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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, 1997
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.)
6189 MEMORIAL DRIVE
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
(Title of Class)
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 $9,640,000 on March 16, 1998.
There were 11,334,169 shares of the Registrant's Common Shares
outstanding on March 16, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1998 Annual
Meeting of Shareholders are incorporated by reference in Part III.
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PART I
ITEM 1. BUSINESS.
GENERAL
The Company is an Ohio corporation engaged in the business of
acquiring, developing and marketing medical and health-related technologies. The
principal business activity of the Company is the marketing of the PAPNET(R)
Testing System, which is a proprietary product of Neuromedical Systems, Inc.
("NSI"). The PAPNET Testing System is a semi-automated cancer detection system
for the review of cell, tissue or body fluid specimens, including cervical
cytology specimens. Slides containing cytology specimens are processed using the
PAPNET Testing System (either by the laboratory at its own facilities or at one
of NSI's central facilities) which produces processed images for evaluation by
the laboratory's NSI-trained cytotechnologists.
The Company was originally organized in 1989 for the purpose of
acquiring the exclusive territorial rights to market NSI's proprietary products
in Ohio. In 1990, it acquired from NSI marketing rights for Kentucky and the
Chicago, Illinois metropolitan area. On December 16, 1996, the Company completed
a merger with Cytology Indiana, Inc., Indiana Cytology Review Company, ER Group,
Inc., CCWP Partners, Inc., and Carolina Cytology, Inc. (the "Predecessor
Companies"), which had held the rights to market the PAPNET Testing System 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.
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 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. In pursuit of this strategy, in early 1997 the Company embarked upon the
further development and commercialization of a technology for separating and
concentrating pure oxygen from ambient air, and has targeted the home health
care market as the first commercial application of the technology.
See "Business - Other Company Technologies."
NSI - LICENSOR OF THE PAPNET(R) 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 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
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 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 Testing System was approved for commercial use in the United
States by FDA on November 8, 1995. Thereafter, NSI commenced marketing to
laboratories and clinicians, and as of December 31, 1997, the Papnet test was
available through nearly 300 laboratories in the United States, and in 25
countries worldwide. The PAPNET 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 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 Testing System, comply with all applicable regulatory
requirements.
Currently, commercial use of the PAPNET Testing System in the United
States is limited by the FDA to the rescreening of Pap smears that have been
classified as "negative" for cervical abnormality by manual microscopic
inspection. In certain other countries, the PAPNET Testing System has been
successfully used as a primary screener for cervical abnormality. NSI has
announced its intention to pursue FDA approval for use of the device as a
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primary screener in the United States, stating that it expects to begin
realizing primary screening revenues in the U. S. by the end of 1999.
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, and over 50 million
tests are 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 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 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 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(R) TESTING SYSTEM
The PAPNET Testing System is a computerized image processing service
provided to laboratories. The laboratory performs PAPNET 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 then processed on a PAPNET Scanning Station (either at the
lab or at one of NSI's processing facilities), which is designed to inspect the
hundreds of thousands of cells and other objects on the slide. The PAPNET
Scanning Station's 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.
At the laboratory, a certified cytotechnologist specially trained in
the use of the PAPNET Testing System evaluates the 128 color images from each
slide on a PAPNET Review Station. The PAPNET 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 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, she classifies the slide as "review." The cytotechnologist then refers
to the "x, y" coordinates provided with each PAPNET 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, she refers the slide to the
laboratory's pathologist for a final diagnosis. In no case does NSI, the
Company, nor the PAPNET Testing System make a diagnosis of a slide or smear.
The PAPNET 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
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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 four companies that are engaged in
efforts to automate one or more aspects of cervical smear screening. Three of
these, Cytyc, Autocyte and MonoGen, have focused on the development of devices
for the production, and in the case of Autocyte, 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(R) preparation to laboratories, for the purpose
of filtering out blood, mucus and other material from Pap smears. Autocyte has
submitted an application to the FDA for premarketing approval of its monolayer
method and scanning process, but to date has not received FDA approval of
either. MonoGen's monolayer preparation method has been used for other types of
cytology specimens, but has not yet received FDA approval for use for cervical
cytology.
With monolayer techniques, clinicians are required to prepare special
slides, and only a portion of the cells and background information displayed on
the conventional slide is retained for analysis. Because these preparations
result in slides with fewer cells and less obscuring material, their
manufacturers claim an increased rate of detection of abnormal cells when the
slides are examined under a microscope. As opposed to the monolayer systems,
because the PAPNET System uses the conventional method of sample collection, it
does not require clinicians to deviate from standard practice in the preparation
or visual screening of Pap smears. While NSI has stated that the PAPNET System
is capable of rescreening monolayer slides, to date it has not sought FDA
approval to do so, choosing instead to focus on obtaining FDA approval for
primary screening of both conventional and monolayer slides.
In July 1997, several persons (including Carl Genberg, a shareholder of
the Company and a director of NSI) filed a citizen's petition with the FDA
requesting that the FDA reexamine its earlier approval of the ThinPrep(R)
technology as a replacement for the conventional Pap smear. NSI and Cytyc are
also currently engaged in litigation in which each has asserted product
disparagement claims against the other.
The other competitor, NeoPath, has received FDA approval for the use of
its AutoPap(R) System as part of a laboratory's quality control procedure.
According to NeoPath, the AutoPap 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 sought FDA
approval for partial automated primary screening (as opposed to rescreening) of
conventional Pap smears, and has submitted to the FDA a supplemental pre-market
approval application. In January 1998, an FDA advisory panel reviewing the
application recommended approval, with certain limitations. As recommended by
the panel, use of the AutoPap System would first require that slides with
inadequate specimen quality and slides from high-risk women be examined
manually. The remaining slides would be screened with the AutoPap System, and up
to 25% could be excluded from further review based upon this screen. The
remaining 75% of the slides would be required to be manually reviewed, and 15%
of those (as opposed to 10% under conventional practice) would be randomly
selected for a second manual review. 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 System. NeoPath
has denied these allegations and has asserted counterclaims to the effect that
NSI has made false and misleading representations concerning the AutoPap System.
NSI has stated that it believes NeoPath's assertions are without merit.
As noted above, the PAPNET Testing System has been successfully used as
a primary screener outside of the U.S. NSI has announced its intention to
pursue FDA approval for unrestricted use of the device as a primary screener in
the United States, and has stated that it views the recent panel recommendation
concerning the AutoPap System as a positive step toward eventual FDA approval of
the PAPNET System as a primary screener.
These or other competitors may develop new products and technologies
that prove to be more effective than the PAPNET 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 Testing System. Such developments could render the
PAPNET 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.
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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 Testing System could detect cancerous and precancerous cells of the
esophagus on conventionally prepared smears. The Company is also aware of
ongoing efforts to use the PAPNET System as a screener for oral cancer. NSI's
patents cover applications of its technology to cytological screening for
cancers occurring at all body sites, and the Company's licenses of NSI's
technology (described below) would extend to these applications.
The foregoing information concerning NSI and the PAPNET Testing System
was obtained either directly from NSI or from filings that NSI has made with the
Commission. While the Company believes that the foregoing information is
accurate and a fair summary of publicly available information concerning NSI and
the PAPNET Testing System, readers are encouraged to review NSI's filings with
the Commission for additional and more detailed information.
THE NSI LICENSES
The Company has the right and license to market the PAPNET Testing
System and service in the states of Ohio, Georgia, Kentucky, Missouri, North
Carolina and in the Chicago metropolitan area, representing approximately 16.5%
of the total U.S. population. 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 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 Company entered into its
original license agreement with NSI in 1989, covering the State of Ohio. In
1990, the Company acquired licenses for Kentucky and the Chicago metropolitan
area. The Predecessor Companies held licenses for North Carolina, Georgia and
Missouri. Each license expires on the later of (i) 17 years after its execution,
or (ii) the expiration of the initial patent granted for the PAPNET System, and
(except in the case of the Ohio license) is renewable for an additional 17 year
term at the Company's option.
Under the licenses, the Company is entitled to receive the greater of
(i) royalties equal to 50% of the net slide revenue generated from participating
laboratories within its territory, not to exceed the Company's share of revenues
from the first 10 million slides annually; or (ii) 3.5% of NSI's annual slide
processing revenues less certain taxes, commissions and other enumerated
expenses, up to an annual aggregate limit of $18.8 million.
