-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q0+RkXqKFTPUYaW6Kz2NtUEEzwm1ShwoaoN0YZ1Mf3+pnneyBUTMF2vGV/fe7dGD 05SwpbeXcOuWFq6SQ588zA== 0000912057-96-014772.txt : 19960717 0000912057-96-014772.hdr.sgml : 19960717 ACCESSION NUMBER: 0000912057-96-014772 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 19 FILED AS OF DATE: 19960716 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAPNET OF OHIO INC CENTRAL INDEX KEY: 0000863739 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-08199 FILM NUMBER: 96595539 BUSINESS ADDRESS: STREET 1: 6059 MEMORIAL DR CITY: DUBLIN STATE: OH ZIP: 43017 S-4 1 FORM S-4 As filed with the Securities and Exchange Commission on July 16, 1996 Registration No. 333- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------- PAPNET OF OHIO, INC. (Exact name of Registrant as specified in its charter) Ohio 5047 31-1282391 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or Classification Code Number) Identification No.) organization) ------------------- 6059 Memorial Drive Dublin, Ohio 43017 (614) 793-9356 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ------------------- David J. Richards President Papnet of Ohio, Inc. 6059 Memorial Drive Dublin, Ohio 43017 (614) 793-9356 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------- Copies of Correspondence to: William J. Kelly, Esq. Porter, Wright, Morris & Arthur 41 South High Street Columbus, Ohio 43215 (614)227-2136 Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after this Registration Statement becomes effective. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------- Proposed Maximum Proposed Maximum Amount of Title of Each Class of Amount to be Offering Price Aggregate Offering Registration Securities to be Registered Registered Per Share* Price* Fee* - --------------------------------------------------------------------------------------------------------------------- Common stock, without par value..... 4,850,033 $5,013,750 $1.03 $1,729.00 - ---------------------------------------------------------------------------------------------------------------------
* Estimated solely for the purpose of calculating the registration fee based on the book value of the securities to be acquired by the Registrant, pursuant to Regulation 457 (f) (2) of the Securities Act of 1933, as amended. The stockholders equity of ER Group, Inc. being $2,131,911, the combined stockholders equity of Carolina Cytology, Inc. and CCWP Partners, Inc. being $1,895,790, the stockholders equity of Indiana Cytology Review Company being $330,693 and the stockholders equity of Cytology Indiana, Inc. being $655,356. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. CROSS REFERENCE SHEET Form S-4 Item Prospectus Caption ------------- ------------------ 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus. . . . . . . . . . Facing Page of Registration Statement; Cross Reference Sheet; Cover Page of Prospectus. 2. Inside Front and Outside Back Cover Pages of Prospectus. . . . . . . . . . . . . . . . . . . . Available Information; Table of Contents. 3. Risk Factors, Ratio of Earnings to Fixed Charges and Other Information . . . . . . . . . . Introduction; Summary; Risk Factors. 4. Terms of the Transaction. . . . . . . . . . . . . The Merger; The Company; Reasons for the Merger; Recommendation of the Boards of Directors of the Company and the Predecessor Companies; Comparison of Certain Rights of the Company and the Predecessor Companies. 5. Pro Forma Financial Information . . . . . . . . . Summary; Unaudited Pro Forma Condensed Combined Financial Information; Notes to Unaudited Pro Forma Condensed Combined Financial Information. 6. Material Contracts with the Company Being Acquired. . . . . . . . . . . . . . . . . . . . . The Merger; Certain Related Transactions. 7. Additional Information Required for Reoffering by Persons and Parties Deemed to Be Underwriters. . . . . . . . . . . . . . . . Not Applicable. 8. Interests of Named Experts and Counsel. . . . . . Not Applicable. 9. Disclosure of Commission Position on Indemnification for Securities Act Liabilities . . . . . . . . . . . . . . . . . . . Not Applicable. 10. Information with Respect to S-3 Registrants . . . Not Applicable. 11. Incorporation of Certain Information by Reference . . . . . . . . . . . . . . . . . . . . Not applicable. 12. Information with Respect to S-2 or S-3 Registrants . . . . . . . . . . . . . . . . . . . Not Applicable. 13. Incorporation of Certain Information by Reference . . . . . . . . . . . . . . . . . . . . Not Applicable. 14. Information with Respect to Registrants Other Than S-3 or S-2 Registrants . . . . . . . . Summary; The Merger; The Company; Financial Statements of the Company. Form S-4 Item Prospectus Caption ------------- ------------------ 15. Information with Respect to S-3 Companies . . . . Not Applicable. 16. Information with Respect to S-2 or S-3 Companies . . . . . . . . . . . . . . . . . . . . Not Applicable. 17. Information with Respect to Companies Other than S-3 or S-2 Companies . . . . . . . . . Summary; The Predecessor Companies; The Merger . 18. Information if Proxies, Consents or Authorizations are to be Solicited. . . . . . . . Introduction; Summary; The Merger; Certain Related Transactions; Executive Officers and Directors; Executive Compensation . 19. Information if Proxies, Consents or Authorizations are not to be Solicited or in an Exchange Offer. . . . . . . . . . . . . . . Not Applicable. PAPNET OF OHIO, INC. 6059 Memorial Drive Dublin, Ohio 43017 ______, 1996 Dear Fellow Shareholders: You are cordially invited to attend the Special Meeting of Shareholders (the "Papnet Special Meeting") of Papnet of Ohio, Inc. ("Papnet"), which will be held on _________, September __, 1996, at _____ _., local time. The Papnet Special Meeting will be held at______________________________________________. At the Papnet Special Meeting, shareholders of Papnet will be asked to consider and vote on the Agreement and Plan of Merger, dated as of July 5, 1996 (the "Merger Agreement"), among Papnet and Cytology Indiana, Inc., Indiana Cytology Review Company, ER Group, Inc., CCWP Partners, Inc. and Carolina Cytology, Inc. (individually a "Predecessor Company" and collectively "Predecessor Companies"), pursuant to which the Predecessor Companies would be merged with and into Papnet (the "Merger"). In the Merger, the shareholders of the Predecessor Companies will receive whole shares of Papnet common stock in exchange for each share of Predecessor Company common stock held by them. The actual number of shares of Papnet stock to be exchanged for each share of Predecessor Company stock will be determined pursuant to Schedule 2.05(a) of the Merger Agreement. Each of the Predecessor Companies, except CCWP Partners, Inc., was organized to acquire and exercise the right to market the PAPNET-Registered Trademark- SYSTEM and PAPNET-Registered Trademark- SERVICE within their respective licensed territories. However, until November 8, 1995, when the United States Food and Drug Administration finally approved the marketing of the PAPNET-Registered Trademark- technology, the technology could be used in the United States only for investigational purposes in connection with the FDA approval process. Consequently, the Predecessor Companies had only minor business activities prior to November, 1995, and had no employees. THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AS BEING IN THE BEST INTEREST OF PAPNET SHAREHOLDERS AND RECOMMENDS THAT YOU VOTE IN FAVOR OF THE APPROVAL OF THE AGREEMENT AND PLAN OF MERGER. Additional information regarding the Merger and the parties thereto is set forth in the attached Proxy Statement, which also serves as the Prospectus regarding the common stock of Papnet to be issued in connection with the Merger. Please read these materials and carefully consider the information contained in them. The affirmative vote of the holders of at least two-thirds of the outstanding shares of Papnet Common Stock is required to approve the Merger and the Amended and Restated Articles of Incorporation and Amended and Restated Regulations pursuant thereto. An affirmative vote for the Merger Agreement will act as an affirmative vote for the Amended and Restated Articles of Incorporation and Amended and Restated Regulations. Accordingly, your vote is important no matter how large or how small your holdings may be. Whether or not you plan to attend the Papnet Special Meeting, you are urged to complete, sign, and promptly return the enclosed proxy card to assure that your shares will be voted at the Papnet Special Meeting. If you attend the Papnet Special Meeting, you may vote in person if you wish and your proxy will not be used. Very truly yours, David J. Richards PRESIDENT PAPNET OF OHIO, INC. 6059 Memorial Drive Dublin, Ohio 43017 -------------------- NOTICE OF SPECIAL MEETING OF SHAREHOLDERS _________, 1996 -------------------- Notice is hereby given that a Special Meeting of Shareholders (the "Papnet Special Meeting") of Papnet of Ohio, Inc. ("Papnet") has been called by the Board of Directors and will be held at ________________________, on _________, __________ __, 1996, at _____ _., local time, for the following purposes: 1. To consider and vote upon the approval of a certain Agreement and Plan of Merger, dated as of July 5, 1996 (the "Merger Agreement"), and the consummation of the merger contemplated therein. Pursuant to the Merger Agreement, Cytology Indiana, Inc., Indiana Cytology Review Company, ER Group, Inc., CCWP Partners, Inc. and Carolina Cytology, Inc. (collectively the "Predecessor Companies"), will be merged with and into Papnet, and the shareholders of the Predecessor Companies will receive whole shares of Papnet common stock in exchange for their shares of Predecessor Company common stock, as more fully described in the accompanying Proxy Statement. In addition, Papnet's Articles of incorporation and Code or Regulations will be amended and restated as provided in the Merger Agreement; and 2. To transact any other business which may properly come before the meeting or any adjournment or adjournments thereof. (The Board of Directors is not currently aware of any other business to come before the Papnet Special Meeting.) Only holders of Papnet common stock of record at the close of business on _______, 1996, the record date for the Papnet Special Meeting, are entitled to notice of and to vote at the Papnet Special Meeting and any adjournments thereof. A holder of Papnet common stock who dissents from the Merger Agreement and who complies with the provisions of applicable law relating to dissenters' rights will be entitled to receive payment in cash of the appraised value of only those shares held by the shareholder (a) which are voted against the approval of the Merger Agreement at the Papnet Special Meeting, or (b) with respect to which the holder thereof has given written notice to Papnet, at or prior to the Papnet Special Meeting, that the shareholder intends to dissent from the Merger Agreement and which are not voted in favor of approval of the Merger Agreement. THE BOARD OF DIRECTORS OF PAPNET UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT AND CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY. We urge you to execute and return the enclosed proxy as soon as possible in order to ensure that your shares will be represented at the Papnet Special Meeting. Your proxy may be revoked in the manner described in the accompanying Proxy Statement at any time before it has been voted at the Papnet Special Meeting. If you attend the Papnet Special Meeting, you may vote in person, and your proxy will not be used. Dated: __________ __, 1996 By Order of the Board of Directors David J. Richards PRESIDENT ------------------------------------------------------------------ WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE SIGN AND MAIL THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. NO POSTAGE NECESSARY IF MAILED IN THE UNITED STATES. PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES AT THIS TIME. ------------------------------------------------------------------ DAVID J. RICHARDS CHAIRMAN OF ADVISORY BOARD Dear Predecessor Company Shareholders: On July__, 1996, Papnet of Ohio, Inc. ("Papnet") entered into an Agreement and Plan of Merger (the "Merger Agreement") with Cytology Indiana, Inc. ("CIN"), Indiana Cytology Review Company ("INC"), ER Group, Inc. ("ERG"), CCWP Partners, Inc. ("CCWP"), and Carolina Cytology, Inc. ("CCI") (individually "Predecessor Company" collectively "Predecessor Companies"), pursuant to which the Predecessor Companies will merge (the "Merger") with and into Papnet. As a result of the Merger, all shareholders of a Predecessor Company will be entitled to receive shares of Papnet common stock in exchange for the shares of Predecessor Company stock held by them (the "Merger Consideration"). Under the terms of the Merger Agreement, I have been selected as Chairman of the Advisory Board, a board consisting of shareholders and officers of the Predecessor Companies. It is in this capacity that I write you this letter. The number of shares of Papnet common stock that will comprise the Merger Consideration is calculated based on the conversion ratio contained in Schedule 2.05 of the Merger Agreement. Each share of Predecessor Company stock that is held in treasury shall be extinguished. THE BOARDS OF DIRECTORS OF PAPNET AND THE PREDECESSOR COMPANIES HAVE UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND BELIEVE THAT THE MERGER IS IN THE BEST INTERESTS OF ALL PREDECESSOR COMPANIES SHAREHOLDERS. THE BOARD OF DIRECTORS OF EACH PREDECESSOR COMPANY BELIEVES THAT THIS STRATEGIC COMBINATION WITH PAPNET WILL CREATE AN EFFICIENT AND EFFECTIVE ENTITY. Approval of the Merger and the Merger Agreement and the transactions contemplated thereby requires the affirmative vote of the holders of common stock of each ERG, CCWP, and CCI entitling them to exercise a majority of the voting power of the respective corporations. Approval of the Merger and the Merger Agreement and the transactions contemplated thereby requires the affirmative vote of the holders of shares entitling them to exercise at least two-thirds of the voting power of CIN and INC. In accordance with the General Corporation Law of the State of Ohio, the Merger and the Merger Agreement may be approved without a meeting of shareholders of the Predecessor Companies with the affirmative vote, in a writing or writings, signed by all the shareholders who would be entitled to notice of a meeting of the shareholders held for such purpose. It is expected that all the shareholders of each Predecessor Company will unanimously consent in writing to the Merger and therefore, at this time no special meetings for the shareholders of the Predecessor Companies is planned. The accompanying Prospectus explains in detail the terms of the Merger and the Papnet common stock to be issued in the Merger. It also contains pro forma financial information and other information concerning Papnet, the Predecessor Companies and the Merger. Although you are not being asked for a proxy or written consent, and are requested not to send a proxy or written consent, please read the Prospectus carefully. If unanimous consent of the shareholders of any Predecessor Company is not obtained, then a special meeting of shareholders of that Predecessor Company will be called. Shareholders who do not consent to the Merger Agreement are entitled to dissenter's rights as described in the Prospectus. TO EXERCISE SUCH DISSENTER'S RIGHTS, SHAREHOLDERS MUST TAKE CERTAIN ACTIONS WITHIN THE TIME LIMITS PRESCRIBED BY OHIO LAW. The Prospectus describes the actions shareholders must take and other relevant considerations to the exercise of such rights. Very truly yours, David J. Richards CHAIRMAN OF THE ADVISORY BOARD ____________ PROSPECTUS PAPNET OF OHIO, INC. ____________ COMMON STOCK, WITHOUT PAR VALUE ____________ This Prospectus is being furnished to the shareholders of Cytology Indiana, Inc., an Ohio corporation ("CIN"), Indiana Cytology Review Company, an Ohio corporation ("INC"), ER Group, Inc., an Ohio corporation ("ERG"), CCWP Partners, Inc., an Ohio corporation ("CCWP"), and Carolina Cytology, Inc., an Ohio corporation ("CCI"), in connection with the merger (the "Merger") of the foregoing companies (individually, a "Predecessor Company" and collectively the "Predecessor Companies") with and into Papnet of Ohio, Inc., an Ohio corporation (the "Company"). This Prospectus is also being distributed to shareholders of the Company in connection with the solicitation of proxies for the approval of the Merger and certain amendments to the Company's Articles of Incorporation (the "Company Articles") and Regulations (the "Company Regulations"). For purposes of this Prospectus, any reference to the "Company" shall also include NetMed, Inc., which will be the Company's name upon consummation of the Merger. The Merger will be effected pursuant to the terms and conditions of an Agreement and Plan of Merger, dated as of July 5, 1996, among the Company and the Predecessor Companies (the "Merger Agreement"). Upon consummation of the Merger (the "Effective Time"), and without any action on the part of the Company, the Predecessor Companies, or the holder of any of the securities of the Predecessor Companies, each issued and outstanding share of capital stock of each of the Predecessor Companies shall be converted into the right to receive the number of fully paid and nonassessable shares of the common stock, without par value, of the Company (the "Company Shares") as set forth below: Number of Company Shares for each Predecessor Predecessor Company Company Share ------------------- ------------- CIN 1,121.6652 INC 4,491.7064 ERG 3,237.2643 CCWP 37.3971 CCI 1,487.6186 Under the Articles of Incorporation of ERG, CCWP, and CCI, the affirmative vote of the holders of common shares of each of ERG, CCWP, and CCI entitling them to exercise a majority of the voting power of the respective corporations is required to approve the Merger. Ohio law provides that the Merger must be approved by the affirmative vote of the holders of common shares of each of CIN and INC entitling them to exercise at least two-thirds of the voting power of the respective corporations. The Company's shareholders must vote to approve the Merger and the amendments to the Company Articles and Company Regulations, which will be effective upon consummation of the Merger. Under the General Corporation Law of Ohio, holders of record of the Company's common stock who follow the procedures under Section 1701.85 will be entitled to exercise dissenter's rights with respect to their shares and receive the "fair cash value" of such shares. In addition, Section 1701.85 provides the holders of record of shares of the Predecessor Companies' common stock, who properly exercise and perfect dissenting shareholder rights with respect to the Merger, the right to obtain a cash payment for the "fair cash value" of their shares (excluding any element of value arising from the accomplishment or expectation of the Merger). In order to exercise such rights, holders must comply with the procedural requirements of the General Corporation Law of Ohio, a description of which is provided under "THE MERGER - Dissenters' Rights" and the full text of which is attached to this Prospectus as Appendix B. Failure to take any of the steps required under the General Corporation Law of Ohio on a timely basis may result in the loss of dissenters' rights. See "THE MERGER - Dissenters' Rights." THE COMPANY SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" AT PAGE 13. ____________________________ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ____________________________ NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS AND ANY INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED BY THIS PROSPECTUS IN ANY JURISDICTION OR TO ANY PERSON TO WHOM IT WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ____________________________ The date of this Prospectus is July 16, 1996. AVAILABLE INFORMATION While the Company is not now subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (the "Exchange Act"), it anticipates that it will be subject to these rules and regulations following consummation of the Merger and, in accordance therewith, will file reports, proxy statements, and other information with the Securities and Exchange Commission (the "Commission"). Copies of such reports, proxy statements, and other information, when filed by the Company, can be inspected and copied at the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 or at the public reference facilities of the regional offices of the Commission at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such material will also be available by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the fees prescribed by the rules and regulations of the Commission. The Company has filed with the Commission under the Securities Act of 1933, as amended, and the rules and regulations thereunder (the "Securities Act"), a Registration Statement on Form S-4 (as it may be amended, the "Registration Statement") with respect to the Company Shares issuable in connection with the Merger. This Prospectus does not contain all of the information contained in the Registration Statement, certain portions of which have been omitted pursuant to the rules and regulations of the Commission and to which reference is hereby made. Any statements contained herein or in any document incorporated by reference herein concerning the provisions of any contract or other document are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or other document, each such statement being qualified in its entirety by such reference. The Registration Statement (and exhibits thereto) should be available for inspection at the offices of the Commission at 450 Fifth Street, N.W., Washington D.C. 20549, and copies thereof may be obtained from the Commission at prescribed rates. All information contained herein with respect to the Company was supplied by the Company and all information contained herein with respect to the Predecessor Companies was supplied by the Predecessor Companies. The Company cannot warrant the accuracy or completeness of information relating to the Predecessor Companies. No Predecessor Company can warrant the accuracy or completeness of the information relating to the Company or any other Predecessor Company. -3- TABLE OF CONTENTS PAGE AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 3 TABLE OF CONTENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 The Predecessor Companies . . . . . . . . . . . . . . . . . . . . . . 5 The Merger; General Terms . . . . . . . . . . . . . . . . . . . . . . 7 Reasons for the Merger; Recommendation of the Boards of Directors of the Company and Predecessor Companies. . . . . . . . . . . . . . . . . . . . . . . . 10 Restrictions on Transfer of the Company Shares. . . . . . . . . . . . 11 Certain Related Transactions. . . . . . . . . . . . . . . . . . . . . 11 Dissenter's Rights. . . . . . . . . . . . . . . . . . . . . . . . . . 12 Comparative Per Share Information . . . . . . . . . . . . . . . . . . 12 Market Price Data . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Dividend History. . . . . . . . . . . . . . . . . . . . . . . . . . . 13 RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SELECTED HISTORICAL COMBINED FINANCIAL DATA OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Background of the Merger. . . . . . . . . . . . . . . . . . . . . . . 19 Reasons for the Merger; Recommendation of the Boards of Directors of the Company and the Predecessor Companies. . . . . . . . . . . . . . . . . . . . . . . . 19 Required Vote . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 The Merger Agreement. . . . . . . . . . . . . . . . . . . . . . . . . 20 Exchange of Certificates. . . . . . . . . . . . . . . . . . . . . . . 23 Amendment to Articles of Incorporation. . . . . . . . . . . . . . . . 23 Dissenter's Rights. . . . . . . . . . . . . . . . . . . . . . . . . . 23 NASDAQ/NMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . 25 Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . 25 Resales by Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 27 CERTAIN RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . 28 THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 NSI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 The Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 The PAPNET System . . . . . . . . . . . . . . . . . . . . . . . . . . 30 The PAPNET Service. . . . . . . . . . . . . . . . . . . . . . . . . . 31 The License . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Executive Officers and Directors. . . . . . . . . . . . . . . . . . . 32 Committees of the Board of Directors. . . . . . . . . . . . . . . . . 34 Director Compensation . . . . . . . . . . . . . . . . . . . . . . . . 34 Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . 35 Stock Option Plans. . . . . . . . . . . . . . . . . . . . . . . . . . 35 Principal Stockholders. . . . . . . . . . . . . . . . . . . . . . . . 37 Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company and the Predecessor Companies. . . . . . . . . . . . . . . . . . . . 37 Description of the Company Capital Stock. . . . . . . . . . . . . . . 41 THE PREDECESSOR COMPANIES. . . . . . . . . . . . . . . . . . . . . . . . . 44 Market Information. . . . . . . . . . . . . . . . . . . . . . . . . . 45 COMPARISON OF CERTAIN RIGHTS OF THE COMPANY AND THE PREDECESSOR COMPANIES SHAREHOLDERS. . . . . . . . . . . . . . . . 47 Articles of Incorporation Provisions. . . . . . . . . . . . . . . . . 47 Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Voting Power. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Payment of Dividends and Other Distributions. . . . . . . . . . . . . 49 Regulation Provisions . . . . . . . . . . . . . . . . . . . . . . . . 49 Meetings of Stockholders. . . . . . . . . . . . . . . . . . . . . . . 50 Stockholder Nominations and Proposals . . . . . . . . . . . . . . . . 51 Amendment of Articles of Incorporation and Regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Action by Written Consent . . . . . . . . . . . . . . . . . . . . . . 52 Size and Classification of Board of Directors; Removal of Directors; Filling Vacancies. . . . . . . . . . . . . . . . . . . 52 Liability and Indemnification of Officers and Directors . . . . . . . 53 Interested Stockholder Transactions . . . . . . . . . . . . . . . . . 53 Preemptive Rights . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Repurchase and Redemption of Stock. . . . . . . . . . . . . . . . . . 54 EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 INDEX TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . F-1 APPENDICES Appendix A - Agreement and Plan of Merger Appendix B - Section 1701.85 of the Ohio Revised Code - rights of Dissenting Shareholders -4- SUMMARY THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN INFORMATION WITH RESPECT TO THE MERGER. THIS SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND SHOULD BE READ IN CONJUNCTION WITH, THE DETAILED INFORMATION AND FINANCIAL STATEMENTS CONTAINED HEREIN AND IN THE EXHIBITS HERETO. THE COMPANY The Company is an Ohio corporation formed on October 25, 1989 for the purpose of acquiring from Neuromedical Systems, Inc. ("NSI") the exclusive rights to market the PAPNET-Registered Trademark- System and the PAPNET-Registered Trademark- Service in the State of Ohio. The Company later assigned its rights to Papnet Limited Partnership, an Ohio limited partnership ("PLP"). In January 1993, the Company acquired all of the issued and outstanding units of limited partnership interest in both PLP and Papnet Midwest Limited Partnership, an Ohio limited partnership ("PMLP"). PMLP owned the rights to market the PAPNET-Registered Trademark- System and PAPNET-Registered Trademark- Service in Kentucky and the Standard Metropolitan Area of Chicago, Illinois. As a result of these acquisitions the Company has the marketing rights to the PAPNET-Registered Trademark- System and the PAPNET-Registered Trademark- Service in Ohio, Kentucky and the Standard Metropolitan Area of Chicago. The PAPNET-Registered Trademark- System is a semi-automated cancer detection system for the review of cell, tissue or body fluid specimens, including but not limited to, cervical cytology specimens ("Slides"). The PAPNET-Registered Trademark- Service permits laboratories to submit Slides to one of NSI's central facilities for image processing employing NSI's patented neural network technology. NSI returns the Slides and digital tape containing processed images for evaluation by NSI-trained cytotechnologists. The Company's offices are located at 6059 Memorial Drive, Dublin, Ohio 43017 and its telephone number is (614) 793-9356. THE PREDECESSOR COMPANIES GENERAL Each of the Predecessor Companies, other than CCWP, was organized to acquire and exercise the right to market the PAPNET-Registered Trademark- System and PAPNET-Registered Trademark- Service within its licensed territory. However, until November 8, 1995, when the United States Food and Drug Administration ("FDA") finally approved the marketing of the PAPNET-Registered Trademark- technology, the technology could be used in the United States only for investigational purposes in connection with the FDA approval process. CCWP is an affiliate of CCI, and was organized for the purpose of holding certain warrants for the purchase of NSI common stock. Consequently, the Predecessor Companies had only minor levels of business activities prior to November 1995. -5- CYTOLOGY INDIANA, INC. CIN is an Ohio corporation formed on September 7, 1990 to serve as the general partner of Papnet Indiana Limited Partnership, an Ohio limited partnership, which was formed for the purpose of acquiring the rights to market the PAPNET-Registered Trademark- System and the PAPNET-Registered Trademark-Service in Indiana. Papnet Indiana Limited Partnership subsequently exchanged its rights for the State of Indiana for the right to market the PAPNET-Registered Trademark-System and the PAPNET-Registered Trademark- Service in Missouri. In 1995, Papnet Indiana Limited Partnership distributed its assets to its general and limited partners. CIN owns an approximate 65% interest in the rights to market the PAPNET-Registered Trademark- System and PAPNET-Registered Trademark- Service in Missouri. The former limited partners of Papnet Indiana Limited Partnership are now shareholders of INC, which owns an approximate 35% interest in the rights to market the PAPNET-Registered Trademark- System and PAPNET-Registered Trademark- Service in Missouri. CIN's offices are located at 6059 Memorial Drive, Dublin, Ohio 43017 and its telephone number is (614) 793-9356. INDIANA CYTOLOGY REVIEW COMPANY INC is an Ohio corporation formed on December 1, 1995 by the former limited partners of Papnet Indiana Limited Partnership for the purpose of owning an approximate 35% interest in the rights to market the PAPNET-Registered Trademark- System and the PAPNET-Registered Trademark- Service in Missouri. INC's offices are located at 6059 Memorial Drive, Dublin, Ohio 43017 and its telephone number is (614) 793-9356. ER GROUP, INC. ERG is an Ohio corporation formed on May 13, 1991 for the purpose of acquiring the rights to market the PAPNET-Registered Trademark- System and the PAPNET-Registered Trademark- Service in Georgia. ERG's offices are located at 8595 Milmichael Court, Dublin, Ohio 43017 and its telephone number is (614) 764-2501. CCWP PARTNERS, INC. CCWP is an Ohio corporation formed on December 1, 1995. Carolina Cytology Partnership, an Ohio limited partnership, owned warrants for the purchase of NSI common stock. In December 1995, immediately after the formation of CCWP, CCWP acquired all of the outstanding units of limited partnership interest in Carolina Cytology Partnership in exchange for stock in CCWP. CCWP now owns the common stock issued upon exercise of the NSI warrant. CCWP's offices are located at 8651 Gairloch Court, Dublin, Ohio 43017 and its telephone number is (614) 889-1052. -6- CAROLINA CYTOLOGY, INC. CCI is an Ohio corporation formed on December 10, 1992 for the purpose of acquiring the rights to market the PAPNET-Registered Trademark- System and the PAPNET-Registered Trademark- Service in North Carolina. CCI's offices are located at 8651 Gairloch Court, Dublin, Ohio 43017 and its telephone number is (614) 889-1052. THE MERGER; GENERAL TERMS At the Effective Time of the Merger, the Predecessor Companies will be merged with and into the Company, with the Company being the surviving corporation. In connection with the Merger, and without further action by the shareholders of the Company or the Predecessor Companies, the Company will amend its Articles of Incorporation to, among other things, change its name to NetMed, Inc. It is currently anticipated that, assuming all conditions to the Merger have been satisfied or waived, the Effective Time will occur in September, 1996, but in no event later than September 30, 1996. See "THE MERGER." MERGER CONSIDERATION. In the Merger, all outstanding shares of the Predecessor Companies' common stock, including shares of the Predecessor Companies issuable upon the exercise of outstanding warrants and options, shall be converted into the right to receive fully paid and nonassessable Company Shares (the "Merger Consideration"). Shares of outstanding common stock of the Predecessor Companies (other than Dissenting Shares) will be converted into Company Shares based on a ratio of one Predecessor Company share for the following number of shares of the Company: CIN (1,121.6652); INC (4,491.7064); ERG (3,237.2643); CCWP (37.3971); and CCI (1,487.6186). See "THE MERGER - The Merger Agreement (Merger Consideration Generally)." VOTE REQUIRED. Approval of the Merger and the Merger Agreement and the transactions contemplated thereby requires the affirmative vote of the holders of common shares of each of ERG, CCWP, and CCI entitling them to exercise a majority of the voting power of the respective corporations and the affirmative vote of holders of shares entitling them to exercise at least two-thirds of the voting power of the Company, CIN, and INC. In addition to the approval of the Merger, the adoption of amendments to the Company's Articles of Incorporation must be approved by the holders of at least two thirds of the outstanding stock of the Company entitled to vote thereon. In the event that the shareholders of the Company and each of the Predecessor Companies approve and adopt the Merger and the Merger Agreement as required by their respective Articles of Incorporation and the General Corporation Law of Ohio, and upon satisfaction or waiver of all other conditions to the Merger, the Merger will be consummated without any further vote of the shareholders of the Company or the Predecessor Companies. See "THE MERGER - Required Vote." CONDITIONS TO THE MERGER; TERMINATION. The respective obligations of the Company and the Predecessor Companies to consummate the Merger are subject to certain conditions, including among others the adoption of the Merger and the Merger Agreement by the