or all of the Parties in connection with the negotiation and
consummation of the Proposed Acquisition, including, without limitation,
accounting, legal, underwriting, fairness opinion and other coats and expenses
(collectively, the "Transaction Expenses"). Each of the Parties does hereby (a)
authorize Genberg, Richards and Kinsey to incur Transaction Expenses on behalf
of the Parties (or any of them) and (b) agree to pay (either directly or by
reimbursement, as directed by Genberg, Richards or Kinsey) its "Pro Rata Share,
(as defined below) of any Transaction Expenses approved in advance of incurrence
by Genberg, Richards or Kinsey in the event that, for any reason, the Proposed
Acquisition is not consummated; provided, however, that in no event shall any
Party be required to bear any Transaction Expenses incurred after it provides
written notice to the other Parties of termination as provided for in Section 6.
For purposes of this section 5, the "Pro Rata Share" of each Party is equal to
its preliminary Relative Value set forth in column 11 of the table on EXHIBIT B.
If the Proposed Acquisition is consummated, those Transaction Expenses which are
reasonably incurred and approved in advance of incurrence by Genberg, Richards
or Kinsey shall be borne by CWI.
6. EXPIRATION. This letter of intent shall expire, and be of no force or
effect, unless fully executed by each of the Target Entities by February 7,
1995. Any of the Parties may for any reason terminate its proposed
participation in the Proposed Acquisition at any time prior to the execution by
it of the Definitive Agreements by giving written notice thereof to the other
Parties.
7. GOVERNING LAW. This letter of intent shall be governed by and
construed in accordance with the internal laws, and not the laws pertaining to
conflicts of laws, of the State of Nevada.
8. COUNTERPARTS. This latter of intent may be signed in multiple
counterparts, any one of which need not contain the signatures of more than CWI
and one Target Entity, but all such counterparts taken together shall constitute
one and the same agreement.
9. INTEGRATION; AMENDMENTS. This letter of intent sets forth the
complete and entire understanding of the Parties with respect to the subject
matter hereof, and may not be amended except in writing by all of the Parties.
10. NON-BINDING NATURE OF LETTER; BINDING PROVISIONS. Except as
hereinafter provided with respect to the binding nature of certain provisions
hereof, (a) this letter of intent is intended only to express the mutual good
faith intentions of the Parties and is not intended to constitute a binding
agreement, (b) any of the Parties may at any time and in its sole discretion
discontinue discussions concerning the Proposed Acquisition and/or terminate its
proposed participation in the Proposed
<PAGE>
February 1, 1995
Page 7
Acquisition as provided in section 6 and (c) each of the Parties reserves the
right at any time prior to execution of the Definitive Agreements to refuse to
enter into the Definitive Agreements. The Parties understand that no contract,
agreement, arrangement or understanding providing for the acquisition (or offer
to acquire) any of the Target Entities or for the purchase (or offer to
purchase) or for voting of any of the equity securities of any of the Target
Entities shall be deemed to exist between or among CWI and any of the Target
Entities or their respective equity holders unless and until each of the Parties
and all other necessary parties have executed fully and delivered mutually
acceptable Definitive Agreements containing such covenants, representations,
warranties, closing conditions and other provisions as the Parties may agree
upon. Notwithstanding any provision contained in this Section 10 or elsewhere
in this letter of intent to the contrary, upon execution of this letter of
intent by each of the Target Entities pursuant to Section 6, the provisions of
Sections 4(d), 5, 6, 7, 8, 9 and 10 shall represent the binding agreements of
each of the Parties and shall survive any termination of this letter of intent
or the discussions concerning the Proposed Acquisition.
If this letter of intent accurately sets forth the understanding of the
Parties, please so indicate by executing this original letter of intent and the
enclosed duplicate original letters of intent where provided below and returning
each of them to me. I will distribute an original fully executed letter of
intent to each of the Target Entities for its files.
Very truly yours,
CYTOLOGY WEST, INC.
By/s/ Carl Genberg
------------------------------------------
Carl Genberg
Its: President
APPROVED, ACCEPTED AND AGREED:
Papnet Indiana L.P., Cytology Indiana, Inc.
By:/s/ Joseph Blancato Date:Feb. 1, 1995
-------------------------------- ------------------------
Its:
--------------------------
Papnet of Ohio, Inc.
By:/s/ David J. Richards Date:Feb. 1, 1995
-------------------------------- ------------------------
Its:President
--------------------------
<PAGE>
February 1, 1995
Page 8
Carolina Cytology, Inc.
By:/s/ Rodney Kinsey Date:Feb. 8, 1995
-------------------------------- ------------------------
Its:
--------------------------
ER Group, Inc.
By:/s/ Thomas Kelley Date:Feb. 8, 1995
-------------------------------- ------------------------
Its: President
--------------------------
Papnet Utah, Inc.
By:/s/ Kent Dawson Date:Feb. 7, 1995
-------------------------------- ------------------------
Its:
--------------------------
By: Date:
-------------------------------- ------------------------
Its:
--------------------------
<PAGE>
EXHIBIT A
TARGET ENTITIES
PAPNET OF OHIO, INC.
PAPNET INDIANA LIMITED PARTNERSHIP
E R GROUP, INC.
CAROLINA CYTOLOGY GENERAL AND WARRANT PARTNERSHIP
PAPNET UTAH, INC.
<PAGE>
EXHIBIT B - CALCULATION METHOD-PERCENTAGE OF SHARES BY POPULATION, WARRANTS,
CASH.
PAPNET OF OHIO, INC. NOTE
- ------------------------------ ----------------------------
Share Price $15.00 Agreed to by the parties.
Shares 1,560,000 Calculated on effective date of
acquisition, this figure is not
exact.
Cash assets 600,000 Calculated on effective date of
acquisition, including costs and
fees as credit.
NSI Warrants 1,505,000 Calculated on effective date of
acquisition.
NSI share Value $2.50 AGREED TO BY PARTIES AS OF THE DATE
OF THE DATE OF THIS AGREEMENT.
Exercise Price $0.01 As agreed with NSI.
FORMULA FOR CALCULATING PER PERSON VALUE OF PAPNET OF OHIO:
- ----------------------------------------------------------
Papnet of Ohio
Market Cap 23,400,000
Less Assets ($600,000)
Less NSI Warrants ($3,777,550)
Net Value of Territor 19,022,450
TERRITORY PER CAPITA VALUE
- --------------------------
Chicago 8,476,000 Based on 1994 Yr. End Population
Ohio 11,119,000 Based on 1994 Yr. End Population
Kentucky 3,804,000 Based on 1994 Yr. End Population
Total Population 23,399,000
VALUE PER CAPIT $0.81
<TABLE>
<CAPTION>
% VALUE % OF VALUE OF VALUE OF % OF TOTAL
POPULATION* POPULATION POPULATION WARRANTS E/P WARRANTS WARRANTS CASHCASH TOTAL VALUE VALUE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ohio* 23,299 44.29% $19,022,450 1,505,000 $0.01 51% $3,747,450 $600,000 $23,369,900 46.15%
West* 8,337 15.78% $6,777,647 0 $400,000 $7,177,647 14.18%
Missouri* 5,249 9.94% $4,267,227 280,000 $0.49 10% $562,800 $0 $4,830,027 9.54%
Utah* 1,880 3.56% $1,528,365 0 $0 $1,528,365 3.02%
Georgia* 6,968 13.19% $5,664,705 571,731 $0.49 20% $1,149,179 $70,000 $6,883,884 12.60%
North Carolina* 6,968 12.24% $5,685,029 571,731 $0.49 20% $1,149,179 $10,000 $6,844,208 13.52%
Totals 52,826 100% 49,945,423 2,928,462 100% $6,608,609 $1,080l000 $50,634,031 100%
</TABLE>
*1994 Year End Population
<PAGE>
SIDE LETTER AGREEMENT
Re: Cytology West Inc. Letter of Intent dated February 1, 1995
The parties below have signed a Letter of Intent to effect a combination. A
deadline of February 28, 1995, is given to Neuromedical Systems, Inc. to
complete negotiations and finalize a new License Agreement for all of the
parties. It is the intent of the parties to continue to operate under the
non-binding Letter of Intent until such time as any party provides written
notice of withdrawal as provided for in the Letter of Intent that they no longer
are interested in pursuing the merger. The February 28, 1995, date is put into
the agreement for the sole purpose of providing a deadline against which NSI
will operate.
The parties also agree to give Tom Kelly veto power over any expense to be
incurred prior to the time when a new license agreement is reached. Any expense
so incurred will have to be approved by the Kinsey, Richards, Genberg committee
and also by Tom Kelly before they are incurred.
APPROVED, ACCEPTED AND AGREED:
Papnet of Ohio, Inc.
- -----------------------------------
By:/s/ David J. Richards Date:2/3/95
-------------------------------- ----------------------------------
Its:President
--------------------------
- -----------------------------------
By:/s/ Cecil J. Petitti Date:2/3/95
-------------------------------- ----------------------------------
Its:
--------------------------
- -----------------------------------
Carolina Cytology All
- -----------------------------------
By:/s/ Rodney Kinsey Date:2/8/95
-------------------------------- ----------------------------------
Its:
--------------------------
ER Group, Inc.
- -----------------------------------
By:/s/ Thomas Kelley Date:2/8/95
-------------------------------- ----------------------------------
Its:President
--------------------------
- -----------------------------------
By:/s/ Kent Dawson Date:2/22/95
-------------------------------- ----------------------------------
Its:
--------------------------
<PAGE>
VOTING AGREEMENT
This Voting Agreement, dated as of July 5, 1996, by and among Papnet of
Ohio, Inc., an Ohio corporation (the "Company"), Cytology Indiana, Inc., an
Ohio corporation ("CIN"), Indiana Cytology Review Company, an Ohio
corporation ("INC"), ER Group, Inc., an Ohio corporation ("ERG"), CCWP
Partners, Inc., an Ohio corporation ("CCWP") and Carolina Cytology, Inc., an
Ohio corporation ("CCI") (the Company, CIN, INC, ERG, CCWP and CCI are
hereinafter collectively referred to as the "Constituent Corporations") and
each of the individual shareholders of the Constituent Corporations executing
this Agreement ("Shareholders").
RECITALS
A. The Constituent Corporations have agreed to a merger in which the
Company will be the surviving corporation (the "Merger"), pursuant to an
Agreement and Plan of Merger dated as of July 5, 1996 (the "Merger
Agreement").
B. The persons executing this Agreement as Shareholders own
substantial blocks of voting shares in one or more of the Constituent
Corporations ("Shares") and were parties to a Voting Agreement, dated May 31,
1996, which has been terminated.
C. In order to facilitate the Merger and its approval by the other
shareholders of the Constituent Corporations, the Shareholders have agreed to
vote their shares in favor of the Merger.
STATEMENT OF AGREEMENT
In consideration of their mutual promises therein, and as additional
consideration and inducement to the Constituent Corporations to perform their
obligations under the Merger Agreement, the parties agree as follows:
1. VOTING AGREEMENT. Each Shareholder severally agrees and covenants
with the Constituent Corporations and each of the other Shareholders that at
any meeting of the shareholders of any of the Constituent Corporations called
to vote upon the Merger and the Merger Agreement or at any adjournment
thereof or in any other circumstance upon which a vote, consent or other
approval with respect to the Merger and the Merger Agreement is sought, such
Shareholder shall vote (or cause to be voted) such Shareholder's Shares in
favor of the Merger, the approval of the Merger Agreement and each of the
other transactions contemplated by the Merger Agreement.
2. COVENANTS. Each Shareholder severally agrees and covenants with
the Constituent Corporations and each of the other Shareholders that such
Shareholder shall not (a) grant any proxy, power-of-attorney or other
authorization in or with respect to his Shares, except to vote such Shares as
provided in this Agreement, or (b) deposit such Shares into a voting trust or
enter into a voting agreement or arrangement with respect to such Shares.
<PAGE>
3. GRANT OF IRREVOCABLE PROXY. Each Shareholder irrevocably grants
to, and appoints John P. Kennedy and Cecil J. Pettiti, and each of them
individually, such Shareholder's proxy and attorney-in-fact (with full power
of substitution), for and in the name, place and stead of such Shareholder,
to vote such Shareholder's Shares in each Constituent Corporation, or grant a
consent or approval with respect to such Shares, in favor of the Merger, the
approval of the Merger Agreement and each of the other transactions
contemplated by the Merger Agreement, and hereby revokes any proxies
heretofore given.
4. SECURITIES LAWS. Each of the obligations of Shareholder under this
Agreement is conditioned upon the filing and effectiveness of a registration
statement on Form S-4 under the Securities Act of 1933, as amended, covering
the offering and sale of the Surviving Corporation Shares (as such term is
defined in the Merger Agreement) to be issued in the Merger.
5. TERMINATION. This Agreement, and all rights and obligations of the
parties hereunder, shall terminate upon the first to occur of the Effective
Time (as such term is defined in the Merger Agreement) or the date upon which
the Merger Agreement is terminated in accordance with its terms.
6. REMEDIES. Each Shareholder agrees that irreparable damage would
occur and that the Constituent Corporations and the other Shareholders would
not have an adequate remedy at law in the event that such Shareholder failed
to perform his obligations hereunder or otherwise breaches this Agreement.
It is accordingly agreed that any party seeking to enforce this Agreement
shall be entitled to an injunction or injunctions to prevent breaches by any
Shareholder and to enforce specifically the terms and provisions of this
Agreement in any state or federal court located in Franklin County, Ohio,
this being in addition to any other remedy which may be available at law or
in equity. In addition, each of the parties hereto (a) consents to submit to
the personal jurisdiction of any state or federal court located in Franklin
County in the event any dispute arises out of this Agreement or any of the
transactions contemplated hereby; (b) agrees that such party will not attempt
to deny or defeat such personal jurisdiction by motion or other request; and
(c) agrees that such party will not bring any action relating to this
Agreement or the transactions contemplated hereby in any court other than a
state or federal court located in Franklin County, Ohio.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first set forth above.
PAPNET OF OHIO, INC.
By: /s/ David J. Richards
--------------------------------------------
David J. Richards, President
2
<PAGE>
CYTOLOGY INDIANA, INC.
By: /s/ S. Trevor Ferger
-------------------------------------------
S. Trevor Ferger, President
INDIANA CYTOLOGY REVIEW COMPANY
By: /s/ Cecil J. Petitti
---------------------------------------------
Cecil J. Petitti, President
ER GROUP, INC.
By: /s/ Thomas J. Kelley
---------------------------------------------
Thomas J. Kelley, President
CAROLINA CYTOLOGY, INC.
By: /s/ Rodney M. Kinsey
--------------------------------------------
Rodney M. Kinsey, President
CCWP PARTNERS, INC.
By: /s/ Rodney M. Kinsey
---------------------------------------------
Rodney M. Kinsey, President
3
<PAGE>
SHAREHOLDERS:
/s/ David J. Richards
-----------------------------------------------
David J. Richards
/s/ John P. Kennedy
-----------------------------------------------
John P. Kennedy
-----------------------------------------------
Carl A. Genberg
-----------------------------------------------
Kent J. Dawson
/s/ Rodney M. Kinsey
-----------------------------------------------
Rodney M. Kinsey
/s/ Michael S. Blue
-----------------------------------------------
Michael S. Blue, M. D.
/s/ David M. Smith
-----------------------------------------------
David M. Smith
/s/ David Allen
-----------------------------------------------
David Allen
4
<PAGE>
/s/ James Derck
-----------------------------------------------
James Derck
/s/ Alan F. Weisenberg
-----------------------------------------------
Alan F. Weisenberg
5
<PAGE>
LOAN AGREEMENT
This Agreement, dated as of July 5, 1996, by and among Papnet of Ohio,
Inc., an Ohio corporation ("Papnet"), Cytology Indiana, Inc., an Ohio
corporation ("CIN"), Indiana Cytology Review Company, an Ohio corporation
("INC"), ER Group, Inc., an Ohio corporation ("ERG"), CCWP Partners, Inc., an
Ohio corporation ("CCWP") and Carolina Cytology, Inc., an Ohio corporation
("CCI"). CIN, INC, ERG, CCWP and CCI are hereinafter sometimes collectively
referred to as the "Borrowers" and individually as a "Borrower."
RECITALS
A. Papnet and the Borrowers were parties to a Loan Agreement, dated as
of March 14, 1996, which has been terminated (the "Initial Loan Agreement").
Papnet made advances to the Borrowers under the Initial Loan Agreement in the
amounts set forth opposite their respective names on Exhibit A attached
hereto and incorporated herein (the "Initial Advances").
B. Pursuant to an Agreement and Plan of Merger of even date (the
"Merger Agreement"), the parties have agreed that CIN, INC, ERG, CCWP and CCI
will merge with and into Papnet (the "Merger"). Certain capitalized terms
not otherwise defined herein shall have the meanings as defined in the Merger
Agreement.