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 a Settlement Agreement with NSI. 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 Testing System, as well as certain other medical technologies
which may be developed by NSI (the "Amended License"). While the Amended License
would extend the term of the Company's license to December 31, 2025, and would
make other clarifying changes to the existing license agreements, the key
revenue sharing terms would not materially differ from those contained in the
existing license agreements.
While the Company and NSI have agreed on the general form of the
Amended License, which the Company has agreed to execute with certain
modifications, no final agreement had been executed as of March 15, 1998. The
modifications requested by the Company deal principally with the determination
of the amount of
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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 (as well as royalties from slides that are processed in certain
large national laboratories), and the geographic boundaries of the Company's
metropolitan Chicago territory.
PAPNET(R) MARKETING
Following FDA approval of use of the PAPNET System for rescreening Pap
smears, NSI decided to focus its marketing of the product on primary care
physicians and consumers. It deployed a sales force to call on individual
physicians and group practices, and developed point of sale brochures and a
national advertising campaign to communicate directly to consumers the benefits
of PAPNET rescreening. After evaluating the costs and results of this approach,
in late 1997 NSI decided to refocus its marketing efforts on laboratories, and
offered pricing concessions to laboratories that agreed to rescreen 100% of
their negative Pap smears with the PAPNET System. The first two laboratories
implementing this program are located in the Company's licensed territory. At
about the same time, NSI reevaluated its strategy of positioning the PAPNET
System as a rescreener of manually screened Pap smears, and decided to pursue
FDA approval of use of the system as a primary screener of both conventional and
monolayer slides. As a result of these changes, the Company has recently
redirected its marketing resources to focus on pursuing 100% rescreening and
other volume-priced transactions with laboratories and obtaining insurance and
managed care coverage for the PAPNET test, pending FDA approval of use of the
PAPNET System as a primary screener.
THIRD-PARTY PAPNET(R) REIMBURSEMENT
Reimbursement of laboratory charges for PAPNET 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 test, others (including Medicare) provide
little or no reimbursement. To the extent that third-party payers do not provide
for reimbursement of PAPNET testing, or if the level of reimbursement is
significantly below the amount laboratories charge patients to perform PAPNET
testing, the size of the potential market available to NSI and the Company may
be reduced.
Consequently, the Company is directing significant marketing efforts
toward obtaining third-party reimbursement for the PAPNET test. In February
1997, the Company entered into an agreement with Medical Mutual of Ohio, Inc.
(MMO) (formerly Blue Cross and Blue Shield of Ohio, Inc.) whereby MMO agreed to
cover the cost of the PAPNET test for most members. In addition, MMO 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 testing. MMO
was among the largest health care payors in the State of Ohio in 1997, with
approximately 1.5 million covered members. In February 1998, the Commonwealth of
Kentucky informed the Company that its Medicaid program would begin reimbursing
for the test.
Notwithstanding these efforts, the Company may encounter significant
resistance in its attempts to expand use of the PAPNET System as a rescreener.
In January, 1998 an article appeared in the Journal of the American Medical
Association (JAMA) reporting the results of a small study of Pap smears from
military women and dependents which questioned the cost-effectiveness of PAPNET
rescreening, as opposed to manual rescreening. In February, 1998 a technology
assessment committee of the Blue Cross/Blue Shield Association (BCBSA) reported
its opinion that PAPNET rescreening, AutoPap rescreening and the ThinPrep
monolayer technology were not sufficiently cost-effective to support a
recommendation that BCBSA member plans reimburse for their use. On the other
hand, there have been extensive peer-reviewed published studies demonstrating
the cost-effectiveness of PAPNET rescreening (as compared to other commonly
reimbursed tests, such as mammography screening for breast cancer and PSA
testing for prostate cancer), including a retrospective study of over 200,000
Pap smears reported in a recent issue of the international pathology journal
Acta Cytologica. The Company believes that there were substantial scientific and
statistical flaws in the study reported in JAMA and in the BCBSA committee's
analysis, and that the weight of scientific evidence supports the
cost-effectiveness of the PAPNET test. Nonetheless, these recent developments
may adversely effect the Company's efforts to market the PAPNET test as a
rescreener, at least in the short term.
OTHER COMPANY TECHNOLOGIES
In early 1997 the Company entered into an agreement with CeramPhysics,
Inc. of Westerville, Ohio
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("Ceram"), pursuant to which the Company obtained the right to acquire 95%
ownership of a Ceram subsidiary that holds an exclusive world-wide license to
Ceram's patented oxygen generation technology for all applications of the
technology except oxygen sensors and fuel cells. Pursuant to the agreement,
through December 31, 1997 the Company had advanced $278,499 to the Ceram
subsidiary to complete the fabrication and testing of a ceramic element
incorporating the licensed technology, which the Company expects will be capable
of generating oxygen of a purity and in quantities suitable for medical use.
Through December 31, 1997, the Company had expensed an additional $345,171 in
costs associated with the development of this technology. It is the Company's
intention to incorporate the element into an oxygen generation device (the
OxyNet(R) System) that the Company expects tO manufacture and market to the home
health care industry.
Upon completion of an acceptance test demonstrating the technology's
ability to consistently generate pure oxygen, the Company has the option to
acquire for $200,000 common shares representing 95% of the Ceram subsidiary's
outstanding common equity. This investment will then be used to fund a license
fee payable to Ceram under the license agreement for the technology. Thereafter,
the Company expects to proceed with the development of a commercial version of
the device, obtain appropriate regulatory approvals, and commence manufacturing,
marketing and distribution of the product. These activities are likely to
require substantial expenditures in 1998 and 1999, requiring it to seek
additional capital during this period. The amount and timing of the Company's
capital needs will depend to a large degree upon the ultimate methods of
manufacture, marketing and distribution chosen by the Company.
PERSONNEL
As of March 15, 1998, the Company employed twelve (12) full time
employees. 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. The Company supplements its staff through ongoing
consulting arrangements with several persons and organizations, which provide
additional technical and marketing advisory services to the Company on an
as-needed basis.
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 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 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 limited income from operations, and as of
December 31, 1997 has an accumulated deficit of $4,085,578. While the Company
intends to complete development and commercialization of the oxygen
concentration device, it has to date focused its efforts primarily on the
marketing of the PAPNET(R) Testing System and until the commercial launch of the
oxygen product will be dependent upon the successful marketing of the PAPNET
System to generate revenues.
The Company cannot accurately predict the extent of its future capital
needs, but assuming that it completes the transaction with Ceram, it will likely
incur substantial expenditures during 1998 and 1999 to complete development and
commercialization of the OxyNet oxygen concentrator. The Company does not
currently have adequate funds to accomplish this objective, and anticipates that
it will need to raise additional capital by mid-1998. There can be no assurance
that capital will be available on terms acceptable 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. See "Business"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company has not paid and does not anticipate paying any cash
dividends in the foreseeable future and intends to retain future earnings for
the development and expansion of its business. The Company has accumulated
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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.
The success of the Company's operations is highly dependent up David J.
Richards, its founder and President, as well as its other key executive
officers. The loss of any of these persons could have a materially adverse
effect on the Company.
RISKS RELATING TO NSI
The Company obtains all of the information relating to the PAPNET
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 Testing System.
The Company has no ownership rights in the PAPNET technology. NSI has
granted the Company exclusive rights with respect to the marketing of the PAPNET
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 Testing System's
compliance with FDA and other regulatory requirements, maintenance of the
technological advantages of the PAPNET Testing System, maintenance of product
liability insurance, and the ability to manufacture and deliver the equipment
required to operate the PAPNET Testing System. Further, NSI is in a stage of
development that may require additional funding for its operations. In the event
that NSI should fail to perform in any of these areas, or in any others that
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 AGREEMENTS AND PATENTS
The Company's marketing rights and the revenues generated by these
activities are governed by the terms of its licenses from NSI (the "Licenses").
The Licenses impose significant territorial and other restrictions on the
Company's marketing rights, and place certain limitations on the amounts of
royalty revenues which the Company can generate through the marketing of the
PAPNET Testing System and Service. In December 1995, the Company entered into a
Settlement Agreement with NSI which contemplated the execution of an amended
and restated license agreement, but to date no such agreement has been executed
by the parties. See "Business - The NSI Licenses."