holders of the requisite number of shares of the Company and Predecessor Companies' common stock; the compliance by -7- each of the parties to the Merger Agreement with its material obligations thereunder and the truth of the representations and warranties made by each of the parties on the date of the Merger Agreement and at the Effective Time; the Registration Statement shall have become effective under the Securities Act; the Company shall have received all state securities or "Blue Sky" permits and other authorizations necessary to issue the Company Shares pursuant to the Merger and the Merger Agreement; the Company Shares shall have been admitted for quotation on the National Market of the National Association of Securities Dealers, Inc. Automated Quotation system ("NASDAQ NMS") upon official notice of issuance; at the time of the consummation of the transactions contemplated by the Merger Agreement (the "Closing"), the shareholders of the Company or any Predecessor Company entitled to assert dissenter's rights shall own in the aggregate less than 10% of the outstanding shares of the Company or the Predecessor Company; and the Company and the Predecessor Companies having received an opinion of Porter, Wright, Morris & Arthur, counsel to the Company, to the effect that, among other things, the Merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code") and each Predecessor Company will be a party to that reorganization within the meaning of Section 368(b) of the Code and that the holding period for the Company Shares received in exchange for the Predecessor Company shares will include the period for which the Predecessor Company shares were held, provided that the Predecessor Company shares were held as a capital asset. See "THE MERGER - The Merger Agreement (Conditions to Consummation of the Merger)." The Merger Agreement may be terminated by mutual consent of all of the parties; by any of the parties if the Merger shall not have been consummated before September 30, 1996 (unless the failure to consummate the Merger by such date shall be due to the action or failure to act of the party seeking to terminate the Merger Agreement); by any party if any permanent injunction or other order of a court or other competent authority shall have become final and non-appealable; or by any party if any required approval of the shareholders of such party or any other party shall not have been obtained. The Merger Agreement may also be terminated by a vote of the majority of a seven member interim advisory board (the "Advisory Board") appointed by the parties. In the event that the Merger Agreement is terminated, the Merger Agreement shall be void and have no effect, without any liability on the part of any party or its affiliates, directors, officers, or shareholders. Notwithstanding the foregoing, the parties to the Merger Agreement will continue to be bound by the provisions of the Merger Agreement that relate to: (i) their respective obligations as to confidentiality and the payment of any broker's or finder's fees; (ii) a party's obligation to pay liquidated damages in the amount of $500,000 to the other parties if the termination arises out of that party's failure to obtain the required approval of the Merger and the Merger Agreement or that party's breach of the Merger Agreement; and (iii) a party's obligation to pay its share of all costs and expenses incurred by the parties in connection with the Merger and the transactions contemplated by the Merger Agreement. A party's share of any liquidated damages paid as a result of a termination of the Merger or its share of costs and expenses required to be paid by it under the Merger Agreement shall be in proportion to the number of Company Shares that are or would have been owned by the party's shareholders immediately after the Effective Time. See "THE MERGER - The Merger Agreement (Termination)." -8- ACCOUNTING TREATMENT. The merger will be effected by an exchange of the Company's common stock for the outstanding common shares of the Predecessor Companies. The merger of the Company and the Predecessor Companies will be accounted for at historical cost. For accounting purposes, the Company will be the predecessor of the merged entity and its historical financial statements will be those of the new entity NetMed, Inc. The results of operations of the Predecessor Companies will be combined with those of the Company commencing at the date of merger. See "THE MERGER - Anticipated Accounting Treatment." FEDERAL INCOME TAX CONSEQUENCES. The following discussion is a general summary of the principal federal income tax consequences of the Merger to individual United States holders of the Predecessor Companies shares who hold their shares as capital assets. The discussion is based on laws, regulations, rulings and decisions currently in effect. It is for general information only, and is not intended to be tax advice to any particular shareholder of the Company or a Predecessor Company. The discussion does not take into account rules that are applicable to shareholders of the Predecessor Companies that are subject to special treatment under the Code, including without limitation, insurance companies, dealers in securities, financial institutions, tax-exempt investors, foreign investors, shareholders who do not hold their stock as a capital asset and shareholders who acquired shares pursuant to the exercise of an employee stock option, employee stock purchase plan or otherwise as compensation. The discussion also does not address state, local or foreign tax consequences of the Merger. No rulings have been or will be requested from the Internal Revenue Service with respect to the tax consequences of the Merger. Assuming the Merger is consummated in the manner set forth in the Merger Agreement and qualifies as a reorganization under Section 368 of the Code, the principal federal income tax consequences of the Merger under present federal income tax law will be as described below. (a) No gain or loss will be recognized by the Company or the Predecessor Companies as a result of the Merger; (b) No gain or loss will be recognized by the holders of Predecessor Company shares upon the exchange of their shares of Predecessor Company shares for Company Shares pursuant to the Merger (except for any gain or loss attributable to cash received by a holder of Predecessor Company stock in payment of appraisal or dissenters' rights of appraisal or for fractional share interests to which they may be entitled ); (c) The federal income tax basis of the Company Shares received by the shareholders of the Predecessor Companies (including fractional share interests to which they may be entitled) for their Predecessor Company shares will be the same as the federal income tax basis of the Predecessor Company shares surrendered in exchange therefor, increased by any gain recognized; and (d) The holding period for the Company Shares received by shareholders of the Predecessor Companies in exchange for their Predecessor Company shares will include the period for which the Predecessor Company shares exchanged therefor were held, -9- provided that the exchanged Predecessor Company shares were held as a capital asset by such shareholder on the date of the exchange. It is a condition to the closing that the Company and the Predecessor Companies shall have received an opinion of Porter, Wright, Morris & Arthur which will be based upon certain certificates, representations and assumptions, substantially to the effect that, for federal income tax purposes the Merger will constitute a reorganization within the meaning of section 368(a) of the Code and will result in the tax consequences described above. No opinion will be expressed with respect to any other tax consequences of the exchange, including, without limitation, the tax consequences with respect to any shares of Predecessor Company stock that were acquired in contemplation of the Merger, were held by shareholders subject to special treatment under the Code, were not held as capital assets or were acquired by the holder thereof pursuant to any employee stock option, employee stock purchase plan or otherwise as compensation or pursuant to the exercise of any warrants to purchase shares of Predecessor Company stock. Further, no opinion will be expressed concerning the effect of state, local and foreign tax laws. An opinion of counsel is not binding upon the IRS, and there can be no assurance that the IRS will not take a position contrary to the positions reflected in such opinion or that such opinion will be upheld by the courts if challenged by the IRS. THE SPECIFIC TAX TREATMENT OF EACH SHAREHOLDER WILL DEPEND ON THEIR PARTICULAR FACTS AND CIRCUMSTANCES. EACH HOLDER OF COMPANY SHARES AND PREDECESSOR COMPANY SHARES IS ADVISED TO CONSULT WITH SUCH STOCKHOLDER'S OWN TAX ADVISER CONCERNING THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER, AS WELL AS THE APPLICABLE STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES. See "THE MERGER - - Certain Federal Income Tax Consequences." REASONS FOR THE MERGER; RECOMMENDATION OF THE COMPANY'S AND THE PREDECESSOR COMPANIES' BOARDS OF DIRECTORS In evaluating the proposed Merger, the Boards of Directors of the Company and the Predecessor Companies, with the assistance of outside counsel and other advisors, considered a variety of factors, including the following: (i) the efficiencies created through the combined entity; (ii) the relative market positions of each of the Company and the Predecessor Companies and the increased market penetration of the combined entity; (iii) the ability of management of the combined entity to realize the full potential of the combined entity; (iv) the opportunity that the combination would afford the Predecessor Companies' shareholders to acquire an equity participation in a larger enterprise with significantly larger equity value than any one of the Predecessor Companies; (v) the terms of the Merger Agreement; and (vi) the potential for greater liquidity for the shareholders of the Company and Predecessor Companies. The directors of the Company and the Predecessor Companies have unanimously determined that the Merger Agreement and the Merger are advisable and fair and in the best interests of the Company and the Predecessor Companies and recommend that their respective shareholders approve the Merger Agreement and the Merger. See "THE MERGER - Background of the Merger," "- -10- Reasons for the Merger" and "- Recommendation of the Predecessor Companies' Boards of Directors." RESTRICTIONS ON TRANSFER OF THE COMPANY SHARES Certain persons who may be deemed "affiliates" of the Company or any of the Predecessor Companies for purposes of Rule 145 under the Securities Act ("Rule 145") will not be permitted to transfer their Company Shares issued in the Merger except (i) pursuant to an effective registration statement; (ii) in compliance with Rule 145; or (iii) pursuant to an exemption from the registration requirements of the Securities Act. This Prospectus does not cover resales of Company Shares by affiliates of the Company or the Predecessor Companies. In addition certain affiliates of the Company and the Predecessor Companies have agreed not to sell their Company Shares for a specified period of time. See "THE MERGER - Resales by Affiliates." Under the terms of the Merger Agreement, the Predecessor Company shareholders have, with respect to the Company shares that each receives in the Merger, and David J. Richards, John P. Kennedy and Carl A. Genberg (the "Key Company Shareholders") have, with respect to their shares of the Company, agreed to certain additional restrictions on the transfer of their respective shares of the Company. Except with respect to certain privately negotiated sales, the Predecessor Company shareholders will be prohibited from selling more than an aggregate of 625,000 Company Shares during the one year period commencing on the closing date of the Merger. The number of Company Shares that each Predecessor Company shareholder will be entitled to sell is equal to the product of (A) the ratio of Company Shares received with respect to the conversion of the shareholder's shares in a Predecessor Company to the number of Company Shares so received by all shareholders of such Predecessor Company, times (B) the number of shares allocated to such Predecessor Company in the Merger Agreement for the relevant time period. Except with respect to certain privately negotiated sales and certain transactions involving the pledge of the shares held by the Key Company Shareholders, the Key Company Shareholders have agreed not to sell the Company Shares they own immediately after the Merger for a period of one year commencing on the closing of the Merger. See "Merger Agreement - Appendix A." CERTAIN RELATED TRANSACTIONS Each of the other Predecessor Companies and the Company entered into a Loan Agreement, dated July 5, 1996 (the "Loan Agreement"), whereby the Company has agreed to advance to the other Predecessor Companies the expenses incurred by each in connection with the Merger. In addition, the Company will advance funds necessary to pay reasonable expenses of ordinary business operations for the Predecessor Companies pending consummation of the Merger (collectively, the "Advances"). Advances made to the Predecessor Companies in connection with the merger that was abandoned in June 1996 (the "Initial Advances") will be added to the Advances. The Initial Advances and the Advances will be evidenced by a promissory note bearing interest at an annual rate of 7%, payable 180 days after the earlier of the consummation of the Merger or the termination of the Merger Agreement. Promissory notes delivered by the Predecessor Companies will be secured by their shares of NSI common stock. -11- The Loan Agreement has been modified by a side-letter agreement among the Company, ERG, CCI and CCWP, dated July 16, 1996, which provides, among other things, terms relating to notice and cure periods for any defaults and credits for certain expenses that are paid directly by these Predecessor Companies. The Company entered into a loan agreement, dated March 14, 1996 with Cytology West, Inc. ("CWI") and Papnet Utah, Inc. ("PUI"). CWI is licensed to sell the PAPNET-Registered Trademark- System and the PAPNET-Registered Trademark- Service in Arizona, Nevada and San Diego County California. PUI is licensed to sell PAPNET-Registered Trademark- System and the PAPNET-Registered Trademark- Service in Utah. Carl Genberg, President of CWI, owns 383,616 shares of the Company's common stock and may be deemed to be an affiliate of the Company. CWI and PUI were originally to have been a parties to a merger with the Company and the Predecessor Companies, but that transaction was abandoned by the parties. The loan agreement provides for advances to CWI of up to $585,000 to cover certain operating expenses, expenses associated with the abandoned merger, and the acquisition of new technology. No specific amount was established for advances to PUI. The advances will bear interest at the rate of 7% per annum. As of June 15, 1996, the Company had advanced approximately $146,320 to CWI and $14,315 to PUI under the terms of the loan agreement, and no further advances will be made. The Company, the Predecessor Companies and certain individual shareholders of these companies entered into a Voting Agreement, dated July 5, 1996, pursuant to which the individual shareholders appointed John P. Kennedy and Cecil J. Petitti as their proxies and attorneys-in-fact for the purpose of voting their shares in the Company or Predecessor Company, as the case may be, in favor of the Merger, the Merger Agreement and the transactions contemplated thereby. Pending completion of the Merger, the business operations of CIN, INC, ERG, and CCI are being managed by the Company. DISSENTER'S RIGHTS Under Ohio General Corporation Law, holders of record of shares of the Company and the Predecessor Companies who properly exercise and perfect dissenter's rights with respect to the Merger will have the right to receive the "fair cash value" of their shares (excluding any appreciation or depreciation in market value resulting from the Merger). In order to exercise such rights, holders must comply with the procedural requirements of Section 1701.85 of the Ohio Revised Code, a description of which is provided under "THE MERGER - Dissenter's Rights" and the full text of which is attached to this Prospectus as Appendix B. Failure to take any of the steps required under Section 1701.85 on a timely basis may result in the loss of dissenter's rights. See "THE MERGER - Dissenter's Rights." COMPARATIVE PER SHARE INFORMATION The Predecessor Companies had only minor levels of business activities prior to November 1995. In addition, there is no public market for the any Predecessor Company's common stock. Accordingly, comparative share information would not be meaningful. -12- MARKET PRICE DATA Currently, there is no public market for the common stock of any Predecessor Company. There has been a limited over the counter public market for the shares of the Company, which are quoted on the NASDAQ Bulletin Board. The following are the high and low quarterly closing bid and asked prices per Company share for 1994, 1995 and the first quarter of 1996, which have been adjusted to reflect 2-for-1 stock splits in May 1994, May 1995 and December 1995. The prices shown represent quotations between dealers, without adjustments for retail markups, markdowns or commissions and may not represent actual transactions. 1994 High Low ---- ---- --- 2nd Qtr. 7.50 3.75 3rd Qtr. 6.875 3.625 4th Qtr. 4.25 3.50 1995 ---- 1st Qtr. 5.398 3.75 2nd Qtr. 8.094 7.875 3rd Qtr. 17.688 10.75 4th Qtr. 15.688 13.375 1996 ---- 1st Qtr. 13 9.375 DIVIDEND HISTORY The Company has paid no cash dividends since its formation. The Company presently anticipates that all of its future earnings will be retained for the development of its business and does not anticipate paying cash dividends on the Company common stock in the foreseeable future. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will be based on the Company's future earnings, financial condition, capital requirements and other relevant factors. RISK FACTORS IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, SHAREHOLDERS OF THE COMPANY AND THE PREDECESSOR COMPANIES SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE MAKING A DECISION REGARDING THEIR VOTE ON THE MERGER. LIMITED OPERATING HISTORY. The Company was formed on October 25, 1989. Because the Company is in the early stage of its operations it is subject to all the risks incident to the creation and development of a new business, including the absence of earnings and minimal net worth. The Company has to date had no appreciable income from operations, and as of March 31, 1996 has an accumulated deficit of $287,344. See INDEX TO FINANCIAL STATEMENTS. -13- LICENSE AGREEMENT. The Company's rights to market the PAPNET-Registered Trademark- System and PAPNET-Registered Trademark- Service and the revenues generated by these activities are governed by the terms of a License Agreement with NSI (the "License Agreement"). The License Agreement imposes significant territorial and other restrictions on the Company's marketing rights, and places certain limitations on the amounts of royalty revenues which the Company can generate through the marketing of the PAPNET-Registered Trademark- System and PAPNET-Registered Trademark- Service. See "THE COMPANY - The License." RELIANCE ON NSI. The business of the Company is dependent upon a number of factors, many of which are controlled by NSI. These factors include maintaining the PAPNET-Registered Trademark- System's compliance with FDA and other regulatory requirements, maintenance of the technological advantages of the PAPNET-Registered Trademark- System, maintenance of product liability insurance, the ability to manufacture and deliver the equipment required to operate the PAPNET-Registered Trademark- System, and the ability to build and operate the Scanning Station portion of the PAPNET-Registered Trademark- System. Further, NSI is in a stage of development that may require additional funding for its internal operations. In the event that NSI should fail to perform in any of these areas, or in any others which could affect its licensees, such failure could have an adverse effect on the Company and its business. The Company is dependent and relies upon NSI for product information, support and marketing and other pertinent information. Further, NSI does not manufacture all of the equipment used in the PAPNET-Registered Trademark- System, and is therefore dependent upon others to do so. The failure of NSI's suppliers to perform could have an adverse effect on the Company's business. NEED FOR MARKET ACCEPTANCE OF THE PAPNET-Registered Trademark- SYSTEM. The Company's future performance will depend to a substantial degree upon market acceptance of the PAPNET-Registered Trademark- System. The extent of, and rate at which, market acceptance and penetration are achieved by the PAPNET-Registered Trademark- System are functions of many variables including, but not limited to, price, effectiveness, acceptance by patients, physicians and laboratories (including the ability of laboratories to hire additional cytotechnologists), manufacturing, slide processing and training capacity, reimbursement practice and marketing and sales efforts. There can be no assurance that the PAPNET-Registered Trademark- System will achieve or maintain acceptance in its target markets. See "THE COMPANY - The Market." RELIANCE ON A SINGLE PRODUCT. While the Company intends to develop or acquire other technologies, it has concentrated its efforts primarily on the marketing of the PAPNET-Registered Trademark- System and will be dependent upon the successful development of that product to generate revenues. Accordingly, for the foreseeable future, the Company's success will be dependent upon the marketing of the PAPNET-Registered Trademark- System. DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY. The technology underlying the PAPNET-Registered Trademark- System is protected by broad patent protection granted to NSI with respect to the use of neural networks in automated and semi-automated cytology. There can be no assurance that the NSI patents will afford protection from material infringement or that such patents will not be challenged. NSI and the Company will also rely on trade secrets and proprietary know-how, which they will seek to protect, in part, through confidentiality agreements with employees, consultants and other parties. There can be no assurance that these agreements will not be breached, that there will be adequate remedies for any breach or that trade secrets of NSI or the Company will not otherwise become known to, or independently developed by, competitors. -14- The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property rights. Although patent and intellectual property disputes in the medical device area have often been settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and there can be no assurance that necessary licenses would be available to NSI or the Company on satisfactory terms or at all. Adverse determinations could limit the value of NSI's or the Company's issued patents or result in invalidation of those patents, subject NSI or the Company to significant liabilities to third parties, require NSI or the Company to seek licenses from third parties or prevent NSI or the Company from manufacturing and selling its products, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. PRODUCT LIABILITY. The business of the Company could expose it to the risks inherent in the production and distribution of medical diagnostic equipment. Although NSI has attempted to reduce the exposure to product liability risk by disclosing the demonstrated range of accuracy of the PAPNET-Registered Trademark- System, there can be no assurance that the Company will not be exposed to liability resulting from the failure or inaccuracy of the PAPNET-Registered Trademark- System. Neither the Company nor any Predecessor Company carries product liability insurance. However, NSI is required, under the terms of the License Agreement, to name the Company and each Predecessor Company as additional insureds on its product liability policy. TECHNOLOGY RISKS. NSI, and consequently the Company, are dependent upon the technological advantages of the PAPNET-Registered Trademark- System and its patent protection. There can be no assurance that NSI will be able to maintain such advantages, and the failure to do so could have adverse consequences on the business of the Company. GOVERNMENT REGULATION. NSI's services, products and manufacturing activities are subject to extensive and rigorous government regulation, including the provisions of the Medical Device Amendment to the Federal Food, Drug and Cosmetic Act. Commercial distribution in certain foreign countries is also subject to government regulations. The process of obtaining required regulatory approvals can be lengthy, expensive and uncertain. Moreover, regulatory approvals, if granted, may include significant limitations on the indicated uses for which a product may be marketed. The FDA actively enforces regulations prohibiting marketing without compliance with the premarket approval provisions of products and conducts periodic inspections to determine compliance with Good Manufacturing Practice regulations. The FDA recently warned the Company that certain promotional materials relating to the PAPNET-Registered Trademark- System appearing on the Company's World Wide Web site failed to comply with certain FDA premarket approval regulations. The FDA cited specific claims made in these materials and advised the Company that it should review these and other promotional materials to ensure compliance with the regulations. While the Company believes that the materials comply in all respects with applicable regulations, it has suspended access to these materials on its Web site pending FDA's evaluation of its detailed response to the warning letter. Failure to comply with applicable regulatory requirements can result in, among other things, fines, suspensions of approvals, seizures or recalls of products, operating restrictions and criminal prosecutions. Furthermore, changes in existing regulations or adoption of new regulations could -15- prevent NSI from obtaining, or affect the timing of, future regulatory approvals. The effect of governmental regulation may be to delay for a considerable period of time or to prevent the marketing and/or full commercialization of future products or services that NSI or the Company may develop and/or impose costly requirements on NSI or the Company. There can be no assurance that NSI or the Company will be able to obtain regulatory approvals of any products on a timely basis or at all. Delays in receipt of or failure to receive such approvals or loss of previously received approvals would adversely affect the marketing of NSI's and the Company's proposed products. There can also be no assurance that additional regulations will not be adopted or current regulations amended in such a manner as will materially adversely effect NSI or the Company. RELIANCE ON MANAGEMENT. The success of the Company's operations is highly dependent upon David J. Richards who has devoted much effort in marketing the PAPNET-Registered Trademark- System. The loss of Mr. Richards as an employee could have an adverse effect on the business of the Company. The Company has no employment agreement with Mr. Richards and does not own any insurance policies on his life. COMPETITION. The Company is aware of several companies that either have developed or are developing Pap smear classification systems that are competitive with the PAPNET-Registered Trademark- System. Commercial availability of such products could have a material adverse effect on the Company's business, financial condition and results of operations. NSI's competitors may have substantially greater financial, manufacturing, marketing and technical resources than NSI and represent significant potential long-term competition for NSI. NSI's competitors may succeed in developing products that are more effective or less costly than any that may be developed by NSI. These competitors may also prove to be more successful than NSI in production and marketing. New developments are expected to continue at a rapid pace in both industry and academia. There can be no assurance that research and development by others will not render NSI's current and contemplated products obsolete. Competition may increase further as a result of advances that may be made in the commercial applicability of technologies and greater availability of capital for investment in these fields. Since the Company was organized, competitors have made strides in developing automated or semi-automated system that could successfully compete with the PAPNET-Registered Trademark- System. See "THE COMPANY - Competition." LACK OF PROSPECTIVE DIVIDENDS. The Company does not contemplate the payment of dividends on the Company Shares for the foreseeable future. The Company has accumulated substantial losses since its inception and there can be no assurance that the Company's operations will result in sufficient revenues to enable the Company to operate at profitable levels or to generate positive cash flow. Any earnings generated from the operations of the Company will be used to finance the business and growth of the Company. See "DESCRIPTION OF SECURITIES - - Dividends." PUBLIC MARKET. To date, the Company's common stock has traded on a limited over the counter market. Although the Company expects that a public market will develop for its common stock upon consummation of the Merger, there can be no assurance of that market. Also, there can be no assurance that, if a market develops, that it will be an active, liquid or continuous trading market. The stock market has experienced extreme price and volume fluctuations and volatility that has particularly affected the market prices of many technology, emerging growth and developmental -16- stage companies. Such fluctuations and volatility have often been unrelated or disproportionate to the operating performance of such companies. Factors such as announcements of the introduction of new or enhanced services or related products by the Company or its competitors may have a significant impact on the market price of the Company's common stock. CONTROL BY PRINCIPAL SHAREHOLDERS. Upon completion of the Merger, the directors, executive officers and principal shareholders of the Company and their affiliates will collectively own approximately 31% of the outstanding Company common stock. As a result, these shareholders will be able to exercise significant influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. Such concentration of ownership may have the effect of delaying or preventing a change in control of the Company. See "The Company - Principal Shareholders." SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON MARKET PRICE. Upon completion of the Merger, the Company will have 10,922,969 shares of common stock outstanding. Of these shares, 7,734,437 shares will be held by nonaffiliates of the Company or the Predecessor Companies and will be, subject only to the Lock-up provisions of the Merger Agreement, freely tradeable without restriction or further registration under the Securities Act. The remaining 3,519,552 shares are or will be held by affiliates of the Company or the Predecessor Companies, who will be entitled to resell them, subject to the Lock- up provisions of the Merger Agreement, only pursuant to a registration statement under the Securities Act or an applicable exemption from registration thereunder such as an exemption provided by Rule 144 under the Securities Act, or, in the case of shares acquired in connection with the Merger by affiliates of the Predecessor Companies, in compliance with the provisions of Rule 145 under the Securities Act. Sales of substantial amounts of the Company common stock in the public market or the prospect of such sales after the Merger could adversely affect the market price of the Company common stock. ANTI-TAKEOVER PROVISIONS; CERTAIN PROVISIONS OF OHIO LAW; ARTICLES OF INCORPORATION AND REGULATIONS. Certain provisions of Ohio law, the Company's Articles of Incorporation and Regulations could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. The Company's Articles of Incorporation provide for the Board of Directors to be divided into three classes of directors serving staggered three-year terms (unless there are fewer than 9 Directors, in which case there will be two classes). Such classification of the Board of Directors expands the time required to change the composition of a majority of directors and may tend to discourage a proxy contest or other takeover bid for the Company. See "THE COMPANY - Description of Capital Stock." Certain provisions of Ohio law and the Company's Articles of Incorporation allow the Company to issue preferred stock (the "Company Preferred Stock") with rights senior to those of the Company common stock without any further vote or action by the shareholders. The issuance of Company Preferred Stock could decrease the amount of earnings and assets available for distribution to the holders of the Company common stock or could adversely affect the rights and powers, including voting rights, of the holders of the Company common stock. In certain circumstances, such issuance could have the effect of decreasing the market price of the Company common stock. See "THE COMPANY - Description of Capital Stock." Additionally, upon completion of the Merger, the directors, executive officers and existing principal shareholders of the -17- Company and their affiliates will collectively own approximately 31% of the outstanding Company common stock. Such concentration of ownership may have the effect of delaying or preventing a change in control of the Company. See "RISK FACTORS - Control by Principal Shareholders" and "THE COMPANY - Principal Shareholders." FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING. If additional funds are needed for the Company's operations, there can be no assurance that such funds will be available on terms favorable to the Company, or at all. If additional funds are raised through the issuance of equity securities, the percentage ownership of the then current shareholders of the Company may be reduced and such equity securities may have rights, preferences or privileges senior to those of the holders of the Company's common stock. [The remainder of this page intentionally left blank.] -18- SELECTED HISTORICAL FINANCIAL DATA OF THE COMPANY The selected financial data which follows have been derived from the financial statements of the Company included elsewhere in this Prospectus. The selected combined financial data set forth below should be read in conjunction with "THE COMPANY - Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company" and the Financial Statements and Notes thereto included elsewhere in this Prospectus. See "INDEX TO FINANCIAL STATEMENTS."
