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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-26984
Neuromedical Systems, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3526980
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(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Two Executive Boulevard, Suffern, NY 10901-4164
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(Address of Principal Executive Offices)
Registrant's telephone number including area code: (914) 368-3600
--------------
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former
Fiscal Year if Changed Since Last Report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---- -----
As of July 31, 1997, an aggregate of 30,919,752 shares of common stock were
outstanding.
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NEUROMEDICAL SYSTEMS, INC.
Table of Contents
Form 10-Q for the Quarterly Period Ended June 30, 1997
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PART I FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1997
(unaudited) and December 31, 1996 3
Condensed Consolidated Statements of Operations for the three months
and six months ended June 30, 1997 and 1996 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION
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Item 1. Legal Proceedings 17
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote
of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 22
Safe Harbor Statement 23
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2
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NEUROMEDICAL SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30, December 31,
1997 1996
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(unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 31,950,000 $ 83,391,000
Short-term investments 30,182,000 --
Accounts receivable, net of allowance 2,095,000 1,650,000
Prepaid expenses 583,000 803,000
Other current assets 708,000 732,000
-------------- --------------
Total current assets 65,518,000 86,576,000
Restricted cash 819,000 1,000,000
Property and equipment 16,792,000 16,388,000
Intangible assets, net of accumulated amortization
(1997-$575,000, 1996-$492,000) 1,443,000 166,000
Other assets 57,000 74,000
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$ 84,629,000 $ 104,204,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes and bank loans payable-short-term $ 2,455,000 $ 1,200,000
Current portion of capital lease obligations 2,237,000 1,972,000
Accounts payable 1,643,000 2,256,000
Accrued liabilities 3,551,000 4,082,000
-------------- --------------
Total current liabilities 9,886,000 9,510,000
Notes and bank loans payable-long-term 3,739,000 4,704,000
Notes payable-stockholder -- 600,000
Capital lease obligations, less current portion 5,873,000 5,862,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.0001 par value; authorized -
10,000,000 shares; none issued and outstanding -- --
Common stock, $.0001 par value; authorized-
100,000,000 shares; issued and outstanding - 30,919,752
shares in 1997 and 29,795,049 shares in 1996 3,000 3,000
Additional paid-in capital 178,616,000 177,559,000
Deferred compensation (869,000) --
Accumulated deficit (113,002,000) (94,508,000)
Foreign currency translation 383,000 474,000
-------------- --------------
Total stockholders' equity 65,131,000 83,528,000
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$ 84,629,000 $ 104,204,000
============== ==============
See accompanying notes.
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3
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NEUROMEDICAL SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended June 30, Six Months Ended June 30
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1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Revenues:
Slide processing $ 2,230,000 $ 1,017,000 $ 3,881,000 $ 1,668,000
------------ ------------ ------------- -------------
Total revenues 2,230,000 1,017,000 3,881,000 1,668,000
------------ ------------ ------------- -------------
Costs and Expenses:
Cost of sales 2,659,000 1,933,000 5,252,000 3,624,000
Sales and 4,833,000 3,856,000 10,311,000 7,373,000
Marketing
Research and development 2,041,000 1,529,000 3,989,000 3,079,000
General and administrative 2,058,000 1,815,000 3,998,000 3,556,000
------------ ------------ ------------- -------------
Total costs and expenses 11,591,000 9,133,000 23,550,000 17,632,000
------------ ------------ ------------- -------------
Loss from operations (9,361,000) (8,116,000) (19,669,000) (15,964,000)
Other income (expense):
Interest income 996,000 1,325,000 1,997,000 2,808,000
Interest expense (411,000) (236,000) (800,000) (484,000)
Foreign exchange 7,000 (351,000) (22,000) (585,000)
------------ ------------ ------------- -------------
Other income- net 592,000 738,000 1,175,000 1,739,000
------------ ------------ ------------- -------------
Net loss $ (8,769,000) $ (7,378,000) $ (18,494,000) $ (14,225,000)
============ ============ ============= =============
Net loss per share $ (0.28) $ (0.25) $ (0.60) $ (0.49)
============ ============ ============= =============
Weighted average shares
outstanding 30,916,000 29,089,000 30,871,000 28,949,000
============ ============ ============= =============
See accompanying notes.
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4
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NEUROMEDICAL SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------
1997 1996
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<S> <C> <C>
Operating Activities
Net Loss $ (18,494,000) $ (14,225,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 2,380,000 1,628,000
Foreign exchange (gain) (8,000) --
Amortization of deferred compensation 12,000 --
Changes in operating assets and liabilities:
Increase in accounts receivable (250,000) (227,000)
Decrease in accounts payable (725,000) (490,000)
(Decrease) increase in accrued
liabilities (536,000) 123,000
Decrease (increase) in prepaid
expenses and other assets 320,000 (114,000)
--------------- -------------
Net cash used in operating
activities (17,301,000) (13,305,000)
--------------- -------------
Investing Activities
Purchases of short-term investments (30,182,000) --
Purchases of property and equipment (2,942,000) (5,126,000)
Acquisition of a business (1,564,000) --
--------------- -------------
Net cash used in investing
activities (34,688,000) (5,126,000)
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Financing Activities
Restricted cash 181,000 (1,250,000)
Issuance of common stock 176,000 325,000
Proceeds from notes and bank loans 456,000 595,000
Proceeds from capital lease financing 1,619,000 962,000
Payments of notes and bank loans (758,000) (735,000)
Payments on capital leases (1,132,000) (378,000)
--------------- -------------
Net cash provided by (used in)
financing activities 542,000 (481,000)
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Effect of exchange rate changes on cash 6,000 596,000
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Net (decrease) in cash and cash
equivalents (51,441,000) (18,316,000)
Cash and cash equivalents, beginning of
period 83,391,000 114,143,000
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Cash and cash equivalents, end of period $ 31,950,000 $ 95,827,000
=============== =============
See accompanying notes.
</TABLE>
5
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NEUROMEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1997
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Certain prior year amounts have been
reclassified to conform with the current year presentation. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in the
Neuromedical Systems, Inc. (the "Company" or "NSI") Annual Report on Form 10-K
for the year ended December 31, 1996 (the "1996 Form 10-K"). Operating results
for the interim periods ended June 30, 1997 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1997.
NOTE 2. COMMITMENTS AND CONTINGENCIES
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, alleging
false and misleading advertising, unfair and deceptive trade practices, theft of
trade secrets, unfair competition, interference with relationships and
defamation. On June 23, 1997, the court dismissed the Massachusetts lawsuit on
the basis of lack of jurisdiction. On June 24, 1997, Cytyc reinstituted this
lawsuit against the Company and two of its officers in the United States
District Court for the District of New York, alleging substantially the same
claims as the initial lawsuit. Cytyc is seeking preliminary and permanent
injunctive relief as well as unspecified compensatory damages, including treble
damages. The Company believes that Cytyc'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 likely have a material adverse effect on the
Company's operations, financial position or cash flows, but there can be no
assurance in this regard.
On June 30, 1997, the Company announced that Mark R. Rutenberg submitted his
resignation as President and Chief Executive Officer of the Company. Mr.
Rutenberg will serve as non-executive Chairman of the Board of the Company
until a new CEO and Chairman is selected. Subsequently, it is anticipated that
Mr. Rutenberg will become
6
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NEUROMEDICAL SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited) -- (Continued)
non-executive Vice-Chairman of the Board of the Company. Until a new CEO is
selected, the Office of the Chief Executive will be filled jointly by Uzi Ish-
Hurwitz and John B. Henneman, III. The Board of Directors has directed and
empowered Mr. Ish-Hurwitz and Mr. Henneman to move forward on all key
initiatives.
In connection with the resignation of Mark Rutenberg as President and CEO of the
Company, the Company entered into a revised and restated employment agreement
with Mr. Rutenberg on June 29, 1997 (the "Revised Agreement") which will remain
effective until November 19, 1998. The material provisions of the Revised
Agreement provide for Mr. Rutenberg's continuation of employment with the
Company and participation in the Company's executive benefit plans. In
addition, the Revised Agreement provides for a non-recourse loan to Mr.
Rutenberg from the Company in an amount of $600,000 which shall be secured by
his pledge of 100,000 shares of Company common stock. The loan is repayable on
the earlier of November 30, 1999 or the date which is ten days after termination
of his employment for any reason. The Revised Agreement may be terminated for
"Cause" (as defined in the Revised Agreement) or by either party to the Revised
Agreement upon thirty days written notice. The Revised Agreement provides that
in the event of his voluntary termination prior to November 19, 1998 or if
terminated for Cause, Mr. Rutenberg shall receive $598,000; and if terminated
for reasons other than Cause, he shall receive in addition to such amount, the
equivalent of his remaining base salary as measured from such termination date
until the expiration date of the Revised Agreement. The options held by Mr.
Rutenberg to purchase Company stock have also been extended so as to expire
eight and one-half years after the expiration date of the Revised Agreement,
subject to the terms of such stock options as of the execution date of the
Revised Agreement. In connection with the extension of the options, the Company
will record a non-cash expense of $781,000 over the term of the Revised
Agreement.
7
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company's principal activities since its founding in 1988 have been research
and product and organizational development. The Company was established to
develop, manufacture and market systems for computer-assisted screening of
cervical Papanicolaou ("Pap") smears and other cytological specimens. The
Company's revenues have been derived primarily from (i) sales of PAPNET(R)
testing services, (ii) sales of license agreements (prior to 1992) to the
Company's territorial licensees ("Licensees") and (iii) interest income.
The PAPNET(R) Testing System was approved by the United States Food and Drug
Administration (the "FDA") for commercial use in the United States on November
8, 1995. Prior to that time, the PAPNET(R) Testing System was permitted to be
utilized in the United States on an investigational basis only, and the Company
was permitted to derive revenue with respect thereto only to recover certain of
its costs. The Company, however, was previously selling PAPNET(R) testing
services for commercial use outside of the United States. The Company has
established three scanning facilities (the "Scanning Centers"), one each in the
United States, The Netherlands and Hong Kong. The Netherlands operation has
scanned slides primarily from customers in Europe while the Hong Kong operation
has scanned slides from Asia and Australia. See Note 5 of Notes to Consolidated
Financial Statements for the year ended December 31, 1996 for information
regarding the Company's revenues, net loss and identifiable assets by geographic
area.
The Company has incurred net losses since inception through June 30, 1997 of
$113,002,000 and has to date generated only limited commercial revenues. Since
the approval of the PAPNET(R) Testing System by the FDA, the Company has been
increasing the scale of its operations to commercial levels in the United
States. Management of the Company believes that its existing cash resources
will be sufficient to fund the increase in the scale of the Company's operations
and to meet its cash requirements through 1998, although there can be no
assurance in this regard. The Company's past results of operations reflect its
developmental or early commercial stage and are not necessarily indicative of
the results from operations that may be expected as the scale of its operations
increases.
RESULTS OF OPERATIONS
The Company's results of operations have fluctuated significantly from year to
year and quarter to quarter, principally due to variations in the level of
expenditures relating to its clinical trials, research projects, marketing and
sales programs and international expansion. The Company's results of operations
are expected to continue to fluctuate significantly and may continue to result
in substantial losses.
8
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From inception through June 30, 1997, the Company has experienced negative gross
margins due to the significant under-utilization of its scanning and
manufacturing operations which occurred as a result of the need to establish
these capabilities prior to FDA approval and the anticipated demand resulting
from expansion of the Company's marketing and sales activities since such
approval. Improvement in the Company's future gross margins will be dependent
upon the level of commercial acceptance of the PAPNET(R) Testing System.