The technologies underlying the PAPNET System and the OxyNet oxygen
concentrator are protected by various patents, which may benefit the Company as
a licensee of these technologies. There can be no assurance that these patents
will afford protection from material infringement by third parties or that such
patents will not be challenged. The Company and NSI also rely on trade secrets
and proprietary know-how, which they 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 the Company or NSI
will not otherwise become known to, or independently developed by, competitors.
Litigation is currently pending between NSI and a competitor over alleged
infringement of NSI's patents.
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 as to the PAPNET and OxyNet patents
could limit or destroy the value of the Company's license rights to these
technologies, subject the Company to significant liabilities to third parties,
require the Company to seek licenses from third parties or prevent the Company
from manufacturing or selling these products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
RISKS RELATED TO THE COMPANY'S COMMON SHARES
The directors, executive officers and principal shareholders (5% or
greater) of the Company collectively
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<PAGE> 9
beneficially own or have the right to acquire under currently exercisable
options approximately 25% of the outstanding 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.
The Company had 11,334,169 common shares outstanding as of March 16,
1998. Approximately 2,650,000 shares are held by affiliates of the Company who
will be entitled to resell them 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. In August 1997, the Company
sold $3 million in principal amount of debentures convertible into Common Shares
at a discount to the market price at the time of conversion. The discount is
22.5% through June 30, 1998, and increases to 25% thereafter. There remains
$1,932,000 in principal amount of the debentures outstanding as of March 16,
1998, which if converted at the prevailing market price on that date would
result in the issuance of approximately 2,400,000 additional Common Shares. The
Company has filed and there is currently effective a registration statement
under the Securities Act of 1933 under which such shares may be immediately
resold to the public. Such resales may adversely affect the pricing and
volatility of trading in the Common Shares.
Although the 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 Common
Shares.
Market prices of securities of medical technology companies, including
the Common Shares, have experienced significant volatility from time to time.
There may be volatility in the market price of the Common Shares due to factors
that may or may not relate to the Company's performance. Various factors and
events, such as announcements by the Company or its competitors concerning new
product developments, governmental approvals, regulations or actions,
developments or disputes relating to patent or proprietary rights and public
concern over product liability may have a significant impact on the market price
of the Common 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 premarket 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
9
<PAGE> 10
by third-party payers that do provide reimbursement differ considerably.
Third-party payers (Medicare/Medicaid, private health insurance, health
maintenance organizations, health administration authorities in foreign
countries and other organizations) may affect the pricing or relative
attractiveness of the Company's products and services by regulating the maximum
amount of reimbursement for products or services provided by the Company or by
not providing any reimbursement at all. Restrictions on reimbursement may limit
the price which the Company can charge for its products and services or reduce
the demand for them, or, in the case of PAPNET testing, if the level of such
reimbursement is significantly below what laboratories charge patients to
perform the test, 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
testing will become reimbursable or that the level of reimbursement will be
sufficient to permit the Company to generate substantial revenues in its PAPNET
business. See "Business - Third Party PAPNET(R) Reimbursement."
RISKS RELATING TO MARKETABILITY AND COMPETITION
Until successful commercialization of the OxyNet system, the Company's
performance will depend upon market acceptance of the PAPNET 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, manufacturing, slide
processing and training capacity, reimbursement practice and marketing and sales
efforts. There can be no assurance that the PAPNET 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 System and 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 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. See "Business - Competition in the Cervical Cytology Market."
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 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 System. The Company
currently carries no product liability insurance. However, NSI is required,
under the terms of the Licenses, 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 executive offices are located in Dublin, Ohio, in
approximately 4,900 square feet of space. The Company leases such space at an
annual net rent of $53,900.
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
10
<PAGE> 11
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.
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The 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 last
sales prices per share, as reported on the NASDAQ Bulletin Board, and
subsequently on the American Stock Exchange. The prices shown through December
17, 1996 represent inter-dealer prices, without adjustments for retail markups,
markdowns or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
<S> <C> <C>
First Quarter 1996............................... $13.00 $9.375
Second Quarter 1996.............................. 10.75 8.375
Third Quarter 1996............................... 9.00 7.125
Fourth Quarter 1996.............................. 8.875 6.25
First Quarter 1997............................... 9.625 6.625
Second Quarter 1997.............................. 7.875 5.00
Third Quarter 1997............................... 6.875 4.00
Fourth Quarter 1997.............................. 4.50 2.063
</TABLE>
On March 16, 1998, the last reported sale price of the Common Shares
was $1.0625 per share. On March 16, 1998, there were 407 holders of record of
the Common Shares.
The Company has not paid and does not anticipate paying any cash
dividends in the foreseeable future and intends to retain future earnings for
the development and expansion of its business. Any future determination to pay
dividends will be at the discretion of the Board and subject to certain
limitations under the Ohio General Corporation Law and will depend upon the
Company's results of operations, financial condition, contractual restrictions
and other factors deemed relevant by the Board.
11
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Year ended December 31,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue $ 4,322 $ 24,765 $ 48,000 $ 102,813 $ 893,608
Loss from operations (285,591) (302,596) (525,149) (1,677,312) (2,453,599)
Net income (loss) (277,068) (283,537) 1,324,945 (592,822) (3,284,276)
Net income (loss) per
share - Basic (0.05) (0.05) 0.22 (0.09) (0.30)
Diluted (0.05) (0.05) 0.21 (0.09) (0.30)
BALANCE SHEET DATA:
Total assets 962,492 768,934 9,225,744 10,379,590 3,769,049
Convertible Debentures - - - - 2,190,000
Total Shareholders' equity
923,828 738,600 6,253,679 7,035,067 832,095
</TABLE>
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
principal business activity of the Company is the marketing of the PAPNET(R)
Testing System, which is a proprietary product of Neuromedical Systems, Inc.
("NSI"). The PAPNET Testing System is a semi-automated cancer detection system
for the review of cell, tissue or body fluid specimens, including cervical
cytology specimens. Slides containing cytology specimens are processed using the
PAPNET Testing System (either by the laboratory at its own facilities or at one
of NSI's central facilities) which produces processed images for evaluation by
the laboratory's NSI-trained cytotechnologists.
The Company was originally organized in 1989 for the purpose of
acquiring the exclusive territorial rights to market NSI's proprietary products
in Ohio. In 1990, it acquired from NSI marketing rights for Kentucky and the
Chicago, Illinois metropolitan area. On December 16, 1996, the Company completed
a merger with Cytology Indiana, Inc., Indiana Cytology Review Company, ER Group,
Inc., CCWP Partners, Inc., and Carolina Cytology, Inc. (the "Predecessor
Companies"), which had held the rights to market the PAPNET Testing System 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.
In addition to exploiting its rights under the license agreements 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 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.
This report contains forward-looking statements that 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 1 of
this report, in the section entitled "Business Risks".
12
<PAGE> 13
For accounting purposes, the historical financial statements of the
Company prior to December 16, 1996 are those of Papnet of Ohio, Inc. The results
of operations for the merged entities are reported on a prospective basis
commencing December 16, 1996. The following discussion therefore includes the
operations of Papnet of Ohio, Inc. from January 1, 1995 through December 15,
1996, and the combined operations of all entities from December 16, 1996 through
December 31, 1997.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The PAPNET 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 Testing System during 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
System. Beginning in September of 1996, the commercial launch of the product was
initiated with a national advertising campaign.
Royalty revenue increased to $893,608 for the year ended December 31,
1997 from $102,813 and $48,000 for the years ended December 31, 1996 and 1995,
respectively. The increase can be attributed to an increase in market
penetration due to an increased sales force calling on doctors and laboratories,
consumer advertising and increased insurance reimbursement during 1997 compared
to prior years.
As a result of receiving FDA approval for the PAPNET test and the
product market launch in September 1996, the Company increased the number of
sales representatives. At December 31, 1997 the Company employed a total of
eight sales representatives an increase from six at December 31, 1996 and three
at December 31, 1995. In addition to marketing the PAPNET test, the Company
began to investigate additional business opportunities during 1996, and on March
3, 1997 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 Ceram subsidiary 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. As a result of the new business
opportunities and the Company's listing on the American Stock Exchange and the
accompanying regulatory filings, the administrative staff of the Company was
increased from two at December 31, 1995 to five at December 31, 1996, and to
seven at December 31, 1997. The Company also incurred a non-cash expense of
$455,593 and $410,000 for the years ended December 31, 1997 and 1996,
respectively, for stock options granted at a discount to current market value
and the extension of options that were due to expire. Due to the above, salaries
and benefits expense increased to $1,818,251 for the year ended December 31,
1997 from $838,846 and $303,105 for the years ended December 31, 1996 and 1995,
respectively.
