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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 1996
Commission File Number: 1-12529
NETMED, INC.
(Exact name of Registrant as specified in its charter)
OHIO 31-1282391
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
425 METRO PLACE NORTH, STE. 140
DUBLIN, OHIO 43017
(Address of principal executive offices,
including zip code)
(614) 793-9356
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
COMMON SHARES, NO PAR VALUE Exchange:
(Title of Class) American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
The Registrant has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports),
and has been subject to the filing requirements for at least the past 90 days.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of the Registrant's Common Shares held by non-
affiliates of the Registrant was approximately $72,800,000 on March 14, 1997.
There were 10,947,114 shares of the Registrant's Common Shares outstanding
on March 14, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1997 Annual Meeting of
Shareholders are incorporated by reference in Part III.
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PART I
ITEM 1. BUSINESS.
GENERAL
NetMed, Inc., (formerly known as Papnet of Ohio, Inc.) (the "Company"),
is an Ohio corporation engaged in the business of acquiring, developing and
marketing medical and health-related technologies. The Company's revenues
are currently derived principally from the marketing of the PAPNET-Registered
Trademark-Testing System, which is a proprietary product of Neuromedical
Systems, Inc., a Delaware corporation ("NSI"). The PAPNET-Registered
Trademark- Testing 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. Clinical laboratories submit slides containing
cytology specimens to one of NSI's central facilities for image processing
using the PAPNET-Registered Trademark- Testing System, which produces
processed images for evaluation by NSI-trained cytotechnologists. The Company
is also currently engaged in the development of an oxygen
generation/concentration device which it plans to manufacture and sell in the
home healthcare market.
The Company was originally organized in 1989 for the purpose of
acquiring the exclusive territorial rights to market NSI's proprietary
products. The Company organized two limited partnerships for this purpose,
one of which acquired the marketing rights in the State of Ohio, and the
other which acquired territorial rights for Kentucky and the Chicago,
Illinois metropolitan area. In 1993 the Company acquired all of the issued
and outstanding limited partnership interests in both partnerships and
thereby acquired all of the rights to market the PAPNET-Registered Trademark-
Testing System in Ohio, Kentucky and the Chicago metropolitan area.
On December 16, 1996, the Company completed a merger (the "Merger") with
five companies which had collectively acquired the rights to market the
PAPNET-Registered Trademark- Testing System and service in the states of
Missouri, Georgia, and North Carolina (collectively the "Predecessor
Companies"). The Company was the surviving corporation in the Merger. Upon
completion of the Merger, the Company changed its name from Papnet of Ohio,
Inc. to NetMed, Inc.
In addition to exploiting its rights under the license agreement with
NSI, the corporate mission of NetMed is to become a well diversified health
care technology company founded upon proprietary products that offer a
distinct market advantage. The Company's intention is to follow the example
of its initial investment, the PAPNET-Registered Trademark- technology, in
pursuing other opportunities in healthcare technology. Specifically, it
intends to make early investments in selected healthcare technologies and
apply the management and marketing resources of the Company to develop and
implement strategies designed to significantly increase the value of the
investment over a period of two to four years.
NSI - LICENSOR OF THE PAPNET-Registered Trademark- TESTING SYSTEM
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 product, the PAPNET-Registered Trademark- Testing System,
is a supplemental test to aid laboratories in the detection of abnormal cells on
cervical Papanicolaou ("Pap") smears which were not detected by the standard
manual microscopic inspection. When used to supplement manual screening of Pap
smears, PAPNET-Registered Trademark- testing has been shown to increase the
detection of cervical abnormality by up to 30% when compared to manual
screening. The Company believes that this improved detection can result in more
effective and less costly early treatment, reduced possibility of morbidity and
mortality for patients, and reduced possibility of malpractice litigation for
the patient's doctor and laboratory. The PAPNET-Registered Trademark- Testing
System can achieve these improvements without requiring a modification of the
standard Pap smear sample due to its use of a patented combination of
algorithmic and adaptive pattern recognition technology, a form of artificial
intelligence.
The PAPNET-Registered Trademark- Testing System was approved for commercial
use in the United States by the United States Food and Drug Administration (the
"FDA") on November 8, 1995. Thereafter, NSI commenced marketing to laboratories
and clinicians, and as of December 31, 1996, the PAPNET-Registered Trademark-
test was available through 201 laboratories in the United States, and was
available in 23 countries worldwide. The PAPNET-Registered Trademark- Testing
System is a medical device subject to extensive regulation in the United States
by the FDA and other federal, state and local authorities. The FDA regulates
the research, development, clinical studies, manufacturing, processing,
packaging, labeling, distribution, promotion and
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post-market surveillance of medical devices in the United States. The
Company relies entirely upon NSI to assure that all of these activities, as
they relate to the PAPNET-Registered Trademark- Testing System, comply with
all applicable regulatory requirements.
THE CERVICAL CYTOLOGY 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- Testing 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 the PAPNET-Registered Trademark- Testing 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- TESTING SYSTEM
The PAPNET-Registered Trademark- Testing System is a computerized image
processing service provided to laboratories. The laboratory performs PAPNET-
Registered Trademark- testing when specifically requested by clinicians,
patients or third-party payers who wish to minimize the probability of false
negatives and their attendant medical and legal consequences. Slides first
diagnosed by a laboratory as "negative" using manual inspection are sent to
designated NSI facilities ("Scanning Centers") for imaging on a PAPNET-
Registered Trademark- Scanning Station, which is designed to inspect the
hundreds of thousands of cells and other objects on the slide. The PAPNET-
Registered Trademark- Scanning Stations' proprietary neural network computers
are designed to select color images of 128 potentially abnormal cells and cell
clusters from each slide for detailed video review (whether or not they are, in
fact, abnormal). These 128 images from each slide are recorded on a digital
tape cassette or CD-ROM which is returned to the client laboratory within two to
four working days along with the referred Pap smear slides.
At the laboratory, a certified cytotechnologist specially trained in the
use of the PAPNET-Registered Trademark- Testing System evaluates the 128 color
images from each slide on the PAPNET-Registered Trademark- Review Station. The
PAPNET-Registered Trademark- Review Station's software ensures that the
cytotechnologist displays each image at 200x magnification (twice normal
screening power) and permits the user to expand any image to 400x magnification.
If all of the images appear normal, the cytotechnologist classifies the slide as
"negative," and no further examination is required. NSI has found that
cytotechnologists experienced in the use of the PAPNET-Registered Trademark-
Review Station can review negative cases in substantially less time than it
takes to perform a conventional manual re-examination.
If any one of the 128 images appears to the cytotechnologist to be
abnormal, the cytotechnologist classifies the slide as "review." The
cytotechnologist then refers to the "x, y" coordinates provided with each
PAPNET-Registered Trademark- image and uses the coordinates as a reference point
to re-examine the slide directly through the microscope. If, after direct
inspection, the cytotechnologist continues to believe that the slide contains
abnormal cells, he or she refers the slide to the laboratory's pathologist for a
final diagnosis. In no case does NSI, the Company, nor the PAPNET-Registered
Trademark- Testing System make a diagnosis of a slide or smear.
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The PAPNET-Registered Trademark- Testing System is used as a supplement to
current practice and does not alter the clinician's procedure for the taking of
smears or the laboratory's method of staining or applying the coverslip. It
provides an additional and complementary level of screening for the purpose of
decreasing false negative Pap smear diagnoses.
COMPETITION IN THE CERVICAL CYTOLOGY MARKET
The Company is currently aware of three principal competitors which are
engaged in efforts to automate one or more aspects of cervical smear screening.
Two competitors, Cytyc and Roche, have focused on the development of devices for
the production, and, in the case of Roche, automated analysis, of monolayer
slides, a potential alternative to the conventional Pap smear method of specimen
collection and preparation. Cytyc received approval from the FDA in May 1996 to
market its ThinPrep-Registered Trademark- preparation to laboratories, for the
purpose of filtering out blood, mucus and other material from Pap smears. With
monolayer techniques, clinicians are required to prepare special slides, and
only a fraction of the cells and background information displayed on the
conventional slide is retained for analysis. Because the PAPNET-Registered
Trademark- Testing System uses the well-established method of sample collection,
it does not require clinicians to deviate from standard practice in the
preparation or visual screening of Pap smears.
The other competitor, NeoPath, has received FDA approval for the use of its
AutoPap-Registered Trademark- System as part of a laboratory's quality control
procedure. According to NeoPath, the AutoPap-Registered Trademark- System is
designed to sort purportedly "negative" Pap smear slides into two groups, one
classified as "negative" and one classified for "review." The group of slides
classified for review, which constitutes a specified percentage of the whole, is
again reviewed manually by the cytotechnologist through a conventional
microscope. NeoPath has stated that it is developing a device for the fully
automated primary screening (as opposed to rescreening) of conventional Pap
smears, and has submitted to the FDA a pre-market approval supplemental
application. On September 27, 1996, an FDA Advisory Panel recommended that the
FDA not approve the supplemental application, pending completion of additional
studies. NSI is currently engaged in litigation with NeoPath alleging patent
infringement, unfair competition and other tortious conduct concerning the
development and marketing of the AutoPap-Registered Trademark- System. NeoPath
has denied these allegations and has asserted counterclaims to the effect that
NSI has made false and misleading representations concerning the AutoPap-
Registered Trademark- System. NSI has stated that it believes NeoPath's
assertions are without merit.
These or other competitors may develop new products and technologies that
prove to be more effective than the PAPNET-Registered Trademark- Testing System
or that may be viewed by clinical laboratories as reducing operating costs (for
example, by reducing the number of cytotechnologists used in screening). In
addition, competitive products and technologies may be manufactured and marketed
more successfully than the PAPNET-Registered Trademark- Testing System. Such
developments could render the PAPNET-Registered Trademark- Testing System less
competitive or possibly obsolete, and could have a material adverse effect on
NSI and the Company. NSI and the Company will be required to compete with
respect to product effectiveness, price, manufacturing and slide processing
efficiency, marketing capabilities and customer service and support, areas in
which they currently have limited experience.
In addition to competitors attempting to develop fully automated or
semi-automated systems for the screening or rescreening of cervical samples,
there may in the future be alternate techniques or technologies for the
detection or prevention of cervical cancer. Although no such technique has been
demonstrated to be useful as a substitute for the Pap smear, there can be no
assurance that new techniques or technologies will not one day supplant or
replace the Pap smear in medical practice.
POTENTIAL FUTURE NSI PRODUCTS
NSI has stated the belief that its technology can be adapted for use in the
early detection of cancers occurring at body sites in addition to the uterine
cervix, including the bladder, breast, esophagus, lung, oral cavity and thyroid.
Not all such cancers are commonly the subject of cytological analysis, and NSI
has not yet determined which of these applications, if any, it will be able to
commercialize. However, NSI has announced that a study reported at a recent
meeting of the U.S. and Canadian Academy of Pathology showed that the PAPNET-
Registered Trademark- Testing System could detect cancerous and precancerous
cells of the esophagus on conventionally prepared smears. NSI's patents cover
applications of its technology to cytological screening for cancers occurring at
all body sites, and the Company's license of NSI's technology (described below)
would extend to these applications.
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The foregoing information concerning NSI and the PAPNET-Registered
Trademark- Testing System was obtained either directly from NSI or from NSI's
September 1996 prospectus and other filings that NSI has made with the United
States Securities and Exchange Commission ("SEC"). While the Company believes
that the foregoing information is accurate and a fair summary of publicly
available information concerning NSI and the PAPNET-Registered Trademark-
Testing System, readers are encouraged to review NSI's filings with the SEC for
additional and more detailed information.
THE NSI LICENSE
On December 5, 1995 the Company, the Predecessor Companies, Cytology
West, Inc. and Papnet Utah, Inc. (other NSI regional licensees who were not
parties to the Merger), entered into the 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 that NSI
had with its regional licensees (relating to, among other things, calculation of
royalties, control of marketing and sales activities, use of NSI's trademarks,
and rights to market other technologies developed by NSI), 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 agreed to the form of a license
agreement, under which the Company and the other regional licensees will
continue to have the rights to market the PAPNET-Registered Trademark- Testing
System, as well as certain other medical technologies which may be developed by
NSI ("NSI Technology").
While the Company and NSI have agreed on the form of a license
agreement, which the Company has agreed to execute with certain modifications,
no final agreement had been executed by the parties as of March 14, 1997. The
modifications requested by the Company deal principally with the determination
of the amount of royalties that should be paid to the Company with respect to
slides originating in its licensed territory but that are processed by
laboratories located outside of the territory.
The Company has the right and license to sell the
PAPNET-Registered Trademark- Testing System service and NSI Technology in the
states of Ohio, Georgia, Kentucky, Missouri, North Carolina and in the
Consolidated Metropolitan Statistical Area of Chicago, Illinois. The
Company's rights are exclusive within the described territory, subject to the
right of NSI to conduct marketing and sales activities therein. However,
because the royalties paid to the Company are based on "Territory Gross
Revenues" recognized by NSI from activities (including any sales by NSI) in
the licensed territory, any sales activities in the Company's territory by
NSI will inure to the benefit of the Company.
The form of license agreement incorporated in the Settlement Agreement
provides that the regional licensees (as a group) 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 to a
licensee's territory 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 census data). These provisions may, in some
circumstances, have the effect of limiting the potential revenues which the
Company can realize from its sales activities.
The royalty calculations described in the foregoing paragraph are
aggregate calculations for all of the territorial licensees. Based upon the
aggregation of the applicable amounts contained in the original license
agreements of the Company and the Predecessor Companies and recent census data,
the Company believes that its share of the number of slides for the slide
royalty cap described in clause (a) in the foregoing paragraph will be
approximately 10,000,000 slides, the worldwide revenue percentage described in
clause (b) will be 3.5 percent, and the royalty cap described in the same clause
will be approximately $18.8 million.
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The Company's license has an initial term that expires on December 31,
2025. The Company has the right to extend the license 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. The
license may not be terminated or cancelled except upon expiration of its
initial or renewal term or by written agreement of the parties.
THIRD-PARTY REIMBURSEMENT
Reimbursement of laboratory charges for PAPNET-Registered Trademark-
testing by third-party medical insurance payers, managed care organizations, and
government agencies (such as Medicare/Medicaid, private health insurance, health
maintenance organizations and self-insured employers) is a key factor in the
rate of growth of the revenues which NSI and the Company will be able to realize
from this technology. Currently, some third-party payers reimburse some or all
of the charges to patients for the PAPNET-Registered Trademark- test, others
(including Medicare and Medicaid) provide no reimbursement. To the extent that
third-party payers do not provide for reimbursement of
PAPNET-Registered Trademark-testing, or, if the level of reimbursement is
significantly below the amount laboratories charge patients to perform
PAPNET-Registered Trademark- testing, the size of the potential market
available to NSI and the Company may be reduced. Based upon a study recently
published in the international journal ACTA CYTOLOGICA finding that
PAPNET-Registered Trademark- testing for cervical cancer detection decreases
the incidence of cervical cancer at a cost which is within the range of tests
and other procedures commonly reimbursed by managed care organizations, the
Company anticipates that it will eventually be successful in convincing most
third-party payers in its licensed territory to reimburse for the
PAPNET-Registered Trademark- test.
Consequently, the Company and NSI are directing their marketing efforts
to obtaining third-party reimbursement for the PAPNET-Registered Trademark-
test. In February 1997, the Company entered into an agreement with Blue Cross
Blue Shield Mutual of Ohio (BCBSO) whereby BCBSO agreed to cover the cost of the
PAPNET-Registered Trademark- test for all members. In addition, BCBSO has
agreed to strongly recommend to its clinicians and laboratories that all
negative Pap smears covered by its benefit plans are to be examined using
PAPNET-Registered Trademark- testing. BCBSO was the largest health care
provider in the State of Ohio in 1996, with approximately 1.5 million covered
members. While the Company believes that its agreement with BCBSO will
increase the number of Pap smears from its licensed territory which are
processed using the PAPNET-Registered Trademark- System during 1997 and
subsequent years, there can be no guarantee as to the amount or timing of any
increase.