C. Pending the effectiveness of the Merger, Papnet has agreed, subject
to the terms and conditions contained in this Agreement, to make certain
advances (hereinafter called an "Advance" or "Advances") on behalf of the
Borrowers to pay certain expenses of the Merger and to fund business
operations of the Borrowers.
D. The parties wish to set forth in this Agreement the terms and
conditions on which the Initial Advances will be repaid and the Advances made
under this Agreement will be made and repaid.
STATEMENT OF AGREEMENT
1. ADVANCES OF MERGER AND OFFERING EXPENSES. Through the Effective
Date, Papnet agrees to make such Advances on behalf of each Borrower as are
necessary to pay such Borrower's pro-rata share of expenses incurred in
connection with the Merger. Papnet may incur and pay legal, accounting,
printing, filing, travel, meeting and other expenses in connection with the
Merger, or may pay such expenses reasonably incurred by any Borrower, and
shall allocate a pro-rata share of all of such expenses to each Borrower in
the proportion provided in the Merger Agreement. Such amounts will be
considered an Advance to each Borrower hereunder, in the proportion provided
in the Merger Agreement, as of the date that such amounts are actually paid
by Papnet. Papnet shall keep adequate books and records of such expenses
which shall be available for inspection by any Borrower during normal
business hours upon reasonable prior notice.
2. ADVANCES OF OPERATING EXPENSES. Through the Effective Date,
Papnet agrees to make such Advances to or on behalf of each Borrower
individually as are necessary to pay
<PAGE>
reasonable expenses of ordinary business operations of such Borrower, as
approved by Papnet. Each such Advance shall be made to or on behalf of a
Borrower upon receipt of the Borrower's application therefor and disbursement
instructions, which shall be in a form as Papnet shall reasonably prescribe,
and will be considered an Advance to such Borrower hereunder. The
reasonableness of any expenses for which Advances are requested, and the
amount of any Advance, shall be determined by Papnet in its sole discretion.
3. REPAYMENT. The total amount of the Initial Advances and the
Advances hereunder to or on behalf of a Borrower shall be repaid, with
interest at the rate of seven percent (7.00%) per annum, sixty days after the
Termination Date, as defined in Section 5. Each Borrower may pay the unpaid
principal amount of any Advance made to or on behalf of it in whole or in
part at any time and from time to time. Each such payment of principal may
be made without the payment of accrued and unpaid interest thereon.
Interest shall be calculated on the basis of a 360-day year for the actual
number of days the principal balance is unpaid. After maturity, whether such
maturity occurs by lapse of time or acceleration, interest on the unpaid
balance of any Initial Advances Advances (and interest thereon accrued
through maturity) shall accrue at the rate of twenty four percent (24.00%)
per annum until all Advances and accrued interest are repaid in full. The
Initial Advances and Advances to each Borrower shall be evidenced by one or
more promissory notes in the form of Exhibit B to this Agreement, or by one
or more notes subsequently executed in substitution therefor.
4 STATEMENTS. On the 25th day of each month during the term of this
Agreement, Papnet shall deliver to each Borrower a statement showing, for the
immediately preceding month, all Advances made to or on behalf of such
Borrower, all payments or partial payments of the principal amount of
Advances by the Borrower, the accrued and unpaid interest on the Advances, if
any, and such other information as may be necessary or appropriate. Each
Borrower hereto agrees that it will immediately notify Papnet of any error in
any monthly statement delivered to it, and the failure to do so within five
(5) business days shall be deemed to be a waiver of any claimed error.
Papnet's allocation of Advances to any Borrower shall be presumed correct,
and in the event of any dispute concerning the amount, manner of calculation
or allocation of any Advance as shown on any statement, the party disputing
the statement shall have the burden of demonstrating any error.
5. TERMINATION. Papnet's right and ability to make Advances hereunder
shall terminate upon a date (the "Termination Date") which is the earlier to
occur of (a) the closing of the Merger, or (b) the termination of the Merger
Agreement as provided in Article VIII thereof.
6. SECURITY. As security for the Initial Advances and Advances to or
on behalf of it hereunder, each Borrower shall pledge to Papnet all of the
common shares of Neuromedical Systems, Inc. currently owned by it, pursuant
to the terms of a Security Agreement in the form attached hereto as Exhibit C.
7. REPRESENTATIONS AND WARRANTIES OF BORROWERS. In addition to the
representations and warranties of each Borrower contained in the Merger
Agreement, upon which each Borrower agrees
2
<PAGE>
that Papnet may rely for purposes of this Agreement, each Borrower represents
and warrants to Papnet that:
(a) The Board of Directors of the Borrower has duly authorized the
execution and delivery of this Agreement and of the documents contemplated
herein, and this Agreement and such documents constitute valid and binding
obligations of the Borrower enforceable in accordance with their terms,
subject to the Enforceability Exceptions.
(b) The execution of this Agreement and related documents and the
compliance by the Borrower with all the provisions thereof:
(i) are within the corporate powers of the Borrower; and
(ii) will not conflict with, result in any breach in any of the
provisions of, constitute a default under, or result in the
creation of any lien or encumbrance upon any property of the
Borrower under the provisions of, any agreement, charter
instrument, bylaw, or other instrument to which the Borrower is a
party or by which it may be bound.
8. EVENTS OF DEFAULT. An "Event of Default" with respect to a
Borrower shall exist if any of the following occurs and is continuing:
(a) the Borrower fails to pay any amount hereunder when due, or fails
to perform or observe any covenant contained in Article VI of the Merger
Agreement;
(b) any warranty, representation or other statement by or on behalf of
the Borrower contained in this Agreement, the Merger Agreement, or in any
instrument furnished in compliance with or in reference to this Agreement is
false or misleading in any material respect;
(c) the Borrower becomes insolvent or bankrupt, or makes an assignment
for the benefit of creditors, or consents to the appointment of a trustee,
receiver or liquidator; or
(d) bankruptcy, reorganization, arrangement, insolvency or liquidation
proceedings are instituted by or against the Borrower.
9. DEFAULT REMEDIES.
(a) ACCELERATION. If an Event of Default exists with respect to a
Borrower, Papnet may immediately exercise any right, power or remedy
permitted to it by law, and shall have, in particular, without limiting the
generality of the foregoing, the right to declare the entire principal and
all interest accrued on all Advances then outstanding to or on behalf of such
Borrower pursuant to this Agreement to be forthwith due and payable, without
any presentment, demand, protest or other notice of any kind, all of which
are hereby expressly waived by each Borrower.
3
<PAGE>
(b) NONWAIVER. No course of dealing on the part of Papnet nor any
delay or failure on the part of Papnet to exercise any right shall operate as
a waiver of such right or otherwise prejudice Papnet's rights, powers and
remedies.
10. MISCELLANEOUS.
(a) NOTICES. All communications under this Agreement shall be in
writing and shall be mailed by first class mail, postage prepaid. Any notice
so addressed and mailed shall be deemed given when so mailed.
(b) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit
of and be binding upon the heirs, successors and assigns of each of the
parties.
(c) AMENDMENT AND WAIVER. This Agreement may be amended, and the
observance of any term of this Agreement may be waived, with (and only with)
the written consent of the parties hereto.
(d) DUPLICATE ORIGINALS. Duplicate originals of this Agreement may
be signed by the parties, each of which shall be an original but all of which
together shall constitute one and the same instrument.
(e) GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Ohio applicable to contracts made
and performed entirely within such state, without regard to principles of
conflicts of laws.
(f) CONSENT TO JURISDICTION AND WAIVER OF OBJECTION TO VENUE. Each
party agrees that any legal action or proceeding with respect to this
Agreement or the notes or the transactions contemplated hereby may be brought
in the Court of Common Pleas of Franklin County, Ohio, or in the United
States District Court for the Southern District of Ohio, Eastern Division,
and each party hereby irrevocably submits to and accepts generally and
unconditionally the jurisdiction of those courts with respect to its person,
property and revenues and irrevocably consents to service of process in any
such action or proceeding by the mailing thereof by U.S. mail to such party
at the address set forth in the Merger Agreement. Each party hereby
irrevocably waives any objection to the laying of venue of any such suit or
proceeding in the above described courts, and unconditionally waives and
agrees not to plead or claim that any such suit or proceeding brought in any
such court has been brought in an inconvenient forum.
(g) WAIVER OF JURY TRIAL. THE PARTIES ACKNOWLEDGE THAT, AS TO ANY AND
ALL DISPUTES THAT MAY ARISE BETWEEN THE PARTIES, THE COMMERCIAL NATURE OF THE
TRANSACTION OUT OF WHICH THIS AGREEMENT ARISES WOULD MAKE ANY SUCH DISPUTE
UNSUITABLE FOR TRIAL BY JURY. ACCORDINGLY, EACH OF THE PARTIES TO THIS
AGREEMENT HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY AS TO ANY AND ALL DISPUTES
THAT MAY ARISE
4
<PAGE>
RELATING TO THIS AGREEMENT OR TO ANY OF THE OTHER INSTRUMENTS OR DOCUMENTS
EXECUTED IN CONNECTION HEREWITH.
IN WITNESS WHEREOF, the parties have each caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first written above.
PAPNET OF OHIO, INC.
By: /s/ David J. Richards
---------------------------------------------
David J. Richards, President
BORROWERS:
CYTOLOGY INDIANA, INC.
By: /s/ S. Trevor Ferger
---------------------------------------------
S. Trevor Ferger, President
INDIANA CYTOLOGY REVIEW COMPANY
By: /s/ Cecil J. Petitti
---------------------------------------------
Cecil J. Petitti, President
ER GROUP, INC.
By: /s/ Thomas J. Kelley
---------------------------------------------
Thomas J. Kelley, President
5
<PAGE>
CAROLINA CYTOLOGY, INC.
By: /s/ Rodney M. Kinsey
---------------------------------------------
Rodney M. Kinsey, President
CCWP PARTNERS, INC.
By: /s/ Rodney M. Kinsey
---------------------------------------------
Rodney M. Kinsey, President
6
<PAGE>
EXHIBIT A
SCHEDULE OF INITIAL ADVANCES
COMPANY NAME AMOUNT OF INITIAL ADVANCES
- ------------ --------------------------
Cytology Indiana, Inc. $50,713
Indiana Cytology Review Company $27,307
ER Group, Inc. $70,890
CCWP Partners, Inc. $27,994
Carolina Cytology, Inc. $50,304
<PAGE>
EXHIBIT B
PROMISSORY NOTE
Columbus, Ohio
$ , 1996
FOR VALUE RECEIVED, the undersigned promises to pay to the order of
PAPNET OF OHIO, INC. (hereinafter called the "Lender," which term shall
include any holder hereof) at such place as the Lender may designate or, in
the absence of such designation, at any of the Lender's offices, the sum of
$ or so much of such sum as shall have been advanced by the
Lender at any time and not hereafter repaid (hereinafter referred to as
"Advances") pursuant to the Loan Agreement of even date (the "Agreement")
together with interest provided and payable at the time(s) and in the
manner(s) provided in the Agreement. Each such Advance shall be made to the
undersigned upon receipt by the Lender of the undersigned's application
therefor and disbursement instructions, which shall be in such form as the
Lender shall from time to time reasonably prescribe. The Lender shall be
entitled to rely on any oral or telephonic communication requesting an
Advance and/or providing disbursement instructions hereunder, which shall be
received by it in good faith from anyone reasonably believed by the Lender to
be the undersigned, or the undersigned's authorized agent. Each request for
an Advance shall constitute a warranty and representation by the undersigned
that no event of default hereunder, under the Agreement, or under any related
loan documents has occurred and is continuing and that no event or
circumstance which would constitute such an event of default, but for the
requirement that notice be given or time elapse or both, has occurred and is
continuing. The undersigned agrees that all Advances made by the Lender will
be evidenced by entries made by the Lender into records maintained by the
Lender. The undersigned further agrees that the sum or sums shown such
records shall be rebuttably presumptive evidence of the amount of the
Advances and of the amount of any accrued interest.
INTEREST
Interest will accrue on the unpaid balance of the Advances until paid at
the rate of 7% per annum. Upon maturity, whether by acceleration or
otherwise, interest will accrue on the unpaid balance of the Advances and
unpaid interest, if any, until paid at the rate of 24% per annum.
All interest shall be calculated on the basis of a 360 day year for the
actual number of days the Advances or any part thereof remain unpaid. There
shall be no penalty for prepayment.
MANNER OF PAYMENT
The Advances and accrued interest thereon shall be due and payable sixty
days after the Termination Date, as defined in the Agreement, and at
maturity, whether by acceleration or otherwise.
<PAGE>
SECURITY
The obligations of the undersigned hereunder are secured by a Security
Agreement of even date, granting Lender a security interest in certain
property of the undersigned (the "Collateral"). The Lender shall not be
bound to take any steps necessary to preserve any rights in the Collateral
against prior parties. If any obligation evidenced by this Note is not paid
when due, the Lender may, at its option, demand, sue for, collect or make any
compromise or settlement it deems desirable with reference to the Collateral,
and shall have the rights of a secured party under the laws of the State of
Ohio, and the undersigned shall be liable for any deficiency.
DEFAULT
Upon the occurrence of any of the events of default set forth in the
Agreement, then the Lender may, at its option, without notice or demand,
accelerate the maturity of the obligations evidenced hereby, which
obligations shall become immediately due and payable. In the event the
Lender shall institute any action for the enforcement or collection of the
obligations evidenced hereby, the undersigned agrees to pay all costs and
expenses of such action, including reasonable attorneys' fees, to the extent
permitted by law.
GENERAL PROVISIONS
The undersigned, and any indorser, surety, or guarantor, hereby
severally waive presentment, notice of dishonor, protest, notice of protest,
and diligence in bringing suit against any of them, and consent that, without
discharging any of them, the time of payment may be extended an unlimited
number of times before or after maturity without notice. The Lender shall
not be required to pursue the undersigned, including any guarantor, or to
exercise any rights against any Collateral herefor before exercising any
other such rights.
The obligations evidenced hereby may from time to time be evidenced by
another note or notes given in substitution, renewal or extension hereof.
Any security interest which secures the obligations evidenced hereby shall
remain in full force and effect notwithstanding any such substitution,
renewal, or extension.
The captions used herein are for references only and shall not be deemed
a part of this Note. If any of the terms or provisions of this Note shall be
deemed unenforceable, the enforceability of the remaining terms and
provisions shall not be affected. This Note shall be governed by and
construed in accordance with the laws of the State of Ohio.
WAIVER OF RIGHT TO TRIAL BY JURY
THE UNDERSIGNED ACKNOWLEDGES THAT, AS TO ANY AND ALL DISPUTES THAT MAY
ARISE BETWEEN THE UNDERSIGNED AND THE LENDER, THE COMMERCIAL NATURE OF THE
TRANSACTION OUT OF WHICH THIS NOTE ARISES
2
<PAGE>
WOULD MAKE ANY SUCH DISPUTE UNSUITABLE FOR TRIAL BY JURY. ACCORDINGLY, THE
UNDERSIGNED HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY AS TO ANY AND ALL
DISPUTES THAT MAY ARISE RELATING TO THIS NOTE OR TO ANY OF THE OTHER
INSTRUMENTS OR DOCUMENTS EXECUTED IN CONNECTION HEREWITH.
WARRANT OF ATTORNEY
The undersigned authorizes any attorney at law to appear in any Court of
Record in the State of Ohio or in any state or territory of the United States
after the above indebtedness becomes due, whether by acceleration or
otherwise, to waive the issuing and service of process, and to confess
judgment against undersigned in favor of the Lender for the amount then
appearing due together with costs of suit, and thereupon to waive all errors
and all rights of appeal and stays of execution. The attorney at law
authorized hereby to appear for the undersigned may be an attorney at law
representing the Lender, and the undersigned hereby expressly waives any
conflict of interest that may exist by virtue of such representation.
WARNING-BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER
FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE
AGREEMENT, OR ANY OTHER CAUSE.
-------------------------------------------
By:
----------------------------------------
Its:
----------------------------------------
3
<PAGE>
EXHIBIT C
SECURITY AGREEMENT
CERTIFICATED STOCK
The undersigned (hereinafter called "Debtor" whether one or more), for
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, hereby grants, pledges and assigns to Papnet of Ohio, Inc.
(hereinafter called "Lender"), a security interest in the following stock,
whether Debtor's interest therein be now owned or existing or hereafter
arising or acquired, together with all substitutions, replacements,
exchanges, reissues and additions therefor or thereto, all books and records
relating thereto, all dividends and distributions arising therefrom, payable
thereon or distributed in respect thereto, whether in cash, property, stock
or otherwise, and whether now or hereafter declared, paid or made, and
together with the right to receive and receipt therefor, and all cash and
non-cash proceeds thereof including, but not limited to, notes, drafts,
checks, instruments and deposit and money market accounts:
<TABLE>
<CAPTION>
No. of Shares Certificate
and Class Issuer Number(s)
- ------------- ------ -----------
<S> <C> <C>
Common Shares,
$.0001 par value Neuromedical Systems, Inc.