The Company expects that its costs and expenses will increase substantially
during 1997, compared to 1996, as the Company continues to expand its commercial
operations, including its marketing, sales, manufacturing, slide processing,
research and administrative activities, to meet the anticipated increase in
market demand for PAPNET(R) testing, expand its clinical claims and develop
enhancements to the PAPNET(R) Testing System and to fund the acquisition and
expected losses of New System International, Ltd. acquired in June 1997. In
addition, royalty payments will increase proportionate to increases in the
Company's revenues in the sales territories of the Licensees.
To establish PAPNET(R) testing in the United States as the standard of care in
Pap smear analysis, the Company is executing a three-step sequential marketing
approach that targets (i) its direct clients, the clinical laboratories that
perform Pap smear testing, (ii) gynecologists and those primary care physicians
and other clinicians who take Pap smears and can order PAPNET(R) testing and
(iii) women, to encourage them to request PAPNET(R) testing or to agree to it if
it is recommended by a clinician. The Company believes that significant revenue
growth in the United States depends upon effective marketing to all three target
audiences.
The Company's sales and marketing efforts to date in the United States have
generated considerable awareness about PAPNET(R) testing among pathologists,
cytotechnologists, gynecologists and women. The Company believes support and
interest has been highest among women. Medical specialities, however, are often
reluctant to change clinical practice methods and procedures, and early stage
resistance is being experienced in the adoption of PAPNET(R) testing. Among
gynecologists and pathologists there has been, in general, a slow adoption of
the PAPNET(R) 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(R)
testing 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 six months of 1997, the Company initiated
medical and other communications designed to address each of these
considerations.
During 1997 the Company continued its efforts to accelerate the medical
acceptance and commercial success of PAPNET (R) testing. In July 1997, the
Company announced that it is establishing an advisory board of leading
pathologists to advise the Company on medical communications, product
development and clinical trials. The Company
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believes this is an important step toward including members of the pathology
community in the Company's product planning and communications efforts. The
Pathology Advisory Board will be comprised of several leading pathologists from
highly regarded institutions across the United States and chaired by a leading
academic pathologist. The role of the Pathology Advisory Board will be to focus
on building advocacy within the professional communities, to advise the Company
on product development and clinical trials, and otherwise to accelerate the
adoption of the PAPNET(R) test.
In July 1997, the Company also announced it had formed a Laboratory Support
Group to focus and improve customer support and service. The Laboratory Support
Group includes cytotechnologists to work with the laboratory professionals
directly performing the PAPNET(R) test, and engineers to help laboratories
integrate PAPNET(R) testing into their routine flow of work. The ultimate
objective is to improve customer satisfaction throughout the laboratory
organization.
During the second quarter of 1997, the Company received smears directly from 138
laboratories in the United States. This represents an increase of ten direct
laboratory customers over the first quarter of 1997. (In addition there are
approximately 120 laboratories that can refer smears for PAPNET(R) testing if
requested by their customers.) NSI also continued to expand its international
laboratory distribution. During the second quarter of 1997, the Company
received smears for PAPNET(R) testing from 48 laboratories in Europe and South
Africa and 11 laboratories in Australia. In Asia, the Company continued to
expand its business in Hong Kong, and mainland China through the acquisition in
June 1997 of New System International, Ltd. During the quarter, the Company
received slide processing revenue from 47 laboratories and hospitals in Hong
Kong, Taiwan and mainland China.
Interest expense is expected to increase in the future as the Company borrows to
fund expansion of its manufacturing, slide processing and marketing
capabilities, including the installation of additional PAPNET(R) Scanning
Stations at the Company's Scanning Centers. It is expected that this increase
will continue to be substantially offset during 1997 by interest income from the
investment of the Company's cash. The Company expects that its interest income
will decline in 1997, compared to 1996, because of the significant use of cash
in 1996 and the anticipated use of cash in 1997.
The impact of inflation and changing prices on the Company's revenues and costs
has not been significant.
Results For the Second Quarter Ending June 30, 1997 and 1996
Revenues for the second quarter of 1997 were $2,230,000, an increase of 119%
from $1,017,000 during the second quarter of 1996. Of such revenues, $2,149,000
represented per slide charges for the screening of Pap smears, and the balance
of such revenues represented the sale or rental payments for PAPNET(R) Review
Stations. The revenue increase over the second quarter of 1996 was due to a
significant increase in unit volume, average unit pricing, additional revenues
from the sale or rental of Review Stations and
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the acquisition of New System International, Ltd.
Unit volume during the second quarter of 1997, compared to the second quarter of
1996, increased in all of the Company's major markets including the United
States, Asia, Australia and Europe and accounted for approximately 49% of the
revenue increase between the periods. For United States operations (which
include Canada and South America), unit volume increased 136% over the second
quarter of 1996. In International markets, unit volume increased 25% over the
second quarter of 1996. Average unit pricing in the second quarter of 1997
increased by approximately 36% over the second quarter of 1996 due to a higher
proportion of slide volume being generated in the United States and accounted
for approximately 42% of the increase. Finally, the combined impact of the
acquisition of New System International, Ltd. and higher revenue from the sale
or rental of review stations accounted for the remaining 9% of the worldwide
revenue increase.
Total costs and expenses for the quarter ended June 30, 1997 were $11,591,000,
an increase of $2,458,000 over the second quarter of 1996. This increase was
due primarily to an increase in marketing and sales and research and development
expenses and to an increase in cost of sales, primarily associated with
increased royalty expenses and the expansion of slide processing and
manufacturing capacity in anticipation of increased future demand for PAPNET(R)
testing.
Sales and marketing expenses increased to $4,833,000 during the second quarter
of 1997 from $3,856,000 during the second quarter of 1996, an increase of
$977,000. The increase in sales and marketing expenses was due primarily to
costs associated with marketing the PAPNET(R) Testing System in the United
States, including salaries for additional personnel and advertising and
promotion costs of the PAPNET(R) Testing System, and to expanded sales and
marketing operations in international markets.
The Company's cost of sales increased to $2,659,000 in the second quarter of
1997, compared to $1,933,000 during the second quarter of 1996, an increase of
$726,000. This increase was primarily associated with increased royalty
expenses and the expansion of the Company's slide processing and manufacturing
capacity. The increase in royalty expenses was the result of increases in the
Company's revenues in the sales territories of the Licensees during 1997. Slide
processing costs increased in 1997, compared to the second quarter of 1996, due
to the establishment of the Company's new 26,500 square foot scanning center in
New Jersey in October, 1996 and the additional cost of increased depreciation
and other costs at the Company's three slide processing facilities.
Manufacturing costs increased due to the physical expansion of the Company's
manufacturing facility in late 1996 and expansion of manufacturing capacity and
related overhead.
The Company's research and development expenses increased to $2,041,000 in the
second quarter 1997, from $1,529,000 in the second quarter of 1996. This
increase was due primarily to the expansion of the product development and
medical organizations of the Company to support expanded clinical claims and
indications and future
11
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enhancements of the PAPNET(R) Testing System.
The Company's general and administrative expenses also increased in the second
quarter 1997, compared to the second quarter of 1996, although at a slower rate
than other expenses. General and administrative expenses were $2,058,000 during
the second quarter of 1997 compared to $1,815,000 during the second quarter of
1996. This increase was due primarily to the expansion of the administrative
infrastructure of the Company to support expanded commercial activities in both
the United States and international markets.
Interest income for the second quarter ended June 30, 1997 was $996,000 compared
to $1,325,000 during the second quarter of 1996. This decrease was due
primarily to the lower level of cash, cash equivalents and short term
investments available to the Company during the second quarter of 1997 as a
result of the Company's continuing losses in 1996 and the first six months of
1997.
Interest expense during the second quarter of 1997 was $411,000 compared to
$236,000 during the second quarter of 1996. This increase was due to higher
average levels of debt and capital lease obligations, which the Company entered
into in late 1996 and 1997, incurred to finance capital equipment additions,
primarily related to the Company's PAPNET(R) Scanning Stations. The Company
anticipates higher levels of interest expense in 1997 resulting from increased
levels of debt and capital lease obligations.
The Company incurred a net loss during the second quarter of 1997 of $8,769,000,
or $0.28 per share, compared to a net loss of $7,378,000, or $0.25 per share
during the second quarter of 1996. The increased net loss during the second
quarter of 1997 was due to the factors discussed above.
Results For the Six Month Period Ending June 30, 1997 and 1996
Revenues for the six month period ending June 30, 1997 were $3,881,000, an
increase of 133% from $1,668,000 during the same period of 1996. The revenue
increase over the corresponding period of 1996 was due to a significant increase
in both unit volume and average unit pricing, additional revenues from the sale
or rental of Review Stations and the acquisition of New System International,
Ltd. in June 1997.
Unit volume during the first six months of 1997, compared to the same period of
1996, increased in all of the Company's major markets including the United
States, Asia, Australia and Europe and accounted for approximately 51% of the
revenue increase. For United States operations (includes Canada and South
America), unit volume increased 148% over the same period of 1996. In
international markets, unit volume increased 37% over 1996. Average unit
pricing during the first six months of 1997 increased by approximately 37% over
the same period of 1996 and accounted for approximately 41% of the increase due
to a higher proportion of slide volume being generated in the United States.
Finally, the combined impact of the acquisition of New System International,
Ltd. and higher revenue from the sale or rental of review stations accounted for
the remaining
12
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8% of the worldwide revenue increase.
Total costs and expenses for the period ended June 30, 1997 were $23,550,000, an
increase of $5,918,000 over the same period of 1996. This increase was due
primarily to an increase in marketing and sales expenses, research and
development expenses and cost of sales, primarily associated with increased
royalty expenses and the expansion of slide processing capacity in the United
States in anticipation of increased future demand for PAPNET(R) testing.
Sales and marketing expenses increased to $10,311,000 during 1997 from
$7,373,000 during the same period of 1996, an increase of $2,938,000. The
increase in sales and marketing expenses was due primarily to costs associated
with marketing the PAPNET(R) Testing System in the United States, including
salaries for additional personnel and advertising and promotion costs of the
PAPNET(R) Testing System, and to expanded sales and marketing operations in
international markets.
The Company's cost of sales increased to $5,252,000 in 1997, compared to
$3,624,000 during the same period of 1996, an increase of $1,628,000. As was
the case for the quarter, this increase was primarily associated with increased
royalty expenses and the expansion of the Company's slide processing and
manufacturing capacity.
The Company's research and development expenses increased to $3,989,000 in 1997,
from $3,079,000 during the same period of 1996. This increase was due primarily
to the expansion of the product development and medical organizations of the
Company to support expanded clinical claims and indications and future
enhancements of the PAPNET(R) Testing System.
The Company's general and administrative expenses also increased during 1997,
compared to the same period of 1996, although at a slower rate than other
expenses. General and administrative expenses were $3,998,000 during the first
six months of 1997 compared to $3,556,000 in the same period of 1996. This
increase was due primarily to the expansion of the administrative infrastructure
of the Company to support expanded commercial activities in both the United
States and international markets.
Interest income for the six month period ended June 30, 1997 was $1,997,000
compared to $2,808,000 during the same period of 1996. This decrease was due
primarily to the lower level of cash, cash equivalents and short term
investments available to the Company during 1997 as a result of the Company's
continuing losses in 1996 and the first six months of 1997.