OTHER COMPANY TECHNOLOGIES
The Company recently entered into an agreement with CeramPhysics, Inc.
of Westerville, Ohio ("Ceram"), pursuant to which the Company has the right
to acquire control of a newly-organized corporation holding a world-wide
license to Ceram's patented oxygen generation technology, which is exclusive
as to all applications of the technology except oxygen sensors and fuel
cells. Pursuant to the agreement, the Company will work with and loan up to
$200,000 to Ceram to complete the fabrication and testing of a ceramic
element incorporating the licensed technology, which will be capable of
generating oxygen of a purity and in quantities suitable for medical use. It
is the Company's intention to incorporate the element into an oxygen
generation device which the Company will manufacture and market for the home
health care market. If the device is acceptable to the Company, it has the
right to acquire 95% of the stock of the licensee company for an additional
$200,000 investment, with the remaining 5% to be held by Ceram. This new
subsidiary would manufacture and market the device, as well as pursue
additional applications for the licensed technology.
In September, 1996, the Company executed a non-binding letter of intent
to make up to a $4 million investment in HUBLink, Inc., a healthcare software
development and marketing company. No definitive agreement was reached,
however, and the term of the letter of intent has expired, although the Company
and HUBLink have continued discussions of a possible investment.
The Company is currently negotiating for the rights in other medical
technologies, but has not concluded any binding agreements to date.
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TERMS OF RECENTLY COMPLETED MERGER
On December 16, 1996, the Company completed the Merger with the
Predecessor Companies, which had collectively acquired the rights to market the
PAPNET-Registered Trademark- Testing System and service in the states of
Missouri, Georgia, and North Carolina. The Company was the surviving
corporation in the Merger. Upon completion of the Merger, the Company changed
its name from Papnet of Ohio, Inc. to NetMed, Inc.
Each of the Predecessor Companies, other than CCWP, Inc. was organized
to acquire and exercise the right to market the PAPNET-Registered Trademark-
Testing 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. Consequently, the Predecessor Companies had only limited operations
prior to November 1995. CCWP, Inc. was an affiliate of Carolina Cytology, Inc.
and was organized for the purpose of holding certain warrants for the purchase
of NSI common stock.
Cytology Indiana, Inc. ("CIN") was an Ohio corporation formed on
September 7, 1990. CIN owned an approximate 65% interest in the rights to
market the PAPNET-Registered Trademark- Testing System and service in Missouri.
Indiana Cytology Review Company ("INC") was an Ohio corporation formed on
December 1, 1995, and owned an approximate 35% interest in the PAPNET-Registered
Trademark- marketing rights for Missouri. ER Group, Inc. ("ERG") was an Ohio
corporation formed on May 13, 1991 for the purpose of acquiring PAPNET-
Registered Trademark- marketing rights for Georgia. Carolina Cytology, Inc.
("CCI") was an Ohio corporation formed on December 10, 1992 for the purpose of
acquiring PAPNET-Registered Trademark- marketing rights for North Carolina.
CCWP Partners, Inc. ("CCWP") was an Ohio corporation formed on December 1, to
hold certain warrants to acquire NSI common stock acquired by a predecessor
partnership in connection with the acquisition of the PAPNET-Registered
Trademark- marketing rights for North Carolina by CCI.
In the Merger, all outstanding common shares of the Predecessor
Companies, including shares issuable upon the exercise of outstanding warrants
and options, were converted into the right to receive fully paid and
nonassessable common shares of the Company. Shares of outstanding common stock
of the Predecessor Companies were 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). The total number of common shares of the Company issued
in the Merger was 4,849,988. Immediately following the Merger, the
shareholders of each of the Predecessor Companies owned, in the aggregate, the
following percentage of the issued and outstanding stock of the Company: CIN
(7.70%); INC (4.11%); ERG (17.13%); CCWP (3.13%); and CCI (12.32%). Certain
restrictions were imposed on the resale of shares issued in the Merger, to be
released incrementally over the one year period following the Merger, which
period may be accelerated by the Company. As of the date of this report, such
restrictions have expired as to 225,000 shares. The issuance of common shares
of the Company in the Merger was pursuant to a registration statement on Form S-
4 filed with the SEC (Registration No. 333-8199).
The merger of the Company and the Predecessor Companies was accounted
for at historical cost based on the guidance in SEC Staff Accounting Bulletins
48 and 97. For accounting purposes, Papnet of Ohio, Inc. is treated as the
predecessor of the merged entity and its historical financial statements are
included in this report as the historical financial statements of the Company.
The results of operations of the Predecessor Companies have been combined with
those of the Company on a prospective basis commencing on the date of the
Merger.
PERSONNEL
As of March 14, 1997, the Company employed fifteen (15) full time
employees. The Company has one (1) part time employee. None of the Company's
employees are subject to a collective bargaining agreement, and the Company
considers its relationship with its employees to be good.
BUSINESS RISKS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The following factors, among
others, could cause actual results to differ materially from those contained
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in forward-looking statements made in this report, including without
limitation, the sections entitled "Business," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Legal
Proceedings." When used in this report and the documents incorporated by
reference herein, the words "estimate," "project," "anticipate," "expect,"
"believe" and words of similar import are intended to identify
forward-looking statements.
RISKS RELATING TO NSI
The Company obtains all of the information relating to the PAPNET-
Registered Trademark- Testing System and service from NSI, and in most cases
cannot independently verify this information. Therefore, the Company is
dependent on NSI to accurately report the results of clinical studies and other
data relating to the capabilities and performance of the PAPNET-Registered
Trademark- Testing System.
The Company has no ownership rights in the PAPNET-Registered Trademark-
technology. NSI has granted the Company exclusive rights with respect to the
marketing of the PAPNET-Registered Trademark- Testing System and service in
certain geographic territories. Therefore, 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- Testing System's
compliance with FDA and other regulatory requirements, maintenance of the
technological advantages of the PAPNET-Registered Trademark- Testing System,
maintenance of product liability insurance, the ability to manufacture and
deliver the equipment required to operate the PAPNET-Registered Trademark-
Testing 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.
Additional risks relating to the business of NSI which may have an
impact on the Company are set forth in NSI's periodic reports filed with the
SEC, including its Annual Report on Form 10-K.
RISKS RELATING TO LICENSE AGREEMENT AND PATENTS
The Company's marketing rights and the revenues generated by these
activities, are governed by the terms of its license from NSI (the "License").
The License 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- Testing System and service. The terms of the
License are set forth in the form of a license agreement incorporated into the
Settlement Agreement, but to date the Company and NSI have not executed a
definitive license agreement.
The technology underlying the PAPNET-Registered Trademark- Testing
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.
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 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 from manufacturing its products or
prevent NSI or the Company from selling NSI's products, any of which could have
a material adverse effect on the Company's business, financial condition and
results of operations.
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<PAGE>
RISKS RELATING TO OPERATIONS AND PAST PERFORMANCE
The Company is in the early stage of its operations, and is therefore
subject to risks incident to any new business, including the absence of
earnings. The Company has to date had no appreciable income from operations,
and as of December 31, 1996 has an accumulated deficit of $801,302. While the
Company intends to develop or acquire other technologies, it has concentrated
its efforts primarily on the marketing of the PAPNET-Registered Trademark-
Testing 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- Testing System and service.
The Company cannot accurately predict the extent of its future capital
needs, but anticipates that expenditures will increase significantly during
the period from 1997 through 1998 due to the cost of the commercial launch of
the PAPNET-Registered Trademark- Testing System, the development and
commercialization of an oxygen device for the home healthcare market, and the
execution of the Company's business plan to acquire complementary
technologies. A significant amount of the Company's assets are represented
by its investment in NSI common stock, which the Company expects to liquidate
as necessary to finance its business activities. There can be no assurance
regarding the market value of the NSI common stock and any decrease in its
market value will adversely impact the Company's total assets and its ability
to fund its business plan. In addition, there can be no assurance that other
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 shares.
The Company does not contemplate the payment of dividends 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.
The success of the Company's operations is highly dependent upon David
J. Richards, and 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.
RISKS RELATED TO THE COMPANY'S COMMON SHARES
Upon completion of the Merger the directors, executive officers and
principal shareholders (5% or greater) of the Company collectively owned
approximately 26.9% of the outstanding Company common shares. As a result,
these shareholders will be able to exercise significant influence over matters
requiring shareholder 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.
Although the Company's common shares are currently listed for trading on
the American Stock Exchange, trading volume has been limited. There can be no
assurance that there will continue to be an active and liquid 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 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 shares.
The Company had 10,940,524 common shares outstanding as of December 31,
1996. Of these shares, approximately 8,700,000 shares are held by nonaffiliates
of the Company or the Predecessor Companies and are freely tradeable without
restriction or further registration under the Securities Act. Approximately
2,250,000 shares are held by affiliates of the Company who will be entitled to
resell them, subject to the restrictions on transfer imposed by or in connection
with the Merger Agreement, only pursuant to a registration statement under the
Securities Act or an applicable exemption from registration thereunder such as
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.
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<PAGE>
Sales of substantial amounts of the Company's shares in the public
market or the prospect of such sales could adversely affect the market price of
its shares.
RISKS RELATING TO GOVERNMENT REGULATION
The services, products and manufacturing activities of NSI and the
Company 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 pre-market approval provisions
of products and conducts periodic inspections to determine compliance with Good
Manufacturing Practice regulations.
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 prevent NSI
or the Company 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.
RISKS RELATING TO THIRD PARTY REIMBURSEMENT
In the United States, many Pap smears are currently paid for by the
patient, and the level of reimbursement by third-party payers that do provide
reimbursement differ considerably. Third-party payers (Medicare/Medicaid,
private health insurance, health administration authorities in foreign
countries and other organizations) may affect the pricing or relative
attractiveness of the Company's and NSI's products and services by regulating
the maximum amount of reimbursement for PAPNET-Registered Trademark- testing
provided by such payers or by not providing any reimbursement at all.
Restrictions on reimbursement may limit the price which the Company can
charge for its services or reduce the demand for PAPNET-Registered Trademark-
testing, or, if the level of such reimbursement is significantly below what
laboratories charge patients to perform PAPNET-Registered Trademark- testing,
the size of the potential market available to the Company may be reduced.
There can be no assurance of the extent to which costs of PAPNET-Registered
Trademark- testing will become reimbursable or that the level of
reimbursement will be sufficient to permit the Company to generate
substantial revenues.
RISKS RELATING TO MARKETABILITY AND COMPETITION
The Company's future performance will depend to a substantial degree
upon market acceptance of the PAPNET-Registered Trademark- Testing System. The
extent of, and rate at which, market acceptance and penetration are achieved 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-
Testing System will achieve or maintain acceptance in its target markets.
The Company is aware of several companies that either have developed or
are developing systems that are competitive with the
PAPNET-Registered Trademark-Testing System or other technologies targeted for
development by the Company. Commercial availability of such products could
have a material adverse effect on the Company's business, financial condition
and results of operations. Competitors may have substantially greater
financial, manufacturing, marketing and technical resources, and represent
significant potential long-term competition. Competitors may succeed in
developing products that are more effective or less costly than any that may
be developed by NSI or the Company. 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 or
the Company's current and contemplated products
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<PAGE>
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.
RISKS RELATING TO PRODUCT LIABILITY
The business of the Company could expose it to the risks inherent in the
production and distribution of medical diagnostic and treatment 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- Testing 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. The Company currently carries no product
liability insurance. However, NSI is required, under the terms of the License,
to name the Company as an additional insured on its product liability policies.
There can be no assurance that NSI will have the resources necessary to purchase
and maintain the insurance, that such insurance will be sufficient to cover
potential claims, or that NSI will have adequate resources to indemnify the
Company from any uninsured loss.
ITEM 2. PROPERTIES.
The Company's headquarters is located in Dublin, Ohio and is leased from
the L&B SERBO Fund under a lease agreement that expires on August 14, 2001. The
Company leases 1,947 square feet at an annual rental rate ranging from
approximately $20,400 to $22,400 during the term of the lease.
ITEM 3. LEGAL PROCEEDINGS.
There are no pending legal proceedings against the Company. The Company
in 1996 filed an application with the United States Patent and Trademark Office
for registration of the trademark "NetMed." The Company has been notified that
a notice of opposition has been filed by Epicenter, Inc., which had registered
an Internet domain name of "netmed.com," among over 100 other medical and health
care related names. Although the ultimate resolution of this matter cannot be
determined, the Company believes the opposition is without merit and intends to
vigorously pursue the registration of its trademark.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 5, 1996, a Special Meeting of Shareholders was held at the
Westin Hotel, 310 South High Street, Columbus, Ohio 43215 (the "Special
Meeting"). The Special Meeting was called to consider and vote upon:
1. The approval of Agreement and Plan of Merger among the Company and the
Predecessor Companies, dated as of July 5, 1996, and the consummation of
the Merger. The proposal to approve the Merger received 4,453,082
affirmative votes, 8,196 votes against, and 958,336 broker non-votes.
2. The approval of the Amended and Restated Articles of Incorporation of the
Company, which included, among other things, an increase in the authorized
capital stock of the Company and the elimination of cumulative voting. The
votes in favor of the Amended and Restated Articles were 4,460,601, votes
against were 18,796, and broker non-votes were 934,477.
3. The approval of the Amended and Restated Regulations of the Company. The
votes in favor of the Amended and Restated Regulations was 4,421,496,
votes against were 17,016, and broker non-votes were 973,607.
4. The election of the seven (7) directors. David J. Richards, S. Trevor
Ferger, Cecil J. Petitti and Michael S. Blue were nominated to serve as
Class I directors for a term expiring at the 1997 annual meeting of the
shareholders. Bryan Whipp, John P. Kennedy and Rodney M. Kinsey were
nominated as Class II directors for a term expiring at the 1998 annual
meeting of shareholders. The following chart is a list of votes cast in
favor, against, and broker non votes for each of the above named
individuals:
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Name: For Against Broker Non-Votes
----- --- ------- ----------------
Richards: 5,418,878 12,700 0
Kennedy: 5,428,878 2,700 0
Petitti: 5,428,878 2,700 0
Ferger: 5,428,878 2,700 0
Whipp: 5,428,816 2,762 0
Kinsey: 5,428,878 2,700 0
Blue: 5,428,878 2,700 0
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Shares are listed for trading on the American
Stock Exchange under the symbol "NMD." Prior to December 18, 1996, the
Company's Common Shares were traded in the over the counter market on the
NASDAQ Bulletin Board. The following table sets forth, for the periods
indicated, the high and low sales prices for the Company's common shares, as
reported on the NASDAQ Bulletin Board and subsequently the American Stock
Exchange. The figures have been adjusted to reflect 2-for-1 stock splits in
May 1994, May 1995 and December 1995. The NASDAQ Bulletin Board prices shown
represent quotations between dealers, without adjustments for retail markups,
markdowns or commissions and may not represent actual transactions:
1995 High Low
---- ---- ---
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. 13.00 9.375
2nd Qtr. 10.75 8.375
3rd Qtr. 9.00 7.125
4th Qtr. 8.875 6.25
1997
----
1st Qtr.
(through March 14, 1997) 9.625 6.75
The number of record holders of the Company's common shares as of March 14,
1997, was 462. The closing sales price of the common shares on March 14, 1997,
was $8.375.
The Company has never paid a cash dividend. 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 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.
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ITEM 6. SELECTED FINANCIAL DATA.
YEAR ENDED DECEMBER 31,
1996 (1) 1995 1994 1993 1992
(unaudited)
-------- ------- ------- -------- ------
Revenue 102,813 48,000 24,765 4,322 27,989
Loss from operations (1,677,312) (525,149) (302,596) (285,591) (210,148)
Net income (loss) (592,822) 1,324,945 (283,537) (277,068) (202,702)
Net income (loss) per
share (0.09) 0.21 (0.05) (0.05) (0.07)
BALANCE SHEET DATA:
Total assets 10,379,590 9,225,744 768,934 962,492 833,074
Total Shareholders'
equity 7,035,067 6,253,679 738,600 923,828 412,457
(1) See Note 1 to Financial Statements regarding the Merger effective
December 16, 1996.
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The Company is an Ohio corporation engaged in the business of acquiring,
developing and marketing medical and health-related technologies. The
Company's revenues are currently derived principally from the marketing of
the PAPNET-Registered Trademark- Testing System and service, which are
proprietary products of NSI. The Company is also currently engaged in the
development of an oxygen generation/concentration device which it plans to
manufacture and sell in the home healthcare market.
The PAPNET-Registered Trademark- Testing 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. The PAPNET-
Registered Trademark- Service permits laboratories to submit slides containing
such specimens to one of NSI's central facilities for image processing employing
NSI's patented neural processed images for evaluation by NSI-trained
cytotechnologists.
