<PAGE>
Filed pursuant to
Rule 424(b)(3)
Registration Statement
No.: 33-97722
Prospectus Supplement No. 9, dated August 13, 1996
(To Prospectus dated December 7, 1995,
as supplemented on January 17, February 20,
April 2, May 6, May 16, May 23, July 16, and July 30, 1996)
NEUROMEDICAL SYSTEMS, INC.
Common Stock
Par Value $.0001 Per Share
On August 13, 1996, Neuromedical Systems, Inc. filed with the
Securities and Exchange Commission the attached quarterly report on Form 10-Q
for the period ending June 30, 1996.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ____________
Commission File No. 33-97722
Neuromedical Systems, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3526980
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
- --------------------------------------------------------------------------------
Two Executive Boulevard, Suffern, NY 10901-4164
(Address of Principal Executive Offices)
- --------------------------------------------------------------------------------
Registrant's telephone number including area code: (914) 368-3600
(Former Name, Former Address and Former
Fiscal Year if Changed Since Last Report)
- --------------------------------------------------------------------------------
Indicated by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
---- ----
As of July 31, 1996, an aggregate of 29,345,953 shares of common stock were
outstanding.
1
<PAGE>
NEUROMEDICAL SYSTEMS, INC.
Table of Contents Form 10-Q for the Quarterly Period
Ended June 30, 1996
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
- ------ --------------------- ----
<C> <C> <C>
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets at
June 30, 1996 (unaudited) and December 31, 1995. 3
Condensed Consolidated Statements of Operations for
Three Months Ended June 30, 1996 (unaudited) and
1995 (unaudited) and Six Months Ended June 30, 1996
(unaudited) and 1995. 4
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 1996 (unaudited) and 1995. 5
Notes to Condensed Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 7
<CAPTION>
PART II OTHER INFORMATION
- ------- -----------------
<C> <S> <C>
Item 1. Legal Proceedings. 15
Item 2. Changes in Securities. 15
Item 3. Defaults upon Senior Securities. 15
Item 4. Submission of Matters to a Vote
of Security Holders. 15
Item 5. Other Information. 16
Item 6. Exhibits and Reports on Form 8-K. 16
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Neuromedical Systems, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------------- --------------
(unaudited)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 95,827,000 $ 114,143,000
Accounts receivable, net of allowance 1,127,000 900,000
Prepaid expenses 345,000 596,000
Other current assets 714,000 105,000
------------- -------------
Total current assets 98,013,000 115,744,000
Property and equipment, net 14,608,000 11,216,000
Patent and patent application costs, net
(1996-$408,000, 1995-$325,000) 250,000 333,000
Other assets 1,061,000 55,000
------------- -------------
$ 113,932,000 $ 127,348,000
============= =============
<CAPTION>
Liabilities and Stockholders' Equity
<S> <C> <C>
Current liabilities:
Notes and bank loans payable--short-term $ 529,000 $ 583,000
Current portion of capital lease obligations 981,000 680,000
Accounts payable 1,555,000 2,045,000
Accrued liabilities 3,446,000 3,323,000
------------- -------------
Total current liabilities 6,511,000 6,631,000
Notes and bank loans payable--long-term 3,342,000 3,436,000
Notes payable--stockholder 600,000 600,000
Capital lease obligations, less current portion 2,178,000 2,014,000
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $.0001 par value; authorized -
10,000,000 shares; none issued and outstanding -- --
Common stock, $.0001 par value; authorized -
100,000,000 shares; issued and outstanding 29,319,203
shares in 1996 and 28,804,828 shares in 1995 3,000 3,000
Additional paid-in capital 175,562,000 175,237,000
Accumulated deficit (74,575,000) (60,350,000)
Foreign currency translation 311,000 (223,000)
------------- -------------
Total stockholders' equity 101,301,000 114,667,000
------------- -------------
$ 113,932,000 $ 127,348,000
============= =============
</TABLE>
See accompanying notes.