Interest expense during the first six months of 1997 was $800,000 compared to
$484,000 during the same period 1996. As was the case for the second quarter of
1997, this increase was due to higher average levels of debt and capital lease
obligations incurred to finance capital equipment additions.
The Company incurred a net loss during the first six months of 1997 of
$18,494,000, or
13
<PAGE>
$0.60 per share, compared to a net loss of $14,225,000, or $0.49 per share
during the same period 1996. The increased net loss was due to the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since its inception primarily by the
issuance of equity securities, sales of PAPNET(R) Testing System services, funds
received for the territorial license agreements (prior to 1992), interest earned
on cash, cash equivalents and short-term investments and proceeds from notes,
bank loans and equipment leasing arrangements.
The Company's combined cash and cash equivalents, excluding short term
investments of $30,182,000, totaled $31,950,000 at June 30, 1997, a decrease of
$51,441,000 from December 31, 1996. During the first six months of 1997, the
Company used $17,301,000 for operating activities, $34,688,000 for investing
activities, including the purchase of $30,182,000 of short term investments,
while generating $542,000 from financing activities. In addition, the effect of
exchange rate changes on cash was $6,000, which accounted for the remaining
change to the Company's cash balance.
The primary uses of cash and cash equivalents during the first six months of
1997 were $18,494,000 (inclusive of $2,384,000 of non-cash expenses) to finance
the Company's net loss, $30,182,000 to purchase short term investments,
$2,942,000 to purchase capital equipment, primarily for the manufacture of
PAPNET(R) Scanning Stations and related equipment to support the expansion of
the Company's scanning capacity, $1,564,000 to acquire New Systems
International, Ltd., $1,890,000 to repay notes, bank loans and capital lease
obligations, and $1,191,000 for changes in operating assets and liabilities.
The sources of cash and cash equivalents during the first six months of 1997
were proceeds of $456,000 from notes and bank loans, proceeds of $1,619,000 from
capital lease financing transactions (sale/leaseback), a reduction in restricted
cash of $181,000 and proceeds of $176,000 from the issuance of common stock,
associated with the exercise of stock options.
The Company anticipates that its use of cash will be substantial for the
foreseeable future. In particular, the Company anticipates that expenditures
during the balance of 1997 will continue to be significant due to the cost of
marketing the PAPNET(R) Testing System in the United States, the cost of
marketing and sales programs in overseas markets, and research and development
programs for additional clinical indications and claims. The Company
anticipates that, during 1997, it will invest approximately $4.0 million for
working capital purposes and approximately $7.0 million for capital expenditures
and leasehold improvements and the acquisition cost of New System International,
Ltd. Although funding for capital expenditures is expected to be available out
of the Company's cash resources, management of the Company believes that it may
be desirable for the Company to finance certain of such capital expenditures
through additional debt or capital lease obligations.
14
<PAGE>
During 1996 and 1997, the Company entered into loan and equipment lease
agreements with two equipment financing companies to provide the Company with
approximately $11.0 million of lines of credit to finance certain of the
Company's equipment purchases. During 1996 and 1997, the Company borrowed
approximately $6.8 million under the agreements. The Company is required to
maintain certain financial covenants throughout the duration of both the loan
and lease agreements. The agreements stipulate that additional funding can be
denied in the event of a material adverse change in the financial condition,
operation or prospects of the Company. The loan and lease commitments expire on
December 31, 1997. There can be no assurance, however, that these financings,
or any other financings, will ultimately be obtained by the Company or, if they
are obtained, that the terms thereof will not change or will be reasonable.
The Company anticipates that its current cash and cash equivalents will be
sufficient to enable the Company to meet its future operating requirements
through 1998. The Company does not expect to generate a positive internal cash
flow in the foreseeable future due to the continued capital expenditures,
working capital requirements and ongoing losses during the next year, including
the expected cost of continued commercialization of the PAPNET(R) Testing
System. The Company may need to arrange additional equity or debt financing for
the future operation of its business. There can be no assurance that such
financing can be obtained or, if it is obtained, that the terms thereof will be
reasonable. The Company plans to invest excess funds in short-term instruments,
including money market funds.
On June 30, 1997, the Company announced that Mark R. Rutenberg submitted his
resignation as President and Chief Executive Officer of the Company. Mr.
Rutenberg will serve as non-executive Chairman of the Board of the Company
until a new CEO and Chairman is selected. Subsequently, it is anticipated that
Mr. Rutenberg will become non-executive Vice-Chairman of the Board of the
Company. Until a new CEO is selected, the Office of the Chief Executive will be
filled jointly by Uzi Ish-Hurwitz and John B. Henneman, III. The Board of
Directors has directed and empowered Mr. Ish-Hurwitz and Mr. Henneman to move
forward on all key initiatives.
In connection with the resignation of Mark Rutenberg as President and CEO of the
Company, the Company entered into a revised and restated employment agreement
with Mr. Rutenberg on June 29, 1997 (the "Revised Agreement") which will remain
effective until November 19, 1998. The material provisions of the Revised
Agreement provide for Mr. Rutenberg's continuation of employment with the
Company and participation in the Company's executive benefit plans. In
addition, the Revised Agreement provides for a non-recourse loan to Mr.
Rutenberg from the Company in an amount of $600,000 which shall be secured by
his pledge of 100,000 shares of Company common stock. The loan is repayable on
the earlier of November 30, 1999 or the date which is ten days after termination
of his employment for any reason. The Revised Agreement may be terminated
15
<PAGE>
for "Cause" (as defined in the Revised Agreement) or by either party to the
Revised Agreement upon thirty days written notice. The Revised Agreement
provides that in the event of his voluntary termination prior to November 19,
1998 or if terminated for Cause, Mr. Rutenberg shall receive $598,000; and if
terminated for reasons other than Cause, he shall receive in addition to such
amount, the equivalent of his remaining base salary as measured from such
termination date until the expiration date of the Revised Agreement. The options
held by Mr. Rutenberg to purchase Company stock have also been extended so as to
expire eight and one-half years after the expiration date of the Revised
Agreement, subject to the terms of such stock options as of the execution date
of the Revised Agreement. In connection with the extension of the options, the
Company will record a non-cash expense of $781,000 over the term of the Revised
Agreement.
In an agreement effective as of June 1, 1997, the Company acquired New System
International, Ltd., a Hong Kong corporation. New System International was the
operating subsidiary of Papnet (Far East) Ltd. a Hong Kong corporation ("PFEL"),
a distributor of the Company's PAPNET(R) Testing System in Hong Kong and China.
More than 40 hospitals and gynecology clinics in China are currently New System
International clients, and they are expected to process all of their outpatient
Pap smear slides with PAPNET(R) testing. New System International began
marketing Neuromedical's PAPNET(R) Testing System in 1994 and currently has
operations in Hong Kong and China. In addition to its Hong Kong office, New
System International established offices in Beijing in July 1995 and recently
opened offices in Shanghai, Guangzhou, Nanjing and Lanzhou. New System
International also provides clinical laboratory services through its Hong Kong-
based Compuscreen Medical Diagnostic Centre, a laboratory customer of
Neuromedical Systems. During the second quarter of 1997, the Company acquired
New System International, Ltd. for a net cost of $1,564,000. Dr. Stephen Ng,
M.D., the president and a member of the board of directors of PFEL, was also a
member of the Company's board of directors from 1994 until the Company's Annual
Meeting of Stockholders on May 15, 1997 when his term of office expired. Dr. Ng
served as president of New System International, Ltd. prior to its acquisition
and the Company expects to shortly enter into an employment agreement providing
for his continuation in such capacity. As part of the acquisition of New System
International, Ltd., the Company expects to receive, during the third quarter of
1997, $800,000 from PFEL for the right to participate in a royalty of 3% to 4%
based on sales in Hong Kong, China and Taiwan over a 15 year period (the "PFEL
Royalty Agreement").
The Company has also reached an agreement in principal for the acquisition of
the business of the Taiwan PAPNET(R) distributor for a purchase price of
$391,000 which the Company expects to complete during the third quarter of 1997.
Upon completion of the Hong Kong and Taiwan acquisitions, and the execution of
the PFEL Royalty Agreement, the net aggregate purchase price for the
acquisitions is estimated to be $1,155,000 plus future royalty payments of 3% to
4% of revenue from Hong Kong, China and Taiwan. The Company expects that it
will invest additional cash in New System International and the Taiwan business
to fund operations and expansion of their respective marketing and sales
programs.
To date, the Company has not implemented a program to hedge its foreign currency
risk, but may do so in the future.
16
<PAGE>
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, alleging
false and misleading advertising, unfair and deceptive trade practices, theft of
trade secrets, unfair competition, interference with relationships and
defamation. On June 23, 1997, the court dismissed the Massachusetts lawsuit on
the basis of lack of jurisdiction. On June 24, 1997, Cytyc reinstituted this
lawsuit against the Company and two of its officers in the United States
District Court for the District of New York, alleging substantially the same
claims as the initial lawsuit. Cytyc is seeking preliminary and permanent
injunctive relief as well as unspecified compensatory damages, including treble
damages. The Company believes that Cytyc'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 likely have a material adverse effect on the
Company's operations, financial position or cash flows, but there can be no
assurance in this regard. The Cytyc lawsuit against the Company was previously
reported in the Company's Form 10-Q for the period ending March 31, 1997.
The Company is a defendant in a civil lawsuit brought by Herbst et al.
("Herbst") and also a defendant in a patent infringement lawsuit filed by
NeoPath, Inc. ("NeoPath"). Each of these lawsuits have been disclosed in the
Company's Form 10-Q for the period ending March 31, 1997 and no material
developments have occurred since that filing with the Securities and Exchange
Commission. The Company intends to continue to vigorously defend each of these
actions. The Company believes that, in any event, the damages claimed in the
Herbst case bear no relation to the harm alleged, and the Company also believes
that NeoPath's claims are without merit. The Company believes that an adverse
judgment in either or both of these cases would not have a material adverse
effect on the Company's operations, financial position or cash flows.
On July 15, 1996, the Company filed a lawsuit against NeoPath for patent
infringement and additional claims related to unfair business practices.
NeoPath has filed counter-claims against the Company seeking damages and
injunctive relief for false advertising and unfair competition. This lawsuit
has been disclosed in the Company's Form 10-Q for the period ending March 31,
1997 and no material developments have occurred since that filing with the
Securities and Exchange Commission. The Company believes that NeoPath's
counter-claim assertions are without merit. Although the duration, costs and
ultimate outcome of this lawsuit are unknown, the Company expects that the costs
of pursuing this lawsuit will be significant during 1997.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
See Management's Discussion and Analysis of Financial Condition and
Results of Operation in Part I herein for disclosure concerning legal
17
<PAGE>
proceedings, which information is incorporated herein by reference
thereto.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults upon Senior Securities.
Not applicable.
18
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Stockholders of the Company, held on May 15, 1997, the
following matters were submitted to a vote of the holders of the Company's
common stock, $.0001 par value per share:
1. For the following persons to serve as directors of the Company
until the year 2000 Annual Meeting of Stockholders and until their respective
successors are duly elected and qualified:
For Election Withheld Total
Stuart M. Essig 21,054,526 46,064 21,100,590
C. Raymond Larkin, Jr. 21,054,526 46,064 21,100,590
No broker non-votes were submitted in the election balloting for the
foregoing directors, nor were any abstentions received or recorded.