On December 5, 1996, the Company's shareholders approved an Agreement and
Plan of Merger (the "Merger Agreement") whereby Cytology Indiana, Inc., Indiana
Cytology Review Company, ER Group, Inc., CCWP Partners, Inc., and Carolina
Cytology, Inc. (the "Predecessor Companies") were merged with and into the
Company (the "Merger"). The Merger was effective on December 16, 1996 and the
Company issued, in the aggregate, 4,849,988 common shares in exchange for the
issued and outstanding shares of the Predecessor Companies. Under terms of the
Merger Agreement, Papnet of Ohio, Inc. changed its name to NetMed, Inc. NetMed
common stock began trading on the American Stock Exchange on December 18, 1996
under the symbol "NMD."
As a result of the Merger, the Company has the marketing rights to the
PAPNET-Registered Trademark- Testing System and service in Ohio, Kentucky,
Missouri, Georgia, North Carolina and the Consolidated Metropolitan Statistical
Area of Chicago. The Company's marketing rights are exclusive within these
territories, subject to the right of NSI to conduct marketing and sales
activities therein. However, because the royalties paid to the Company by NSI
are based on revenues recognized by NSI from activities (including any sales by
NSI) in the licensed territories, NSI's sales activities therein benefit the
Company.
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This report contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in Item I of
this report, in the section entitled "Business Risks."
For accounting purposes, the historical financial statements of the Company
are those of Papnet of Ohio, Inc. The results of operations for the merged
entities, is reported on a prospective basis commencing December 16, 1996. The
following discussion therefore includes the operations of Papnet of Ohio, Inc.
from January 1, 1996 through December 15, 1996, and the combined operations of
all entities from December 16, 1996 through December 31, 1996.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
The PAPNET-Registered Trademark- Testing System was approved by the FDA for
commercial use in the United States on November 8, 1995. Prior to that time, it
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. Therefore, the Company was able to generate only
a minimal amount of revenue from the PAPNET-Registered Trademark- Testing System
during 1994 and 1995. During the first eight months of 1996, the Company and
NSI spent time and effort building a sales force and familiarizing doctors and
laboratories with the benefits of the PAPNET-Registered Trademark- System and
PAPNET-Registered Trademark- Service. Beginning in September of 1996, the
commercial launch of the product was initiated with a national advertising
campaign.
In February 1997, the Company entered into an agreement with Blue Cross
Blue Shield Mutual of Ohio (BCBSO) whereby BCBSO agreed to cover the cost of the
PAPNET-Registered Trademark- test for all members. In addition, BCBSO has
agreed to strongly recommend to its clinicians and laboratories that all
negative Pap smears covered by its benefit plans are to be examined using
PAPNET-Registered Trademark- testing. BCBSO is the largest health care provider
in the State of Ohio with approximately 1.5 million covered members. While
management believes that this agreement will increase the number of Pap smears
processed using the PAPNET-Registered Trademark- Testing System (the "Slides")
during 1997, there can be no guarantee as to the increased quantity or timing of
any increase.
As a result of the FDA approval mentioned above and the commercial launch
of the product in September 1996, the number of Slides processed increased to
13,820 Slides for the year ended December 31, 1996 from 1,529 Slides for the
year ended December 31, 1995. There were no Slides processed during 1994.
Royalty revenue was $102,813, $48,000 and $24,765 for the years ended December
31, 1996, 1995 and 1994, respectively.
Revenue for the year ended December 31, 1996 has been accrued according
to a formula in the Company's license agreement with NSI which calculates
royalties based upon the number of Slides processed in the Company's
territory. Revenue for the years ended December 31, 1995 and 1994 was
accrued using an alternative royalty formula based upon a percentage of NSI's
worldwide revenue.
In anticipation of FDA approval for the PAPNET-Registered Trademark-
test, the Company began hiring additional sales representatives beginning in
the third quarter of 1995 bringing the total to three by December 31, 1995
from one at December 31, 1994. At December 31, 1996 the Company employed a
total of six sales representatives. An additional two sales representatives
and a Sales Director were hired during the first quarter of 1997. In
addition, the Company increased the administrative staff from two during 1994
and 1995 to a total of five by December 31, 1996. The Company also incurred
an expense of $410,000 for the year ended December 31, 1996 as a result of
extending the expiration date of 56,000 options due to expire near the end of
1996. Accounting Principles Board Opinion No. 25 require that extended
options be treated as if they were a new grant. As a result of the headcount
increases mentioned above and the expense for the option extensions, salary
and benefit expense increased to $838,846 for the year ended December 31,
1996 from $303,105 and $196,825 for the years ended December 31, 1995 and
1994 respectively.
While the Company had incurred costs to market and promote the
PAPNET-Registered Trademark- Testing System in the years ended December 31,
1994 and 1995, the amount of expenditure increased significantly during 1996.
Sales and marketing expense other than salaries and benefits was $250,389 for
the year ended December 31, 1996 an increase from $74,329 and $26,433 for the
years ended December 31, 1995 and 1994, respectively. In addition to the
direct expenses of the sales representatives in developing their respective
sales territories, the Company incurred additional expenses for advertising,
promotional materials and sales literature. The Company incurred expense of
$80,000 for professional services in its efforts to expand the reimbursement
of the cost of the PAPNET-Registered Trademark- test by healthcare providers
for the year ended December 31, 1996.
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<PAGE>
General and administrative expenses increased to $240,562 for the year
ended December 31, 1996 compared to $89,299 and $104,103 for the years ended
December 31, 1995 and 1994, respectively. The Company incurred one time costs
for registering with the American Stock Exchange and state securities fees
associated with increasing the number of authorized shares of the Company of
approximately $74,000 for the year ended December 31, 1996. In addition,
general and administrative expense increased due to the increase in headcount as
well as the cost of additional office space beginning in the fourth quarter of
1996.
During 1995, the Company began discussions with the Predecessor Companies
that resulted in the Merger that was effective December 16, 1996. For the year
ended December 31, 1996, the Company incurred one time merger expenses of
$364,852 compared to $106,415 in the year ended December 31, 1995.
While the Company's primary focus has been, and will continue to be,
exploiting its rights under the NSI license, the Company will also consider the
acquisition of compatible business technologies in the future. Consistent with
that plan, the Company incurred costs of $85,476 for the year ended December 31,
1996 in the negotiation and evaluation of additional opportunities in medical
technology. The Company entered into a non-binding preliminary letter of intent
for an investment of approximately $4,000,000 in common stock of HUBLink, Inc.,
a healthcare software development and marketing company. The Company has not
concluded this transaction, but continues to negotiate with HUBLink. On March
3, 1997, the Company announced that it had entered an agreement with
CeramPhysics, Inc. of Westerville, Ohio ("Ceram"), pursuant to which the Company
has the right to acquire control of a newly-organized corporation holding a
world-wide license to Ceram's patented oxygen generation technology, which is
exclusive as to all applications except oxygen sensors and fuel cells.
On December 5, 1995 the Company and the Predecessor Companies 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. As a result of exercising
NSI warrants, settling claims with NSI and buying and selling NSI stock from
NSI's initial public offering, the Company recorded other income of $1,715,399
in the year ended December 31, 1995. The Company has reported a gain on the
sale of securities available-for-sale of $664,057 in the year ended December
31,1996 which has been recorded as other income.
The equity in income or loss in partnerships is the Company's percentage of
income or loss in Carolina Cytology Licensing Company and Carolina Cytology
Warrant Partnership. Both entities were Predecessor Companies and were merged
into the Company on the effective date of the Merger.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily by the issuance of
equity securities and by the sale of NSI stock. The Company's combined cash
and cash equivalents totaled $142,074 at December 31, 1996 a decrease of
$669,285 from December 31, 1996. The decrease is primarily the result of
funding the pre-tax loss, excluding the $410,000 charge for the extension of
options, for the year ended December 31, 1996 of $603,835. While the Company
continues to generate negative operating cash flow on a monthly basis, the
Company does own 697,246 shares of NSI which had a value of $9,238,503 at
December 31, 1996. These shares are unrestricted.
While the Company anticipates that its cash requirements will be
substantial for the foreseeable future, it believes its existing investments
will be adequate to meet those requirements. In particular, the Company has
accounts payable and accrued expense at December 31, 1996 of approximately
$350,000, the Company continues to generate negative cash flow on a monthly
basis and the costs associated with the sales and marketing efforts to
healthcare providers, doctors, laboratories and direct to the consumer will be
substantial during 1997 and potentially 1998. The sales and marketing expenses
include, but are not limited to, the cost of expanding the sales force, direct
advertising to consumers, advertising and promotion expense associated with the
implementation of the BCBSO contract and professional fees associated with
marketing to healthcare providers. The professional fees associated with
marketing to healthcare providers is necessary as the current sales force is
responsible for marketing primarily to doctors and laboratories. While
management believes that the above strategies will increase Slide volume, there
can be no guarantee as to the timing and the amount of increase, if any.
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In addition to exploiting its rights under the license agreement with
NSI, the corporate mission of the Company is to become a well diversified
health care technology company founded upon proprietary products that offer a
distinct market advantage. The Company's intention is to follow the example
of the initial investment, the PAPNET-Registered Trademark- technology, in
pursuing other opportunities in healthcare technology. Specifically, making
early investments and applying the management and marketing resources of the
Company to develop and implement strategies which will substantially increase
the value of the investment over a period of two to four years. As
opportunities become available, the Company will require substantial funds in
making the initial investment and/or commercializing the healthcare product.
The Company has currently committed to the following in conjunction with the
recent agreement with CeramPhysics. Pursuant to the agreement, the Company
will work with and loan up to $200,000 to Ceram to complete the fabrication
and testing of a ceramic element incorporating the licensed technology, which
will be capable of generating oxygen of a purity and in quantities suitable
for medical use. It is the Company's intention to incorporate the element
into an oxygen generation device which the Company will manufacture and
market for the home health care market. If the device is acceptable to the
Company, it has the right to acquire 95% of the Capital Stock of the licensee
company for an additional $200,000 investment, with the remaining 5% to be
held by Ceram. In addition, substantial funds would be necessary to
commercialize the oxygen device beginning in late 1997 and during 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this Item is submitted in a separate section of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included under the captions
"ELECTION OF DIRECTORS," "EXECUTIVE OFFICERS" and "SECTION 16(A) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE" in the Company's Proxy Statement (the "Proxy
Statement") relating to the Company's 1997 Annual Meeting of Shareholders to be
held on May 15, 1997, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included under the captions
"INFORMATION CONCERNING THE BOARD OF DIRECTORS" and "EXECUTIVE COMPENSATION" in
the Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included under the captions
"OWNERSHIP OF COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS" and "OWNERSHIP
OF COMMON STOCK BY PRINCIPAL STOCKHOLDERS" in the Proxy Statement and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included under the captions
"CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS" in the Proxy
Statement and is incorporated herein by reference.
-16-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
(1) The following financial statements are included in this report
under Item 8:
Balance Sheets as of December 31, 1996 and 1995.
Statements of Operations for the years ended December 31, 1996, 1995,
and 1994.
Statements of Stockholders' Equity for the years ended December 31,
1996, 1995, and 1994.
Statements of Cash Flows for the years ended December 31, 1996, 1995,
and 1994.
Notes to the Financial Statements.
(2) The following financial statement schedule is included in this
Annual Report on Form 10-K and should be read in conjunction with the Financial
Statements contained in the Annual Report.
None.
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.
(3) Exhibits:
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3(a) Amended and Restated Articles of Incorporation of the Registrant.
(Previously filed as Part of Appendix A to the Registration
Statement on Form S- 4, Registration No. 333-8199, and
incorporated herein by reference.)
3(b) Amended and Restated Regulations of the Registrant. (Previously
filed as Part of Appendix A to the Registration Statement on
Form S-4, Registration No. 333-8199, and incorporated herein by
reference.)
3(c) Form of Specimen Stock Certificate. (Previously filed as Exhibit
3(e) to the Registration Statement on Form S-4, Registration No.
333-8199, and incorporated herein by reference.)
4(a) Articles FOURTH, SIXTH, SEVENTH, EIGHTH, TENTH, and ELEVENTH, of
the Registrant's Amended and Restated Articles of Incorporation
and Articles I, V and VII of the Registrant's Amended and
Restated Regulations. (Previously filed as Part of Appendix A
to the Registration Statement on Form S-4, Registration No.
333-8199, and incorporated herein by reference.)
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
-17-
<PAGE>
Partnership, and GRK Partners, dated as of December 5, 1995.
(Previously filed as Exhibit 10(a) to the Registration Statement
on Form S-4, Registration No. 333-8199, and incorporated herein
by reference.)
10(b) 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. (Previously filed as Exhibit
10(c) to the Registration Statement on Form S-4, Registration
No. 333-8199, and incorporated herein by reference.)
10(c) 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 18, 1996. (Previously
filed as Exhibit 10(d) to the Registration Statement on Form S-4,
Registration No. 333-8199, and incorporated herein by reference.)
10(d) Loan Agreement between the Registrant and Cytology West, Inc.
and Papnet Utah, Inc., dated March 14, 1996. (Previously filed
as Exhibit 10(e) to the Registration Statement on Form S-4,
Registration No. 333-8199, and incorporated herein by reference.)
10(e) Promissory Note and Security Agreement among Cytology West, Inc.
and the Registrant dated April 5, 1996 and April 4, 1996,
respectively. (Previously filed as Exhibit 10(f) to the
Registration Statement on Form S-4, Registration No. 333-8199,
and incorporated herein by reference.)
10(f) Guaranty executed by Carl Genberg, guaranteeing all obligation of
Cytology West, Inc., dated April 4, 1996. (Previously filed as
Exhibit 10(g) to the Registration Statement on Form S-4,
Registration No. 333-8199, and incorporated herein by reference.)
10(g) Security Agreement granting a security interest in Neuromedical
Systems, Inc. stock to the Registrant, executed by Carl Genberg
on April 4, 1996. (Previously filed as Exhibit 10(h) to the
Registration Statement on Form S-4, Registration No. 333-8199,
and incorporated herein by reference.)
10(h) Amended and Restated 1995 Stock Option Plan of the Registrant.
(Previously filed as Exhibit 10(i) to the Registration Statement
on Form S-4, Registration No. 333-8199, and incorporated herein
by reference.)
10(i) Registrant Office Lease. (Previously filed as Exhibit 10(j) to
the Registration Statement on Form S-4, Registration No. 333-
8199, and incorporated herein by reference.)
10(j) * Investment Agreement among the Registrant, CeramPhysics, Inc. and
Ceram Oxygen Technologies, Inc., dated February 28, 1997.
10(k) * Revolving Loan-Grid Note, between the Registrant as the lender
and Ceram Oxygen Technologies, Inc. as maker, dated February 28,
1997.
10(l) * Marketing Support Agreement among Neuromedical Systems, Inc., the
Registrant, and Blue Cross and Blue Shield Mutual of Ohio, dated
January 30, 1997.**
-18-
<PAGE>
24 * Powers of Attorney.
27 * Financial Data Schedule.
- ----------------------
* Filed with this Registration Statement.
** Registrant has requested that portions of this Exhibit be given
confidential treatment.
(B) REPORTS ON FORM 8-K
None.
(C) EXHIBITS
The exhibits to this report appear after the financial statements.
(D) FINANCIAL STATEMENT SCHEDULES
None.
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NetMed, Inc.
Date: March 21,1997 By: /s/ David J. Richards
----------------------------
David J. Richards, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 21st day of March, 1997.
SIGNATURE TITLE
/s/ David J. Richards President, Secretary and Director
- ---------------------------------
David J. Richards
*John P. Kennedy Vice President-Business Development,
- --------------------------------- Assistant Secretary, Treasurer, and Director
John P. Kennedy
*Kenneth B. Leachman Vice President - Finance
- --------------------------------- (Principal Accounting Officer)
Kenneth B. Leachman
*S. Trevor Ferger Director
- ---------------------------------
S. Trevor Ferger
*Cecil J. Petitti Director
- ---------------------------------
Cecil J. Petitti
*James F. Zid Director
- ---------------------------------
James F. Zid
*Michael S. Blue Director
- ---------------------------------
Michael S. Blue
*Robert J. Massey Director
- ---------------------------------
Robert J. Massey
*By: /s/ David J. Richards
---------------------------------------
David J. Richards, Attorney in fact
-20-
<PAGE>
Annual Report on Form 10-K
Item 8, Item 14(a)(1) and (2), (c) and (d)
Financial Statements and Supplementary Data
List of Financial Statements and Financial Statement Schedules
Certain Exhibits
Financial Statement Schedules
Year ended December 31, 1996
NetMed, Inc.