3
<PAGE>
Neuromedical Systems, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Slide processing $ 1,017,000 $ 563,000 $ 1,668,000 $ 1,067,000
----------- ----------- ------------ -----------
Total revenues 1,017,000 563,000 1,668,000 1,067,000
----------- ----------- ------------ -----------
Costs and Expenses:
Cost of sales 1,933,000 1,641,000 3,624,000 2,894,000
Marketing and sales 3,856,000 1,221,000 7,373,000 2,112,000
Research and development 1,529,000 1,362,000 3,079,000 2,557,000
General and administrative 1,815,000 1,189,000 3,556,000 2,366,000
----------- ----------- ------------ -----------
Total costs and expenses 9,133,000 5,413,000 17,632,000 9,929,000
----------- ----------- ------------ -----------
Loss from operations (8,116,000) (4,850,000) (15,964,000) (8,862,000)
Other income (expense):
Interest income 1,325,000 35,000 2,808,000 74,000
Interest expense (236,000) (240,000) (484,000) (480,000)
Foreign exchange (351,000) (5,000) (585,000) 348,000
----------- ----------- ------------ -----------
Other income (expense)-net 738,000 (210,000) 1,739,000 (58,000)
----------- ----------- ------------ -----------
Net loss $(7,378,000) $(5,060,000) $(14,225,000) $(8,920,000)
=========== =========== ============ ===========
Net loss per share
(1995 on a pro forma basis) $ (0.25) $ (0.30) $ (0.49) $ (0.53)
=========== =========== ============ ===========
Shares used in computation of
net loss per share 29,089,000 16,848,000 28,949,000 16,805,000
=========== =========== ============ ===========
</TABLE>
See accompanying notes.
4
<PAGE>
Neuromedical Systems, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
1996 1995
----------- ----------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss $(14,225,000) $(8,920,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,628,000 1,617,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (227,000) 51,000
(Decrease) in accounts payable (490,000) (351,000)
Increase in accrued liabilities 123,000 100,000
(Increase) decrease in prepaid expenses
and other assets (114,000) 507,000
----------- ----------
Net cash used in operating activities (13,305,000) (6,996,000)
----------- ----------
INVESTING ACTIVITIES
Purchases of property and equipment (5,126,000) (2,640,000)
----------- ----------
Net cash used in investing activities (5,126,000) (2,640,000)
----------- ----------
FINANCING ACTIVITIES
Restricted cash (1,250,000) 1,016,000
Issuance of common stock 325,000 861,000
Issuance of convertible preferred stock -- 7,146,000
Repayments to licensees -- (40,000)
Proceeds from notes and bank loans 595,000 956,000
Payment of notes and bank loans (735,000) (969,000)
Payments on capital leases (378,000) (249,000)
Proceeds from capital lease financing 962,000 1,313,000
----------- ----------
Net cash (used in) or provided by financing
activities (481,000) 10,034,000
----------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 596,000 (474,000)
----------- ----------
Net decrease in cash and cash equivalents (18,316,000) (76,000)
Cash and cash equivalents, beginning of period 114,143,000 1,235,000
----------- ----------
Cash and cash equivalents, end of period $ 95,827,000 $ 1,159,000
=========== ==========
</TABLE>
See accompanying notes.
5
<PAGE>
Neuromedical Systems, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1996
Note 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and footnotes thereto
included in the Neuromedical Systems, Inc. (the "Company" or "NSI") Annual
Report on Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K").
Operating results for the three month period ended June 30, 1996 and six month
period ended June 30, 1996, are not necessarily indicative of the results that
may be expected for the year ended December 31, 1996.
6
<PAGE>
Item 2.
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
OVERVIEW
The Company's principal activities since its founding in 1988 have been
research and product and organizational development. The Company was
established to develop, manufacture and market systems for computer assisted
screening of Pap smears and other cytological specimens. The Company's revenues
have been derived primarily from (i) sales of PAPNET(R) testing services, (ii)
sales of licensing agreements (prior to 1992) and (iii) interest income.