2. To ratify the appointment of Ernst & Young LLP by the Board of
Directors as independent public accountants to audit the books and records of
the Company for the fiscal year ending December 31, 1997:
For the Against the
Total Votes Resolution Resolution Abstaining
21,100,590 21,072,377 22,203 6,010
In addition to the foregoing directors duly elected at the Annual
Meeting of Stockholders, the following directors are continuing in their
capacity as directors of the Company for their respective terms of office: Mark
R. Rutenberg, Chairman, Carl Genberg, Dr. Arthur L. Herbst, Uzi Ish-Hurwitz and
Elizabeth Cogan Fascitelli.
19
<PAGE>
Item 5. Other Information.
MANAGEMENT CHANGES
On June 30, 1997, the Company announced that Mark R. Rutenberg submitted his
resignation as President and Chief Executive Officer of the Company. Mr.
Rutenberg will serve as non-executive Chairman of the Board of the Company
until a new CEO and Chairman is selected. Subsequently, it is anticipated that
Mr. Rutenberg will become non-executive Vice-Chairman of the Board of the
Company.
Until a new CEO is selected, the Office of the Chief Executive will be filled
jointly by Uzi Ish-Hurwitz and John B. Henneman, III. The Board of Directors
has directed and empowered Mr. Ish-Hurwitz and Mr. Henneman to move forward on
all key initiatives.
Mr. Ish-Hurwitz, who joined the Company in April 1993, is Executive Vice-
President and Chief of Technical Operations of the Company and President of
Neuromedical Systems Israel, Ltd., a subsidiary of the Company. Mr. Ish-Hurwitz
is a member of the Board of Directors. Prior to joining NSI, Mr. Ish-Hurwitz
was the co-founder of Indigo Graphic Systems, Ltd. (Israel), and served as its
President from 1987-1992. From 1973 to 1985, he served as Vice President -
Operations of Scitex Corporation, Ltd.
Mr. Henneman is Vice President of Corporate Development, General Counsel and
Secretary of the Company and joined the Company in February 1994. Prior to
joining NSI, Mr. Henneman practiced as a corporate and securities attorney with
the law firm of Latham & Watkins in Chicago for more than seven years.
ACQUISITION OF NEW SYSTEM INTERNATIONAL, LTD.
In an agreement effective as of June 1, 1997, the Company acquired New System
International, Ltd., a Hong Kong corporation. New System International was the
operating subsidiary of Papnet (Far East) Ltd. a Hong Kong corporation ("PFEL"),
a distributor of the Company's PAPNET(R) Testing System in Hong Kong and China.
More than 40 hospitals and gynecology clinics in China are currently New System
International clients, and they are expected to process all of their outpatient
Pap smear slides with PAPNET(R) testing. New System International began
marketing Neuromedical's PAPNET(R) Testing System in 1994 and currently has
operations in Hong Kong and China. In addition to its Hong Kong office, New
System International established offices in Beijing in July 1995 and recently
opened offices in Shanghai, Guangzhou, Nanjing and Lanzhou. New System
International also provides clinical laboratory services through its Hong Kong-
based Compuscreen Medical Diagnostic Centre, a laboratory customer of
Neuromedical Systems. During the second quarter of 1997, the Company acquired
New System International, Ltd. for a net cost of $1,564,000. Dr. Stephen Ng,
M.D., the president and a member of the board of directors of PFEL, was also a
member of the Company's board of directors from 1994 until the Company's Annual
Meeting of Stockholders on May 15, 1997 when his term of office expired. Dr. Ng
served as president of New System International, Ltd. prior to its acquisition
and the Company
20
<PAGE>
expects to shortly enter into an employment agreement providing for his
continuation in such capacity. As part of the acquisition of New System
International, Ltd., the Company expects to receive, during the third quarter of
1997, $800,000 from PFEL for the right to participate in a royalty of 3% to 4%
based on sales in Hong Kong, China and Taiwan over a 15 year period (the "PFEL
Royalty Agreement").
The Company has also reached an agreement in principal for the acquisition of
the business of the Taiwan PAPNET(R) distributor for a purchase price of
$391,000 which the Company expects to complete during the third quarter of 1997.
Upon completion of the Hong Kong and Taiwan acquisitions, and the execution of
the PFEL Royalty Agreement, the net aggregate purchase price for the
acquisitions is estimated to be $1,155,000 plus future royalty payments of 3% to
4% of revenue from Hong Kong, China and Taiwan. The Company expects that it
will invest additional cash in New System International and the Taiwan business
to fund operations and expansion of their respective marketing and sales
programs.
21
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit
Number Exhibit
------- -------
10.30 Restated Agreement between the Company and
Mark R. Rutenberg, dated June 29, 1997
10.31 Secured Non-Recourse Promissory Note between
the Company and Mark R. Rutenberg, dated July
9, 1997
11.0 Statement Regarding Computation of Per Share
Earnings
27.1 Financial Data Schedule*
99.1 Cautionary Statement for Purposes of the Safe
Harbor Provisions of the Private Securities
Litigation Reform Act of 1995**
* Previously filed as an exhibit to the Form 8-K filed by
the Company with the Commission on July 31, 1997 and
incorporated herein by reference thereto.
** Previously filed as an exhibit to the Company's 1996
Annual Report on Form 10-K and incorporated herein by
reference thereto.
(b) Reports on Form 8-K during the quarter for which this
report is filed:
May 1, 1997
June 30, 1997
22
<PAGE>
Safe Harbor Statement
Statements in this Form 10-Q, including but not limited to the Management
Discussion and Analysis of Financial Condition and Results of Operations, which
are not historical facts, including statements about the Company's confidence
and strategies and its expectations about demand for and acceptance of the
PAPNET(R) Testing System, are forward looking statements that involve risks and
uncertainties. The forward looking statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially due to a variety of factors which include,
but are not limited to, 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 both products and advertising,
limited marketing and sales history, the impact of third-party reimbursement
decisions, risk of litigation and other risks detailed in the Company's
Securities and Exchange Commission filings, including its 1996 Form 10-K and
Exhibit 99.1 attached thereto.
23
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, a duly authorized officer and the Company's principal financial
officer.
NEUROMEDICAL SYSTEMS, INC.
Dated: August 8, 1997 By: /s/ David Duncan, Jr.
David Duncan, Jr.
Vice President, Finance and
Administration, Chief Financial
Officer
24
<PAGE>
Exhibit 10.30
RESTATED
EMPLOYMENT AGREEMENT
--------------------
RESTATED AGREEMENT, dated this 29th day of June, 1997, by and between
NEUROMEDICAL SYSTEMS, INC., a Delaware corporation with principal executive
offices at Two Executive Boulevard, Suffern, New York 10901-4114 ("NSI"), and
MARK R. RUTENBERG, ("Rutenberg").
W I T N E S S E T H :
WHEREAS, Rutenberg has been employed by NSI as its President,
Chief Executive Officer and Chairman of the Board pursuant to an employment
agreement dated as of November 19, 1993, as amended October 25, 1995 (the
"Original Employment Agreement"); and
WHEREAS, by mutual agreement between NSI and Rutenberg, Rutenberg
has resigned from his positions as President and Chief Executive Officer
effective as of June 27, 1997 (the "Restatement Date"); and
WHEREAS, the parties desire to restate the Original Employment
Agreement to set forth the nature of their relationship and the compensation and
benefits to be provided to Rutenberg from the Restatement Date until the
expiration of the Restated Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, the parties hereto, intending to be legally bound,
agree as follows:
<PAGE>
1. EMPLOYMENT.
----------
NSI agrees to employ Rutenberg, and Rutenberg agrees to be
employed by NSI, upon the terms and subject to the conditions of this Restated
Agreement.
2. TERM.
----
The employment of Rutenberg by NSI as provided in Section 1 will
be for the period from the Restatement Date until November 19, 1998 (the
"Term"). The Company and Rutenberg may mutually agree to extend the term. As
used herein, the word "Term" shall include any such extension. The Term shall
expire upon the termination of Rutenberg's employment as provided herein.
3. DUTIES; BEST EFFORTS; INDEMNIFICATION.
-------------------------------------
(a) Effective as of the Restatement Date, Rutenberg hereby
confirms his resignation from his positions as President and Chief Executive
Officer of the Company and hereby resigns, effective as of the Restatement Date,
as an employee, officer or director of each of its affiliates, except as
provided herein. From and after the Restatement Date and until NSI appoints a
new Chief Executive Officer and a new Chairman (which may be the same person),
Rutenberg shall serve as Chairman of the Board of Directors of NSI (the "Board")
and, upon such appointment of a new Chief Executive Officer and Chairman,
Rutenberg shall serve as Vice-Chairman of the Board. In each case, Rutenberg
shall serve as a non-executive employee and shall perform, under the supervision
and control of the Board or the Chief Executive Officer of NSI, only such
assignments as may reasonably and specifically be assigned to him by the Board
or the Chief Executive Officer of NSI from time to time. In addition, until such
time as the Board determines otherwise, Rutenberg shall serve as the Chairman of
the Board of Directors of Neuromedical Systems Israel, Ltd. ("NSIL").
(b) Rutenberg will remain as a member of the Board following the
Restatement Date and, provided Rutenberg's employment has not terminated for any
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<PAGE>
reason as of the date of the 1998 annual meeting of stockholders (the "1998
Meeting"), NSI agrees to renominate Rutenberg for election at the 1998 Meeting
for a three (3) year term. If Rutenberg voluntarily terminates his employment
prior to the expiration of the Term, he shall resign as a director of the
Company.
(c) Rutenberg shall devote such portion of his business time,
attention and energies as may be necessary to perform his duties hereunder and
shall use his best efforts to advance the best interests of NSI and shall not
during the Term be actively engaged in any other business activity, which would
materially interfere with the performance of his duties hereunder, whether or
not such business activity is pursued for gain, profit or other pecuniary
advantage.
(d) Subject to the provisions of NSI's Certificate of
Incorporation and Bylaws, each as amended from time to time, NSI shall indemnify
Rutenberg to the fullest extent permitted by the General Corporation Law of the
State of Delaware, as amended from time to time, for all amounts (including,
without limitation, judgments, fines, settlement payments, expenses and
attorney's fees) incurred or paid by Rutenberg in connection with any action,
suit, investigation or proceeding arising out of or relating to the performance
by Rutenberg of services for, or the acting by Rutenberg as a director, officer
or employee of, NSI, or any other person or enterprise at NSI's request;
provided, however, that NSI shall not be required to indemnify Rutenberg against
- -------- -------
any liability resulting from conduct which is willful, intentional or grossly
negligent. NSI shall use its best efforts to obtain and maintain in full force
and effect during the Term directors' and officers' liability insurance policies
providing full and adequate protection to Rutenberg for his capacities, provided
that the Board shall have no obligation to purchase such insurance if, in its
opinion, coverage is available only on unreasonable terms.
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<PAGE>
4. PLACE OF PERFORMANCE.
--------------------
In connection with his employment by NSI, during the Term,
Rutenberg shall be provided, at NSI's expense (which expense shall be approved
in advance by the Board) (a) at Rutenberg's election, with an office at NSI's
New Jersey facility or an office not located in any NSI facility or in the same
building as an NSI facility (an "Offsite Office"), provided that, if Rutenberg
elects to have an office at NSI's New Jersey facility, the Board may, at any
time in its discretion, require Rutenberg to have an Offsite Office, (b) with an
office at NSIL's facility in Israel and (c) the services of one (1) full-time
assistant. Rutenberg shall vacate NSI's principal executive offices within two
(2) weeks of the Restatement Date.
