AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
APRIL 21, 1997
REGISTRATION NO. 33-97722
=================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
ON
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------------
NEUROMEDICAL SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8099 13-3526980
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION
INCORPORATION OR CLASSIFICATION CODE NUMBER)
ORGANIZATION) NUMBER)
TWO EXECUTIVE BOULEVARD
SUFFERN, NEW YORK 10901-4164
(914) 368-3600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------------
JOHN B. HENNEMAN, III
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
NEUROMEDICAL SYSTEMS, INC.
TWO EXECUTIVE BOULEVARD
SUFFERN, NEW YORK 10901-4164
(914) 368-3600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
-----------------------------
COPIES TO:
PAUL M. REINSTEIN, ESQ. ROBERT E. BUCKHOLZ, JR., ESQ.
FRIED, FRANK, HARRIS, SHRIVER & SULLIVAN & CROMWELL
JACOBSON 125 BROAD STREET
ONE NEW YORK PLAZA NEW YORK, NEW YORK 10004
NEW YORK, NEW YORK 10004 (212) 558-4000
(212) 859-8000
-----------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO
PUBLIC: As soon as practicable after the effective date
of this Registration Statement.
If any of the Securities being registered on this
Form are to be offered on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act of 1933,
other than securities offered only in connection with
dividend or interest reinvestment plans, check the
following box. /x/
If this Form is filed to register additional
securities for an offering pursuant to Rule 462(b) under
the Securities Act, please check the following box and
list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. / /
If this Form is a post-effective amendment filed
pursuant to Rule 462(c) under the Securities Act, check
the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made
pursuant to Rule 434, please check the following box. / /
------------------------------
THIS POST-EFFECTIVE AMENDMENT TO THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SECTION 8(C) OF THE
SECURITIES ACT OF 1933, MAY DETERMINE.
=================================================================
EXPLANATORY NOTE
This Registration Statement includes a prospectus relating
to an indeterminate number of shares of Neuromedical Systems,
Inc. (the "Company") Common Stock which may be sold by Goldman,
Sachs & Co. in connection with market-making transactions. See
"Plan of Distribution."
[LOGO] NEUROMEDICAL SYSTEMS, INC.
COMMON STOCK
(par value $0.0001 per share)
------------------------------
INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A
HIGH DEGREE OF RISK. SEE "RISK FACTORS" APPEARING ON PAGE 7.
The Common Stock is quoted on the Nasdaq National Market
under the symbol "NSIX."
---------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL
OFFENSE.
-------------------------------
This Prospectus has been prepared for and is to be used by
Goldman, Sachs & Co. in connection with offers and sales of the
Common Stock related to market-making transactions, at prevailing
market prices, related prices or negotiated prices. The Company
will not receive any of the proceeds of such sales. Goldman,
Sachs & Co. may act as a principal or agent in such transactions.
See "Plan of Distribution."
Goldman, Sachs & Co.
------------------------------
The date of this Prospectus is April __, 1997.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement on
Form S-3 (the "Registration Statement") (which term includes
any amendments thereto), under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Common Stock
being offered by this Prospectus. This Prospectus, which constitutes
a part of the Registration Statement, does not contain all the
information set forth in the Registration Statement and in the
exhibits and schedules thereto to which reference is hereby made.
For further information regarding the Company and the Common
Stock, reference is hereby made to the Registration Statement and
to the exhibits and schedules filed as a part thereof. As to
statements made in this Prospectus with respect to the contents
of any contract, agreement or other current document filed as an
exhibit to the Registration Statement, reference is hereby made
to such exhibit for a more complete description of the matter
involved, and each statement shall be deemed qualified in its
entirety by such reference.
The Company is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith, files reports, proxy
statements and other information with the Commission. This
Registration Statement, including exhibits and schedules thereto,
and the reports and proxy statements filed by the Company and
other information may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Regional Offices
of the Commission located at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300,
New York, New York 10048. Copies of such material can also be
obtained from the Commission at prescribed rates by addressing
written requests for such copies to the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission maintains a Web site at http://www.sec.gov
that contains reports, proxy and information statements and other
information regarding registrants that file electronically with
the Commission. In accordance with Exchange Act requirements,
the Company files reports, proxy statements and other information
with the National Association of Securities Dealers, Inc. Such
reports, proxy statements and other information filed by the
Company may be inspected at the offices of the National
Association of Securities Dealers, Inc., Reports Section, 1735 K
Street, N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, which has been filed with the Commission
pursuant to the Exchange Act (File No. 0-26984), is hereby
incorporated by reference into this Prospectus. The information
under the heading "Recent Developments" should be read in
conjunction with the Company's financial statements contained in
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.
In addition, all documents filed by the Company pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent
to the date of this Prospectus and prior to termination of the
offering of the shares offered hereby shall be deemed to be
incorporated by reference into this Prospectus and to be a part
hereof from the respective date of filing of such documents with
the Commission.
Any statement contained herein, or any document, all or a
portion of which is incorporated or deemed to be incorporated by
reference herein, shall be deemed to be modified or superseded
for purposes of the Registration Statement and this Prospectus to
the extent that a statement contained herein, or in any
subsequently filed document that also is or is deemed to be
incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute
part of the Registration Statement or this Prospectus. All
information appearing in this Prospectus is qualified in its
entirety by the information and financial statements (including
notes thereto) appearing in the documents incorporated herein by
reference. This Prospectus incorporates documents by reference
which are not presented herein or delivered herewith. These
documents (other than exhibits thereto, unless such exhibits are
specifically incorporated by reference in such documents) are
available without charge, upon written or oral request by any
person to whom this Prospectus has been delivered, by directing
such request to Neuromedical Systems, Inc., Two Executive
Boulevard, Suffern, New York 10901-4164, Attention: Investor
Relations Manager, telephone: (914) 369-4130.
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E
of the Exchange Act. When used in this Prospectus, the words
"intends to," "believes," "anticipates," "expects," "projects,"
"estimates" and similar expressions are intended to identify
forward-looking statements, which speak only as of their dates.
Such statements are subject to a number of risks and
uncertainties. Actual results in the future could differ
materially from the forward-looking statements as a result of
various important factors described in "Risk Factors", including,
among others, the Company's continuing negative cash flow,
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 products and advertising, limited
marketing and sales history, the impact of third-party
reimbursement decisions and litigation.
THE COMPANY
Neuromedical Systems, Inc., a Delaware corporation (the
"Company"), is a healthcare technology company focused on
diagnostic screening applications to aid in the early detection
of certain cancers. During the past five years, the Company and
its subsidiaries have been primarily engaged in the development,
manufacturing and marketing of the PAPNET[Registered Trademark]
Testing System, and the scanning of cervical smears at its slide
processing facilities. The Company's first and, to date, only
product, the PAPNET[Registered Trademark] Testing System, was
approved for commercial use in the United States by the Food and
Drug Administration ("FDA") on November 8, 1995 and, in January
1996, the Company initiated the first two stages of its United
States marketing program, to laboratories and clinicians. As of
March 31, 1997, the PAPNET[Registered Trademark] test was
available in over 230 laboratories in the United States alone.
As of March 31, 1997, PAPNET[Registered Trademark] testing was
available in more than 20 countries worldwide. While continuing
to market to laboratories and clinicians, the Company initiated
the third stage of its United States marketing program, direct-to-
consumer advertising, in August 1996. The Company's objective is
to establish the use of its PAPNET[Registered Trademark] Testing
System as the new standard of care in cervical cancer screening.
The PAPNET[Registered Trademark] Testing System is a
supplemental test in the United States to aid laboratories in the
detection of abnormal cells on cervical Papanicolaou ("Pap")
smears which were not detected by standard manual microscopic
inspection. When used to supplement manual screening of Pap
smears, PAPNET[Registered Trademark] testing has been shown to
increase the detection of cervical abnormality by up to 30% when
compared to manual screening with routine manual quality control
rescreening. The Company believes that this improved detection
can result in more effective and less costly early treatment,
reduced morbidity and mortality for patients and reduced
possibility of malpractice litigation for the patient's doctor
and laboratory. The PAPNET[Registered Trademark] Testing System
can achieve these improvements without requiring a modification
of the standard Pap smear sample due to its use of a patented
combination of algorithmic and adaptive processing technology, a
form of artificial intelligence. The Company and its
subsidiaries manufacture the PAPNET[Registered Trademark] Testing
System and market and provide processing services which utilize
the PAPNET[Registered Trademark] Testing System.
When precancerous conditions are detected on Pap smears,
they are usually treatable using simple procedures in the
physician's office. If abnormal cells on the Pap smear are not
detected by the laboratory, however, the patient may be
incorrectly told that her Pap smear is negative, and significant
morbidity (including, for example, hysterectomies) or mortality
may occur as a result. In addition, when a laboratory does fail
to diagnose a positive Pap smear correctly, its defense of any
resulting lawsuit may be difficult, because all Pap smear slides
are retained in the laboratory's archive for five years pursuant
to federal law and therefore are available for re-examination.
Unlike most other high-volume laboratory tests, the
cytological evaluation (the visual examination of cells) of the
cervical Pap smear is performed manually. Specially trained
medical technicians, known as cytotechnologists, screen up to 100
Pap smears per day using standard light microscopes, usually at
100x magnification. Each of these smears may contain hundreds of
thousands of normal cells. The few smears that are abnormal may
contain only a small number of abnormal cells (as few as 20)
scattered among the vast number of normal cells. The manual
screening of Pap smears has been appropriately characterized as
extremely taxing and inherently prone to error, and has often
been compared to searching for a needle in a haystack or to
proofreading a long document to find a few spelling errors. As a
result, manual screening false-negative rates ranging from 10% to
40% of true positives have been commonly reported in the medical
literature over the last 20 years.
The PAPNET[Registered Trademark] Testing System is a
computerized image processing service. The laboratory performs
PAPNET[Registered Trademark] testing when specifically requested
by clinicians, patients or third-party payers who wish to
minimize the probability of false negatives and their attendant
medical and legal consequences. Slides first diagnosed by a
laboratory as "negative" using manual inspection are sent to
designated Company facilities ("Scanning Centers") for
imaging on a PAPNET[Registered Trademark]Scanning Station,
which is designed to inspect the hundreds of thousands of cells
and other objects on the slide. The PAPNET [Registered Trademark]
Scanning Stations' proprietary neural network computers are
designed to select color images of 128 potentially abnormal
cells and cell clusters from each slide for detailed video review
(whether or not they are, in fact, abnormal). These 128 images
from each slide are recorded on a digital tape cassette or CD-ROM
which is returned to the client laboratory within two to four
working days along with the referred Pap smear slides.