Sales and marketing expenses were $622,060, $250,389 and $74,329 for
the years ended December 31, 1997, 1996 and 1995, respectively. The increase in
the expense is due to the direct costs associated with the increased number of
sales representatives, an increase in sales literature and promotional materials
used in physician offices and an increase in advertising.
General and administrative expenses increased to $612,944 for the year
ended December 31, 1997 from $240,562 for the year ended December 31, 1996.
Approximately $200,000 of the increase is due to increased professional fees
associated with being a publicly traded company listed on a national exchange,
including legal, accounting and investor relations activities. The remaining
increase is due to the increased administrative headcount, an increase in
occupancy costs as a result of increased office space and an increase in
insurance costs associated with the purchase of directors and officers liability
insurance. General and administrative expense increased $151,263 for the year
ended December 31, 1996 to $240,562 from $89,299 at December 31 1995. The
increase for 1996 is attributable to the one time expenses of $74,000 incurred
for the AMEX listing and state securities fees associated with increasing the
number of authorized shares of the Company and to the increase in headcount and
occupancy costs associated with that headcount.
While the Company's primary focus has been exploiting its rights under
the NSI license, the Company will also consider the acquisition of other
medical technologies in the future. Consistent with that plan, the Company
incurred costs of $293,952 and $85,476 for the years ended December 31, 1997
and 1996, respectively in the negotiation and evaluation of additional
opportunities in medical technology. Specifically, the Company incurred costs
for market validation and additional design specifications and testing
associated with the OxyNet technology pursuant to the agreement with Ceram. In
addition, the Company has hired a full time employee to further the development
and commercialization of the technology.
13
<PAGE> 14
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. No
expenses related to this transaction were incurred in 1997.
The Company issued $3,000,000 in principal amount of 6% Secured
Convertible Subordinated Debentures ("Debentures") on August 13, 1997, and
recorded associated one-time expenses of $1,106,452. The expenses included
$750,000 in discount calculated as of the closing date, $100,000 for the value
of warrants issued to placement agents and the purchasers of the Debentures,
$170,000 in placement fees and $87,000 in professional, stock exchange and
registration fees associated with the Debentures and subsequent registration
statement. (See Note 4 to the Financial Statements.)
Interest income was $39,442 for the year ended December 31, 1997
compared to $13,743 and $16,606 for the years ended December 31, 1996 and 1995,
respectively. The increase is due to increased cash balances available for
investment resulting from the net proceeds of the Debentures.
Interest expense increased to $72,464 for the year ended December 31,
1997 compared to $872 and $264 for the years ended December 31, 1996 and 1995,
respectively. The increase in the expense is the result of borrowings through
margin accounts utilizing NSI common stock for collateral and the expense
associated with the Debentures. The Company has the option of paying the
interest in cash, or in stock at the prevailing conversion price under the
Debentures.
The Company recognized a gain on available-for-sale securities of
$794,819 for the year ended December 31, 1997 compared to $664,057 for the same
period in 1996 which has been recorded as other income. 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 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 to date primarily by the sale
of NSI common stock owned by the Company, the sale of Common Shares, and the
sale of the Debentures. Including the net proceeds of the sale of the Debentures
in August 1997 of $2,805,000, the Company's combined cash and cash equivalents
totaled $1,656,370 at December 31, 1997, an increase of $1,514,296 from December
31, 1996. As of December 31, 1997, the Company owned 450,611 shares of NSI
common stock, of which 82,246 were unrestricted and can be liquidated in an
orderly fashion to fund future operations. The remaining 368,365 are pledged as
additional security for the Debentures. NSI common stock closed trading at $2.81
per share on December 31, 1997, and at $2.09 per share on March 16, 1998.
The Company anticipates that its cash requirements will be substantial
for the immediate future and believes that it will be necessary to raise
additional capital in order to complete the development of the OxyNet device
and continue funding the negative cash flow from operations. The expected
negative cash flow from operations will result from the accounts payable and
accrued expenses at December 31, 1997 of approximately $417,000, the costs
associated with the sales and marketing efforts to healthcare providers,
doctors and laboratories during 1998 and the overhead necessary for the day to
day operations of the Company.
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 technology, in pursuing other opportunities in
healthcare technology. Specifically, the Company intends to make early
investments and applying the management and marketing resources of the Company
to develop and
14
<PAGE> 15
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 new healthcare products.
In pursuit of that strategy, the Company has embarked upon the
development of an oxygen generation/concentration device for use in home
healthcare. In early 1997 the Company entered into an agreement with Ceram,
pursuant to which the Company obtained the right to acquire 95% ownership of a
Ceram subsidiary that holds an exclusive world-wide license to Ceram's patented
oxygen generation technology for all applications except oxygen sensors and fuel
cells. Pursuant to the agreement, through December 31, 1997 the Company had
advanced $278,499 to the Ceram subsidiary to complete the fabrication and
testing of a ceramic element incorporating the licensed technology, which the
Company expects will be capable of generating oxygen of a purity and in
quantities suitable for medical use. Through December 31, 1997, the Company had
expensed an additional $345,171 in costs associated with the development of this
technology. It is the Company's intention to incorporate the element into an
oxygen generation device (the OxyNet(R) System) that the Company expects tO
manufacture and market to the home health care industry.
Upon completion of an acceptance test demonstrating the technology's
ability to consistently generate pure oxygen, the Company has the option to
acquire for $200,000 common shares representing 95% of the Ceram subsidiary's
outstanding common equity. This investment will then be used to fund a license
fee payable to Ceram under the license agreement for the technology. Thereafter,
the Company expects to proceed with the development of a commercial version of
the device, obtain appropriate regulatory approvals, and commence manufacturing,
marketing and distribution of the product. These activities are likely to
require substantial expenditures in 1998 and 1999, requiring it to seek
additional capital during this period. The amount and timing of the Company's
capital needs will depend to a large degree upon the ultimate methods of
manufacture, marketing and distribution chosen by the Company.
The Company has assessed the potential operational and financial
effects that it may encounter with respect to its information systems as a
result of the "Year 2000" issue, and believes that these will not be material.
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 hereby incorporated by
reference from the registrant's definitive proxy statement filed pursuant to
Regulation 14A which has been, or will be, filed with the Commission within 120
days after the end of the fiscal year covered by this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is hereby incorporated by
reference from the registrant's definitive proxy statement filed pursuant to
Regulation 14A which has been, or will be, filed with the Commission within 120
days after the end of the fiscal year covered by this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item hereby incorporated by reference
from the registrant's definitive proxy statement filed pursuant to Regulation
14A which has been, or will be, filed with the Commission within 120 days after
the end of the fiscal year covered by this Form 10-K.
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<PAGE> 16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item hereby incorporated by reference
from the registrant's definitive proxy statement filed pursuant to Regulation
14A which has been, or will be, filed with the Commission within 120 days after
the end of the fiscal year covered by this Form 10-K.
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 1997.
Statements of Operations for the three years ended
December 31, 1997.
Statements of Stockholders' Equity for the three years
ended December 31, 1997.
Statements of Cash Flows for the three years ended
December 31, 1997.
Notes to the Financial Statements.
Independent Auditors' Report.
(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
------ -----------
3.1 Amended and Restated Articles of Incorporation of the
Registrant. (Previously filed as Appendix A to the
Registration Statement on Form S-4, Registration No.
333-8199, and incorporated herein by reference.)
3.2 Amended and Restated Regulations of the Registrant.
(Previously filed as Appendix A to the Registration
Statement on Form S-4, Registration No. 333-8199, and
incorporated herein by reference.)
3.3 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.)
4.1 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 Exhibit 4(b) to the Registration
Statement on Form S-4, Registration No. 333-8199, and
incorporated herein by reference.)
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<PAGE> 17
10.1 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.
333-8199, and incorporated herein by reference.)
10.2 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.)
10.3 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.)
10.4 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.)
10.5 Net Lease between Muirfield Square, Ltd. as Lessor and
Registrant as Lessee, dated September 15, 1997.