The PAPNET(R) Testing System was cleared by the FDA for commercial use in
the United States on November 8, 1995. Prior to that time, the PAPNET(R)
Testing System was permitted to be utilized in the United States on an
investigational basis only, and the Company was permitted to derive revenue with
respect thereto only to recover certain of its costs. The Company, however, was
previously selling PAPNET(R) testing services for commercial use outside of the
United States. The Company has established three designated facilities (the
"Scanning Centers"), one each in the United States, The Netherlands and Hong
Kong. The Netherlands operation has scanned slides from customers in Europe,
South Africa and Canada, while the Hong Kong operation has scanned slides from
Asia and Australia. See Note 5 to the Company's Consolidated Financial
Statements for the year ended December 31, 1995, included in the 1995 Form 10-K,
for information regarding the Company's revenues, net loss and identifiable
assets by geographic area.
The Company has incurred net losses since inception through June 30, 1996
of $74,575,000 and has to date generated only limited commercial revenues.
Because the PAPNET(R) Testing System has now been cleared by the FDA, the
Company is increasing the scale of its operations to commercial levels in the
United States. Management of the Company believes that its existing cash
resources will be sufficient to fund the increase in the scale of the Company's
operations and to meet its cash requirements during the commercialization
process. The Company's past results of operations reflect its developmental or
early commercial stage and are not necessarily indicative of the results from
operations that may be expected as the scale of its operations increases.
Statements in this discussion which are not historical facts, including
statements about the Company's confidence and strategies and its expectations
about demand for and acceptance of the PAPNET(R) Testing System are forward
looking statements that involve risks and uncertainties. These include, but are
not limited to, the Company's reliance on a single product, competition,
dependence on key personnel, the impact on the Company of its territorial
license agreements, dependence on patents and proprietary technology, government
regulation of both products and advertising, limited marketing and sales
history, the impact of third-party reimbursement decisions, risk of litigation
and other risks detailed in the Company's Security and Exchange Commission
filings, including its 1995 Form 10-K.
7
<PAGE>
RESULTS OF OPERATIONS
The Company's results of operations have fluctuated significantly from year
to year and quarter to quarter, principally due to variations in the level of
expenditures relating to its clinical trials, research projects, marketing and
sales programs and international expansion. The Company's results of operations
are expected to continue to fluctuate significantly and may continue to result
in substantial losses.
From inception through June 30, 1996, the Company experienced negative
gross margins due to the significant underutilization of its scanning and
manufacturing operations which occurred as a result of the need to establish
these capabilities prior to FDA clearance and the anticipated expansion of the
Company's marketing and sales activities since such clearance.
The Company expects that costs and expenses will increase significantly in
the second half of 1996 and during 1997 as the Company expands its commercial
operations, including marketing, sales, manufacturing, slide processing,
research and administrative activities to meet the expected increase in market
demand.
To establish PAPNET(R) testing in the United States as the standard of care
in Pap smear analysis, the Company is executing a three step sequential
marketing approach that targets (i) its direct clients, the clinical
laboratories that perform Pap smear testing, (ii) gynecologists and those
primary care physicians and other clinicians who take Pap smears and can order
PAPNET(R) testing and (iii) women, to encourage them to request PAPNET(R)
testing or to agree to it if it is recommended by a clinician. The Company
believes that significant revenue growth in the United States depends upon
effective marketing to all three target audiences.
The Company will begin direct-to-consumer advertising after it determines
that an adequate distribution network of laboratories is established and that
clinician awareness of the PAPNET(R) test is sufficiently high to motivate
clinicians to prescribe or recommend the test. During the second quarter, the
Company made significant progress in building laboratory distribution and
physician awareness. Accordingly, the Company expects to initiate direct-to-
consumer advertising in the second half of 1996. The Company has also begun
discussions with insurers, managed care organizations and other third-party
payers concerning reimbursement for PAPNET(R) testing.
In addition, the Company has had discussions with other health care
companies regarding the limited co-promotion of PAPNET(R) testing along with the
products of such health care companies. No agreement has been reached with any
such company. Although such an agreement is expected to increase physician
awareness of the PAPNET(R) test, the Company does not expect that any such
contemplated agreement would have a direct impact on its sales.