</TABLE>
(all of the foregoing hereinafter sometimes called the "Collateral"). Except
as otherwise provided in this agreement, Debtor shall have the right to
receive all dividends arising with respect to the Collateral paid in cash or
in other property, but Debtor shall have no right to receive any dividend in
respect of the Collateral paid in stock of the Issuer or in the stock of
corporations other than the Issuer or paid out of the proceeds of the sale or
condemnation of any property of the Issuer or upon or in the course of
dissolution or liquidation (whether partial or otherwise) or winding up of
the Issuer or which in any way shall be chargeable to or payable out of
capital, capital surplus or paid in surplus. Debtor shall not have the right
to receive any dividends arising with respect to the Collateral if a default
exists in the observance and performance of any of the terms of this
agreement, or of any of the Obligations, or if ownership of the Collateral
has been registered in the name of Lender or any nominee of Lender or any
sub-agent appointed by Lender pursuant to paragraph 7 of this agreement, and
all dividends arising under such circumstances shall be paid to Lender and,
at Lender's option, may be applied to the Obligations in such order as Lender
may elect or be held as security therefor.
The security interest hereby granted is to secure the prompt and full
payment and complete performance of all Obligations of Debtor to Lender. The
word "Obligations" is used in its most comprehensive sense and includes, without
limitation, all indebtedness, debts and liabilities (including principal,
interest, late charges, collection costs, attorneys' fees to the extent
permitted by law, and the like) of Debtor to Lender, whether now existing or
hereafter arising, either created by Debtor alone or together with another or
others, primary or secondary, secured or unsecured,
<PAGE>
absolute or contingent, liquidated or unliquidated, direct or indirect,
whether evidenced by note, draft, application for letter of credit or
otherwise, and any and all renewals of or substitutes therefor. The word
"Obligations" shall include, BUT NOT BE LIMITED TO, all indebtedness owed by
Debtor to Lender by reason of credit extended or to be extended to Debtor
pursuant to a Loan Agreement of even date and related documents.
It is Debtor's express intention that this agreement and the continuing
security interest granted hereby, in addition to covering all present
Obligations of Debtor to Lender, shall extend to all future Obligations of
Debtor to Lender, whether or not such Obligations are reduced or entirely
extinguished and thereafter increased or reincurred, whether or not such
Obligations are related to the indebtedness identified above by class, type
or kind and whether or not such Obligations are specifically contemplated by
Debtor and Lender as of the date hereof. The absence of any reference to
this agreement in any documents, instruments or agreements evidencing or
relating to any Obligation secured hereby shall not limit or be construed to
limit the scope or applicability of this agreement.
1. GENERAL COVENANTS. Debtor represents, warrants and covenants as
follows:
(a) Unless Lender compels registration of ownership of the
Collateral in the name of Lender or any nominee of Lender or any sub-agent
appointed by Lender pursuant to paragraph 7 of this agreement, Debtor is and
shall remain the sole owner and registered holder of the Collateral.
(b) Except for the security interest granted hereby, the
Collateral is and shall remain free from any and all security interests,
liens, encumbrances, claims and interests.
(c) The Issuer is duly organized, validly existing and is in good
standing, and each share of stock comprising the Collateral is or, upon
delivery to Lender shall be, duly authorized, authenticated, issued and
delivered and enforceable in accordance with its terms and not in default.
(d) Each share of stock comprising the Collateral is fully paid
and nonassessable and, except as otherwise indicated in the certificates
representing the shares, is transferable in its present form upon delivery
without restriction or limitation on the books and records of its Issuer.
(e) Debtor shall, at Debtor's expense, perform, do, make, procure,
execute and deliver all acts, things, writings and other assurances as Lender
may at any time request or require to protect, assure or enforce Lender's
interests, rights and remedies created by, provided in or emanating from this
agreement.
(f) Debtor shall not create, permit or suffer to exist, and shall
take such action as is necessary to remove, any claim to or interest in or
lien or encumbrance upon the Collateral, other than the security interest
granted hereby, and shall defend the right, title and interest of Lender in
and to the Collateral against all claims and demands of all persons and
entities at any time claiming the same or any interest therein.
-2-
<PAGE>
(g) Subject to any limitation stated therein or in connection
therewith, all information furnished by Debtor concerning the Collateral or
otherwise in connection with the Obligations, is or shall be at the time the
same is furnished, accurate, correct and complete in all material respects.
2. VOTING. With respect to any Collateral not registered in the name
of Lender or Lender's nominee or sub-agent pursuant to paragraph 7 of this
agreement, during the term of this agreement, and so long as (i) there is no
default in the observance and performance of any of the terms of this
agreement or of any of the Obligations, and (ii) Lender has not notified
Debtor of Lender's election to exercise any voting rights relating to the
Collateral, Debtor shall have the right to exercise such voting rights on all
corporate questions.
3. SUBSTITUTED AND ADDITIONAL SECURITIES. If during the term of this
agreement any stock dividend, exchange, conversion, reclassification,
readjustment or other change is paid, declared or made with respect to the
Collateral, all new, substituted and additional securities issued in respect
to the Collateral shall be deemed pledged to Lender under the terms of this
agreement in the same manner as the Collateral originally pledged hereunder.
4. WARRANTS AND OPTIONS. If during the term of this agreement
subscription warrants or options are issued in connection with the Collateral
or any other securities at the time pledged to Lender hereunder, such
warrants and options shall be immediately assigned by Debtor to Lender, and
all new securities acquired by Debtor in connection therewith shall be
immediately assigned to Lender under the terms of this agreement in the same
manner as the Collateral originally pledged hereunder.
5. PRESERVATION AND DISPOSITION OF COLLATERAL.
(a) Debtor shall advise Lender promptly, in writing and in
reasonable detail, (i) of any material encumbrance upon or claim asserted
against any of the Collateral; and (ii) of the occurrence of any event that
would have a material effect upon the aggregate value of the Collateral or
upon the security interest of Lender.
(b) Debtor shall pay promptly when due all taxes, assessments,
charges or levies upon the Collateral or in respect to the income or profits
therefrom or the transfer or registration thereof.
(c) At its option, Lender may discharge taxes, liens, security
interests or other encumbrances at any time levied or placed on or arising in
connection with the Collateral. Debtor agrees to reimburse Lender upon
demand for any payment made or any expense incurred (including reasonable
attorneys' fees to the extent permitted by law) by Lender pursuant to the
foregoing authorization. Should Debtor fail to pay said sum to Lender upon
demand, interest shall accrue thereon, from the date of demand until paid in
full, at the highest rate set forth in any document or instrument evidencing
any of the Obligations.
-3-
<PAGE>
6. EXTENSIONS AND COMPROMISES. With respect to any Collateral pledged
to Lender as security for the Obligations, Debtor assents to all extensions
or postponements of the time of payment thereof or any other indulgence in
connection therewith, to each substitution, exchange or release of
Collateral, to the addition or release of any party primarily or secondarily
liable, to the acceptance of partial payments thereon and to the settlement,
compromise or adjustment thereof, all in such manner and at such time or
times as Lender may deem advisable. Lender shall have no duty as to the
collection or protection of Collateral or any income therefrom, nor as to the
preservation of any right pertaining thereto, beyond the safe custody of
Collateral in the possession of Lender.
7. LENDER'S APPOINTMENT AS ATTORNEY-IN-FACT. Debtor hereby
irrevocably constitutes and appoints Lender and any officer or agent thereof,
with full power of substitution, as Debtor's true and lawful attorney-in-fact
with full irrevocable power and authority in the place and stead of Debtor
and in the name of Debtor or in Lender's own name, from time to time in
Lender's discretion, for the purpose of carrying out the terms of this
agreement, to take any and all appropriate action and to execute any and all
documents and instruments that may be necessary or desirable to accomplish
the purpose of this agreement.
Debtor hereby ratifies all that said attorneys shall lawfully do or
cause to be done by virtue hereof. This power of attorney is a power coupled
with an interest and shall be irrevocable.
Lender may, in its discretion, register ownership of any of the
Collateral in the name of Lender or any nominee of Lender or any sub-agent
appointed by Lender, or may designate a nominee or sub-agent for the purpose
of retaining physical possession of the instruments, certificates and similar
writings representing any of the Collateral, indorsed or assigned in blank or
in favor of Lender or Lender's nominee or sub-agent.
Debtor hereby consents and agrees that the Issuer or any obligor in
respect of the Collateral or any registrar or transfer agent or trustee for
any of the Collateral shall be entitled to accept the provisions hereof as
conclusive evidence of the rights of Lender to effect any transfer pursuant
to this paragraph 7, notwithstanding any other notice or direction to the
contrary heretofore or hereafter given.
The powers conferred upon Lender hereunder are solely to protect
its interests in the Collateral and shall not impose any duty upon Lender to
exercise any such powers. Lender shall be accountable only for amounts that
Lender actually receives as a result of the exercise of such powers and
neither Lender nor any of its officers, directors, employees or agents shall
be responsible to Debtor for any act or failure to act, except for Lender's
own gross negligence or willful misconduct.
8. DEFAULT. If any event of default in the payment of any of the
Obligations or in the performance of any of the terms, conditions, or
provisions of any instrument or document evidencing the Obligations secured
by this agreement or in the performance of any covenant contained herein
shall occur and be continuing; or if any warranty, representation or
statement made or furnished to Lender by Debtor proves to have been false in
any material respect when made or furnished; or if
-4-
<PAGE>
Lender shall for any reason deem itself insecure as to the prospect of
payment of any of the Obligations:
(a) Lender may, at its option and without notice, declare the
unpaid balance of any or all of the Obligations immediately due and payable
and this agreement and any or all of the Obligations in default.
(b) All payments received by Debtor under or in connection with
any of the Collateral shall be held by Debtor in trust for Lender, shall be
segregated from other funds of Debtor and shall forthwith upon receipt by
Debtor be turned over to Lender in the same form as received by Debtor (duly
indorsed by Debtor to Lender, if required). Any and all such payments so
received by Lender (whether from Debtor or otherwise) may, in the sole
discretion of Lender, be held by Lender as collateral security for, and/or
then or at any time thereafter be applied in whole or in part by Lender
against, all or any part of the Obligations in such order as Lender may
elect. Any balance of such payments held by Lender and remaining after
payment in full of all the Obligations shall be paid over to Debtor or to
whomsoever may be lawfully entitled to receive the same. Nothing set forth
in this subparagraph (b) shall authorize or be construed to authorize Debtor
to sell or otherwise dispose of any Collateral.
(c) Lender and its nominees and sub-agents shall have the rights
and remedies of a secured party under this agreement, under any other
instrument or agreement securing, evidencing or relating to the Obligations
and under the law of the State of Ohio. To the extent permitted by
applicable law, Debtor waives all claims, damages and demands against Lender
arising out of the repossession, retention, sale or disposition of the
Collateral. Debtor agrees that Lender need not give more than seven (7)
days' notice (which notification shall be deemed given when mailed, postage
prepaid, addressed to Debtor at Debtor's address set forth at the beginning
of this agreement, or when telecopied or telegraphed to that address or when
telephoned or otherwise communicated orally to Debtor or any agent of Debtor
at that address), if any, of the time and place of any public sale or of the
time after which a private sale may take place and that such notice is
reasonable notification of such matters. Debtor shall remain liable for any
deficiency if the proceeds of any sale or disposition of the Collateral are
insufficient to pay all amounts to which Lender is entitled. Debtor shall
also be liable for the costs of collecting any of the Obligations or
otherwise enforcing the terms thereof or of this agreement including
reasonable attorneys' fees to the extent permitted by law.
9. GENERAL. Any provision of this agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. Lender shall not be deemed to have waived any of its rights
hereunder or under any other agreement, instrument or paper signed by Debtor
unless such waiver be in writing and signed by Lender. No delay or omission on
the part of Lender in exercising any right shall operate as a waiver of such
right or any other right. All of Lender's rights and remedies, whether
-5-
<PAGE>
evidenced hereby or by any other agreement, instrument or paper, shall be
cumulative and may be exercised singularly or concurrently. Any written
demand upon or written notice to Debtor shall be effective when deposited in
the mails addressed to Debtor at the address shown at the beginning of this
agreement. This agreement and all rights and obligations hereunder, including
matters of construction, validity and performance, shall be governed by the
law of the State of Ohio. The provisions hereof shall, as the case may
require, bind or inure to the benefit of, the respective heirs, successors,
legal representatives and assigns of Debtor and Lender.
IN WITNESS WHEREOF, Debtor has signed this agreement this day of
March, 1996.
DEBTOR:
----------------------------------
By:
------------------------------
Its:
------------------------------
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<PAGE>
PAPNET OF OHIO, INC.
July 16, 1996
ER Group, Inc. ("ERG")
Carolina Cytology, Inc. ("CCI")
CCWP Partners, Inc. ("CCWP")
Subject: Loan Agreement
Gentlemen:
Papnet of Ohio, Inc. ("Papnet") is issuing this letter to each of you, to
induce you to execute and in consideration of you executing the Loan Agreement
(a copy of which is attached hereto), committing as follows:
(1) Notwithstanding its discretion with regard to the payment of such
expenses under Section 1 of the Loan Agreement, Papnet agrees to and shall in
all events as Advances (as defined in the Loan Agreement) to CCWP and CCI pay or
reimburse up to at least $20,000 of invoices for legal fees and expenses
incurred by CCWP and CCI in connection with the Merger (as defined in the Loan
Agreement), with the same to be done promptly following submission of such
invoices by CCWP and CCI.
(2) As regards Section 3 of the Loan Agreement, any expense incurred by
any of ERG, CCWP or CCI (a "Borrower") prior hereto or hereafter in connection
with the Merger which is not paid by Papnet to or on behalf of such Borrower
under the Loan Agreement (an "Unreimbursed Merger Expense") shall be treated as
a repayment by such Borrower of Initial Advances (as defined in the Loan
Agreement) and of Advances made or to be made by Papnet as of the date of
payment of such Unreimbursed Merger Expense by such Borrower to the extent the
amount of such Unreimbursed Merger Expense exceeds such Borrower's share of the
Merger expenses provided for in the Merger Agreement (as defined in the Loan
Agreement).
(3) Notwithstanding Section 4 of the Loan Agreement, a failure to notify
Papnet of any error in any monthly statement will not be deemed to be a waiver
by you of any claimed error.
(4) Notwithstanding Section 6 of the Loan Agreement, Papnet acknowledges
that only a portion of your common shares of Neuromedical Systems, Inc. are
being pledged.
(5) Schedule A to the Loan Agreement has not yet been completed, and the
final Schedule A will be subject to the approval of each of you prior to its
taking effect.
(6) With respect to the Security Agreement executed by each of you
pursuant to the Loan Agreement, you will not be considered to be in default
under Section 8 of said Security Agreement
<PAGE>
until Papnet has give you 30 days' written notice thereof and you have failed to
cure the same within such 30-days' period.
Sincerely,
PAPNET OF OHIO, INC.
By:/s/ David J. Richards
--------------------------------
David J. Richards, President
<PAGE>
EXHIBIT 10(e)
<PAGE>
LOAN AGREEMENT
This Agreement, dated as of March 14, 1996, by and among Papnet of Ohio,
Inc., an Ohio corporation ("Papnet"), Cytology West, Inc., a Delaware
corporation ("CWI"), Cytology Indiana, Inc., an Ohio corporation ("CIN"),
Indiana Cytology Review Corporation, an Ohio corporation ("INC"), ER Group,
Inc., an Ohio corporation ("ERG"), CCWP Partners, Inc., an Ohio corporation
("CCWP"), Carolina Cytology, Inc., an Ohio corporation ("CCI"), and Papnet Utah,
Inc., a Nevada corporation ("PUI"). CWI, CIN, INC, ERG, CCWP, CCI and PUI are
hereinafter sometimes collectively referred to as the "Borrowers" and
individually as a "Borrower."
RECITALS
A. Pursuant to an Agreement and Plan of Merger of even date (the "Merger
Agreement"), the parties have agreed that Papnet, CIN, INC, ERG, CCWP, CCI and
PUI will merge with and into CWI (the "Merger"). Certain capitalized terms not
otherwise defined herein shall have the meanings as defined in the Merger
Agreement.
B. Pending the effectiveness of the Merger, Papnet has agreed, subject to
the terms and conditions contained in this Agreement, to make certain advances
(hereinafter called an "Advance" or "Advances") on behalf of the Borrowers to
pay certain expenses of the Merger and an anticipated Initial Public Offering by
the Surviving Corporation, and to fund business operations of the Borrowers.
C. The parties wish to set forth in this Agreement the terms and
conditions on which such Advances will be made and repaid.