Dublin, Ohio
21
<PAGE>
NetMed, Inc.
Audited Financial Statements
Years ended December 31, 1996, 1995 and 1994
CONTENTS
Report of Independent Auditors...............................................23
Audited Financial Statements
Balance Sheets...............................................................24
Statements of Operations.....................................................25
Statements of Stockholders' Equity...........................................26
Statements of Cash Flows.....................................................27
Notes to Financial Statements................................................28
22
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
NetMed, Inc.
We have audited the accompanying balance sheets of NetMed, Inc. (the Company)
as of December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. 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,
1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Columbus, Ohio
March 14, 1997
23
<PAGE>
NetMed, Inc.
Balance Sheets
DECEMBER 31
1996 1995
------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 142,074 $ 811,359
Accounts receivable 175,512 75,993
Note receivable from stockholder (NOTE 6) -- 50,000
Prepaid assets 28,394 1,021
------------------------------
Total current assets 345,980 938,373
Notes receivable - NSI 21,443 51,080
Investment in NSI--available for sale 9,238,503 7,696,296
Investment in partnerships -- 172,679
Furniture and equipment (net of accumulated
depreciation of $32,399 -- 1996 and
$24,623 -- 1995) 28,034 17,316
Deferred taxes 744,162 348,670
Deposits and other assets 1,468 1,330
------------------------------
Total assets $10,379,590 $ 9,225,744
------------------------------
------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 97,625 $ 49,931
Accrued expenses 223,536 81,630
Loan payable 96,909 --
Other liabilities 29,844 42,831
------------------------------
Total current liabilities 447,914 174,392
Deferred taxes 2,896,609 2,797,673
Stockholders' equity:
Common stock, no par value, 20,000,000
shares authorized, 10,940,524 and
6,072,936 issued and outstanding
at December 31, 1996 and 1995 3,881,605 2,562,542
Unrealized gains on available-for-sale
securities net of deferred taxes of
$2,636,509 in 1996 and $2,517,718
in 1995 3,954,764 3,899,617
Retained deficit (801,302) (208,480)
------------------------------
Total stockholders' equity 7,035,067 6,253,679
------------------------------
Total liabilities and stockholders'
equity $10,379,590 $ 9,225,744
------------------------------
------------------------------
SEE ACCOMPANYING NOTES.
24
<PAGE>
NetMed, Inc.
Statements of Operations
YEAR ENDED DECEMBER 31
1996 1995 1994
------------------------------------------
Royalty revenue $ 102,813 $ 48,000 $ 24,765
Operating expenses:
Salaries and benefits 838,846 303,105 196,825
Sales and marketing 250,389 74,329 26,433
General and administrative 240,562 89,299 104,103
Business development 85,476 -- --
Merger (NOTE 1) 364,852 106,415 --
------------------------------------------
Total operating expense 1,780,125 573,149 327,361
------------------------------------------
Operating loss (1,677,312) (525,149) (302,596)
Other income (expense):
Interest income 13,743 16,606 19,059
Interest expense (872) (264) --
Gain on sale of availabl-for-sale
securities 664,057 -- --
Equity income in partnerships (13,451) 49,638 --
NSI settlement and common stock
transactions (NOTE 3) -- 1,715,399 --
------------------------------------------
Total other income 663,477 1,781,379 19,059
------------------------------------------
(Loss) income before income taxes (1,013,835) 1,256,230 (283,537)
Income tax benefit (421,013) (68,715) --
------------------------------------------
Net (loss) income $ (592,822) $1,324,945 $(283,537)
------------------------------------------
------------------------------------------
Net (loss) income per share $(.09) $.21 $(.05)
------------------------------------------
------------------------------------------
Shares used in computation 6,263,924 6,349,594 5,860,336
------------------------------------------
------------------------------------------
SEE ACCOMPANYING NOTES.
25
<PAGE>
NetMed, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
ADJUSTMENTS
TO UNREALIZED RETAINED
COMMON GAINS EARNINGS
STOCK (LOSSES) (DEFICIT) TOTAL
----------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1994 $2,173,716 $ -- $(1,249,888) $ 923,828
Stock issued and warrants exercised 98,309 -- -- 98,309
Net loss -- -- (283,537) (283,537)
----------------------------------------------------
Balance, December 31, 1994 2,272,025 -- (1,533,425) 738,600
Stock issued and warrants exercised 290,517 -- -- 290,517
Adjustment to unrealized gains net
of tax -- 3,899,617 -- 3,899,617
Net income -- -- 1,324,945 1,324,945
----------------------------------------------------
Balance, December 31, 1995 2,562,542 3,899,617 (208,480) 6,253,679
Stock options exercised 3,600 -- -- 3,600
Adjustment to unrealized gains
net of tax -- (1,710,691) -- (1,710,691)
Net assets acquired via the merger
(Note 1) 905,463 1,765,838 -- 2,671,301
Deferred compensation stock options 410,000 -- -- 410,000
Net loss -- -- (592,822) (592,822)
----------------------------------------------------
Balance, December 31, 1996 $3,881,605 $ 3,954,764 $ (801,302) $ 7,035,067
----------------------------------------------------
----------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
26
<PAGE>
NetMed, Inc.
Statements of Cash Flows
YEAR ENDED DECEMBER 31
1996 1995 1994
-------------------------------------
OPERATING ACTIVITIES
Net (loss) income $ (592,822) $ 1,324,945 $(283,537)
Adjustments to reconcile net income
(loss) to net cash provided by (used
for) operating activities:
Depreciation and amortization 7,776 7,496 8,152
Recognition of deferred tax assets (421,013) (68,715) --
Gain on settlement and exercise of
warrants with NSI -- (1,402,002) --
Gain on available-for-sale securities (664,057) -- --
Compensation on extended stock options 410,000 -- --
Equity (income) loss in partnership 13,451 (49,638) --
Changes in operating assets and
liabilities:
Accounts receivable (55,727) (42,548) (24,765)
Note receivable from stockholder 50,000 -- (50,000)
Prepaid assets (27,373) -- --
Accounts payable 47,694 49,931 (23,905)
Accrued expenses and other
liabilities 101,398 94,127 15,574
-------------------------------------
Net cash used in operating activities (1,130,673) (86,404) (358,481)
INVESTING ACTIVITIES
Sale of NSI stock 750,057 -- --
Net cash advances to Predecessor
Companies in contemplation of Merger (400,183) -- --
Notes receivable - NSI 29,637 74,961 70,717
Purchase of furniture and equipment (18,494) (4,260) (7,200)
Other assets (138) 1,000 (172)
-------------------------------------
Net cash provided by investing activities 360,879 71,701 63,345
FINANCING ACTIVITIES
Proceeds from stock subscription
receivable -- -- 290,975
Proceeds from margin account 96,909 -- --
Issuance of common stock and warrants
exercised 3,600 290,517 98,309
-------------------------------------
Net cash provided by financing activities 100,509 290,517 389,284
-------------------------------------
Net (decrease) increase in cash (669,285) 275,814 94,148
Cash and cash equivalents at beginning
of period 811,359 535,545 441,397
-------------------------------------
Cash and cash equivalents at end of
period $ 142,074 $ 811,359 $ 535,545
-------------------------------------
-------------------------------------
SEE ACCOMPANYING NOTES.
27
<PAGE>
NetMed, Inc.
Notes to Financial Statements
December 31, 1996
1. ORGANIZATION AND BASIS OF PRESENTATION
On December 5, 1996, the Company's shareholders approved an Agreement and
Plan of Merger (the Merger Agreement') whereby Cytology Indiana, Inc.,
Indiana Cytology Review Company, ER Group, Inc., CCWP Partners, Inc. (CCWP),
and Carolina Cytology, Inc. (the Predecessor Companies') were merged with
and into the Company (the Merger ). The Merger was effective on December
16, 1996 and the Company issued, in the aggregate, 4,849,988 shares of its
common stock, without par value, in exchange for the issued and outstanding
shares of the Predecessor Companies. Under terms of the Merger Agreement,
the Company changed its name from Papnet of Ohio, Inc. to NetMed, Inc
Prior to the Merger, Papnet of Ohio, Inc. and each of the Predecessor
Companies (except for CCWP) held long-term territorial license agreements
("License Agreement") issued by Neuromedical Systems, Inc. (NSI). The
License Agreements provide the right to sell the "PAPNET-Registered
Trademark- System" and the "PAPNET-Registered Trademark- Service", as
described below, in Ohio, Kentucky, Missouri, Georgia, North Carolina and the
Standard Metropolitan Area of Chicago. As a result of the Merger, and in
accordance with an agreement with NSI, the individual License Agreements held
by Papnet of Ohio, Inc. and the Predecessor Companies will be exchanged for a
single License Agreement that encompasses the same territories covered by the
individual License Agreements.
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 Pap smear
slides to one of NSI's central facilities for processing by the PAPNET
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.
The Merger of the Company and the Predecessor Companies occurred in
connection with the initial registration of the Company's common stock with
the Securities and Exchange Commission (SEC) which resulted in the public
trading of the Company's common stock. The Merger was accounted for at
historical cost based on the guidance in SEC Staff Accounting Bulletins 48
and 97. The results of operations of the Predecessor Companies have been
combined with those of the Company on a prospective basis commencing at the
date of Merger. The following displays summarized pro forma results of
operations assuming the Merger transaction occurred on January 1, 1995:
28
<PAGE>
NetMed, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
PRO FORMA
YEAR ENDED DECEMBER 31
1996 1995
--------------------------
Royalty revenue $ 222,002 $ 84,000
Operating loss (2,153,257) (641,788)
Net (loss) income (1,032,865) 2,484,546
Net (loss) income per share (.10) .23
The Company received the following assets and assumed the following
liabilities at the Merger date:
Cash $ 41,000
Accounts receivable 44,000
NSI common stock 4,457,000
----------
----------
Totals assets $4,542,000
Payable to Net Med, Inc. $ 441,000
Accrued liabilities 27,000
Deferred taxes 1,256,000
Minority interest 146,000
----------
1,870,000
----------
Net equity at Merger $2,672,000
----------
----------
The payable to the Company was offset against a related receivable from the
Predecessor Companies recorded on the books of the Company at the date of
Merger. In addition, the minority interest represented Net Med's interest in
two partnerships controlled by certain predecessor companies (see Note 2).
29
<PAGE>
NetMed, Inc.
Notes to Financial Statements (continued)
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
The Company considers all short-term deposits and highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
INVESTMENT IN PARTNERSHIPS
Prior to the Merger described in Note 1, the Company owned a minority
interest in two partnerships which were accounted for by the equity method.
The majority owners of these partnerships were parties to the Merger
Agreement, so the partnerships were merged into the Company at the effective
date of the Merger.
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.
30
<PAGE>
NetMed, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
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.
STOCK-BASED COMPENSATION
The Company accounts for stock compensation arrangements in accordance with
APB Opinion No. 25, "Accounting for Stock issued to Employees." The pro
forma information regarding net income and earnings per share as required by
Statement of Financial Accounting Standards No.123, "Accounting for
Stock-Based Compensation ("SFAS No. 123") is disclosed in "Note 4 - Stock
Options and Warrants."
RECLASSIFICATION
Certain amounts presented for 1995 and 1994 have been reclassified to conform
to the 1996 presentation.
31
<PAGE>
NetMed, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET (LOSS) INCOME PER SHARE
Net (loss) income per share amounts are based on the weighted average common
and common equivalent shares outstanding during the respective periods
(including 4,849,988 shares issued in connection with Merger on December 16,
1996). Common stock equivalents were antidilutive in 1996 and 1994;
therefore, they were excluded from the calculation of net income per share.
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."
During 1996, the Company sold 43,000 shares of NSI stock which resulted in a
gain of $664,057 which was reported as other income.
As of December 31, 1996, the Company owned 697,246 shares of NSI stock at a
cost of $2,647,237. The NSI common stock has been recorded in the
accompanying balance sheet based on its $13.25 closing price on December 31,
1996. On March 14, 1997, NSI common stock closed trading at $9.625 per
share.
The exercise of the warrants in NSI was completed in 1995 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.
32
<PAGE>
NetMed, Inc.
Notes to Financial Statements (continued)
4. STOCK OPTIONS AND WARRANTS
The Company's 1995 Stock Option Plan (the "Stock Option Plan") provides for
the granting of options that may either meet the requirements of Section 422
("Incentive Options") of the Internal Revenue Code of 1986, as amended (the
"Code") or not meet such requirements ("Nonqualified Options"). Key
employees, officers, and directors of, and consultants and advisors who
render services to, the Company are eligible to receive options under the
Stock Option Plan. The number of shares available for grants under the Stock
Option Plan was 300,000 at December 31, 1996 and 1995.
Pro forma information regarding net income and earnings per share is required
by SFAS No. 123, which also requires that the information be determined as if
the Company has accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996: risk-free interest rate of 6.0%; no dividend
yield; volatility factor of the expected market price of the Company's common
stock of .62; and expected lives ranging from 2 to 5 years.
If the Company had elected to recognize compensation cost based on the fair
value of options at the grant date as prescribed by SFAS No. 123, the
following displays what reported net income (loss) and per share amounts
would have been:
PRO FORMA YEARS ENDED
DECEMBER 31,
1996 1995
-----------------------
Net (loss) income $(873,876) $1,257,467
Net (loss) income per share $(.14) $.20
The pro forma financial effects of applying SFAS N0. 123 are not likely to be
representative of the pro forma effects on reported results of operations for
future years.
33
<PAGE>
NetMed, Inc.
Notes to Financial Statements (continued)
4. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following is a summary of the stock option activity for a prior
non-qualified plan (no additional options may be granted under this plan):
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------------------------------------
NON-QUALIFIED PLAN
Outstanding at December 31, 1993 397,600 $ 1.21
Issued 32,000 $ 2.75
Expired 24,000 $ 1.38
---------------
Outstanding at December 31, 1994 405,600 $ 1.32
Issued 16,000 $11.00
Expired 56,000 $ 1.38
---------------
Outstanding at December 31, 1995 365,600 $ 1.74
Issued 56,000 $ 1.55
Exercised 21,200 $ 1.53
Expired 64,000 $ 1.53
---------------
Outstanding at December 31, 1996 336,400 $ 1.76
---------------
---------------
Exercisable at December 31, 1994 197,600 $1.22
Exercisable at December 31, 1995 349,600 $1.31
Exercisable at December 31, 1996 336,400 $1.76
34
<PAGE>
NetMed, Inc.
Notes to Financial Statements (continued)
4. STOCK OPTIONS AND WARRANTS (CONTINUED)
During 1996, the company extended the expiration date of 56,000 options due
to expire near the end of the year. Accounting Principles Board Opinion No.
25 requires that extended options be treated as if they were a new grant. The
exercise price set for these options was below the market price at the date
of grant and resulted in $410,000 in compensation expense. These options had
a weighted-average fair value and a weighted-average exercise price of $7.60
and $1.55, respectively. During 1995, the Company issued 16,000 options with
an exercise price equal to the market price at the grant date. The weighted
average fair value of these options was $6.39. Exercise prices for options
outstanding at December 31, 1996 ranged from $1.09 to $11.00 and had a
weighted-average remaining contractual life of 6.57 years.
As of December 31, 1996, 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.
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------------------------------------
Outstanding at December 31, 1993 339,040 $1.01
Exercised (84,000) $1.25
---------------
Outstanding at December 31, 1994 255,040 $ .93
Exercised during 1995 (184,020) $ .90
---------------
Outstanding at December 31, 1995
and December 31, 1996 71,020 $1.25
---------------
---------------
35
<PAGE>
NetMed, Inc.
Notes to Financial Statements (continued)
5. INCOME TAXES
Significant components of deferred tax assets and liabilities are as follows:
1996 1995
-------------------------------
Loss carryforwards $ 580,162 $ 348,670
Unrealized gains on investments (2,636,509) (2,517,718)
Gain on NSI warrants (260,100) (260,100)
Income from Equity Investee -- (19,855)
Stock options issued 164,000 --
-------------- ---------------
Net deferred tax liability $(2,152,447) $(2,449,003)
-------------- ---------------
-------------- ---------------
At December 31, 1996, the Company had unused NOL carryforwards for tax
purposes of approximately $329,000, $320,000, $211,000, and $251,000 which
expire in 2007, 2008, 2009 and 2010, respectively.
