<PAGE>
Filed pursuant to
Rule 424(b)(3)
Registration Statement
No.: 33-97722
Prospectus Supplement No. 2, dated November 14, 1996
(To the Prospectus dated September 30, 1996,
as Supplemented on October 31, 1996)
NEUROMEDICAL SYSTEMS, INC.
COMMON STOCK
PAR VALUE $.0001 PER SHARE
On November 14, 1996, the Company filed with the Securities and
Exchange Commission the attached Quarterly Report on Form 10-Q for the quarterly
period ending September 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 September 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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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 October 31, 1996, an aggregate of 29,738,611 shares of common stock
were outstanding.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
NEUROMEDICAL SYSTEMS, INC.
TABLE OF CONTENTS FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 1996
<TABLE>
<S> <C>
PART I FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements...................................................... 3
Condensed Consolidated Balance Sheets at September 30, 1996 (unaudited)
and
December 31, 1995......................................................... 3
(Unaudited) Condensed Consolidated Statements of Operations for Three
Months Ended
September 30, 1996 and 1995 and Nine Months Ended
September 30, 1996 and 1995............................................... 4
(Unaudited) Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1996 and 1995.................................. 5
Notes to (Unaudited) Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 13
Item 2. Changes in Securities..................................................... 13
Item 3. Defaults upon Senior Securities........................................... 13
Item 4. Submission of Matters to a Vote of Security Holders....................... 13
Item 5. Other Information......................................................... 13
Item 6. Exhibits and Reports on Form 8-K.......................................... 13
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NEUROMEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER 31,
30, 1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 87,126,000 $114,143,000
Accounts receivable, net of allowance............ 1,191,000 900,000
Prepaid expenses................................. 1,451,000 596,000
Other current assets............................. 1,585,000 105,000
------------ ------------
Total current assets............................... 91,353,000 115,744,000
Property and equipment, net........................ 15,256,000 11,216,000
Patent and patent application costs, net of accumu-
lated amortization
(1996-$450,000, 1995-$325,000).................... 208,000 333,000
Other assets....................................... 1,056,000 55,000
------------ ------------
$107,873,000 $127,348,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes and bank loans payable--short-term......... $ 691,000 $ 583,000
Current portion of capital lease obligations..... 1,205,000 680,000
Accounts payable................................. 1,721,000 2,045,000
Accrued liabilities.............................. 4,280,000 3,323,000
------------ ------------
Total current liabilities.......................... 7,897,000 6,631,000
Notes and bank loans payable--long-term............ 3,258,000 3,436,000
Notes payable--stockholder......................... 600,000 600,000
Capital lease obligations, less current portion.... 3,368,000 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
29,620,481 shares in 1996 and 28,804,828 shares
in 1995......................................... 3,000 3,000
Additional paid-in capital....................... 176,643,000 175,237,000
Accumulated deficit.............................. (84,163,000) (60,350,000)
Foreign currency translation..................... 267,000 (223,000)
------------ ------------
Total stockholders' equity......................... 92,750,000 114,667,000
------------ ------------
$107,873,000 $127,348,000
============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
NEUROMEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
1996 1995 1996 1995
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Slide processing...................................... $ 1,286,000 $ 698,000 $ 2,954,000 $ 1,765,000
----------- ----------- ------------ ------------
Total revenues...................................... 1,286,000 698,000 2,954,000 1,765,000
----------- ----------- ------------ ------------
Costs and Expenses:
Cost of sales......................................... 2,085,000 1,741,000 5,709,000 4,635,000
Marketing and sales................................... 6,262,000 1,614,000 13,635,000 3,726,000
Research and development.............................. 1,945,000 1,554,000 5,024,000 4,111,000
General and administrative............................ 1,559,000 1,791,000 5,115,000 4,157,000
----------- ----------- ------------ ------------
Total costs and expenses............................ 11,851,000 6,700,000 29,483,000 16,629,000
----------- ----------- ------------ ------------
Loss from operations.................................... (10,565,000) (6,002,000) (26,529,000) (14,864,000)
Other income (expense):
Interest income....................................... 1,236,000 68,000 4,044,000 142,000
Interest expense...................................... (305,000) (197,000) (789,000) (677,000)
Foreign exchange...................................... 46,000 (157,000) (539,000) 191,000
----------- ----------- ------------ ------------
Other income (expense)--net......................... 977,000 (286,000) 2,716,000 (344,000)
----------- ----------- ------------ ------------
Net loss................................................ $(9,588,000) $(6,288,000) $(23,813,000) $(15,208,000)
=========== =========== ============ ============
Net loss per share (1995 on a pro forma basis).......... $ (0.33) $ (0.37) $ (0.82) $ (0.90)
=========== =========== ============ ============
Shares used in computation of net loss per share........ 29,450,000 16,978,000 29,117,000 16,863,000
=========== =========== ============ ============
</TABLE>
See accompanying notes.