STATEMENT OF AGREEMENT
1. ADVANCES OF MERGER AND OFFERING EXPENSES. Through the Effective Date,
Papnet agrees to make such Advances on behalf of each Borrower as are necessary
to pay such Borrower's pro-rata share of expenses incurred in connection with
the Merger or the Initial Public Offering. Papnet may incur and pay legal,
accounting, printing, filing, travel, meeting and other expenses in connection
with the Merger or the Initial Public Offering, or may pay such expenses
reasonably incurred by any Borrower, and shall allocate a pro-rata share of all
of such expenses to each Borrower in the proportion provided in the Merger
Agreement. Such amounts will be considered an Advance to each Borrower
hereunder, in the proportion provided in the Merger Agreement, as of the date
that such amounts are actually paid by Papnet. Papnet shall keep adequate books
and records of such expenses which shall be available for inspection by any
Borrower during normal business hours upon reasonable prior notice.
2. ADVANCES OF OPERATING EXPENSES. Through the Effective Date, Papnet
agrees to make such Advances to or on behalf of each Borrower individually as
are necessary to pay reasonable expenses of ordinary business operations of such
Borrower, as approved by Papnet. In the case of CWI, such expenses shall include
reasonable expenses necessary to the development of technologies acquired from
GDP Technologies, Inc. Each such Advance shall be made to or on
<PAGE>
behalf of a Borrower upon receipt of the Borrower's application therefor and
disbursement instructions, which shall be in a form as Papnet shall reasonably
prescribe, and will be considered an Advance to such Borrower hereunder. The
reasonableness of any expenses for which Advances are requested, and the amount
of any Advance, shall be determined by Papnet in its sole discretion.
3. REPAYMENT. The total amount of Advances to or on behalf of a Borrower
shall be repaid, with interest at the rate of seven percent (7.00%) per annum,
sixty days after the Termination Date, as defined in Section 5. Each Borrower
may pay the unpaid principal amount of any Advance made to or on behalf of it in
whole or in part at any time and from time to time. Each such payment of
principal may be made without the payment of accrued and unpaid interest
thereon. Interest shall be calculated on the basis of a 360-day year for the
actual number of days the principal balance is unpaid. After maturity, whether
such maturity occurs by lapse of time or acceleration, interest on the unpaid
balance of any Advances (and interest thereon accrued through maturity) shall
accrue at the rate of twenty four percent (24.00%) per annum until all Advances
and accrued interest are repaid in full. Advances to each Borrower shall be
evidenced by one or more promissory notes in the form of Exhibit A to this
Agreement, or by one or more notes subsequently executed in substitution
therefor.
4 STATEMENTS. On the 25th day of each month during the term of this
Agreement, Papnet shall deliver to each Borrower a statement showing, for the
immediately preceding month, all Advances made to or on behalf of such Borrower,
all payments or partial payments of the principal amount of Advances by the
Borrower, the accrued and unpaid interest on the Advances, if any, and such
other information as may be necessary or appropriate. Each Borrower hereto
agrees that it will immediately notify Papnet of any error in any monthly
statement delivered to it, and the failure to do so within five (5) business
days shall be deemed to be a waiver of any claimed error. Papnet's allocation
of Advances to any Borrower shall be presumed correct, and in the event of any
dispute concerning the amount, manner of calculation or allocation of any
Advance as shown on any statement, the party disputing the statement shall have
the burden of demonstrating any error.
5. TERMINATION. Papnet's right and ability to make Advances hereunder
shall terminate upon a date (the "Termination Date") which is the earlier to
occur of (a) the closing of the Merger, or (b) the termination of the Merger
Agreement as provided in Article VIII thereof.
6. SECURITY. As security for Advances to or on behalf of it hereunder,
each Borrower other than CWI shall pledge to Papnet all of the common shares of
Neuromedical Systems, Inc. currently owned by it, pursuant to the terms of a
Security Agreement in the form attached hereto as Exhibit B. As security for
Advances to or on behalf of it, CWI shall grant Papnet a security interest in
its assets pursuant to the terms of a Security Agreement in the form attached
hereto as Exhibit C.
7. REPRESENTATIONS AND WARRANTIES OF BORROWERS. In addition to the
representations and warranties of each Borrower contained in the Merger
Agreement, upon which each Borrower agrees that Papnet may rely for purposes of
this Agreement, each Borrower represents and warrants to Papnet that:
2
<PAGE>
(a) The Board of Directors of the Borrower has duly authorized the
execution and delivery of this Agreement and of the documents contemplated
herein, and this Agreement and such documents constitute valid and binding
obligations of the Borrower enforceable in accordance with their terms, subject
to the Enforceability Exceptions.
(b) The execution of this Agreement and related documents and the
compliance by the Borrower with all the provisions thereof:
(i) are within the corporate powers of the Borrower; and
(ii) will not conflict with, result in any breach in any of the
provisions of, constitute a default under, or result in the
creation of any lien or encumbrance upon any property of the
Borrower under the provisions of, any agreement, charter
instrument, bylaw, or other instrument to which the Borrower is a
party or by which it may be bound.
8. EVENTS OF DEFAULT. An "Event of Default" with respect to a Borrower
shall exist if any of the following occurs and is continuing:
(a) the Borrower fails to pay any amount hereunder when due, or fails to
perform or observe any covenant contained in Article VI of the Merger Agreement;
(b) any warranty, representation or other statement by or on behalf of the
Borrower contained in this Agreement, the Merger Agreement, or in any instrument
furnished in compliance with or in reference to this Agreement is false or
misleading in any material respect;
(c) the Borrower becomes insolvent or bankrupt, or makes an assignment for
the benefit of creditors, or consents to the appointment of a trustee, receiver
or liquidator; or
(d) bankruptcy, reorganization, arrangement, insolvency or liquidation
proceedings are instituted by or against the Borrower.
9. DEFAULT REMEDIES.
(a) ACCELERATION. If an Event of Default exists with respect to a
Borrower, Papnet may immediately exercise any right, power or remedy permitted
to it by law, and shall have, in particular, without limiting the generality of
the foregoing, the right to declare the entire principal and all interest
accrued on all Advances then outstanding to or on behalf of such Borrower
pursuant to this Agreement to be forthwith due and payable, without any
presentment, demand, protest or other notice of any kind, all of which are
hereby expressly waived by each Borrower.
3
<PAGE>
(b) NONWAIVER. No course of dealing on the part of Papnet nor any delay
or failure on the part of Papnet to exercise any right shall operate as a waiver
of such right or otherwise prejudice Papnet's rights, powers and remedies.
10. MISCELLANEOUS.
(a) NOTICES. All communications under this Agreement shall be in writing
and shall be mailed by first class mail, postage prepaid. Any notice so
addressed and mailed shall be deemed given when so mailed.
(b) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
and be binding upon the heirs, successors and assigns of each of the parties.
(c) AMENDMENT AND WAIVER. This Agreement may be amended, and the
observance of any term of this Agreement may be waived, with (and only with) the
written consent of the parties hereto.
(d) DUPLICATE ORIGINALS. Duplicate originals of this Agreement may be
signed by the parties, each of which shall be an original but all of which
together shall constitute one and the same instrument.
(e) GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Ohio applicable to contracts made and
performed entirely within such state, without regard to principles of conflicts
of laws.
(f) CONSENT TO JURISDICTION AND WAIVER OF OBJECTION TO VENUE. Each party
agrees that any legal action or proceeding with respect to this Agreement or the
notes or the transactions contemplated hereby may be brought in the Court of
Common Pleas of Franklin County, Ohio, or in the United States District Court
for the Southern District of Ohio, Eastern Division, and each party hereby
irrevocably submits to and accepts generally and unconditionally the
jurisdiction of those courts with respect to its person, property and revenues
and irrevocably consents to service of process in any such action or proceeding
by the mailing thereof by U.S. mail to such party at the address set forth in
the Merger Agreement. Each party hereby irrevocably waives any objection to the
laying of venue of any such suit or proceeding in the above described courts,
and unconditionally waives and agrees not to plead or claim that any such suit
or proceeding brought in any such court has been brought in an inconvenient
forum.
(g) WAIVER OF JURY TRIAL. THE PARTIES ACKNOWLEDGE THAT, AS TO ANY AND ALL
DISPUTES THAT MAY ARISE BETWEEN THE PARTIES, THE COMMERCIAL NATURE OF THE
TRANSACTION OUT OF WHICH THIS AGREEMENT ARISES WOULD MAKE ANY SUCH DISPUTE
UNSUITABLE FOR TRIAL BY JURY. ACCORDINGLY, EACH OF THE PARTIES TO THIS
AGREEMENT HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY AS TO ANY AND ALL DISPUTES
THAT MAY ARISE
4
<PAGE>
RELATING TO THIS AGREEMENT OR TO ANY OF THE OTHER INSTRUMENTS OR DOCUMENTS
EXECUTED IN CONNECTION HEREWITH.
IN WITNESS WHEREOF, the parties have each caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first written above.
PAPNET OF OHIO, INC.
By: /s/ David J. Richards
------------------------------------
David J. Richards, President
BORROWERS:
CYTOLOGY WEST, INC.
By: /s/ Carl Genberg
------------------------------------
Carl Genberg, President
CYTOLOGY INDIANA, INC.
By:
------------------------------------
President
INDIANA CYTOLOGY REVIEW COMPANY
By:
------------------------------------
President
5
<PAGE>
ER GROUP, INC.
By:
------------------------------------
Thomas J. Kelley, President
CAROLINA CYTOLOGY, INC.
By:
------------------------------------
Rodney M. Kinsey, President
CCWP PARTNERS, INC.
By:
------------------------------------
Rodney M. Kinsey, President
PAPNET UTAH, INC.
By: /s/ Kent Dawson
------------------------------------
President
6
<PAGE>
PROMISSORY NOTE
Columbus, Ohio
$585,000.00 April 5, 1996
FOR VALUE RECEIVED, the undersigned promises to pay to the order of PAPNET
OF OHIO, INC. (hereinafter called the "Lender," which term shall include any
holder hereof) at such place as the Lender may designate or, in the absence of
such designation, at any of the Lender's offices, the sum of $585,000.00 or so
much of such sum as shall have been advanced by the Lender at any time and not
hereafter repaid (hereinafter referred to as "Advances") pursuant to the Loan
Agreement dated as of March 14, 1996 (the "Agreement") together with interest
provided and payable at the time(s) and in the manner(s) provided in the
Agreement. Each such Advance shall be made to the undersigned upon receipt by
the Lender of the undersigned's application therefor and disbursement
instructions, which shall be in such form as the Lender shall from time to time
reasonably prescribe. The Lender shall be entitled to rely on any oral or
telephonic communication requesting an Advance and/or providing disbursement
instructions hereunder, which shall be received by it in good faith from anyone
reasonably believed by the Lender to be the undersigned, or the undersigned's
authorized agent. Each request for an Advance shall constitute a warranty and
representation by the undersigned that no event of default hereunder, under the
Agreement, or under any related loan documents has occurred and is continuing
and that no event or circumstance which would constitute such an event of
default, but for the requirement that notice be given or time elapse or both,
has occurred and is continuing. The undersigned agrees that all Advances made
by the Lender will be evidenced by entries made by the Lender into records
maintained by the Lender. The undersigned further agrees that the sum or sums
shown such records shall be rebuttably presumptive evidence of the amount of the
Advances and of the amount of any accrued interest.
INTEREST
Interest will accrue on the unpaid balance of the Advances until paid at
the rate of 7% per annum. Upon maturity, whether by acceleration or otherwise,
interest will accrue on the unpaid balance of the Advances and unpaid interest,
if any, until paid at the rate of 24% per annum.
All interest shall be calculated on the basis of a 360 day year for the
actual number of days the Advances or any part thereof remain unpaid. There
shall be no penalty for prepayment.
MANNER OF PAYMENT
The Advances and accrued interest thereon shall be due and payable one
hundred eighty (180) days after the Termination Date, as defined in the
Agreement, and at maturity, whether by acceleration or otherwise.
<PAGE>
SECURITY
The obligations of the undersigned hereunder are secured by a Security
Agreement of even date, granting Lender a security interest in certain property
of the undersigned (the "Collateral"). The Lender shall not be bound to take
any steps necessary to preserve any rights in the Collateral against prior
parties. If any obligation evidenced by this Note is not paid when due, the
Lender may, at its option, demand, sue for, collect or make any compromise or
settlement it deems desirable with reference to the Collateral, and shall have
the rights of a secured party under the laws of the State of Ohio, and the
undersigned shall be liable for any deficiency.
DEFAULT
Upon the occurrence of any of the events of default set forth in the
Agreement, then the Lender may, at its option, without notice or demand,
accelerate the maturity of the obligations evidenced hereby, which obligations
shall become immediately due and payable. In the event the Lender shall
institute any action for the enforcement or collection of the obligations
evidenced hereby, the undersigned agrees to pay all costs and expenses of such
action, including reasonable attorneys' fees, to the extent permitted by law.
GENERAL PROVISIONS
The undersigned, and any indorser, surety, or guarantor, hereby severally
waive presentment, notice of dishonor, protest, notice of protest, and diligence
in bringing suit against any of them, and consent that, without discharging any
of them, the time of payment may be extended an unlimited number of times before
or after maturity without notice. The Lender shall not be required to pursue
the undersigned, including any guarantor, or to exercise any rights against any
Collateral herefor before exercising any other such rights.
The obligations evidenced hereby may from time to time be evidenced by
another note or notes given in substitution, renewal or extension hereof. Any
security interest which secures the obligations evidenced hereby shall remain in
full force and effect notwithstanding any such substitution, renewal, or
extension.
The captions used herein are for references only and shall not be deemed a
part of this Note. If any of the terms or provisions of this Note shall be
deemed unenforceable, the enforceability of the remaining terms and provisions
shall not be affected. This Note shall be governed by and construed in
accordance with the laws of the State of Ohio.
WAIVER OF RIGHT TO TRIAL BY JURY
THE UNDERSIGNED ACKNOWLEDGES THAT, AS TO ANY AND ALL DISPUTES THAT MAY
ARISE BETWEEN THE UNDERSIGNED AND THE LENDER, THE COMMERCIAL NATURE OF THE
TRANSACTION OUT OF WHICH THIS NOTE ARISES
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<PAGE>
WOULD MAKE ANY SUCH DISPUTE UNSUITABLE FOR TRIAL BY JURY. ACCORDINGLY, THE
UNDERSIGNED HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY AS TO ANY AND ALL DISPUTES
THAT MAY ARISE RELATING TO THIS NOTE OR TO ANY OF THE OTHER INSTRUMENTS OR
DOCUMENTS EXECUTED IN CONNECTION HEREWITH.
WARRANT OF ATTORNEY
The undersigned authorizes any attorney at law to appear in any Court of
Record in the State of Ohio or in any state or territory of the United States
after the above indebtedness becomes due, whether by acceleration or otherwise,
to waive the issuing and service of process, and to confess judgment against
undersigned in favor of the Lender for the amount then appearing due together
with costs of suit, and thereupon to waive all errors and all rights of appeal
and stays of execution. The attorney at law authorized hereby to appear for the
undersigned may be an attorney at law representing the Lender, and the
undersigned hereby expressly waives any conflict of interest that may exist by
virtue of such representation.
WARNING-BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL.
IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR
PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU
REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED
GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY
OTHER CAUSE.
CYTOLOGY WEST, INC.
By: /s/ Carl A. Genberg
-----------------------------------------
Carl A. Genberg, President
-3-
<PAGE>
SECURITY AGREEMENT
EQUIPMENT, FIXTURES, INVENTORY, RECEIVABLES AND INTANGIBLES
Cytology West, Inc., a corporation organized under the law of the State of
Delaware, with principal offices located at 3753 Howard Hughes Parkway, Suite
200, Las Vegas, NV 89109 (hereinafter called "Debtor"), for valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
hereby grants, pledges and assigns to Papnet of Ohio, Inc. (hereinafter called
"Lender"), a security interest in the following property, whether Debtor's
interest therein as owner, co-owner, lessee, consignee, secured party or
otherwise be now owned or existing, or hereafter arising or acquired, and
wherever located, together with all substitutions, replacements, additions and
accessions therefor or thereto, all replacement and repair parts therefor, all
documents including, but not limited to, negotiable documents, documents of
title, warehouse receipts, storage receipts, dock receipts, dock warrants,
express bills, freight bills, airbills, bills of lading and other documents
relating thereto, all products thereof and all cash and non-cash proceeds
thereof including, but not limited to, notes, drafts, checks, instruments,
insurance proceeds, indemnity proceeds, warranty and guaranty proceeds and
proceeds arising in connection with any requisition, confiscation, condemnation,
seizure or forfeiture of all or any part of the following property by any
governmental body, authority, bureau or agency (or any person acting under color
of governmental authority):
(a) All of Debtor's machinery, equipment, tools, furniture, furnishings
and fixtures including, but not limited to, all manufacturing, fabricating,
processing, transporting and packaging equipment, communication systems, and
computing and data processing systems (hereinafter sometimes called the
"Equipment";
(b) All of Debtor's inventory including, but not limited to, parts,
supplies, raw materials, work in process, finished goods, materials used or
consumed in Debtor's business, repossessed and returned goods (hereinafter
sometimes called the "Inventory");
(c) All of Debtor's accounts, accounts receivable, royalties receivable,
contract rights, guaranties of accounts, accounts receivable and contract rights
and security therefor, chattel paper, income tax refunds, instruments,
negotiable documents, notes, drafts, acceptances and other forms of obligations
and receivables arising from or in connection with the operation of Debtor's
business including, but not limited to, those arising from or in connection with
Debtor's sale, lease or other disposition of Inventory, deposit accounts, and
all books, records, ledger cards, computer programs and other documents or
property at any time evidencing or relating to the foregoing receivables
(hereinafter sometimes called the "Receivables"); and
(d) All of Debtor's general intangibles, trade names, trademarks, trade
secrets, goodwill, patents, patent applications, copyrights, licenses and
franchises, excluding patents and patent applications relating to technologies
acquired by Debtor from GDP Technologies, Inc., a Colorado corporation, and the
license from Neuromedical Systems, Inc. ("NSI"), as most recently amended
<PAGE>
pursuant to the Settlement Agreement among the Debtor, NSI and certain other
parties dated as of December 5, 1996 (hereinafter sometimes called the
"Intellectual Property")
(all of the foregoing hereinafter sometimes called the "Collateral").