5. COMPENSATION AND BENEFITS.
-------------------------
(a) Base Salary. NSI shall pay to Rutenberg for his employment
-----------
during the Term a base salary (the "Base Salary") at a rate of $200,000 per
annum, payable in accordance with NSI's ordinary payroll practices as in effect
from time to time.
(b) Bonus. In addition to and separate from the Base Salary,
-----
Rutenberg shall be eligible for an annual bonus in an amount to be determined in
the sole discretion of the Board and subject to performance objectives
established by the Board.
(c) Out-of-Pocket Expenses. NSI shall promptly pay to Rutenberg
----------------------
the reasonable expenses (not in excess of $75,000 in any twelve (12) month
period) incurred by him in the performance of his duties hereunder, including,
without limitation, those incurred in connection with business related travel or
entertainment, or, if such expenses are paid directly by Rutenberg, shall
promptly reimburse him for such payment, provided that in either case Rutenberg
properly accounts therefor in accordance with NSI's policy.
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<PAGE>
(d) Participation in Benefit Plans. During the Term, Rutenberg
------------------------------
shall be entitled to participate in or receive benefits under any pension plan,
profit sharing plan, health and accident plan or any other employee benefit plan
or arrangement made available in the future by NSI to its executives and key
management employees, subject to the terms and conditions applicable to
employees generally.
(e) Vacation. Rutenberg shall be entitled to such paid vacation
--------
days in each calendar year as determined by NSI from time to time, but not less
than four (4) weeks in any calendar year, prorated in any calendar year during
which Rutenberg is employed hereunder for less than an entire year in accordance
with the number of days in such year during which he is so employed. Rutenberg
shall also be entitled to all paid holidays given by NSI to its executives and
key management employees. Such vacation and holiday allowance shall otherwise be
subject to the policies and practices of NSI.
(f) Automobile. During the Term, NSI shall provide Rutenberg with
----------
the use of an automobile suitable and typical for a person occupying his
position and similar to the automobile currently leased for Rutenberg by NSI and
shall pay the costs of insurance, repairs and maintenance thereon.
(g) Loan. Within ten (10) days after the Restatement Date, NSI
----
shall loan to Rutenberg, on a non-recourse basis, upon the execution of
appropriate documentation, an amount equal to $600,000 repayable by Rutenberg on
or before the earlier of November 30, 1999 or the date which is ten (10) days
after his termination of employment for any reason. Such loan shall be secured
by a pledge by Rutenberg of 100,000 shares of NSI common stock owned by
Rutenberg and shall bear interest at the Citibank prime rate as in effect from
time to time, which shall accrue and be payable upon the repayment of the
principal of the loan.
(h) NSI shall reimburse Rutenberg for properly documented
expenses (not in excess of $50,000) to relocate his family to Israel at any time
prior to November
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<PAGE>
1, 1998; provided, however, that, if Rutenberg voluntarily terminates his
employment with NSI, his entitlement to reimbursement under this Section 5(h)
shall cease on the date of such termination.
6. TERMINATION.
-----------
Rutenberg's employment hereunder shall be terminated upon
Rutenberg's death and may be terminated as follows:
(a) By NSI for "Cause." A termination for Cause is a termination
evidenced by a resolution adopted by a vote of the majority of the members of
the Board finding that Rutenberg has (i) willfully failed to comply with any of
the material terms of this Restated Agreement, (ii) willfully and continually
failed to perform his duties hereunder, (iii) willfully engaged in misconduct
materially injurious to NSI, or (iv) been convicted of a felony or a crime of
moral turpitude; provided, however, that Rutenberg shall receive thirty (30)
-------- -------
days' advance written notice that the Board intends to meet to consider
Rutenberg's termination for Cause and Rutenberg shall be given a reasonable
opportunity to be heard by the Board on the issue prior to the Board's vote on
the matter.
(b) By either party upon thirty (30) days' advance written notice
to the other.
7. COMPENSATION UPON TERMINATION.
-----------------------------
(a) In the event of the termination of Rutenberg's employment as
a result of Rutenberg's death, NSI shall, within thirty (30) days after the date
of his death, pay to Rutenberg's estate (i) his Base Salary through the date of
his death and (ii) a lump sum of $598,000.
(b) In the event that Rutenberg terminates his employment prior
to November 19, 1998, or NSI terminates Rutenberg's employment for Cause, NSI
shall pay to Rutenberg his Base Salary through the date of his termination and
NSI shall,
-6-
<PAGE>
within ten (10) days after the termination of his employment, pay Rutenberg a
lump sum of $598,000.
(c) In the event that Rutenberg's employment is terminated by NSI
other than for Cause, NSI shall, within ten (10) days after his termination of
employment, pay to Rutenberg, in a lump sum, the sum of (i) the amount of his
Base Salary which he would have received through November 19, 1998 and (ii)
$598,000.
(d) Within ten (10) days after the expiration of the Term
(including any extension thereof), if Rutenberg's employment has not previously
terminated for any reason, NSI shall pay to Rutenberg a lump sum of $598,000.
(e) Provided Rutenberg's employment has not terminated for any
reason prior to November 19, 1998, the term of each outstanding option to
purchase NSI stock held by Rutenberg as of such date shall, notwithstanding
Rutenberg's termination of employment thereafter, be extended so that it expires
eight and one-half (8 1/2) years after the expiration of the Term; provided,
--------
however, that (i) the option granted to Rutenberg as of October 1, 1995 shall
- -------
not be vested and exercisable unless the conditions to such option being vested
and exercisable as set forth in the option agreement are satisfied during the
term of the option (as so extended), (ii) if Rutenberg's employment terminates
for any reason prior to November 19, 1998, his rights with respect to the
outstanding stock options shall be determined in accordance with the terms
thereof as in effect on the Restatement Date and (iii) if the options have been
extended pursuant to this Section 7(e) and thereafter Rutenberg materially
breaches his obligations under this Restated Agreement, including, without
limitation, those covenants contained in Sections 8, 9 and 10 of this Restated
Agreement, the options shall immediately terminate and Rutenberg shall have no
further rights in respect of the options.
-7-
<PAGE>
(f) Rutenberg shall not be required to mitigate the amount of the
termination payment provided pursuant to this Section 7 nor will such payment be
reduced by reason of Rutenberg's securing other employment.
(g) Notwithstanding anything contained in this Restated Agreement
to the contrary, to the extent that the payments and benefits provided under
this Restated Agreement and benefits provided to, or for the benefit of,
Rutenberg under any other NSI plan or agreement (such payments or benefits are
collectively referred to as the "Payments") would be subject to the excise tax
(the "Excise Tax") imposed under Section 4999 of the Internal Revenue Code of
1986, as amended (the "Code"), the Payments provided under this Agreement shall
be reduced (but not below zero) if and to the extent necessary so that no
Payment to be made or benefit to be provided to Rutenberg under this Agreement
shall be subject to the Excise Tax (such reduced amount is hereinafter referred
to as the "Limited Payment Amount"). Unless Rutenberg shall have given prior
written notice specifying a different order to NSI to effectuate the Limited
Payment Amount, NSI shall reduce or eliminate the Payments, by first reducing or
eliminating those payments or benefits which are not payable in cash and then by
reducing or eliminating cash payments, in each case in reverse order beginning
with payments or benefits which are to be paid the farthest in time from the
determination (as hereinafter defined). Any notice given by Rutenberg pursuant
to the preceding sentence shall take precedence over the provisions of any other
plan, arrangement or agreement governing Rutenberg's rights and entitlements to
any benefits or compensation. An initial determination as to whether the
Payments shall be reduced to the Limited Payment Amount pursuant to this
Agreement and the amount of such Limited Payment Amount shall be made by an
accounting firm at NSI's expense selected by NSI which is one of the five
largest accounting firms in the United States (the "Accounting Firm"). The
Accounting Firm shall provide its determination (the "Determination"), together
with detailed supporting calculations and documentation to
-8-
<PAGE>
NSI and Rutenberg within five (5) days of the date of termination of Rutenberg's
employment, if applicable, or such other time as requested by NSI or by
Rutenberg (provided Rutenberg reasonably believes that any of the Payments may
be subject to the Excise Tax) and if the Accounting Firm determines that no
Excise Tax is payable by Rutenberg with respect to a Payment or Payments, it
shall furnish Rutenberg with an opinion reasonably acceptable to Rutenberg that
no Excise Tax will be imposed with respect to any such Payment or Payments.
Within ten (10) days of the delivery of the Determination to Rutenberg,
Rutenberg shall have the right to dispute the Determination (the "Dispute"). If
there is no Dispute, the Determination shall be binding, final and conclusive
upon NSI and Rutenberg subject to the application of the remainder of this
Section 7(g).
As a result of the uncertainty in the application of Sections
4999 and 280G of the Code, it is possible that the Payments to be made to, or
provided for the benefit of, Rutenberg either have been made or will not be made
by NSI which, in either case, will be inconsistent with the limitations provided
above in this Section 7(c) (hereinafter referred to as an "Excess Payment" or
"Underpayment," respectively). If it is established pursuant to a final
determination of a court or an Internal Revenue Service (the "IRS") proceeding,
which has been finally and conclusively resolved, that an excess payment has
been made, such Excess Payment shall be deemed for all purposes to be a loan to
Rutenberg made on the date Rutenberg received the Excess Payment, and Rutenberg
shall repay the Excess Payment to NSI on demand (but not less than ten (10) days
after written notice is received by Rutenberg) together with interest on the
Excess Payment at the "Applicable Federal Rate" (as defined in Section 1274(d)
of the Code) from the date of Rutenberg's receipt of such Excess Payment until
the date of such repayment. In the event that it is determined (i) by the
Accounting Firm, NSI (which shall include the position taken by NSI, or together
with its consolidated group, on its federal income tax return) or the IRS, (ii)
pursuant to a
-9-
<PAGE>
determination by a court, or (iii) upon the resolution to Rutenberg's
satisfaction of the Dispute, that an Underpayment has occurred, NSI shall pay an
amount equal to the Underpayment to Rutenberg within ten (10) days of such
determination or resolution together with interest on such amount at the
Applicable Federal Rate from the date such amount would have been paid to
Rutenberg until the date of payment.
(h) This Section 7 sets forth the only obligations of NSI with
respect to the termination of Rutenberg's employment with NSI and Rutenberg
acknowledges that upon his termination of employment he shall not be entitled to
any payments or benefits which are not explicitly provided herein.
8. COVENANT REGARDING INVENTIONS AND COPYRIGHTS.
--------------------------------------------
(a) Rutenberg shall disclose promptly to NSI any and all
inventions, discoveries, improvements, patentable or copyrightable works
initiated, conceived or made by him, either alone or in conjunction with others,
during the Term and related to the "Business of NSI" (as defined below) and he
assigns all of his interest therein to NSI or its nominee; whenever requested to
do so by NSI, Rutenberg shall execute any and all applications, assignments or
other instruments which NSI shall deem necessary to apply for and obtain letters
patent or copyrights of the United States or any foreign country or otherwise
protect NSI's interest therein. These obligations shall continue beyond the
conclusion of the Term with respect to inventions, discoveries, improvements,
patentable or copyrightable works initiated, conceived or made by Rutenberg
during the Term and shall be binding upon Rutenberg's assigns, executors,
administrators and other legal representatives. For purposes of this Agreement,
the "Business of NSI" shall be deemed to refer to the cytological, histological,
pathological, hematological or microbiological detection or diagnosis of
conditions, diseases or other abnormalities. Notwithstanding the foregoing, any
inventions, discoveries, improvements, patentable or copyrightable works
conceived by Rutenberg
-10-
<PAGE>
after the date hereof which are not communicated to any third party during the
Term, and which are not referred to in any patent application or other
application as having been invented, discovered or conceived during the Term,
shall not be subject to the provisions of this Section 8(a).