4
<PAGE>
NEUROMEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss.................................... $ (23,813,000) $ (15,208,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............. 2,445,000 2,153,000
Issuance of common stock warrants and op-
tions for services rendered.............. 237,000 --
Changes in operating assets and liabilities:
(Increase) in accounts receivable......... (291,000) (137,000)
(Decrease) in accounts payable............ (324,000) (887,000)
Increase in accrued liabilities........... 720,000 1,689,000
(Increase) decrease in prepaid expenses
and other assets......................... (2,086,000) 43,000
--------------- ---------------
Net cash used in operating activities..... (23,112,000) (12,347,000)
--------------- ---------------
INVESTING ACTIVITIES
Purchases of property and equipment......... (6,531,000) (3,110,000)
--------------- ---------------
Net cash used in investing activities..... (6,531,000) (3,110,000)
--------------- ---------------
FINANCING ACTIVITIES
Restricted cash............................. (1,250,000) 1,016,000
Issuance of common stock.................... 1,406,000 861,000
Issuance of convertible preferred stock..... -- 19,345,000
Repayments to licensees..................... -- (80,000)
Proceeds from notes and bank loans.......... 1,001,000 1,686,000
Payment of notes and bank loans............. (1,063,000) (1,064,000)
Payments on capital leases.................. (670,000) (403,000)
Proceeds from capital lease financing....... 2,655,000 1,332,000
--------------- ---------------
Net cash provided by financing activities. 2,079,000 22,693,000
--------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..... 547,000 (283,000)
--------------- ---------------
Net (decrease) increase in cash and cash
equivalents.............................. (27,017,000) 6,953,000
Cash and cash equivalents, beginning of pe-
riod....................................... 114,143,000 1,235,000
--------------- ---------------
Cash and cash equivalents, end of period.... $ 87,126,000 $ 8,188,000
=============== ===============
</TABLE>
See accompanying notes.
5
<PAGE>
NEUROMEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 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 September 30, 1996 and nine month period ended September
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 September 30,
1996 of $84,163,000 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 Securities and Exchange
Commission filings, including its 1995 Form 10-K.
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 September 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 remainder 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 anticipated increase in
market demand.
7
<PAGE>
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 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 planned to begin direct-to-consumer advertising after it
determined that an adequate distribution network of laboratories was
established and that clinician awareness of the PAPNET(R) test was
sufficiently high to motivate clinicians to prescribe or recommend the test.
During 1996, the Company made significant progress in building laboratory
distribution and physician awareness. Accordingly, the Company initiated
direct-to-consumer advertising in August 1996, while continuing to market to
laboratories and clinicians. The Company is also marketing to insurers,
managed care organizations and other third-party payers concerning
reimbursement for PAPNET(R) testing.
In addition, in September 1996, the Company entered into a co-promotion
agreement with the Women's Healthcare Group of the Parke-Davis division of
Warner-Lambert Company. According to the terms of that agreement, members of
the Parke-Davis field sales force will present PAPNET(R) testing promotional
materials to physicians when making sales calls regarding Parke-Davis
Loestrin(R) oral contraceptives. Although the Company does not expect that
Parke-Davis's activities will have a significant direct impact on sales, the
Company anticipates that the program will increase awareness of PAPNET(R)
testing in the clinician's office, and that interested doctors will contact
the Company's own sales representatives for more detailed presentations.