The security interest hereby granted is to secure the prompt and full
payment and complete performance of all Obligations. The word "Obligations"
means all indebtedness owed by Debtor to Lender by reason of Advances made to or
on behalf of Debtor pursuant to a Loan Agreement of even date and related
documents.
It is Debtor's express intention that this agreement and the continuing
security interest granted hereby, in addition to covering all present
Obligations of Debtor to Lender, shall extend to all future Obligations of
Debtor to Lender, whether or not such Obligations are reduced or entirely
extinguished and thereafter increased or reincurred, whether or not such
Obligations are related to the indebtedness identified above by class, type or
kind and whether or not such Obligations are specifically contemplated by Debtor
and Lender as of the date hereof. The absence of any reference to this
agreement in any documents, instruments or agreements evidencing or relating to
any Obligation secured hereby shall not limit or be construed to limit the scope
or applicability of this agreement.
1. GENERAL COVENANTS. Debtor represents, warrants and covenants as
follows:
(a) Except for the security interest granted hereby, (i) Debtor is,
or as to Collateral arising or to be acquired after the date hereof, shall be,
the sole and exclusive owner of the Collateral, and the Collateral is and shall
remain free from any and all liens, security interests, encumbrances, claims and
interests; and (ii) no security agreement, financing statement, equivalent
security or lien instrument or continuation statement covering any of the
Collateral is on file or of record in any public office.
(b) Debtor shall not create, permit or suffer to exist, and shall
take such action as is necessary to remove, any claim to or interest in or lien
or encumbrance upon the Collateral, other than the security interest granted
hereby, and shall defend the right, title and interest of Lender in and to the
Collateral against all claims and demands of all persons and entities at any
time claiming the same or any interest therein.
(c) Debtor's principal place of business/chief executive office is
located at the address set forth at the beginning of this agreement and Debtor
has no other place of business; and, unless Lender consents in writing to a
change in the location of the Equipment, Inventory or Debtor's records
concerning the Receivables prior to such a change in location, the Equipment,
Inventory and Debtor's records concerning the Receivables shall be kept at that
address .
(d) At least thirty (30) days prior to the occurrence of any of the
following events, Debtor shall deliver to Lender written notice of such
impending events: (i) a change in Debtor's
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<PAGE>
principal place of business or chief executive office; (ii) the opening or
closing of any place of business; or (iii) a change in Debtor's name, identity
or corporate structure.
(e) Subject to any limitation stated therein or in connection
therewith, all information furnished by Debtor concerning the Collateral or
otherwise in connection with the Obligations, is or shall be at the time the
same is furnished, accurate, correct and complete in all material respects.
(f) The Collateral is and shall be used primarily for business
purposes.
2. COLLECTION OF RECEIVABLES. Debtor shall, unless otherwise directed by
Lender, collect all of Debtor's Receivables. With respect to any Receivables
collected by the Lender, Debtor authorizes Lender to indorse the name of Debtor
upon any checks or other items received in payment of any Receivable and to do
any and all things necessary in order to reduce the same to money. All amounts
received by Lender representing payment of Receivables may be applied by Lender
to the payment of the Obligations in such order of preference as Lender may
determine, or Lender may, at its option, impound all or any portion of such
amounts and retain said amounts as security for the payment of the Obligations,
with the right on the part of Debtor, upon approval by Lender, to obtain the
release of all or part of such impounded amounts. Lender may, however, at any
time, apply all or any part of such impounded amounts as aforesaid. If so
directed by Lender, Debtor shall hold all payments of any Receivable in trust
for Lender and shall forthwith deliver the same to Lender in the form received
by Debtor without commingling with any funds of Debtor. Debtor also authorizes
Lender at any time, without notice, to appropriate and apply any balances,
credits, property, deposits, accounts or money of or owing to Debtor in Lender's
possession, custody or control to the payment of any of the Obligations.
If any of Debtor's Receivables arise out of contracts with or orders
from the United States or any State or any department, agency or instrumentality
thereof, Debtor shall immediately notify Lender thereof in writing and shall
execute any instrument and take any steps required by Lender in order that all
money due and to become due under such contract or order shall be assigned to
Lender and due notice thereof given to the appropriate governmental agency.
Debtor agrees to execute, deliver, file and record all such notices,
affidavits, assignments, financing statements and other instruments as shall in
the judgment of Lender be necessary or desirable to evidence, validate and
perfect the security interest of Lender in the Receivables. Lender shall have
the right to notify any persons or entities owing any Receivables and to demand
and receive payment, but Lender shall have no duty so to do. Upon request of
Lender at any time, Debtor shall notify such account debtors and shall indicate
on all invoices to such account debtors that the accounts are payable to Lender.
3. INSURANCE. Debtor shall have and maintain insurance at all times with
respect to all Equipment and Inventory (i) insuring against risks of fire
(including so-called extended coverage), explosion, theft, sprinkler leakage and
such other casualties as Lender may designate, and (ii)
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<PAGE>
insuring against liability for personal injury and property damage relating to
the Equipment and Inventory, containing such terms, in such form, for such
periods and written by such companies as may be satisfactory to Lender, such
insurance to be payable to Lender and Debtor as their interests may appear.
4. INSPECTION. Debtor shall at all times keep accurate and complete
records of the Receivables and Debtor shall, at all reasonable times and from
time to time, allow Lender, by or through any of its officers, agents, attorneys
or accountants, to examine, inspect and make extracts from Debtor's books and
records and to arrange for verification of the Receivables directly with account
debtors or by other methods and to examine and inspect the Collateral wherever
located.
5. FURTHER ASSURANCES. Debtor shall perform, do, make, execute and
deliver all such additional and further acts, things, deeds, assurances and
instruments as Lender may require to more completely vest in and assure to
Lender its rights hereunder and in or to the Collateral.
6. PRESERVATION AND DISPOSITION OF COLLATERAL.
(a) Debtor shall advise Lender promptly, in writing and in reasonable
detail, (i) of any material encumbrance upon or claim asserted against any of
the Collateral; (ii) of any material change in the composition of the
Collateral; and (iii) of the occurrence of any other event that would have a
material effect upon the aggregate value of the Collateral or upon the security
interest of Lender.
(b) Debtor shall not sell or otherwise dispose of the Collateral;
provided, however, that until default, Debtor may use the Equipment and
Inventory in any lawful manner not inconsistent with this agreement or with the
terms or conditions of any policy of insurance thereon and may also sell or
otherwise dispose of the Inventory in the ordinary course of Debtor's business.
A disposition in the ordinary course of business shall not include a transfer in
partial or total satisfaction of a debt.
(c) Debtor shall keep the Collateral in good condition and shall not
misuse, abuse, secrete, waste or destroy any of the same.
(d) Debtor shall not use the Collateral in violation of any statute,
ordinance, regulation, rule, decree or order.
(e) Debtor shall pay promptly when due all taxes, assessments,
charges or levies upon the Collateral or in respect to the income or profits
therefrom, except that no such charge need be paid if (i) the validity thereof
is being contested in good faith by appropriate proceedings; (ii) such
proceedings do not involve any danger of sale, forfeiture or loss of any
Collateral or any interest therein; and (iii) such charge is adequately reserved
against in accordance with generally accepted accounting principles.
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<PAGE>
(f) At its option, Lender may discharge taxes, liens, security
interests or other encumbrances at any time levied or placed on the Collateral
and may pay for the maintenance and preservation of the Collateral. Debtor
agrees to reimburse Lender upon demand for any payment made or any expense
incurred (including reasonable attorneys' fees to the extent permitted by law)
by Lender pursuant to the foregoing authorization. Should Debtor fail to pay
said sum to Lender upon demand, interest shall accrue thereon, from the date of
demand until paid in full, at the highest rate set forth in any document or
instrument evidencing any of the Obligations.
(g) Upon Lender's request at any time or times, Debtor shall assign
and deliver to Lender any Collateral and shall furnish to Lender additional
collateral of value and character satisfactory to Lender as security for the
Obligations.
7. EXTENSIONS AND COMPROMISES. With respect to any Collateral held by
Lender as security for the Obligations, Debtor assents to all extensions or
postponements of the time of payment thereof or any other indulgence in
connection therewith, to each substitution, exchange or release of Collateral,
to the addition or release of any party primarily or secondarily liable, to the
acceptance of partial payments thereon and to the settlement, compromise or
adjustment thereof, all in such manner and at such time or times as Lender may
deem advisable. Lender shall have no duty as to the collection or protection of
Collateral or any income therefrom, nor as to the preservation of rights against
prior parties, nor as to the preservation of any right pertaining thereto,
beyond the safe custody of Collateral in the possession of Lender.
8. FINANCING STATEMENTS. At the request of Lender, Debtor shall join
with Lender in executing one or more financing statements in a form satisfactory
to Lender and shall pay the cost of filing the same in all public offices
wherever filing is deemed by Lender to be necessary or desirable. A carbon,
photographic or other reproduction of this agreement or of a financing statement
shall be sufficient as a financing statement.
9. LENDER'S APPOINTMENT AS ATTORNEY-IN-FACT. Debtor hereby irrevocably
constitutes and appoints Lender and any officer or agent thereof, with full
power of substitution, as Debtor's true and lawful attorney-in-fact with full
irrevocable power and authority in the place and stead of Debtor and in the
name of Debtor or in Lender's own name, from time to time in Lender's
discretion, for the purpose of carrying out the terms of this agreement, to take
any and all appropriate action and to execute any and all documents and
instruments that may be necessary or desirable to accomplish the purposes of
this agreement and, without limiting the generality of the foregoing, hereby
grants to Lender the power and right, on behalf of Debtor, without notice to or
assent by Debtor:
(a) To execute, file and record all such financing statements,
certificates of title and other certificates of registration and operation and
similar documents and instruments including, but not limited to, those relating
to aircraft or marine vessels, as Lender may deem necessary or desirable to
protect, perfect and validate Lender's security interest.
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<PAGE>
(b) Upon the occurrence and continuance of any event of default under
paragraph 10 hereof, (i) to sign and indorse any invoices, freight or express
bills, bills of lading, storage or warehouse receipts, drafts against debtors,
assignments, verifications and notices in connection with accounts and other
documents relating to the Collateral; (ii) to commence and prosecute any suits,
actions or proceedings at law or in equity in any court of competent
jurisdiction to collect the Collateral or any part thereof and to enforce any
other right in respect of any Collateral; (iii) to defend any suit, action or
proceeding brought against Debtor with respect to any Collateral; (iv) to
settle, compromise or adjust any suit, action or proceeding described above and,
in connection therewith, to give such discharges or releases as Lender may deem
appropriate; and (v) generally, to sell, transfer, pledge, make any agreement
with respect to or otherwise deal with any of the Collateral as fully and
completely as though Lender were the absolute owner thereof for all purposes,
and to do, at Lender's option and Debtor's expense, at any time or from time to
time, all acts and things which Lender deems necessary to protect, preserve or
realize upon the Collateral and Lender's security interest therein, in order to
effect the intent of this agreement, all as fully and effectively as Debtor
might do.
Debtor hereby ratifies all that said attorneys shall lawfully do or
cause to be done by virtue hereof. This power of attorney is a power coupled
with an interest and shall be irrevocable.
The powers conferred upon Lender hereunder are solely to protect its
interests in the Collateral and shall not impose any duty upon Lender to
exercise any such powers. Lender shall be accountable only for amounts that
Lender actually receives as a result of the exercise of such powers and neither
Lender nor any of its officers, directors, employees or agents shall be
responsible to Debtor for any act or failure to act, except for Lender's own
gross negligence or willful misconduct.
10. DEFAULT. If any event of default in the payment of any of the
Obligations or in the performance of any of the terms, conditions, or provisions
of any instrument or document evidencing the Obligations secured by this
agreement or in the performance of any covenant contained herein shall occur and
be continuing; or if any warranty, representation or statement made or furnished
to Lender by Debtor proves to have been false in any material respect when made
or furnished:
(a) Lender may, at its option and without notice, declare the unpaid
balance of any or all of the Obligations immediately due and payable and this
agreement and any or all of the Obligations in default.
(b) All payments received by Debtor under or in connection with any
of the Collateral shall be held by Debtor in trust for Lender, shall be
segregated from other funds of Debtor and shall forthwith upon receipt by Debtor
be turned over to Lender in the same form as received by Debtor (duly indorsed
by Debtor to Lender, if required). Any and all such payments so received by
Lender (whether from Debtor or otherwise) may, in the sole discretion of Lender,
be held by Lender as collateral security for, and/or then or at any time
thereafter be applied in whole or in part by Lender against, all or any part of
the Obligations in such order as Lender may elect. Any balance of such payments
held by Lender and remaining after payment in full of all the Obligations shall
be
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<PAGE>
paid over to Debtor or to whomsoever may be lawfully entitled to receive the
same. Nothing set forth in this subparagraph (b) shall authorize or be
construed to authorize Debtor to sell or otherwise dispose of any Collateral
except as provided in subparagraph 6(b) hereof.
(c) Lender shall have the rights and remedies of a secured party
under this agreement, under any other instrument or agreement securing,
evidencing or relating to the Obligations and under the laws of the States of
Ohio and Nevada. Without limiting the generality of the foregoing, Lender shall
have the right to take possession of the Collateral and all books and records
relating to the Collateral and for that purpose Lender may enter upon any
premises on which the Collateral or books and records relating to the Collateral
or any part thereof may be situated and remove the same therefrom. Debtor
expressly agrees that Lender, without demand of performance or other demand,
advertisement or notice of any kind (except the notices specified below of time
and place of public sale or disposition or time after which a private sale or
disposition is to occur) to or upon Debtor or any other person or entity (all
and each of which demands, advertisements and/or notices are hereby expressly
waived), may forthwith collect, receive, appropriate and realize upon the
Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give
option or options to purchase or sell or otherwise dispose of and deliver the
Collateral (or contract to do so), or any part thereof, in one or more parcels
at public or private sale or sales, at any of Lender's offices or elsewhere at
such prices as Lender may deem best, for cash or on credit or for future
delivery without assumption of any credit risk. Lender shall have the right
upon any such public sale or sales, and, to the extent permitted by law, upon
any such private sale or sales, to purchase the whole or any part of the
Collateral so sold, free of any right or equity of redemption in Debtor. Debtor
further agrees, at Lender's request, to assemble the Collateral and to make it
available to Lender at such places as Lender may reasonably select, whether at
Debtor's premises or elsewhere. Debtor further agrees to allow Lender to use or
occupy Debtor's premises, without charge, for the purpose of effecting Lender's
remdies in respect of the Collateral. Lender shall apply the net proceeds of
any such collection, recovery, receipt, appropriation, realization or sale,
after deducting all reasonable costs and expenses of every kind incurred in
connection therewith or incidental to the care or safekeeping of any or all of
the Collateral or in any way relating to the rights of Lender hereunder,
including reasonable attorneys' fees to the extent permitted by law and
reasonable legal expenses, to the payment in whole or in part of the
Obligations, in such order as Lender may elect, and only after so paying over
such net proceeds and after the payment by Lender of any other amount required
by any provision of law, need Lender account for the surplus, if any, to
Debtor. To the extent permitted by applicable law, Debtor waives all claims,
damages and demands against Lender arising out of the repossession, retention,
sale or disposition of the Collateral. Debtor agrees that Lender need not
give more than seven (7) days' notice (which notification shall be deemed
given when mailed, postage prepaid, addressed to Debtor at Debtor's address
set forth at the beginning of this agreement or when telecopied or telegraphed
to that address or when telephoned or otherwise communicated orally to Debtor
or any agent of Debtor at that address) of the time and place of any public
sale or of the time after which a private sale may take place and that such
notice is reasonable notification of such matters. Debtor shall remain
liable for any deficiency if the proceeds of any sale or disposition of the
Collateral are insufficient to pay all amounts to which Lender is entitled.