At the laboratory, a certified cytotechnologist specially
trained in the use of the PAPNET[Registered Trademark] Testing
System evaluates the 128 color images from each slide on the
PAPNET[Registered Trademark] Review Station. The PAPNET
[Registered Trademark] Review Station's software ensures that the
cytotechnologist displays each image at 200x magnification (twice
normal screening power) and permits the user to expand any image
to 400x magnification. If all of the images appear normal, the
cytotechnologist classifies the slide as "negative," and no
further examination is required. The Company has found that
cytotechnologists experienced in the use of the PAPNET Registered
Trademark Review Station can review negative cases in
substantially less time than it takes to perform a conventional
manual re-examination.
If any one of the 128 images appears to the cytotechnologist
to be abnormal, the cytotechnologist classifies the slide as
"review." The cytotechnologist then refers to the "x, y"
coordinates provided with each PAPNET[Registered Trademark] image
and uses the coordinates as a reference point to re-examine the
slide directly through the microscope. If, after direct
inspection, the cytotechnologist continues to believe that the
slide contains abnormal cells, he or she refers the slide to the
laboratory's pathologist for a final diagnosis. In no case does
the Company or the PAPNET[Registered Trademark] Testing System
make a diagnosis of a slide or smear.
In October 1996, the Company received FDA approval to claim
that PAPNET[Registered Trademark] testing of routine, presumed
negative Pap smears can be conservatively expected to identify at
least 7.1 times more false negatives than manual re-examination
of the same number of smears.
Management believes that the Company's 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 the Company has not yet determined which of these
other applications, if any, it will be able to commercialize.
The Company's patents cover application of its technology to
cytological screening for cancers occurring at all body sites.
The Company's principal offices are located at Two Executive
Boulevard, Suffern, New York 10901-4164, and its telephone number
at that address is (914)368-3600.
RECENT DEVELOPMENTS
On March 28, 1997, NeoPath, Inc. ("NeoPath") filed
a patent infringement lawsuit against the Company in
the United States District Court for the Western District of
Washington. The lawsuit seeks to enjoin the Company from
allegedly infringing three of NeoPath's patents. NeoPath is
seeking preliminary and permanent injunctive relief as well as
compensatory damages, including treble damages. The Company
believes that NeoPath's claims are without merit and intends to
vigorously defend this action. The Company also believes that
an adverse judgment in this case would not have a
material adverse effect on the Company's operations, financial
position or cash flows.
On April 15, 1997, the Company was served with a lawsuit
filed by Cytyc Corporation ("Cytyc") in the United States
District Court for the District of Massachusetts against the
Company, certain of its officers and others, which alleges false
and misleading advertising, unfair and deceptive trade practices,
theft of trade secrets, unfair competition, interference with
relationships and defamation. Cytyc is seeking preliminary and
permanent injunctive relief as well as unspecified compensatory
damages, including treble damages. Based upon a preliminary
review of the complaint, the Company believes that Cytyc's claims
against the Company and its officers are without merit and intends
to vigorously defend this action. The Company also believes that
an adverse judgment in this case would not likely have a material
adverse effect on the Company's operations, financial position or
cash flows, but there can be no assurance in that regard.
These recent developments should be considered carefully,
together with all other available information.
USE OF PROCEEDS
The Company will not receive any of the proceeds from market-
making transactions.
RISK FACTORS
Investment in the securities of the Company being offered
hereby involves a high degree of risk including, but not limited
to, the risk factors described below. In evaluating an investment
in the Company's common stock, par value $.0001 per share (the
"Common Stock"), offered hereby, prospective investors should
carefully consider the following risk factors, in addition to the
other information contained in this Prospectus.
EARLY COMMERCIAL STAGE COMPANY; HISTORY OF LOSSES;
PROFITABILITY UNCERTAIN
The Company is in its early commercial stage and has
generated limited operating revenue to date and has incurred,
from incorporation through December 31, 1996, net losses
aggregating approximately $94.5 million. The Company 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[Registered Trademark] Testing System.
The likelihood of the success of the Company must be considered
in light of the problems, expenses, difficulties, complications
and delays frequently encountered in connection with the
formation of a new business, the development of new products and
the competitive environment in which the Company operates.
Although the Company is deriving limited operating revenue from
its current operations, there can be no assurance that it will be
able to develop significant additional sources of revenue or that
its operations will become profitable. Results of operations may
fluctuate significantly and will depend upon numerous factors,
including regulatory actions, market acceptance of the Company's
products, efficient manufacturing and slide processing
operations, new product introductions and competition.
NEED FOR MARKET ACCEPTANCE OF THE PAPNET REGISTERED
TRADEMARK TESTING SYSTEM
The Company's future performance will depend to a
substantial degree upon market acceptance of the PAPNET
[Registered Trademark] Testing System. The extent of, and rate at
which, market acceptance and penetration are achieved by the
PAPNET[Registered Trademark] Testing System are functions of many
variables including, but not limited to, price, effectiveness,
acceptance by patients, physicians and laboratories (including
the ability of laboratories to hire additional
cytotechnologists), manufacturing, slide processing and training
capacity, reimbursement practice and marketing and sales efforts.
The Company believes that significant revenue growth in the
United States depends upon effective marketing to three target
audiences: clinical laboratories, clinicians and women. Future
revenues may also be dependent on the outcome of discussions
which the Company has initiated with insurers, managed care
organizations and other third-party payers concerning
reimbursement for PAPNET[Registered Trademark] testing.
The Company's sales and marketing efforts to date in the
United States have generated considerable awareness about PAPNET
[Registered Trademark] testing among pathologists,
cytotechnologists, gynecologists and women. The Company believes
support and interest has been highest among women. Medical
specialties, however, are often reluctant to change clinical
practice methods and procedures, and early stage resistance is
being experienced in the adoption of PAPNET[Registered Trademark]
testing. Among gynecologists and pathologists there has been,
in general, a slow adoption of the PAPNET[Registered Trademark]
technology and some reluctance to use it even if a woman inquires
about or requests the test. The Company believes that this is
due to several factors, including controversy within the medical
profession about the public health consequences of Pap smear
false negatives, the relative cost of PAPNET[Registered Trademark]
testing as compared to the Pap smear, limited reimbursement by
third party payers and confusion in the marketplace about
alternative technologies for cervical cancer screening. In late
1996 and the first quarter of 1997, the Company initiated medical
and other communications designed to address each of these
considerations.
There can be no assurance that the PAPNET Registered
Trademark Testing System will achieve or maintain acceptance in
its target markets. Similar risks may confront other products
developed by the Company in the future.
RELIANCE ON A SINGLE PRODUCT
The Company has concentrated its efforts primarily on the
development of the PAPNET[Registered Trademark] Testing System and
will be dependent upon acceptance of that product to generate
revenues. The Company has performed only limited research on
other applications of its technology. There can be no assurance
that the PAPNET[Registered Trademark] Testing System will be
successfully commercialized or that such other applications will
be developed.
COMPETITION
The Company is currently aware of three principal
competitors which are engaged in efforts to automate one or more
aspects of cervical smear screening. Two competitors, Cytyc and
AutoCyte Inc., formerly a unit of Hoffman-La Roche's Roche Image
Analysis Systems ("AutoCyte"), are focused on the development of
devices for the production and, in the case of AutoCyte, imaging
and automated analysis, of monolayer slides, a potential
alternative to the conventional Pap smear method of specimen
collection and preparation. AutoCyte has stated that it expects
to file for FDA pre-market approval in 1997 of its slide
preparation and imaging system. Cytyc received approval from the
FDA in May 1996 to market its ThinPrep[Registered Trademark]
System to laboratories, for the purpose of filtering out blood,
mucus and other material from Pap smears for cervical cancer
screening as a replacement for the conventional Pap smear method.
In addition, Cytyc received FDA approval in November 1996 to
expand its product labeling to include the claim that the
ThinPrep [Registered Trademark] System is significantly more
effective in detecting Low Grade Squamous Intraepithelial
Lesions and more severe lesions than the conventional Pap smear
method. Cytyc labeling may also indicate that the specimen
quality using the ThinPrep [Registered Trademark] System is
significantly improved over that of the conventional Pap smear
method. PAPNET[Registered Trademark] is not currently indicated
under its FDA label for the scanning of ThinPrep(registered
trademark) System slides. With monolayer techniques, clinicians
are required to prepare special slides, and only a fraction of
the cells and background information displayed on the conventional
slide may be observed by the cytotechnologist or clinician for
analysis. Because the PAPNET [Registered Trademark] Testing System
uses the well-established methods of sample collection, it does
not reduce the diagnostic sample size or require clinicians to
deviate from standard practice. There can be no assurance,
however, that clinicians will not select monolayer slide
preparations for Pap smear analyses and it is uncertain, even
if PAPNET [Registered Trademark] testing does become indicated under
its FDA label to scan monolayer slides, that such scanning would be
economically viable for the Company's potential customers.
The other competitor of which the Company is aware, NeoPath,
has stated that it is developing a device for the fully automated
primary screening of conventional Pap smears, for which it
submitted to the FDA a pre-market approval supplemental
application. The FDA Hematology and Pathology Devices Panel (the
"Panel") held a public meeting on September 27, 1996 to consider
recommending approval of such supplement. The Panel voted not to
approve such supplement and enumerated certain conditions that
the Panel would want satisfied prior to approval of such
supplement. NeoPath responded to the Panel's determination by
stating that it expected to meet such conditions within the next
several months.
On September 29, 1995, the FDA granted approval to NeoPath
for the AutoPap[Registered Trademark] System to be used as part of
a laboratory's quality control procedures. According to NeoPath,
the AutoPap[Registered Trademark] System is designed to sort
purportedly "negative" Pap smear slides into two groups, one
classified as "negative" and one classified for "review." The
group of slides classified for review, which constitutes a
specified percentage of the whole, is again reviewed manually by
the cytotechnologist through a conventional microscope. Every
slide rescreened using the PAPNET[Registered Trademark] system
must receive a directed, professional human analysis, either of
the PAPNET[Registered Trademark] images or of both the images and
the slide. There can be no assurance that the laboratories will
select the PAPNET[Registered Trademark] review system, which
requires higher unit labor costs for the rescreening process than
NeoPath's AutoPap[Registered Trademark] System.