At December 31, 1994, a full valuation allowance was recorded due to the lack
of deferred tax liabilities, historical income and tax planning strategies.
For 1995 and 1996, due to the existence of a significant deferred tax
liability, a valuation allowance was not required.
36
<PAGE> NetMed, Inc.
Notes to Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
The reconciliation of income tax computed at the statutory rate to the
recorded tax provision (benefit) is:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------
<S> <C> <C> <C>
Tax provision (benefit) at statutory rate $(344,704) $ 427,118 $(96,402)
Benefit of state loss carryforward (76,309) -- --
Recognition of previously reserved tax
assets -- (495,833) --
Valuation allowance provided -- -- 96,402
---------------------------------------
Total tax provision (benefit) $(421,013) $ (68,715) $ --
---------------------------------------
---------------------------------------
</TABLE>
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. Under the loan agreement, effective with
the Merger described in Note 1, the loan was deemed a bonus and converted into
compensation during the year ended December 31,1996.
7. LEASES
The Company leases facilities and equipment under operating leases. Commitments
for these leases approximate $21,000 per year through August 14, 2001. Rent
expense for the years ended December 31, 1996, 1995 and 1994 was $41,677,
$19,537 and $15,526, respectively.
37
<PAGE>
NETMED, INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996
EXHIBIT INDEX
<PAGE>
EXHIBIT INDEX
EXHIBIT EXHIBIT
EXHIBIT INDEX
NUMBER
DESCRIPTION PAGE NUMBER
- ------------- -------------
3(a) Amended and Restated Articles
of Incorporation of the Registrant.
(Previously filed as part of Appendix A
to the Registration Statement on Form S-4,
Registration No. 333-8891, and
incorporated herein by reference.)
3(b) Amended and Restated Regulations of
Registrant. (Previously filed as part
of Appendix A to the Registration Statement
on Form S-4, Registration No. 333-8891,
and incorporated herein by reference.)
3(c) Form of Specimen Stock Certificate. (Previously
filed as Exhibit 3(e) to the Registration Statement
on Form S-4, Registration No. 333-8891, and
incorporated herein by reference.)
4(a) Articles FOURTH, SIXTH,
SEVENTH, EIGHTH, TENTH, and ELEVENTH,
of the Registrant's Restated Articles of
Incorporation and Articles I, V, and VII
of the Registrant's Amended and Restated
Regulations (Previously filed as part of
Appendix A to the Registration Statement on
Form S-4, Registration No. 333-8891, and
incorporated herein by reference.)
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.
(Previously filed as Exhibit 10(a) to the
Registration Statement on Form S-4,
Registration No. 333-8891, and incorporated
herein by reference.)
10(b) Voting Agreement among the
Registrant, Cytology Indiana, Inc.,
Indiana Cytology Review Company, ER
Group, Inc., CCWP Partners, Inc., and
Carolina Cytology, Inc.,
<PAGE>
and certain shareholders of these entities
dated July 5, 1996. (Previously filed as
Exhibit 10(c) to the Registration
Statement on Form S-4, Registration No.
333-8891, and incorporated herein by
reference.)
10(c) 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. (Previously filed as
Exhibit 10(d) to the Registration
Statement on Form S-4, Registration No.
333-8891, and incorporated herein by
reference.)
10(d) Loan Agreement between the
Registrant and Cytology West, Inc. and
Papnet Utah, Inc. dated March 14, 1996.
(Previously filed as Exhibit 10(d) to
the Registration Statement on Form S-4,
Registration No. 333-8891, and
incorporated herein by reference.)
10(e) Promissory Note and Security
Agreement among Cytology West, Inc. and
the Registrant dated April 5, 1996 and
April 4, 1996 respectively. (Previously
filed as Exhibit 10(f) to the
Registration Statement on Form S-4,
Registration No. 333-8891, and
incorporated herein by reference.)
10(f) Guaranty executed by Carl Genberg, guaranteeing
all obligations of Cytology West, Inc.,
dated April 4, 1996. (Previously filed
as Exhibit 10(g) to the Registration
Statement on Form S-4, Registration No.
333-8891, and incorporated herein by
reference.)
10(g) Security Agreement, granting a
security interest in Neuromedical
Systems, Inc. stock to the Registrant,
executed by Carl Genberg on April 4,
1996. (Previously filed as Exhibit 10(h)
to the Registration Statement on Form S-
4, Registration No. 333-8891, and
incorporated herein by reference.)
10(h) Amended and Restated 1995 Stock
Option Plan of the Registrant.
(Previously filed as Exhibit 10(i) to
the Registration Statement on Form S-4,
Registration No. 333-8891, and
incorporated herein by reference.)
10(i) Registrant's Office Lease. (Previously filed as
Exhibit 10(j) to the Registration Statement on Form
S-4, Registration No. 333-8891, and incorporated
<PAGE>
herein by reference.)
10(j) * Investment Agreement among the Registrant,
CeramPhysics, Inc. and Ceram Oxygen Technologies,
Inc., dated February 28, 1997.
10(k) * Revolving Loan-Grid Note, between the Registrant as
lender and Ceram Oxygen Technologies, Inc., as maker,
dated February 28, 1997.
10(l) * Marketing Support Agreement, among Neuromedical
Systems, Inc., the Registrant, and Blue Cross and Blue
Shield Mutual of Ohio, dated January 30, 1997.**
24 * Powers of Attorney.
27 * Financial Data Schedule.
- ---------------
* Filed with this Registration Statement.
** Registrant has requested that portions of this Exhibit be given
confidential treatment.
<PAGE>
INVESTMENT AGREEMENT
dated as of February 28, 1997
by and among
NETMED, INC.,
CERAMPHYSICS, INC., AND
CERAM OXYGEN TECHNOLOGIES, INC.
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
DEFINED TERMS
ARTICLE II
PURCHASE OF SHARES
Section 2.1 Purchase and Sale. . . . . . . . . . . . . . 2
Section 2.2. Payment. . . . . . . . . . . . . . . . . . . 2
Section 2.3. License Fee . . . . . . . . . . . . . . . . 2
ARTICLE III
LOANS TO THE COMPANY
Section 3.1. Loans. . . . . . . . . . . . . . . . . . . . 2
Section 3.2. Interest . . . . . . . . . . . . . . . . . . 2
Section 3.3. Evidence of the Loan and Terms of Payment. . 3
Section 3.4. Prepayment . . . . . . . . . . . . . . . . . 3
Section 3.5. Security . . . . . . . . . . . . . . . . . . 3
Section 3.6. Limited Guaranty of CPI. . . . . . . . . . . 3
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND CPI
Section 4.1. Corporate Existence. . . . . . . . . . . . . 3
Section 4.2. Power and Authority. . . . . . . . . . . . . 4
Section 4.3. Absence of Undisclosed Liabilities . . . . . 4
Section 4.4. Subsidiaries . . . . . . . . . . . . . . . . 4
Section 4.5. Absence of Certain Changes . . . . . . . . . 4
Section 4.6. Litigation . . . . . . . . . . . . . . . . . 5
Section 4.7. Other Relationships. . . . . . . . . . . . . 5
Section 4.8. Licenses; Compliance with Laws, Other
Agreements, etc. . . . . . . . . . . . . . . 5
Section 4.9. Intellectual Property Rights . . . . . . . . 5
Section 4.10. Ownership and Status of Stock. . . . . . . . 6
Section 4.11. Disclosure . . . . . . . . . . . . . . . . . 6
Section 4.12. Minute Books . . . . . . . . . . . . . . . . 6
ii
<PAGE>
Page
----
Section 4.13. Employment Contracts, etc; Certain Material
Transactions . . . . . . . . . . . . . . . . 6
Section 4.14. Contracts and Commitments, etc.. . . . . . . 7
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF INVESTOR
Section 5.1. Power and Authority . . . . . . . . . . . . . 7
Section 5.2. Purchase for Investment . . . . . . . . . . . 7
ARTICLE VI
COVENANTS OF THE COMPANY AND CPI
Section 6.1. Development of Prototype. . . . . . . . . . . 8
Section 6.2. Use of Loan Proceeds. . . . . . . . . . . . . 8
Section 6.3. Accounts and Reports. . . . . . . . . . . . . 8
Section 6.4. Compensation of Executive Officers. . . . . . 9
Section 6.5. Noncompetition and Proprietary Rights
Agreements. . . . . . . . . . . . . . . . . . 9
Section 6.6. Observer Rights . . . . . . . . . . . . . . . 9
Section 6.7. Liability Insurance . . . . . . . . . . . . . 9
Section 6.8 Taxes and Assessments . . . . . . . . . . . . 9
Section 6.9. Maintenance of Corporate Existence. . . . . . 10
Section 6.10. Governmental Consents . . . . . . . . . . . . 10
Section 6.11. Further Assurances. . . . . . . . . . . . . . 10
Section 6.12. Negative Covenants. . . . . . . . . . . . . . 10
Section 6.13. Waiver. . . . . . . . . . . . . . . . . . . . 11
Section 6.14. Termination of Covenants. . . . . . . . . . . 11
ARTICLE VII
THE CLOSING AND CLOSING CONDITIONS
Section 7.1. Election of Investor to Close . . . . . . . . 11
Section 7.2. The Closing . . . . . . . . . . . . . . . . . 11
Section 7.3. Conditions of Closing . . . . . . . . . . . . 12
Section 7.4. Supporting Documents. . . . . . . . . . . . . 12
Section 7.5. Reasonable Satisfaction of Investor . . . . . 13
iii
<PAGE>
Page
----
ARTICLE VIII
EVENTS OF DEFAULT
Section 8.1. Nature of Events. . . . . . . . . . . . . . . 13
Section 8.2. Default Remedies. . . . . . . . . . . . . . . 14
ARTICLE IX
MISCELLANEOUS
Section 9.1. Expenses. . . . . . . . . . . . . . . . . . . 14
Section 9.2. Remedies Cumulative . . . . . . . . . . . . . 14
Section 9.3. Action for Breach . . . . . . . . . . . . . . 14
Section 9.4. Brokerage . . . . . . . . . . . . . . . . . . 14
Section 9.5. Severability. . . . . . . . . . . . . . . . . 15
Section 9.6. Parties In Interest . . . . . . . . . . . . . 15
Section 9.7. Notices . . . . . . . . . . . . . . . . . . . 15
Section 9.8. No Waiver . . . . . . . . . . . . . . . . . . 16
Section 9.9. Integration . . . . . . . . . . . . . . . . . 16
Section 9.10. Survival of Agreements etc. . . . . . . . . . 16
Section 9.11. Construction. . . . . . . . . . . . . . . . . 16
Section 9.12. Counterparts. . . . . . . . . . . . . . . . . 16
Section 9.13. Assignment; No Third-Party Beneficiaries. . . 16
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . 17
iv
<PAGE>
INVESTMENT AGREEMENT
This Agreement is made as of February 28, 1997, among CeramPhysics, Inc.,
an Ohio corporation ("CPI"), Ceram Oxygen Technologies, Inc., an Ohio
corporation ("Company"), and NetMed, Inc., an Ohio corporation ("Investor").
RECITAL
The Company has been recently formed as a wholly-owned subsidiary of CPI
and holds an exclusive license to certain oxygen generation technology from CPI.
The Investor is willing, on the terms contained in this Agreement, to advance
funds to the Company to finance further development of the technology, and on
the conditions set forth herein, to purchase common shares of the Company.
STATEMENT OF AGREEMENT
In consideration of the foregoing, and of their mutual promises contained
herein, the parties agree as follows:
ARTICLE I
DEFINED TERMS
The following terms, when used in this Agreement, have the following
meanings, unless the context otherwise indicates:
"Closing" and "Closing Date" mean the consummation of sale and the
Investor's purchase of the Common Shares, and the date on which the same occurs.
"Common Shares" means the no par value common shares of the Company.
"License Agreement" means the License Agreement of even date pursuant to
which the Technology has been licensed to the Company by CPI.
"Prototype" means a prototype ceramic honeycomb element incorporating the
Technology to be developed by the Company, with the assistance of CPI, using the
best available electroding, manifolding, and sealing technology, which will be
presented to Investor for testing for suitability for incorporation into medical
oxygen generation units to be fabricated by the Company.
"Shares" means any Common Shares, as the context requires.
"Technology" means the oxygen generation technology licensed to the Company
by CPI pursuant to the terms of the License Agreement.
Additional defined terms are found in the body of the following text.
<PAGE>
The masculine form of words includes the feminine and the neuter and vice
versa, and, unless the context otherwise requires, the singular form of words
includes the plural and vice versa. The words "herein," "hereof," "hereunder,"
and other words of similar import when used in this Agreement refer to this
Agreement as a whole, and not to any particular section or subsection. All
Schedules and Exhibits to this Agreement are incorporated herein by this
reference.
ARTICLE II
PURCHASE OF SHARES
Section 2.1. PURCHASE AND SALE. Subject to the terms and conditions of
this Agreement, including satisfactory completion of testing of the Prototype as
provided in Section 7.1, the Company shall issue and sell to the Investor and
the Investor shall purchase from the Company at the Closing ninety-five (95)
Shares, for a total purchase price of Two Hundred Thousand Dollars ($200,000)
(the "Purchase Price"). The Company and CPI represent and warrant that the
number of Common Shares to be issued and sold to Investor shall represent in the
aggregate not less than ninety five percent (95%) of the aggregate number of
Shares of the Company which will be outstanding immediately following the
Closing.
Section 2.2. PAYMENT. At the Closing, the Company shall issue to the
Investor certificates for the Shares, and Investor shall pay the Company the
Purchase Price in immediately available U.S. funds.
Section 2.3. LICENSE FEE. The Company will apply the proceeds of the sale
of the Shares to payment of the $200,000 license fee payable to CPI. The
license fee shall be paid to CPI at the Closing, and shall not be subject to the
security interest granted hereunder.
ARTICLE III
LOANS TO THE COMPANY
Section 3.1. LOANS. Subject to the terms and conditions of this Agreement,
Investor will make loans and advances to the Company of up to the sum of Two
Hundred Thousand Dollars ($200,000.00) (the "Loan"), upon request of the
Company from the date hereof through October 15, 1997 (or such later date as
agreed by Investor pursuant to Section 6.1), for the purposes of development of
the Prototype. Each request for an advance shall be in writing, and shall be
accompanied by invoices and other documentation reasonably requested by Investor
establishing application of such advance to pay costs of development of the
Prototype. Advances under the Loan shall be made no more frequently than
monthly, and once advanced and repaid, shall not be readvanced to the Company.
Section 3.2. INTEREST. The Company agrees to pay to the Lender interest
on the unpaid balance of the Loan as provided in Section 3.3 of this Agreement
at a fixed of interest equal to 8.50% per annum. Interest shall be calculated
on a 365 day per year basis and shall be based on the actual
2
<PAGE>
number of days which elapse during the interest calculation period.
Section 3.3. EVIDENCE OF THE LOAN AND TERMS OF PAYMENT. The Loan shall
be evidenced by one or more promissory notes in the form of Exhibit 3.3 to this
Agreement, or by one or more notes subsequently executed in substitution
therefor (the "Note"). Repayment of the Loan and payment of interest shall be
made in accordance with the terms of the Note.
Section 3.4. PREPAYMENT. The Company, if not then in default hereunder,
shall have the right to prepay at any time and from time to time before maturity
any amount or amounts due to the Investor pursuant to this Agreement or the
Note.
Section 3.5. SECURITY. As security for the Loan, the Company hereby
grants to the Investor a first security interest in all its accounts, inventory,
equipment, fixtures and other tangible or intangible personal property of every
kind and description (including its rights under the License Agreement), whether
now owned or hereafter acquired or created by the Company, and the proceeds
thereof. At the request of the Investor, the Company shall authorize and cause
to be executed any and all documents which the Investor shall require in order
to evidence or perfect such security interest.
Section 3.6 LIMITED GUARANTY OF CPI. As additional inducement for
Investor to make the Loan, CPI hereby unconditionally guarantees the prompt and
full payment to Investor when due, whether by acceleration or otherwise, of the
principal amount of the Loan, together with interest, late charges, collection
costs, attorneys' fees and the like, as provided for in the Note; PROVIDED,
HOWEVER, that CPI shall be required to satisfy such guaranty obligation only to
the extent of funds which it or the Company may receive as a result of grants
for the purpose of development of the Technology which are made or guaranteed by
any agency or instrumentality of the United States or State of Ohio ("Grants"),
and only to the extent that such application of the Grants is permitted by law.