Debtor shall also be liable for the costs of collecting any of the Obligations
or otherwise enforcing
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<PAGE>
the terms thereof or of this agreement including reasonable attorneys' fees to
the extent permitted by law.
(d) In the event of a default, in lieu of exercising its remedies
with respect to the Collateral provided in this Section 10, Lender may apply the
amount of the outstanding Obligations secured hereby to the purchase of common
shares of Debtor at a price of $8.50 per share (the "Conversion Price"), and
Debtor agrees to sell such number of shares to Lender. Debtor agrees to
maintain sufficient authorized and unissued shares sufficient to discharge its
obligations under this paragraph, and that upon issuance to Lender as provided
herein, such shares shall be duly authorized, validly issued, fully paid and
nonassessable, and free of any lien, claim, preemptive right or other
restriction, except for restrictions on transfer necessary to comply with
applicable securities laws. If subsequent to the date of this Agreement the
Debtor issues common stock representing more than 1% of the outstanding common
equity of Debtor on a fully diluted basis for a consideration per share with a
value of less than $8.50, other than upon the exercise of stock options or
warrants outstanding on the date hereof, then the Conversion Price shall be
reduced to a price equal to such value. In case the Debtor shall (i) pay a
dividend on its common stock in common stock, (ii) subdivide its outstanding
shares of common stock, or (iii) combine its outstanding shares of common stock
into a small number of shares, then, in such an event, the Conversion Price in
effect immediately prior thereto shall be adjusted proportionately so that the
adjusted Conversion Price will bear the same relation to the Conversion Price in
effect immediately prior to any such event as the total number of shares of
common stock outstanding immediately prior to any such event shall bear to the
total number of shares of common stock outstanding immediately after such event.
11. GENERAL. Any provision of this agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. Lender shall not be deemed to have waived any of its rights
hereunder or under any other agreement, instrument or paper signed by Debtor
unless such waiver be in writing and signed by Lender. No delay or omission on
the part of Lender in exercising any right shall operate as a waiver of such
right or any other right. All of Lender's rights and remedies, whether
evidenced hereby or by any other agreement, instrument or paper, shall be
cumulative and may be exercised singularly or concurrently. Any written demand
upon or written notice to Debtor shall be effective when deposited in the mails
addressed to Debtor at the address shown at the beginning of this agreement.
This agreement and all rights and obligations hereunder, including matters of
construction, validity and performance, shall be governed by the law of the
State of Ohio. The provisions hereof shall, as the case may require, bind or
inure to the benefit of, the respective successors and assigns of Debtor and
Lender.
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<PAGE>
IN WITNESS WHEREOF, Debtor has signed this agreement this 4th day of April,
1996.
DEBTOR:
CYTOLOGY WEST, INC.
By: /s/ CARL GENBERG
------------------------------------
Carl A. Genberg, President
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<PAGE>
GUARANTY
For the purpose of inducing Papnet of Ohio, Inc. (hereinafter referred to
as "Lender") to lend money or advance credit to, or renew, extend or forbear
from demanding immediate payment of the Obligations (as such term is defined
below) of Cytology West, Inc. (hereinafter referred to as "Debtor") the
undersigned (hereinafter referred to as "Guarantor"), hereby unconditionally
guarantees the prompt and full payment to Lender when due, whether by
acceleration or otherwise, of all Obligations for which Debtor is now or may
hereafter become liable to Lender.
The word "Obligations" means all indebtedness, debts and liabilities
(including principal, interest, late charges, collection costs, attorneys' fees
and the like) of Debtor to Lender pursuant to that certain Loan Agreement and
related loan documents dated March 14, 1996.
Guarantor hereby promises that if the Obligations are not paid promptly
when due, upon request of Lender he will pay the Obligations to Lender,
irrespective of any action or lack of action on Lender's part in connection with
the acquisition, perfection, possession, enforcement or disposition of any or
all Obligations or any or all security therefor or otherwise, and further
irrespective of any invalidity in any or all Obligations, the unenforceability
thereof or the insufficiency, invalidity or unenforceability of any security
therefor.
Guarantor waives notice of any and all acceptances of this Guaranty.
Lender's rights hereunder shall be reinstated and revived, and this Guaranty
shall be fully enforceable, with respect to any amount at any time paid on
account of the Obligations which thereafter shall be required to be restored or
returned by Lender as a result of the bankruptcy, insolvency or reorganization
of Debtor, Guarantor, or any other person, or as a result of any other fact or
circumstance, all as though such amount had not been paid.
Guarantor waives presentment, demand, protest, notice of protest and notice
of dishonor or other nonpayment of any and all Obligations and further waives
notice of sale or other disposition of any collateral or security now held or
hereafter acquired by Lender. Guarantor agrees that no extension of time,
whether one or more, nor any other indulgence granted by Lender to Debtor, or to
Guarantor, and no omission or delay on Lender's part in exercising any right
against, or in taking any action to collect from or pursue Lender's remedies
against Debtor or Guarantor, will release, discharge or modify the duties of
Guarantor. Guarantor agrees that Lender may, without notice to or further
consent from Guarantor, release or modify any collateral, security or other
guaranties now held or hereafter acquired, or substitute other collateral,
security or other guaranties, and no such action will release, discharge or
modify the duties of Guarantor hereunder. Guarantor further agrees that Lender
will not be required to pursue or exhaust any of its rights or remedies against
Debtor or Guarantor, with respect to payment of any of the Obligations, or to
pursue, exhaust or preserve any of its rights or remedies with respect to any
collateral, security or other guaranties given to secure the Obligations, or to
take any action of any sort, prior to demanding payment from or pursuing its
remedies against Guarantor.
<PAGE>
Guarantor shall not be liable to Lender hereunder for more than $300,000
in principal amount of the Obligations, plus interest, late charges,
collection costs, attorneys' fees and the like as provided for in the
Obligations. Nothwithstanding the foregoing limitation, Lender may permit the
Obligations of Debtor to exceed the liability of Guarantor to Lender hereunder.
Guarantor agrees that any legal suit, action or proceeding arising out of
or relating to this Guaranty may be instituted in a state or federal court of
appropriate subject matter jurisdiction in the State of Ohio; waive any
objection which he may have now or hereafter to the venue of any such suit,
action or proceeding; and irrevocably submits to the jurisdiction of any such
court in any such suit, action or proceeding.
WAIVER OF RIGHT TO TRIAL BY JURY
GUARANTOR ACKNOWLEDGES THAT, AS TO ANY AND ALL DISPUTES THAT MAY ARISE BETWEEN
GUARANTOR AND LENDER, THE COMMERCIAL NATURE OF THE TRANSACTION OUT OF WHICH THIS
GUARANTY ARISES WOULD MAKE ANY SUCH DISPUTE UNSUITABLE FOR TRIAL BY JURY.
ACCORDINGLY, GUARANTOR HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY AS TO ANY AND
ALL DISPUTES THAT MAY ARISE RELATING TO THIS GUARANTY OR TO ANY OF THE OTHER
INSTRUMENTS OR DOCUMENTS EXECUTED IN CONNECTION HEREWITH.
Guarantor hereby authorizes any attorney at law to appear for him in any
action on any or all Obligations guaranteed hereby at any time after such
Obligations become due, whether by acceleration or otherwise, in any court of
record in or of the State of Ohio or elsewhere, to waive the issuing and service
of process against, and confess judgment against Guarantor in favor of Lender
for the amount that may be due, including interest, late charges, collection
costs, attorneys' fees and the like as provided for in said Obligations, and
costs of suit, and to waive and release all errors in said proceedings and
judgments, and all petitions in error and rights of appeal from the judgments
rendered. The attorney at law authorized hereby to appear for the Guarantor may
be an attorney at law representing the Lender, and Guarantor hereby expressly
waives any conflict of interest that may exist by virtue of such representation.
If any Obligation of Debtor is assigned by Lender, this Guaranty will inure
to the benefit of Lender's assignee, and to the benefit of any subsequent
assignee, to the extent of the assignment or assignments, provided that no
assignment will operate to relieve Guarantor from any duty to Lender hereunder
with respect to any unassigned Obligation. In the event that any one or more of
the provisions contained in this Guaranty or any application thereof shall be
determined to be invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein and any
other applications thereof shall not in any way be affected or impaired thereby.
This Guaranty shall be construed in accordance with the laws of the State of
Ohio.
As security for payment by Guarantor hereunder, Guarantor has, by a
Security Agreement of even date, granted Lender a security interest in certain
property of (hereinafter the
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"Collateral").Lender shall not be bound to take any steps necessary to preserve
any rights in the Collateral against prior parties. If any Obligations
hereunder are not paid when due, Lender may, at its option, demand, sue for,
collect or make any compromise or settlement it deems desirable with reference
to the Collateral, and shall have the rights of a secured party under the law of
the State of Ohio. Guarantor shall be liable for any deficiency.
Executed and delivered at Las Vegas, Nevada this 4th day of April, 1996.
GUARANTOR:
/s/ CARL A. GENBERG
-------------------------------------------------
Carl A. Genberg
WARNING--BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL.
IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR
PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU
REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED
GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY
OTHER CAUSE.
3
<PAGE>
SECURITY AGREEMENT
CERTIFICATED STOCK
The undersigned (hereinafter called "Debtor"), for valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, hereby grants,
pledges and assigns to Papnet of Ohio, Inc. (hereinafter called "Lender"), a
security interest in the following stock, whether Debtor's interest therein be
now owned or existing or hereafter arising or acquired, together with all
substitutions, replacements, exchanges, reissues and additions therefor or
thereto, all books and records relating thereto, all dividends and distributions
arising therefrom, payable thereon or distributed in respect thereto, whether in
cash, property, stock or otherwise, and whether now or hereafter declared, paid
or made, and together with the right to receive and receipt therefor, and all
cash and non-cash proceeds thereof including, but not limited to, notes, drafts,
checks, instruments and deposit and money market accounts:
No. of Shares Certificate
and Class Issuer Number(s)
- --------------- ------ ---------
17,150 Common Shares,
$.0001 par value Neuromedical Systems, Inc. 121
(all of the foregoing hereinafter sometimes called the "Collateral"). Except as
otherwise provided in this agreement, Debtor shall have the right to receive all
dividends arising with respect to the Collateral paid in cash or in other
property, but Debtor shall have no right to receive any dividend in respect of
the Collateral paid in stock of the Issuer or in the stock of corporations other
than the Issuer or paid out of the proceeds of the sale or condemnation of any
property of the Issuer or upon or in the course of dissolution or liquidation
(whether partial or otherwise) or winding up of the Issuer or which in any way
shall be chargeable to or payable out of capital, capital surplus or paid in
surplus. Debtor shall not have the right to receive any dividends arising with
respect to the Collateral if a default exists in the observance and performance
by Debtor of any of the terms of this agreement, or of any of the Obligations,
or if ownership of the Collateral has been registered in the name of Lender or
any nominee of Lender or any sub-agent appointed by Lender pursuant to paragraph
7 of this agreement, and all dividends arising under such circumstances shall be
paid to Lender and, at Lender's option, may be applied to the Obligations in
such order as Lender may elect or be held as security therefor.
The security interest hereby granted is to secure the prompt and full
payment and complete performance of all Obligations of Debtor to Lender. The
word "Obligations" means all indebtedness owed by Debtor to Lender by reason of
a certain Guaranty executed and delivered by Debtor to Lender of even date,
which guarantees payment of certain Advances made by Lender to or on behalf of
Cytology West, Inc., a Delaware corporation, pursuant to a Loan Agreement and
related documents dated March 14, 1996.
<PAGE>
1. GENERAL COVENANTS. Debtor represents, warrants and covenants as
follows:
(a) Unless Lender compels registration of ownership of the Collateral
in the name of Lender or any nominee of Lender or any sub-agent appointed by
Lender pursuant to paragraph 7 of this agreement, Debtor is and shall remain the
sole owner and registered holder of the Collateral.
(b) Except for the security interest granted hereby, the Collateral
is and shall remain free from any and all security interests, liens,
encumbrances, claims and interests.
(c) Each share of stock comprising the Collateral is fully paid and
nonassessable and, except as otherwise indicated in the certificates
representing the shares, is transferable in its present form upon delivery
without restriction or limitation on the books and records of its Issuer.
(d) Debtor shall, at Debtor's expense, perform, do, make, procure,
execute and deliver all acts, things, writings and other assurances as Lender
may at any time request or require to protect, assure or enforce Lender's
interests, rights and remedies created by, provided in or emanating from this
agreement.
(e) Debtor shall not create, permit or suffer to exist, and shall
take such action as is necessary to remove, any claim to or interest in or lien
or encumbrance upon the Collateral, other than the security interest granted
hereby, and shall defend the right, title and interest of Lender in and to the
Collateral against all claims and demands of all persons and entities at any
time claiming the same or any interest therein.
(f) Subject to any limitation stated therein or in connection
therewith, all information furnished by Debtor concerning the Collateral or
otherwise in connection with the Obligations, is or shall be at the time the
same is furnished accurate, correct and complete in all material respects.
2. VOTING. With respect to any Collateral not registered in the name of
Lender or Lender's nominee or sub-agent pursuant to paragraph 7 of this
agreement, during the term of this agreement, and so long as (i) there is no
default by Debtor in the observance and performance of any of the terms of this
agreement or of any of the Obligations, and (ii) Lender has not notified Debtor
of Lender's election to exercise any voting rights relating to the Collateral,
Debtor shall have the right to exercise such voting rights on all corporate
questions.
3. SUBSTITUTED AND ADDITIONAL SECURITIES. If during the term of this
agreement any stock dividend, exchange, conversion, reclassification,
readjustment or other change is paid, declared or made with respect to the
Collateral, all new, substituted and additional securities issued in respect to
the Collateral shall be deemed pledged to Lender under the terms of this
agreement in the same manner as the Collateral originally pledged hereunder.
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4. WARRANTS AND OPTIONS. If during the term of this agreement
subscription warrants or options are issued in connection with the Collateral or
any other securities at the time pledged to Lender hereunder, such warrants and
options shall be immediately delivered and pledged by Debtor to Lender, and all
new securities acquired by Debtor in connection therewith shall be immediately
delivered and pledged to Lender under the terms of this agreement in the same
manner as the Collateral originally pledged hereunder.
5. PRESERVATION AND DISPOSITION OF COLLATERAL.
(a) Debtor shall advise Lender promptly, in writing and in reasonable
detail, (i) of any material encumbrance upon or claim asserted against any of
the Collateral; and (ii) of the occurrence of any event that would have a
material effect upon the aggregate value of the Collateral or upon the security
interest of Lender.
(b) Debtor shall pay promptly when due all taxes, assessments,
charges or levies upon the Collateral or in respect to the income or profits
therefrom or the transfer or registration thereof.
(c) At its option, Lender may discharge taxes, liens, security
interests or other encumbrances at any time levied or placed on or arising in
connection with the Collateral. Debtor agrees to reimburse Lender upon demand
for any payment made or any expense incurred (including reasonable attorneys'
fees to the extent permitted by law) by Lender pursuant to the foregoing
authorization. Should Debtor fail to pay said sum to Lender upon demand,
interest shall accrue thereon, from the date of demand until paid in full, at
the highest rate set forth in any document or instrument evidencing any of the
Obligations.
6. EXTENSIONS AND COMPROMISES. With respect to any Collateral pledged to
Lender as security for the Obligations, Debtor assents to all extensions or
postponements of the time of payment thereof or any other indulgence in
connection therewith, to each substitution, exchange or release of Collateral,
to the addition or release of any party primarily or secondarily liable, to the
acceptance of partial payments thereon and to the settlement, compromise or
adjustment thereof, all in such manner and at such time or times as Lender may
deem advisable. Lender shall have no duty as to the collection or protection of
Collateral or any income therefrom, nor as to the preservation of any right
pertaining thereto, beyond the safe custody of Collateral in the possession of
Lender.
7. LENDER'S APPOINTMENT AS ATTORNEY-IN-FACT. Debtor hereby irrevocably
constitutes and appoints Lender and any officer or agent thereof, with full
power of substitution, as Debtor's true and lawful attorney-in-fact with full
irrevocable power and authority in the place and stead of Debtor and in the name
of Debtor or in Lender's own name, from time to time in Lender's discretion, for
the purpose of carrying out the terms of this agreement, to take any and all
appropriate action and to execute any and all documents and instruments that may
be necessary or desirable to accomplish the purpose of this agreement.
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<PAGE>
Debtor hereby ratifies all that said attorneys shall lawfully do or
cause to be done by virtue hereof. This power of attorney is a power coupled
with an interest and shall be irrevocable.
In the event of any default by Debtor in the observance and
performance of any of the terms of this agreement or any of the Obligations,
Lender may at any time thereafter, in its discretion, register ownership of any
of the Collateral in the name of Lender or any nominee of Lender or any
sub-agent appointed by Lender, or may designate a nominee or sub-agent for the
purpose of retaining physical possession of the instruments, certificates and
similar writings representing any of the Collateral, indorsed or assigned in
blank or in favor of Lender or Lender's nominee or sub-agent.