The Company's known competitors or other companies may
develop new products and technologies that prove to be more
effective than the PAPNET[Registered Trademark] Testing System or
that may be viewed by clinical laboratories as reducing operating
costs (for example, by reducing the number of cytotechnologists
used in screening). In addition, competitive products and
technologies may be manufactured and marketed more successfully
than the PAPNET[Registered Trademark] Testing System. Such
developments could render the PAPNET[Registered Trademark] Testing
System less competitive or possibly obsolete, and could have a
material adverse effect on the Company. 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 it
currently has limited experience.
In addition to competitors attempting to develop fully
automated or semi-automated systems for the screening or
rescreening of cervical samples, there may in the future be
alternate techniques or technologies for the detection or
prevention of cervical cancer. Although no such technique has
been demonstrated to be useful as a substitute for the Pap smear,
there can be no assurance that new techniques or technologies
will not one day supplant or replace the Pap smear in medical
practice.
DEPENDENCE ON KEY PERSONNEL
The Company's business is highly dependent on the principal
members of its management (including the President and Chief
Executive Officer of the Company, Mark R. Rutenberg), marketing
and technical staffs, and the loss of their services might impede
the achievement of the Company's business objectives. In
addition, the Company's future success will depend in part upon
its ability to retain highly qualified management, scientific,
technical and marketing personnel. There can be no assurance
that the Company will be successful in retaining such qualified
personnel or hiring additional qualified personnel. Losses of
key personnel could have a material adverse effect on the
Company's business.
IMPACT OF TERRITORIAL LICENSE AGREEMENTS
From 1989 through 1991, the Company entered into various
long-term territorial license agreements (the "License
Agreements") for the PAPNET[Registered Trademark] Testing System,
relating to certain states and metropolitan areas, which together
account for approximately 20% of the population of the United
States. Pursuant to the License Agreements, each licensee
("Licensee") thereunder is entitled to receive the greater of (i)
royalties equal to 50% of the Net Slide Revenue (as defined
below) generated from participating laboratories within its
territory, not to exceed the Licensee's share of a specified
number of slides annually, or (ii) a specified percentage of the
Company's annual slide processing revenues less certain taxes,
commissions and other enumerated expenses, up to specific annual
monetary limits for each Licensee. "Net Slide Revenue" is
defined as the gross slide processing revenue minus certain costs
related to asset-based financing for PAPNET[Registered Trademark]
Scanning Stations and related equipment (not to exceed $1.00 per
slide) and transportation costs. The Company estimates that the
License Agreements will result in royalty expense to the Company
of approximately 10% of its United States revenues over the term
of the License Agreements, but there can be no assurance that the
amount of such royalties will not be more or less than such
percentage. In December 1995, the Company and the Licensees
entered into a settlement agreement (the "Settlement Agreement")
and a warrant exercise agreement, the effect of which included
the clarification of previously disputed elements of prior
license agreements, the requirement for the Company to make
payments of stock having a fair market value equivalent to
approximately $1,652,000 and the irrevocable election by the
Licensees and acceptance by the Company for the cashless exercise
of 826,032 outstanding warrants into 715,894 shares of Common
Stock in connection with the closing of the Company's initial
public offering (the "IPO"). Pursuant to the Settlement
Agreement, the Company has consented to the merger of the
Licensees and related parties. The Licensees and the Company
have agreed to enter into a new license following such merger,
pursuant to which the rights and obligations of the parties will
be clarified but, with respect to which, the economic terms of
the License Agreements will not be materially altered. The
Company and the Licensees have also executed mutual general
releases, which include, among other things, the release of
claims previously made by the Licensees. The new licenses will
expire on December 31, 2025.
In addition, the provisions of a promissory note dated
October 3, 1990 (which was later converted to Series A
Convertible Preferred Stock and subsequently automatically
converted into Common Stock upon consummation of the IPO) granted
the holder of the note certain rights to an agreement to be the
Company's sole licensee for distribution of the PAPNET Registered
Trademark system in Canada. The promissory note provides that
such "licensee shall be entitled to terms which are at least as
favorable as those in any domestic United States of America
licenses." An agreement has not been negotiated. There can be no
assurance that the terms of such agreement when it is negotiated,
or the activities of the licensee thereunder, will not have a
material adverse effect on the profitability of the Company's
business in Canada. Joseph Salamon, a former director of the
Company, is the agent of the record holder of the rights to the
Canadian license.
DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY
The Company has depended and will continue to depend
substantially on its proprietary technology. The technology
underlying the PAPNET[Registered Trademark] Testing System is
protected by five United States patents and similar corresponding
foreign patents granted to the Company. The Company also has
filed several additional patent applications as to certain other
aspects of the Company's technology; however, there can be no
assurance that such applications will be granted. There can be no
assurance that the Company's issued patents or other patents
issued in the future will afford protection from material
infringement or that such patents will not be challenged. The
Company also relies on trade secrets and proprietary know-how,
which it protects, in part, through confidentiality agreements
with employees, consultants and other parties. There can be no
assurance that these agreements will not be breached, that the
Company would have adequate remedies for any breach or that the
Company's trade secrets will not otherwise become known to, or
independently developed by, competitors.
The medical device industry has been the subject of
extensive litigation regarding patents and other intellectual
property rights, and the Company may institute or otherwise be
involved in such litigation to enforce its patents, protect its
trade secrets or know-how, challenge the validity of proprietary
rights of others or defend against alleged infringement by the
Company of proprietary rights of others. The Company has
instituted such litigation against NeoPath, a competitor of the
Company, and NeoPath has recently instituted such litigation
against the Company. In addition, among the claims brought by
Cytyc in its lawsuit served against the Company in April of 1997
is a claim with respect to theft of trade secrets. An adverse
determination in these or other such litigations could limit the
value of the Company's issued patents or result in invalidation
of those patents, subject the Company to significant liabilities
to third parties, require the Company to seek licenses from third
parties, prevent the Company from manufacturing and selling its
products or increase the Company's unit labor cost, any of which
could have a material adverse effect on the Company's business,
financial condition and results of operations. See "-
Competition", "- Litigation" and "Recent Developments".
GOVERNMENT REGULATION
The Company's services, products and manufacturing
activities are subject to extensive and rigorous government
regulation, including the provisions of the Medical Device
Amendments 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 its 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 affect the timing of, or prevent the Company from
obtaining, future regulatory approvals. The effect of government
regulation may be to delay for a considerable period of time or
to prevent the marketing and full commercialization of future
products or services that the Company may develop and/or to
impose costly requirements on the Company. 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 affect the Company.
LIMITED MARKETING AND SALES HISTORY
Until it received FDA approval on November 8, 1995, the
Company was prohibited from marketing the PAPNET Registered
Trademark Testing System in the United States. Although the
Company has begun marketing the PAPNET[Registered Trademark]
Testing System, the Company is still in the process of
establishing commercial scale customer service, training and
support capabilities. The Company markets, sells, services and
supports PAPNET[Registered Trademark] Testing System services
through recruitment of its own direct sales force and through
cooperation with the existing sales personnel of client clinical
laboratories. There can be no assurance that the Company will be
able to recruit and retain skilled sales, marketing, service or
support personnel or establish satisfactory relationships with
client laboratories, or that the Company's marketing and sales
efforts will be successful.
INTERNATIONAL SALES AND OPERATIONAL RISKS
The Company markets the PAPNET[Registered Trademark] Testing
System to customers outside of the United States. In addition,
the Company manufactures its PAPNET[Registered Trademark] Scanning
Stations in Israel and operates Scanning Centers in Amsterdam and
Hong Kong. A number of risks are inherent in international
transactions. International sales and operations may be limited
or disrupted by the regulatory approval process, governmental
controls, export license requirements, political instability,
price controls, trade restrictions, changes in tariffs or
difficulties in staffing and managing international operations.
Foreign regulatory agencies have established, or may establish,
product standards different from those in the United States, and
any inability to obtain foreign regulatory approvals on a timely
basis could have an adverse effect on the Company's international
business and its financial condition and results of operations.
In addition, the Company's business, financial condition and
results of operations may be adversely affected by limitations on
its ability to repatriate funds, increases in duty rates and
difficulties in obtaining export licenses. Finally, certain of
the Company's operations are located in Hong Kong. Pursuant to
the existing treaty between the Government of the United Kingdom
and the People's Republic of China, Hong Kong will revert to and
become part of China in July 1997. The Company is uncertain as
to the impact that such a change in government will have on its
business operations in Hong Kong. There can be no assurance that
the Company will be able to successfully commercialize the PAPNET
[Registered Trademark] Testing System or any future product in any
foreign market.
FOREIGN EXCHANGE FLUCTUATIONS
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
[Registered Trademark] Testing System on a worldwide basis,
including in the United States. Neuromedical Systems, Inc., the
United States parent company, has provided a significant portion
of the financing required for its Netherlands and Hong Kong
Scanning Centers through United States dollar-denominated
intercompany loans. The Company also maintains its PAPNET
[Registered Trademark] Testing System manufacturing facility in
Israel. As a result of its international operations and its
current financing practices, 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. Future currency fluctuations,
to the extent not adequately hedged, could have an adverse effect
on the Company's business, financial condition and results of
operations.
LIMITED SLIDE PROCESSING AND MANUFACTURING HISTORY;
DEPENDENCE ON SOLE SOURCE SUPPLIERS
The Company has had limited experience with slide processing
in commercial-scale quantities and the manufacture and assembly
of PAPNET[Registered Trademark] Scanning Stations in the volumes
that will be necessary for the Company to generate significant
revenues from the processing of slides on the PAPNET Registered
Trademark Testing System. The Company may encounter difficulties
in scaling up its slide processing operations or production or in
hiring and training additional personnel to operate its Scanning
Centers or to manufacture its products. Future interruptions in
supply or other production problems could have a material adverse
effect on the Company's business, financial condition and results
of operations. In addition, the Company has qualified only
single sources for certain essential components. Interruptions in
the supply of such components might result in production delays
and create the need for modifications of the design of the
various components of the PAPNET[Registered Trademark] Testing
System, either of which could have a material adverse effect on
the Company's business, financial condition and results of
operations.
IMPACT OF MEDICARE, MEDICAID AND OTHER THIRD-PARTY
REIMBURSEMENT
In the United States, many Pap smears are currently paid for
by the patient, and the level of reimbursement by third-party
payers that do provide reimbursement varies considerably. Third-
party payers (Medicare/Medicaid, private health insurance, health
administration authorities in foreign countries and other
organizations) may affect the pricing or relative attractiveness
of the Company's products and services by regulating the maximum
amount of reimbursement for PAPNET[Registered Trademark] testing
provided by such payers or by not providing any reimbursement at
all. Restrictions on reimbursement may limit the price which the
Company can charge for its services or reduce the demand for
PAPNET[Registered Trademark] testing. In addition, if Medicare
and Medicaid do not provide for reimbursement of PAPNET
[Registered Trademark] testing or if the level of such
reimbursement is significantly below the amount laboratories
charge patients to perform PAPNET[Registered Trademark] testing,
the size of the potential market available to the Company may be
reduced. There can be no assurance that costs associated with
PAPNET[Registered Trademark] testing will ever become reimbursable
or that the level of reimbursement to laboratories for PAPNET
[Registered Trademark] testing necessary to permit the Company to
generate substantial revenues will be achieved or be maintained.