YEAR ENDED THREE MONTHS ENDED DECEMBER 31 MARCH 31 1993 1994 1995 1995 1996 ----------------------------------------------------------------------- (UNAUDITED) Royalty Revenue $ 4,322 $ 24,765 $ 48,000 $ 10,080 $ 13,533 Operating Expenses Salaries and Benefits 180,909 184,113 284,041 46,456 60,368 Sales and Marketing 41,881 26,433 62,079 13,142 19,294 Professional 38,935 40,664 32,854 8,181 1,863 Payroll and franchise taxes 19,272 20,831 22,316 9,995 19,297 Depreciation and amortization 8,916 8,152 7,496 1,800 1,500 Office and other - 47,168 57,948 12,067 10,792 Merger - - 106,415 - 36,613 ----------------------------------------------------------------------- Total operating expenses 289,913 327,361 573,149 91,601 149,727 ----------------------------------------------------------------------- Operating loss (289,591) (302,596) (525,149) (81,521) (136,174) Other income (expense) Interest income 9,037 19,059 16,606 3,766 6,010 Interest expense (514) - (264) (39) - Equity income in partnerships - - 49,638 - (1,275) NSI settlement and common stock transactions - - 1,715,399 - - ----------------------------------------------------------------------- Total other income 8,523 19,059 1,781,379 3,727 4,735 ----------------------------------------------------------------------- Income (loss) before income taxes (277,068) (283,537) 1,256,230 (77,794) (131,439) Income tax provision (benefit) - - (68,715) - (52,575) ----------------------------------------------------------------------- Net income (loss) $(277,068) $(283,537) $1,324,945 (77,794) (78,864) ----------------------------------------------------------------------- ----------------------------------------------------------------------- Net income (loss) per share $ (.05) $ (.05) $ .21 $ (.01) $ (.01) ----------------------------------------------------------------------- ----------------------------------------------------------------------- Shares used in computation 5,623,000 5,860,336 6,349,594 5,860,336 6,073,136 ----------------------------------------------------------------------- ----------------------------------------------------------------------- Balance Sheet Data: Total assets 768,934 8,945,789 9,419,540 Total stockholders' equity 738,600 6,253,679 6,528,990
THE MERGER BACKGROUND OF THE MERGER Management of the Company and the Predecessor Companies began discussing a possible business combination in early 1995. These discussions culminated in the signing of a letter of intent, dated February 1, 1995, summarizing the discussions and understandings of the parties regarding a proposed merger of the Company and the Predecessor Companies (the "Letter of Intent"). The Letter of Intent did not contain specific terms or a specific structure for the combination. The parties to the Letter of Intent had to agree on the relative valuation of the combining entities and certain other issues. NSI's pending initial public offering and disagreements with NSI involving the Company's and the Predecessor Companies' rights under their respective license agreements with NSI also contributed to the delay in finalizing the Merger Agreement. On December 5, 1995, the Company and the Predecessor Companies entered into a Settlement Agreement with NSI, which settled all disputes with NSI as of that date. The Settlement Agreement included the License Agreement for the licensing of rights to the PAPNET-Registered Trademark- System and the PAPNET-Registered Trademark- Service that the Company and each of the Predecessor Companies approved. NSI also closed its initial public offering on December 7, 1995. In March 1996, the Company and the Predecessor Companies agreed to a merger in which CWI and PUI were to have been parties. CWI would have been the surviving corporation, but that transaction was abandoned in May 1996, and the parties decided to proceed without the participation of CWI and PUI. REASONS FOR THE MERGER; RECOMMENDATION OF THE COMPANY'S AND PREDECESSOR COMPANIES' BOARD OF DIRECTORS In evaluating the proposed Merger, the Boards of Directors of the Company and the Predecessor Companies, with the assistance of outside counsel and other advisors, considered a variety of factors, including the following: (i) the efficiencies created through the combined entity; (ii) the relative market positions of each of the Company and the Predecessor Companies and the increased market penetration of the combined entity; (iii) the ability of management of the combined entity to realize the full potential of the combined entity; (iv) the opportunity that the combination would afford the Predecessor Companies' shareholders to acquire an equity participation in a larger -19- enterprise with significantly larger equity value than any one of the Predecessor Companies; (v) the terms of the Merger Agreement; and (vi) the potential for greater liquidity for the shareholders of the Predecessor Companies. The directors of the Company and the Predecessor Companies have unanimously determined that the Merger Agreement and the Merger are advisable and fair and in the best interests of the Company and the Predecessor Companies and recommend that their respective shareholders approve the Merger Agreement and the Merger. REQUIRED VOTE ERG, CCWP, and CCI are all Ohio corporations and their respective Articles of Incorporation provide that where Ohio General Corporation Law requires the affirmative vote of greater than a majority of the shares entitled to vote on a matter, that matter can be approved by a majority of the shares entitled to vote on the matter. Accordingly, approval of the Merger, Merger Agreement and the transactions contemplated thereby requires the affirmative vote of the holders of the issued and outstanding shares of ERG, CCWP, and CCI common stock entitling them to exercise a majority of the voting power of the respective corporations. The Company, CIN, and INC are also Ohio corporations, but their respective Articles of Incorporation do not provide for majority approval of transactions like those contemplated by the Merger and the Merger Agreement. Accordingly, the Merger, the Merger Agreement and the transactions contemplated thereby must be approved by the affirmative vote of the holders of the issued and outstanding shares of the Company, CIN, and INC common stock entitling them to exercise at least two-thirds of the voting power of the respective corporations. THE MERGER AGREEMENT The following is a brief summary of certain provisions of the Merger Agreement, a copy of which is attached as Appendix A to this Prospectus and is incorporated herein by reference. Such summary is qualified in its entirety by reference to the Merger Agreement. Shareholders are urged to read the Merger Agreement carefully. The Merger Agreement provides that, as promptly as practicable following the approval of the Merger by the shareholders of the Company and the Predecessor Companies and the satisfaction or waiver of the other conditions to the Merger, but in no event later than two days thereafter, the Predecessor Companies will be merged with and into the Company, with the Company continuing as the surviving corporation under the name "NetMed, Inc." Upon the satisfaction or waiver of all conditions to the Merger, the Merger will become effective upon the filing of a certificate of merger by the Company and the Predecessor Companies with the Secretary of State of Ohio in accordance with Ohio General Corporation Law. The anticipated Effective Time is not until September 1996. MERGER CONSIDERATION GENERALLY. In the Merger, all outstanding shares of the Predecessor Companies' common stock, including shares of Predecessor Company common stock issuable upon -20- the exercise of outstanding warrants and options, shall be converted into the right to receive the Company Shares, based on the following conversion table: Number of Company Shares for each Predecessor Predecessor Company Company Share ------------------- ------------- CIN 1,121.6652 INC 4,491.7064 ERG 3,237.2643 CCWP 37.3971 CCI 1,487.6186 FRACTIONAL SHARES. No fractional shares will be issued in the Merger. CONDITIONS TO CONSUMMATION OF THE MERGER. The respective obligations of the Company and the Predecessor Companies to consummate the Merger are subject to certain conditions, including among others the adoption of the Merger and the Merger Agreement by the holders of the requisite number of shares of the Company and Predecessor Companies' common stock; the compliance by each of the parties to the Merger Agreement with its material obligations thereunder and the truth of the representations and warranties made by each of the parties on the date of the Merger Agreement and at the Effective Time; the effectiveness of the Registration Statement under the Securities Act; the receipt by the Company of all state securities or "Blue Sky" permits and other authorizations necessary to issue the Company Shares pursuant to the Merger and the Merger Agreement; the admission of the Company for quotation on the National Market of the National Association of Securities Dealers, Inc. Automated Quotation system ("NASDAQ NMS") upon official notice of issuance; at the Closing, the shareholders of the Company or any Predecessor Company entitled to assert dissenter's rights shall own in the aggregate less than 10% of the outstanding shares of the Company or such Predecessor Company; and the receipt by the Company and the Predecessor Companies of an opinion of Porter, Wright, Morris & Arthur, counsel to the Company, to the effect that, among other things that, the Merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code and each Predecessor Company will be a party to that reorganization within the meaning of Section 368(b) of the Code. REPRESENTATIONS AND WARRANTIES. In the Merger Agreement, each of the Predecessor Companies and the Company has made certain representations and warranties relating to, among other things: (i) its corporate organization and qualification; (ii) its capitalization; (iii) its corporate power and authority relative to the Merger Agreement; (iv) the absence of conflicts with its constituent documents and material agreements; (v) filings required to be made with and consents required to be obtained from governmental entities in connection with the transactions contemplated by the Merger Agreement; (vi) the accuracy of the information supplied for this prospectus and the Registration Statement; and (vii) the absence of changes that would have a material adverse effect on the properties, assets, financial condition, operating results or business. -21- CERTAIN AGREEMENTS AND COVENANTS. Pursuant to the Merger Agreement, each of the Predecessor Companies and the Company agree that, without the consent of the other parties, among other things: (i) each party will carry on its respective businesses as usual, regular and ordinary course, consistent with past practice; (ii) it will not amend its articles of incorporation or code of regulations; (iii) it will not cause a split, combination, or re-classification of any of its outstanding capital stock; (iv) it will not cause the declaration, setting aside or payment of any dividend; (v) it will not cause the redemption, purchase, acquisition, or offer to acquire, of any shares of capital stock; (vi) it will not cause the issuance, sale, pledge, or disposition of, or agreement to issue, sell, pledge, or dispose of, any stock of, or securities convertible or exchangeable for, or any option, warrant or right of any kind to acquire any shares of capital stock of any class of stock or other securities or equity equivalents (other than pursuant to the exercise of currently outstanding options or warrant); (vii) it will not incur or guarantee of any indebtedness for borrowed money other than in the ordinary course of business consistent with past practice; or (viii) no party shall change any of the accounting principles or practices used by it (except as required by GAAP). LOCK-UP AGREEMENT. Under the terms of the Merger Agreement, the Predecessor Company shareholders have, with respect to the Company shares that each receives in the Merger, and David J. Richards, John P. Kennedy and Carl A. Genberg (the "Key Company Shareholders") have, with respect to their shares of the Company, agreed to certain additional restrictions on the transfer of their respective shares of the Company. Except with respect to certain privately negotiated sales, the Predecessor Company shareholders will be prohibited from selling more than an aggregate of 625,000 Company Shares during the one year period commencing on the closing date of the Merger. The number of Company Shares that each Predecessor Company shareholder will be entitled to sell is equal to the product of (A) the ratio of Company Shares received with respect to the conversion of the shareholder's shares in a Predecessor Company to the number of Company Shares so received by all shareholders of such Predecessor Company, times (B) the number of shares allocated to such Predecessor Company in the Merger Agreement for the relevant time period. Except with respect to certain privately negotiated sales and certain transactions involving the pledge of the shares held by the Key Company Shareholders, the Key Company Shareholders have agreed not to sell the Company Shares they own immediately after the Merger for a period of one year commencing on the closing of the Merger. See "Merger Agreement - Appendix A." TERMINATION. The Merger Agreement may be terminated by mutual consent of all of the parties; by any of the parties if the Merger shall not have been consummated before September 30, 1996 (unless the failure to consummate the Merger by such date shall be due to the action or failure to act of the party seeking to terminate the Merger Agreement); by any party if any permanent injunction or other order of a court or other competent authority shall have become final and non-appealable; or by any party if any required approval of the shareholders of such party or any other party shall not have been obtained. In the event that the Merger Agreement is terminated, the Merger Agreement shall be void and have no effect, without any liability on the part of any party or its affiliates, directors, officers, or shareholders. Notwithstanding the foregoing, the parties to the Merger Agreement will continue to be bound by the provisions of the Merger Agreement that relate to: (i) their respective obligations as to confidentiality and the payment of any broker's or finder's fees; (ii) a party's obligation to pay liquidated damages in the amount of $500,000 to the other parties if the termination arises out of that party's failure to obtain the required approval of the Merger and -22- the Merger Agreement or that party's breach of the Merger Agreement; and (iii) a party's obligation to pay its share of all costs and expenses incurred by the parties in connection with the Merger and the transactions contemplated by the Merger Agreement. A party's share of any liquidated damages paid as a result of a termination of the Merger or its share of costs and expenses required to be paid under the Merger Agreement shall be in proportion to the number of the Company Shares that would have been owned by the party's shareholders immediately after the Effective Time. The Merger Agreement may also be terminated by a majority vote of the members of the Advisory Board. EXCHANGE OF CERTIFICATES The Huntington National Bank, N.A., the Company's transfer agent (the "Exchange Agent"), will mail to each holder of record of Predecessor Company shares a letter of transmittal and instructions for use in effecting the surrender of the Predecessor Company certificates (the "Certificates") in exchange for certificates representing the Company's common stock. Upon surrender of a Certificate to the Exchange Agent, together with a letter of transmittal, duly executed, the holder of the Certificate shall be entitled to receive in exchange therefor the certificates representing the shares of common stock of the Company in accordance with the provisions of the Merger Agreement. AMENDMENT TO ARTICLES OF INCORPORATION At the Effective Time and upon the filing of the Certificate of Merger with the Ohio Secretary of State, the Company's Articles of Incorporation will be amended to, among other things: change the name of the Company to "NetMed, Inc."; increase the Company's authorized capital stock to 15,500,000 shares, consisting of 15,000,000 shares of common stock and 500,000 shares of preferred stock; establish standards by which the Board of Directors must evaluate any proposal that would result in a change of control; and provide that the provisions of the Articles of Incorporation that relate to the powers, duties and liabilities of the directors may only be amended by affirmative vote of 80% of the outstanding shares entitled to vote on the matter. DISSENTER'S RIGHTS THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW PERTAINING TO DISSENTING SHAREHOLDER RIGHTS UNDER THE OHIO GENERAL CORPORATION LAW AND IS QUALIFIED IN ITS ENTIRETY BY THE FULL TEXT OF SECTION 1701.85 WHICH IS REPRINTED IN ITS ENTIRETY AS APPENDIX B TO THIS PROSPECTUS. The Company, CIN, INC, ERG, CCWP, and CCI are all Ohio corporations. Shareholders of any of the parties who (i) are shareholders of record on the record date established for determining who is entitled to notice of the meeting called for the purpose of approving the Merger, (ii) do not vote in favor of the Merger, and (iii) who, within 10 days after the date of the vote on the Merger is taken, deliver written demand in compliance with the provisions of Section 1701.85(A)(2) of the Ohio Revised Code, shall be entitled to receive the fair cash value of the shares that were not voted in favor of the Merger (the "Dissenting Shares"). The written demand must set forth the -23- shareholder's address, the number and class of stocks as to which the stockholder seeks relief and the amount the shareholder claims as the fair cash value of the Dissenting Shares. If a constituent corporation receives a written demand from a shareholder seeking the fair cash value of Dissenting Shares, it may request the certificate or certificates that represent the Dissenting Shares. The dissenting shareholder must deliver the certificate or certificates representing the Dissenting Shares to the corporation within 15 days of the date of its request therefor or the shareholder's rights with respect to the Dissenting Shares will terminate. If the certificate or certificates representing the Dissenting Shares are delivered to constituent corporation, it must promptly endorse the certificates with a legend to the effect that a demand for the fair cash value for the Dissenting Shares has been made and return the certificates to the dissenting shareholder. If the Company and the dissenting shareholder cannot agree on the fair cash value of the Dissenting Shares, then either may, within three months after the date of the service of the demand for fair cash value was made by the dissenting shareholder file a complaint in the court of common pleas of the county in which the principal office of the corporation that issued the Dissenting Shares is located or was located when the Merger proposal was adopted by the shareholders of that corporation. The court will first make a determination if the dissenting shareholder is entitled to receive the fair cash value for the Dissenting Shares. If the court determines that the dissenting shareholder is entitled to fair cash value for the Dissenting Shares, the court will appoint an appraiser or appraisers to make a finding as to the fair cash value of the Dissenting Shares. The fair cash value will be determined based on what a willing seller who is under no compulsion to sell would be willing to accept and that which a willing buyer who is under no compulsion to purchase would be willing to pay for the Dissenting Shares. In no event will the fair cash value exceed the amount stated in the written demand by the dissenting shareholder. In computing the fair cash value, any appreciation or depreciation in the market value resulting from the Merger shall be excluded. The fair cash value that is agreed upon between the parties or that is determined by the court shall be paid within 30 days after the date of the final determination of such value or the consummation of the Merger, whichever occurs last. Payment shall be made only upon and simultaneously with the surrender to the Ohio Corporation of the certificate or certificates representing the Dissenting Shares. The costs of the action, including reasonable compensation to the appraisers, will be fixed by the court and will be assessed or apportioned as the court considers equitable. A shareholder's right to receive the fair cash value for the Dissenting Shares terminates if (i) the dissenting shareholder does not strictly comply with the requirements of Section 1701.85, (ii) the Merger is abandoned, (iii) the dissenting shareholder withdraws the demand for fair cash value, or (iv) the Company and the dissenting shareholder have not come to an agreement regarding the fair cash value of the Dissenting Shares and neither has filed a complaint with the court of common pleas within the time period described in Section 1701.85(B). -24- FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 1701.85 OF THE OHIO GENERAL CORPORATION LAW FOR PERFECTING DISSENTING SHAREHOLDER RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS (IN WHICH EVENT AN OHIO CORPORATION SHAREHOLDER WILL BE ENTITLED TO RECEIVE THE CONSIDERATION RECEIVABLE WITH RESPECT TO SUCH SHARES IN ACCORDANCE WITH THE MERGER AGREEMENT). NASDAQ/NMS One of the conditions to the consummation of the Merger is that its common stock will be admitted for quotation on NASDAQ/NMS, subject to official notice of issuance. UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION The merger will be effected by an exchange of the Company's common stock for the outstanding common shares of the Predecessor Companies. This exchange transaction will occur in connection with the initial registration of the Company's common stock with the Securities and Exchange Commission and will result in the public trading of the common stock which is expected to be on the NASDAQ/NMS. The merger of the Company and the Predecessor Companies will be accounted for at historical cost. This accounting reflects the level of common ownership (shareholders) and common management (officers and directors) that exists between the Company and Predecessor Companies. It also recognizes the lack of objective criteria for valuing the merger transaction. For accounting purposes, the Company will be the predecessor of the merged entity and its historical financial statements will be those of the new entity NetMed, Inc. The results of operations of the Predecessor Companies will be combined with those of the Company commencing at the date of merger. Pro Forma Combining Balance Sheet March 31, 1996
CCI AND PRO FORMA COMBINED PPNT ERG CCWP INC CIN ADJUSTMENTS NETMED ---------------------------------------------------------------------------- ------------- Assets Current assets: Cash and cash equivalents $ 599,550 $ 61,710 $ 26,397 $ - $ - $ - $ 687,657 Accounts receivable 58,962 3,173 3,255 6,861 12,742 - 84,993 Due from related entities 70,575 - - - - (70,575) (A) - Net receivable form stockholder 50,000 - - - - (50,000) (C) - Prepaid assets 1,021 - - - - - 1,021 -------------------------------------------------------------------------------------------- Total current assets 780,108 64,883 29,652 6,861 12,742 (120,575) 773,671 Investment in partnerships 183,524 - - - - (183,524) (B) - Notes receivable - NSI 51,080 - - - - - 51,080 Investment in NSI-available for sale 8,266,392 3,139,895 3,139,895 543,968 1,010,196 - 16,100,346 Furniture and equipment 15,816 - - - - - 15,816 Deferred taxes 121,290 - - 14,358 - 20,000 (C) 155,648 Deposits and other assets 1,330 69 2,065 - - - 3,464 -------------------------------------------------------------------------------------------- Total assets $9,419,540 $3,204,847 $3,171,612 $565,187 $1,022,938 $ (284,099) $17,000,025 -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- Liabilities and owners' equity Current liabilities: Accounts payable $ 108,966 $ - $ 11,818 $ - $ - $ - $ 120,784 Due to related entities - 13,603 37,946 6,389 12,637 (70,575) (A) - Accrued expenses 34,968 16,798 - 36,976 - - 88,742 Other liabilities 860 - - 10,519 19,538 - 30,917 -------------------------------------------------------------------------------------------- Total current liabilities 144,794 30,401 49,764 53,884 32,175 (70,575) 240,443 Deferred taxes 2,745,756 1,042,535 1,042,534 180,610 335,407 - 5,346,842 Minority interest - - 183,524 - - (183,524) (B) - Stockholders' equity: Common stock 1,779,465 575,000 465,000 196,735 365,365 - 3,381,565 Additional paid-in capital 783,077 - - - - - 783,077 Unrealized gains on available- for-sale securities net of deferred taxes 4,253,792 1,563,802 1,428,641 270,915 503,111 - 8,020,261 Retained earnings (deficit) (287,344) (6,891) 2,149 (136,957) (213,120) (30,000) (C) (672,163) -------------------------------------------------------------------------------------------- Total stockholders' equity 6,528,990 2,131,911 1,895,790 330,693 655,356 (30,000) 11,512,740 -------------------------------------------------------------------------------------------- Total liabilities and owners' equity $9,419,540 $ 3,204,847 $ 3,171,612 $ 565,187 $ 1,022,938 $ (284,099) $17,100,025 -------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------
(A) Reflects accounts receivable and accounts payable between the Company and the Predecessor Companies that will be eliminated upon the merger. (B) Reflects PPNT's minority interest in partnerships consolidated into CCI and CCWP that will be eliminated upon the merger. (C) Note receivable from stockholder will be forgiven upon the merger, tax effected at 40%. Combining Statement of Operations Period ended March 31, 1996
CCI AND PRO FORMA COMBINED PPNT ERG CCWP INC CIN ADJUSTMENTS NETMED ---------------------------------------------------------------------------- ------------- Royalty revenue $ 13,553 $ 3,630 $ 3,360 $ 1,140 $ 2,116 $ - $ 24,069 Operating expenses: Salaries and benefits 60,368 9,279 - 4,767 8,852 50,000 (B) 133,266 Sales and marketing 19,294 2,716 - 4,010 7,447 - 33,467 Professional 1,863 750 6,150 643 1,967 - 11,373 Payroll and franchise taxes 19,297 2,392 - 392 728 - 22,809 Depreciation and amortization 1,500 - - - - - 1,500 Office and other 10,792 - - - - - 10,792 Merger 36,613 11,054 11,076 2,667 4,956 - 66,366 -------------------------------------------------------------------------------------------- Total operating expense 149,727 26,191 17,226 12,479 23,950 50,000 279,573 -------------------------------------------------------------------------------------------- Operating loss (136,174) (22,561) (13,596) (11,339) (21,834) (50,000) (255,504) Other income (expense): Interest income 6,010 289 - - - - 6,299 Equity income in partnerships (1,275) - - - - 1,275 (A) - -------------------------------------------------------------------------------------------- Total other income 4,735 289 - - - 1,275 6,299 Minority interest - - 1,275 - - (1,275) (A) - -------------------------------------------------------------------------------------------- Loss before income taxes (131,439) (22,272) (12,321) (11,339) (21,834) (50,000) (249,205) Income tax benefit (52,575) - - (4,536) - (20,000) (B) (77,111) -------------------------------------------------------------------------------------------- Net loss $ (78,864) $ (22,272) $ (12,321) $ (6,803) $(21,834) $ (30,000) $ (172,094) -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- Pro forma loss per share $ (.02) (C) ------------- -------------
(A) Refects the elimination of PPNT's equity income in its minority interest in partnerships consolidated into CCI and CCWP. (B) Note receivable from stock holder will be forgiven upon the merger, tax effected at 40%. (C) Pro forma loss per share calculated based upon 10,922,969 shares of common stock assumed to be outstanding upon completion of the merger. Combining Statement of Operations Year ended December 31, 1995
CCI AND PRO FORMA COMBINED PPNT ERG CCWP INC CIN ADJUSTMENTS NETMED ---------------------------------------------------------------------------- ------------- Royalty revenue $ 48,000 $ 12,000 $ 12,000 $ 4,200 $ 7,800 $ - $ 84,000 Operating expenses: Salaries and benefits 284,041 - - - - 50,000 (B) 334,041 Sales and marketing 62,079 - - - - - 62,079 Professional 32,854 2,042 535 3,331 6,186 - 44,948 Payroll and franchise taxes 22,316 - - - - - 22,316 Depreciation and amortization 7,496 166 953 70 130 - 8,815 Office and other 57,948 1,337 44 487 904 - 60,720 Merger 106,415 32,103 32,195 7,755 14,401 - 192,869 ------------------------------------------------------------------------------------------- Total operating expense 573,149 35,648 33,727 11,643 21,621 50,000 725,788 ------------------------------------------------------------------------------------------- Operating loss (525,149) (23,648) (21,727) (7,443) (13,821) (50,000) (641,788) Other income (expense): Interest income 16,606 1,346 - 158 293 - 18,403 Interest expense (264) - - - - - (264) Equity income in partnerships 49,638 - - - - (49,638) (A) (641,788) NSI settlement and common stock transactions 1,715,399 533,558 533,558 92,442 171,677 - 3,046,634 ------------------------------------------------------------------------------------------- Total other income 1,781,379 534,904 533,558 92,600 171,970 (49,638) 3,064,773 Minority interest - - (49,638) - - 49,638 (A) - ------------------------------------------------------------------------------------------- Income (loss) before income taxes 1,256,230 511,256 462,193 85,157 158,149 (50,000) 2,422,985 Income tax (benefit) provision (68,715) - - 27,154 - (20,000) (B) (65,561) ------------------------------------------------------------------------------------------- Net income (loss) $1,324,945 $ 511,256 $ 462,193 $ 58,000 $ 158,149 $ (30,000) $2,484,546 ------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- Pro forma earnings per share $ .23 (C) ------------ ------------