(Previously filed as Exhibit 10.9 to the Registration
Statement on Form S-1, Registration No. 333-35663, and
incorporated herein by reference.)
10.6 Investment Agreement among the Registrant,
CeramPhysics, Inc. and Ceram Oxygen Technologies,
Inc., dated February 28, 1997. (Previously filed as
Exhibit 10(j) to Registrant's 1996 Annual Report on
Form 10-K, Commission file no. 1-12529, and
incorporated herein by reference.)
10.7 * Revolving Loan-Grid Note, between the Registrant as
the lender and Ceram Oxygen Technologies, Inc. as
maker, dated February 28, 1997, as amended December
16, 1997.
10.8 Marketing Support Agreement among Neuromedical
Systems, Inc., NetMed, Inc., and Blue Cross and Blue
Shield Mutual of Ohio, dated January 30, 1997.
(Previously filed as Exhibit 10(l) to Registrant's
1996 Annual Report on Form 10-K, and incorporated
herein by reference.)
10.9 Employment Agreement between the Registrant and David
J. Richards, dated as of April 1, 1997. (Previously
filed as Exhibit 10(a) to Registrant's Quarterly
Report on Form 10-Q for the quarter ending June 30,
1997, and incorporated herein by reference.)
10.10 Employment Agreement between the Registrant and
William J. Kelly, Jr., dated as of July 1, 1997.
(Previously filed as Exhibit 10.14 to the
Registration Statement on Form S-1, Registration No.
333-35663, and incorporated herein by reference.)
24 * Powers of Attorney.
27 * Financial Data Schedule.
99.1 6% Secured Convertible Subordinated Debenture
Purchase Agreement, dated August 12, 1997, between
the Registrant and CPR (USA), Inc. (Previously filed
as Exhibit 99.1 to the Registration Statement on Form
S-1, Registration No. 333-35663, and incorporated
herein by reference.)
17
<PAGE> 18
99.2 Pledge Agreement, dated August 12, 1997, among the
Registrant, CPR (USA), Inc., LibertyView Fund LLC,
LibertyView Plus Fund, and National City Bank.
(Previously filed as Exhibit 99.2 to the Registration
Statement on Form S-1, Registration No. 333-35663,
and incorporated herein by reference.)
99.3 Convertible Debenture Escrow Agreement, dated August
12, 1997, among the Registrant, CPR (USA), Inc., and
Sheldon E. Goldstein, P.C. (Previously filed as
Exhibit 99.3 to the Registration Statement on Form
S-1, Registration No. 333-35663, and incorporated
herein by reference.)
99.4 Registration Rights Agreement, dated August 12, 1997,
between the Registrant and CPR (USA), Inc. (Previously
filed as Exhibit 99.4 to the Registration Statement on
Form S-1, Registration No. 333-35663, and incorporated
herein by reference.)
99.5 Debenture, dated August 13, 1997, issued by the
Registrant to CPR (USA), Inc. (Previously filed as
Exhibit 99.5 to the Registration Statement on Form
S-1, Registration No. 333-35663, and incorporated
herein by reference.)
99.6 Warrant to Purchase 73,334 Shares of Common Stock,
dated August 13, 1997, issued by the Registrant to CPR
(USA), Inc. (Previously filed as Exhibit 99.6 to the
Registration Statement on Form S-1, Registration No.
333-35663, and incorporated herein by reference.)
99.7 Amendment to Convertible Debenture Purchase Agreement.
(Previously filed as Exhibit 99.7 to the Registration
Statement on Form S-1, Registration No. 333-35663, and
incorporated herein by reference.)
99.8 * Amendment 2 to Convertible Debenture Purchase
Agreement, dated February 27, 1998.
* Filed with this Report.
(b) REPORTS ON FORM 8-K
None.
(c) EXHIBITS
The exhibits to this report begin on page 38.
(d) FINANCIAL STATEMENT SCHEDULES
None.
18
<PAGE> 19
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 23,1998 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 23rd day of March, 1998.
Signature Title
/s/ DAVID J. RICHARDS President and Director
--------------------------------
David J. Richards
*JOHN P. KENNEDY Vice President-Business
-------------------------------- Development, Treasurer,
John P. Kennedy and Director
*KENNETH B. LEACHMAN Vice President - Finance
-------------------------------- (Principal Accounting Officer)
Kenneth B. Leachman
*WILLIAM J. KELLY, JR. Vice President, Secretary
-------------------------------- and General Counsel
William J. Kelly, Jr.
*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
19
<PAGE> 20
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, 1997
NetMed, Inc.
Dublin, Ohio
20
<PAGE> 21
NetMed, Inc.
Audited Financial Statements
Years ended December 31, 1997, 1996 and 1995
CONTENTS
Report of Independent Auditors...............................................22
Audited Financial Statements
Balance Sheets...............................................................23
Statements of Operations.....................................................24
Statements of Stockholders' Equity...........................................25
Statements of Cash Flows.....................................................26
Notes to Financial Statements................................................27
21
<PAGE> 22
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, 1997 and 1996, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Columbus, Ohio
February 16, 1998
22
<PAGE> 23
NetMed, Inc.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,656,370 $ 142,074
Accounts receivable 216,356 175,512
Prepaid assets 25,208 28,394
---------------------------------
Total current assets 1,897,934 345,980
Investment in NSI--available for sale 1,267,343 9,238,503
Notes receivable - NSI 21,443 21,443
Note receivable-COTI 278,499 --
Furniture and equipment (net of accumulated
depreciation of $46,095 -- 1997 and $32,399 -- 1996) 42,263 28,034
Deferred taxes 260,100 744,162
Deposits and other assets 1,467 1,468
=================================
Total assets $3,769,049 $10,379,590
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 113,176 $ 97,625
Accrued expenses 304,576 223,536
Loan payable -- 96,909
Other liabilities 69,102 29,844
---------------------------------
Total current liabilities 486,854 447,914
Deferred taxes 260,100 2,896,609
Convertible debentures 2,190,000
--
Stockholders' equity:
Common stock, no par value, 20,000,000 shares authorized, 11,080,783 and
10,940,524 issued and outstanding at December 31, 1997 and 1996
5,417,151 3,881,605
Unrealized gains (losses) on available-for-sale securities net of
deferred taxes of $0 in 1997 and $2,636,509 in 1996 (499,478) 3,954,764
Retained deficit (4,085,578) (801,302)
---------------------------------
Total stockholders' equity 832,095 7,035,067
---------------------------------
Total liabilities and stockholders' equity $3,769,049 $10,379,590
=================================
</TABLE>
See accompanying notes.
23
<PAGE> 24
NetMed, Inc.
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997 1996 1995
-------------------------------------------------------
<S> <C> <C> <C>
Royalty revenue $ 893,608 $ 102,813 $ 48,000
Operating expenses:
Salaries and benefits 1,818,251 838,846 303,105
Sales and marketing 622,060 250,389 74,329
General and administrative 612,944 240,562 89,299
Business development 293,952 85,476 --
Merger (Note 1) -- 364,852 106,415
-------------------------------------------------------
Operating expenses 3,347,207 1,780,125 573,149
-------------------------------------------------------
Operating loss (2,453,599) (1,677,312) (525,149)
Other income (expense):
Interest income 39,442 13,743 16,606
Interest expense (72,464) (872) (264)
Gain on sale of available-for-sale securities 794,819 664,057 --
Financing costs (1,106,452) -- --
Equity (loss) income in partnerships -- (13,451) 49,638
NSI settlement and common stock
transactions (Note 3) -- -- 1,715,399
-------------------------------------------------------
Total other (expense) income (344,655) 663,477 1,781,379
-------------------------------------------------------
(Loss) income before income taxes (2,798,254) (1,013,835) 1,256,230
Income tax liability (benefit) 486,022 (421,013) (68,715)
-------------------------------------------------------
Net (loss) income $(3,284,276) $ (592,822) $1,324,945
=======================================================
(Loss) income per share:
Basic $(.30) $(.09) $.22
=======================================================
=======================================================
Diluted $(.30) $(.09) $.21
=======================================================
</TABLE>
See accompanying notes.