Activities under the agreement began in late October 1996. The co-promotional
effort is expected to continue into early 1997.
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 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 THIRD QUARTER ENDING SEPTEMBER 30, 1996 AND 1995
Total revenues for the third quarter ending September 30, 1996 were
$1,286,000, an increase of 84% from $698,000 for the third quarter of 1995.
The revenue increase over 1995 was due primarily to a significant increase in
both unit volume and unit pricing in the United States market.
During the third quarter of 1996, the Company announced several initiatives
intended to increase awareness of the PAPNET(R) test, including the
aforementioned co-promotion agreement with the Parke-Davis division of the
Warner-Lambert Company and an agreement with MagnaCare/MagnaHealth that it
provide PAPNET(R) testing as a covered benefit with Pap smears when ordered
through its physician network.
The Company's efforts during the first nine months 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
September 30, 1996, the Company increased the number of U.S. laboratories
offering PAPNET(R) testing by 55, bringing the total number of U.S. facilities
offering PAPNET(R) testing (including both laboratories certified to perform
the test and laboratories that have referral arrangements with such certified
laboratories) to 193 by the end of the quarter.
NSI also continued to expand its international laboratory distribution
during the third quarter of 1996. PAPNET(R) testing is now available in 23
countries worldwide. By the end of the third quarter, PAPNET(R) testing
8
<PAGE>
was available through 44 laboratories in European countries and ten
laboratories in Australia. In Asia, the Company continued to expand its
business in Hong Kong, Taiwan and mainland China. During the quarter, the
Company received limited slide processing revenue from 27 laboratories in
mainland China.
The Company increased its world-wide marketing and sales headcount by four
to a total of 57 persons during the quarter. The Company expects to continue
to expand its marketing and sales personnel during the remainder of 1996 and
throughout 1997, which will increase the number of sales personnel calling on
both laboratories and clinicians.
Total costs and expenses for the third quarter of 1996 were $11,851,000
compared to $6,700,000 during the third quarter of 1995, an increase of
$5,151,000. This increase was primarily the result of higher sales and
marketing expenses, which increased to $6,262,000 from $1,614,000 in the third
quarter of 1995. The increase in sales and marketing expenses of $4,648,000
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 required to initiate the PAPNET(R) direct-to-
consumer campaign. In addition, the Company's cost of sales and research and
development expenses also increased during the third quarter of 1996 as
compared to the third 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.
Interest income for the third quarter of 1996 was $1,236,000 compared to
$68,000 in the third quarter 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 for the third quarter of 1996 was $305,000 compared to
$197,000 during the third quarter of 1995. The increased expense level was due
to a higher level of capital lease obligations in 1996.
The Company incurred a favorable foreign exchange gain of $46,000 during the
third quarter of 1996 compared to a foreign exchange loss of $157,000 during
the third quarter of 1995. Both the 1996 gain and the 1995 loss were caused
primarily 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 third quarter of 1996 of
$9,588,000 compared to a net loss of $6,288,000 during the third quarter of
1995. The increased net loss was due primarily to the increase in marketing
and sales expenses, including advertising and promotion expenses required to
initiate the PAPNET(R) direct-to-consumer campaign.
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 AND 1995
Total revenues for the nine months ending September 30, 1996 were
$2,954,000, an increase of 67% from $1,765,000 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 nine month period ending September 30, 1996,
compared to the corresponding period of 1995, in the United States and
internationally. The rate of increase internationally was reduced
significantly 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.