(A) Reflects the elimination of PPNT's equity income in its minority interest in partnerships consolidated into CCI and CCWP. (B) Note receivable from stockholder will be forgiven upon the merger, tax effected at 40%. (C) Pro forma earnings per share calculated based upon 10,922,969 shares of common stock assumed to be outstanding upon completion of the merger. CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following discussion is a general summary of the principal federal income tax consequences of the Merger to individual United States holders of the Predecessor Companies shares who hold their shares as capital assets. The discussion is based on laws, regulations, rulings and decisions currently in effect. It is for general information only, and is not intended to be tax advice to any particular shareholder of the Company or a Predecessor Company. The discussion does not take into account rules that are applicable to shareholders of the Predecessor Companies that are subject to special treatment under the Code, including without limitation, insurance companies, dealers in securities, financial institutions, tax-exempt investors, foreign investors, shareholders who do not hold their stock as a capital asset and shareholders who acquired shares pursuant to the exercise of an employee stock option, employee stock purchase plan or otherwise as compensation. The discussion also does not address state, local or foreign tax consequences of the Merger. No rulings have been or will be requested from the IRS with respect to the tax consequences of the Merger. -25- Assuming the Merger is consummated in the manner set forth in the Merger Agreement and qualifies as a reorganization under Section 368 of the Code, the principal federal income tax consequences of the Merger under present federal income tax law will be as described below. (a) No gain or loss will be recognized by the Company or the Predecessor Companies as a result of the Merger; (b) No gain or loss will be recognized by the holders of Predecessor Company shares upon the exchange of their shares of Predecessor Company shares for Company Shares pursuant to the Merger (except for any gain or loss attributable to cash received by a holder of Predecessor Company stock in payment of appraisal or dissenters' rights of appraisal or for fractional share interests to which they may be entitled ); (c) The federal income tax basis of the Company Shares received by the shareholders of the Predecessor Companies (including fractional share interests to which they may be entitled) for their Predecessor Company shares will be the same as the federal income tax basis of the Predecessor Company shares surrendered in exchange therefor, increased by any gain recognized; and (d) The holding period for the Company Shares received by shareholders of the Predecessor Companies in exchange for their Predecessor Company shares will include the period for which the Predecessor Company exchanged therefor were held, provided that the exchanged Predecessor Company shares were held as a capital asset by such shareholder on the date of the exchange. It is a condition to the closing that the Company and the Predecessor Companies shall have received an opinion of Porter, Wright, Morris & Arthur which will be based upon certain certificates, representations and assumptions, substantially to the effect that, for federal income tax purposes the Merger will constitute a reorganization within the meaning of section 368(a) of the Code and will result in the tax consequences described above. No opinion will be expressed with respect to any other tax consequences of the exchange, including, without limitation, the tax consequences with respect to any shares of Predecessor Company stock that were acquired in contemplation of the Merger, were held by shareholders subject to special treatment under the Code, were not held as capital assets or were acquired by the holder thereof pursuant to any employee stock option, employee stock purchase plan or otherwise as compensation or pursuant to the exercise of any warrants to purchase shares of Predecessor Company stock. Further, no opinion is expressed concerning the effect of state, local and foreign tax laws. An opinion of counsel is not binding upon the IRS, and there can be no assurance that the IRS will not take a position contrary to the positions reflected in such opinion or that such opinion will be upheld by the courts if challenged by the IRS. THE SPECIFIC TAX TREATMENT OF EACH SHAREHOLDER WILL DEPEND ON THEIR PARTICULAR FACTS AND CIRCUMSTANCES. EACH HOLDER OF COMPANY SHARES AND PREDECESSOR COMPANY SHARES IS ADVISED TO CONSULT WITH SUCH STOCKHOLDER'S OWN TAX ADVISER CONCERNING THE FEDERAL INCOME TAX -26- CONSEQUENCES OF THE MERGER, AS WELL AS THE APPLICABLE STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES. BACKUP WITHHOLDING. Under federal income tax law concerning "backup withholding," the Company will be required to withhold, and will withhold, 31% of any cash payments to which a shareholder is entitled pursuant to the Merger unless the holder provides its taxpayer identification number ("TIN") and certifies that such number is correct or otherwise establishes that the holder is an exempt holder (such as a corporation or certain foreign individuals, partnerships or trusts). In general, the TIN of an individual shareholder is that shareholder's social security number. Each holder should sign the Substitute Form W-9 included as part of the Transmittal Letter (or in the case of a nonresident alien or foreign entity, a Form W-8) to prevent backup withholding. RESALES BY AFFILIATES The Company Shares issuable in the Merger will have been registered under the Securities Act but will not be freely transferable if held by persons, including directors and executive officers of the Predecessor Companies, who may be deemed to be "affiliates" of the Predecessor Companies for purposes of Rule 145. Affiliates may not offer to sell, sell or otherwise dispose of Company Shares issued to them in connection with the Merger, except (i) pursuant to an effective registration statement under the Securities Act covering those shares, (ii) in compliance with Rule 145, or (iii) pursuant to an exemption from the registration requirements of the Securities Act. The Company intends to obtain customary agreements with all affiliates of the Predecessor Companies under which those persons shall agree not to dispose of the Company Shares received by them in the Merger, except in compliance with the Securities Act and the rules and regulations promulgated thereunder. The Company shall be entitled to place appropriate legends on the certificates evidencing the Company Shares to be received by such affiliate pursuant to the terms of the Merger, and to issue appropriate stock transfer instructions to the transfer agent for Company Shares, to the effect that the shares received or to be received by such affiliate pursuant to the Merger may only be sold, transferred or otherwise conveyed, and the holder thereof may only reduce his interest in or risks related to such shares, pursuant to an effective registration statement under the Securities Act or in accordance with the provisions of paragraph (d) of Rule 145 or pursuant to an exemption from registration provided under the Securities Act. The foregoing restrictions on the transferability of the Company Shares shall apply to all purported sales, transfers and other conveyances of the shares received or to be received by such affiliate pursuant to the Merger and to all purported reductions in the interest in or risks relating to such shares, whether or not such affiliate has exchanged the certificates previously evidencing shares of the Predecessor Company common stock. This Prospectus does not cover any resales of the Company Shares received by affiliates of the Predecessor Companies. Under the terms of the Merger Agreement, the Predecessor Company shareholders have, with respect to the Company shares that each receives in the Merger, and the Key Company Shareholders have, with respect to their shares of the Company, agreed to certain additional restrictions on the transfer of their respective shares of the Company. Except with respect to certain privately negotiated sales, the Predecessor Company shareholders will be prohibited from selling more than an aggregate of 625,000 Company Shares during the one year period commencing on the closing date of the Merger. The number of Company -27- Shares that each Predecessor Company shareholder will be entitled to sell is equal to the product of (A) the ratio of Company Shares received with respect to the conversion of the shareholder's shares in a Predecessor Company to the number of Company Shares so received by all shareholders of such Predecessor Company, times (B) the number of shares allocated to such Predecessor Company in the Merger Agreement for the relevant time period. Except with respect to certain privately negotiated sales and certain transactions involving the pledge of the shares held by the Key Company Shareholders, the Key Company Shareholders have agreed not to sell the Company Shares they own immediately after the Merger for a period of one year commencing on the closing of the Merger. See "Merger Agreement - Appendix A." CERTAIN RELATED TRANSACTIONS Each of the other Predecessor Companies and the Company entered into a Loan Agreement, dated July 5, 1996 (the "Loan Agreement"), whereby the Company has agreed to advance to the other Predecessor Companies the expenses incurred by each in connection with the Merger. In addition, the Company will advance funds necessary to pay reasonable expenses of ordinary business operations for the Predecessor Companies pending consummation of the Merger (collectively the "Advancer"). The advances made to the Predecessor Companies in connection with the merger that was abandoned in June 1996 (the "Initial Advances") will be added to the Advances. The Initial Advances and the Advances will be evidenced by a promissory note bearing interest at an annual rate of 7%, payable 180 days after the earlier of the consummation of the Merger or the termination of the Merger Agreement. Promissory notes delivered by the Predecessor Companies will be secured by their shares of NSI common stock. The Loan Agreement has been modified by a side-letter agreement among the Company, ERG, CCI and CCWP, dated July 16, 1996, which provides, among other things, terms relating to notice and cure periods for any defaults and credits for certain expenses that are paid directly by these Predecessor Companies. The Company entered into a loan agreement, dated March 14, 1996 with Cytology West, Inc. ("CWI") and Papnet Utah, Inc. ("PUI") CWI is licensed to sell the PAPNET-Registered Trademark- System and the PAPNET-Registered Trademark- Service in Arizona, Nevada and San Diego County California. PUI is licensed to sell PAPNET-Registered Trademark- System and the PAPNET-Registered Trademark- Service in Utah. Carl Genberg, President of CWI, owns 383,616 shares of the Company's common stock and may be deemed to be an affiliate of the Company. CWI and PUI were originally to have been a parties to a merger with the Company and the Predecessor Companies, but that transaction was abandoned by the parties. The loan agreement provides for advances to CWI of up to $585,000 to cover certain operating expenses, expenses associated with the abandoned merger, and the acquisition of new technology. No specific amount was established for advances to PUI. The advances will bear interest at the rate of 7% per annum. As of June 15, 1996, the Company had advanced approximately $146,320 to CWI and $14,315 to PUI under the terms of the loan agreement, and no further advances will be made. The Company, the Predecessor Companies and certain individual shareholders of these companies entered into a Voting Agreement, dated July 5, 1996, pursuant to which the individual shareholders appointed John P. Kennedy and Cecil J. Petitti as their proxies and attorneys-in-fact for -28- the purpose of voting their shares in the Company or Predecessor Company, as the case may be, in favor of the Merger, the Merger Agreement and the transactions contemplated thereby. Pending completion of the Merger, the business operations of CIN, INC, ERG, and CCI are being managed by the Company. THE COMPANY GENERAL The Company is an Ohio corporation formed on October 25, 1989 for the purpose of acquiring the exclusive rights to market certain proprietary products of NSI in the State of Ohio. On December 29, 1989, Papnet Limited Partnership ("PLP") was formed with the Company as its general partner and the Company assigned its marketing rights to the PAPNET-Registered Trademark- System to PLP. Papnet Midwest Limited Partnership ("PMLP") was formed on April 6, 1990 with the Company as its general partner and PMLP acquired the rights to market the PAPNET-Registered Trademark- System in Kentucky and the Standard Metropolitan Statistical Area of Chicago, Illinois. In January 1993, the Company acquired all of the issued and outstanding units of limited partnership interest in both PLP and PMLP and thereby acquired all of their respective rights to market the PAPNET-Registered Trademark- System in Ohio, Kentucky and the Standard Metropolitan Area of Chicago, Illinois. NSI Neuromedical Systems, Inc. ("NSI"), founded in 1988, is an emerging health care service company focused on value-added diagnostic screening applications to aid in the early detection of cancer of several body sites. NSI's first product, the PAPNET-Registered Trademark- System, has been shown in a series of controlled clinical trials to allow pathology laboratories to detect abnormal cells on cervical Papanicolaou ("Pap") smears which were not detected by the standard manual microscopic inspection. This improved detection can result in more effective and less costly early treatment, reduced possibility of morbidity and mortality for the patient, and reduced possibility of malpractice litigation for the patient's doctor and laboratory. On September 21, 1994 NSI submitted an application to the U.S. Food and Drug Administration ("FDA") to market the PAPNET-Registered Trademark- System in the United States for routine clinical use, supported by clinical trial data indicating that PAPNET-Registered Trademark- System would have resulted in earlier detection of disease for many patients (see below). The PAPNET-Registered Trademark- System can achieve these improvements without requiring a modification of the standard Pap smear sample due to its patented use of a combination of algorithmic and neural network pattern recognition technology. By June 1996, PAPNET-Registered Trademark- System was already in routine clinical use in 21 countries worldwide. Because the PAPNET-Registered Trademark- System has now been approved by the FDA, NSI intends to increase the scale of its operations to commercial levels. NSI is required to register with the FDA and to submit device listing information for products in commercial distribution, and is subject to periodic reinspection by the FDA for compliance with Good Manufacturing Practice regulations. -29- THE MARKET Pap smears are widely used in North America, Europe and other developed areas to aid in the early detection of cervical cancer with over 50 million tests performed annually in the U.S. alone. Pap smears can reveal early changes in cervical cells that precede or indicate the development of cancer, thereby facilitating timely medical intervention. When cervical cancer or precancerous conditions are detected early on a Pap smear, the disease is almost always completely curable using a simple outpatient procedure. However, if abnormal cells on the Pap smear are not noticed by the laboratory, the patient may be falsely told that her Pap smear is negative (a "false negative"), with significant morbidity or mortality occurring as a result. Failure to diagnose cervical cancer is a significant and rapidly growing source of malpractice litigation against laboratories and clinicians in both the U.S. and abroad. Manual searching of routine Pap smears to spot abnormal cells is an unavoidably tedious and error-prone task. This is primarily because a seriously abnormal Pap smear can contain fewer than a dozen abnormal cells scattered among hundreds of thousands of normal cells and other objects. The cytotechnologist's job is thus very similar to proofreading a very long document to try to detect a few misspelled words. Regardless of how conscientious and careful the laboratory is, many of these "needles in a haystack" may be missed, and the patient falsely informed that her Pap smear was negative. Manual screening false-negative rates ranging from 10% to 40% have been reported in numerous published studies. The PAPNET-Registered Trademark- System has been shown in several domestic and international clinical studies published in peer-reviewed journals to detect abnormal cells on Pap smears that were falsely diagnosed as "negative" by conventional manual inspection. Indeed, in a number of such cases PAPNET-Registered Trademark- System detected abnormal cells on archived, supposedly "negative" Pap smears of women who were ultimately diagnosed with advanced cervical cancer. A published review of six such studies which in the aggregate evaluated 513 Pap smears known to contain precancerous or cancerous abnormality reported a pooled average PAPNET-Registered Trademark- false negative rate of 3%. These results compare extremely favorably to manual screening's false negative rate, typically reported to be many times higher (10% to 40%). THE PAPNET-Registered Trademark- SYSTEM The PAPNET-Registered Trademark- System is a computer-based system which allows the cytotechnologist at the referring laboratory to review a slide by viewing a small number of computer selected cells on a high resolution, color video monitor. The PAPNET-Registered Trademark- System consists of a scanning system (the "Scanner"), which processes slides and stores digital images of certain portions of the slides on a digital tape, and a proprietary review station (the "Review Station"), which, among other things, permits a cytotechnologist trained by NSI to review the images stored on the digital tape. The PAPNET-Registered Trademark- System is used as a supplement to current practice and does not alter the clinician's or pathology laboratory's existing smear preparation or manual screening procedures in any way. It provides an additional and complementary level of screening for the purpose of decreasing false negative Pap smear diagnosis. -30- The PAPNET-Registered Trademark- System provides a semi-automated search for abnormal cells which may have been missed on initial, manual screening. It addresses those aspects of the cervical smear screening process which most affect the false negative rate: the psychological habituation and fatigue associated with the "needle in a haystack," repetitive search for a small number of abnormal cells distributed among hundreds of thousands of normal cells. The PAPNET-Registered Trademark- System is only used to aid in the rescreening of slides which are diagnosed by manual inspection to be "negative" and which would otherwise be sent to the laboratory's archive without further examination. The system is semi-automated in that it does not attempt to provide a diagnosis, but only points out potentially abnormal cells to the cytotechnologist, thus retaining and enhancing the ability of trained cytotechnologists to evaluate and interpret cytological evidence. The Scanner operates continuously and virtually unattended, selecting 128 cells from each slide which appear most suspect to the system. The Review Station is installed in the cytotechnologist's work area of the referring laboratory. The Scanner includes an automated microscope, a primary high speed image classifier, and a secondary neural network based classifier. The Review Station includes a high resolution color video monitor, video display cards, and an Intel compatible computer. NSI was granted a patent for technology used in the PAPNET-Registered Trademark- System, which enables automated analysis of the conventionally prepared smear. NSI and the Company enroll and train laboratories to use the PAPNET-Registered Trademark- System as a rescreening device in NSI's clinical investigation. The PAPNET-Registered Trademark- System is in use in numerous foreign countries, where the scope of use permitted by regulatory authorities is generally much broader than is currently the case in the United States. THE PAPNET-Registered Trademark- SERVICE NSI markets and sells PAPNET-Registered Trademark- Testing as a service, by which end-user laboratories submit slides to one of NSI's central facilities for processing on a Scanner and NSI returns such slides and the related digital tape containing the images to the laboratories so that NSI-trained cytotechnologists employed by the laboratories may review the slides and images using the Review Station. The Company is licensed to market the PAPNET-Registered Trademark- Service. THE LICENSE On December 5, 1995 the Company, the Predecessor Companies and CWI and PUI who are not parties to the Merger, entered into a Settlement Agreement with NSI (the "Settlement Agreement"). The purpose of the Settlement Agreement was to resolve and clarify certain issues relating to the license agreements which NSI had with its regional licensees, and issues relating to warrants to purchase shares of NSI common stock which were held by the Company and certain of the Predecessor Companies. Pursuant to the Settlement Agreement, NSI and the regional licensees (including the Company and all of the Predecessor Companies except CCWP) agreed to the form of a license agreement to be executed upon the merger of some or all of the regional licensees (the "License Agreement"), under which the Company and the other regional licensees will continue to have the rights to market the PAPNET-Registered Trademark- System and PAPNET-Registered Trademark- Service, as well as certain other medical technologies which may be developed by NSI ("NSI Technology"). In the event that the Merger is not consummated as anticipated, NSI will enter into separate license agreements which each of the regional licensees on substantially the same terms as the License Agreement. NSI and the regional licensees have agreed to operate under the terms of the License Agreement until such agreement or agreements are executed following consummation of the Merger. Upon consummation of the Merger, the Company will have the exclusive right and license of sell the PAPNET-Registered Trademark- System, PAPNET-Registered Trademark- Service and NSI Technology in the states of Ohio, Georgia, Kentucky, Missouri, North Carolina and in the Standard Metropolitan Statistical Area of Chicago, Illinois. The License Agreement provides that the regional licensees will be paid royalties as follows: (a) monthly royalties equal to 50% of the amount by which NSI's gross revenues from sales in the licensed territories exceed the cost of processing slides originating in the licensed territories (for purposes of which calculation costs per slide may not exceed $1.00 per slide) and the cost of transporting such slides, with the maximum amount of such monthly royalties in any fiscal year capped at an amount derived by applying the royalty formula to 12,175,000 slides; (b) annual royalties equal to the difference, if any, by which aggregate monthly royalties in any fiscal year are less than 4.15% of NSI's worldwide gross revenues for such fiscal year, with the maximum annual royalty amount in any fiscal year capped at $23,000,000, less the amount of monthly royalties paid in such fiscal year calculated as described in clause (a). For the purposes of calculating the numbers of slides attributable -31- to the licensed territories which are submitted by certain large laboratories operating in multiple states ("Multistate National Laboratories"), there will be attributed to each territory a proportionate number of slides submitted to NSI for processing from all Multistate National Laboratories equal to the ratio that the population of such territory bears to the population of the United States (determined according to official U.S. Census data). The royalty calculations described in the foregoing paragraph are aggregate calculations for all of the territorial licensees. Following consummation of the Merger, the amounts allocable to the Company will be determined according to the population of the geographic areas exclusively licensed to the Company. The applicable number of slides for the slide royalty cap described in clause (a) in the foregoing paragraph, the worldwide revenue percentage described in clause (b) in the foregoing paragraph, and the $23,000,000 amount described in the same clause, will be adjusted based upon the census data available at the time of the Merger. The License Agreement has an initial term that expires on December 31, 2025. The Company has the right to extend the License Agreement for an additional 20 year term upon written notice to NSI within six months preceding the expiration of the initial term and upon payment of a renewal fee, which is based on the net present value at the time of such notice of 20 years of royalties. The License Agreement may not be terminated or cancelled except upon expiration of its initial or renewal term or by written agreement of the parties. EXECUTIVE OFFICERS AND DIRECTORS The executive officers, current and prospective directors of the Company are as follows: NAME AGE POSITION - ---- --- -------- David J. Richards 45 (1)(2) Trevor M. Ferger 42 (2)(3) Cecil J. Petitti 42 (2)(3) Bryan Whipp 40 (2)(3) John P. Kennedy 42 (2)(3) -32- Rodney M. Kinsey 47 (2)(4) Michael Blue, M.D. 41 (2)(4) ____________________ (1) Current President and director of the Company and nominee for Chairman, President and director of the Company after consummation of the Merger. (2) Members of the Advisory Board and nominees for directors of the Company after consummation of the Merger. (3) Messrs. Kennedy, Petitti, Ferger and Whipp are current members of the board of directors of the Company. (4) Messrs. Blue and Kinsey are members of the board of directors of CCI. Mr. Richards, one of the founders of the Company, has served as President and director of the Company since its inception. From 1981 until commencing employment with the Company, Mr. Richards was a practicing attorney and, from 1983, a partner, in the law firm of Crabbe, Brown, Jones, Potts & Schmidt in Columbus, Ohio. From 1985 through 1994, Mr. Richards was engaged in real estate development as President of Sunset Development, a multi-family housing developer. Mr. Richards has an accounting degree from Wright State University, and earned his Juris Doctor degree from The Ohio State University College of Law in 1977. Mr. Kennedy is also a founder of the Company and has served as an officer and director since its inception. Mr. Kennedy is currently of counsel with the law firm of Crabbe, Brown, Jones, Potts & Schmidt in Columbus, Ohio, where he was a partner from 1986 to 1994. In addition to practicing law, Mr. Kennedy has been a Columbus, Ohio City Councilman since 1988, where he currently serves as President. Mr. Kennedy has a Bachelor of Arts in Finance from the University at Bridgeport, Bridgeport, Connecticut and earned his Juris Doctor from The Ohio Northern University College of Law in 1978. S. Trevor Ferger is President of Ferger & Associates, a food brokerage specializing in the sales and marketing of consumer goods to grocery stores. Mr. Ferger has been active with Ferger & Associates since 1979. Prior to that time he was a sales manager with Procter & Gamble. Mr. Ferger has a Bachelor of Arts degree from Wake Forest University and a M.B.A. degree from Xavier University. Mr. Ferger has been a director of the Company since June, 1994. Cecil J. Petitti has been co-owner of Chaney & Petitti Insurance Agency located in Dublin, Ohio since 1984. Chaney & Petitti specialize in multiple insurance products, including medical insurance. Prior to merging with the Chaney Group, Mr. Petitti was associated with the Burke, Kendall & Petitti Insurance Agency. Mr. Petitti is also President of NetWalk, Inc., a Columbus- -33- based Internet service provider. Mr. Petitti earned a Bachelor of Arts degree in Education from The Ohio State University. Mr. Petitti has been a director of the Company since June, 1994. Bryan Whipp is President and owner of The Breakfast Club Cafe, an upstart three unit restaurant chain based in Dayton, Ohio. Mr. Whipp was formerly a manager of S.J. Associates, an electronics and computer manufacturer's representative. Mr. Whipp is the brother-in-law of Mr. Richards. Mr. Whipp earned a Bachelor of Science degree in Accounting from Park College. Mr. Whipp has been a director of the Company since June, 1994. Michael Blue, M.D. has been a practicing physician since 1980. Dr. Blue is currently vice president of Immediate Health Associates. Rodney M. Kinsey has been a self-employed manufacturers representative since 1971. COMMITTEES OF THE BOARD OF DIRECTORS The Company's Board of Directors has not established committees. It is anticipated that after the consummation of the Merger, the Board of Directors will establish a stock option committee, an audit committee and a compensation committee. DIRECTOR COMPENSATION Directors of the Company have received stock options and have been entitled to reimbursement of reasonable expenses incurred in connection with their attendance at board meetings. No cash compensation has been paid to directors. The Company anticipates that, following consummation of the Merger, it will be necessary to pay directors for their service in order to attract and retain the services of qualified directors, but the amount of such compensation has not been established. -34- EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE Long-Term Annual Compensation Compensation ---------------------- ------------ Awards ------------ Securities Underlying All Other Salary Bonus Options Compensation Name and Principal Position Year ($) ($) (#) ($)(1) - --------------------------- ------------ ------------ ------------ ------------ ------------ DAVID J. RICHARDS 1995 125,000 50,000 0 12,228 President and Secretary 1994 108,333 0 0 11,959 1993 82,913 0 0 8,900