Interest expense is expected to increase in the future as the Company
borrows to fund expansion of its manufacturing, slide processing and marketing
capabilities, including the installation of additional PAPNET(R) Scanning
Stations at the Company's Scanning Centers. It is expected that this increase
will continue to be substantially offset during 1996 by the interest
8
<PAGE>
income from the investment of the Company's cash, including the proceeds of the
Company's initial public offering, completed in December 1995 (the "IPO").
The impact of inflation and changing prices on the Company's revenues and
costs has not been significant.
FOR THE SECOND QUARTERS ENDING JUNE 30, 1996 AND 1995
Total revenues for the second quarter ending June 30, 1996 were $1,017,000,
an increase of 81% from $563,000 for the second quarter of 1995. Revenue
increased both in the United States and internationally. The increase was due
primarily to the Company's ability to charge higher slide processing fees, both
in the United States and in international markets, primarily because of
clearance by the FDA of the PAPNET(R) Testing System for commercial use in the
United States on November 8, 1995. Prior to that time, the PAPNET(R) Testing
System was permitted to be utilized in the United States on an investigational
basis only, and the Company was permitted to derive revenue with respect thereto
only to recover certain of its costs.
The Company's efforts during the first half of 1996 were focused on
building distribution for PAPNET(R) testing in the United States, which involves
training cytotechnologists and pathologists and equipping laboratories, as well
as educating gynecologists in areas where there are laboratories that can
provide PAPNET(R) testing. During the quarter ended June 30, 1996, PAPNET(R)
testing became available through 49 additional laboratories, bringing the total
number of sites able to provide the PAPNET(R) test to 138 by the end of the
quarter.
During the second quarter of 1996, in the United States, the Company
scanned Pap smears from 75 different laboratories in 34 states. The Company
increased its world-wide marketing and sales headcount by twelve to a total of
53 persons during the quarter. The Company expects to continue to expand its
marketing and sales personnel during the second half of 1996, which will
increase the number of sales personnel calling on both laboratories and
clinicians.
Total costs and expenses for the second quarter of 1996 were $9,133,000
compared to $5,413,000 during the second quarter of 1995, an increase of
$3,720,000. This increase was primarily the result of higher sales and
marketing expenses, which increased to $3,856,000 from $1,221,000 in the second
quarter of 1995. The increase in sales and marketing expenses of $2,635,000 was
due primarily to costs associated with the launch of the PAPNET(R) Testing
System in the United States, including salaries for additional personnel and
advertising and promotion costs. In addition, the Company's cost of sales,
research and development and general and administrative expenses also increased
during the second quarter of 1996 as compared to the second quarter of 1995,
although at a slower rate than sales and marketing expenses. These increases
were due primarily to the expansion of the administrative and technical
infrastructure of the Company to support commercial activities in both the
United States and overseas, along with the additional costs of being a public
company following the Company's IPO.
Interest income for the second quarter of 1996 was $1,325,000 compared to
$35,000 in the second quarter of 1995. This increase was due primarily to the
Company's significantly higher
9
<PAGE>
levels of cash and cash equivalent balances in 1996 as a result of the IPO,
equity sales to private investors during the third quarter of 1995 and the
exercise of certain warrants by investors in December 1995.
Interest expense for the second quarter of 1996 was $236,000 compared to
$240,000 during the second quarter of 1995. There were no material changes to
the level of debt and capital lease obligations between the two periods.
The Company incurred an unfavorable foreign exchange loss of $351,000
during the second quarter of 1996 compared to a foreign exchange loss of $5,000
during the second quarter of 1995. Both of these losses were caused by
fluctuations in exchange rates on dollar-denominated intercompany loans. To
date, the Company has not implemented a program to hedge its foreign currency
risk, but may do so in the future.
The Company incurred a net loss during the second quarter of 1996 of
$7,378,000 compared to a net loss of $5,060,000 during the second quarter of
1995. The increased net loss was due primarily to the increase in marketing and
sales expenses and to the expansion of the administrative and technical
infrastructure relating to the commercial launch of the PAPNET(R) Testing System
in the United States.