24
<PAGE> 25
NetMed, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
ADJUSTMENTS TO RETAINED
UNREALIZED GAINS EARNINGS
COMMON STOCK (LOSSES) (DEFICIT) TOTAL
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1995 $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
Adjustment to unrealized gains
net of tax -- (4,454,242) -- (4,454,242)
Deferred compensation
Stock options 455,593 -- -- 455,593
Warrants issued 850,096 -- -- 850,096
Stock issued 360,000 -- -- 360,000
Stock received for note (Note 10) (130,143) -- -- (130,143)
Net loss -- -- (3,284,276) (3,284,276)
-----------------------------------------------------------------
Balance, December 31, 1997 $5,417,151 $ (499,478) $(4,085,578) $ 832,095
=================================================================
</TABLE>
See accompanying notes.
25
<PAGE> 26
NetMed, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
-----------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $(3,284,276) $ (592,822) $ 1,324,945
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 13,696 7,776 7,496
Change in deferred taxes 484,062 (421,013) (68,715)
Gain on settlement and exercise of
warrants with NSI -- -- (1,402,002)
Gain on available-for-sale securities (794,819) (664,057) --
Compensation on extended stock options 455,593 410,000 --
Equity (income) loss in partnership -- 13,451 (49,638)
Financing costs 850,096 -- --
Changes in operating assets and liabilities:
Accounts receivable (170,987) (55,727) (42,548)
Note receivable from stockholder -- 50,000 --
Prepaid assets 3,186 (27,373) --
Accounts payable 15,551 47,694 49,931
Accrued expenses and other liabilities 81,040 101,398 94,127
Other liabilities 39,258 -- --
---------------------------------------------------
Net cash used in operating activities (2,307,600) (1,130,673) (86,404)
INVESTING ACTIVITIES
Sale of NSI stock 1,225,229 750,057 --
Net cash advances to Predecessor Companies in
contemplation of Merger -- (400,183) --
Notes receivable - NSI -- 29,637 74,961
Note receivable-COTI (278,499) -- --
Purchase of furniture and equipment (27,925) (18,494) (4,260)
Other assets -- (138) 1,000
---------------------------------------------------
Net cash provided by investing activities 918,805 360,879 71,701
FINANCING ACTIVITIES
Issuance of convertible debentures 3,000,000 -- --
(Payment) proceeds from margin activity (96,909) 96,909 --
Issuance of common stock and warrants exercised -- 3,600 290,517
---------------------------------------------------
Net cash provided by financing activities 2,903,091 100,509 290,517
---------------------------------------------------
Net increase (decrease) in cash 1,514,296 (669,285) 275,814
Cash and cash equivalents at beginning
of period 142,074 811,359 535,545
===================================================
Cash and cash equivalents at end of period $ 1,656,370 $ 142,074 $ 811,359
===================================================
</TABLE>
See accompanying notes.
26
<PAGE> 27
NetMed, Inc.
Notes to Financial Statements
December 31, 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
NetMed, Inc. is 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(R) TestinG System, an
advanced computerized test that pinpoints and magnifies precancerous and
cancerous cells. The Company is also investigating other medical technologies,
including an oxygen concentrator device to be sold in the home healthcare
market.
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(R) System" and the "PAPNET(R) 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 ("Amended License") that encompasses the same
territories covered by the individual License Agreements. While the Company and
NSI have agreed on the general form of the Amended License, which the Company
has agreed to execute with certain modifications, no final agreement has been
executed as of December 31, 1997.
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(R) System, was approved for
commercial use in the United States by the Food and Drug Administration (the
"FDA") on November 8, 1995. The PAPNET(R) Service permits laboratories to submit
Pap smear slides to one of NSI's central facilities for processinG by the
PAPNET(R) System. NSI's objective is to establish the use of its PAPNET(R)
System as the new standard of cAre in cervical cancer screening.
27
<PAGE> 28
NetMed, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
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:
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 NetMed's interest in two
partnerships controlled by certain predecessor companies (see Note 2).
28
<PAGE> 29
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.
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 three to seven years.
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.
29
<PAGE> 30
NetMed, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 5 - Stock Options and
Warrants."
RECLASSIFICATION
Certain amounts presented for 1996 and 1995 have been reclassified to conform to
the 1997 presentation
NET (LOSS) INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to the Statement 128 requirements. The
following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ----------------- ---------------
<S> <C> <C> <C>
Net (loss) income $(3,284,276) $(592,822) $1,324,945
================== ================= ===============
Weighted average shares 10,963,978 6,263,924 5,895,981
Effect of dilutive stock options
and warrants N/A N/A 453,613
------------------ ----------------- ---------------
10,963,978 6,263,924 6,349,594
================== ================= ===============
Basic earnings per share $(.30) $(.09) $.22
================== ================= ===============
Diluted earnings per share $(.30) $(.09) $.21
================== ================= ===============
</TABLE>
30
<PAGE> 31
NetMed, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The outstanding convertible debentures (see Note 4) were not included in the
diluted earnings per share calculation for 1997 because the effect would be
antidilutive.
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." The Company sold
140,000 and 43,000 shares of NSI stock which resulted in a gain of $794,819 and
$664,057 during 1997 and 1996, respectively, which was reported as other income.
In addition, the Company used 106,635 shares in exchange for a reduction of
$450,000 in the debentures payable more fully described in Note 4.
As of December 31, 1997, the Company owned 450,611 shares of NSI stock at a cost
of $1,766,821 of which 368,365 shares are pledged as additional security for the
debentures payable. The NSI common stock has been recorded in the accompanying
balance sheet based on its $2.81 closing price on December 31, 1997.
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.
31
<PAGE> 32
NetMed, Inc.
Notes to Financial Statements (continued)
4. CONVERTIBLE DEBENTURES
In August 1997, the Company issued $3,000,000 of 6% Convertible Debentures (the
"Debentures") resulting in net proceeds to the Company of $2,743,644 and
recorded associated one time expenses of $1,106,452. The expenses included
$750,000 in discount calculated as of the closing date, $100,000 for the cost of
warrants issued to placement agents and the purchasers of the Debentures,
$170,000 in placement fees and $87,000 in professional, stock exchange and
registration fees associated with the Debentures and subsequent registration
statement. The Company has reserved 1,500,000 shares for the conversion of the
Debentures.
The Debentures are convertible into Common Stock at a conversion price equal to
80% of the average closing price of the Common Stock for the three business days
immediately preceding such time as the debentures are converted (75% after March
31, 1998) and mature August 13, 2000. The Debentures may also be redeemed for
cash at the Company's option. Interest is accrued and at the option of the
Company may be paid in cash or converted to Common Stock at the same prices as
above. As of December 31, 1997, Debentures with a total principal amount of
$360,000 had been converted into 150,000 shares of Common Stock.
The Debentures were originally secured by 475,000 shares of common stock of
Neuromedical Systems, Inc. owned by the Company (the "NSI Shares"). During 1997,
the Company exchanged 106,635 NSI Shares for a reduction of $450,000 in the
Debentures payable. If at anytime between February 1, 1998 and March 31, 1998,
the conversion price is $3.00 or less, the holders of the Debentures may elect
to exercise their conversion rights for NSI Shares, rather than common stock of
the Company, at a discount that would produce a 25% return on an annualized
basis.
In connection with this financing, the Company issued warrants to the purchasers
of the Debentures and to placement agents. The warrants are exercisable at any
time prior to August 13, 2000 at exercise prices of $7.79 per share (for up to
150,000 shares) and $9.35 per share (for up to 65,000 shares).
In February, 1998, the conversion price discount was modified to 22.5% from
April 1 through June 30, 1998, and 25% thereafter; and the period during which
the Debenture holders may convert into NSI Shares was extended to June 30, 1998.
32
<PAGE> 33
NetMed, Inc.
Notes to Financial Statements (continued)
5. 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
following represents the activity for the Stock Option Plan for the year ended
December 31, 1997:
<TABLE>
<CAPTION>
Options Granted
-------------------------------------------------------
Equal to Less than Greater than Total
Market Market Value Market Value Options
Value Granted 1997
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options Granted -- 313,667 225,000 538,667
Weighted-average fair value -- $5.25 $2.08 N/A
Weighted-average exercise price -- $6.76 $9.54 N/A
Weighted-average contract life in years -- 9.1 9.33 N/A
Compensation expense -- $431,593 -- $431,593
</TABLE>
At December 31, 1997 there are 55,750 options exercisable at a weighted-average
exercise price of $7.09. The number of shares available for grants under the
Stock Option Plan was 211,333 and 300,000 at December 31, 1997 and 1996,
respectively.