In the international market, reimbursement by private third-party
medical insurance providers, including governmental insurers and
payers, varies from country to country. In certain countries, the
Company's ability to achieve significant market penetration may
depend upon the availability of third-party or governmental
reimbursement.
HEALTHCARE REFORM
Recent proposals before Congress have included plans to
restructure the delivery and financing of healthcare services in
the United States. Such proposals focus on the control and
reduction of public and private spending on healthcare, including
Medicare and Medicaid, the reform of the methods of payment for
healthcare goods and services by both the public and private
sectors and the provision of universal access to
healthcare. The Company cannot predict what form such
legislation, if any, may take or the effect of such legislation on
its business. It is possible that legislation enacted by Congress
will contain provisions resulting in limitations which may
adversely affect the business, financial position and results of
operations of the Company. It is also possible that future
legislation either could result in modifications to the nation's
public and private healthcare insurance systems, which could
affect reimbursement policies in a manner adverse to the Company,
or could encourage integration or reorganization of the healthcare
delivery system in a manner that could adversely affect the
Company. The Company cannot predict what other legislation, if
any, relating to its business or to the healthcare industry may be
enacted, including legislation relating to third-party
reimbursement, or what effect any such legislation may have on its
business, financial position and results of operations.
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL
FINANCING
There can be no assurance that the Company will not be
required to seek additional equity or debt capital to finance its
operations in the future. In addition, there can be no assurance
that any such financings, if needed, will be available to the
Company or that adequate funds for the Company's operations,
whether from the Company's revenues, financial markets,
collaborative or other arrangements with corporate partners or
from other sources, will be available when needed or on terms
attractive to the Company. The inability to obtain sufficient
funds may require the Company to delay, scale back or eliminate
some or all of its research and product development programs,
sales and marketing efforts, manufacturing and slide processing
operations, clinical studies and/or regulatory activities or to
license third parties to commercialize products or technologies
that the Company would otherwise seek to market and sell
itself.
LITIGATION; POTENTIAL UNAVAILABILITY OF INSURANCE
The commercial screening of Pap smears has been
characterized by significant malpractice litigation. As a
result, the Company faces a risk of exposure to product
liability, errors and omissions or other claims in the event that
the use of its PAPNET[Registered Trademark] Testing System or
other future potential products is alleged to have resulted in a
false negative diagnosis. While PAPNET[Registered Trademark] is a
supplemental test and does not purport to diagnose any slide,
there can be no assurance that the Company will avoid significant
liability. There also can be no assurance that the Company will
be able to obtain adequate insurance coverage or that, if
obtained, such coverage will continue to be available at an
acceptable cost, if at all. Consequently, such claims could have
a material adverse effect on the business or financial condition
of the Company.
On July 15, 1996, the Company filed a lawsuit against
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[Registered Trademark] System. The
Company also alleges that NeoPath falsely characterized and made
misleading comparisons to consumers and securities analysts of
the AutoPap[Registered Trademark] System and the Company's PAPNET
[Registered Trademark] 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[Registered Trademark]
Testing System, and its effectiveness relative to NeoPath's
AutoPap[Registered Trademark] System, as well as other statements,
are false and misleading and constitute misrepresentations. The
Company believes that NeoPath's claims are without merit.
On March 28, 1997, NeoPath filed a lawsuit
against the Company, in the United States District Court for the
Western District of Washington, seeking to enjoin the Company
from allegedly infringing three of NeoPath's patents. NeoPath is
seeking preliminary and permanent injunctive relief as well as
compensatory damages, including treble damages. The Company
believes that NeoPath's claims are without merit and intends to
vigorously defend this action.
In addition, on April 15, 1997, the Company was served with
a lawsuit filed by Cytyc in the United States District Court for
the District of Massachusetts against the Company, certain of its
officers and others, which alleges false and misleading
advertising, unfair and deceptive trade practices, theft of trade
secrets, unfair competition, interference with relationships and
defamation. Cytyc is seeking preliminary and permanent
injunctive relief as well as unspecified compensatory damages,
including treble damages. The Company believes that Cytyc's claims
against the Company and its officers are without merit and intends
to vigorously defend this action.
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. On February 23, 1996, the
defendants moved to dismiss the Amended Complaint and, on
November 27, 1996, the New York State Supreme Court issued an
opinion dismissing all of the plaintiff's claims that the Company
and certain officers and directors committed fraud and other
improper actions that allegedly diminished the value of the
warrants plaintiffs claim they are entitled to receive. The Court
denied the Company's motion to dismiss plaintiffs' breach of
contract claim, and plaintiffs continue to seek $39 million in
compensatory damages and $75 million in punitive damages. The
Company intends to continue to vigorously defend this action.
The Company believes that 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.
The duration, costs and ultimate outcome of these lawsuits are
unknown, and the Company expects that the costs relating to these
lawsuits will be significant during 1997.
DILUTION; EFFECT OF OUTSTANDING OPTIONS AND WARRANTS
The Company has outstanding options and warrants to purchase
Common Stock at prices that may be below the per share price to
purchasers of the Company's Common Stock in the market. The
exercise of such options and warrants may have a dilutive effect
on the purchaser's investment. As of March 31, 1997, the Company
had approximately 30,907,497 issued and outstanding shares of
Common Stock and 3,927,050 outstanding options and warrants
exercisable into the same number of additional shares of Common
Stock.
ANTI-TAKEOVER PROVISIONS; STOCKHOLDER RIGHTS PLAN
The Company's Amended and Restated Certificate of
Incorporation (the "Certificate") and By-Laws (the "By-Laws")
contain provisions that may have the effect of discouraging a
third party from making an acquisition proposal for the Company.
The Certificate and By-Laws, among other things, (i) classify the
Board of Directors of the Company (the "Board") into three
classes, with directors of each class serving for a staggered
three-year period, (ii) provide that directors may be removed
only for cause and only upon the affirmative vote of at least 66-
2/3% of the voting power of all the then outstanding shares of
stock entitled to vote, (iii) prohibit action by stockholders by
written consent, (iv) require advance notice of stockholder
nominations and proposals and (v) preclude stockholders from
calling a special meeting of stockholders. Such provisions would
make the removal of incumbent directors more difficult and time-
consuming and may have the effect of discouraging a tender offer
or other takeover attempt not previously approved by the Board.
The Board has the authority to issue up to 10,000,000 shares of
preferred stock in one or more series and to fix the powers,
preferences and rights of any such series without stockholder
approval. In addition, the Company has adopted a stockholder
rights plan. The stockholder rights plan, as well as the
Certificate and By-Laws provisions described above, could have
the effect of discouraging unsolicited acquisition proposals or
making it more difficult for a third party to gain control of the
Company and could otherwise adversely affect the market price of
the Common Stock.
CONTROL BY EXISTING STOCKHOLDERS
As of March 31, 1997, officers and directors of the Company
and stockholders owning more than 5.0% of the Common Stock of the
Company, together with entities affiliated with them,
beneficially owned approximately 56.5% of the Common Stock of the
Company. As of March 31, 1997, Goldman, Sachs & Co., and certain
of its affiliates (including certain investment limited
partnerships), owned approximately 21.9% of the Common Stock of
the Company (excluding shares held in managed accounts, shares
acquired in the ordinary course of business and shares issuable
upon the exercise of warrants and options to acquire Common
Stock). In the event that certain entities affiliated with
Goldman, Sachs & Co. own in excess of 25.0% of the Common Stock
of the Company (but not including certain securities), Goldman,
Sachs & Co. would be precluded from making a market in the Common
Stock. Officers and directors of the Company and stockholders
owning more than 5.0% of the Common Stock of the Company may be
able to control the election of all members of the Board and
determine corporate actions. Such concentration of ownership may
have the effect of delaying, deferring or preventing a change in
control of the Company.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of substantial amounts of Common Stock in the public
market could have an adverse effect on the price of the Common
Stock. As of March 31, 1997, the Company had outstanding
approximately 30,907,497 shares of Common Stock of which
approximately 22,704,324 shares of Common Stock were eligible for
sale and not subject to restriction. Approximately 8,203,173
shares of Common Stock, issued prior to the IPO, are eligible for
sale from time to time under Rule 144 ("Rule 144") promulgated
under the Securities Act. The Commission enacted certain
amendments to Rule 144 which become effective April 29, 1997
which will permit the resale of limited amounts of restricted
securities by any person after a one-year, rather than
a two-year holding period, and unlimited resales of restricted
securities held by non-affiliates of the Company after a holding
period of two years, rather than three years. Under such
amendments, all of the Common Stock issued prior to the IPO will
become eligible for sale during 1997. Such additional freely
tradable shares of Common Stock may adversely affect its trading
price.
In addition, the Company has filed a registration statement
under the Securities Act, covering Common Stock issued pursuant
to the Neuromedical Systems, Inc. 1993 Stock Incentive Plan, as
amended and restated October 25, 1995.
The Company may, and it may be obligated to, register
approximately 12,193,000 shares of Common Stock for sale pursuant
to registration rights which have been granted to certain holders
of the Company's securities. These registration rights could
prevent or limit the ability of the Company to sell shares for
its own account, could adversely affect the market price of the
Common Stock and could require the Company to incur significant
expenses.
LIMITED PRIOR PUBLIC MARKET; LIQUIDITY; POSSIBLE VOLATILITY
OF STOCK PRICE
The Common Stock is quoted on the Nasdaq National Market
System, under the symbol "NSIX." There can be no assurance as to
the liquidity of the Common Stock or that an active public market
for the Common Stock can be sustained. The market price of the
Common Stock could fluctuate significantly as a result of the
Company's financial results, regulatory approval filings,
clinical studies, technological innovations or new commercial
products introduced by the Company or its competitors,
developments concerning patents or proprietary rights, trends in
the healthcare industry or in healthcare generally, litigation,
the adoption of new laws or regulations or new interpretations of
existing laws or regulations and other factors. The underwriters
of the Company's IPO have informed the Company that, subject to
applicable laws and regulations, they intend to continue to make
a market in the Common Stock; however, they are not obligated to
do so and any such market-making may be discontinued at any time
without notice. Moreover, because of the affiliation of Goldman,
Sachs & Co. with the Company, Goldman, Sachs & Co. is required to
deliver a current prospectus and otherwise comply with the
requirements of the Securities Act in connection with any
secondary market sale of the Common Stock, which may affect their
ability to continue market-making activities.