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
Total revenues for the six months ending June 30, 1996 were $1,668,000, an
increase of 56% from $1,067,000 during the corresponding period of 1995. This
increase was due primarily to higher unit pricing in 1996 compared to 1995 and
to increased unit volume in the United States.
Revenue increased during the six month period ending June 30, 1996,
compared to the corresponding period of 1995, in the United States and
internationally. The rate of increase internationally was reduced by a decline
in revenue in Canada that was due primarily to a decision by the Company's
client laboratories in Ontario, Canada to begin processing slides only for
patients who would pay for the PAPNET(R) test, rather than testing a specified
minimum number of slides each month.
Total costs and expenses for the six month period ending June 30, 1996 were
$17,632,000 compared to $9,929,000 during the corresponding period of 1995, an
increase of $7,703,000. This increase was primarily the result of higher sales
and marketing expenses, which increased to $7,373,000 in 1996 from $2,112,000
during the corresponding period of 1995. As was the case for the second
quarter, the increase in sales and marketing expenses of $5,261,000 was due
primarily to costs associated with the launch of the PAPNET(R) Testing System in
the United States, including salaries for additional personnel, advertising and
promotion costs. In addition, the Company's cost of sales, research and
development and general and administrative expenses also increased during the
first six months of 1996 as compared to the corresponding period of 1995,
although at a slower rate than sales and marketing expenses. These increases
were due primarily to the expansion of the administrative and technical
infrastructure of the Company to
10
<PAGE>
support commercial activities in both the United States and overseas, along with
the additional costs of being a public company following the Company's IPO.
Interest income for the first six months of 1996 was $2,808,000 compared to
$74,000 during the first six months of 1995. This increase was due primarily to
the Company's significantly higher levels of cash and cash equivalent balances
in 1996 as a result of the IPO, equity sales to private investors during the
third quarter of 1995 and the exercise of certain warrants by investors in
December 1995.
Interest expense during the first six months of 1996 was $484,000 compared
to $480,000 during the corresponding period of 1995. There were no material
changes to the level of debt and capital lease obligations between the two
periods.
The Company incurred an unfavorable foreign exchange loss of $585,000
during the first six months of 1996 compared to a foreign exchange gain of
$348,000 during the corresponding period of 1995. Both the 1996 loss and the
1995 gain were caused by fluctuations in exchange rates on dollar-denominated
intercompany loans.
The Company incurred a net loss during the first six months of 1996 of
$14,225,000 compared to a net loss of $8,920,000 during the same period of 1995.
The increased net loss was due primarily to the increase in marketing and sales
expenses and to the expansion of the administrative and technical infrastructure
relating to the commercial launch of the PAPNET(R) Testing System in the United
States.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since its inception primarily by
the issuance of equity securities, sales of PAPNET(R) Testing System services,
funds received for territorial license agreements (prior to 1992), interest
earned on cash, cash equivalents and short-term investments and proceeds from
notes, bank loans and equipment leasing arrangements.
The Company's combined cash and cash equivalents totaled $95,827,000 at
June 30, 1996, a decrease of $18,316,000 from December 31, 1995. During the
first six months of 1996, the Company used $13,305,000 for operating activities,
$5,126,000 for investing activities and a net use of $481,000 for financing
activities, including the deposit of $1,250,000 of cash into a restricted
certificate of deposit as security collateral on a letter of credit for the
lease of the Company's new scanning facility in New Jersey.
The primary uses of cash and cash equivalents during the first six months
of 1996 were $14,225,000 (inclusive of $1,628,000 of non-cash expenses) to
finance the Company's net loss, $5,126,000 to purchase capital equipment,
primarily for the manufacture of PAPNET(R) Scanning Stations to support the
expansion of the Company's commercial activities, $1,113,000 to repay notes,
bank loans and capital lease obligations, the aforementioned deposit of
$1,250,000 of cash into a restricted certificate of deposit as security
collateral on a letter of credit, and $708,000 to finance changes in operating
assets and liabilities.