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,
1996 and 1997: risk-free interest rate of 6% for 1995 and 1996 and 5.75% for
1997; no dividend yield; volatility factor of the expected market price of the
Company's common stock of .62 for 1995 and 1996 and .44 for 1997 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:
33
<PAGE> 34
NetMed, Inc.
Notes to Financial Statements (continued)
5. STOCK OPTIONS AND WARRANTS (CONTINUED)
<TABLE>
<CAPTION>
PRO FORMA YEARS ENDED DECEMBER 31
1997 1996 1995
------------------------------------------------------------
<S> <C> <C> <C>
Net (loss) income $(4,035,573) $ (873,866) $ 1,257,467
Diluted (loss) income per share $(.37) $(.14) $.20
</TABLE>
The pro forma financial effects of applying SFAS No. 123 are not likely to be
representative of the pro forma effects on reported results of operations for
future years.
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) for
the three years ended December 31, 1997:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------------------------------
NON-QUALIFIED PLAN
Outstanding at January 1, 1995 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
Issued 16,000 $ 3.25
Exercised 8,400 $ 1.83
Expired 16,000 $ 3.25
----------------
Outstanding at December 31, 1997 328,000 $ 1.76
================
Exercisable at December 31, 1995 349,600 $ 1.31
Exercisable at December 31, 1996 336,400 $ 1.76
Exercisable at December 31, 1997 328,000 $ 1.76
The exercisable options for the non-qualified plan had a remaining
weighted-average contract life of 2.9 years.
34
<PAGE> 35
NetMed, Inc.
Notes to Financial Statements (continued)
5. STOCK OPTIONS AND WARRANTS (CONTINUED)
During 1997 and 1996, the company extended the expiration date of 16,000 and
56,000 options, respectively, 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 $24,000 in 1997 and $410,000
in 1996 in compensation expense. These options had a weighted-average fair value
and a weighted-average exercise price of $2.11 and $3.25 for the 1997 extension
and $7.60 and $1.55 for the 1996 extension, respectively.
As of December 31, 1997, there were outstanding 286,020 warrants to purchase
common stock at exercise prices from $.875 per share to $9.35 per share. The
following is a summary of warrant activity for the three years ended December
31, 1997:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------------------------
Outstanding at January 1, 1995 255,040 $.93
Exercised (184,200) $.90
-----------
Outstanding at December 31, 1995
and December 31, 1996 71,020 $1.25
Issued during 1997 215,000 $8.26
-----------
Outstanding and exercisable at December 31,
1997 286,020 $6.46
===========
35
<PAGE> 36
NetMed, Inc.
Notes to Financial Statements (continued)
6. INCOME TAXES
Significant components of deferred tax assets and liabilities are as follows:
1997 1996
--------------------------------
Loss carryforwards $ 1,132,251 $ 580,162
Unrealized gains on investments -- (2,636,509)
Gain on NSI warrants (260,100) (260,100)
Stock options issued 346,237 164,000
Valuation allowance provided (1,218,388) --
--------------------------------
Net deferred tax liability $ -- $(2,152,447)
================================
At December 31, 1997, the Company had unused NOL carryforwards for tax purposes
of approximately $329,000, $320,000, $211,000, $711,000 and $1,380,000 which
expire in 2007, 2008, 2009, 2010 and 2011 respectively.
At December 31, 1997, a full valuation allowance was recorded due to the lack of
deferred tax liabilities, historical income and tax planning strategies. For
1996, due to the existence of a significant deferred tax liability, a valuation
allowance was not required.
The reconciliation of income tax computed at the statutory rate to the recorded
tax provision (benefit) is:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ----------------- -----------------
<S> <C> <C> <C>
Tax provision (benefit) at statutory rate $(951,406) $(344,704) $ 427,118
Benefit of state loss carryforward (108,189) (76,309) --
Permanent differences:
Convertible discount and interest 313,670 -- --
Other permanent 13,559 -- --
Recognition of previously reserved tax
assets -- -- (495,833)
Valuation allowance provided 1,218,388 -- --
---------------- ----------------- -----------------
Total tax provision (benefit) $ 486,022 $(421,013) $ (68,715)
================ ================= =================
</TABLE>
36
<PAGE> 37
NetMed, Inc.
Notes to Financial Statements (continued)
7. 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.
8. NOTE RECEIVABLE FROM CERAM OXYGEN TECHNOLOGIES, INC.
On March 3, 1997, the Company entered an agreement with CeramPhysics,
Inc.("Ceram") pursuant to which the Company has the right to acquire control of
a newly-organized corporation, Ceram Oxygen Technologies, Inc ("COTI") holding a
worldwide license to Ceram's patented oxygen generation technology, which is
exclusive as to all applications except oxygen sensors and fuel cells. Pursuant
to the agreement, the Company will work with and loan up to $300,000 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. Ceram has pledged the patents as
additional security for the note. As of December 31, 1997, the Company has
advanced $278,499 under the note.
9. LEASES
The Company leases facilities and equipment under operating leases. Commitments
for these leases approximate $109,000, $106,000, $94,000, $85,000 and $43,000
for the years ending December 31, 1998, 1999, 2000, 2001 and 2002, respectively.
Rent expense for the years ended December 31, 1997, 1996 and 1995 was $68,798,
$41,677 and $19,537 respectively.
In September 1997, the Company entered into a net lease with Muirfield Square,
Ltd. for 4,900 square feet of office space in which the Company's principal
offices are located. The lease term is for five years at an annual rent of
$53,900 for the first year, escalating annually at the rate of 3% over the term,
and renewable for an additional 5 year term at an annual rental of $60,660.
Certain officers and directors own a majority of the membership interests in
Muirfield Square, Ltd. The Company believes that the lease is on terms at least
as favorable to the Company as available for office space of a similar size and
quality in the locality.
10. NOTE RECEIVABLE
In April 1997, the Company completed a transaction to accept 16,331 shares of
Company stock for payment of a note receivable valued at $130,143. The number of
shares received in the exchange was based on the market value of the shares in
November 1996 when the method of settling the note was negotiated. The note was
charged to common stock on the accompanying balance sheet as the shares were
retired.
37
<PAGE> 38
NETMED, INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997
EXHIBIT INDEX
38
<PAGE> 39
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
3.1 Amended and Restated Articles of Incorporation of the
Registrant. (Previously filed as Appendix A to the
Registration Statement on Form S-4, Registration No.
333-8199, and incorporated herein by reference.)
3.2 Amended and Restated Regulations of the Registrant.
(Previously filed as Appendix A to the Registration
Statement on Form S-4, Registration No. 333-8199, and
incorporated herein by reference.)
3.3 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.)
4.1 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 Exhibit 4(b) to the Registration
Statement on Form S-4, Registration No. 333-8199, and
incorporated herein by reference.)
10.1 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.
333-8199, and incorporated herein by reference.)
10.2 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.)
10.3 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.)
10.4 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.)
10.5 Net Lease between Muirfield Square, Ltd. as Lessor
and Registrant as Lessee, dated September 15, 1997.
(Previously filed as Exhibit 10.9 to the Registration
Statement on Form S-1, Registration No. 333-35663,
and incorporated herein by reference.)
10.6 Investment Agreement among the Registrant,
CeramPhysics, Inc. and Ceram Oxygen Technologies,
Inc., dated February 28, 1997. (Previously filed as
Exhibit 10(j) to Registrant's 1996 Annual Report on
Form 10-K, Commission file no. 1-12529, and
incorporated herein by reference.)
10.7 * Revolving Loan-Grid Note, between the Registrant as
the lender and Ceram Oxygen Technologies, Inc. as
maker, dated February 28, 1997, as amended December
16, 1997.
39
<PAGE> 40
10.8 Marketing Support Agreement among Neuromedical
Systems, Inc., NetMed, Inc., and Blue Cross and Blue
Shield Mutual of Ohio, dated January 30, 1997.
(Previously filed as Exhibit 10(l) to Registrant's
1996 Annual Report on Form 10-K, and incorporated
herein by reference.)
10.9 Employment Agreement between the Registrant and David
J. Richards, dated as of April 1, 1997. (Previously
filed as Exhibit 10(a) to Registrant's Quarterly
Report on Form 10-Q for the quarter ending June 30,
1997, and incorporated herein by reference.)