____________________ (1) Includes matching contribution to the Company's 401(k) Plan and a 1994 and 1995 automobile allowance of approximately $270 per month. The following table provides certain information regarding the number and value of stock options held by the Company's President at December 31, 1995.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES (1) Number of Securities Value of Unexercised Underlying Unexercised Options In-the-Money Options at Fiscal at Fiscal Year-End (#) Year-End ($)(2) ------------------------------ ------------------------------ Shares Acquired on Value Exercise Realized Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable - ------------- ------------- ------------- ------------- ------------- ------------- ------------- David J. Richards 66,080 $1,983,357.50 287,020 -0- $3,535,914.90 -0-
____________________ (1) Adjusted to reflect 2-for-1 stock splits in May 1994, May 1995 and December 1995. (2) Represents the total gain which would be realized if all in-the-money options held at year end were exercised, determined by multiplying the number of shares underlying the options by the difference between the per share option exercise price and the per share fair market value at year end ($13.38 on December 29, 1995). An option is in-the-money if the fair market value of the underlying shares exceeds the exercise price of the option. 1995 STOCK OPTION PLAN The Company's Amended 1995 Stock Option Plan (the "1995 Plan") has been approved by the Company's Board of Directors and adopted by the shareholders in September 1995. The 1995 Plan provides for the grant of options to key associates, officers, directors, consultants and advisers who render services -35- to the Company for the purchase of up to 150,000 Company Shares. The options may be either Incentive Options or Nonqualified Options. The 1995 Plan is to be administered by the Board of Directors of the Company, which may, to the fullest extent permitted by law, delegate all or any of its powers under the 1995 Plan to a committee, consisting of not fewer than two members of the Board of Directors (the "Committee"). If the Company Shares are registered under Section 12 of the Exchange Act, all members of the Committee will be "disinterested persons" as defined in Rule 16b-3(c)(2)(i) promulgated under the Exchange Act, and "outside directors", as defined in Section 162(m) of the Code. The Board of Directors or the Committee will be authorized, subject to the provisions of the 1995 Plan, to determine to whom and at what time the stock options may be granted, the designation of the option as either an Incentive Option or Nonqualified Option, the per share exercise price, the duration of each option, the number of shares subject to each option, any restrictions on such shares, the rate and manner of exercise, and the timing and form of payment. Under the 1995 Plan, an Incentive Option may not have an exercise price less than fair market value of the Company Shares on the date of grant or an exercise period that exceeds ten years from the date of grant and is subject to certain other limitations which allow the optionholder to qualify for favorable tax treatment. None of these restrictions will apply to the grant of Nonqualified Options, which may have an exercise price less than the fair market value of the underlying Company Shares on the date of grant and may be exercisable for an indeterminate period of time. The exercise price of an option under the 1995 Plan may be paid in cash or, with the consent of the Board of Directors or the Committee, (i) by tendering previously acquired Company Shares valued at their fair market value on the date they are tendered, (ii) by delivery of a full recourse promissory note for the portion of the exercise price in excess of the par value of the shares subject to the option, the terms and conditions of which will be determined by the Board of Directors or the Committee, and in cash for the par value of the shares, (iii) by any combination of the foregoing methods, or (iv) by delivery of written instructions to forward the notice of exercise to a broker or dealer and to deliver to a specified account a certificate for the shares purchased upon exercise of the option and a copy of irrevocable instructions to the broker or dealer to deliver the purchase price of the shares to the Company. Under the 1995 Plan, an option is not transferable except by will or by the laws of descent and distribution and may be exercised, during the lifetime of the optionee, only by the optionee or by the optionee's guardian or legal representative. Any option granted under the 1995 Plan will terminate automatically (i) 30 days after the employee's termination of employment with the Company (other than by reason of death or disability or for cause), (ii) one year after the employee's death or termination of employment by reason of disability unless the option expires earlier by its terms and (iii) on the effective date of a termination for cause. Options not exercisable as of the date of a change in control of the Company will become -36- exercisable immediately as of such date. The 1995 Plan will terminate on the tenth anniversary of its effective date, unless earlier terminated by the Board of Directors. PRINCIPAL SHAREHOLDERS The following table sets forth certain information as of March 31, 1996 regarding beneficial ownership of the Company's common stock by: (i) each person known by the Company to own beneficially 5% or more of outstanding shares of the Company's common stock; (ii) each director of the Company; (iii) the proposed executive officers and directors; and (iv) all current directors and executive officers as a group. SHARES BENEFICIALLY OWNED (1)(2) ---------------------------------------- STOCKHOLDER NUMBER PERCENT - ---------------------------- ----------- ---------- David J. Richards 1,065,052 16.64 John P. Kennedy 599,424 9.37 Cecil J. Petitti 51,750 * S. Trevor Ferger 8,000 * Michael S. Blue, M.D. 0 * Rodney M. Kinsey 0 * Bryan Whipp 4,000 * Carl A. Genberg 383,616 6.0 ____________________ * Represents beneficial ownership of less than 1% of the outstanding the Company common stock. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission which generally attribute beneficial ownership of securities to persons who possess sole or shared voting power and/or investment power with respect to those shares. (2) Includes shares purchasable within 60 days after March 31, 1996 pursuant to the exercise of options covering 287,020 shares for Mr. Richards, 24,000 shares for Mr. Kennedy, 8,000 shares for Mr. Petitti, and 8,000 shares for Mr. Ferger. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY AND THE PREDECESSOR COMPANIES OVERVIEW The Company is an Ohio corporation formed on October 25, 1989 for the purpose of acquiring the exclusive rights to market certain proprietary products of Neuromedical Systems, Inc., a Delaware corporation ("NSI"), including the right to sell the PAPNET-Registered Trademark- System and PAPNET-Registered Trademark- Service in the State -37- of Ohio. The Company later assigned its rights to Papnet Limited Partnership, an Ohio limited partnership ("PLP"). In January 1993, the Company acquired all of the issued and outstanding units of limited partnership interest in both PLP and Papnet Midwest Limited Partnership, an Ohio limited partnership ("PMLP"). PMLP owned the rights to market the PAPNET-Registered Trademark- System and PAPNET-Registered Trademark- Service in Kentucky and the Standard Metropolitan Statistical Area of Chicago, Illinois. As a result of these acquisitions the Company has the rights to the PAPNET-Registered Trademark- System and PAPNET-Registered Trademark- Service in Ohio, Kentucky and the Standard Metropolitan Statistical Area of Chicago. The PAPNET-Registered Trademark- System was approved by the FDA for commercial use in the United States on November 8, 1995. Prior to that time, the PAPNET-Registered Trademark- System was permitted to be utilized in the United States on an investigational basis only, and NSI was permitted to derive revenue with respect thereto only to recover certain of its costs. NSI, however, has sold PAPNET testing services for commercial use outside of the United States. As a result, prior to FDA approval, the Company was able to earn revenues based upon the worldwide revenue calculation as described below. On December 5, 1995 the Company, the Predecessor Companies and CWI and PUI who are not parties to the Merger, entered into a Settlement Agreement with NSI (the "Settlement Agreement"). The purpose of the Settlement Agreement was to resolve and clarify certain issues relating to the license agreements which NSI had with its regional licensees, and issues relating to warrants to purchase shares of NSI common stock which were held by the Company and certain of the Predecessor Companies. Pursuant to the Settlement Agreement, NSI and the regional licensees (including the Company and all of the Predecessor Companies except CCWP) agreed to the form of a license agreement to be executed upon the merger of some or all of the regional licensees (the "License Agreement"), under which the Company and the other regional licensees will continue to have the rights to market the PAPNET-Registered Trademark- System and PAPNET-Registered Trademark- Service, as well as certain other medical technologies which may be developed by NSI ("NSI Technology"). In the event that the Merger is not consummated as anticipated, NSI will enter into separate license agreements which each of the regional licensees on substantially the same terms as the License Agreement. NSI and the regional licensees have agreed to operate under the terms of the License Agreement until such agreement or agreements are executed following consummation of the Merger. Upon consummation of the Merger, the Company will have the exclusive right and license of sell the PAPNET-Registered Trademark- System, PAPNET-Registered Trademark- Service and NSI Technology in the states of Ohio, Georgia, Kentucky, Missouri, North Carolina and in the Standard Metropolitan Statistical Area of Chicago, Illinois. The License Agreement provides that the regional licensees will be paid royalties as follows: (a) monthly royalties equal to 50% of the amount by which NSI's gross revenues from sales in the licensed territories exceed the cost of processing slides originating in the licensed territories (for purposes of which calculation costs per slide may not exceed $1.00 per slide) and the cost of transporting such slides, with the maximum amount of such monthly royalties in any fiscal year capped at an amount derived by applying the royalty formula to 12,175,000 slides; (b) annual royalties equal to the difference, if any, by which aggregate monthly royalties in any fiscal year are less than 4.15% of NSI's worldwide gross revenues for such fiscal year, with the maximum annual royalty amount in any fiscal year capped at $23,000,000, less the amount of monthly royalties paid in such fiscal year calculated as described in clause (a). For the purposes of calculating the numbers of slides attributable -38- to the licensed territories which are submitted by certain large laboratories operating in multiple states ("Multistate National Laboratories"), there will be attributed to each territory a proportionate number of slides submitted to NSI for processing from all Multistate National Laboratories equal to the ratio that the population of such territory bears to the population of the United States (determined according to official U.S. Census data). The royalty calculations described in the foregoing paragraph are aggregate calculations for all of the territorial licensees. Following consummation of the Merger, the amounts allocable to the Company will be determined according to the population of the geographic areas exclusively licensed to the Company. The applicable number of slides for the slide royalty cap described in clause (a) in the foregoing paragraph, the worldwide revenue percentage described in clause (b) in the foregoing paragraph, and the $23,000,000 amount described in the same clause, will be adjusted based upon the census data available at the time of the Merger. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1995 AND 1996 Royalty revenue for the three months ended March 31, 1996 was $13,553 compared to $10,080 for the same period in 1995. The increase is a result of increased worldwide sales at NSI due to NSI receiving FDA approval for the PAPNET-Registered Trademark- System in November 1995. While revenue for the quarters ending March 31, 1996 and 1995 has been accrued using the worldwide revenue calculation, based on current information management anticipates that revenue from slide volume from the Company's territory will exceed the revenue from the worldwide revenue calculation for the 1996 calendar year. Slide volume for the quarter ending March 31, 1996 was 1,590 slides processed compared to 65 slides processed in the quarter ending March 331, 1995. The increase in slide volume is the result of the FDA approval received in November 1995 and increasing the number of laboratories offering the PAPNET-Registered Trademark- testing. NSI has spent the first half of 1996 developing a laboratory distribution network for the PAPNET-Registered Trademark- test so that it would be available for a consumer product launch sometime during the third quarter of 1996. Total operating expense was $149,727 for the three months ended March 31, 1996 compared to $81,601 for the same period the prior year. The increase is primarily the result of higher expenses for (i) the addition of sale staff (in certain territories) and (ii) merger expenses incurred during the three months ended March 31, 1996. Interest income for the three months ended March 31, 1996 was $6,010 compared to $3,766 for the same period the prior year. The increase was a result of higher available cash balances to invest. YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 Royalty revenue for the year ended December 31, 1995 was $48,000 compared to $24,755 for 1994. the increase is a result of increased worldwide revenue for NSI as NSI established new marketing operations in Europe, Hong Kong, Canada and Mexico. The 1994 royalty revenue was $24,765 -39- compared to $4,332 for 1993. This increase was due to NSI expansion of sales to European laboratories. Total operating expense was $573,149 for the year ended December 31, 1995 compared to $327,361 for 1994. The increase is primarily the result of higher expense for (i) the additional sales staff in certain territories in anticipation of FDA approval of the PAPNET-Registered Trademark- System and (ii) merger expenses incurred during 1995. Total operating expense was $327,301 in 1994 compared to $289,913 in 1993. This increase was primarily the result of increases in sales and marketing and office expenses as the Company increased the sales and marketing efforts for the PAPNET-Registered Trademark- System. Interest income was $16,606 for the year ended December 31, 1995 compared to $19,059 for 1994. Interest income totaled $19,059 for 1994 compared to $9,037 in 1993. These fluctuations were due primarily to corresponding fluctuations in cash and cash equivalents resulting from the issuance of equity securities in such periods. Other income was $1,715,399 for the year ended December 31, 1995. This resulted from the exercise of warrants in NSI utilizing a cashless exercise provision, the settlement of certain claims with NSI from which the Company received 53,939 shares of NSI stock and the purchase and subsequent sale of 55,000 shares of NSI stock. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations primarily by the issuance of equity securities. The Company's combined cash and cash equivalents totaled $599,550 at March 31, 1996, a decrease of $211,808 from December 31, 1995. The decrease was primarily the result of (i) funding the first quarter pretax loss of $131,439 (ii) a decrease in current liabilities of $29,697 and (iii) an increase in accounts receivable of $53,554. In addition, the company owns 380,064 shares of NSI common stock which can be liquidated in an orderly fashion to fund future operations. The market value of the NSI shares was $8,286,392 at March 31, 1996. These shares are currently unrestricted. The Company anticipates that its capital requirements will be substantial for the foreseeable future. In particular, the Company anticipates that expenditures will increase significantly in the years 1996 through 1998 due to the cost of the commercial launch of the Papnet System and the cost of investing in similar technologies. The foregoing statements include forward-looking statements which involve risks and uncertainties. The Company's actual experience may differ materially from that discussed above. Factors that might cause such a difference include, but are not limited to, those discussed in "RISK FACTORS" as well as future events that have the effect of reducing the Company's available cash balances, such as unexpected operating losses or capital expenditures or cash expenditures related to possible future acquisitions. PREDECESSOR COMPANIES Each of the Predecessor Companies, except for CCWP, was organized to acquire and exercise the right to market the PAPNET-Registered Trademark- System and PAPNET-Registered Trademark- Service within their respective licensed territories. However, until November 6, 1995, when the FDA finally approved the marketing of the PAPNET-Registered Trademark- technology, the technology could be used in the United States only for investigational -40- purposes in connection with the FDA approval process. Consequently, the Predecessor Companies had only minor levels of business activities prior to November 1995. Minimal amounts of royalty revenue were earned prior to November 1995 from NSI under license arrangements identical to that described previously for the Company. Beginning in late 1995, the Company began managing the activities of the Predecessor Companies, including the hiring of employees, pending the completion of the Merger. In the event the merger is not consummated, the Predecessor Companies will need to develop their own infrastructure to market the PAPNET-Registered Trademark- System and PAPNET-Registered Trademark- Service or engage a third party to do so. DESCRIPTION OF COMPANY CAPITAL STOCK Upon consummation of the Merger, the Company's authorized capital stock will consist of 15,000,000 shares of Company common stock, without par value, and 500,000 shares of preferred stock, without par value (the "Company Preferred Stock"). The following summary description of the Company's capital stock does not purport to be complete and is qualified in its entirety by this reference to the Company's Amended and Restated Articles of Incorporation (the "Company Articles") and Amended and Restated Regulations (the "Company Regulations"), copies of which have been filed as exhibits to the Registration Statement of which this Prospectus forms a part. COMPANY COMMON STOCK As of March 31, 1996, there were 6,072,936 shares of Company common stock outstanding and held of record by approximately 400 shareholders. All of the issued and outstanding shares of Company common stock are fully paid and nonassessable. Holders of validly issued and outstanding shares of Company common stock are entitled to one vote per share of record on all matters to be voted upon by shareholders. At a meeting of shareholders at which a quorum is present, a majority of the votes cast decides all questions, unless the matter is one upon which a different vote is required by express provision of law or the Company Articles or the Company Regulations. There is no cumulative voting with respect to the election of directors. Shareholders have no preemptive or other rights to subscribe for additional shares nor any other rights to convert their Company common stock into any other securities. Subject to the preferences that may be applicable to the holders of any outstanding shares of Company Preferred Stock, holders of Company common stock are entitled to such dividends as may be declared by the Board of Directors out of funds legally available therefor. The payment by the Company of dividends, if any, rests within the discretion of its Board of Directors and will depend upon the Company's operating results, financial condition and capital expenditure plans, as well as other factors considered relevant by the Board of Directors. The Company may enter into bank credit agreements which include financial covenants restricting the payment of dividends. See "SUMMARY - Market Price Data." -41- Upon liquidation, dissolution or winding-up of the Company, the assets legally available for distribution to shareholders are distributable ratably among the holders of Company common stock at that time outstanding, subject to prior distribution rights of creditors of the Company and preferential rights of any outstanding shares of Company Preferred Stock. COMPANY PREFERRED STOCK Upon effectiveness of the Merger the Company Certificate will authorize the Board of Directors to issue up to 500,000 shares of Company Preferred Stock in one or more series and to establish such relative voting, dividend, redemption, liquidation, conversion and other powers, preferences, rights, qualifications, limitations and restrictions as the Board of Directors may determine without further approval of the shareholders of the Company. The issuance of Company Preferred Stock by the Board of Directors could be used, under certain circumstances, as a method of delaying or preventing a change in control of Company and could permit the Company Board of Directors, without any action by holders of Company common stock, to issue Company Preferred Stock which could have a detrimental effect on the rights of holders of Company common stock, including loss of voting control. In certain circumstances, this could have the effect of decreasing the market price of the Company common stock. The issuance of any series of Company Preferred Stock, and the relative powers, preferences, rights, qualifications, limitations and restrictions of such series, if and when established, will depend upon, among other things, the future capital needs of the Company, the then-existing market conditions and other factors that, in the judgment of the Company Board of Directors, might warrant the issuance of Company Preferred Stock. At the date of this Prospectus, there are no plans, agreements or understandings relative to the issuance of any shares of Company Preferred Stock. OHIO LAW AND CERTAIN ARTICLE AND REGULATIONS PROVISIONS Certain provisions of the General Corporation Law of Ohio and of the Company Articles and the Company Regulations, summarized in the following paragraphs, may be considered to have an anti-takeover effect and may delay, deter or prevent a tender offer, proxy contest or other takeover attempt that a shareholder might consider to be in such shareholder's best interest, including such an attempt as might result in payment of a premium over the market price for shares held by shareholders. CLASSIFIED BOARD OF DIRECTORS. The Company Regulations provide for the Company Board of Directors to be divided into three classes (unless there are fewer than 9 directors in which case there will be two classes) of directors serving staggered three-year terms. As a result, approximately one-third of the Company Board of Directors will be elected each year. Classification of the Company Board of Directors expands the time required to change the composition of a majority of directors and may tend to discourage a proxy contest or other takeover bid for the Company. The Company Regulations provide that any director or the entire Company Board of Directors may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least 80% of all of the outstanding shares of capital stock of the Company entitled to vote on the election of directors at a meeting of shareholders called for that purpose, except that if the Company Board of Directors, by an affirmative vote of at least 66 2/3% of the entire Company Board of Directors, recommends removal of a director to the shareholders, such removal may be effected by the affirmative vote of the holders of at least a majority of the outstanding shares of capital stock of the Company present in person or -42- represented by proxy and entitled to vote on the election of directors at a meeting of shareholders called for that purpose. These provisions, when coupled with provisions of the Company Regulations authorizing only the Company Board of Directors to fill vacant directorships, will preclude shareholders of the Company from removing incumbent directors without cause, and simultaneously gaining control of the Company Board of Directors by filling the vacancies with their own nominees. SPECIAL MEETINGS OF SHAREHOLDERS. The Company Regulations provide that special meetings of shareholders may be called by the Chairman of the Board, President or Chief Executive Officer or by the Board of Directors by action at a meeting or a majority of the directors without a meeting or by shareholders holding 50% or more of the voting power entitled to elect directors. ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS. The Company Regulations provide that shareholders seeking to bring business before a meeting of shareholders, or to nominate candidates for election as directors at a meeting of shareholders, must provide timely notice thereof in writing. To be timely, a shareholder's notice must be delivered to, or mailed and received at, the principal executive office of the Company, not less than 30 days nor more than 60 days prior to the scheduled meeting (or, if less than 40 days' notice of the meeting is given to shareholders not later than the close of business on the tenth day following the earlier of (i) the day on which such notice of the date of the meeting was mailed, or (ii) the day on which public disclosure of the date of the special meeting was made). The Company Regulations also specify certain requirements pertaining to the form and substance of a shareholder's notice. These provisions may preclude some shareholders from making nominations for directors at an annual or special meeting or from bringing other matters before the shareholders at a meeting. ACTION BY WRITTEN CONSENT OF THE SHAREHOLDERS. The Ohio General Corporation Law provides that, unless otherwise provided in the Articles of Incorporation, any action that is required to be taken at any annual or special meeting of shareholders, or any action which may be taken at any annual or special meeting of shareholders, may be taken without a meeting, with the affirmative vote, or approval, and in a writing signed by all shareholders who would be entitled to notice of a meeting of the shareholders held for such purpose. DIRECTORS' RESPONSE TO ACQUISITION PROPOSALS. The Company Articles provides that the Company Board of Directors must base the response of the Company to any "Acquisition Proposal" on the Company Board of Directors' evaluation of what is in the best interest of the Company. In evaluating what is in the best interest of the Company, the Company Board of Directors must consider all relevant factors including, without limitation, the best interest of the shareholders which, for this purpose, requires the Company Board of Directors to consider, among other factors, not only the consideration offered in the Acquisition Proposal in relation to the then current market price of the Company's stock, but also in relation to the current value of the Company in a freely negotiated transaction and in relation to the Company Board of Directors' then estimate of the future value of the Company as an independent entity or as the subject of a future Acquisition Proposal; and such other factors as the Company Board of Directors determines to be relevant, including, among other factors, the long-term and short-term interests of the Company and its subsidiaries and their businesses and properties and the social, legal and economic effects upon the employees, suppliers, customers, creditors and other affected persons, firms and corporations and on the communities and geographical areas in which the Company and its subsidiaries operate or are located. "Acquisition Proposal" is -43- defined in the Company Articles as any proposal for the consolidation or merger of the Company with another corporation, any share exchange involving the Company's outstanding capital stock, any liquidation or dissolution of the Company, any transfer of all or a material portion of the assets of the Company and any tender offer or exchange offer for any of the Company's outstanding stock. VOTING REQUIREMENTS. The Company Regulations provide that certain provisions in the Company Regulations may not be altered, amended or repealed in any respect, and new provisions inconsistent therewith may not be adopted unless such action is approved by the affirmative vote of the holders of at least 80% of all of the outstanding shares of capital stock of the Company entitled to vote on such matter at a meeting of shareholders called for that purpose. DIRECTOR LIABILITY AND INDEMNIFICATION The Company Articles provides that the Corporation may indemnify any director, officer, incorporator or any former director or officer of the Corporation and any person who is or has served at the request of the Corporation as a director, officer or trustee of another corporation, partnership, joint venture, trust or other enterprise (and his or hers heirs, executors and administrators) against expenses, including attorney fees, judgments, fines and amounts paid in settlement, actually and reasonably incurred by him by reason of the fact that he is or was such director, officer, incorporator or trustee in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative, to the full extent and according to the procedures and requirements set forth in the Ohio General Corporation Law as the same may be in effect from time to time. The indemnification provided herein shall not be deemed to restrict the right of the Corporation to (i) indemnify employees, agents and others as permitted by law, (ii) purchase and maintain insurance or provide similar protection on behalf of the directors, officers or such other persons against liabilities asserted against them or expenses incurred by them arising out of their service to the Corporation as contemplated herein, and (iii) enter into agreements with such directors, officers, incorporators, employees, agents or others indemnifying them against any and all liabilities asserted against them or incurred by them arising out of their service to the Corporation as contemplated herein. TRANSFER AGENT The transfer agent and registrar for the Company common stock is Huntington National Bank N.A., Columbus, Ohio. THE PREDECESSOR COMPANIES CYTOLOGY INDIANA, INC. CIN is an Ohio corporation formed on September 7, 1990 to serve as the general partner of Papnet Indiana Limited Partnership, an Ohio limited partnership, which was formed for the purpose of acquiring the rights to market the PAPNET-Registered Trademark-System and the PAPNET-Registered Trademark-Service in Indiana. Papnet Indiana Limited Partnership subsequently exchanged its rights for the State of Indiana for the right to market -44- the PAPNET-Registered Trademark-System and the PAPNET-Registered Trademark-Service in Missouri. In 1995, Papnet Indiana Limited Partnership distributed its assets to its general and limited partners. CIN owns an approximate 65% interest in the rights to market the PAPNET-Registered Trademark- System and Service in Missouri. The former limited partners of Papnet Indiana Limited Partnership are now shareholders of INC, which owns an approximate 35% interest in the rights to market the PAPNET-Registered Trademark-System and Service in Missouri. As of December 31, 1995, CIN had 10 shareholders. INDIANA CYTOLOGY REVIEW CORPORATION INC is an Ohio corporation formed on December 1, 1995 by the former limited partners of Papnet Indiana Limited Partnership for the purpose of owning an approximate 35% interest in the rights to market the PAPNET-Registered Trademark- System and the PAPNET-Registered Trademark- Service in Missouri. As of December 31, 1995, INC had 15 shareholders. ER GROUP, INC. ERG is an Ohio corporation formed on May 13, 1991 for the purpose of acquiring the rights to market the PAPNET-Registered Trademark- System and the PAPNET-Registered Trademark- Service in Georgia. As of December 31, 1995, ERG had nine shareholders. CCWP PARTNERS, INC. CCWP is an Ohio corporation formed on December 1, 1995. Carolina Cytology Partnership, an Ohio limited partnership, owned warrants for the purchase of NSI common stock. In December 1995, immediately after the formation of CCWP, CCWP acquired all of the outstanding units of limited partnership interest in Carolina Cytology Partnership in exchange for stock in CCWP. CCWP now owns the common stock issued upon exercise of the NSI warrant. As of December 31, 1995, CCWP had 12 shareholders. CAROLINA CYTOLOGY, INC. CCI is an Ohio corporation formed on December 10, 1992 for the purpose of acquiring the rights to market the PAPNET-Registered Trademark- System and the PAPNET-Registered Trademark- Service in North Carolina. As of December 31, 1995, CCI had 15 shareholders. MARKET INFORMATION There is no public market for the common stock of CIN, INC, ERG, CCWP or CCI. There is only a limited public market for the Company's common stock, with five securities dealers acting as market makers. The Company's common stock is quoted on the National Association of Securities -45- Dealers, Inc. "Bulletin Board." The following table sets forth the quarterly high and low bid quotations for 1994, 1995 and the first quarter of 1996 which have been adjusted to reflect 2-for-1 stock splits in May 1994, May 1995 and December 1995. The prices shown represent quotations between dealers, without adjustments for retail markups, markdowns or commissions and may not represent actual transactions. 1994 High Low ---- ---- --- 2nd Qtr. 7.50 3.75 3rd Qtr. 5.875 3.625 4th Qtr. 4.25 3.50 1995 ---- 1st Qtr. 5.398 3.75 2nd Qtr. 8.094 1.875 3rd Qtr. 17.688 10.75 4th Qtr. 15.688 13.375 1996 ---- 1st Qtr. 13 9.375 DIVIDENDS The Predecessor Companies have not paid dividends on their common stock. -46- COMPARISON OF CERTAIN RIGHTS OF THE COMPANY AND THE PREDECESSOR COMPANY SHAREHOLDERS ARTICLES OF INCORPORATION PROVISIONS The following chart (the "Chart") provides a comparison of certain provisions of the Company's and the Predecessor Companies' Articles of Incorporation, and compares certain other rights the shareholders of the Company and the Predecessor Companies may have.