9
<PAGE>
Total costs and expenses for the nine month period ending September 30, 1996
were $29,483,000 compared to $16,629,000 during the corresponding period of
1995, an increase of $12,854,000. This increase was primarily the result of
higher sales and marketing expenses, which increased to $13,635,000 in 1996
from $3,726,000 during the corresponding period of 1995. As was the case for
the third quarter, the increase in sales and marketing expenses of $9,909,000
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 first nine 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 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 nine months of 1996 was $4,044,000 compared to
$142,000 during the first nine 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 nine months of 1996 was $789,000 compared
to $677,000 during the corresponding period of 1995. This increase was due to
slightly higher levels of debt and capital lease obligations in 1996.
The Company incurred an unfavorable foreign exchange loss of $539,000 during
the first nine months of 1996 compared to a foreign exchange gain of $191,000
during the corresponding period of 1995. Both the 1996 loss and the 1995 gain
were caused primarily by fluctuations in exchange rates on dollar-denominated
intercompany loans.
The Company incurred a net loss during the first nine months of 1996 of
$23,813,000 compared to a net loss of $15,208,000 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 Company's 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 $87,126,000 at
September 30, 1996, a decrease of $27,017,000 from December 31, 1995. During
the first nine months of 1996, the Company used $23,112,000 for operating
activities, primarily to finance the Company's loss, and $6,531,000 for
investing activities, while generating a net source of cash of $2,079,000 from
financing activities, primarily from the exercise of common stock warrants and
options and proceeds from notes, bank loans and capital lease financing
transactions. These financing proceeds were partially offset by the scheduled
repayment of debt and capital lease obligations and 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 nine months of
1996 were $23,813,000 (inclusive of $2,682,000 of non-cash expenses) to finance
the Company's net loss, $6,531,000 to purchase capital equipment, primarily for
the manufacture of PAPNET(R) Scanning Stations to support the expansion of the
Company's commercial activities, $1,733,000 to repay notes, bank loans and
capital lease financing transactions,
10
<PAGE>
the aforementioned deposit of $1,250,000 into a restricted certificate of
deposit as security collateral on a letter of credit, and $1,981,000 to
finance changes in operating assets and liabilities.
The primary sources of cash and cash equivalents during the first nine
months of 1996 were $2,655,000 from proceeds of capital lease financing
transactions (sale/lease-backs), $1,406,000 from the issuance of common stock,
primarily associated with the exercise of common stock warrants and options
and proceeds of $1,001,000 from notes and bank loans. 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 the remainder of 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 $10.0 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. In addition, the Company believes that
similar amounts will be invested in working capital and capital expenditures
during 1997. Although funding for these capital expenditure requirements is
expected to be available from the Company's available 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 financing transactions. 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.
For the nine months ending September 30, 1996, the Company's operating
results reflect foreign exchange losses of $539,000 and its financial position
as of that date reflects a foreign currency translation effect of $267,000. 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 intercompany equity investments and intercompany loans.
From inception through September 30, 1996, the Company's sales of PAPNET(R)
testing services for commercial use have been derived principally from foreign
sources. Although U.S. revenues are increasing 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
11
<PAGE>
several European currencies (predominately Dutch guilders) because the
Company's subsidiaries invoice for slide processing services and incur costs
and expenses in local currencies. In addition, although the Company's Israeli
subsidiary maintains its books in U.S. dollars, certain of its expenses are
incurred in Israeli shekels and are subject to exchange fluctuations. The
revenues and expenses of the Company's Hong Kong subsidiary are in Hong Kong
dollars, the value of which is presently tied to the United States dollar and,
therefore, is not currently subject to material fluctuations. There can be no
assurance, however, that the exchange rate between the U.S. dollar and the
Hong Kong dollar 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 defendants have moved to dismiss the Amended
Complaint. Such motion is currently under consideration by the court. 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"), a competitor of the Company, 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 the
Company's patented technology and used such technology in NeoPath's AutoPap(R)
System. The Company also alleges that NeoPath falsely characterized and made
misleading comparisons to consumers and securities analysts between the
AutoPap(R) System and the Company's PAPNET(R) Testing System. Neopath has
denied all allegations and, in addition, it has filed counter-claims against
the Company seeking damages and injunctive relief for false advertising and
unfair competition. In the counter-claims, Neopath alleges that statements
made by the Company characterizing the performance of the PAPNET(R) Testing
System, and its effectiveness relative to Neopath's AutoPap(R) System, as well
as other statements, are false and misleading and constitute
misrepresentations. The Company believes that Neopath's assertions are without
merit. Although the 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.