Debtor hereby consents and agrees that the Issuer or any obligor in
respect of the Collateral or any registrar or transfer agent or trustee for any
of the Collateral shall be entitled to accept the provisions hereof as
conclusive evidence of the rights of Lender to effect any transfer pursuant to
this paragraph 7, notwithstanding any other notice or direction to the contrary
heretofore or hereafter given.
The powers conferred upon Lender hereunder are solely to protect its
interests in the Collateral and shall not impose any duty upon Lender to
exercise any such powers. Lender shall be accountable only for amounts that
Lender actually receives as a result of the exercise of such powers and neither
Lender nor any of its officers, directors, employees or agents shall be
responsible to Debtor for any act or failure to act, except for Lender's own
gross negligence or willful misconduct.
8. DEFAULT. If any event of default in the payment of any of the
Obligations or in the performance of any of the terms, conditions, or provisions
of any instrument or document evidencing the Obligations secured by this
agreement or in the performance of any covenant contained herein shall occur and
be continuing; or if any warranty, representation or statement made or furnished
to Lender by Debtor proves to have been false in any material respect when made
or furnished:
(a) Lender may, at its option and without notice, declare the unpaid
balance of any or all of the Obligations immediately due and payable and this
agreement and any or all of the Obligations in default.
(b) All payments received by Debtor under or in connection with any
of the Collateral shall be held by Debtor in trust for Lender, shall be
segregated from other funds of Debtor and shall forthwith upon receipt by Debtor
be turned over to Lender in the same form as received by Debtor (duly indorsed
by Debtor to Lender, if required). Any and all such payments so received by
Lender (whether from Debtor or otherwise) may, in the sole discretion of Lender,
be held by Lender as collateral security for, and/or then or at any time
thereafter be applied in whole or in part by Lender against, all or any part of
the Obligations in such order as Lender may elect. Any balance of such payments
held by Lender and remaining after payment in full of all of the Obligations
shall be paid over to Debtor or to whomsoever may be lawfully entitled to
receive the same. Nothing set forth in this subparagraph (b) shall authorize or
be construed to authorize Debtor to sell or otherwise dispose of any Collateral.
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<PAGE>
(c) Lender and its nominees and sub-agents shall have the rights and
remedies of a secured party under this agreement, under any other instrument or
agreement securing, evidencing or relating to the Obligations and under the laws
of the State of Ohio. To the extent permitted by applicable law, Debtor waives
all claims, damages and demands against Lender arising out of the repossession,
retention, sale or disposition of the Collateral. Debtor agrees that Lender
need not give more than ten (10) days' notice (which notification shall be
deemed given when mailed, postage prepaid, addressed to Debtor at Debtor's
address set forth at the beginning of this agreement, or when telecopied or
telegraphed to that address or when telephoned or otherwise communicated orally
to Debtor or any agent of Debtor at that address), if any, of the time and place
of any public sale or of the time after which a private sale may take place and
that such notice is reasonable notification of such matters. Debtor shall
remain liable for any deficiency if the proceeds of any sale or disposition of
the Collateral are insufficient to pay all amounts to which Lender is entitled.
Debtor shall also be liable for the costs of collecting any of the Obligations
or otherwise enforcing the terms thereof or of this agreement including
reasonable attorneys' fees to the extent permitted by law.
9. GENERAL. Any provision of this agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. Lender shall not be deemed to have waived any of its rights
hereunder or under any other agreement, instrument or paper signed by Debtor
unless such waiver be in writing and signed by Lender. No delay or omission on
the part of Lender in exercising any right shall operate as a waiver of such
right or any other right. All of Lender's rights and remedies, whether
evidenced hereby or by any other agreement, instrument or paper, shall be
cumulative and may be exercised singularly or concurrently. Any written demand
upon or written notice to Debtor shall be effective when deposited in the mails
addressed to Debtor at the address shown at the beginning of this agreement.
This agreement and all rights and obligations hereunder, including matters of
construction, validity and performance, shall be governed by the laws of the
State of Ohio. The provisions hereof shall, as the case may require, bind or
inure to the benefit of the respective successors and assigns of Debtor and
Lender.
IN WITNESS WHEREOF, Debtor has signed this agreement this 4th day of
April, 1996.
DEBTOR:
/s/ CARL GENBERG
---------------------------------------
Carl Genberg
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<PAGE>
PAPNET OF OHIO, INC.
AMENDED AND RESTATED
1995 STOCK OPTION PLAN
1. PURPOSE. This plan (the "Plan") is intended as an incentive and to
encourage stock ownership by certain key associates, officers, directors,
consultants and advisers who render services to PAPNET OF OHIO, INC., an Ohio
corporation (the "Company"), and any current or future subsidiaries or parent of
the Company (the "Company Group"), by the granting of stock options (the
"Options") as provided herein. By encouraging such stock ownership, the Company
seeks to attract, retain and motivate employees, officers, directors,
consultants and advisers of training, experience and ability. The Options
granted under the Plan may be either incentive stock options ("ISOs") which meet
the requirements of Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), or options which do not meet such requirements ("Non-statutory
Options").
2. EFFECTIVE DATE. The Plan shall become effective on September 28,
1995, the date the Plan was approved by a majority of the shares of common stock
of the Company entitled to vote thereon (the "Effective Date").
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board of Directors of the
Company (the "Board"), which may, to the full extent permitted by law, delegate
all or any of its powers under the Plan to a committee (the "Committee") which
consists of not fewer than two members of the Board. If the Committee is so
appointed and to the extent such powers are delegated, all references to the
Board in the Plan shall mean and relate to the Committee. If any class of
equity securities of the Company is registered under section 12 of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), all members of the
Committee will be "disinterested persons" as defined in Rule 16b-3(c)(2)(i)
promulgated under the 1934 Act (or any successor rule of like tenor and effect)
and "outside directors" as defined in section 162(m) of the Code and the
regulations promulgated thereunder.
(b) Subject to the provisions of the Plan, the Board is authorized to
establish, amend and rescind such rules and regulations as it may deem
appropriate for its conduct and for the proper administration of the Plan, to
make all determinations under and interpretations of, and to take such actions
in connection with, the Plan or the Options granted thereunder as it may deem
necessary or advisable. All actions taken by the Board under the Plan shall be
final and binding on all persons. No member of the Board shall be liable for
any action taken or determination made relating to the Plan, except for gross
negligence or willful misconduct.
<PAGE>
(c) Each member of the Board shall be indemnified by the Company
against costs, expenses and liabilities (other than amounts paid in settlements
to which the Company does not consent, which consent shall not be unreasonably
withheld) reasonably incurred by such member in connection with any action taken
in relation to the Plan to which he or she may be a party by reason of service
as a member of the Board, except in relation to matters as to which he or she
shall be adjudged in such action to be personally guilty of gross negligence or
willful misconduct in the performance of his or her duties. The foregoing right
to indemnification shall be in addition to such other rights as the Board member
may enjoy as a matter of law, by reason of insurance coverage of any kind, or
otherwise.
4. ELIGIBILITY.
(a) ISOs and Non-statutory Options may be granted to such key
associates of the Company Group, and Non-statutory Options only may be granted
to directors who are not employees of and to consultants and advisers who render
services to the Company Group, as the Board shall select from time to time (the
"Optionees"). More than one Option may be granted to an individual under the
Plan.
(b) No ISO may be granted to an individual who, at the time an ISO is
granted, is considered under Section 422(b)(6) of the Code to own stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company or of its parent or any subsidiary corporation;
PROVIDED, HOWEVER, this restriction shall not apply if at the time such ISO is
granted the option price per Share of such ISO shall be at least 110% of the
fair market value of such Share, and such ISO by its terms is not exercisable
after the expiration of five years from the date it is granted. This
subparagraph 4(b) has no application to Options granted under the Plan as
Non-statutory Options.
(c) The aggregate fair market value (determined as of the date the
ISO is granted) of Shares with respect to which ISOs are exercisable for the
first time by any Optionee during any calendar year under the Plan or any other
ISO plan of the Company or the Company Group may not exceed $100,000. If an ISO
which exceeds the $100,000 limitation of this subparagraph 4(c) is granted, the
portion of such Option which is exercisable for Shares in excess of the $100,000
limitation shall be treated as a Non-statutory Option pursuant to Section 422(d)
of the Code. Except as otherwise expressly provided in the immediately
preceding sentence, this subparagraph 4(c) has no application to Options granted
under the Plan as Non-statutory Options.
5. STOCK SUBJECT TO PLAN. The stock subject to Options under the Plan
shall be shares of the common stock, no par value, of the Company ("Shares").
The Shares issued pursuant to Options granted under the Plan may be authorized
and unissued Shares, Shares purchased on the open market or in a private
transaction, or Shares held as treasury stock. The aggregate number of Shares
for which Options may be granted under the Plan shall not exceed 150,000 shares,
subject to adjustment in accordance with the terms of paragraph 12 hereof. Any
Shares subject to an Option which for any reason expires or is terminated
unexercised as to such Shares and any Shares reacquired by the Company pursuant
to any forfeiture or any repurchase right hereunder may again be the subject of
an Option under the Plan. The Board, in its sole discretion, may permit the
exercise of any Option as to full Shares or fractional Shares. Proceeds from
the sale of Shares under Options shall constitute general funds of the Company.
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<PAGE>
6. TERMS AND CONDITIONS OF OPTIONS.
(a) At the time of grant, the Board shall determine whether the
Options granted are to be ISOs or Non-statutory Options and shall enter into
stock option agreements with the recipients accordingly. All Options granted
shall be authorized by the Board and, within a reasonable time after the date of
grant, shall be evidenced by stock option agreements in writing ("Stock Option
Agreements"), in such form and containing such terms and conditions not
inconsistent with the provisions of this Plan as the Board shall from time to
time determine. Any action under paragraph 12 may be reflected in an amendment
to or restatement of such Stock Option Agreements.
(b) The Board may grant Options having terms and provisions which
vary from those specified in the Plan if such Options are granted in
substitution for, or in connection with the assumption of, existing options
granted by another corporation and assumed or otherwise agreed to be provided
for by the Company pursuant to or by reason of a transaction involving a
corporate merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation to which the Company is a party.
7. PRICE. The option price per Share (the "Option Price") of each Option
granted under the Plan shall be determined by the Board; PROVIDED, HOWEVER, the
Option Price of each ISO granted under the Plan shall not be less than the fair
market value (determined without regard to any restrictions other than a
restriction which, by its terms, will never lapse) of a Share on the date of
grant of such Option. An Option shall be considered granted on the date the
Board acts to grant the Option or such later date as the Board shall specify.
8. OPTION PERIOD. The period during which the Option may be exercised
(the "Option Period") shall be determined by the Board; PROVIDED, HOWEVER, any
ISO granted under the Plan shall have an Option Period which does not exceed 10
years from the date the ISO is granted.
9. NON-TRANSFERABILITY OF OPTIONS. An Option shall not be transferable
by the Optionee otherwise than by will or the laws of descent and distribution
and may be exercised, during the lifetime of the Optionee, only by him or by his
guardian or legal representative. Notwithstanding the foregoing, an Optionee
may transfer a Non-Statutory Option to members of his or her immediate family
(as defined in Rule 16a-1 promulgated under the 1934 Act), to one or more trusts
for the benefit of such family members or to partnerships in which such family
members are the only partners if (a) the stock option agreement with respect to
such Non-Statutory Option as approved by the Committee expressly so provides and
(b) the Optionee does not receive any consideration for the transfer.
Non-Statutory Options held by such transferees are subject to the same terms and
conditions that applied to such Non-Statutory Options immediately prior to
transfer.
10. EXERCISE OF OPTIONS.
(a) Options granted hereunder will be exercisable upon the terms and
conditions and in accordance with the vesting percentages determined by the
Board in its sole discretion. Notwithstanding the foregoing or the terms and
conditions of any Stock Option Agreement to the
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contrary, (i) in the event of the Optionee's termination of employment as
specified in subparagraph 11(a), the Options shall be exercisable to the extent
and for the period specified in subparagraph 11(a); (ii) in the event of the
Optionee's termination of employment as a result of disability or death as
specified in subparagraph 11(b), the Options shall be exercisable to the extent
and for the period specified in subparagraph 11(b); (iii) in the event of a
merger, reorganization or sale of all or substantially all of the assets of the
Company as specified in subparagraph 12(c), the Options shall be exercisable to
the extent and for the period specified in subparagraph 12(c); and (iv) in the
event of a change in control, as defined herein, all Options held by Optionee
shall become exercisable for the period specified in subparagraph 12(d).
(b) An Option shall be exercisable only upon delivery of a written
notice to the Board, any member of the Board, the Company's Treasurer, or any
other officer of the Company designated by the Board to accept such notices on
its behalf, specifying the number of Shares for which it is exercised.
(c) Within five business days following the date of exercise of an
Option, the Optionee or other person exercising the Option shall make full
payment of the Option Price (i) in cash; (ii) with the consent of the Board, by
tendering previously acquired Shares (valued at their fair market value as of
the date of tender); (iii) with the consent of the Board, and to the extent
permitted by applicable law, with a full recourse promissory note of the
Optionee for the portion of the Option Price in excess of the par value of
Shares subject to the Option, under terms and conditions determined by the
Board and in cash for the par value of the Shares; (iv) with the consent of the
Board, any combination of (i), (ii), or (iii); or (v) with the consent of the
Board, if the Shares subject to the Option have been registered under the
Securities Act of 1933, as amended (the "1933 Act"), and there is a regular
public market for the Shares, by delivering to the Company on the date of
exercise of the Option written notice of exercise together with:
(A) written instructions to forward a copy of such
notice of exercise to a broker or dealer as defined in
Section 3(a)(4) and 3(a)(5) of the Securities Exchange Act
of 1934, as amended (the "1934 Act"), and designated in such
notice ("Broker"), and to deliver to the specified account
maintained with the Broker by the person exercising the
Option a certificate for the Shares purchased upon the
exercise of the Option, and
(B) a copy of irrevocable instructions to the Broker
to deliver promptly to the Company a sum equal to the
purchase price of the Shares purchased upon exercise of the
Option.
(d) The Optionee or other person exercising such Option shall pay to
the Company an amount equal to the withholding amount required to be made less
any amount withheld by the Company under paragraph 17.
If previously acquired Shares are to be used to pay the exercise price of
an ISO, the Company prior to such payment must be furnished with evidence
satisfactory to it that the acquisition of such Shares and their transfer in
payment of the exercise price satisfy the requirements of Section 422 of the
Code and other applicable laws.
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<PAGE>
11. TERMINATION OF EMPLOYMENT.
(a) Upon termination of an Optionee's employment with the Company
Group, other than termination of employment by reason of disability or death or
for cause, the Optionee shall have 30 days after the date of termination of
employment (but not later than the expiration date of the Stock Option
Agreement) to exercise all Options held by him or her to the extent the same
were exercisable on the date of termination; PROVIDED, HOWEVER, if such
termination is due to the Optionee's retirement with the consent of the Company,
such Option shall then be exercisable to the extent of 100% of the Shares
subject thereto. The Board shall determine in each case whether a termination
of employment shall be considered a retirement with the consent of the Company
and, subject to applicable law, whether a leave of absence shall be considered a
termination of employment. The Board may cancel an Option during the 30-day
period after termination of employment referred to in this paragraph if the
Optionee engages in employment or activities contrary, in the sole opinion of
the Board, to the best interests of the Company or any parent or subsidiary of
the Company.
(b) Upon termination of an Optionee's employment by reason of
disability, as defined in subparagraph 27(a) of this Plan, or death, the
Optionee or the Optionee's personal representative, or the person or persons to
whom his or her rights under the Options pass by will or the laws of descent or
distribution, shall have one year after the date of termination of employment by
reason of disability or death (but not later than the expiration date of the
Stock Option Agreement) to exercise all Options held by Optionee to the extent
the same were exercisable on the date of the Optionee's termination of
employment; PROVIDED, HOWEVER, the Board may, but shall not be required to,
permit, in its discretion, the exercise of all or any portion of any Option
granted to such Optionee not otherwise exercisable.
(c) Upon termination of an Optionee's employment for cause, as
defined herein, all Options held by such Optionee shall terminate effective on
the date of termination of employment.
12. STOCK SPLITS; MERGERS; REORGANIZATIONS; SALE OF ASSETS.
(a) In the event of a stock split, stock dividend, combination or
exchange of shares, exchange for other securities, reclassification,
reorganization, redesignation or other change in the Company's capitalization,
the aggregate number of Shares for which Options may be granted under this Plan,
the number of Shares subject to outstanding Options and the Option Price of the
Shares subject to outstanding Options shall be proportionately adjusted or
substituted to reflect the same. The Board shall make such other adjustments to
the Options, the provisions of the Plan and the Stock Option Agreements as may
be appropriate and equitable, which adjustments may provide for the elimination
of fractional Shares.