- --------------------------------------------------------------------------------------------------------- Auth/Out Auth/Out State of Common Preferred Majority Cumulative Preemptive Entity Organization Shares(1) Shares(2) Vote Voting Rights - --------------------------------------------------------------------------------------------------------- The 8,000,000/ Company Ohio 6,072,936 N/A no yes no - --------------------------------------------------------------------------------------------------------- CIN Ohio 750/750 N/A no yes yes - --------------------------------------------------------------------------------------------------------- INC Ohio 100/100 N/A no(3) yes no - --------------------------------------------------------------------------------------------------------- ERG Ohio 750/578 N/A yes yes yes - --------------------------------------------------------------------------------------------------------- CCWP Ohio 10,000/9,150 N/A yes yes no - --------------------------------------------------------------------------------------------------------- CCI Ohio 1,500/905 N/A yes yes no - ----------------------------------------------------------------------------------------------------
(1) This column represents authorized and outstanding common shares prior to the Effective Time of the Merger. The Company's Articles of Incorporation will be amended as described under "THE COMPANY - Articles of Incorporation." (2) This column represents authorized and outstanding preferred shares prior to the Effective Time of the Merger. (3) INC's Articles of Incorporation provide that if a merger is approved by the directors of INC, it can be adopted by a vote of a majority of the outstanding shares entitled to vote on the Merger. Otherwise the approval of a merger would require the affirmative vote of two-thirds of the outstanding shares entitled to vote the merger. The Merger has been unanimously recommended by the directors of INC. The rights of the shareholders of the Predecessor Companies are currently governed and defined by the laws of the State of Ohio and by their respective Articles of Incorporation and or Regulations. Upon consummation of the Merger, the shareholders of the Predecessor Companies will become shareholders of the Company and their rights will cease to be governed and defined by Articles of Incorporation and Codes of Regulation and will be defined and governed by the Ohio General Corporation Law, the Company Articles and the Company Regulations. Certain provisions of the Company Articles and the Company Regulations provide different rights of shareholders from those that the shareholders of the Predecessor Companies currently have. Certain of these provisions are summarized below. This summary is not intended to be complete and is qualified in its entirety by reference to applicable provisions of the Ohio General Corporation Law and to the respective corporate documents of the Company and the Predecessor Companies. For information as to how such corporate documents may be obtained, see "AVAILABLE INFORMATION." -47- CAPITAL STOCK The Ohio General Corporation Law requires a corporation's Articles of Incorporation to set forth the total number of shares of all classes of stock that the corporation has authority to issue, and, for each class, the designations, powers, preferences, rights, qualifications, limitations and restrictions thereof. The Company Articles currently authorizes 8,000,000 shares of the Company common stock of which 6,072,936 shares were issued and outstanding on December 31, 1995. The Company Articles will be amended in connection with the Merger and will authorize 15,000,000 shares of the Company common stock of which 10,930,449 will be issued and outstanding immediately after the Merger and 500,000 shares of the Company Preferred Stock of which no shares will be outstanding immediately after the Merger. The authorized and issued and outstanding shares of the Predecessor Companies' capital stock, as of March 31, 1996, is set forth in the Chart. The provisions of the Company Articles setting the terms of the Company common stock are compared in the Chart and differ in certain respects. Holders of Company common stock and Predecessor Company common stock, respectively, are entitled to one vote per share on all matters submitted to a vote of shareholders. The Company's shareholders have no preemptive rights, but the shareholders of ERG and CIN do. The shareholders of the Company are entitled to cumulative voting (the Company Articles will be amended to eliminate cumulative voting) as are the shareholders of the Predecessor Companies. The rights, preferences and privileges of holders of Company common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Company Preferred Stock that the Company may designate and issue in the future. In addition, the right of holders of Company common stock to receive ratably any dividends that may be declared by the Company Board of Directors is subject to preferential dividend rights of any Company Preferred Stock then outstanding. None of the Predecessor Company Articles of Incorporation authorize any class of preferred stock. Although no shares of the Company Preferred Stock will be outstanding immediately following the Merger, the Company Board of Directors has the authority, without any further vote or action by the shareholders, to issue Company Preferred Stock in one or more classes or series and to fix the number of shares, designations, powers, preferences, rights, qualifications, limitations and restrictions thereof. The ability of the Company Board to so issue Company Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire (or of discouraging a third party from acquiring) a majority of the outstanding voting stock of the corporation. The Company currently has no plan to issue any Company Preferred Stock. VOTING POWER Holders of Company common stock and Predecessor Company common stock, respectively, are entitled to one vote per share. -48- PAYMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS The Ohio General Corporation Law generally allows dividends to be paid in cash, property, or shares of the corporation. The dividend shall not exceed the combination of the surplus of the Corporation and the difference between (i) the reduction in surplus that results from the immediate recognition of the transition obligation under the statement of financial accounting standards No. 106; and (2) the aggregate amount of the transition obligation that would have been recognized as of the date of the declaration of a dividend if the corporation had elected to amortize its recognition of the transition obligation under statement of financial accounting standards No. 106. However, no dividends may be paid to the holders of shares of any class in violation of the rights of the holders of shares of any other class, or when the corporation is solvent or there is reasonable ground to believe that by such payment it would be rendered insolvent. Holders of both the Company common stock and the Predecessor Company common stock are entitled to receive dividends in such amounts and at such times as declared by their respective Boards of Directors. Neither the Company nor any Predecessor Company has paid cash dividends. The Company presently anticipates that all of its future earnings will be retained for the development of its business and does not anticipate paying cash dividends on the Company common stock in the foreseeable future. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will be based on the Company's future earnings, financial condition, capital requirements and other relevant factors. REGULATION PROVISIONS The following chart (the "Chart") provides a comparison of certain provisions of the Company's and the Predecessor Companies Codes of Regulation and compares certain other rights the shareholders of the Company and the Predecessor Companies may have.
- --------------------------------------------------------------------------------------------------- Entity Meetings Directors Officers Committees Indemnification - --------------------------------------------------------------------------------------------------- The Annual meeting Not less than President, Board may Each director, Company held on first three, and Secretary, designate officer and member first Tuesday number can and directors of committee in the third be fixed or Treasurer to serve on shall be indemnified month following changed at a and in the an against all expenses the end of the meeting of discretion executive incurred in fiscal year, shareholders. of the committee, connection with any within or without Board, a and other action from position the State of Ohio. Chairman of committees held at the Company. Action may be the Board, at its taken without vice- discretion. meeting if written presidents consent of all and other holders entitled such to notice of a officers as meeting for such the Board purpose. may decide. - -----------------------------------------------------------------------------------------------
-49-
Entity Meetings Directors Officers Committees Indemnification - ------------------------------------------------------------------------------------------------------------------------ ERG Annually, as the Not less than President, Executive Committee For officer or director directors may three, with number Secretary, specifically director against decide within or determined by Treasurer and provided for expenses incurred in without the vote of in the and the Board any action resulting State of Ohio. shareholders. discretion of has authority to from position held at the Board, a elect other committees. the Company. Chairman of the Board. - ------------------------------------------------------------------------------------------------------------------------ CCWP Annually as the Not less than President, For officer or Executive Directors may three, with the Secretary, director against Committee decide within or number Treasurer and in expenses incurred specifically without the State determined by the discretion in connection with provided for of Ohio. a vote of of the Board, any action resulting and the Board shareholders. a Chairman of from position held has authority to the Board. at the Company. elect other committees. - ------------------------------------------------------------------------------------------------------------------------ CCI Annually as the Not less than President, Executive For officer or Directors may number Secretary, Committee director against decide within determined by Treasurer and in specifically expenses incurred or without the a vote of the discretion of provided for in connection with State of Ohio. shareholders. the Board, a and the Board any action resulting Chairman of the has authority to from position held Board. elect other at the Company. committees. - ------------------------------------------------------------------------------------------------------------------------ CIN Annual meeting Not less than President, Vice Board of Directors may Each director held on second three, and President, designate directors to indemnified to the Tuesday of April, number can be Secretary, and in serve on an executive fullest extent of within or fixed or changed the discretion of committee, audit Ohio law. without the State at a meeting the Board, a committee or of Ohio. Action of shareholders. Chairman of the compensation committee. may be taken Board. without meeting if written consent of all holders entitled to vote. - ------------------------------------------------------------------------------------------------------------------------ INC Annually as the Not less than President, Executive Committee For officer or Directors may three, and Secretary, specifically provided director against decide within or number can be Treasurer and in for and the Board has expenses incurred without the State fixed or changed the discretion of authority to elect other in connection with of Ohio. at a meeting the Board, a committees. any action resulting of shareholders. Chairman of the from position held Board. at the Company. - ------------------------------------------------------------------------------------------------------------------------
MEETINGS OF SHAREHOLDERS The Company Regulations provide that special meetings of shareholders may be called by the Chairman of the Board, President or Chief Executive Officer, or by the Board of Directors by action -50- or a majority of the Directors without a meeting or by shareholders holding 80% or more of the voting power of the then outstanding shares entitled to vote in an election of Directors. Except as otherwise provided by law or by the Company Articles, a quorum for any meeting of the Company shareholders is a majority of the capital stock issued and outstanding and entitled to vote at the meeting. SHAREHOLDER NOMINATIONS AND PROPOSALS The Company Regulations also specify certain requirements pertaining to the form and substance of a shareholder's notice. These provisions may preclude some shareholders from making nominations for directors at an annual or special meeting or from bringing other matters before the shareholders at a meeting. See "COMPANY - Description of Capital Stock." Although the Company corporate documents do not give the Company Board any power to approve or disapprove shareholder nominations for the election of directors or proposals for action, the foregoing provisions may have the effect of precluding a contest for the election of directors or the consideration of shareholder proposals if the proper procedures are not followed, and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal, without regard to whether consideration of such nominees or proposals might be harmful or beneficial to the Company and its shareholders. On the other hand, by requiring advance notice of nominations by shareholders, these shareholder notice procedures afford the Company Board of Directors an opportunity to consider the qualifications of the proposed nominees and, to the extent deemed necessary or desirable by the Company Board of Directors, to inform shareholders about such qualifications. By requiring advance notice of other proposed business, the shareholder notice procedures provide a more orderly procedure for conducting annual meetings of shareholders and, to the extent deemed necessary or desirable by the Company Board of Directors, provide the Board with an opportunity to inform shareholders, prior to such meeting, of any business proposed to be conducted at the meeting, together with any recommendations by the Company Board of Directors or statements as to the Company Board of Director's position regarding action to be taken with respect to such business, so that shareholders can better decide whether to attend the meeting or to grant a proxy regarding the disposition of any such business. AMENDMENT OF ARTICLES OF INCORPORATION AND REGULATIONS The Ohio General Corporation Law provides that an amendment to a corporation's Articles of Incorporation requires the approval of the Board of Directors in certain instances and the affirmative vote of the holders of shares entitling them to exercise two-thirds of the voting power of the corporation in other instances. The Company Articles and the Company Regulations provide that certain provisions in the Company Articles and the Company Regulations may not be altered, amended or repealed in any respect, and new provisions inconsistent therewith may not be adopted unless such action is approved by the affirmative vote of the holders of at least 80% of all of the outstanding shares of capital stock of the Company entitled to vote on such matter at a meeting of shareholders called for that purpose, except that if the Company Board of Directors, by an affirmative vote of at least 66 2/3% of the entire Company Board of Directors, recommends approval of such amendment to the Company Articles to the shareholders, such approval may be effected by the affirmative vote of the holders of at least a -51- majority of the outstanding shares of capital stock of the Company present in person or represented by proxy and entitled to vote on such matter at a meeting of shareholders called for that purpose. See "COMPANY - Description of Capital Stock." ACTION BY WRITTEN CONSENT The Ohio General Corporation Law provides that, unless otherwise provided in the Articles of Incorporation, any action that is required to be taken at any annual or special meeting of shareholders, or any action which may be taken at any annual or special meeting of shareholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by all the shareholders who would be entitled to notice of a meeting of the shareholders held for such purpose. See "THE COMPANY - Description of Capital Stock." SIZE AND CLASSIFICATION OF BOARD OF DIRECTORS; REMOVAL OF DIRECTORS; FILLING VACANCIES The Company Regulations provide for the Company Board of Directors to be divided into three classes (unless there are fewer than 9 directors in which case there will be two classes) of directors serving staggered two-year terms. As a result, approximately one-half of the Company Board of Directors will be elected each year. Classification of the Company Board of Directors expands the time required to change the composition of a majority of directors and may tend to discourage a proxy contest or other takeover bid for the Company. The Company Regulations provide that any director or the entire Company Board of Directors may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least 80% of all of the outstanding shares of capital stock of the Company entitled to vote on the election of directors at a meeting of shareholders called for that purpose, except that if the Company Board of Directors, by an affirmative vote of at least 66 2/3% of the entire Company Board of Directors, recommends removal of a director to the shareholders, such removal may be effected by the affirmative vote of the holders of at least a majority of the outstanding shares of capital stock of the Company present in person or represented by proxy and entitled to vote on the election of directors at a meeting of shareholders called for that purpose. These provisions, when coupled with provisions of the Company Regulations authorizing only the Company Board of Directors to fill vacant directorships, will preclude shareholders of the Company from removing incumbent directors without cause, and simultaneously gaining control of the Company Board of Directors by filling the vacancies with their own nominees. See "THE COMPANY- Description of Capital Stock." Although the Articles of Incorporation of all the Predecessor Companies, permit cumulative voting, the Company Articles does not. See COMPARISON OF CERTAIN RIGHTS OF THE COMPANY AND THE PREDECESSOR COMPANY SHAREHOLDERS - Chart. Accordingly, with respect to both corporations, holders of a majority of the shares of common stock entitled to vote in any election of directors of such corporation may elect all of the directors standing for election. Classification of the Company directors has the effect of making it more difficult for shareholders to change the composition of the Company Board of Directors. At least two annual meetings of shareholders, instead of one, generally will be required to effect a change in the majority of a classified board. Such a delay may help ensure that incumbent directors, if confronted by a holder attempting to force a proxy contest, a tender or exchange offer, or any other extraordinary corporate transaction, would have sufficient time to review the proposal as well as any available alternatives to the proposal -52- and to act in what they believe to be the best interests of the shareholders. See "RISK FACTORS - Anti-Takeover Provisions; Certain Provisions of Ohio Law; Articles of Incorporation and Regulations." The term "cause" is not defined in the Company Articles or the Ohio General Corporation Law. Consequently, any question concerning the legal standard for "cause" would have to be judicially determined and such a determination could be difficult, expensive and time consuming. LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS Section 1701.59 of the Ohio General Corporation Law provides that a director shall not be found to have violated his duties under the Ohio General Corporation Law unless it is proved by clear and convincing evidence that the director has not acted in good faith, in a manner he reasonably believes to be in or not opposed to the best interests of the corporation, or with the care that an ordinary prudent person in a like position would use under similar circumstances. Section 1701.13 of the Ohio General Corporation Law allows for corporations to indemnify officers and directors from actions, suits or proceedings arising out of their service to the corporation. The Company's Articles provide that the Corporation may indemnify any director, officer, incorporator or any former director or officer of the Corporation and any person who is or has served at the request of the Corporation as a director, officer or trustee of another corporation, partnership, joint venture, trust or other enterprise (and his or hers heirs, executors and administrators) against expenses, including attorney fees, judgments, fines and amounts paid in settlement, actually and reasonably incurred by him by reason of the fact that he is or was such director, officer, incorporator or trustee in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative, to the full extent and according to the procedures and requirements set forth in the Ohio General Corporation Law as the same may be in effect from time to time. The indemnification provided herein shall not be deemed to restrict the right of the Corporation to (i) indemnify employees, agents and others as permitted by law, (ii) purchase and maintain insurance or provide similar protection on behalf of the directors, officers or such other persons against liabilities asserted against them or expenses incurred by them arising out of their service to the Corporation as contemplated herein, and (iii) enter into agreements with such directors, officers, incorporators, employees, agents or others indemnifying them against any and all liabilities asserted against them or incurred by them arising out of their service to the Corporation as contemplated herein. INTERESTED SHAREHOLDER TRANSACTIONS Chapter 1704 of the Ohio General Corporation Law prohibits certain transactions between a Ohio corporation and an "interested shareholder" Chapter 1704 allows for a corporation to exclude itself from Chapter 1204 by exempting itself in its Articles of Incorporation. The Company has not included such an exemptive provision in the Company Articles. See "THE COMPANY - Description of Capital Stock." PREEMPTIVE RIGHTS The Company shareholders do not have preemptive rights to purchase or subscribe for additional securities of the Company upon any future issuance by such corporation of such securities. -53- REPURCHASE AND REDEMPTION OF STOCK Ohio corporations may generally purchase or redeem their own shares of capital stock. The Company Articles provide that its Board of Directors have the right and power to repurchase any of its outstanding shares upon such terms and conditions agreed upon by the corporation and the selling shareholder. EXPERTS The financial statements of Papnet of Ohio, Inc. at December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995; the financial statements of ER Group, Inc. at December 31, 1995 and the year then ended; the combined financial statements of Carolina Cytology, Inc. and CCWP Partners, Inc. at December 31, 1995 and the year then ended; the financial statements of Indiana Cytology Review Company at December 31, 1995 and the year then ended; and the financial statements of Cytology Indiana, Inc. at December 31, 1995 and the year then ended; appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. LEGAL OPINIONS The validity of the Company Shares to be issued to the Predecessor Company shareholders pursuant to the Merger and certain other legal matters in connection with the Merger, including certain tax matters, will be passed upon by Porter, Wright, Morris & Arthur, Columbus, Ohio. -54- Index to Financial Statements Papnet of Ohio, Inc. Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . F - 3 Balance Sheets at December 31, 1994 and 1995 and March 31, 1996 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . F - 4 Statements of Operations for each of the three years ended December 31, 1993, 1994 and 1995 and for the three-month periods ended March 31, 1995 and 1996 (Unaudited). . . . . . . . . . . F - 5 Statements of Stockholders' Equity for each of the three years ended December 31, 1993, 1994 and 1995 and for the three-month period ended March 31, 1996 (Unaudited). . . . . . . . . . . . . . . . F - 6 Statements of Cash Flows for each of the three years ended December 31, 1993, 1994 and 1995 and for the three-month periods ended March 31, 1995 and 1996 (Unaudited). . . . . . . . . . . F - 7 Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . F - 8 ER Group, Inc. Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . F - 15 Balance Sheets at December 31, 1995 and March 31, 1996 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . F - 16 Statements of Operations for the year ended December 31, 1995 and for the three-month period ended March 31, 1996 (Unaudited). . . . F - 17 Statements of Cash Flows for the year ended December 31, 1995 and for the three-month period ended March 31, 1996 (Unaudited). . . . F - 18 Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . F - 19 Carolina Cytology, Inc. and CCWP Partners, Inc. Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . F - 22 Combined Balance Sheets at December 31, 1995 and March 31, 1996 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . F - 23 Combined Statements of Operations for the year ended December 31, 1995 and for the three-month period ended March 31, 1996 (Unaudited). . . . . . . . . . . . . . . . F - 24 Combined Statements of Cash Flows for the year ended December 31, 1995 and for the three-month period ended March 31, 1996 (Unaudited). . . . . . . . . . . . . . . . F - 25 Notes to Combined Financial Statements . . . . . . . . . . . . . . . . . F - 26 F-1 Index to Financial Statements (continued) Indiana Cytology Review Corporation Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . F - 29 Balance Sheets at December 31, 1995 and March 31, 1996 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . F - 30 Statements of Operations for the period December 1 through December 31, 1995 and for the three-month period ended March 31, 1996 (Unaudited) . . . . . . . . . . . . . . . . . . . F - 31 Statements of Cash Flows for the period December 1 through December 31, 1995 and for the three-month period ended March 31, 1996 (Unaudited) . . . . . . . . . . . . . . . . . . . F - 32 Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . F - 33 Cytology Indiana, Inc. Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . F - 37 Balance Sheets at December 31, 1995 and March 31, 1996 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . F - 38 Statements of Operations for the year ended December 31, 1995 and for the three-month period ended March 31, 1996 (Unaudited). . . . F - 39 Statements of Cash Flows for the year ended December 31, 1995 and for the three-month period ended March 31, 1996 (Unaudited). . . . F - 40 Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . F - 41 F-2 Report of Independent Auditors The Board of Directors and Stockholders Papnet of Ohio, Inc. We have audited the accompanying balance sheets of Papnet of Ohio, Inc. (the Company) as of December 31, 1995 and 1994, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Columbus, Ohio March 22, 1996, except for Note 8 as to which the date is July 15, 1996 F-3 Papnet of Ohio, Inc. Balance Sheets
DECEMBER 31 MARCH 31, 1994 1995 1996 ---------------------------------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 535,545 $ 811,359 $ 599,550 Accounts receivable 33,445 75,993 58,962 Due from related entities (NOTE 8) - - 70,575 Note receivable from stockholder (NOTE 6) 50,000 50,000 50,000 Prepaid assets 1,021 1,021 1,021 ---------------------------------------- Total current assets 620,011 938,373 780,108 Notes receivable - NSI 126,041 51,080 51,080 Investment in NSI--available for sale - 7,696,296 8,266,392 Investment in partnerships - 172,679 183,524 Furniture and equipment (net of accumulated depreciation of $17,127 -- 1994 and $24,623 -- 1995) 20,552 17,316 15,816 Deferred taxes - 68,715 121,290 Deposits and other assets 2,330 1,330 1,330 ---------------------------------------- Total assets $ 768,934 $8,945,789 $9,419,540 ---------------------------------------- ---------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ - $ 49,931 $ 108,966 Accrued expenses 30,334 81,630 34,968 Other liabilities - 42,831 860 ---------------------------------------- Total current liabilities 30,334 174,392 144,794 Deferred taxes - 2,517,718 2,745,756 Stockholders' equity: Common stock no par value, 8,000,000 shares authorized, 5,864,916 and 6,072,936 issued and outstanding at December 31, 1994 and 1995 1,488,948 1,779,465 1,779,465 Additional paid-in capital 783,077 783,077 783,077 Unrealized gains on available-for-sale securities net of deferred taxes of $2,517,718 in 1995 and $2,745,756 in 1996 - 3,899,617 4,253,792 Retained deficit (1,533,425) (208,480) (287,344) ---------------------------------------- Total stockholders' equity 738,600 6,253,679 6,528,990 ---------------------------------------- Total liabilities and stockholders' equity $ 768,934 $8,945,789 $9,419,540 ---------------------------------------- ----------------------------------------