12
<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.
None.
ITEM 5. OTHER INFORMATION.
The competition section of the Company's Prospectus dated September 30, 1996
is updated as follows: Cytyc Corporation ("Cytyc") announced on November 6,
1996 that the FDA approved its claim that the Thin Prep(R) Pap Test is
significantly more effective than the conventional Pap smear method and that
the FDA confirmed that the quality of the cervical specimens prepared on
Cytyc's ThinPrep System(R) is significantly improved over that of the
conventional Pap smear.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<S> <C>
11.0 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which this
report is filed.
13
<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: November 14, 1996 By: /s/ David Duncan, Jr.
---------------------------------
DAVID DUNCAN, JR.VICE PRESIDENT,
FINANCE AND ADMINISTRATION,CHIEF
FINANCIAL OFFICER
<PAGE>
EXHIBIT
11.0
NEUROMEDICAL SYSTEMS, INC.
COMPUTATION OF PRIMARY EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------------------------------------
1996 1995(2) 1996 1995(2)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding 29,450,247 4,316,926 29,117,267 4,202,519
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
from date of issuance 0 9,888,081 0 9,888,081
------------ ------------ ------------ ------------
Weighted average number of common and common
equivalent shares outstanding 29,450,247 16,977,873 29,117,267 16,863,466
------------ ------------ ------------ ------------
Net loss for period $ (9,588,000) $ (6,288,000) $(23,813,000) $(15,208,000)
============ ============ ============ ============
Net loss per share (1995 pro forma) $ (0.33) $ (0.37) $ (0.82) $ (0.90)
============ ============ ============ ============
</TABLE>
(1) Represents share 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.
<PAGE>
EXHIBIT 11.0
NEUROMEDICAL SYSTEMS, INC.
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------------------------------------
1996 1995(3) 1996 1995(3)
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding 29,450,247 4,316,926 29,117,267 4,202,519
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
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) 3,110,686 6,080,287 3,420,283 6,141,903
---------------------------------------------------------------------
Weighted average number of common and common
equivalent shares outstanding 32,560,933 23,058,160 32,537,550 23,005,369
=====================================================================
Net loss for period $(9,588,000) $(6,288,000) $(23,813,000) $(15,208,000)
---------------------------------------------------------------------
Net loss per share (1995 pro forma) $ (0.29) $ (0.27) $ (0.73) $ (0.66)
=====================================================================
</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 exercise of
outstanding stock options and warrants, the closing stock price of $9.40
per share was used for 1995 and $18.63 was used for 1996.
(3) On a pro forma basis, giving effect to the conversion of convertible
preferred stock to common.
<PAGE>
[ARTICLE] 5
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] DEC-31-1996
[PERIOD-END] SEP-30-1996
[CASH] 87,126
[SECURITIES] 0
[RECEIVABLES] 1,343
[ALLOWANCES] (152)
[INVENTORY] 0
[CURRENT-ASSETS] 91,353
[PP&E] 23,984
[DEPRECIATION] (8,728)
[TOTAL-ASSETS] 107,873
[CURRENT-LIABILITIES] 7,897
[BONDS] 7,226
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 3
[OTHER-SE] 92,747
[TOTAL-LIABILITY-AND-EQUITY] 107,873
[SALES] 0
[TOTAL-REVENUES] 2,954
[CGS] 0
[TOTAL-COSTS] 5,709
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 789
[INCOME-PRETAX] (23,813)
[INCOME-TAX] 0
[INCOME-CONTINUING] (23,813)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (23,813)
[EPS-PRIMARY] (.82)
[EPS-DILUTED] (.73)
</TABLE>