DIVIDEND POLICY
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 Company's Board of Directors and subject to
certain limitations under the General Corporation Law of the
State of Delaware and will depend upon the Company's results of
operations, financial condition, other contractual restrictions
and other factors deemed relevant by the Board.
INVESTMENT COMPANY ACT CONSIDERATIONS
The Investment Company Act of 1940, as amended (the "1940
Act"), requires the registration of, and imposes various
substantive restrictions on, certain companies that engage
primarily, or propose to engage primarily, in the business of
investing, reinvesting or trading in securities, or that fail
certain statistical tests regarding the composition of assets and
sources of income, and are not primarily engaged in businesses
other than investing, holding, owning or trading securities. The
Company believes that it is, and intends to remain, primarily
engaged in businesses other than investing, reinvesting, owning,
holding or trading in securities. The Company has temporarily
invested the net proceeds of the IPO, pending their use, in a
manner so as to avoid becoming subject to the registration
requirements of the 1940 Act. Such investment may result in the
Company's obtaining lower yields on the funds invested than might
be available in the securities market generally. There can be,
however, no assurance that such investments and utilization can
be maintained, or that any other exemption would be available, so
as to enable the Company to avoid the registration requirements
of the 1940 Act. If the Company were required to register as an
investment company under the 1940 Act, it would become subject to
substantial regulations with respect to its capital structure,
management, operations, transactions with affiliated persons (as
defined in the 1940 Act) and other matters. Application of the
provisions of the 1940 Act would have a material adverse effect
on the Company.
PLAN OF DISTRIBUTION
This Prospectus may be used by Goldman, Sachs & Co. in
connection with offers and sales related to market-making
transactions in the Common Stock effected from time to time
through the NASDAQ system, in private transactions or otherwise.
Goldman, Sachs & Co. may act as principal or agent in such
transactions, including as agent for the counterparty when acting
as principal or as agent for both counterparties, and may receive
compensation in the form of discounts and commissions, including
from both counterparties when it acts as agent for both. Such
sales will be made at prevailing market prices at the time of
sale, at prices related thereto or at negotiated prices.
The Goldman Sachs Group, L.P. and certain of its affiliates
are the beneficial owners of approximately 21.9% of the Company's
outstanding Common Stock as of March 31, 1997 (excluding shares
held in managed accounts, shares acquired in the ordinary course
of business and shares issuable upon the exercise of warrants and
options to acquire Common Stock). Two of the Company's directors
are officers of Goldman, Sachs & Co., an affiliate of The Goldman
Sachs Group, L.P. Goldman Sachs & Co. acted as one of the
representatives of the underwriters in the Company's IPO in which
all such underwriters received aggregate underwriting discounts
and commissions of approximately $7,245,000 from the Company.
Because of the relationships between Goldman, Sachs & Co.
and the Company, Goldman, Sachs & Co. intend to deliver a
prospectus to any purchaser in connection with secondary
transactions in the securities.
The Company has agreed to indemnify Goldman, Sachs & Co.
with respect to certain liabilities in connection with this
market-making Prospectus, including liabilities under the
Securities Act.
Goldman, Sachs & Co. have informed the Company that they do
not intend to confirm sales to any accounts over which they
exercise discretionary authority without the prior specific
written approval of such transactions by the customer.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of
100,000,000 shares of Common Stock, par value $.0001 per share,
and 10,000,000 shares of preferred stock, par value $.0001 per
share (the "Preferred Stock"). As of March 31, 1997, there were
approximately 30,907,497 shares of Common Stock outstanding and
approximately 3,927,050 shares of Common Stock issuable upon
exercise of outstanding options and warrants. All outstanding
shares of Common Stock are fully paid and non-assessable. As of
March 31, 1997, there were no shares of Preferred Stock issued or
outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote for
each share on all matters voted on by stockholders, including the
election of directors and, except as otherwise required by law or
provided in any resolution adopted by the Board with respect to
any series of Preferred Stock, will exclusively possess all
voting power. The holders of Common Stock do not have any
cumulative voting, conversion, redemption or preemptive rights.
The Board is classified in accordance with the Certificate.
Subject to any preferential rights of any outstanding series of
Preferred Stock designated by the Board from time to time, the
holders of Common Stock are entitled to such dividends as may be
declared from time to time by the Board from funds available
therefor, and upon liquidation are entitled to receive pro rata
all assets of the Company available for distribution to such
holders.
The Common Stock is quoted on the Nasdaq National Market
System under the symbol "NSIX."
PREFERRED STOCK
The Board is authorized to provide for the issuance of
shares of the Preferred Stock, in one or more series, and to fix
for each such series such voting powers, designations,
preferences and relative, participating, optional and other
special rights, and such qualifications, limitations or
restrictions, as are stated in the resolution adopted by the
Board providing for the issuance of such series and as are
permitted by the Delaware Law. In connection with the Stockholder
Rights Plan adopted by the Company (the "Stockholder Rights
Plan"), the Company has authorized a series of 450,000 shares of
Preferred Stock designated Series A Participating Preferred Stock
(the "Series A Preferred Stock"). The Board could
authorize the issuance of shares of Preferred Stock with terms and
conditions which could have the effect of impeding or delaying a
merger, tender offer or other transaction or a change of control
of the Company that some, or a majority, of the Company's
stockholders might believe to be in their best interests. Other
than the Series A Preferred Stock, the Company has no present
plans to issue any Preferred Stock.
OPTIONS AND WARRANTS
The Company has sold or granted options and warrants to
purchase its capital stock at various exercise prices over
various periods of time. As of March 31, 1997, excluding the
options granted under the Incentive Plan (under which options to
purchase 3,968,468 shares have been granted of which 3,531,983
are outstanding), the Company has outstanding warrants to
purchase an aggregate of 395,067 shares of Common Stock at
exercise prices ranging from $1.80 to $14.63 per share. If all of
such warrants were exercised by payment of cash to the Company,
the aggregate proceeds to the Company would be approximately
$2,213,000.
Excluding the options granted under the Incentive Plan,
most of the Company's outstanding warrants and options
contain provisions allowing for the conversion of such warrants
and options into a lesser number of shares without the payment of
cash to the Company (so-called "cashless exercise" provisions).
Accordingly, there can be no assurance that, even if all of such
options and warrants are exercised, the Company will receive any
cash proceeds from the exercise of warrants or options.
PREFERRED STOCK PURCHASE RIGHTS
The Board has adopted the Stockholder Rights Plan pursuant
to which there has been issued with respect to each share of
Common Stock issued and outstanding, as of or following the
consummation of the IPO, one Preferred Stock Purchase Right (a
"Right"). Each Right entitles the registered holder to purchase
from the Company one one-hundredth of a share of Series A
Preferred Stock at a price of $60.00 per one one-hundredth of a
share, subject to adjustment.
The Rights have certain anti-takeover effects. The Rights
will cause substantial dilution to a person or group that
attempts to acquire the Company without conditioning the offer on
the Rights being redeemed or a substantial number of Rights being
acquired. However, the Rights should not interfere with any
tender offer or merger approved by the Company (other than with
an Acquiring Person (as defined below)) because the Rights (i) do
not become exercisable in the event of a Permitted Offer (as
defined below) and expire automatically upon the consummation of
a merger in which the form of consideration is the same as, and
the price is not less than the price paid in, the Permitted Offer
and (ii) are redeemable in connection with an approved merger in
which all holders of Common Stock are treated alike.
The Rights are or will be attached to all certificates
representing shares of Common Stock issued prior to the Rights
Distribution Date (as defined below). Initially, no separate
Rights certificates will be distributed. Until the earlier to
occur of (i) the first date (the "Stock Acquisition Date") of a
public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person"), other than persons
who would be an Acquiring Person solely by reason of ownership of
stock upon the completion of the IPO (a "Grandfathered
Stockholder"), has acquired, or obtained the right to acquire,
beneficial ownership of securities having 15% (or, with respect
to a Grandfathered Stockholder, such stockholder's ownership of
stock upon completion of the IPO plus 1%) or more of the voting
power of all outstanding voting securities of the Company or (ii)
ten days (unless such date is extended by the Board) following
the commencement of (or a public announcement of an intention to
make) a tender offer or exchange offer which would result in any
person or group of related persons becoming an Acquiring Person
(in either case, except as a result of Permitted Offer) (the
earlier of such dates being called the "Rights Distribution
Date"), the Rights will be evidenced by the certificates
representing shares of Common Stock. Until the Rights
Distribution Date, the Rights will be transferred with and only
with certificates representing shares of Common Stock.
Certificates issued upon transfer or new issuance of shares of
Common Stock will contain a notation incorporating the Rights
Agreement by reference. Until the Rights Distribution Date (or
earlier redemption or expiration of the Rights), the surrender
for transfer of any certificates for shares of Common Stock will
also constitute the transfer of the Rights associated with the
shares represented by such certificate. As soon as practicable
following the Rights Distribution Date, separate certificates
evidencing the Rights ("Rights Certificates") will be mailed to
holders of record of shares of Common Stock as of the close of
business on the Rights Distribution Date, and the separate Rights
Certificates alone will evidence the Rights.
The Rights are not exercisable until the Rights Distribution
Date. The Rights will expire on the earliest of (i) December 7,
2005, (ii) consummation of a merger transaction with a person or
group who acquired shares of Common Stock pursuant to a Permitted
Offer, and is offering in the merger the same form of
consideration, and not less than the price per share of Common
Stock paid pursuant to the Permitted Offer or (iii) redemption by
the Company as described below.
The purchase price payable per one one-hundredth of a share
of Series A Preferred Stock (the "Purchase Price"), as set forth
in the Rights Certificates, and the number of shares of Series A
Preferred Stock or other securities issuable upon exercise of the
Rights is subject to adjustment from time to time to prevent
dilution (i) in the event of a stock dividend on, or a
subdivision, combination or reclassification of, the Series A
Preferred Stock, (ii) upon the grant to holders of the Series A
Preferred Stock of certain rights or warrants to subscribe for
Series A Preferred Stock, certain convertible securities or
securities having rights, privileges and preferences the same as,
or more favorable than, the Series A Preferred Stock at less than
the current market price of the Series A Preferred Stock or (iii)
upon the distribution to holders of the Series A Preferred Stock
of evidences of indebtedness, cash (excluding regular quarterly
cash dividends out of earnings or retained earnings), assets
(other than a dividend payable in Series A Preferred Stock) or of
subscription rights or warrants (other than those referred to
above).