(b) If Rutenberg has a concept for an invention which is within
the Business of NSI, and Rutenberg wishes NSI to support such invention, NSI
will discuss the invention with Rutenberg in good faith, including reasonable
compensation therefor.
9. PROTECTION OF CONFIDENTIAL INFORMATION.
--------------------------------------
Rutenberg acknowledges that he has been and will be provided with
information about, and his employment by NSI will, throughout the Term, bring
him into close contact with, many confidential affairs of NSI and its
subsidiaries, including proprietary information about costs, profits, markets,
sales, products, key personnel, pricing policies, operational methods, technical
processes and other business affairs and methods, plans for future developments
and other information not readily available to the public, all of which are
highly confidential and proprietary and all of which were developed by NSI at
great effort and expense. Rutenberg further acknowledges that the services to be
performed by him under this Restated Agreement are of a special, unique,
unusual, extraordinary and intellectual character, that the business of NSI will
be conducted throughout the world (the "Territory"), that its products will be
marketed throughout the Territory, that NSI competes and will compete in nearly
all of its business activities with other organizations which are located in
nearly any part of the Territory and that the nature of the relationship of
Rutenberg with NSI is such that Rutenberg is capable of competing with NSI from
nearly any location in the Territory. In recognition of the foregoing, Rutenberg
covenants and agrees during the Term and for a period of five (5) years
thereafter:
-11-
<PAGE>
(i) That he will keep secret all confidential matters
of NSI and not disclose them to anyone outside of NSI, either during or after
the Term, except with NSI's prior written consent or, if during the Term, in the
performance of his duties hereunder, Rutenberg makes a good faith determination
that it is in the best interest of NSI to disclose such matters;
(ii) That he will not make use of any of such
confidential matters for his own purposes or the benefit of anyone other than
NSI; and
(iii) That he will deliver promptly to NSI on termination
of this Restated Agreement, or at any time NSI may so request, all confidential
memoranda, notes, records, reports and other confidential documents (and all
copies thereof) relating to the business of NSI, which he may then possess or
have under his control.
10. RESTRICTION ON COMPETITION, INTERFERENCE AND SOLICITATION.
---------------------------------------------------------
In recognition of the considerations described in Section 9
hereof, Rutenberg covenants and agrees that, from the Restatement Date and until
the date that is two (2) years after (i) the date of his termination of
employment if NSI terminates Rutenberg without Cause or (ii) in all other
events, November 1998, Rutenberg will not, directly or indirectly, (A) enter
into the employ of, or render any services to, any person, firm or corporation
engaged in any business competitive with the Business of NSI in any part of the
Territory; (B) engage in any such business for his account; (C) become
interested in any such business as an individual, partner, shareholder,
creditor, director, officer, principal, agent, employee, trustee, consultant,
advisor, franchisee or in any other relationship or capacity; or (D) interfere
with NSI's relationship with, or endeavor to employ or entice away from NSI any
person, firm, corporation, governmental entity or other business organization
who or which is or was an employee, customer or supplier of, or maintained a
business relationship with, NSI at any time (whether before, during or after the
Term), or which NSI has solicited or
-12-
<PAGE>
prepared to solicit; provided, however, that nothing contained in this Section
-------- -------
10 shall be deemed to prohibit Rutenberg from acquiring or holding, solely for
investment, publicly traded securities of any corporation all or a portion of
the activities of which are competitive with the Business of NSI so long as such
securities do not, in the aggregate, constitute more than five percent (5%) of
any class or series of outstanding securities of such corporation.
11. SPECIFIC REMEDIES.
-----------------
For purposes of Sections 8, 9 and 10 of this Restated Agreement,
references to NSI shall include all current and future majority-owned
subsidiaries of NSI and all current and future joint ventures in which NSI may
from time to time be involved. It is understood by Rutenberg and NSI that the
covenants contained in this Section 11 and in Sections 8, 9 and 10 hereof are
essential elements of this Restated Agreement and that, but for the agreement of
Rutenberg to comply with such covenants, NSI would not have agreed to enter into
this Agreement. NSI and Rutenberg have independently consulted with their
respective counsel and have been advised concerning the reasonableness and
propriety of such covenants with specific regard to the nature of the business
conducted by NSI and the interests of NSI and its stockholders. Rutenberg agrees
that the covenants of Sections 8, 9 and 10 are reasonable and valid. If
Rutenberg commits a breach of any of the provisions of Sections 8, 9, or 10,
such breach shall be deemed to be grounds for termination for Cause. In
addition, Rutenberg acknowledges that NSI may have no adequate remedy at law if
he violates any of the terms hereof. Rutenberg therefore understands and agrees
that NSI shall have (i) the right to have such provisions specifically enforced
by any court having equity jurisdiction, it being acknowledged and agreed that
any such breach will cause irreparable injury to NSI and that money damages will
not provide an adequate remedy to NSI, and (ii) the right to require Rutenberg
to account for and pay
-13-
<PAGE>
over to NSI all compensation, profits, monies, accruals, increments and other
benefits (collectively, the "Benefits") derived or received by Rutenberg as a
result of any transaction constituting a breach of any of the provisions of
Sections 8, 9 or 10 and Rutenberg hereby agrees to account for and pay over such
Benefits to NSI.
12. INDEPENDENCE, SEVERABILITY AND NON-EXCLUSIVITY.
----------------------------------------------
Each of the rights enumerated in Section 11 hereof shall be
independent of the others and shall be in addition to and not in lieu of any
other rights and remedies available to NSI at law or in equity. If any of the
covenants contained in Sections 8, 9 or 10, or any part of any of them, is
hereafter construed or adjudicated to be invalid or unenforceable, the same
shall not affect the remainder of the covenant or covenants or rights or
remedies which shall be given full effect without regard to the invalid
portions. The parties intend to and do hereby confer jurisdiction to enforce the
covenants contained in Sections 8, 9 or 10 and the remedies enumerated in
Section 11 upon the federal and state courts of New York sitting in New York
County. If any of the covenants contained in Sections 8, 9 or 10 is held to be
invalid or unenforceable because of the duration of such provision or the area
covered thereby, the parties agree that the court making such determination
shall have the power to reduce the duration and/or area of such provision and in
its reduced form said provision shall then be enforceable. No such holding of
invalidity or unenforceability in one jurisdiction shall bar or in any way
affect NSI's right to the relief provided in Section 11 or otherwise in the
courts of any other state or jurisdiction within the geographical scope of such
covenants as to breaches of such covenants in such other respective states of
jurisdictions, such covenants being, for this purpose, severable into diverse
and independent covenants.
-14-
<PAGE>
13. DISPUTES.
--------
If NSI or Rutenberg shall dispute any termination of Rutenberg's
employment hereunder or if a dispute concerning any payment hereunder shall
exist:
(a) either party shall have the right (but not the obligation),
in addition to all other rights and remedies provided by law, to compel
arbitration of the dispute in the City of New York under the rules of the
American Arbitration Association by giving written notice of arbitration to the
other party within thirty (30) days after notice of such dispute has been
received by the party to whom notice has been given; and
(b) if such dispute (whether or not submitted to arbitration
pursuant to Section 13(a) hereof) results in a determination that (i) NSI did
not have the right to terminate Rutenberg's employment under the provisions of
this Restated Agreement or (ii) the position taken by Rutenberg concerning
payments to Rutenberg is correct, NSI shall promptly pay, or if theretofore paid
by Rutenberg, shall promptly reimburse Rutenberg for, all costs and expenses
(including attorney's fees) reasonably incurred by Rutenberg in connection with
such dispute.
14. SUCCESSORS; BINDING AGREEMENT.
-----------------------------
In the event of a future disposition by NSI (whether direct or
indirect, by sale of assets or stock, merger, consolidation or otherwise) of all
or substantially all of its business and/or assets in a transaction to which
Rutenberg consents, NSI will require any successor, by agreement in form and
substance satisfactory to Rutenberg, to expressly assume and agree to perform
this Restated Agreement in the same manner and to the same extent that NSI would
be required to perform if no such disposition had taken place.
This Restated Agreement and all rights of Rutenberg hereunder
shall inure to the benefit of, and be enforceable by, Rutenberg's personal or
legal
-15-
<PAGE>
representatives, executors, administrators, administrators c.t.a., successors,
heirs, distributees, devisees and legatees. Unless otherwise provided herein,
any amounts payable hereunder after Rutenberg's death shall be paid in
accordance with the terms of this Restated Agreement to Rutenberg's estate.
15. NOTICES.
-------
All notices, consents or other communications required or
permitted to be given by any party hereunder shall be in writing (including
telecopy or other similar writing) and shall be given by personal delivery,
certified or registered mail, postage prepaid, or telecopy (or other similar
writing) as follows:
To NSI:
To each of the members of the Board at their
respective business addresses or at their
respective primary residential address with a copy
to the Secretary of NSI
To Rutenberg: [Residential Address]
or at such other address or telecopy number (or other similar number) as either
party may from time to time specify to the other. Any notice, consent or other
communication required or permitted to be given hereunder shall be deemed to
have been given on the date of mailing, personal delivery or telecopy or other
similar means thereof (provided the appropriate answer back is received) and
shall be conclusively presumed to have been received on the second business day
following the date of mailing or, in the case of personal delivery or telecopy
or other similar means, the day of delivery thereof, except that a change of
address shall not be effective until actually received.
-16-
<PAGE>
16. MODIFICATIONS AND WAIVERS.
-------------------------
No term, provision or condition of this Restated Agreement may be
modified or discharged unless such modification or discharge is authorized by
the Board of Directors of NSI and is agreed to in writing and signed by
Rutenberg. No waiver by either party hereto of any breach by the other party
hereto of any term, provision or condition of this Restated Agreement to be
performed by such other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time.
17. ENTIRE AGREEMENT.
----------------
This Restated Agreement constitutes the entire understanding
between the parties hereto relating to the subject matter hereof, superseding
all negotiations, prior discussions, preliminary agreements and agreements
relating to the subject matter hereof made prior to the date hereof.
18. LAW GOVERNING.
-------------
Except as otherwise explicitly noted, this Restated Agreement
shall be governed by and construed in accordance with the laws of the State of
New York (without giving effect to conflicts of law).
19. INVALIDITY.
----------
Except as otherwise specified herein, the invalidity or
unenforceability of any term or terms of this Restated Agreement shall not
invalidate, make unenforceable or otherwise affect any other term of this
Restated Agreement which shall remain in full force and effect.
-17-
<PAGE>
20. HEADINGS.
--------
The headings contained in this Restated Agreement are for
reference purposes only and shall not affect the meaning or interpretation of
this Restated Agreement.