To secure such obligation, and to the extent permitted by law the Company and
CPI hereby grant Investor a security interest in any such Grants and the
proceeds thereof. At the request of the Investor, the Company and CPI shall
authorize and cause to be executed any and all documents which the Investor
shall require in order to evidence and perfect such security interest. All
obligations of CPI under this Section 3.6 shall terminate upon completion of the
Closing, but if the Closing does not occur, CPI's obligations hereunder shall
continue until the Loan is paid in full.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND CPI
The Company and CPI jointly and severally make the following
representations and warranties to Investor as of the date hereof and at and as
of the Closing.
Section 4.1. CORPORATE EXISTENCE. The Company and CPI are corporations
duly incorporated, validly existing and in good standing under Ohio law and each
has full power and
3
<PAGE>
authority to conduct its business and own its properties as now conducted and
owned. SCHEDULES 3.1(a) AND 3.1(b) contain true copies of the Articles of
Incorporation and Regulations of each of the Company and CPI, with all
amendments. Each of the Company and CPI are qualified as a foreign
corporation to do business in all jurisdictions in which the nature of its
properties and business requires such qualification and in which
noncompliance with such qualification would materially affect its business.
Section 4.2. POWER AND AUTHORITY. Each of the Company and CPI has full
power and authority, and has taken all required corporate and other action
necessary (including stockholder approval, if necessary) to permit it to own its
properties to carry on its current business, to execute and deliver this
Agreement and the License Agreement, to carry out the terms of this Agreement
and all other documents, instruments, or transactions required by this
Agreement, and none of such actions will violate any provision of its
Regulations or Articles of Incorporation, or result in the breach of or
constitute a default under any agreement or instrument to which the Company is a
party or by which it is bound or result in the creation or imposition of any
material lien, claim or encumbrance on any of its assets. The Company has taken
all corporate action necessary to authorize the issuance and sale of the Common
Shares as herein provided. This Agreement has been duly executed and delivered
by each of the Company and CPI, and (assuming the due authorization, execution
and delivery hereof by the Investor) constitutes the valid and binding
obligation of the each of them enforceable against each of them in accordance
with its terms.
Section 4.3. ABSENCE OF UNDISCLOSED LIABILITIES. The Company has no
material liabilities (matured or unmatured, fixed or contingent) except those
created by this Agreement or the License Agreement, and CPI has no material
liabilities (matured or unmatured, fixed or contingent) which in any way
encumber (or following notice or the passage of time, could encumber) the
Technology or any rights of the Company or obligations of CPI under the License
Agreement, including without limitation liabilities for taxes, assessments or
other governmental charges.
Section 4.4. SUBSIDIARIES. Other than the Company, CPI has no
subsidiaries and owns no capital stock or other securities, or rights or
obligations to acquire the same, of any other entity.
Section 4.5. ABSENCE OF CERTAIN CHANGES. Since the date of its
incorporation, except as contemplated by this Agreement there has not been:
(a) any material adverse change in the condition (financial or
otherwise), assets, liabilities, business or business prospects of the
Company;
(b) any damage, destruction or loss of any of the properties or
assets of the Company (whether or not covered by insurance) materially
adversely affecting its business or business prospects;
(c) any material asset or property of the Company made subject to a
lien of any kind, except for purchase money security interests;
4
<PAGE>
(d) any material liability or obligation of any nature whatsoever
(contingent or otherwise) incurred by the Company, other than liabilities
or obligations incurred in the ordinary course of business;
(e) any issuance of any stock, bonds or other securities (including
options, warrants or rights) of the Company or any agreements or
commitments respecting the same; or
(f) any sale, assignment or transfer of any material tangible or
intangible assets of the Company except with respect to tangible assets in
the ordinary course of business.
Section 4.6. LITIGATION. There are no suits, proceedings or
investigations pending or threatened against or affecting CPI or the Company or
any officer of either which could have a material adverse effect on the
business, assets, or financial condition of either CPI or the Company or the
ability of any officer to participate in its affairs of the Company, or which
concern the transactions contemplated by this Agreement.
Section 4.7. OTHER RELATIONSHIPS. No officer of CPI or the Company has
any interest (other than as a noncontrolling holder of securities of a publicly
traded company), either directly or indirectly, in any entity, including without
limitation, any corporation, partnership, joint venture, proprietorship, firm,
person, licensee, business or association (whether as an employee, officer,
director, shareholder, agent, independent contractor, security holder, creditor,
consultant, or otherwise) that presently (i) provides any services or designs,
produces and/or sells any products or product lines, or engages in any activity
which is the same, similar to or competitive with any activity or business in
which CPI or the Company is now engaged or in which it proposes to engage; (ii)
is a supplier of, customer of, creditor of, or has an existing contractual
relationship with CPI or the Company; or (iii) has any direct or indirect
interest in any asset or property used by CPI or the Company or any property,
tangible or intangible, that is necessary or desirable for the conduct of the
business of CPI or the Company.
Section 4.8. LICENSES; COMPLIANCE WITH LAWS, OTHER AGREEMENTS, ETC. The
Company and CPI have all franchises, permits, licenses, and other rights which
they currently deem necessary for the conduct of their present and proposed
businesses and know of no basis for the denial of such rights in the future.
Neither the Company nor CPI is in violation of any order or decree of any
court, or of the provisions of any contract or agreement to which it is a party
or by which it may be bound, or of any law, order, or regulation of any
governmental authority, and neither this Agreement nor the transactions
contemplated hereby will result in any such violation.
Section 4.9. INTELLECTUAL PROPERTY RIGHTS. SCHEDULE 4.9 is a true and
complete list and summary description of all patents, trademarks, service marks,
trade names, copyrights, and rights or licenses to use the same, and any and all
applications therefor, relating to the Technology. Such patents, trademarks,
service marks, trade names, copyrights and rights or licenses to use the same,
and any and all applications therefor, as well as all trade secrets and similar
proprietary information
5
<PAGE>
owned or held by the Company or CPI relating to the Technology (collectively,
the "Intellectual Property") have been exclusively licensed to the Company as
provided in the License Agreement, and except as disclosed in SCHEDULE 4.9,
no person other than the Company or CPI has any right, title, interest or
claim thereto, nor does any person have any lien or security interest
therein, except the security interest of the Investor granted by this
Agreement. Neither CPI nor the Company has received any formal or informal
notice of infringement or other complaint that the Intellectual Property
traverses or infringes rights under patents, trademarks, service marks, trade
names, trade secrets, copyrights or licenses or any other proprietary rights
of others, nor does CPI or the Company have any reason to believe that there
has been any such infringement. No royalties or fees are or will be payable
by the Company to any person by reason of the ownership or use by the Company
of the Intellectual Property, except for the royalties payable to CPI as
provided in the License Agreement.
Section 4.10. OWNERSHIP AND STATUS OF STOCK. The Company's authorized
capital stock consists of 850 Common Shares, of which 5 Shares have been
issued to CPI. The Company has no other shares of capital stock authorized,
issued or outstanding, and there is no agreement or commitment of the Company
for the issuance of any shares of capital stock, or options, warrants or
other rights exercisable for or convertible into shares of capital stock,
except as contemplated by this Agreement. All of the Common Shares held by
CPI have been, and the Shares to be issued and sold to Investor hereunder
will be, duly authorized, validly issued, fully paid and nonassessable, and
were (or will be) issued in full compliance with applicable law. There is no
agreement to which the Company or CPI is a party with respect to the sale or
voting of any shares of capital stock of the Company, or restricting the
transferability of any shares of capital stock, except for the sale of the
Common Shares by CPI to the Investor pursuant to this Agreement.
Section 4.11. DISCLOSURE. No written statement, information,
certificate, document or other written material furnished to the Investor by
CPI or the Company pursuant to this Agreement or in connection with the
transactions contemplated hereby contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements
contained therein or herein not misleading, when all are taken together as a
whole. Neither CPI nor the Company knows of any information or fact which
has or would have a material adverse effect on the financial condition,
business or business prospects of CPI or Company, or relating to the
ownership, functionality, feasibility or marketability of the Technology
which has not been disclosed to the Investor.
Section 4.12. MINUTE BOOKS. The minute books of the Company contain a
complete summary of all meetings of directors and shareholders since the time
of incorporation and reflect all transactions referred to in such minutes
accurately in all material respects.
Section 4.13. EMPLOYMENT CONTRACTS, ETC.; CERTAIN MATERIAL
TRANSACTIONS. Except as contemplated by this Agreement, (i) the Company has
no employees, and is not a party to any employment, consulting or deferred
compensation agreements, (ii) the Company does not have any employee benefit
or bonus, incentive or profit-sharing plans, (iii) the Company does not have
any pension, retirement or similar plans or obligations, whether funded or
unfunded, and (iv) there are no existing material arrangements or proposed
material transactions between the Company and
<PAGE>
any officer or director or shareholder of the Company.
Section 4.14. CONTRACTS AND COMMITMENTS, ETC. Except for this
Agreement and the License Agreement, the Company is not a party to any
written or oral (i) contract or commitment for the future lease or purchase
of fixed assets, materials, supplies, or equipment, (ii) agreements,
indentures or commitments relating to the borrowing of money or to the
mortgaging, pledging or otherwise placing of a lien on any assets of the
Company, (iii) guaranty of any obligation for borrowed money or otherwise,
(iv) lease or other agreement relating to the ownership or use of real or
personal property, (iv) agreement or other commitment for capital
expenditures. Except as contemplated by this Agreement, or as disclosed on
Schedule 4.14, CPI is not a party to any written or oral contract or
commitment relating to the ownership, use, development, financing or
licensing of the Technology. The Company has furnished to counsel for the
Investor true and correct copies of all such agreements and other documents
requested by the Investor or its authorized representatives.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF INVESTOR
Investor represents and warrants to the Company and CPI, as of the date
hereof and at and as of the Closing that:
Section 5.1. POWER AND AUTHORITY. Investor has full power and
authority and has taken all required corporate and other action necessary to
permit it to execute and deliver this Agreement, and all other documents or
instruments required by this Agreement, and to carry out the terms of this
Agreement and of all other documents, instruments or transactions required by
this Agreement, and none of such actions will violate any provision of
Investor's articles of incorporation or regulations, or result in the breach
of or constitute a default under any agreement or instrument to which
Investor is a party or by which it is bound, or result in the creation or
imposition of any material lien, claim or encumbrance on any material asset.
This Agreement has been duly executed and delivered by the Investor and
(assuming due authorization, execution and delivery by the Company and CPI)
constitutes the valid and binding obligation of the Investor enforceable
against Investor in accordance with its terms.
Section 5.2. PURCHASE FOR INVESTMENT. Investor is purchasing the
Common Shares for investment, for its own account and not with a view to
distribution thereof. Investor understands that the Common Shares must be
held indefinitely unless they are registered under the Securities Act or an
exemption from such registration becomes available. Investor represents that
it is an "accredited investor" as that term is defined in Regulation D
promulgated under the Securities Act.
7
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ARTICLE VI
COVENANTS OF THE COMPANY AND CPI
Section 6.1. DEVELOPMENT OF PROTOTYPE. The Company and CPI shall use
their best efforts to complete the development and fabrication of one or more
Prototypes for testing by an independent testing laboratory for suitability
for incorporation into medical oxygen generation units to be fabricated by
the Company. The Company and CPI shall use their best efforts to complete
development and fabrication and to present the Prototype to Investor for
testing by October 15, 1997. Investor shall thereupon submit the Prototype
for acceptance testing. The nature, extent and duration of testing shall be
entirely at the discretion of the Investor. If test results are not entirely
satisfactory to the Investor, it may request that the Company and CPI make
modifications to the Prototype and resubmit it for further testing. The
Investor, CPI and the Company shall agree to a date by which such
modifications shall be completed, and if the maximum amount of Advances have
not yet been made under this Agreement, Investor shall make additional
Advances to the Company hereunder to fund such modifications during such
period, until the aggregate amount of Advances hereunder is $200,000.00
Section 6.2. USE OF LOAN PROCEEDS. The Company shall use, and CPI shall
cause the Company to use, the proceeds of the Loan to pay expenses of
development, fabrication and testing of the Prototype, and no portion thereof
shall be used for any other purpose without the written approval of Investor.
Section 6.3. ACCOUNTS AND REPORTS. The Company and CPI shall furnish to
Investor copies of the following certificates, filings and reports:
(a) MONTHLY FINANCIAL STATEMENTS. As requested by Investor, copies of the
Company's unaudited statements of income and cash flow and unaudited
balance sheet as of the end of each month, which shall be prepared in
accordance with generally accepted accounting principles consistently
applied, shall fairly present the financial condition and results of
operations of the Company for such period, and shall so be certified
by the Company's principal financial officer.
(b) EVENTS OF DEFAULT. Immediately upon becoming aware of the existence
of any condition or event which constitutes an Event of Default, a
written notice specifying the nature and period of existence thereof
and what action the Company is taking or proposes to take with respect
thereto;
(c) OTHER INFORMATION. Such other information and data pertaining to the
Company's business, financial and corporate affairs as is from time to
time requested by the Investor. The Company and CPI will permit any
person designated by the Investor in writing to visit and inspect any
of the offices or facilities of the Company, including its books of
account, and to discuss its affairs, finances, and accounts with
8
<PAGE>
the officers or directors of the Company and CPI, all at such
reasonable times and as often as Investor may reasonably request.
Section 6.4. COMPENSATION OF EXECUTIVE OFFICERS. No salary and other
compensation, including without limitation bonuses and fringe benefits, shall be
incurred by the Company or paid to any officer, employee, consultant or
independent contractor without the prior written consent of Investor.
Section 6.5. NONCOMPETITION AND PROPRIETARY RIGHTS AGREEMENTS.
(a) PROPRIETARY INFORMATION. The Company and CPI shall use their
best efforts to (i) insure that no person employed by the Company will
wrongfully employ any confidential information or documentation proprietary to
any former employer, (ii) protect, by maintenance of secrecy to the extent
appropriate, all technical and business information developed by or on behalf of
and belonging to the Company, or which relates to the Technology, (iii) cause to
be patented all technological information developed by and belonging to the
Company or CPI relating to the Technology, which, in the opinion of the Investor
and its counsel, is patentable and is best protected by patenting, and (iv)
cause each person who becomes an employee of the Company or CPI and who shall
have access to confidential or proprietary information relating to the
Technology, or any other confidential or proprietary information of the Company,
to execute an agreement relating to matters of noncompetition and nondisclosure
and assignment, in a form reasonably acceptable to Investor.
(b) LICENSES AND TRADEMARKS. The Company and CPI shall use their
best efforts to maintain their ownership and possession of all patents,
trademarks, service marks, trade names, copyrights and licenses relating to the
Technology, including, without limitation, such of the same as are listed in
SCHEDULE 4.12 hereto, and shall use their best efforts in protecting their
respective rights in the Technology under the License Agreement.
Section 6.6 OBSERVER RIGHTS. The Company will permit an authorized
representative of Investor, to attend all meetings of the Board of Directors of
the Company, and shall, upon the written request of Investor, provide it with
such notice of and other information with respect to such meetings as are
delivered to the directors of the Company. Upon the written request of
Investor, the Company shall notify it, within 10 days thereafter of the taking
of any written action by the Board of Directors of the Company in lieu of a
meeting thereof.
Section 6.7. LIABILITY INSURANCE. The Company will maintain in full force
and effect a policy or policies of standard comprehensive general liability
insurance and in such amounts and coverages as agreed by the Company and the
Investor.
Section 6.8. TAXES AND ASSESSMENTS. CPI and the Company will pay and
discharge before the same become delinquent and before penalties accrue thereon,
all taxes, assessments and governmental charges upon or against either of them,
or any of their respective properties, and all other material liabilities at any
time existing, except to the extent and so long as the same are being
9
<PAGE>
contested in good faith and by appropriate proceedings in such manner as not
to cause any material adverse effect upon the financial condition of CPI or
the Company, or the loss of any right of redemption from any sale thereunder.
Section 6.9. MAINTENANCE OF CORPORATE EXISTENCE. Each of CPI and the
Company will preserve, renew and keep in full force and effect, its corporate
existence, qualification in requisite jurisdictions and rights and privileges
necessary or desirable in the normal conduct of its business.
Section 6.10. GOVERNMENTAL CONSENTS. The Company will obtain and maintain
all consents, approvals, licenses and permits required by federal, state, local
and foreign law to carry on its business.