With certain exceptions, no adjustments in the Purchase
Price will be required until cumulative adjustments require an
adjustment of at least 1% in such Purchase Price. No fractions of
shares of Common Stock will be issued and, in lieu thereof, an
adjustment in cash will be made based on the market price of the
Common Stock on the last trading date prior to the date of
exercise.
In the event that, after the first date of public
announcement by the Company or an Acquiring Person that an
Acquiring Person has become such, the Company is involved in a
merger or other business combination transaction in which shares
of Common Stock are exchanged or changed (other than a merger
with a person or group who acquired shares of Common Stock
pursuant to a Permitted Offer and is offering in the merger not
less than the price paid pursuant to the Permitted Offer and the
same form of consideration paid in the Permitted Offer), or 50%
or more of the Company's assets or earning power are sold (in one
transaction or a series of transactions), proper provision shall
be made so that each holder of a Right (other than such Acquiring
Person) shall thereafter have the right to receive, upon the
exercise thereof at the then current exercise price of the Right,
that number of shares of common stock of the acquiring company
(or, in the event that there is more than one acquiring company,
the acquiring company receiving the greatest portion of the
assets or earning power transferred) which at the time of such
transaction would have a market value of two times the exercise
price of the Right (such right being called the "Merger Right").
"Permitted Offer" means a tender offer or exchange offer for all
outstanding shares of Common Stock at a price and on terms
determined, prior to the purchase of shares under such tender
offer or exchange offer, by at least a majority of the members of
the Board who are not officers of the Company or Acquiring
Persons to be both adequate and otherwise in the best interests
of the Company, its stockholders (other than the person on whose
behalf the offer is being made) and other relevant
constituencies.
In the event that an Acquiring Person becomes such, each
holder of a Right (other than such Acquiring Person) will for a
60-day period thereafter have the right to receive upon exercise
that number of shares of Common Stock having a market value of
two times the exercise price of the Right, to the extent
available, and then (after all authorized and unreserved shares
of Common Stock have been issued) a common stock equivalent (such
as Series A Preferred Stock or another equity security with at
least the same economic value as the Common Stock) having a
market value of two times the exercise price of the Right, with
shares of Common Stock to the extent available being issued first
(such right being called the "Subscription Right").
The holder of a Right will continue to have the Merger Right
whether or not such holder exercises the Subscription Right. Upon
the occurrence of any of the events giving rise to the
exercisability of the Merger Right or the Subscription Right, any
Rights that are or were at any time owned by an Acquiring Person
shall become void insofar as they relate to the Merger Right or
the Subscription Right.
At any time prior to the earlier to occur of (i) a person
becoming an Acquiring Person or (ii) the expiration of the
Rights, the Company may redeem the Rights in whole, but not in
part, at a price of $.01 in cash per Right (the "Redemption
Price"), which redemption shall be effective upon the action of
the Company's Board in the exercise of its sole discretion.
Additionally, the Company may, following the Stock Acquisition
Date, redeem the then outstanding Rights in whole, but not in
part, at the Redemption Price provided that such redemption is
(i) in connection with a merger or other business combination
transaction or series of transactions involving the Company in
which all holders of Common Stock are treated alike but not
involving an Acquiring Person or any person who was an Acquiring
Person or (ii) following an event giving rise to, and the
expiration of the exercise period for, the Subscription Right if
and for as long as no person beneficially owns securities
representing 15% or more of the voting power of the Company's
voting securities. Upon the effective date of the redemption of
the Rights, the right to exercise the Rights will terminate and
the only right of the holders of Rights will be to receive the
Redemption Price.
Any of the provisions of the Rights Agreement may be amended
by the Board prior to the Rights Distribution Date. After the
Rights Distribution Date, the provisions of the Rights Agreement
may be amended by the Board in order to cure any ambiguity, defect
or inconsistency, or to make changes which do not adversely affect
the interest of holders of the Rights (excluding the interests of
any Acquiring Person).
The Series A Preferred Stock purchasable upon exercise of
the Rights will be nonredeemable and junior to any other series
of preferred stock the Company may issue (unless otherwise
provided in the terms of such stock). Each share of Series A
Preferred Stock will have a preferential quarterly dividend in an
amount equal to 100 times the dividend declared on each share of
Common Stock, but in no event less than $1.00. In the event of
liquidation, the holders of Series A Preferred Stock will,
subject to the availability of assets for distribution (including
the rights of securityholders of the Company having priority in
liquidation to the holders of shares of Series A Preferred
Stock), receive a preferred liquidation payment equal to $100 per
share, plus an amount equal to accrued and unpaid dividends
thereon to the date of such payment, and thereafter, once holders
of shares of Common Stock have received an equivalent liquidation
payment, the holders of shares of Series A Preferred Stock and
shares of Common Stock will receive their ratable share of any
remaining assets to be distributed. Each share of Series A
Preferred Stock will have 100 votes, voting together with holders
of shares of Common Stock. In the event of any merger,
consolidation or other transaction in which shares of Common
Stock are exchanged, each share of Series A Preferred Stock will
be entitled to receive 100 times the amount and type of
consideration received per share of Common Stock. The rights of
the Series A Preferred Stock as to dividends, liquidation and
voting, and in the event of mergers and consolidations, are
protected by customary anti-dilution provisions. Fractional
shares of Series A Preferred Stock will be issuable; however, the
Company may elect to distribute depositary receipts in lieu of
such fractional shares. In lieu of fractional shares other than
fractions that are multiples of one one-hundredth of a share, an
adjustment in cash will be made based on the market price of the
Series A Preferred Stock on the last trading date prior to the
date of exercise.
After such time as any person becomes an Acquiring Person
(provided that no person owns 50% or more of the Common Stock),
the Board, at its option, may exchange Rights for Common Stock at
the ratio of one share per Right. Such an exchange of Rights must
be authorized by a majority of the entire Board. The share
exchange option permits stockholders to receive Common Stock
under the Stockholder Rights Plan without the expenditure of
funds otherwise necessary to exercise such Rights. Any such share
exchange would deny the Company the benefits of additional
capital that it might otherwise receive under the Stockholder
Rights Plan.
Until a Right is exercised, the holder thereof, as such,
will have no rights as a stockholder of the Company, including,
without limitation, the right to vote or to receive dividends.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent for the Common Stock is
American Stock Transfer and Trust Company.
CERTAIN CHARTER AND BY-LAWS PROVISIONS
CLASSIFIED BOARD OF DIRECTORS
The Certificate provides that the Board is divided into
three classes of directors, as nearly equal in number as
reasonably possible, except for any directors elected separately
by the holders of any one or more series of Preferred
Stock. The Certificate provides that the term of office of
the first class of directors expired at the 1996 Annual Meeting of
Stockholders, the term of office of the second class of directors
will expire at the 1997 Annual Meeting of Stockholders, and the
term of office of the third class of directors will expire at the
1998 Annual Meeting of Stockholders. Starting with the 1996
Annual Meeting of Stockholders, one class of directors is being
elected each year for a three-year term.
The classification of directors has the effect of making it
more difficult for stockholders to change the composition of the
Board. At least two annual meetings of stockholders, instead of
one, will generally be required to effect a change in a majority
of the Board. Such a delay may help ensure that the Company's
directors, if confronted by a holder attempting to force a proxy
contest, a tender or exchange offer or other extraordinary
corporate transaction, would have sufficient time to review the
proposal as well as any available alternatives to the proposal
and to act in what they believe to be the best interests of the
stockholders.
The classification provisions could also have the effect of
discouraging a third party from initiating a proxy contest,
making a tender offer or otherwise attempting to obtain control
of the Company, even though such an attempt might be beneficial
to the Company and its stockholders. The classification of the
Board could thus increase the likelihood that incumbent directors
will retain their positions.
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES
The Certificate provides that, subject to any rights of
holders of Preferred Stock to elect additional directors under
specified circumstances, the number of directors will be fixed
from time to time by action of not less than a majority of the
Board then in office, but in no event shall be less than four or
more than 11. In addition, the Certificate provides that,
subject to any rights of holders of Preferred Stock, newly
created directorships resulting from an increase in the
authorized number of directors or vacancies on the Board
resulting from death, resignation, disqualification or removal of
directors may be filled only by a majority of the directors then
in office, though less than a quorum. Accordingly, the Board
could prevent any stockholder from enlarging the Board and
filling the new directorships with such stockholder's own
nominees. Under the Delaware Law, unless otherwise provided in
the certificate of incorporation, directors serving on a
classified board may only be removed by the stockholders for
cause. The Certificate provides that, except for any directors
elected separately by holders of one or more series of Preferred
Stock, directors may be removed only for cause and only upon the
affirmative vote of holders of at least 66 2/3% of the voting
power of all the then outstanding shares of stock entitled to
vote generally in the election of directors ("Voting Stock"),
voting together as a single class. The provisions of the
Certificate governing the number of directors, their removal and
the filling of vacancies may have the effect of discouraging a
third party from initiating a proxy contest, making a tender
offer or otherwise attempting to gain control of the Company, or
of attempting to change the composition or policies of the Board,
even though either such attempt might be beneficial to the
Company or its stockholders. These provisions of the Certificate
could thus increase the likelihood that incumbent directors will
retain their positions.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
The Certificate provides that, subject to the rights of
holders of any series of Preferred Stock, stockholder action can
be taken only at an annual or special meeting of stockholders
called by the Board to elect directors, and it prohibits
stockholder action by written consent in lieu of a meeting. The
By-Laws provide that, subject to the Delaware Law, special
meetings of stockholders can be called only by the Board, and
stockholders will not be permitted to call a special meeting or
to require that the Board call a special meeting of stockholders.
Moreover, pursuant to the Certificate and the By-Laws, the
business permitted to be conducted at any special meeting of
stockholders will be limited to the business brought before the
meeting pursuant to the notice of meeting given by the Company.
The provisions of the Certificate prohibiting stockholder
action by written consent may have the effect of delaying
consideration of a stockholder proposal until the next annual
meeting unless a special meeting is called by the Board. These
provisions also prevent the holders of a majority of the voting
power of the Voting Stock from unilaterally using the written
consent procedure to take stockholder action. Moreover, a
stockholder could not force stockholder consideration of a
proposal over the opposition of the Board by calling a special
meeting of the stockholders prior to the time the Board believes
such consideration to be appropriate.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS
AND STOCKHOLDER PROPOSALS
The Certificate establishes an advance notice procedure for
stockholders to make nominations of candidates for election as
director, or to bring other business before an annual meeting of
stockholders of the Company (the "Stockholder Notice Procedure").