21. CONDUCT.
-------
As of and after the date hereof, (a) Rutenberg will not publish
or make any statement (except statements made by Rutenberg to his legal counsel
that are subject to the attorney client privilege and with respect to which such
privilege is not waived or lost) critical of NSI or any of its subsidiaries or
affiliates, or in any way maligning the business or reputation of NSI or any of
its subsidiaries or affiliates and (b) NSI shall use its best efforts to cause
its executive officers and directors not to publish or make any statement
(except statements made by any of them to NSI's or their legal counsel that are
subject to the attorney client privilege and with respect to which such
privilege is not waived or lost) critical of Rutenberg, or in any way maligning
the business reputation of Rutenberg; provided, however, that neither party
-------- -------
shall be deemed to have violated the provisions of this Section 21 by reason of
statements published or made that the party publishing or making the statement
reasonably believed were required by law to be published or made or otherwise
disclosed; and provided further, that either party shall, prior to publishing or
making any such statement, but only to the extent practicable, give notice to
the other party of its intention to publish or make any such statement.
22. RELEASE.
-------
Except as otherwise provided herein, effective as of the
Restatement Date, Rutenberg does hereby release, remise, acquit and forever
discharge NSI and its present and former officers, directors, executives,
agents, attorneys, employees, affiliated companies, divisions, subsidiaries,
successors, predecessors and assigns
-18-
<PAGE>
(collectively, the "Released Parties"), of and from any and all claims, actions,
causes of action, demands, rights, damages, debts, sums of money, accounts,
financial obligations, suits, expenses, attorneys' fees and liabilities of
whatever kind or nature in law, equity or otherwise, whether now known or
unknown, suspected or unsuspected, which Rutenberg, individually or as a member
of a class, now has, owns or holds, or has at any time heretofore had, owned or
held, against any Released Party arising out of or in any way connected with
Rutenberg's employment relationship with NSI, its subsidiaries, predecessors or
affiliated entities, or any event occurring or state of facts existing on or
before the Restatement Date, including, without limitation, any claims for
severance or vacation benefits, unpaid wages, salary or incentive payment,
breach of contract, wrongful discharge, impairment of economic opportunity,
intentional infliction of emotional harm or other tort, or employment
discrimination under any applicable federal, state or local statute, provision,
order or regulation including, but not limited to, any claim under Title VII of
the Civil Rights Act ("Title VII"), the Federal Age Discrimination in Employment
Act ("ADEA") and any similar or analogous state statute excepting only:
(a) those liabilities and obligations that this Restated
Agreement expressly creates or expressly provides which will continue in force
in accordance with this Restated Agreement; and
(b) any claims for benefits under any employee benefit plan of
the Company (within the meaning of Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended).
Rutenberg acknowledges and agrees no provision of this Restated
Agreement is to be construed in any way as an admission of any liability
whatsoever by any Released Party under any federal or state statute or the
principles of common law, any such liability having been expressly denied.
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<PAGE>
Rutenberg acknowledges and agrees that he has not, with respect
to any transaction or state of facts existing prior to the date of execution of
this Restated Agreement, filed any complaints, charges or lawsuits against any
of the Released Parties with any governmental agency or any court or tribunal,
and that he will not do so at any time hereafter.
23. KNOWLEDGE OF CLAIMS.
-------------------
As of the date hereof, the executive officers and directors of
NSI do not have any actual knowledge of any claims, actions or causes of action
that NSI may have against Rutenberg.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the day and year set forth above.
NEUROMEDICAL SYSTEMS, INC.
By:/s/ Uzi Ish-Hurwitz
-------------------
Uzi Ish-Hurwitz
Executive Vice President
/s/ Mark R. Rutenberg
---------------------
Mark R. Rutenberg
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<PAGE>
Exhibit 10.31
SECURED NON-RECOURSE
PROMISSORY NOTE
$600,000.00 July 9, 1997
FOR VALUE RECEIVED, the undersigned, Mark R. Rutenberg (the
"Borrower"), hereby agrees and promises to pay to the order of Neuromedical
--------
Systems, Inc., a Delaware corporation, and its transferees, successors and
assigns (collectively, the "Lender"), the principal sum of Six Hundred Thousand
------
and No/100 Dollars ($600,000.00) in accordance with the terms and conditions set
forth below (including, without limitation, Section 8), together with interest
on the unpaid principal balance hereof from time to time at the rate and on the
dates set forth below.
1. Final Maturity. The Borrower shall pay the entire outstanding
--------------
principal balance of this Note, together with all accrued and unpaid interest
thereon, in full on November 30, 1999 (the "Maturity Date").
-------------
2. Mandatory Prepayments. If, as and when the Borrower's
---------------------
employment pursuant to the terms of that certain Restated Employment Agreement,
dated June 29, 1997, between the Lender and the Borrower, is terminated for any
reason, prior to the Maturity Date, then the Borrower shall prepay this Note on
or before the date which is ten (10) days after such termination of employment
(or 30 days, after such termination of employment in the case of the Borrower's
death).
3. Optional Prepayments. This Note may be prepaid at any time and
--------------------
from time to time at the discretion of the Borrower, in whole or in part,
without penalty or premium.
4. Interest Rate and Interest Payment Dates.
----------------------------------------
(a) Ordinary Interest. The Borrower shall pay interest on
-----------------
the unpaid principal amount of this Note from the date of this
Note until payment in full thereof at a rate equal to the prime
rate of interest of Citibank, N.A. in New York City as publicly
announced and in effect on the first day of each calendar month,
from month to month (the "Prime Rate"). Interest on this Note
shall be due and payable in arrears on the Maturity Date.
-1-
<PAGE>
(b) Default Interest; Maximum Legal Rate. If the Borrower
------------------------------------
shall fail to pay any principal amount of this Note when due and
payable (whether at the Maturity Date, by acceleration or
otherwise), such principal amount shall thereafter bear interest,
payable on demand from time to time and upon payment in full of
such overdue amount, until paid in full, at a rate of equal to
the Prime Rate, plus two points. In no event shall the Borrower
pay interest on this Note at a rate in excess of that permitted
by applicable law, any such excess payments being deemed for all
purposes a prepayment of principal.
(c) Calculation. Interest shall be calculated on the basis
-----------
of the actual number of days elapsed over a 365 day year.
5. Payments; Application to Interest and Principal. The
-----------------------------------------------
Borrower shall make all payments of principal and interest and other amounts
payable under this Note not later than 11:00 A.M., New York City time, on the
date such payment is due, in lawful money of the United States of America by
wire transfer of immediately available funds to the Lender's account (or by such
other method or at such other bank account) as may be designated in writing from
time to time by the Lender. Any prepayment pursuant to Sections 2 or 3 shall be
applied to reduce, first, the accrued and unpaid interest on the principal
balance of this Note and, then, the unpaid principal balance hereof, in each
case outstanding at the time of such prepayment.
6. Pledge of Collateral.
--------------------
6.1 Pledge. The Borrower hereby pledges, assigns and
------
grants to the Lender a security interest in the assets referred to in Section
6.2 (the "Collateral") to secure the prompt payment and performance of the
Borrower's obligations under this Note (the "Obligations").
-----------
6.2 Collateral. The Collateral consists of the following
----------
types or items of property:
(a) 100,000 shares of common stock, par value
$.0001 per share ("Common Stock"), of Neuromedical Systems, Inc.,
------------
a Delaware corporation (the "Issuer"); and
------
(b) (i) the certificates or instruments, if any,
representing such securities, (ii) all dividends (cash, stock or
otherwise), cash instruments, rights to subscribe, purchase or
sell and all other rights and property from time to time received,
receivable or otherwise distributed in respect of or in exchange
for any or all of such securities, (iii) all replacements,
additions to and substitutions for any of the property referred to
in this Section 6.2, and (iv) the proceeds, interest, profits and
other income of or on any of the property referred to in this
Section 6.2.
-2-
<PAGE>
6.3 Transfer of Collateral. All certificates or
----------------------
instruments representing or evidencing any of the securities referred to in
Section 6.2(a) and all additional securities, if any, constituting Collateral
(the "Pledged Securities") shall be delivered to and held pursuant hereto by the
------------------
Lender and shall be in suitable form for transfer by delivery, or shall be
accompanied by duly executed instruments of transfer or assignment in blank. The
Lender shall have the right, at any time during the continuance of an Event of
Default to transfer to or to register in the name of the Lender or any of its
nominees any or all of the Pledged Securities, subject only to the revocable
rights specified in the fourth sentence of Section 10.
6.4 Representations, Warranties and Agreements. The
------------------------------------------
Borrower represents and warrants to and agrees with the Lender that:
(a) Ownership of Collateral; Encumbrances. The
-------------------------------------
Borrower is the legal and beneficial owner of the Pledged
Securities owned from time to time by the Borrower free and clear
of any adverse claim or lien except for the security interest
created by this Note, and the Borrower has full right, power and
authority to pledge, assign and grant a security interest in the
Collateral to the Lender.
(b) No Required Consent. No authorization, consent,
-------------------
approval or other action by, and no notice to or filing with, any
governmental authority is required for (i) the due execution,
delivery and performance by the Borrower of this Note, (ii) the
grant by the Borrower of the security interest granted by this
Note, (iii) the perfection of such security interest or (iv) the
exercise by the Lender of its rights and remedies under this Note
except that filings may be required to perfect such security
interest (to the extent such security interest cannot be perfected
by possession) and sale of the Collateral must be made in
accordance with applicable law.
(c) Pledged Securities. The Pledged Securities have
------------------
been duly authorized and validly issued, and are fully paid and
non-assessable.
(d) First Priority Security Interest. The pledge of
--------------------------------
Pledged Securities pursuant to this Note creates a valid and
perfected first priority security interest in such Collateral,
enforceable against the Borrower and all third parties and
securing payment of the Obligations.
(e) Sale, Disposition or Encumbrance of Collateral.
----------------------------------------------
The Borrower will not in any way encumber any of the Collateral
(or permit or suffer any of the Collateral to be encumbered) or
sell, pledge, assign, lend or otherwise dispose of or transfer any
of the Collateral to or in favor of any person or entity other
than the Lender.
(f) Dividends or Distributions. So long as no Event
--------------------------
of Default shall have occurred and be continuing, the Borrower
shall be entitled
-3-
<PAGE>
to receive and retain any and all dividends and interest paid in
respect of the Collateral; provided, however, that any and all
-------- -------
(i) dividends and interest paid or payable
other than in cash in respect of, and instruments and
other property received, receivable or otherwise
distributed in respect of, or in exchange for (including,
without limitation, any certificate or share purchased or
exchanged in connection with a tender offer or merger
agreement), any Collateral,
(ii) dividends and other distributions paid
or payable in cash in respect of any Collateral in
connection with total liquidation or dissolution, and
(iii) cash paid, payable or otherwise
distributed in redemption of, or in exchange for, any
Collateral,
shall be, and shall be forthwith delivered to the Lender to hold
as, Collateral and shall, if received by the Borrower, be
received in trust for the benefit of the Lender, be segregated
from the other property or funds of the Borrower, and be
forthwith delivered to the Lender as Collateral in the same form
as so received (with any necessary endorsement).
Upon the occurrence and during the continuance of an Event of
Default, all rights of the Borrower to receive the dividends and
interest payments which it would otherwise be authorized to
receive and retain pursuant to this clause (f) shall cease, and
all such rights shall thereupon become vested in the Lender who
shall thereupon have the sole right to receive and hold as
Collateral such dividends and interest payments, but the Lender
shall have no duty to receive and hold such dividends and
interest payments and shall not be responsible for any failure to
do so or delay in so doing.