Section 6.11. FURTHER ASSURANCES. The Company and CPI, at their expense,
will promptly execute and deliver promptly to Investor upon request all such
other and further documents, agreements and instruments in compliance with or
pursuant to their covenants and agreements herein, and will make any recordings,
file any notices, and obtain any consents as may be necessary or appropriate in
connection therewith.
Section 6.12. NEGATIVE COVENANTS. Except as contemplated by this
Agreement, without the prior written consent of the Investor, the Company hereby
agrees that it will not, and CPI agrees that it will not permit the Company to:
(a) authorize or issue shares of any class of capital stock, or any
option, warrant or other right to purchase any capital stock or to convert any
security into capital stock; or increase or decrease the number of directors
constituting the Board of Directors of the Company;
(b) make any amendment to the Company's Articles of Incorporation or
Regulations;
(d) merge or consolidate with any person or entity, or sell, lease or
otherwise dispose of any of its assets , or liquidate, dissolve, recapitalize or
reorganize;
(e) repurchase any of its Common Shares from CPI;
(f) declare any dividend or distribution in respect of its Common
Shares;
(g) amend, modify, cancel of terminate the License Agreement;
(h) enter into any agreement, which by its terms would restrict
the Company's performance of its obligations pursuant to this Agreement or
the License Agreement;
(i) enter into an agreement with any holder or prospective holder
of any securities of the Company providing for the granting to such holder of
registration rights, preemptive
10
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rights, special voting rights or protection against dilution;
(j) cause or permit or agree or consent to cause or permit in the
future (upon the happening of a contingency or otherwise), any of its
property, whether now owned or hereafter acquired, to be subject to a lien or
encumrance except liens incurred or deposits made in the ordinary course of
business in connection with workmen's compensation, unemployment insurance,
social security and other like laws;
(k) create or incur any indebtedness for borrowed money or advances
(except for the Loan), including through the execution of capitalized lease
agreements; or
(l) make any loans or advances to any person, corporation or
entity, or guarantee, indorse or otherwise become surety for or upon the
obligations of others, except by indorsement of negotiable instruments for
deposit or collection in the ordinary course of business.
Section 6.13. WAIVER. Any violation of an affirmative or negative
covenant of the Company or CPI may be waived prospectively or retrospectively
in a given instance only in writing by a duly authorized officer of Investor.
Section 6.14. TERMINATION OF COVENANTS. The covenants of CPI and the
Company contained in this Article VI shall continue until the Closing, and
shall terminate upon the completion of the Closing; provided, however that
if the Investor does not timely elect to close the purchase of the Common
Shares as provided in Section 7.1 below, the covenants of CPI and the
Company contained in Sections 6.3 to 6.13 of this Article shall continue
until such time as the Loan is repaid in full and all their obligations under
Article III hereof have been satisfied.
ARTICLE VII
THE CLOSING AND CLOSING CONDITIONS
Section 7.1. ELECTION OF INVESTOR TO CLOSE. At such time as the
independent testing laboratory referenced in Section 6.1 verifies that a
Prototype is capale of producing oxygen at a volume rate and purity level
acceptable to Investor, Investor shall have thirty (30) days to notify CPI in
writing of its election to proceed with the Closing of the purchase of the
Common Shares as provided in this Agreement. If such written notice is not
given prior to July 1, 1998, the rights of Investor to purchase the Common
Shares shall terminate, but the rights and obligations of the parties under
Article III hereof shall continue until the Loan and all interest and other
charges accrued thereon is paid in full.
Section 7.2 THE CLOSING. The purchase and sale of the Common Shares
shall take place at the Closing as specified in Section 2.1, to be held at
the offices of Porter, Wright, Morris & Arthur,
11
<PAGE>
41 South High Street, Columbus, Ohio (or such other place as agreed by the
parties), within five (5) business days following the delivery of the written
notice referenced in Section 7.1 above.
Section 7.3. CONDITIONS OF CLOSING. The obligation of Investor to
purchase the Common Shares at the Closing shall be subject to satisfaction of
the following conditions at and as of the Closing:
(a) The Company shall have duly issued and delivered certificates to
the Investor for the number of Common Shares purchased by Investor as
provided in Section 2.1.
(b) There shall be provided to Investor the written opinion of Fry,
Waller & McCann Co., L.P.A., counsel for the Company and CPI, to the effect
that the Company is duly organized, validly existing and in good standing,
that upon payment therefor as provided herein the Common Shares purchased by
Investor will be duly authorized, validly issued, fully paid and
non-assessible, and that all actions of CPI and the Company taken in
connection therewith have been duly authorized by appropriate corporate
action.
(c) The Company shall have delivered to Investor a certificate of its
chief executive officer, or alternatives therefor satisfactory to counsel for
the Investor, dated the date of such Closing, to the effect that the
representations and warranties of the Company are true at and as of such
Closing as if made at and as of such Closing, and that each of the conditions
in this Article VI has bee satisfied.
(d) The representations and warranties of the Company and CPI
contained in Article IV shall be true and correct on and as of the Closing
Date with the same effect as though such representations and warranties had
been made on and as of such date (except to the extent that any such
representations and warranties specifically apply to conditions existing at a
particular date), and the Company and CPI shall have certified to such effect
to Investor in writing.
(e) The Company and CPI shall have performed and complied with all
agreements and conditions contained herein required to be performed or
complied with by them prior to or at each Closing Date.
(f) All corporate and other proceedings to be taken by the Company
and CPI in connection with the transactions contemplated hereby and all
documents incident thereto shall be satisfactory in form and substance to the
Investor and its counsel, and the Investor and said counsel shall have
recieved all such counterpart originals or certified or other copies of such
documents as they may reasonably request.
Section 7.4 SUPPORTING DOCUMENTS. On or immediately prior to the Closing
Date the Investor and its counsel shall have received copies of the following
supporting documents:
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(a) copies of the Articles of Incorporation of the Company, and all
amendments thereto, certified as of a recent date by the Secretary of State
of the State of Ohio.
(b) a certificate of said Secretary of State dated as of a recent
date as to the due incorporation and good standind of the Company.
(c) a certificate of the President of the Company, dated the Closing
Date and certifying: (1) that attached thereto is a true and complete copy of
the Regulations of the Company as in effect on the date of such
certification; (2) that the Articles of Incorporation of the Company has not
been amended since the date of the last amendment referred to in the
certificate delivered pursuant to clause (b).
(d) a certificate of the Secretary of CPI dated the Closing Date and
certifying that attached thereto is a true and complete copy of resolutions
adopted by the Board of Directors of CPI authorizing the execution, delivery
and performance of this Agreement, sale, and delivery of the Common Shares,
and that all such resolutions are still in full force and effect and are all
the resolutions adopted in connection with the transactions contemplated by
this Agreement.
(e) such additional supporting documents and other information with
respect to the operations and affairs of the Company as Investor or its
counsel may reasonably request.
Section 7.5 REASONABLE SATISFACTION OF INVESTOR. All instruments
applicable to the issuance and sale of the Common Shares and all proceedings
taken in connection with the transactions contemplated by this Agreement
shall be reasonably satisfactory to the Investor.
ARTICLE VIII
EVENTS OF DEFAULT
Section 8.1. NATURE OF EVENTS. An "Event of Default" with respect to the
Loan shall exist if any of the following occurs and is continuing:
(a) the Company fails to make any payment of principal on the Note
on or before the date such payment is due;
(b) the Company fails to make any payment of interest on the Note
on or before five days after the date such payment is due;
(c) the Company or CPI fails to perform or observe any covenant
contained in Article VI of this Agreement, or in the Note;
(d) the Company or CPI fails to comply with any other provision of
this Agreement, and such failure continues for more than 30
days after such failure shall first become
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known to any officer of the Company;
(e) any warranty, representation or other statement by or on behalf
of the Company or CPI contained in this Agreement or in any
instrument furnished in compliance with or in any instrument
furnished in compliance with or in reference to this Agreement
is false or misleading in any material respect;
(f) the Company or CPI becomes insolvent or bankrupt, or makes an
assignment for the benefit of creditors, or consents to the
appointment of a trustee, receiver or liquidator;
(g) bankruptcy, reorganization, arrangement, insolvency or
liquidation proceedings are instituted by or against the
Company or CPI; or
(h) a final judgment or judgments, from which no further right of
appeal exists, for the payment of money aggregating in excess
of $50,000 is or are outstanding against the Company or CPI and
any one of such judgments has been outstanding for more than 30
days from the date of its entry and has not been discharged in
full or stayed.
Section 8.2 DEFAULT REMEDIES. If an Event of Default exists, the
Investor may immediately exercise any right, power or remedy permitted to
Investor 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 the Note 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 the Company and CPI.
ARTICLE IX
MISCELLANEOUS
Section 9.1. EXPENSES. The Company, CPI and the Investor will each bear
its own expenses, including legal fees, in connection with the negotiation
and preparation of this Agreement, and the Closing of the transactions
contemplated hereby. Investor will bear any costs of incorporating the Company.
Section 9.2. REMEDIES CUMULATIVE. Except as herein provided, the
remedies provided herein shall be cumulative and shall not preclude assertion
by any party hereto of any other rights or the seeking of any other remedies
against the other party hereto.
Section 9.3. ACTION FOR BREACH. In the event of any action by either
party alleging a breach of this Agreement or of any of the other agereements
referenced herein, the prevailing party shall be entitled to recover its
costs of litigation, including reasonable attorneys's fees.
Section 9.4. BROKERAGE. Each party hereto will indemnify and hold
harmless the others against and in respect of any claim for brokerage or
other commission relative to this Agreement or
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<PAGE>
to the transaction contemplated hereby, based in any way on agreements,
arrangements or understandings made or claimed to have been made by such
party with any third party.
Section 9.5. SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such a manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be
prohibited by or invalid under applicable law, such provisions shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of
this Agreement.
Section 9.6. PARTIES IN INTEREST. All covenants and agreements contained
in this Agreement by or on behalf of any of the parties hereto shall bind and
inure to the benefit of the respective legalrepresentatives, successors and
assigns of the parties hereto whether so expressed or not.
Section 9.7. NOTICES. Notices required under this Agreement shall be
deemed to have been adequately given if delivered in person or sent by
certified mail, return receipt requested, to the recipient at its address set
forth below, or such other address as such party may from time to time
designate in writing.
(a) If to Investor:
NetMed, Inc.
425 Metro Place North
Suite 140
Dublin, Ohio 43017
Attn: David J. Richards, President
with a copy to:
William J. Kelly, Jr.
Porter, Wright, Morris & Arthur
41 South High Street, Suite 2900
Columbus, Ohio 43215
(b) If to the Company or CPI:
CeramPhysics, Inc.
921 Eastwind Avenue, Suite 110
Westerville, Ohio 43081
Attn: William N. Lawless, President
with a copy to:
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Carl B. Fry
Fry, Waller & McCann Co., L.P.A.
35 East Livingston Avenue
Columbus, Ohio 43215
Section 9.8. NO WAIVER. No failure to exercise and no delay in
exercising any right, power or privilege granted under this Agreement shall
operate as a waiver of such right, power or privilege. No single or partial
exercise of any right, power or privilege granted under this Agreement shall
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies provided in this Agreement
are cumulative and are not exclusive of any rights or remedies provided by
law.
Section 9.9. INTEGRATION. This Agreement sets forth the entire agreement
and understanding between the parties with respect to the subject matter
hereof. No waiver, alteration, modification, or cancellation of any of the
provisions of this Agreement shall be binding unless made in writing and
signed by an authorized officer of the party to be so bound.
Section 9.10. SURVIVAL OF AGREEMENTS, ETC. All agreements,
representations and warranties contained in this Agreement or made in writing
by or on behalf of the Company and CPI or the Investor in connection with the
transactions contemplated by this Agreement shall survive the execution and
delivery of this Agreement, the Closing, and any investigation at any time
made by or on behalf of the Investor.
Section 9.11. CONSTRUCTION. This Agreement shall be governed y and
construed in accordance with the procedural and substantive laws of the State
of Ohio without regard for its conflicts-of-laws rules. Each of the parties
agrees that it may be served with process in the State of Ohio in any action
in the state or federal courts of such State for breach of this Agreement.
Section 9.12. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original but all of
which taken together shall constitute one agreeement.
Section 9.13. ASSIGNMENT: NO THIRD-PARTY BENEFICIARIES. This Agreement
and the rights hereunder shall not be assignable or transferable by the
Investor, CPI or the Company except that Investor may assign or transfer its
rights hereunder to any affiliate of Investor. Subject to the preceding
sentence, this Agreement shall be binding upon, inure to the benefit of and
be enforceable by the parties hereto and their respective successors and
assigns. Except as provided in this Section, this Agreement is for the sole
benefit of the parties hereto and their permitted assigns and nothing herein
expressed or implied shall give or be construed to give to any person, other
than the parties hereto and such assigns, any legal or equitable rights
hereunder. As used in this Agreement, an "affiliate" of a person shall be
defined as a person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control
with, the person specified.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
COMPANY:
CERAM OXYGEN TECHNOLOGIES, INC.
By: /s/ William N. Lawless
---------------------------------
William N. Lawless, President
CPI:
CERAMPHYSICS,INC.
By: /s/ William N. Lawless
---------------------------------
William N. Lawless, President
INVESTOR:
NETMED,INC.
By: /s/ David J. Richards
---------------------------------
David J. Richards, President
17
<PAGE>
Exhibit 10(k)
REVOLVING LOAN - GRID NOTE
$200,000.00 Westerville, Ohio February 28, 1997
FOR VALUE RECEIVED, the undersigned promises to pay to the order of
NETMED, INC. (hereinafter called the "Lender," which term shall include any
holder hereof) at such place as the Lender may designate, the sum of
TwoHundred Thousand Dollars ($200,000.00) or so much thereof as shall have
been advanced by the Lender at any time and not hereafter repaid (hereinafter
referred to as "Principal Sum") together with interest as hereinafter
provided and payable at the times and in the manners hereinafter provided.
The proceeds of the loan evidenced hereby may be advanced, and repaid in
partial amounts during the term of this revolving note (this "Note") and
prior to maturity. 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 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. The undersigned agrees that all Advances
(as such term is defined in the Investment Agreement referenced below) made
by the Lender and payments by the undersigned will be evidenced by entries
made by the Lender on the grid or grids attached hereto, and the undersigned
further agrees that such entries shown on the grid or grids attached hereto
shall be rebuttably presumptive evidence of the amount of the Principal Sum,
any and all advances and payments thereof. Copies of such entries shall be
provided by Lender to the undersigned within a reasonable time after they are
made. Each request for an advance shall constitute a warranty and
representation by the undersigned that no event of default hereunder, under
the Investment 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.
This Note is executed and the advances contemplated hereunder are to be
made pursuant to an Investment Agreement by and between the undersigned and
the Lender of even date, and all amendments, modifications, and supplements
thereto from time to time (the "Investment Agreement"), and all the
covenants, representations, agreements, terms, and conditions contained
therein, including but not limited to additional conditions of default, are
incorporated herein as if fully rewritten.
INTEREST
Interest will accrue on the unpaid balance of the Principal Sum until
paid at a fixed rate of interest equal to eight and one-half percent (8.50%)
per annum.
All interest shall be calculated on the basis of a 365 day year for the
actual number of days the Principal Sum or any part thereof remains unpaid.
<PAGE>
MANNER OF PAYMENT
The Principal Sum shall be payable on December 31, 1998, and accrued
interest shall be due and payable at maturity, whether by demand,
acceleration or otherwise.
DEFAULT
Upon the occurrence of any of the following events:
(a) the undersigned fails to make any payment of principal on or
before the date such payment is due;
(b) the undersigned fails to make any payment of interest on or
before five days after the date such payment is due; or
(c) an "Event of Default" under the Investment Agreement shall have
occurred and be continuing;
then the Lender may, at his 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 agree to pay all costs and expenses of such action, including
reasonable attorneys' fees, to the extent permitted by law.