The Stockholder Notice Procedure provides that, subject to the
rights of any holders of Preferred Stock, only persons who are
nominated by, or at the direction of, the Board, or by a
stockholder who has given timely written notice to the Secretary
of the Company prior to the meeting at which directors are to be
elected, will be eligible for election as directors of the
Company.
The Stockholder Notice Procedure provides that at an annual
meeting only such business may be conducted as has been brought
before the meeting by, or at the direction of, the Board or by a
stockholder who has given timely written notice to the Secretary
of the Company of such stockholder's intention to bring such
business before such meeting. Under the Stockholder Notice
Procedure, to be timely, notice of stockholder nominations or
proposals to be made at an annual or special meeting must be
received by the Company not less than 60 days nor more than 90
days prior to the scheduled date of the meeting (or, if less than
70 days' notice or prior public disclosure of the date of the
meeting is given, the tenth day following the earlier of (i) the
day such notice was mailed or (ii) the day such public disclosure
was made).
Under the Stockholder Notice Procedure, a stockholder's
notice to the Company proposing to nominate a person for election
as a director must contain certain information about the
nominating stockholder and the proposed nominee. Under the
Stockholder Notice Procedure, a stockholder's notice relating to
the conduct of business other than the nomination of directors
must contain certain information about such business and about
the proposing stockholder. If the Chairman of the Board or other
officer presiding at a meeting determines that a person was not
nominated, or other business was not brought before the meeting,
in accordance with the Stockholder Notice Procedure, such person
will not be eligible for election as a director, or such business
will not be conducted at such meeting, as the case may be.
By requiring advance notice of nominations by stockholders,
the Stockholder Notice Procedure affords the Board an opportunity
to consider the qualifications of the proposed nominees and, to
the extent deemed necessary or desirable by the Board, to inform
stockholders about such qualifications. By requiring advance
notice of other proposed business, the Stockholder Notice
Procedure also provides an orderly procedure for conducting
annual meetings of stockholders and, to the extent deemed
necessary or desirable by the Board, provides the Board with an
opportunity to inform stockholders, prior to such meetings, of
any business proposed to be conducted at such meetings, together
with any recommendations as to the Board's position regarding
action to be taken with respect to such business, so that
stockholders can better decide whether to attend such a meeting
or to grant a proxy regarding the disposition of any such
business.
Although the Certificate does not give the Board any power
to approve or disapprove stockholder nominations for the election
of directors or proposals for action, the foregoing provisions
may have the effect of precluding a contest for the election of
directors or the consideration of stockholder proposals if the
proper procedures are not followed, and of discouraging or
deterring a third party from conducting a solicitation of proxies
to elect its own slate of directors or to approve its own
proposal, without regard to whether consideration of such
nominees or proposals might be harmful or beneficial to the
Company and its stockholders.
PREFERRED STOCK
Pursuant to the Certificate, the Board is authorized,
subject to the limitations prescribed by law, to provide for the
issuance of shares of Preferred Stock in one or more series, to
establish the number of shares of each such series and to fix the
designations, voting powers, preferences and rights of the shares
of each such series, and any qualifications, limitations or
restrictions thereof.
The Company believes that the ability of the Board to issue
one or more series of Preferred Stock provides the Company with
flexibility in structuring possible future financing and
acquisitions, and in meeting other corporate needs which might
arise. The authorized shares of Preferred Stock, as well as
shares of Common Stock, will be available for issuance without
further action by the Company's stockholders, unless such action
is required by applicable law or the rules of any stock exchange
or automated quotation system on which the Company's securities
may be listed or traded. The Nasdaq National Stock Market System
currently requires stockholder approval as a prerequisite to
quotation and trading of shares in several instances, including
where the present or potential issuance of shares could result in
an increase in the number of shares of common stock, or in the
amount of voting securities, outstanding by at least 20%. If the
approval of the Company's stockholders is not required for the
issuance of shares of Preferred Stock or shares of Common Stock,
the Board may determine not to seek stockholder approval.
Although the Board has no intention at the present time of
doing so, it could issue a series of Preferred Stock that could,
depending on the terms of such series, impede the completion of a
merger, tender offer or other takeover attempt. The Board will
make any determination to issue such shares based on its judgment
as to the best interests of the Company and its stockholders. The
Board, in so acting, could issue Preferred Stock having terms
that could discourage an acquisition attempt through which an
acquiror may be able to change the composition of the Board,
including a tender offer or other transaction that some, or a
majority, of the Company's stockholders might believe to be in
their best interests or in which stockholders might receive a
premium for their stock over the then current market price of
such stock.
In connection with the Stockholder Rights Plan adopted by
the Company, the Company has authorized the issuance of Series A
Preferred Stock. For a description of the terms of the Series A
Preferred Stock, see "Description of Capital Stock-Preferred
Stock" and "-Preferred Stock Purchase Rights."
OTHER PROVISIONS
The Certificate provides that, in discharging their
respective duties under applicable law and in determining what
they believe to be in the best interests of the Company and its
stockholders, the Board, each committee of the Board and each
director may take into account the effects, both long-and short-
term, of the proposed action on the employees, distributors,
customers, suppliers and creditors of the Company and the
communities in which the Company conducts its business, to the
extent such persons believe pertinent (including the possibility
that the interests of the Company may best be served by remaining
independent).
The Certificate also authorizes the Board and any committee
authorized by the Board to take such action as it may determine
to be reasonably necessary or desirable to encourage any person
or entity to enter into negotiations with the Board and
management regarding any transaction which may result in a change
of control of the Company, and to contest or oppose any such
transaction which the Board determines to be unfair, abusive or
otherwise undesirable to the Company, its businesses or
stockholders. The Board or any such committee is specifically
authorized to adopt plans or to issue securities of the Company
(including shares of Common Stock or Preferred Stock, Rights or
debt securities), which securities may be exchangeable or
convertible into cash or other securities on such terms as the
Board or any such committee determines and may provide for
differential and unequal treatment of different holders or
classes of holders. The existence of this authority or the
actions which may be taken by the Board pursuant thereto are
intended to give the Board flexibility in order to act in the
best interests of stockholders in the event of a potential change
of control transaction. Such provisions may, however, deter
potential acquirors from proposing unsolicited transactions not
approved by the Board and might enable the Board to hinder or
frustrate such a transaction if proposed.
AMENDMENT OF THE CERTIFICATE OF INCORPORATION AND BY-LAWS
The Certificate contains provisions requiring the
affirmative vote of the holders of at least 66 2/3% of the voting
power of the Voting Stock to amend certain provisions of the
Certificate (including the provisions discussed above relating to
directors, action by written consent, special stockholder
meetings and Stockholder Notice Procedures) or to amend any
provision of the By-Laws by action of stockholders. An
affirmative vote of at least 66 2/3% of the voting power of the
Voting Stock is also required to amend provisions in the
Certificate setting forth the extent of liability and
indemnification of officers and directors, the ability of the
Board to consider constituent interests when discharging its
duties, the authorization for the Board to take steps to
encourage or oppose, as the case may be, transactions which may
result in a change of control of the Company, and the provisions
regarding the amendment of the Certificate. These provisions make
it more difficult for stockholders to make changes in the
Certificate and the By-Laws, including changes designed to
facilitate the exercise of control over the Company.
SECTION 203 OF THE DELAWARE LAW
Section 203 of the Delaware Law provides that, subject to
certain exceptions specified therein, a corporation shall not
engage in any business combination with any "interested
stockholder" for a three-year period following the date that such
stockholder becomes an "interested stockholder" unless (i) prior
to such date, the board of directors of the corporation approved
either the business combination or the transaction which resulted
in the stockholder becoming an "interested stockholder," (ii)
upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced
(excluding certain shares) or (iii) on or subsequent to such
date, the business combination is approved by the board of
directors of the corporation and by the affirmative vote of at
least 66 2/3% of the outstanding voting stock which is not owned
by the "interested stockholder." Except as specified in Section
203 of the Delaware Law, an interested stockholder is defined to
include (x) any person that is the owner of 15% or more of the
outstanding voting stock of the corporation or is an affiliate or
associate of the corporation and was the owner of 15% or more of
the outstanding voting stock of the corporation, at any time
within three years immediately prior to the relevant date and (y)
the affiliates and associates of any such person.
Under certain circumstances, Section 203 of the Delaware Law
may make it more difficult for a person who would be an
"interested stockholder" to effect various business combinations
with a corporation for a three-year period, although the
stockholders may elect to exclude a corporation from the
restrictions imposed thereunder. The Certificate provides that
the Company elects to be subject to the restrictions imposed
under Section 203 of the Delaware Law. It is anticipated that
the provisions of Section 203 of the Delaware Law may encourage
companies interested in acquiring the Company to negotiate in
advance with the Board, since the stockholder approval
requirement would be avoided if the board of directors then in
office approves either the business combination or the
transaction which results in the stockholder becoming an
interested stockholder.
LIMITATION OF LIABILITY OF DIRECTORS
The Certificate provides that a director will not be
personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to
the corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware
Law, which concerns unlawful payments of dividends, stock
purchases or redemptions or (iv) for any transaction from which
the director derived an improper personal benefit. If Delaware
Law is subsequently amended to permit further limitation of the
personal liability of directors, the liability of a director of
the Company will be eliminated or limited to the fullest extent
permitted by the Delaware Law as amended. While these provisions
provide directors with protection from awards for monetary
damages for breaches of their duty of care, they do not eliminate
such duty. Accordingly, these provisions have no effect on the
availability of equitable remedies such as an injunction or
rescission based on a director's breach of his or her duty of
care. The provisions described above apply to an officer of the
Company only if he or she is a director of the Company and is
acting in his or her capacity as director, and do not apply to
officers of the Company who are not directors.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate provides that each person who is involved in
any actual or threatened action, suit or proceeding, whether
civil, criminal, administrative or investigative by reason of the
fact that he or she is or was a director or officer of the
Company or is or was serving at the request of the Company as a
director or officer of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with
respect to an employee benefit plan, will be indemnified by the
Company to the full extent permitted by the Delaware Law, as the
same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits
the Company to provide broader indemnification rights than said
law permitted prior to such amendment) or by other applicable
laws then in effect. The Certificate provides that the expenses
incurred by any director or officer in the defense of any such
action, suit or proceeding shall be paid by the Company in
advance of final disposition for such action, suit or proceeding
upon receipt of an undertaking by such director or officer to
repay all amounts so advanced in the event that it shall
ultimately be determined that such director or officer is not
entitled to indemnification. The indemnification rights conferred
by the Certificate are not exclusive of any other right to which
a person seeking indemnification may be entitled under any law,
by-law, agreement, vote of stockholders or disinterested
directors or otherwise.