11
<PAGE>
The primary sources of cash and cash equivalents during the first six
months of 1996 were $962,000 from proceeds of lease finance transactions
(sale/lease-backs), proceeds of $595,000 from notes and bank loans and $325,000
from the issuance of common stock, primarily associated with the exercise of
Common Stock warrants and options. Changes to the components of working capital
and other items accounted for the remainder of the net change in cash and cash
equivalents.
The Company anticipates that its use of cash will be substantial for the
foreseeable future. In particular, the Company anticipates that expenditures
will continue to increase significantly in 1996 and 1997 due to the cost of the
marketing launch of the PAPNET(R) Testing System in the United States, the
increased cost of marketing and sales programs in overseas markets and the
expansion of research and development programs for additional clinical
indications and claims. The Company estimates that, during 1996, it will invest
approximately $5.0 million for working capital purposes and approximately $13.0
million for capital expenditures and leasehold improvements, primarily
associated with the manufacture or purchase of PAPNET(R) Scanning Stations and
related equipment, PAPNET(R) Review Stations and facility leasehold
improvements. Although funding for these capital expenditures is expected to be
available out of the Company's cash resources, management of the Company
believes that it may be desirable for the Company to finance certain of such
capital expenditures through additional debt or capital lease obligations. There
can be no assurance, however, that such financing can be obtained by the Company
or, if it is obtained, that the terms thereof will be reasonable.
The Company anticipates that its current cash and cash equivalents will be
sufficient to enable the Company to meet its future operating requirements. The
Company, however, does not expect to generate a positive internal cash flow in
the foreseeable future due to the expected increases in capital expenditures,
working capital requirements and ongoing losses during the next year, including
the expected cost of commercializing the PAPNET(R) Testing System. The Company
may need to arrange additional equity or debt financing for the future operation
of its business. There can be no assurance that such financing can be obtained
or, if it is obtained, that the terms thereof will be reasonable. The Company
plans to invest excess funds in short-term instruments, including money market
funds.
During the six months ending June 30, 1996, the Company's operating results
reflect foreign exchange losses of $585,000 and its financial position as of
that date reflects a foreign currency translation effect of $311,000. As
discussed in detail below, the Company is subject to foreign currency exchange
rate risk because (i) it has investments in its foreign subsidiaries, (ii) it
derives a significant portion of its revenues and incurs a significant portion
of its costs and expenses in the local currencies of the countries in which its
subsidiaries are transacting business and (iii) it finances the operations of
such subsidiaries substantially through dollar-denominated intercompany loans
which are recorded on the books of the subsidiaries in their respective local
currencies. Fluctuations in exchange rates have not had a material impact on
the Company's revenues or costs and expenses, but have affected the value of its
equity investments and intercompany loans.
Since inception through June 30, 1996, the Company's sales of PAPNET(R)
testing services for commercial use have been derived principally from foreign
sources. Although the
12
<PAGE>
Company expects U.S. revenues to increase faster than non-U.S. revenues, the
Company anticipates that international sales will continue to represent a
significant portion of its net sales as it executes its plan to establish
commercial use of the PAPNET(R) Testing System on a worldwide basis. In
addition, Neuromedical Systems, Inc., the United States parent company, has
provided a significant portion of the financing required for its subsidiaries in
the Netherlands, Australia, Israel and Hong Kong through intercompany loans and
equity investments denominated in U.S. dollars. As a result of its international
operations and its current financing approach, the Company's operating results
are subject to the impact of fluctuations in exchange rates of the currencies in
which its foreign operations conduct business versus the United States dollar.
The Company is exposed to gains and losses with respect to Australian dollars
and several European currencies (predominately Dutch guilders) because the
Company's subsidiaries invoice for slide processing services and incur costs and
expenses in local currencies. Certain of the Company's and its subsidiaries'
revenues and expenses are in Hong Kong dollars and Israeli shekels, the values
of which are presently tied to the United States dollar and, therefore, are not
currently subject to material fluctuations. There can be no assurance, however,
that the exchange rate between the U.S. dollar and these currencies will not
fluctuate in the future. To date, the Company has not implemented a program to
hedge its foreign currency risk, but may do so in the future.