GENERAL PROVISIONS
All of the parties hereto, including the undersigned, and any indorser,
surety, or guarantor, hereby jointly and severally waive presentment, notice
of dishonor, protest, notice of protest, and diligence in bringing suit
against any party hereto, waive the defenses of impairment of collateral for
the obligation evidenced hereby, impairment of a person against whom the
Lender has any right of recourse, and any defenses of any accommodation maker
and consent that without discharging any of them the time of payment and any
other provision of this promissory note may be extended or modified an
unlimited number of times before or after maturity without notice to the
undersigned. The undersigned agrees that it will pay the obligations
evidenced hereby, irrespective of any action or lack of action on Lender's
part in connection with the acquisition, perfection, possession, enforcement,
disposition, or modification of all the obligations evidenced hereby or any
and all security therefor, and no omission or delay on Lender's part in
exercising any right against, or taking any action to collect from or pursue
Lender's remedies against any party hereto will release, discharge, or modify
the duties of the undersigned to make payments hereunder. The undersigned
agrees that Lender may, without notice to or further consent from the
undersigned, release or modify any collateral, security, document 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 the undersigned hereunder. The undersigned agrees that
Lender will not be required to pursue or
2
<PAGE>
exhaust any of its rights or remedies against the undersigned or any
guarantors of the obligations evidenced hereby with respect to the payment of
any said obligations, or to pursue, exhaust or preserve any of Lender's
rights or remedies with respect to any collateral, security or other
guaranties given to secure said obligations.
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 or mortgage 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 law of the State of Ohio.
WAIVER OF RIGHT TO TRIAL BY JURY
THE UNDERSIGNED HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF
ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (1) ARISING UNDER THIS NOTE OR
ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN
CONNECTION HEREWITH, OR (2) IN ANY WAY CONNECTED WITH OR RELATED OR
INCIDENTAL TO THE DEALINGS OF THE UNDERSIGNED OR THE LENDER WITH RESPECT TO
THIS NOTE OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR
DELIVERED IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR
THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER
SOUNDING IN CONTRACT OR TORT OR OTHERWISE; AND THE UNDERSIGNED HEREBY AGREES
AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE
DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT THE UNDERSIGNED OR THE LENDER
MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS
WRITTEN EVIDENCE OF THE CONSENT OF THE UNDERSIGNED TO THE WAIVER OF THE RIGHT
OF THE UNDERSIGNED TO TRIAL BY JURY.
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 the 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.
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
3
<PAGE>
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.
CERAM OXYGEN TECHNOLOGIES, INC.
By: /s/ William N. Lawless
----------------------------------------
William N. Lawless, President
4
<PAGE>
GRID
Date of Advance ("A")
Advance or or Principal
Payment Payment ("P") Amount Balance
- ------------------------------------------------------------------------------
5
<PAGE>
Exhibit 10(i)
CONFIDENTIAL TREATMENT- Asterisked material has been omitted and filed
separately with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
MARKETING SUPPORT AGREEMENT
This Marketing Support Agreement (the "Agreement"), dated as of January
30, 1997, is between Neuromedical Systems, Inc., a Delaware corporation
("NSI"), NetMed, Inc., an Ohio corporation ("NetMed") and Blue Cross and Blue
Shield Mutual of Ohio, a corporation and its wholly owned subsidiaries and
affiliates ("BCBSMO").
RECITALS
1. NSI has designed, developed and produces the PAPNET-Registered
Trademark- Testing System ("PAPNET testing"), which is a semi-automated system
for the testing of supposedly negative Pap smears. NetMed has a license to
market and sell PAPNET testing services in the State of Ohio, among other
places.
2. BCBSMO is an insurance company that desires to strongly recommend
PAPNET testing for the routine examination of Pap smears for patients served by
BCBSMO's network of physicians and clients.
3. NSI and NetMed desire to assist BCBSMO with the communication of the
availability of PAPNET testing to its network of physicians and patients, and
otherwise to promote the availability of PAPNET testing to physicians and
patients in the State of Ohio.
AGREEMENT
In consideration of the foregoing and mutual agreements set forth below,
the parties agree as follows:
Section 1. COVERAGE OF PAPNET TESTING; COMMUNICATION TO CLINICIANS.
BCBSMO agrees to strongly recommend that all "negative" Pap smears covered by
its benefit plans be examined using PAPNET testing, and to cover the costs of
such examination. BCBSMO shall use its best efforts to promote PAPNET testing
of negative Pap smears among its patient and provider populations. In
furtherance thereof BCBSMO agrees to notify all relevant parties to its plans
(including laboratories, obstetrician/gynecologists, family practitioners,
general practitioners, nurse practitioners and the health care providers who
take Pap smears), in accordance with its usual practices for announcing that new
products, services or procedures are covered by its plans and in any event
within two weeks of the date hereof of such coverage and recommendation. Such
notifications shall be substantially in the form of the letters attached to this
Agreement as Annex B.
Section 2. LABORATORIES. NSI will train, equip and certify any
laboratory designated by BCBSMO and otherwise meeting NSI's requirements to
perform PAPNET testing in accordance with its usual practices.
<PAGE>
Section 3. MARKETING SUPPORT TO BE PROVIDED BY NSI AND NETMED. (a)
In consideration of the foregoing, NSI and NetMed will assist BCBSMO in the
education of clinicians and clients about the availability and benefits of
PAPNET testing by:
(i) mailing to all BCBSMO laboratories announcing BCBSMO's coverage
of PAPNET testing in accordance with Section 1, which mailing will consist
of at least a promotional advertisement or brochure and a letter;
(ii) mailing to all appropriate clinicians announcing coverage of
PAPNET testing in accordance with Section 1, which mailing will inform
clinicians of background information on PAPNET testing and the laboratory
that will perform the test, and which mailing will consist of at least a
promotional advertisement or brochure, a letter, appropriate patient
information and educational materials on the PAPNET test;
(iii) at NSI's and NetMed's cost, making the services of NSI's
marketing department, advertising agency and public relations firm
reasonably available to BCBSMO to assist in the development of specific
educational and marketing materials and the announcement specified above;
(iv) at NSI's and NetMed's cost, production and distribution of such
educational and marketing materials;
(v) NSI and NetMed will assist BCBSMO in the development of suitable
joint press releases announcing the coverage specified in Section 1 hereof,
provided that each party will submit any such press release in draft form
to the other party for its approval, such approval not to be unreasonably
withheld or delayed;
(vi) at NSI's and NetMed's cost, including and specifically mentioning
BCBSMO as a provider of the PAPNET test in selected advertising in
accordance with the media plan attached to this agreement as Annex A.
(b) *Portions have been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment.
(c) *Portions have been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment.
Section 4. INTELLECTUAL PROPERTY. Each party hereby grants the other
party a non-exclusive, revocable right to use, for the limited purposes of
complying with or performing this Agreement, the copyrights, trademarks and
trade names used by each party to identify its products or services. Neither
party shall use the other's copyrights, trademarks or trade names in a
disparaging manner or take any action which is inconsistent with such party's
ownership of its copyrights, trademarks and trade names. In furtherance of the
foregoing, BCBSMO shall review and
2
<PAGE>
approve any promotional or informational materials that refer to BCBSMO prior
to their use or distribution.
Section 5. REPRESENTATIONS AND WARRANTIES OF NSI.
NSI hereby represents and warrants to BCBSMO as follows:
5.1 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.
5.2 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.
5.3 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, as the case may be:
(i) any provision of any law, regulation or ordinance, (ii) the Certificate of
Incorporation or Bylaws of NSI (iii) any agreement, lease, mortgage or other
instrument or undertaking, oral or written, to which NSI is a party or by which
it or any of its properties or assets is or may be bound or affected, (iv) any
judgment, order, writ, injunction or decree of any Governmental Body, or (v) any
action of or by, or filing with, any Governmental Body. The execution and
delivery of this Agreement do not and, except for any approvals, permits and
licenses required to market the PAPNET service in Ohio, the performance of this
Agreement will not, require any action, consent or approval of any person,
entity or Governmental Body.
5.4 LITIGATION. There is no pending or, to the knowledge of NSI,
threatened, legal, administrative, arbitration or other proceeding or
governmental investigation which is likely to have a material adverse effect on
NSI or the performance by NSI of this Agreement.
Section 6. REPRESENTATIONS AND WARRANTIES OF NETMED.
6.1 ORGANIZATION. NetMed is a corporation duly organized, validly
existing and in good standing under the laws of the State of Ohio. NetMed 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. NetMed 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 NetMed, 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
3
<PAGE>
violate, or conflict with, as the case may be: (i) any provision of any law,
regulation or ordinance, (ii) the Certificate of Incorporation or Bylaws of
NetMed, (iii) any agreement, lease, mortgage or other instrument or
undertaking, oral or written, to which NetMed is a party or by which it or
any of its properties or assets is or may be bound or affected, (iv) any
judgment, order, writ, injunction or decree of any Governmental Body, or (v)
any action of or by, or filing with, any Governmental Body. The execution
and delivery of this Agreement do not and, except for any approvals, permits
and licenses required to market the PAPNET service in Ohio, the performance
of this Agreement will not, require any action, consent or approval of any
person, entity or Governmental Body.
6.4 LITIGATION. There is no pending or, to the knowledge of NetMed,
threatened, legal administrative, arbitration or other proceeding or
governmental investigation which is likely to have a material adverse effect on
NetMed or the performance by NetMed of this Agreement.
Section 7. REPRESENTATIONS AND WARRANTIES OF BCBSMO.
BCBSMO hereby represents and warrants to NSI and NetMed as follows:
7.1 ORGANIZATION. BCBSMO is a corporation duly organized, validly
existing and in good standing under the laws of the State of Ohio. BCBSMO 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. BCBSMO 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 BCBSMO, 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 as the case may be: (i)
any provision of any law, regulation or ordinance, (ii) the Certificate of
Incorporation or Bylaws of BCBSMO, (iii) any agreement, lease, mortgage or other
instrument or undertaking, oral or written, to which BCBSMO is a party or by
which it or any of its properties or assets is or may be bound or affected, (iv)
any judgment, order, writ, injunction or decree of any Governmental Body, or (v)
any action of or by, or filing with, any Governmental Body. The execution and
delivery of this Agreement do not, and the performance of this Agreement will
not, require any action, consent or approval of any person, entity or
Governmental Body.
Section 7A. MUTUAL INDEMNIFICATION.
In connection with and in consideration of the matters contemplated in this
Agreement, BCBSMO on the one hand, and NSI and NetMed collectively on the other
hand (any such party, an "Indemnifying Party"), shall each indemnify, save and
hold harmless the other, its and their subsidiaries, its and their respective
employees, officers, directors, agents and representatives (collectively, the
"Indemnified Parties"), from and against any and all costs, losses, liabilities,
damages, lawsuits, deficiencies, claims and expenses (whether or not arising out
of third-party
4
<PAGE>
claims), including, INTER ALIA, interest, penalties, reasonable attorneys'
fees and all reasonable amounts paid in investigation, defense or settlement
of any of the foregoing (herein, the "Losses"), incurred in connection with
or resulting from the activities conducted pursuant to this Agreement;
PROVIDED, that neither of BCBSMO, on the one hand, or NSI and NetMed, on the
other hand, shall be under any obligation to pay Losses to or for the benefit
of any Indemnified Party arising from the finally judicially determined
negligence, gross negligence or willful misconduct of such Indemnified Party.
If any claim is made against any Indemnified Party for which
indemnification is sought hereunder, written notice shall be given to the
Indemnifying Party as promptly as practicable; PROVIDED, that the failure of any
Indemnified Party to give timely notice shall not affect rights to
indemnification hereunder except to the extent that the Indemnifying Party
demonstrates actual damage caused by such failure. If within 30 days of receipt
of such notice the Indemnifying Party acknowledges in writing to the Indemnified
Party that the Indemnifying Party shall be obligated under the terms of its
indemnity hereunder in connection with such claims, then the Indemnifying Party
shall be entitled, if it so elects, to take control of the defense and
investigation of such claim and to employ and engage attorneys of its own choice
to handle and defend the same, at the Indemnifying Party's cost, risk and
expense; PROVIDED, that the Indemnified Party may, at its own cost, participate
in the investigation, trial and defense of such lawsuit or action and any appeal
arising therefrom. Each party shall cooperate in all reasonable respects with
the other party and its attorneys in the investigation, trial and defense of
such lawsuit or action and any appeal arising therefrom.
Section 8. MISCELLANEOUS.
8.1 ASSIGNMENT. This Agreement is not assignable by BCBSMO (including its
wholly owned subsidiaries and affiliates), NetMed or NSI and the rights granted
by one party shall not be transferred without the prior written consent of the
other. This Agreement shall be binding upon and inure to the benefit of the
parties and their respective successors and permitted assigns.
8.2 WAIVER. No waiver by any party of any breach of any provision hereof
shall constitute a waiver of any other breach of that or any other provision
hereof.
8.3 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 party
or provision of this Agreement.
8.4 CHOICE OF LAW. This Agreement and the performance hereunder shall be
governed by and construed in accordance with the laws of the State of Ohio
(without giving affect to principles of conflicts of laws).
8.5 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
and hard copy or by certified or registered mail, postage prepaid as follows;
5
<PAGE>
(a) If to NSI:
Neuromedical Systems, Inc.
Two Executive Boulevard
Suffern, New York 10901-4164
Attn: Andrew C. Panagy
Facsimile: (914) 368-3896
With a copy to the same address to the attention of:
John B. Henneman, III
Vice President of Corporate Development and General Counsel
(b) If to NetMed:
NetMed, Inc.
425 Metro Place North
Suite 140
Dublin, Ohio 43017
Attention: David J. Richards, President and CEO
Facsimile: (614) 793-9376
(c) If to BCBSMO:
BlueCross BlueShield of Ohio
2060 East Ninth Street
Cleveland, Ohio 44115-1355
Attention: Benjamin D. Zelman, Director, Utilization Management
Facsimile: 216-687-6080
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.
8.7 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, discharge& changed or modified except by an instrument in
writing signed by a duly authorized representative of each of the parties.
6
<PAGE>
8.8 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.
8.9 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 RUTTENBERG
------------------------
NETMED, INC.
By: /s/ David J. Richards
------------------------
BLUE CROSS AND BLUE SHIELD MUTUAL OF OHIO
By: /s/ Kent W. Clapp
------------------------
7
<PAGE>
Exhibit 24
POWER OF ATTORNEY
Each director and/or officer of NetMed, Inc. (the "Corporation") whose
signature appears below hereby appoints David J. Richards and Kenneth B.
Leachman as the undersigned's attorneys or any of them individually as the
undersigned's attorney, to sign, in the undersigned's name and behalf and in any
and all capacities stated below, and to cause to be filed with the Securities
and Exchange Commission (the "Commission"), the Corporation's Annual Report on
Form 10-K (the "Form 10-K") for the fiscal year ended December 31, 1996, and
likewise to sign and file with the Commission any and all amendments to the Form
10-K, and the Corporation hereby also appoints such persons as its attorneys-in-
fact and each of them as its attorney-in-fact with like authority to sign and
file the Form 10-K and any amendments thereto granting to each such attorney-in-
fact full power of substitution and revocation, and hereby ratifying all that
any such attorney-in-fact or the undersigned's substitute may do by virtue
hereof.
IN WITNESS WHEREOF, we have hereunto set our hands this 19th day of March,
1997.
SIGNATURE TITLE
/s/ David J. Richards President, Secretary and Director
-------------------------
David J. Richards
/s/ John P. Kennedy Vice President-Business Development,
-------------------------
John P. Kennedy Treasurer, Assistant Secretary, and Director
/s/ Kenneth B. Leachman Vice President - Finance and
-------------------------
Kenneth B. Leachman Chief Financial Officer
/s/ S. Trevor Ferger Director
-------------------------
S. Trevor Ferger
/s/ Michael S. Blue Director
-------------------------
Michael S. Blue
/s/ Cecil J. Petitti Director
-------------------------
Cecil J. Petitti
/s/ Robert J. Massey Director
-------------------------
Robert J. Massey
/s/ James F. Zid Director
-------------------------
James F. Zid
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NETMED, INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 142,074
<SECURITIES> 0
<RECEIVABLES> 175,512
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 345,980
<PP&E> 60,433
<DEPRECIATION> 32,399
<TOTAL-ASSETS> 10,379,590
<CURRENT-LIABILITIES> 447,914
<BONDS> 0
0
0
<COMMON> 3,881,605
<OTHER-SE> 3,954,764
<TOTAL-LIABILITY-AND-EQUITY> 10,379,590
<SALES> 102,813
<TOTAL-REVENUES> 102,813
<CGS> 0
<TOTAL-COSTS> 1,780,125
<OTHER-EXPENSES> (664,057)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 872
<INCOME-PRETAX> (1,013,835)
<INCOME-TAX> (421,013)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (592,822)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