The Company will be authorized to purchase and maintain (and
the Company expects to maintain) insurance on behalf of its
directors or officers.
In addition, the Company has entered into indemnification
agreements (the "Indemnification Agreements") with each of the
directors and several of the officers of the Company. The
Indemnification Agreements (i) confirm to officers and directors
the indemnification provided to them in the Certificate, (ii)
provide officers and directors with procedural protections in the
event that they are sued in their capacity as director or
officer, (iii) provide additional indemnification rights and (iv)
provide contribution rights in the event that indemnification is
unavailable or insufficient.
VALIDITY OF COMMON STOCK
The validity of the shares of Common Stock offered by the
Company has been passed upon for the Company by Fried, Frank,
Harris, Shriver & Jacobson (a partnership including professional
corporations), New York, New York and for the underwriters of the
Company's IPO by Sullivan & Cromwell, New York, New York. Fried,
Frank, Harris, Shriver & Jacobson has from time to time
represented Goldman, Sachs & Co. and its affiliates, including in
connection with the initial investment of certain affiliates of
Goldman, Sachs & Co. in the Company.
EXPERTS
The consolidated balance sheets of the Company and
subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended
December 31, 1996, appearing in the Company's Annual Report (Form
10-K) for the year ended December 31, 1996, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their
report thereon included therein and incorporated herein by
reference. Such consolidated financial statements are
incorporated herein by reference in reliance upon such report
given upon the authority of such firm as experts in accounting
and auditing.
- -------------------------------- ------------------------------
NO PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATIONS OTHER THAN
THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OTHER THAN
THE SECURITIES TO WHICH IT
RELATES OR AN OFFER TO SELL OR NEUROMEDICAL SYSTEMS, INC.
THE SOLICITATION OF AN OFFER TO
BUY SUCH SECURITIES IN ANY COMMON STOCK
CIRCUMSTANCES IN WHICH SUCH OFFER (PAR VALUE $0.0001 PER SHARE)
OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE -----------
HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION HEREIN IS [LOGO]
CORRECT AS OF ANY TIME SUBSEQUENT
TO ITS DATE.
----------------
TABLE OF CONTENTS
PAGE
-----
Available Information........ 2
Incorporation Of
Certain Documents By
Reference.................. 2
Forward-Looking
Statements................. 3
The Company.................. 4
Recent Developments.......... 5
Use Of Proceeds.............. 6
Risk Factors................. 7
Plan Of Distribution......... 16
Description Of
Capital Stock.............. 17
Certain Charter And
By-Laws Provisions......... 21
Validity Of Common
Stock...................... 26
Experts...................... 26
GOLDMAN, SACHS & CO.
- -------------------------------- ------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table shows the expenses, other than
underwriting discounts and commissions, incurred by the Company
in connection with the initial sale and distribution of
securities registered by the Company on December 7, 1995:
<TABLE>
<S> <C>
SEC Registration Fee...................... $35,742
NASD Filing Fee........................... 10,160
Nasdaq National Market System Additional
Listing Fee............................. 51,667
Blue Sky Fees and Expenses................ 2,369
Legal Fees and Expenses................... 798,347
Accounting Fees and Expenses.............. 356,715
Printing Expenses........................ 275,000
-------
Total................................ $1,530,000
==========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company, as a Delaware corporation, is empowered by
Section 145 of the General Corporation Law of the State of
Delaware (the "Delaware Law"), subject to the procedures and
limitations stated therein, to indemnify any person against
expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by
him in connection with any threatened, pending or completed
action, suit or proceeding in which such person is made or
threatened to be made a party by reason of his being or having
been a director, officer, employee or agent of the Company. The
Delaware Law provides that indemnification pursuant to its
provisions is not exclusive of other rights of indemnification to
which a person may be entitled under any by-law, agreement, vote
of stockholders or disinterested directors, or otherwise.
The Company's Amended and Restated Certificate of
Incorporation (the "Certificate") provides that a director will
not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174
of the Delaware Law, which concerns unlawful payments of
dividends, stock purchases or redemptions or (iv) for any
transaction from which the director derived an improper personal
benefit. If the Delaware Law is subsequently amended to permit
further limitation of the personal liability of directors, the
liability of a director of the Company will be eliminated or
limited to the fullest extent permitted by the Delaware Law as
amended.
The Certificate provides that each person who is involved in
any actual or threatened action, suit or proceeding, whether
civil, criminal, administrative or investigative by reason of the
fact that he or she is or was a director or officer of the
Company or is or was serving at the request of the Company as a
director or officer of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with
respect to an employee benefit plan, will be indemnified by the
Company to the full extent permitted by the Delaware Law, as the
same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits
the Company to provide broader indemnification rights than said
law permitted prior to such amendment) or by other applicable
laws then in effect. The Certificate provides that the expenses
incurred by any director or officer in the defense of any such
action, suit or proceeding shall be paid by the Company in
advance of final disposition for such action, suit or proceeding
upon receipt of an undertaking by such director or officer to
repay all amounts so advanced in the event that it shall
ultimately be determined that such director or officer is not
entitled to indemnification. The indemnification rights
conferred by the Certificate are not exclusive of any other right
to which a person seeking indemnification may be entitled under
any law, by-law, agreement, vote of stockholders or disinterested
directors or otherwise. The Company is authorized to purchase
and maintain (and the Company expects to maintain) insurance on
behalf of its directors or officers.
In addition, the Company has entered into indemnification
agreements (the "Indemnification Agreements") with each of the
directors and several of the officers of the Company. The
Indemnification Agreements (i) confirm to officers and directors
the indemnification provided to them in the Certificate, (ii)
provide officers and directors with procedural protections in the
event that they are sued in their capacity as director or
officer, (iii) provide additional indemnification rights and (iv)
provide contribution rights in the event that indemnification is
unavailable or insufficient.
ITEM 16. EXHIBITS
EXHIBIT DESCRIPTION OF DOCUMENT
------- -----------------------
NUMBER
--------
1.3 Form of Underwriting Agreement[dagger]
4.1 Form of Rights Agreement[dagger]
4.2 Form of Stock Certificate[dagger]
5.1 Opinion of Fried, Frank, Harris, Shriver &
Jacobson[dagger]
23.1 Consent of Ernst & Young LLP, Independent
Auditors [double dagger]
23.3 Consent of Fried, Frank, Harris, Shriver &
Jacobson[dagger]
24.1 Powers of Attorney[dagger]
- ----------------------
[dagger] Previously filed.
[double dagger] Filed herewith.
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by
a director, officer or controlling person of the
registrant in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared
effective.
(2) For purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial BONA FIDE offering thereof.
(3) It will file, during any period in which offers or
sales are being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement;
notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the Securities and Exchange
Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent
no more than a 20 percent change in the maximum
aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement;
PROVIDED, HOWEVER, that the undertakings set forth in paragraphs
(3)(i) and (ii) above do not apply if the information required to
be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in this Registration
Statement.
(4) It will remove from registration by means of a post-
effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
(c) The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report
pursuant to section 13(a) or section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
as amended, the Registrant certifies that it has reasonable
grounds to believe that it meets all of the requirements for
filing on Form S-3 and has duly caused this Post-Effective
Amendment No. 2 to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City
of Suffern, State of New York, on April 21, 1997.
NEUROMEDICAL SYSTEMS, INC.
By:/s/ David Duncan, Jr.
--------------------------
David Duncan, Jr.
Vice President, Finance and
Administration and Chief
Financial Officer
Pursuant to the requirements of the Securities Act of 1933,
as amended, this Registration Statement has been signed below by
the following persons in the capacities and on the dates
indicated.
Signature Title Date
-------- ----- ----
/s/ Mark R. Rutenberg* Chairman of the April 21, 1997
- -------------------------------- Board, President
(Mark R. Rutenberg) and Chief Executive
Officer
Vice President, April 21, 1997
/s/ David Duncan, Jr. Finance and
- -------------------------------- Administration,
(David Duncan, Jr.) Chief Financial
Officer and
Principal
Accounting Officer
/s/ Elizabeth Cogan Fascitelli* Director April 21, 1997
- --------------------------------
(Elizabeth Cogan Fascitelli)
/s/ Stuart M. Essig* Director April 21, 1997
- --------------------------------
(Stuart M. Essig)
/s/ Carl Genberg* Director April 21, 1997
- --------------------------------
(Carl Genberg)
Director April __, 1997
- --------------------------------
(Arthur L. Herbst, M.D.)
/s/ Uzi Ish-Hurwitz Director April 21, 1997
- --------------------------------
(Uzi Ish-Hurwitz)
Director April __, 1997
- --------------------------------
(C. Raymond Larkin, Jr.)
/s/ Dr. Stephen K.C. Ng* Director April 21, 1997
- --------------------------------
(Dr. Stephen K.C. Ng)
*By: /s/ David Duncan, Jr. Individually and April 21, 1997
- -------------------------------- Attorney-in-Fact
David Duncan, Jr.
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF DOCUMENT
-------- -----------------------
NUMBER
--------
1.3 Form of Underwriting Agreement[dagger]
4.1 Form of Rights Agreement[dagger]
4.2 Form of Stock Certificate[dagger]
5.1 Opinion of Fried, Frank, Harris, Shriver &
Jacobson [dagger]
23.1 Consent of Ernst & Young LLP, Independent
Auditors [double dagger]
23.3 Consent of Fried, Frank, Harris, Shriver &
Jacobson [dagger]
24.1 Powers of Attorney[dagger]
- ---------------
[dagger] Previously filed.
[double dagger] Filed herewith.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the heading
"Experts" in Post-Effective Amendment No. 2 to the Registration
Statement (Form S-1 No. 33-97722) on Form S-3 and the related
Prospectus of Neuromedical Systems, Inc. for the Registration of
shares of its Common Stock and to the incorporation by reference
therein of our report dated February 7, 1997 with respect to the
consolidated financial statements and schedule of Neuromedical
Systems, Inc. included in its Annual Report (Form 10-K) for the
year ended December 31, 1996, filed with the Securities and
Exchange Commission.
Hackensack, New Jersey Ernst & Young LLP
April 17, 1997