On December 4, 1995, the Company was served with a Summons and Complaint in
an action entitled Herbst et al. v. Neuromedical Systems, Inc. et al., in the
Supreme Court of the State of New York. The plaintiffs in this suit allege,
among other things, that pursuant to written contracts, which they claim the
Company has breached, they were entitled to be issued warrants exercisable for
the purchase of approximately 128,000 shares of common stock at various prices.
They further allege that the Company and certain of its officers and directors
made fraudulent misrepresentations and took other allegedly improper actions
that diminished the value of the warrants they claim they are entitled to under
these contracts. On January 31, 1996, the plaintiffs served the Company with an
Amended Complaint alleging legal claims similar to those in the original Summons
and Complaint served on the Company, but adding one of the Company's former
directors as a defendant and specifying that the plaintiffs are seeking
compensatory damages from the Company and one of its officers and a former
director totaling $114 million and punitive damages totaling $175 million. The
Company intends to vigorously defend this action. The Company believes that, in
any event, the damages claimed bear no relation to the harm alleged and believes
an adverse judgment in this case would not have a material adverse effect on the
Company's operations, financial position or cash flows.
On July 15, 1996, the Company filed a lawsuit against NeoPath, Inc.
("NeoPath") in the United States District Court for the Southern District of New
York, seeking damages and injunctive relief for patent infringement, false
advertising, unfair competition, intentional interference with business
relations and damage to business reputation. In the lawsuit, the Company
alleges that NeoPath willfully misappropriated NSI's patented technology and
used the technology in NeoPath's AutoPap 300 QC System. The Company also
alleges that NeoPath falsely characterized and made misleading comparisons to
consumers and securities analysts between the AutoPap 300 QC System and NSI's
PAPNET(R) Testing System. Although the
13
<PAGE>
duration, costs and the ultimate outcome of this lawsuit are unknown, the
Company expects that the costs of this lawsuit will be significant during 1996
and 1997.
14
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
See Management's Discussion and Analysis of Financial Condition and
Results of Operations in Part I herein for disclosure concerning legal
proceedings.
Item 2. Changes in Securities.
Not Applicable.
Item 3. Defaults upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The following matters were submitted to a vote of the Company's
stockholders on June 20, 1996 at the Company's 1996 Annual Meeting of
Stockholders:
1. Election of three Class I directors to hold office until
the Company's 1999 Annual Meeting and until the election
and qualification of their successors. The votes cast in
such matter were as follows:
<TABLE>
<CAPTION>
Broker
Nominee For Withheld Abstain Non-Votes Total
- ------- --- -------- ------- --------- -----
<S> <C> <C> <C> <C> <C>
Genberg 20,541,410 58,886 0 0 20,600,296
Ish-Hurwitz 20,545,673 54,623 0 0 20,600,296
Herbst 20,545,673 54,623 0 0 20,600,296
</TABLE>
2. Ratification of the appointment of Ernst & Young LLP as
the Company's independent auditors for the fiscal year
ending December 31, 1996. The votes cast in such matter
were as follows:
Broker
For Against Abstain Non-Votes Total
--- ------- ------- --------- -----
20,545,673 54,623 0 0 20,600,296
15
<PAGE>
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit
Number Exhibit
------- -------
11.0 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which this
report is filed.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, a duly authorized officer and the Company's principal
financial officer.
NEUROMEDICAL SYSTEMS, INC.
Dated: August 13, 1996 By: /s/ David Duncan, Jr.
David Duncan, Jr.
Vice President, Finance and
Administration, Chief Financial
Officer
17
<PAGE>
Exhibit 11.0
NEUROMEDICAL SYSTEMS, INC.