10.10 Employment Agreement between the Registrant and
William J. Kelly, Jr., dated as of July 1, 1997.
(Previously filed as Exhibit 10.14 to the
Registration Statement on Form S-1, Registration No.
333-35663, and incorporated herein by reference.)
24 * Powers of Attorney.
27 * Financial Data Schedule.
99.1 6% Secured Convertible Subordinated Debenture
Purchase Agreement, dated August 12, 1997, between
the Registrant and CPR (USA), Inc. (Previously filed
as Exhibit 99.1 to the Registration Statement on Form
S-1, Registration No. 333-35663, and incorporated
herein by reference.)
99.2 Pledge Agreement, dated August 12, 1997, among the
Registrant, CPR (USA), Inc., LibertyView Fund LLC,
LibertyView Plus Fund, and National City Bank.
(Previously filed as Exhibit 99.2 to the Registration
Statement on Form S-1, Registration No. 333-35663,
and incorporated herein by reference.)
99.3 Convertible Debenture Escrow Agreement, dated August
12, 1997, among the Registrant, CPR (USA), Inc., and
Sheldon E. Goldstein, P.C. (Previously filed as
Exhibit 99.3 to the Registration Statement on Form
S-1, Registration No. 333-35663, and incorporated
herein by reference.)
99.4 Registration Rights Agreement, dated August 12, 1997,
between the Registrant and CPR (USA), Inc.
(Previously filed as Exhibit 99.4 to the Registration
Statement on Form S-1, Registration No. 333-35663,
and incorporated herein by reference.)
99.5 Debenture, dated August 13, 1997, issued by the
Registrant to CPR (USA), Inc. (Previously filed as
Exhibit 99.5 to the Registration Statement on Form
S-1, Registration No. 333-35663, and incorporated
herein by reference.)
99.6 Warrant to Purchase 73,334 Shares of Common Stock,
dated August 13, 1997, issued by the Registrant to
CPR (USA), Inc. (Previously filed as Exhibit 99.6 to
the Registration Statement on Form S-1, Registration
No. 333-35663, and incorporated herein by reference.)
99.7 Amendment to Convertible Debenture Purchase
Agreement. (Previously filed as Exhibit 99.7 to the
Registration Statement on Form S-1, Registration No.
333-35663, and incorporated herein by reference.)
99.8 * Amendment 2 to Convertible Debenture Purchase
Agreement, dated February 27, 1998.
* Filed with this Report.
40
<PAGE> 1
Exhibit 10.7
REVOLVING LOAN - GRID NOTE
$300,000.00 Westerville, Ohio
February 28, 1997
as amended December 16, 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 Three
Hundred Thousand Dollars ($300,000.00) or so much thereof as shall have been
advanced by the Lender at any time and not hereafter repaid (hereinafter
referred to as the "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> 2
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
2
<PAGE> 3
of the undersigned hereunder. The undersigned agrees that Lender will not be
required to pursue or 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.
3
<PAGE> 4
WARNING--BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL.
IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR
PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU
REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED
GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY
OTHER CAUSE.
CERAM OXYGEN TECHNOLOGIES, INC.
By: /s/ W. N. LAWLESS
-----------------------------
William N. Lawless, President
4
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
Each director and/or officer of NetMed, Inc. (the "Corporation") whose
signature appears below hereby appoints David J. Richards, Kenneth B. Leachman
and William J. Kelly, Jr. 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, 1997, 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 20th day of
March, 1998.
Signature Title
/s/ DAVID J. RICHARDS President and Director
------------------------------
David J. Richards
/s/ JOHN P. KENNEDY Vice President-Business Development,
------------------------------ Treasurer, Assistant Secretary,
John P. Kennedy and Director
/s/ KENNETH B. LEACHMAN Vice President - Finance and
------------------------------ Chief Financial Officer
Kenneth B. Leachman
/s/ WILLIAM J. KELLY, JR. Vice President, Secretary
------------------------------ and General Counsel
William J. Kelly, Jr.
/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>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
NetMed, Inc. Form 10-K for the year ended December 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 1,656,370 142,074 811,359
<SECURITIES> 0 0 0
<RECEIVABLES> 216,356 175,512 125,993
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 1,897,934 345,980 938,373
<PP&E> 88,358 60,433 41,939
<DEPRECIATION> 46,095 32,399 24,623
<TOTAL-ASSETS> 3,769,049 10,379,590 9,225,744
<CURRENT-LIABILITIES> 486,854 447,914 174,392
<BONDS> 2,190,000 0 0
0 0 0
0 0 0
<COMMON> 5,417,151 3,881,605 2,562,542
<OTHER-SE> (4,585,056) 3,153,462 3,691,137
<TOTAL-LIABILITY-AND-EQUITY> 3,769,049 10,379,590 9,225,744
<SALES> 893,608 102,813 48,000
<TOTAL-REVENUES> 0 0 0
<CGS> 0 0 0
<TOTAL-COSTS> 0 0 0
<OTHER-EXPENSES> 3,347,207 1,780,125 573,149
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 72,464 872 264
<INCOME-PRETAX> (2,798,254) (1,013,835) 1,256,230
<INCOME-TAX> 486,022 (421,013) 68,715
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (3,284,276) (592,822) 1,324,945
<EPS-PRIMARY> (.30) (.09) .22
<EPS-DILUTED> (.30) (.09) .21
</TABLE>
<PAGE> 1
Exhibit 99.8
VIA FACSIMILE
February 27, 1998
Mr. Richard A. Meckler
Senior Managing Director
LibertyView Capital Management, Inc.
101 Hudson Street, Suite 3700
Jersey City, New Jersey 07302
Re: 6% Secured Convertible Subordinated Debenture Purchase Agreements
between NetMed, Inc. ("NetMed") and CPR (USA), Inc. ("CPR"),
LibertyView Fund LLC, and LibertyView Plus Fund (the "Funds").
Dear Rick:
Per our recent discussions, NetMed is prepared to extend to June 30, 1998, the
period during which CPR and the Funds may convert Debentures into the Pledged
Shares under the Debenture Purchase Agreements, provided that CPR and the Funds
agree that conversions into NetMed shares between April 1 and June 30 be at a
discount of 22.5%. To effect this change, the definition of "Conversion Price"
in each of the Debenture Purchase Agreements between NetMed, CPR and the Funds
would be amended to read as follows:
"Conversion Price" means an amount equal to the lesser of (a)
a twenty percent (20%) discount to the average closing bid price as
reported by the American Stock Exchange, Inc. ("Amex") or such other
Exchange on which the securities are listed ("Closing Bid Price") for
the three (3) business days preceding the Conversion Date (for
conversions taking place between April 1, 1998 and June 30, 1998 the
discount shall be twenty two and one-half percent (22.5%) to the
average Closing Bid Price for the three (3) business days preceding the
Conversion Date, and for conversions taking place after June 30, 1998
the discount shall be a twenty five percent (25%) to the average
Closing Bid Price for the three (3) business days preceding the
Conversion Date); or (b) one hundred ten (110%) percent of the average
Closing Price for the Common Stock as reported on the Amex during the
three (3) trading days ending on the day before the Closing Date;
provided, however, that in the event the Conversion Price for (a) or
(b) above is less than Three ($3) Dollars per share prior to June 30,
1998, the Purchaser may either convert into the Company's shares or the
Pledged Shares, as defined herein, at the
<PAGE> 2
Mr. Richard A. Meckler
March 23, 1998
Page 2
indicated discount for the Company's shares as per (a) or (b) above, or
if conversion is into the Pledged Shares, at the discount set forth in
Section 7(iv) of the Pledge Agreement for the Pledged Shares.
The effective date of this amendment would be March 1, 1998. If the foregoing is
acceptable to CPR and the Funds, please sign and return to me by facsimile at
(614) 793-9356.
Sincerely,
/s/ KENNETH B. LEACHMAN
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Kenneth B. Leachman
Vice President - Finance
AGREED TO AND ACCEPTED:
CPR (USA), Inc.
LibertyView Fund, LLC
LibertyView Plus Fund
By: LibertyView Capital Management, Inc.
By: /s/ RICHARD A. MECKLER
-----------------------
Richard A. Meckler
Senior Managing Director