(g) Stock Powers. The Borrower shall furnish to the
------------
Lender such stock powers and other instruments as may be required
by the Lender to assure the transferability of the Collateral when
and as often as may be requested by the Lender.
(h) Voting and Other Consensual Rights. The
----------------------------------
Borrower shall be entitled to exercise any and all voting and
other consensual rights pertaining to the Collateral or any part
thereof for any purpose not inconsistent with the terms of this
Note.
7. Events of Default. If any of the following events (each, an
-----------------
"Event of Default") shall occur and be continuing:
----------------
-4-
<PAGE>
(i) the Borrower shall fail to pay any principal of, or
interest on, this Note when the same becomes due and payable in
accordance with the terms hereof;
(ii) the Borrower shall fail to comply in any material
respect with any other agreement in this Note and such failure
shall continue for 30 days after notice from the Lender; or
(iii) the Borrower shall generally not pay his debts as
such debts become due, or shall admit in writing his inability to
pay his debts generally, or shall make a general assignment for
the benefit of creditors; or any proceeding shall be instituted
by or against the Borrower seeking to adjudicate him a bankrupt
or insolvent, or seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief, or composition of
him or his debts under any law relating to bankruptcy, insolvency
or relief or the appointment of a receiver, trustee, or other
similar official for him or for any substantial part of his
property;
then, and in any such event, the Lender may, by notice to the Borrower,
(a) Declare the entire unpaid principal amount of this Note and
all interest thereon to be forthwith due and payable, whereupon the
entire unpaid principal amount of this Note and all such interest shall
become and be forthwith due and payable, without presentment, demand,
protest or further notice of any kind, all of which are hereby expressly
waived by the Borrower.
(b) Sell, in one or more sales and in one or more parcels, or
otherwise dispose of any or all of the Collateral in any commercially
reasonable manner as the Lender may elect, in a public or private
transaction, at any location as deemed reasonable by the Lender either
for cash or credit or for future delivery at such price at the Lender
may deem fair, and (unless prohibited by the Uniform Commercial Code, as
adopted in any applicable jurisdiction, the "Code") the Lender may be
----
the purchaser of any or all Collateral so sold and may apply the
purchase price therefor against any Obligations secured hereby.
Reasonable notification of the time and place of any public sale of the
Collateral, or reasonable notification of the time after which any
private sale or other intended disposition of the Collateral is to be
made, shall be sent to the Borrower and to any other person or entity
entitled to notice under the Code; provided that, if any of the
Collateral threatens to decline speedily in value or is of the type
customarily sold on a recognized market, the Lender may sell or
otherwise dispose of the Collateral without notification, advertisement
or other notice of any kind. Any such sale or transfer by the Lender
either to itself or to any other person or entity shall be absolutely
free from any claim of right by the Borrower, including any equity or
right of redemption, stay or appraisal which the Borrower has or may
have under any rule of law, regulation or statute now existing or
hereafter adopted. Upon any
-5-
<PAGE>
such sale or transfer, the Lender shall have the right to deliver,
assign and transfer to the purchaser or transferee thereof the
Collateral so sold or transferred. If the Lender deems it advisable to
do so, it may restrict the bidders or purchasers of any such sale or
transfer to persons or entities who will represent and agree that they
are purchasing the Collateral for their own account and not with the
view to the distribution or resale of any of the Collateral. The
Borrower agrees that private sales so made may be at prices and on other
terms less favorable to the seller than if the Collateral were sold at
public sale, and that the Lender has no obligation to delay the sale of
the Collateral for the period of time necessary to permit the
registration of the Collateral for public sale under the Securities Act
of 1933 and under applicable state securities or "blue sky" laws. The
Borrower agrees that a private sale or sales made under the foregoing
circumstances shall be deemed to have been made in a commercially
reasonable manner. The Lender may, at its discretion, provide for a
public sale, and any such public sale shall be held at such time or
times within ordinary business hours and at such place or places as the
Lender may fix in the notice of such sale. The Lender shall not be
obligated to make any sale pursuant to any such notice. The Lender may,
without notice or publication, adjourn any public or private sale by
announcement at any time and place fixed for such sale, and such sale
may be made at any time or place to which the same may be so adjourned.
If only part of the Collateral is sold or transferred such that the
Obligations remain outstanding (in whole or in part), the Lender's
rights and remedies hereunder shall not be exhausted, waived or
modified, and the Lender is specifically empowered to make one or more
successive sales or transfers until all the Collateral shall be sold or
transferred and all the Obligations are paid. In the event that the
Lender elects not to sell the Collateral, the Lender retains its rights
to dispose of or utilize the Collateral or any part or parts thereof in
any manner authorized or permitted by law or in equity, and to apply the
proceeds of the same towards payment of the Obligations. Each and every
method of disposition of the Collateral described in this clause (b)
shall constitute disposition in a commercially reasonable manner.
(c) Apply proceeds of the disposition of the Collateral to the
Obligations in any manner elected by the Lender and permitted by the
Code or otherwise permitted by law or in equity.
(d) Appoint any person as agent to perform any act or acts
necessary or incident to any sale or transfer by the Lender of the
Collateral.
(e) Exercise all other rights and remedies permitted by law or in
equity.
The Borrower hereby irrevocably appoints the Lender as the
Borrower's attorney-in-fact, with full authority in the place and stead of the
Borrower and in the name of the Borrower or otherwise, from time to time during
the continuance of an Event of Default to take any action and to execute any
assignment, certificate, financing statement, stock power, notification,
document or instrument which the Lender may deem necessary
-6-
<PAGE>
or advisable to accomplish the purposes of this Agreement, including, without
limitation, to receive, endorse and collect all instruments made payable to the
Lender representing any dividend, interest payments or other distribution in
respect of the Collateral or any part thereof and to give full discharge for the
same.
If any applicable provision of any law requires the Lender to
give reasonable notice of any sale or disposition or other action, the Borrower
hereby agrees that fifteen days' prior written notice shall constitute
reasonable notice thereof. Such notice, in the case of public sale, shall state
the time and place fixed for such sale and, in the case of private sale, the
time after which such sale is to be made.
The Lender may enforce its rights hereunder without prior
judicial process or judicial hearing, and to the extent permitted by law the
Borrower expressly waives any and all legal rights which might otherwise require
the Lender to enforce its rights by judicial process.
8. No Personal Liability. Neither Borrower nor any of his heirs,
---------------------
legal representatives, successors or assigns shall have any personal liability
for the payment or performance of any of Borrower's obligations hereunder.
Lender may enforce its rights in, to, or against only the Collateral, and Lender
shall have full recourse to and the right to proceed against, only such
Collateral. In all events, no monetary or deficiency judgment shall be sought or
enforced against Borrower or any of his heirs, legal representatives, successors
or assigns.
9. Notices. All notices and other communications provided for
-------
hereunder shall be in writing (including telecopy communication) and mailed,
telecopied, or delivered
if to the Lender: Neuromedical Systems, Inc.
Two Executive Boulevard
Suffern, New York 10901-4164
Telecopy No.: (914) 368-3894
if to the Borrower: Mark R. Rutenberg
[Residential Address]
or at such other address or telecopy number as shall be designated by a party in
a written notice to the other party.
10. No Waivers; Cumulative Remedies; Amendment; Survival of
-------------------------------------------------------
Covenants; Headings; Governing Law; Submission to Jurisdiction; Express Waiver.
- ------------------------------------------------------------------------------
No action, delay or omission by the Lender shall constitute a waiver of any of
the rights or privileges of the Lender under this Note nor shall any single or
partial exercise of any such right or privilege preclude any other or further
exercise thereof or the exercise of any
-7-
<PAGE>
other right or privilege. Such rights are cumulative and not exclusive of any
rights provided by law. This Note may not be amended or otherwise modified
except by a written instrument signed by the Lender. Upon the complete payment
of the Obligations, the Lender will release, reassign and transfer the
Collateral to the Borrower and this Note shall be of no further force or effect.
Notwithstanding the foregoing, the provisions of Section 8 shall survive payment
of the principal of, and interest on, this Note. Section headings herein shall
have no legal effect. THIS NOTE SHALL BE DEEMED MADE UNDER, AND BE GOVERNED BY,
THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAWS RULES. THE
BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY
UNITED STATES FEDERAL OR NEW YORK STATE COURT SITTING IN THE COUNTY AND STATE OF
NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN
DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT
OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND
IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF
ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT
IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE LENDER TO
BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION.
ANY JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE LENDER OR ANY AFFILIATE OF
THE LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT
OF, RELATED TO, OR CONNECTED WITH THE NOTE SHALL BE BROUGHT ONLY IN A COURT IN
THE COUNTY AND STATE OR A FEDERAL COURT IN SUCH COUNTY OF NEW YORK SO LONG AS
SUCH COURT HAS PERSONAL JURISDICTION. THE BORROWER AND THE LENDER HEREBY WAIVE
TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY
MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT
OF, RELATED TO, OR CONNECTED WITH THE NOTE. Except as expressly provided in this
Note, the Borrower expressly waives diligence, presentment, demand for payment,
any other demand, protest, notice of dishonor, notice of presentment, notice of
demand or notice of protest and all other notices of any kind in connection with
this Note and any payment due hereunder.
-8-
<PAGE>
IN WITNESS WHEREOF, the Borrower has executed this Note as of the
date first above written.
/s/ Mark R. Rutenberg
---------------------------
Mark R. Rutenberg
Agreed and Accepted:
NEUROMEDICAL SYSTEMS, INC.
By: /s/ John B. Henneman, III
-------------------------
John B. Henneman, III
Vice President, Secretary and
General Counsel
-9-
<PAGE>
EXHIBIT 11. 0
NEUROMEDICAL SYSTEMS, INC.
COMPUTATION OF PRIMARY EARNINGS PER SHARE
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- ---------
Weighted average
number of common
shares outstanding 30,915,718 29,089,407 30,870,768 28,948,946
Net loss for period $(8,769,000) $(7,378,000) $(18,494,000) $(14,225,000)
------------ ------------ ------------- -------------
Net loss per share $ (0.28) $ (0.25) $ (0.60) $ (0.49)
============ ============ ============= =============
<PAGE>
NEUROMEDICAL SYSTEMS, INC.
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ----------------------------------
1997 1996 1997 1996
---------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Weighted average number of
common shares outstanding 30,915,718 29,089,407 30,870,768 28,948,946
Assumed exercise of stock
options and warrants
using the treasury
stock method (1) 849,186 3,456,202 1,064,228 3,676,781
------------ ------------ ------------ ------------
Weighted average number of
common and common
equivalent shares outstanding 31,764,824 32,545,609 31,934,996 32,625,727
============ ============ ============ ============
Net loss for period $(8,769,000) $(7,378,000) $(18,494,000) $(14,225,000)
------------ ------------ ------------- -------------
Net loss per share $ (0.28) $ (0.23) $ (0.58) $ (0.44)
============ ============ ============= =============
</TABLE>
(1) FOR PURPOSES OF CALCULATING THE NUMBER OF SHARES ISSUABLE UPON EXERCISE OF
OUTSTANDING STOCK OPTIONS AND WARRANTS, THE DAILY AVERAGE CLOSING STOCK PRICE OF
$8.82 WAS USED FOR SIX MONTHS OF 1997, $7.52 WAS USED FOR THREE MONTHS OF 1997,
$19.94 WAS USED FOR SIX MONTHS OF 1996, AND $18.57 WAS USED FOR THREE MONTHS OF
1996.