(b) In the event of a change of the Common Stock resulting from a
merger or similar reorganization as to which the Company is the surviving
corporation, the number and kind of Shares which thereafter may be purchased
pursuant to an Option under the Plan and the number and kind of Shares then
subject to Options granted hereunder and the price per Share thereof shall
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<PAGE>
be appropriately adjusted in such manner as the Board may deem equitable to
prevent dilution or enlargement of the rights available or granted hereunder.
(c) Except as otherwise determined by the Board, a merger or a
similar reorganization which the Company does not survive (other than a merger
or similar reorganization involving only a change in the state of incorporation
or an internal reorganization not involving a change in control as defined
herein), or a sale of all or substantially all of the assets of the Company,
shall cause every Option hereunder to terminate, to the extent not then
exercised, unless any surviving entity agrees to assume the obligations
hereunder; provided, however, that, in the case of such a merger or similar
reorganization, or such a sale of all or substantially all of the assets of the
Company, if there is no such assumption, the Board may provide that some or all
of the unexercised portion of any one or more of the outstanding Options shall
be immediately exercisable and vested as of such date prior to such merger,
similar reorganization or sale of assets as the Board determines.
(d) If a change in control, as defined herein, occurs, all
outstanding options granted under this Plan shall then be immediately
exercisable to the extent of 100% of the Shares subject thereto notwithstanding
any contrary waiting or vesting periods specified in this Plan or in any
applicable Stock Option Agreement.
13. SALE OF OPTION SHARES. If any class of equity securities of the
Company is registered pursuant to Section 12 of the 1934 Act, any Optionee or
other person exercising the Option who is subject to Section 16 of the 1934 Act
by virtue of his or her relationship to the Company shall not sell or otherwise
dispose of the Shares subject to Option unless at least six months have elapsed
from the date of grant of the Option.
14. RIGHTS AS SHAREHOLDER. The Optionee shall have no rights as a
shareholder with respect to any Shares covered by an Option until the date of
issuance of a stock certificate to the Optionee for such Shares.
15. NO CONTRACT OF EMPLOYMENT. Nothing in the Plan or in any Option or
Stock Option Agreement shall confer on any Optionee any right to continue in the
employ or service of the Company or any parent or subsidiary of the Company or
interfere with the right of the Company to terminate such Optionee's employment
or other services at any time. The establishment of the Plan shall in no way,
now or hereafter, reduce, enlarge or modify the employment relationship between
the Company or any parent or subsidiary of the Company and the Optionee.
Options granted under the Plan shall not be affected by any change of duties or
position of the Optionee with the Company.
16. AGREEMENTS AND REPRESENTATIONS OF OPTIONEES. As a condition to the
exercise of an Option, the Board may, in its sole determination, require the
Optionee to represent in writing that the Shares being purchased are being
purchased only for investment and without any present intent at the time of the
acquisition of such Shares to sell or otherwise dispose of the same.
17. WITHHOLDING TAXES. The Company's obligation to deliver Shares upon
exercise of an Option shall be subject to the Optionee's satisfaction of all
applicable federal, state or local tax withholding obligations. The Company
shall have the right to withhold from any salary, wages,
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<PAGE>
or other compensation for services payable by the Company to or with respect to
an Optionee, amounts sufficient to satisfy any federal, state or local
withholding tax liability attributable to such Optionee's (or any beneficiary's
or personal representative's) receipt or disposition of Shares purchased under
any Option or to take any such other action as it deems necessary to enable it
to satisfy any such tax withholding obligations. The Board, in its sole
discretion, may permit Optionees to elect to have Shares that would be acquired
upon exercise of Options (valued at their fair market value as of the date of
exercise) withheld by the Company in satisfaction of such Optionees' withholding
tax liabilities.
18. EXCHANGES. The Board may permit the voluntary surrender of all or a
portion of any Option granted under the Plan to be conditioned upon the granting
to the Optionee of a new Option for the same or a different number of Shares as
the Option surrendered, or may require such voluntary surrender as a condition
precedent to a grant of a new Option to such Optionee. Subject to the
provisions of the Plan, such new Option shall be exercisable at the same price,
during such period and on such other terms and conditions as are specified by
the Board at the time the new Option is granted. Upon surrender, the Options
surrendered shall be cancelled and the Shares previously subject to them shall
be available for the grant of other Options.
19. REPURCHASE OF SHARES BY THE COMPANY. Any Shares purchased or acquired
upon exercise of an Option may, in the sole discretion of the Board, be subject
to repurchase by or forfeiture to the Company if and to the extent and at the
repurchase price, if any, specifically set forth in the Stock Option Agreement
pursuant to which the Shares were purchased or acquired. Certificates
representing Shares subject to such repurchase or forfeiture may be subject to
such escrow and stock legending provisions as may be set forth in the Stock
Option Agreement pursuant to which the Shares were purchased or acquired.
20. CONFIDENTIALITY AGREEMENTS. Upon the Company's request, each Optionee
shall execute, prior to or contemporaneously with the grant of any Option
hereunder, the Company's then standard form of agreement relating to
nondisclosure of confidential information, noncompetition and/or assignment of
inventions and related matters.
21. COMPLIANCE WITH LAWS AND REGULATIONS. The Plan, the grant and
exercise of Options thereunder, and the obligation of the Company to sell and
deliver the Shares under such Options, shall be subject to all applicable
federal and state laws, rules and regulations and to such approvals by any
government or regulatory agency as may be required. Options issued under the
Plan shall not be exercisable prior to (i) the date upon which the Company shall
have registered the Shares for which Options may be issued hereunder under the
1933 Act, and (ii) the completion of any registration or qualification of such
Shares under state law, or any ruling or regulation of any governmental body
which the Company shall, in its sole discretion, determine to be necessary or
advisable in connection therewith, or alternatively, unless the Company shall
have received an opinion from counsel to the Company stating that the exercise
of such Options may be effected without registering the Shares subject to such
Options under the l933 Act, or under state or other law.
22. ASSUMPTION. The Plan may be assumed by the successors and assigns of
the Company.
7
<PAGE>
23. EXPENSES. All expenses and costs in connection with administration of
the Plan shall be borne by the Company.
24. AMENDMENT, MODIFICATION AND TERMINATION OF THE PLAN. The Board may
terminate, amend or modify the Plan at any time without further action on the
part of the shareholders of the Company; PROVIDED, HOWEVER, that (a) in no event
shall any amendment be made to the Plan which would cause the ISOs granted
hereunder to fail to qualify as incentive stock options under the Code; (b) any
amendment to the Plan which requires the approval of the shareholders of the
Company under the Code or the regulations promulgated thereunder shall be
subject to approval by the shareholders of the Company in accordance with the
Code or such regulations; and (c) any amendment to the Plan which requires the
approval of the shareholders of the Company under the rules promulgated under
Section 16 of the 1934 Act shall be subject to the approval of the shareholders
of the Company in accordance with such rules. No amendment, modification or
termination of the Plan shall in any manner adversely affect any Option
previously granted to an Optionee under the Plan without the consent of the
Optionee or the transferee of such Option.
With the consent of the Optionee affected, the Board may amend outstanding
Options or related agreements in a manner not inconsistent with the Plan. The
Board shall have the right to amend or modify the terms and provisions of the
Plan and of any outstanding ISO's granted under the Plan to the extent
necessary to qualify any or all such Options for such favorable federal income
tax treatment (including deferral of taxation upon exercise) as may be afforded
incentive stock options under Section 422 of the Code.
25. TERM OF PLAN. The Plan shall become effective on the Effective Date.
The Plan shall terminate on the tenth anniversary of the Effective Date, or such
earlier date as may be determined by the Board. Termination of the Plan,
however, shall not affect the rights of Optionees under Options previously
granted to them, and all unexpired Options shall continue in force and operation
after termination of the Plan except as they may lapse or be terminated by their
own terms and conditions.
26. LIMITATION OF LIABILITY. The liability of the Company under this Plan
or in connection with any exercise of an Option is limited to the obligations
expressly set forth in the Plan and in any Stock Option Agreements, and no term
or provision of this Plan or of any Stock Option Agreements shall be construed
to impose any further or additional duties, obligations or costs on the Company
not expressly set forth in the Plan or the Stock Option Agreements.
27. DEFINITIONS.
(a) DISABILITY. "Disability," as used herein, shall mean a physical
or mental condition resulting from bodily injury, disease, or mental disorder
which renders the Optionee incapable of continuing the Optionee's usual and
customary employment or service with the Company Group.
(b) FAIR MARKET VALUE. If the Shares are publicly traded, the term
"fair market value" as used in this Plan shall mean (a) the closing price quoted
in the NASDAQ National Market System, if the shares are so quoted, (b) the last
quote reported by NASDAQ for small-cap
8
<PAGE>
issues, if the shares are so quoted, (c) the mean between the bid and asked
prices as reported by NASDAQ, if the Shares are so quoted, or (d) if the Shares
are listed on a securities exchange, the closing price at which the Shares are
quoted on such exchange, in each case at the close of the date immediately
before the Option is granted or, if there be no quotation or sale on that date,
the next previous date on which the Shares were quoted or traded. In all other
cases, the fair market value shall be determined by and in accordance with
procedures established in good faith by the Board and with respect to ISOs,
conforming to regulations issued by the Internal Revenue Service regarding
incentive stock options.
(c) KEY ASSOCIATES. The term "key associates" shall include those
executive, administrative, operational and managerial employees who are
determined by the Board to be eligible for Options under the Plan.
(d) PARENT AND SUBSIDIARY. The terms "subsidiary" and "parent" as
used in the Plan shall have the respective meanings set forth in sections 424(f)
and (e) of the Code.
(e) TERMINATION FOR CAUSE. The term "termination of employment for
cause" shall mean termination of employment for (a) the commission of an act of
dishonesty, including but not limited to misappropriation of funds or property
of the Company; (b) the engagement in activities or conduct injurious to the
reputation of the Company; (c) the conviction or entry of a guilty or no contest
plea to a misdemeanor involving an act of moral turpitude or a felony; (d) the
violation of any of the terms and conditions of any written agreement the
Optionee may have from time to time with the Company Group (following 30 days'
written notice from the Company specifying the violation and the employee's
failure to cure such violation within such 30-day period); or (e) any refusal to
comply with the written directives, policies or regulations established from
time to time by the Board.
(f) CHANGE IN CONTROL. A "change in control" shall be deemed to have
taken place if, as a result of a tender offer, merger, consolidation, sale of
assets or contested election, or any combination of the foregoing transactions
(a "Transaction"), the persons who were directors of the Company immediately
before the Transaction shall cease to constitute a majority of the Board of
Directors of the Company or of any successor to the Company; provided, however,
that any Transaction shall not be deemed to be a change in control if the
Transaction causing such change shall have been approved by the affirmative vote
of at least a majority of the members of the Board of Directors of the Company
in office immediately prior to the change in control.
PAPNET OF OHIO, INC.
Adopted September 28, 1995 By: /s/ David J. Richards
------------------------------------
Amended July 8, 1996 David J. Richards, President
9
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 22, 1996, except for Note 8 as to which the date
is July 15, 1996 on the financial statements of Papnet of Ohio, Inc.; our report
dated March 22, 1996, except for Note 4 as to which the date is July 15, 1996 on
the financial statements of ER Group, Inc.; our report dated March 22, 1996
except for Note 4 as to which the date is July 15, 1996 on the combined
financial statements of Carolina Cytology, Inc. and CCWP Partners, Inc.; our
report dated March 22, 1996, except for Note 5 as to which the date is July 15,
1996 on the financial statements of Indiana Cytology Review Corporation; and our
report dated March 22,1996 except for Note 4 as to which the date is July 15,
1996 on the financial statements of Cytology Indiana, Inc. in the Registration
Statement (Form S-4 No. 33-00000) and related Prospectus of Papnet of Ohio, Inc.
for the registration of 4,850,033 shares of its Common Stock.
ERNST & YOUNG LLP
Columbus, Ohio
July 15, 1996
<PAGE>
POWER OF ATTORNEY
Each of the undersigned officers and directors of Papnet of Ohio, Inc.,
an Ohio corporation (the "Company"), hereby appoints David J. Richards, as
his true and lawful attorney-in-fact, with power to act without the others,
as his true and lawful attorney-in-fact, in his name and on his behalf, and
in any and all capacities stated below, to sign and to cause to be filed with
the Securities and Exchange Commission the Company's Registration Statement
on Form S-4 (the "Registration Statement") to register under the Securities
Act of 1933, as amended, a maximum of 7,000,000 authorized and unissued
shares of common stock, no par value (the "Common Stock"), of the Company (as
such number of shares may be adjusted from time to time for stock dividends,
stock splits, or similar transactions affecting the Common Stock of the
Company generally), in connection with the Agreement and Plan of Merger,
dated July 5, 1996, and all amendments thereto, among the Company, Cytology
Indiana, Inc., Indiana Cytology Review Company, ER Group, Inc., CCWP
Partners, Inc., and Carolina Cytology, Inc., and any and all amendments,
including post-effective amendments, to the Registration Statement, hereby
granting unto such attorney-in-fact, full power and authority to do and
perform in the name and on behalf of each of the undersigned, in any and all
such capacities, every act and thing whatsoever necessary to be done in and
about the premises as fully as the undersigned could or might do in person,
hereby granting to each such attorney-in-fact full power of substitution and
revocation, and hereby ratifying all that any such attorney-in-fact or his
substitute may do by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 5th day of July,
1996.
Signature: Title:
/s/ John P. Kennedy Director, Treasurer and Assistant Secretary
- -------------------------------
John P. Kennedy
/s/ S. Trevor Ferger Director
- -------------------------------
S. Trevor Ferger
/s/ Cecil J. Petitti Director
- -------------------------------
Cecil J. Petitti
/s/ Bryan Whipp Director
- -------------------------------
Bryan Whipp
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PAPNET OF
OHIO, INC. FORM S-4 FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE THREE MONTHS
ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 811,359 599,550
<SECURITIES> 0 0
<RECEIVABLES> 75,993 58,962
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 938,373 780,108
<PP&E> 41,939 41,939
<DEPRECIATION> 24,623 26,123
<TOTAL-ASSETS> 8,945,789 9,419,540
<CURRENT-LIABILITIES> 174,392 144,794
<BONDS> 0 0
0 0
0 0
<COMMON> 1,779,465 1,779,465
<OTHER-SE> 4,682,694 5,036,869
<TOTAL-LIABILITY-AND-EQUITY> 8,945,789 9,419,540
<SALES> 48,000 13,553
<TOTAL-REVENUES> 48,000 13,553
<CGS> 0 0
<TOTAL-COSTS> 573,149 149,727
<OTHER-EXPENSES> (1,715,399) 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 264 0
<INCOME-PRETAX> 1,256,230 (131,439)
<INCOME-TAX> (68,715) (52,575)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,324,945 (78,864)
<EPS-PRIMARY> .21 (.01)
<EPS-DILUTED> .21 (.01)
</TABLE>
<PAGE>
PAPNET OF OHIO, INC.
PROXY FOR SPECIAL MEETING
___________, 1996
The undersigned hereby appoints David J. Richards or John P. Kennedy, and
each of them, with full power of substitution, in the name, place and stead of
the undersigned, to vote at the Special Meeting of Shareholders of Papnet of
Ohio, Inc. on September __, 1996 at ______.m. Eastern Standard Time, or at any
adjournment thereof, upon the number of votes that the undersigned would be
entitled to vote if personally present, upon the following matters:
1. Approval of the Agreement and Plan of Merger, dated July 5, 1996 among
the Company and Cytology Indiana, Inc., Indiana Cytology Review
Company, ER Group, Inc., CCWP Partners, Inc., and Carolina Cytology,
Inc. (the "Merger Agreement"), and the Amended and Restated Articles
of Incorporation and the Amended and Restated Regulations provided for
in the Merger Agreement.
( ) For approval of the Merger Agreement and the Amended and Restated
Articles of Incorporation and the Amended and Restated
Regulations provided for in the Merger Agreement.
( ) Against approval of the Merger Agreement and the Amended and
Restated Articles of Incorporation and Regulations provided for
in the Merger Agreement.
( ) Abstain
2. In their discretion, the proxies are authorized to vote upon such
other business as may properly come before the Special Meeting or any
adjournments thereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. This proxy will be
voted in accordance with the instructions given above. If no instructions are
given, this proxy will be voted FOR the matters described in Items 1 and 2
above.
Dated: ________________, 1996
______________________________________
Signature
______________________________________
Print Name
NOTE: THIS INSTRUMENT MUST BE SIGNED BY THE REGISTERED HOLDER AND THE SIGNATURE
SHOULD CORRESPOND EXACTLY WITH THE NAME AS IT IS SHOWN HEREON. WHEN SIGNING AS
AN ATTORNEY, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE YOUR FULL TITLE AS
SUCH. IN CASE OF JOINT TENANCY, CO-EXECUTORS, OR CO-TRUSTEES, BOTH SHOULD SIGN.