COMPUTATION OF PRIMARY EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------- ------------- -------------- -------------
1996 1995 (2) 1996 1995 (2)
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding 29,089,407 4,186,739 28,948,946 4,144,368
Common shares issued from October 1994 to completion
of IPO (1) 0 57,599 0 57,599
Preferred stock issued from October 1994 to completion
of IPO (1) 0 2,398,287 0 2,398,287
Assumed exercise of stock options and warrants using
the treasury stock method (1) 0 316,980 0 316,980
Weighted average number of common shares representing
assumed conversion of Series A through F convertible
preferred stock from date of issuance 0 9,888,081 0 9,888,081
------------- ------------- -------------- -------------
Weighted average number of common and common
equivalent shares outstanding 29,089,407 16,847,686 28,948,946 16,805,315
============= ============= ============== =============
Net loss for period $ (7,378,000) $ (5,060,000) $ (14,225,000) $ (8,920,000)
------------- ------------- -------------- -------------
Net loss per share (1995 pro forma) $ (0.25) $ (0.30) $ (0.49) $ (0.53)
============== ============== =============== ==============
</TABLE>
(1) Represents shares of common stock or common stock equivalents issued between
October 1994 and completion of the IPO at a price per share less than the
$15 per share price of common stock sold in the initial public offering.
Such shares are considered to be "cheap stock" and, accordingly, reflected
as outstanding for all periods presented prior to the initial public
offering, using the treasury stock method.
(2) On a pro forma basis, giving effect to the conversion of convertible
preferred stock to common.
18
<PAGE>
Exhibit 11.0
NEUROMEDICAL SYSTEMS, INC.
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------- ------------- -------------- -------------
1996 1995 (3) 1996 1995 (3)
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding 29,089,407 4,186,739 28,948,946 4,144,368
Common shares issued from October 1994 to completion
of IPO (1) 0 57,599 0 57,599
Preferred stock issued from October 1994 to completion
of IPO (1) 0 2,398,287 0 2,398,287
Assumed exercise of stock options and warrants using
the treasury stock method (1) 0 316,980 0 316,980
Weighted average number of common shares representing
assumed conversion of Series A through F convertible
preferred stock from date of issuance 0 9,888,081 0 9,888,081
Assumed exercise of stock options and warrants using
the treasury stock method (2) 3,456,202 6,163,032 3,676,781 6,187,780
------------- ------------- -------------- -------------
Weighted average number of common and common
equivalent shares outstanding 32,545,609 23,010,718 32,625,727 22,993,095
============= ============= ============== =============
Net loss for period $ (7,378,000) $ (5,060,000) $ (14,225,000) $ (8,920,000)
------------- ------------- -------------- -------------
Net loss per share (1995 pro forma) $ (0.23) $ (0.22) $ (0.44) $ (0.39)
============= ============= ============== =============
</TABLE>
(1) Represents shares of common stock or common stock equivalents issued between
October 1994 and completion of the IPO, at a price per share less than the
$15 per share price of common stock sold in the initial public offering.
Such shares are considered to be "cheap stock" and, accordingly, reflected
as outstanding for all periods presented prior to the initial public
offering, using the treasury stock method.
(2) For purposes of calculating the number of shares issuable upon excercise of
outstanding stock options and warrants, the closing stock price of $9.40 per
share was used for 1995, $18.57 was used for three months of 1996, and
$19.94 was used for six months of 1996.
(3) On a pro forma basis, giving effect to the conversion of convertible
preferred stock to common.
19
<PAGE>
[ARTICLE] 5
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] DEC-31-1996
[PERIOD-END] JUN-30-1996
[CASH] 95,827
[SECURITIES] 0
[RECEIVABLES] 1,286
[ALLOWANCES] (159)
[INVENTORY] 0
[CURRENT-ASSETS] 98,013
[PP&E] 22,558
[DEPRECIATION] (7,950)
[TOTAL-ASSETS] 113,932
[CURRENT-LIABILITIES] 6,511
[BONDS] 6,120
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 3
[OTHER-SE] 101,298
[TOTAL-LIABILITY-AND-EQUITY] 113,932
[SALES] 0
[TOTAL-REVENUES] 1,668
[CGS] 0
[TOTAL-COSTS] 3,624
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 484
[INCOME-PRETAX] (14,225)
[INCOME-TAX] 0
[INCOME-CONTINUING] (14,225)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (14,225)
[EPS-PRIMARY] (.49)
[EPS-DILUTED] (.44)
</TABLE>