SEE ACCOMPANYING NOTES. F-4 Papnet of Ohio, Inc. Statements of Operations
THREE MONTHS ENDED YEAR ENDED DECEMBER 31 MARCH 31 1993 1994 1995 1995 1996 ------------------------------------------------------------------------ (UNAUDITED) Royalty revenue $ 4,322 $ 24,765 $ 48,000 $ 10,080 $ 13,553 Operating expenses: Salaries and benefits 180,909 184,113 284,041 46,456 60,368 Sales and marketing 41,881 26,433 62,079 13,142 19,294 Professional 38,935 40,664 32,854 8,181 1,863 Payroll and franchise taxes 19,272 20,831 22,316 9,955 19,297 Depreciation and amortization 8,916 8,152 7,496 1,800 1,500 Office and other - 47,168 57,948 12,067 10,792 Merger (NOTE 8) - - 106,415 - 36,613 ------------------------------------------------------------------------ Total operating expense 289,913 327,361 573,149 91,601 149,727 ------------------------------------------------------------------------ Operating loss (285,591) (302,596) (525,149) (81,521) (136,174) Other income (expense): Interest income 9,037 19,059 16,606 3,766 6,010 Interest expense (514) - (264) (39) - Equity income (loss) in partnerships - - 49,638 - (1,275) NSI settlement and common stock transactions (NOTE 3) - - 1,715,399 - - ------------------------------------------------------------------------ Total other income 8,523 19,059 1,781,379 3,727 4,735 ------------------------------------------------------------------------ Income (loss) before income taxes (277,068) (283,537) 1,256,230 (77,794) (131,439) Income tax provision (benefit) - - (68,715) - (52,575) ------------------------------------------------------------------------ Net income (loss) $(277,068) $(283,537) $1,324,945 (77,794) (78,864) ------------------------------------------------------------------------ Net income (loss) per share $(.05) $(.05) $.21 $(.01) $(.01) ------------------------------------------------------------------------ ------------------------------------------------------------------------ Shares used in computation 5,623,000 5,860,336 6,349,594 5,860,336 6,073,136 ------------------------------------------------------------------------ ------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. F-5 Papnet of Ohio, Inc. Statements of Stockholders' Equity
ADJUSTMENTS ADDITIONAL TO UNREALIZED RETAINED COMMON PAID-IN GAINS EARNINGS STOCK CAPITAL (LOSSES) (DEFICIT) TOTAL ------------------------------------------------------------------------------- Balance, January 1, 1993 $ 602,000 $783,077 $ - $ (972,820) $ 412,257 Stock issued 401,802 - - - 401,802 Stock subscribed 386,837 - - - 386,837 Net loss - - - (277,068) (277,068) ------------------------------------------------------------------------------- Balance, December 31, 1993 1,390,639 783,077 - (1,249,888) 923,828 Stock issued and warrants exercised 98,309 - - - 98,309 Net loss - - - (283,537) (283,537) ------------------------------------------------------------------------------- Balance, December 31, 1994 1,488,948 783,077 - (1,533,425) 738,600 Stock issued and warrants exercised 290,517 - - - 290,517 Adjustment to unrealized gains net of tax (unaudited) - - 3,899,617 - 3,899,617 Net income - - - 1,324,945 1,324,945 ------------------------------------------------------------------------------- Balance, December 31, 1995 1,779,465 783,077 3,899,617 (208,480) 6,253,679 Net loss (unaudited) - - - (78,864) (78,864) Adjustment to unrealized gains net of tax (unaudited) - - 354,175 - 354,175 ------------------------------------------------------------------------------- Balance, March 31, 1996 (unaudited) $1,779,465 $783,077 $4,253,792 $(287,344) $6,528,990 ------------------------------------------------------------------------------- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. F-6 Papnet of Ohio, Inc. Statements of Cash Flows
THREE MONTHS ENDED YEAR ENDED DECEMBER 31 MARCH 31 1993 1994 1995 1995 1996 ------------------------------------------------------------------------ (UNAUDITED) OPERATING ACTIVITIES Net income (loss) $(277,068) $(283,537) $1,324,945 $(77,794) $ (78,864) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 8,916 8,152 7,496 1,800 1,500 Recognition of deferred tax assets - - (68,715) - (52,575) Gain on settlement and exercise of warrants with NSI - - (1,402,002) - - Equity (income) loss in partnership - - (49,638) - 1,275 Changes in operating assets and liabilities: Accounts receivable (5,121) (24,765) (42,548) (9,363) 17,031 Note receivable from stockholder - (50,000) - - - Prepaid assets (1,021) - - - - Accounts payable 18,969 (23,905) 49,931 - 59,035 Due from related entities - - - - (112,223) Accrued expenses and other liabilities 2,179 15,574 94,127 (8,272) (46,988) ------------------------------------------------------------------------ Net cash used in operating activities (253,146) (358,481) (86,404) (93,629) (211,809) INVESTING ACTIVITIES Notes receivable - NSI 27,012 70,717 74,961 (717) - Purchase of furniture and equipment (7,179) (7,200) (4,260) - - Other assets (126) (172) 1,000 - - ------------------------------------------------------------------------ Net cash provided by (used in) investing activities 19,707 63,345 71,701 (717) - FINANCING ACTIVITIES Proceeds from stock subscription receivable 95,862 290,975 - - - Issuance of common stock and warrants exercised - 98,309 290,517 - - ------------------------------------------------------------------------ Net cash provided by financing activities 95,862 389,284 290,517 - - Net increase (decrease) in cash (137,577) 94,148 275,814 (94,346) (211,809) Cash and cash equivalents at beginning of period 578,974 441,397 535,545 535,545 811,359 ------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 441,397 $ 535,545 $ 811,359 $441,199 $ 599,550 ------------------------------------------------------------------------ ------------------------------------------------------------------------ Supplemental non-cash transactions: Assets acquired in acquisition of minority interests in exchange for common stock $ 401,802 $ - $ - $ - $ - ------------------------------------------------------------------------ ------------------------------------------------------------------------ Stock subscriptions received from stock offering $ 290,975 $ - $ - $ - $ - ------------------------------------------------------------------------ ------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. F-7 Papnet of Ohio, Inc. Notes to Financial Statements December 31, 1995 1. ORGANIZATION AND BASIS OF PRESENTATION Papnet of Ohio, Inc. (the Company) holds a long-term territorial license agreement ("License Agreement") issued by Neuromedical Systems, Inc. (NSI), which provides the right to sell the "PAPNET-Registered Trademark- System" and the "PAPNET-Registered Trademark- Service", as described below, in Ohio, Kentucky and the Standard Metropolitan Area of Chicago. NSI, founded in 1988, is a healthcare technology company focused on diagnostic screening applications to aid in the early detection of certain cancers. NSI's first and to date only product, the PAPNET-Registered Trademark- System, was approved for commercial use in the United States by the Food and Drug Administration (the "FDA") on November 8, 1995. The PAPNET-Registered Trademark- Service permits laboratories to submit slides to one of NSI's central facilities for processing by the PAPNET-Registered Trademark- System. NSI's objective is to establish the use of its PAPNET-Registered Trademark- System as the new standard of care in cervical cancer screening. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. CASH EQUIVALENTS Cash equivalents include investments in highly liquid debt instruments with a maturity of three months or less at date of acquisition. The carrying amounts reported in the balance sheets for cash equivalents approximate fair value. INVESTMENT IN PARTNERSHIPS The Company accounts for its minority interest in two partnerships on the equity method because the Company exercises significant influence over the partnerships. The majority owners of these partnerships are parties to the Merger Agreement described in Note 8. F-8 Papnet of Ohio, Inc. Notes to Financial Statements (continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FURNITURE AND EQUIPMENT Furniture and equipment consists of office furniture and computer equipment recorded at cost which is being depreciated on an accelerated method over estimated useful lives ranging from five to seven years. LICENSE AGREEMENT The License Agreement expires in 2025, but provide for a 20 year renewal option. Amounts paid by the Company to NSI in exchange for the License Agreement have been expensed in the years paid. This accounting reflects the uncertainty as to the recoverability of amounts paid for the License Agreement, which was contingent on FDA approval of the PAPNET-Registered Trademark- System and the ability of NSI and the Company to develop a profitable market for the technology. The Company treated these payments as an intangible asset in its previously issued financial statements. The Company's historical financial statements have been restated to conform with the accounting practices of the other NetMed Entities, as described in Note 8, so there is consistent application for the merger also described in Note 8. The effect of this change on the Company's historical financial statements was to increase income in each of the three years ended December 31, 1993, 1994 and 1995, by approximately $43,000, $43,000 and $31,000, respectively, in addition to reducing assets and retained earnings by the unamortized balance of the intangible asset. ROYALTY REVENUE Pursuant to the License Agreements, the Company is entitled to receive a calculated royalty or a specified percentage of NSI's annual slide processing revenues less certain expenses, up to specific annual monetary limits for each licensee. Royalty revenue is recognized as earned based on the License Agreements. INCOME TAXES The Company accounts for income taxes using the liability method under Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes." Deferred items are determined based on differences between the financial reporting and tax basis of assets and liabilities, and are measured using the enacted rates and laws that will be in effect when the differences are expected to reverse. STOCK OPTIONS AND WARRANTS The Company accounts for stock options and warrants under APB 25 "Accounting for Stock Issued to Employees." F-9 Papnet of Ohio, Inc. Notes to Financial Statements (continued) 3. INVESTMENT IN NSI The Company owns stock in NSI as a result of the exercise of warrants and settlement of certain claims with NSI. The investment is classified as available-for-sale and is carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. NSI trades publicly on the NASDAQ NMS under the symbol "NSIX." As of December 31, 1995, the Company owned 380,064 shares of NSI stock at a cost of $1,402,002. The exercise of the warrants in NSI was completed utilizing a cashless exercise provision in the warrant agreement. This resulted in a gain of $652,250 which has been reported as other income. As a result of settling certain claims with NSI in December 1995, the Company received 53,939 shares of NSI stock resulting in a gain of $749,752 which is recorded in other income. In addition, the Company was allocated the right to purchase 65,000 shares of NSI stock at NSI's initial public offering. The Company purchased and sold the entire 65,000 shares for $1,292,363 during 1995 resulting in a realized gain of $313,397 which has been recorded as other income. 4. STOCK OPTIONS AND WARRANTS The Company adopted a stock option plan in 1995 under which qualified or nonqualified options may be granted. No options are currently outstanding under the Plan. As of December 31, 1995, there were outstanding 47,020 warrants for the President of the Company and 24,000 for a former consultant to purchase stock at exercise prices of $.875 per share and $1.25 per share, respectively. SHARES VALUE ----------------------------------------- Outstanding at December 31, 1993 339,040 $.875 to $1.25 Exercised (84,000) $1.25 -------------- Outstanding at December 31, 1994 255,040 Exercised (184,020) $.875 to $1.25 -------------- Outstanding at December 31, 1995 71,020 $.875 to $1.25 -------------- -------------- F-10 Papnet of Ohio, Inc. Notes to Financial Statements (continued) 4. STOCK OPTIONS AND WARRANTS (CONTINUED) The Company has outstanding options to issue 365,600 of the Company's shares under a non-qualified stock option plan at exercise prices ranging from $1.09 to $12.00 per share. As of December 31, 1995 and 1994, respectively, the outstanding shares and respective exercise prices were as follows: SHARES VALUE ----------------------------------------- Outstanding at December 31, 1993 397,600 $1.09 to $1.56 Issued 32,000 $2.25 to $3.25 Expired 24,000 $1.38 -------------- Outstanding at December 31, 1994 429,600 $1.09 to $3.25 Issued 16,000 $12.00 Expired 56,000 $1.38 -------------- Outstanding at December 31, 1995 365,600 $1.09 to $12.00 -------------- -------------- All options and warrants were issued at prices that equaled or exceeded fair market value at date of grant. F-11 Papnet of Ohio, Inc. Notes to Financial Statements (continued) 5. INCOME TAXES Significant components of deferred tax assets and liabilities are as follows: 1994 1995 ------------------------------------- Loss carryforwards $ 259,000 $ 68,715 License fees 312,000 - Unrealized gains on investments - (2,517,718) ------------------------------------- 571,000 (2,449,003) Valuation allowance (571,000) - ------------------------------------- Net deferred tax liability $ - $(2,449,003) ------------------------------------- ------------------------------------- At December 31, 1995, the Company had unused NOL carryforwards for tax purposes of approximately $172,000 which expire in 2009. At December 31, 1993 and 1994, a full valuation allowance was recorded due to the lack of deferred tax liabilities, historical income and tax planning strategies. During 1995, due to the recognition of a significant deferred tax liability, a valuation allowance was not required. The reconciliation of income tax computed at the statutory rate to the recorded tax provision (benefit) is: 1993 1994 1995 ------------------------------------- Tax provision (benefit) at statutory rate $(94,203) $(96,402) $ 427,118 Recognition of previously reserved tax assets - - (495,833) Valuation allowance provided 94,203 96,402 - ------------------------------------- Total tax provision (benefit) $ - $ - $ (68,715) ------------------------------------- ------------------------------------- 6. NOTE RECEIVABLE FROM STOCKHOLDER On October 14, 1994, the Company loaned one of its officers and stockholders $50,000, at prime plus 1/2% interest. The loan is due June 1, 1996. Under the loan agreement, effective with the merger described in Note 8, the loan will be deemed a bonus and converted into compensation. F-12 Papnet of Ohio, Inc. Notes to Financial Statements (continued) 7. LEASES The Company leases facilities and equipment under operating leases. Rent expense for the years ended December 31, 1993, 1994 and 1995 was $12,250, $15,526 and $19,537, respectively. 8. SUBSEQUENT EVENTS MERGER AGREEMENT Certain entities with a degree of common ownership interest also hold long-term territorial License Agreements for the PAPNET-Registered Trademark- System. These entities consist of Cytology Indiana, Inc. ("CIN"), Indiana Cytology Review Corporation ("INC"), ER Group, Inc. ("ERG") and Carolina Cytology, Inc. ("CCI"). These entities, along with the Company and CCWP Partners, Inc. ("CCWP"), have signed an agreement to merge into the Company, which will be renamed NetMed, Inc. (NetMed). The entities party to the merger are collectively referred to as the NetMed Entities. NetMed will hold the License Agreements previously held by the individual NetMed Entities. The business purpose of NetMed will be to market the proprietary products of NSI, including the PAPNET-Registered Trademark- System, in the territories encompassed under the License Agreements. These territories include Ohio, Kentucky, the Standard Metropolitan Area of Chicago, Missouri, Georgia and North Carolina. LOAN AGREEMENT WITH NETMED ENTITIES The Company has entered into Loan Agreements with the individual NetMed Entities, dated July 5, 1996 (the "Loan Agreement"), whereby the Company has agreed to advance to the individual NetMed Entities the expenses incurred in connection with the Merger. In addition, the Company will advance funds necessary to pay reasonable expenses of ordinary business operations for the individual NetMed Entities. Advances will be evidenced by a promissory note bearing interest at an annual rate of 7% payable 180 days after the earlier of the consummation of the merger or the termination of the Merger Agreement. Promissory notes delivered by the individual NetMed Entities will be secured by their shares of NSI common stock. F-13 Papnet of Ohio, Inc. Notes to Financial Statements (continued) 8. SUBSEQUENT EVENTS (CONTINUED) LOAN AGREEMENT WITH NETMED ENTITIES (CONTINUED) Pending completion of the merger, the business operations of the NetMed Entities are being managed by the Company. COMMITMENT The Company has also entered into a Loan Agreement, dated March 14, 1996, (the "Loan Agreement"), with Cytology West, Inc. ("CWI") and Papnet Utah, Inc. ("PUI"). CWI is licensed to sell the PAPNET System and the PAPNET Service in Arizona, Nevada and San Diego County California. The President of CWI, owns 383,616 shares of the Company's common stock. The Loan Agreement provides for advances to CWI of up to $585,000 to cover certain operating expenses and the acquisition of new technology. PUI is licensed to sell the PAPNET System and the PAPNET Service in Utah. No specific amount was established for advances to PUI. The advances will bear interest at the rate of 7% per annum. As of June 15, 1996, the Company has advanced $146,320 to CWI and $14,315 to PUI under the terms of the Loan Agreements. INVESTMENT IN NSI On July 15, 1996, NSI Common Stock closed trading on the NASDAQ NMS at $13.25 per share compared to a closing price of $21.75 at March 31, 1996. 9. UNAUDITED FINANCIAL STATEMENTS The financial statements as of March 31, 1996 and for the three months ended March 31, 1995 and 1996 are unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements for these interim periods have been included. The results for the interim period ended March 31, 1996 are not necessarily indicative of the results to be obtained for the full fiscal year ending December 31, 1996. F-14 Report of Independent Auditors The Board of Directors and Stockholders ER Group, Inc. We have audited the accompanying balance sheet of ER Group, Inc. (the Company) as of December 31, 1995, and the related statements of operations and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 1995, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Columbus, Ohio March 22, 1996, except for Note 4 as to which the date is July 15, 1996 F-15 ER Group, Inc. Balance Sheets DECEMBER 31, MARCH 31, 1996 1996 ----------------------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 53,273 $ 61,710 Accounts receivable 18,190 3,173 ----------------------------- Total current assets 71,463 64,883 Investment in NSI--available for sale 2,923,351 3,139,895 Deposits and other assets 69 69 ----------------------------- Total assets $2,994,883 $3,204,847 ----------------------------- ----------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 14,710 $ - Due to related entities (NOTE 4) - 13,603 Accrued expenses - 16,798 ----------------------------- Total current liabilities 14,710 30,401 Deferred taxes 955,917 1,042,535 Stockholders' equity: Common stock 575,000 575,000 Unrealized gains on available-for-sale securities net of deferred taxes of $955,917 in 1995 and $1,042,535 in 1996 1,433,876 1,563,802 Retained earnings (deficit) 15,380 (6,891) ----------------------------- Total stockholders' equity 2,024,256 2,131,911 ----------------------------- Total liabilities and stockholders' equity $2,994,883 $3,204,847 ----------------------------- ----------------------------- SEE ACCOMPANYING NOTES. F-16 ER Group, Inc. Statements of Operations THREE YEAR ENDED MONTHS ENDED DECEMBER 31, MARCH 31, 1995 1996 ----------------------------- (UNAUDITED) Royalty revenue $ 12,000 $ 3,630 Operating expenses: Salaries and benefits - 9,279 Sales and marketing - 2,716 Payroll and franchise taxes - 2,392 Professional 2,042 750 Depreciation and amortization 166 - Office 1,337 - Merger (NOTE 4) 32,103 11,054 ----------------------------- Total operating expense 35,648 26,191 ----------------------------- Operating loss (23,648) (22,561) Other income: Interest income 1,346 289 NSI settlement and common stock transactions (NOTE 3) 533,558 - ----------------------------- Total other income 534,904 289 ----------------------------- Net income (loss) $511,256 $(22,272) ----------------------------- ----------------------------- SEE ACCOMPANYING NOTES. F-17 ER Group, Inc. Statements of Cash Flows THREE YEAR ENDED MONTHS ENDED DECEMBER 31, MARCH 31, 1995 1996 ----------------------------- (UNAUDITED) OPERATING ACTIVITIES Net income (loss) $ 511,256 $(22,272) Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 166 - Gain on settlement and exercise of warrants with NSI (533,558) - Changes in operating assets and liabilities: Accounts receivable (7,331) 15,017 Accounts payable 14,710 (14,710) Due to related entities - 13,603 Accrued expenses - 16,798 ----------------------------- Net cash used in operating activities (14,757) 8,437 Cash and cash equivalents at beginning of period 68,030 53,273 ----------------------------- Cash and cash equivalents at end of period $ 53,273 $ 61,710 ----------------------------- ----------------------------- SEE ACCOMPANYING NOTES. F-18 ER Group, Inc. Notes to Financial Statements December 31, 1995 1. ORGANIZATION AND BASIS OF PRESENTATION ER Group, Inc. (the Company) holds a long-term territorial license agreement ("License Agreement") issued by Neuromedical Systems, Inc. (NSI), which provides the right to sell the "PAPNET-Registered Trademark- System" and the "PAPNET-Registered Trademark- Service" , as described below, in Georgia. NSI, founded in 1988, is a healthcare technology company focused on diagnostic screening applications to aid in the early detection of certain cancers. NSI's first and to date only product, the PAPNET-Registered Trademark- System, was approved for commercial use in the United States by the Food and Drug Administration (the "FDA") on November 8, 1995. The PAPNET-Registered Trademark- Service permits laboratories to submit slides to one of NSI's central facilities for processing by the PAPNET-Registered Trademark- System. NSI's objective is to establish the use of its PAPNET-Registered Trademark- System as the new standard of care in cervical cancer screening. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. LICENSE AGREEMENT The License Agreement expires in 2025, but provides for a 20 year renewal option. Amounts paid by the Company to NSI in exchange for the License Agreement have been expensed in the years paid. This accounting reflects the uncertainty as to the recoverability of amounts paid for the License Agreement, which is contingent on FDA approval of the PAPNET-Registered Trademark- System and the ability of NSI and the Company to develop a profitable market for the technology. F-19 ER Group, Inc. Notes to Financial Statements (continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ROYALTY REVENUE Pursuant to the License Agreement, the Company is entitled to receive a calculated royalty or a specified percentage of NSI's annual slide processing revenues less certain expenses, up to specific annual monetary limits for each licensee. Royalty revenue is recognized as earned based on the License Agreement. INCOME TAXES The shareholders of the Company have elected to report the taxable income of the Company on their individual federal and state income tax returns (Subchapter S corporation election). Accordingly, the financial statements include no provisions for federal or state income taxes. A deferred tax liability relating to the gain on investment in NSI stock has been recorded using a 34% rate. This liability has been recorded to recognize the obligation that would arise for distributions to the S Corporation shareholders to pay their tax liabilities that would arise upon the realization of the gain. 3. INVESTMENT IN NSI The Company owns stock in NSI as a result of the exercise of warrants and settlement of certain claims with NSI. The investment is classified as available for sale and is carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. NSI trades publicly on the NASDAQ NMS under the symbol "NSIX." As of December 31, 1995, the Company owned 144,363 shares of NSI stock at a cost of $533,558. The exercise of the warrants in NSI was completed utilizing a cashless exercise provision in the warrant agreement. This resulted in a gain of $247,750 which has been reported as other income. As a result of settling certain claims with NSI in December 1995, the Company received 20,488 shares of NSI stock resulting in a gain of $285,808 which is recorded in other income. F-20 ER Group, Inc. Notes to Financial Statements (continued) 4. SUBSEQUENT EVENTS MERGER AGREEMENT Certain entities with a degree of common ownership interest also hold long-term territorial License Agreements for the PAPNET-Registered Trademark- System. These entities consist of Papnet of Ohio, Inc. ("PPNT"), Cytology Indiana, Inc. ("CIN"), Indiana Cytology Review Corporation ("INC") and Carolina Cytology, Inc. ("CCI"). These entities, along with the Company and CCWP Partners, Inc. ("CCWP"), have signed an agreement to merge into PPNT which will be renamed NetMed, Inc. (NetMed). The entities party to the merger are collectively referred to as the NetMed Entities. NetMed will hold the License Agreements previously held by the individual NetMed Entities. The business purpose of NetMed will be to market the proprietary products of NSI, including the PAPNET-Registered Trademark- System, in the territories encompassed under the License Agreements. These territories include Ohio, Kentucky, the Standard Metropolitan Area of Chicago, Missouri, Georgia and North Carolina. LOAN AGREEMENT WITH PPNT The Company has entered into a Loan Agreement with PPNT, dated July 5, 1996 (the "Loan Agreement"), whereby PPNT has agreed to advance to the Company the expenses incurred in connection with the Merger. In addition, PPNT will advance funds necessary to pay reasonable expenses of ordinary business operations for the Company. Advances will be evidenced by a promissory note bearing interest at an annual rate of 7%, payable 60 days after the earlier of the consummation of the merger or the termination of the Merger Agreement. Promissory notes delivered by the Company will be secured by its shares of NSI common stock. Advances made to the Company may be repaid, at PPNT's option, in shares of the Company's common stock. Pending completion of the merger, the business operations of the Company are being managed by PPNT. INVESTMENT IN NSI On July 15, 1996, NSI common stock closed trading on the NASDAQ NMS at $13.25 per share compared to a closing price of $21.75 at March 31, 1996. 5. UNAUDITED FINANCIAL STATEMENTS The financial statements as of March 31, 1996 and for the three months ended March 31, 1996 are unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements for the interim period have been included. The results for the interim period ended March 31, 1996 are not necessarily indicative of the results to be obtained for the full fiscal year ending December 31, 1996. F-21 Report of Independent Auditors The Board of Directors and Stockholders Carolina Cytology, Inc. and CCWP Partners, Inc. We have audited the accompanying combined balance sheet of Carolina Cytology, Inc. and CCWP Partners, Inc. (the Company) as of December 31, 1995, and the related combined statements of operations and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Company at December 31, 1995, and the combined results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Columbus, Ohio March 22, 1996, except for Note 4 as to which the date is July 15, 1996 F-22 Carolina Cytology, Inc. and CCWP Partners, Inc. Combined Balance Sheets DECEMBER 31, MARCH 31, 1996 1996 ----------------------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 5,990 $ 26,397 Accounts receivable 18,190 3,255 ----------------------------- Total current assets 24,180 29,652 Investment in NSI--available for sale 2,923,351 3,139,895 Deposits and other assets 2,065 2,065 ----------------------------- Total assets $2,949,596 $3,171,612 ----------------------------- ----------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 8,906 $ 11,818 Due to related entities (NOTE 4) - 37,946 Other liabilities 23,289 - ----------------------------- Total current liabilities 32,195 49,764 Deferred taxes 955,918 1,042,534 Minority interest 172,679 183,524 Stockholders' equity: Common stock 463,500 465,000 Unrealized gains on available-for-sale securities net of deferred taxes of $955,918 in 1995 and $1,042,534 in 1996 1,310,834 1,428,641 Retained earnings 14,470 2,149 ----------------------------- Total stockholders' equity 1,788,804 1,895,790 ----------------------------- Total liabilities and owners' equity $2,949,596 $3,171,612 ----------------------------- ----------------------------- SEE ACCOMPANYING NOTES. F-23 Carolina Cytology, Inc. and CCWP Partners, Inc. Combined Statements of Operations THREE YEAR ENDED MONTHS ENDED DECEMBER 31, MARCH 31, 1995 1996 ----------------------------- (UNAUDITED) Royalty revenue $ 12,000 $ 3,630 Operating expenses: Professional 535 6,150 Depreciation and amortization 953 - Office 44 - Merger (SEE NOTE 4) 32,195 11,076 ----------------------------- Total operating expense 33,727 17,226 ----------------------------- Operating loss (21,727) (13,596) NSI settlement and common stock transactions (SEE NOTE 3) 533,558 - Minority interest (49,638) 1,275 ----------------------------- Net income (loss) $462,193 $(12,321) ----------------------------- ----------------------------- SEE ACCOMPANYING NOTES. F-24 Carolina Cytology, Inc. and CCWP Partners, Inc. Combined Statements of Cash Flows THREE YEAR ENDED MONTHS ENDED DECEMBER 31, MARCH 31, 1995 1996 ----------------------------- (UNAUDITED) OPERATING ACTIVITIES Net income (loss) $462,193 $(12,321) Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 953 - Gain on settlement and exercise of warrants with NSI (533,558) - Minority interest 49,638 (1,275) Changes in operating assets and liabilities: Accounts receivable (8,412) 14,935 Accounts payable 8,906 2,912 Due to related entities - 37,946 Other liabilaities 23,289 (23,289) ----------------------------- Net cash provided by operating activities 3,009 18,907 FINANCING ACTIVITIES Sale of common stock - 1,500 ----------------------------- Net cash provided by financing activities - 1,500 Net increase in cash - 20,407 Cash and cash equivalents at beginning of period 2,981 5,990 ----------------------------- Cash and cash equivalents at end of period $ 5,990 $ 26,397 ----------------------------- ----------------------------- SEE ACCOMPANYING NOTES. F-25 Carolina Cytology, Inc. and CCWP Partners, Inc. Notes to Combined Financial Statements December 31, 1995 1. ORGANIZATION AND BASIS OF PRESENTATION Carolina Cytology, Inc. (CCI) holds (through its majority interest in a partnership) a long-term territorial license agreement ("License Agreement") issued by Neuromedical Systems, Inc. (NSI), which provides the right to sell the "PAPNET-Registered Trademark- System" and the "PAPNET-Registered Trademark- Service", as described below, in North Carolina. CCWP Partners, Inc. (CCWP) was formed on December 1, 1995 for the sole purpose of holding an interest in a partnership that held certain warrants for the purchase of NSI common stock. These warrants were exercised in December 1995. The accompanying financial statements include the accounts of CCI and CCWP and their consolidated partnerships. CCI and CCWP are hereinafter referred to collectively as the "Company". NSI, founded in 1988, is a healthcare technology company focused on diagnostic screening applications to aid in the early detection of certain cancers. NSI's first and to date only product, the PAPNET-Registered Trademark- System, was approved for commercial use in the United States by the Food and Drug Administration (the "FDA") on November 8, 1995. The PAPNET-Registered Trademark- Service permits laboratories to submit slides to one of NSI's central facilities for processing by the PAPNET-Registered Trademark- System. NSI's objective is to establish the use of its PAPNET-Registered Trademark- System as the new standard of care in cervical cancer screening. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. LICENSE AGREEMENT The License Agreement expires in 2025, but provide for a 20 year renewal option. Amounts paid by the Company to NSI in exchange for the License Agreement has been expensed in the years paid. This accounting reflects the uncertainty as to the recoverability of amounts paid for the License Agreement, which is contingent on FDA approval of the PAPNET-Registered Trademark- System and the ability of NSI and the Company to develop a profitable market for the technology. F-26 Carolina Cytology, Inc. and CCWP Partners, Inc. Notes to Combined Financial Statements (continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ROYALTY REVENUE Pursuant to the License Agreement, the Company is entitled to receive a calculated royalty or a specified percentage of NSI's annual slide processing revenues less certain expenses, up to specific annual monetary limits for each licensee. Royalty revenue is recognized as earned based on the License Agreement. INCOME TAXES The shareholders of the Company have elected to report the taxable income of the Company on their individual federal and state income tax returns (Subchapter S corporation election). Accordingly, the financial statements include no provisions for federal or state income taxes. A deferred tax liability relating to the gain on investment in NSI stock has been recorded using a 34% rate. This liability has been recorded to recognize the obligation that would arise for distributions to the S Corporation shareholders to pay their tax liabilities that would arise upon the realization of the gain. 3. INVESTMENT IN NSI The Company owns stock in NSI as a result of the exercise of warrants and settlement of certain claims with NSI. The investment is classified as available-for-sale and is carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. NSI trades publicly on the NASDAQ NMS under the symbol "NSIX." As of December 31, 1995, the Company owned 144,363 shares of NSI stock at a cost of $533,558. The exercise of the warrants in NSI was completed utilizing a cashless exercise provision in the warrant agreement. This resulted in a gain of $247,750 which has been reported as other income. As a result of settling certain claims with NSI in December 1995, the Company received 20,488 shares of NSI stock resulting in a gain of $285,808 which is recorded in other income. F-27 Carolina Cytology, Inc. and CCWP Partners, Inc. Notes to Combined Financial Statements (continued) 4. SUBSEQUENT EVENTS MERGER AGREEMENT Certain entities with a degree of common ownership interest also hold long-term territorial License Agreements for the PAPNET-Registered Trademark- System. These entities consist of Papnet of Ohio, Inc. ("PPNT"), Cytology Indiana, Inc. ("CIN"), Indiana Cytology Review Corporation ("INC") and ER Group, Inc. ("ERG"). These entities, along with the Company, have signed an agreement to merge into PPNT which will be renamed NetMed, Inc. ("NetMed"). The entities party to the merger are collectively referred to as the NetMed Entities. NetMed will hold the License Agreements previously held by the individual NetMed Entities. The business purpose of NetMed will be to market the proprietary products of NSI, including the PAPNET-Registered Trademark- System, in the territories encompassed under the License Agreements. These territories include Ohio, Kentucky, the Standard Metropolitan Area of Chicago, Missouri, Georgia and North Carolina. LOAN AGREEMENT WITH PPNT The Company has entered into Loan Agreements with PPNT, dated July 5, 1996 (the "Loan Agreement"), whereby PPNT has agreed to advance to the Company the expenses incurred in connection with the Merger. In addition, PPNT will advance funds necessary to pay reasonable expenses of ordinary business operations for the Company. Advances will be evidenced by a promissory note bearing interest at an annual rate of 7%, payable 60 days after the earlier of the consummation of the merger or the termination of the Merger Agreement. Promissory notes delivered by the Company will be secured by its shares of NSI common stock. Advances made to the Company may be repaid, at PPNT's option, in shares of the Company's common stock. Pending completion of the merger, the business operations of the Company are being managed by PPNT. INVESTMENT IN NSI On July 15, 1996, NSI common stock closed trading on the NASDAQ NMS at $13.25 per share compared to a closing price of $21.75 at March 31, 1996. 5. UNAUDITED FINANCIAL STATEMENTS The financial statements as of March 31, 1996 and for the three months ended March 31, 1996 are unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements for the interim period have been included. The results for the interim period ended March 31, 1996 are not necessarily indicative of the results to be obtained for the full fiscal year ending December 31, 1996. F-28 Report of Independent Auditors The Board of Directors and Stockholders Indiana Cytology Review Corporation We have audited the accompanying balance sheet of Indiana Cytology Review Corporation (the Company) as of December 31, 1995, and the related statements of operations and cash flows for the period December 1 through December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 1995, and the results of its operations and its cash flows for the period December 1 through December 31, 1995, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Columbus, Ohio March 22, 1996, except for Note 5 as to which the date is July 15, 1996 F-29 Indiana Cytology Review Corporation Balance Sheets DECEMBER 31, MARCH 31, 1996 1996 ----------------------------- (UNAUDITED) ASSETS Current assets: Accounts receivable $ 6,366 $ 6,861 Due from related entities 2,778 - ----------------------------- Total current assets 9,144 6,861 Investment in NSI--available for sale 506,437 543,968 Deferred taxes 9,822 14,358 ----------------------------- Total assets $ 525,403 $ 565,187 ----------------------------- ----------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Due to related entities (NOTE 5) $ - $ 6,389 Accrued liabilities 36,976 36,976 Other liabilities 7,851 10,519 ----------------------------- Total current liabilities 44,827 53,884 Deferred taxes 165,598 180,610 Stockholders' equity: Common stock 196,735 196,735 Unrealized gains on available-for-sale securities net of deferred taxes of $165,598 in 1995 and $196,735 in1996 248,397 270,915 Retained deficit (130,154) (136,957) ----------------------------- Total stockholders' equity 314,978 330,693 ----------------------------- Total liabilities and stockholders' equity $ 525,403 $ 565,187 ----------------------------- ----------------------------- SEE ACCOMPANYING NOTES. F-30 Indiana Cytology Review Corporation Statements of Operations FOR THE PERIOD DECEMBER 1 THREE THROUGH MONTHS ENDED DECEMBER 31, MARCH 31, 1995 1996 ----------------------------- (UNAUDITED) Royalty revenue $ 4,200 $ 1,140 Operating expenses: Salaries and benefits - 4,767 Sales and marketing - 4,010 Payroll and franchise taxes - 392 Professional 3,331 643 Depreciation and amortization 70 - Office 487 - Merger (NOTE 5) 7,755 2,667 ----------------------------- Total operating expense 11,643 12,479 ----------------------------- Operating loss (7,443) (11,339) Other income: Interest income 158 - NSI settlement and common stock transactions (NOTE 3) 92,442 - ----------------------------- Total other income 92,600 - ----------------------------- Income before income taxes 85,157 (11,339) Income tax provision (benefit) 27,154 (4,536) ----------------------------- Net income (loss) $58,003 $ (6,803) ----------------------------- ----------------------------- SEE ACCOMPANYING NOTES. F-31 Indiana Cytology Review Corporation Statements of Cash Flows FOR THE PERIOD DECEMBER 1 THREE THROUGH MONTHS ENDED DECEMBER 31, MARCH 31, 1995 1996 ----------------------------- (UNAUDITED) OPERATING ACTIVITIES Net income (loss) $58,003 $ (6,803) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 70 - Gain on settlement and exercise of warrants with NSI (92,442) - Changes in operating assets and liabilities: Accounts receivable (2,943) (495) Due to/from related entities (2,778) 9,168 Deferred taxes and taxes payable 27,154 (4,536) Other liabilities 7,755 2,668 ----------------------------- Net cash used in operating activities (5,181) - Cash and cash equivalents at beginning of period 5,181 - ----------------------------- Cash and cash equivalents at end of period $ - $ - ----------------------------- ----------------------------- SEE ACCOMPANYING NOTES. F-32 Indiana Cytology Review Corporation Notes to Financial Statements December 31, 1995 1. ORGANIZATION AND BASIS OF PRESENTATION Indiana Cytology Review Corporation (the Company) was formed on December 1, 1995 and holds an approximate 35% interest in a long-term territorial license agreement ("License Agreement") issued by Neuromedical Systems, Inc. (NSI), which provides the right to sell the "PAPNET-Registered Trademark- System" and the "PAPNET-Registered Trademark- Service" , as described below, in Missouri. NSI, founded in 1988, is a healthcare technology company focused on diagnostic screening applications to aid in the early detection of certain cancers. NSI's first and to date only product, the PAPNET-Registered Trademark- System, was approved for commercial use in the United States by the Food and Drug Administration (the "FDA") on November 8, 1995. The PAPNET-Registered Trademark- Service permits laboratories to submit slides to one of NSI's central facilities for processing by the PAPNET-Registered Trademark- System. NSI's objective is to establish the use of its PAPNET-Registered Trademark- System as the new standard of care in cervical cancer screening. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. LICENSE AGREEMENT The License Agreement expires in 2025, but provides for a 20 year renewal option. Amounts paid by the Company to NSI in exchange for the License Agreement has been expensed in the years paid. This accounting reflects the uncertainty as to the recoverability of amounts paid for the License Agreement, which was contingent on FDA approval of the PAPNET-Registered Trademark- System and the ability of NSI and the Company to develop a profitable market for the technology. F-33 Indiana Cytology Review Corporation Notes to Financial Statements (continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ROYALTY REVENUE Pursuant to the License Agreement, the Company is entitled to receive a calculated royalty or a specified percentage of NSI's annual slide processing revenues less certain expenses, up to specific annual monetary limits for each licensee. Royalty revenue is recognized as earned based on the License Agreement. INCOME TAXES The Company, accounts for income taxes using the liability method under Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes." Deferred items are determined based on differences between the financial reporting and tax basis of assets and liabilities, and are measured using the enacted rates and laws that will be in effect when the differences are expected to reverse. 3. INVESTMENT IN NSI The Company owns stock in NSI as a result of the exercise of warrants and settlement of certain claims with NSI. The investment is classified as available-for-sale and is carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. NSI trades publicly on the NASDAQ NMS under the symbol "NSIX." As of December 31, 1995, the Company owned 25,010 shares of NSI stock at a cost of $92,442. The exercise of the warrants in NSI was completed utilizing a cashless exercise provision in the warrant agreement. This resulted in a gain of $42,924 which has been reported as other income. As a result of settling certain claims with NSI in December 1995, the Company received 3,550 shares of NSI stock resulting in a gain of $49,518 which is recorded in other income. F-34 Indiana Cytology Review Corporation Notes to Financial Statements (continued) 4. INCOME TAXES Significant components for the deferred tax assets and liabilities at December 31, 1995 are as follows: License fees $ 9,822 Unrealized gains on investments (165,598) -------------- Net deferred tax asset (liability) $(155,776) -------------- -------------- 5. SUBSEQUENT EVENTS MERGER AGREEMENT Certain entities with a degree of common ownership interest also hold long-term territorial License Agreements for the PAPNET-Registered Trademark- System. These entities consist of Papnet of Ohio, Inc. ("PPNT"), Cytology Indiana, Inc. ("CIN"), ER Group, Inc. ("ERG") and Carolina Cytology, Inc. ("CCI"). These entities, along with the Company and CCWP Partners, Inc. ("CCWP"), have signed an agreement to merge into PPNT which will be renamed NetMed, Inc. (NetMed). The entities party to the merger are collectively referred to as the NetMed Entities. NetMed will hold the License Agreements previously held by the individual NetMed Entities. The business purpose of NetMed will be to market the proprietary products of NSI, including the PAPNET-Registered Trademark- System, in the territories encompassed under the License Agreements. These territories include Ohio, Kentucky, the Standard Metropolitan Area of Chicago, Missouri, Georgia and North Carolina. F-35 Indiana Cytology Review Corporation Notes to Financial Statements (continued) 5. SUBSEQUENT EVENTS (CONTINUED) LOAN AGREEMENT WITH PPNT The Company has entered into a Loan Agreement with PPNT, dated July 5, 1996 (the "Loan Agreement"), whereby PPNT has agreed to advance to the Company the expenses incurred in connection with the Merger. In addition, PPNT will advance funds necessary to pay reasonable expenses of ordinary business operations for the Company. Advances will be evidenced by a promissory note bearing interest at an annual rate of 7%, payable 60 days after the earlier of the consummation of the merger or the termination of the Merger Agreement. Promissory notes delivered by the Company will be secured by its shares of NSI common stock. Advances made to the Company may be repaid, at PPNT's option, in shares of the Company's common stock. Pending completion of the merger, the business operations of the Company are being managed by PPNT. INVESTMENT IN NSI On July 15, 1996, NSI common stock closed trading on the NASDAQ NMS at $13.25 per share compared to a closing price of $21.75 at March 31, 1996. 6. UNAUDITED FINANCIAL STATEMENTS The financial statements as of March 31, 1996 and for the three months ended March 31, 1996 are unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements for the interim period have been included. The results for the interim period ended March 31, 1996 are not necessarily indicative of the results to be obtained for the full fiscal year ending December 31, 1996. F-36 Report of Independent Auditors The Board of Directors and Stockholders Cytology Indiana, Inc. We have audited the accompanying balance sheet of Cytology Indiana, Inc. (the Company) as of December 31, 1995, and the related statements of operations and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 1995, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Columbus, Ohio March 22, 1996, except for Note 4 as to which the date is July 15, 1996 F-37 Cytology Indiana, Inc. Balance Sheets DECEMBER 31, MARCH 31, 1996 1996 ----------------------------- (UNAUDITED) ASSETS Current assets: Accounts receivable $ 11,824 $ 12,742 Due from related entities 5,158 - ----------------------------- Total current assets 16,982 12,742 Investment in NSI--available for sale 940,527 1,010,196 ----------------------------- Total assets $ 957,509 $1,022,938 ----------------------------- ----------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Due to related entities (NOTE 4) $ - $ 12,637 Other liabilities 14,580 19,538 ----------------------------- Total current liabilities 14,580 32,175 Deferred taxes 307,540 335,407 Stockholders' equity: Common stock 365,365 365,365 Unrealized gains on available-for-sale securities net of deferred taxes of $307,540 in 1995 and $335,407 in 1996 461,310 503,111 Retained deficit (191,286) (213,120) ----------------------------- Total stockholders' equity 635,389 655,356 ----------------------------- Total liabilities and stockholders' equity $ 957,509 $1,022,938 ----------------------------- ----------------------------- SEE ACCOMPANYING NOTES. F-38 Cytology Indiana, Inc. Statements of Operations THREE YEAR ENDED MONTHS ENDED DECEMBER 31, MARCH 31, 1995 1996 ----------------------------- (UNAUDITED) Royalty revenue $ 7,800 $ 2,116 Operating expenses: Salaries and benefits - 8,852 Sales and marketing - 7,447 Payroll and franchise taxes - 728 Professional 6,186 1,967 Depreciation and amortization 130 - Office 904 - Merger (NOTE 4) 14,401 4,956 ----------------------------- Total operating expense 21,621 23,950 ----------------------------- Operating loss (13,821) (21,834) Other income: Interest income 293 - NSI settlement and common stock transactions (NOTE 3) 171,677 - ----------------------------- Total other income 171,970 - ----------------------------- Net income (loss) $158,149 $(21,834) ----------------------------- ----------------------------- SEE ACCOMPANYING NOTES. F-39 Cytology, Indiana, Inc. Statements of Cash Flows THREE YEAR ENDED MONTHS ENDED DECEMBER 31, MARCH 31, 1995 1996 ----------------------------- (UNAUDITED) OPERATING ACTIVITIES Net income (loss) $158,149 $(21,834) Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 130 - Gain on settlement and exercise of warrants with NSI (171,677) - Changes in operating assets and liabilities: Accounts receivable (5,468) (918) Due to/from related entities (5,337) 17,794 Other liabilities 14,580 4,958 ----------------------------- Net cash used in operating activities (9,623) - Cash and cash equivalents at beginning of period 9,623 - ----------------------------- Cash and cash equivalents at end of period $ - $ - ----------------------------- ----------------------------- SEE ACCOMPANYING NOTES. F-40 Cytology, Indiana, Inc. Notes to Financial Statements December 31, 1995 1. ORGANIZATION AND BASIS OF PRESENTATION Cytology Indiana, Inc. (the Company) holds an approximate 65% interest in a long-term territorial license agreement ("License Agreement") issued by Neuromedical Systems, Inc. (NSI), which provides the right to sell the "PAPNET-Registered Trademark- System" and the "PAPNET-Registered Trademark- Service" , as described below, in Missouri. NSI, founded in 1988, is a healthcare technology company focused on diagnostic screening applications to aid in the early detection of certain cancers. NSI's first and to date only product, the PAPNET-Registered Trademark- System, was approved for commercial use in the United States by the Food and Drug Administration (the "FDA") on November 8, 1995. The PAPNET-Registered Trademark- Service permits laboratories to submit slides to one of NSI's central facilities for processing by the PAPNET-Registered Trademark- System. NSI's objective is to establish the use of its PAPNET-Registered Trademark- System as the new standard of care in cervical cancer screening. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. LICENSE AGREEMENT The License Agreement expires in 2025, but provide for a 20 year renewal option. Amounts paid by the Company to NSI in exchange for the License Agreement have been expensed in the years paid. This accounting reflects the uncertainty as to the recoverability of amounts paid for the License Agreement, which was contingent on FDA approval of the PAPNET-Registered Trademark- System and the ability of NSI and the Company to develop a profitable market for the technology. F-41 Cytology, Indiana, Inc. Notes to Financial Statements (continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ROYALTY REVENUE Pursuant to the License Agreement, the Company is entitled to receive a calculated royalty or a specified percentage of NSI's annual slide processing revenues less certain expenses, up to specific annual monetary limits for each licensee. Royalty revenue is recognized as earned based on the License Agreements. INCOME TAXES The shareholders of the Company have elected to report the taxable income of the Company on their individual federal and state income tax returns (Subchapter S corporation election). Accordingly, the financial statements include no provisions for federal or state income taxes. A deferred tax liability relating to the gain on investment in NSI stock has been recorded using a 34% rate. This liability has been recorded to recognize the obligation that would arise for distributions to the S Corporation shareholders to pay their tax liabilities that would arise upon the realization of the gain. 3. INVESTMENT IN NSI The Company owns stock in NSI as a result of the exercise of warrants and settlement of certain claims with NSI. The investment is classified as available for sale and is carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. NSI trades publicly on the NASDAQ NMS under the symbol "NSIX." As of December 31, 1995, the Company owned 46,446 shares of NSI stock at a cost of $171,677. The exercise of the warrants in NSI was completed utilizing a cashless exercise provision in the warrant agreement. This resulted in a gain of $79,700 which has been reported as other income. As a result of settling certain claims with NSI in December 1995, the Company received 6,593 shares of NSI stock resulting in a gain of $91,977 which is recorded in other income. F-42 Cytology, Indiana, Inc. Notes to Financial Statements (continued) 4. SUBSEQUENT EVENTS MERGER AGREEMENT Certain entities with a degree of common ownership interest also hold long-term territorial License Agreements for the PAPNET-Registered Trademark- System. These entities consist of Papnet of Ohio, Inc. ("PPNT"), Indiana Cytology Review Corporation ("INC"), ER Group, Inc. ("ERG") and Carolina Cytology, Inc. ("CCI"). These entities, along with the Company and CCWP Partners, Inc. ("CCWP"), have signed an agreement to merge into PPNT, which will be renamed NetMed, Inc. (NetMed). The entities party to the merger are collectively referred to as the NetMed Entities. NetMed will hold the License Agreements previously held by the individual NetMed Entities. The business purpose of NetMed will be to market the proprietary products of NSI, including the PAPNET-Registered Trademark- System, in the territories encompassed under the License Agreements. These territories include Ohio, Kentucky, the Standard Metropolitan Area of Chicago, Missouri, Georgia and North Carolina. LOAN AGREEMENT WITH PPNT The Company has entered into a Loan Agreement with PPNT, dated July 5, 1996 (the "Loan Agreement"), whereby PPNT has agreed to advance to the Company the expenses incurred in connection with the Merger. In addition, PPNT will advance funds necessary to pay reasonable expenses of ordinary business operations for the Company. Advances will be evidenced by a promissory note bearing interest at an annual rate of 7%, payable 60 days after the earlier of the consummation of the merger or the termination of the Merger Agreement. Promissory notes delivered by the Company will be secured by its shares of NSI common stock. Advances made to the Company may be repaid, at PPNT's option, in shares of the Company's common stock. Pending completion of the merger, the business operations of the Company are being managed by PPNT. INVESTMENT IN NSI On July 15, 1996, NSI common stock closed trading on the NASDAQ NMS at $13.25 per share compared to a closing price of $21.75 at March 31, 1996. 5. UNAUDITED FINANCIAL STATEMENTS The financial statements as of March 31, 1996 and for the three months ended March 31, 1996 are unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements for the interim period have been included. The results for the interim period ended March 31, 1996 are not necessarily indicative of the results to be obtained for the full fiscal year ending December 31, 1996. F-43 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. As permitted by the Ohio General Corporation Law, Article NINTH of Registrant's Articles provides that a director, officer, incorporator, or any former officer or director of the Registrant shall be indemnified by the Registrant to the fullest extent permitted by the Ohio General Corporation Law. Indemnification of directors, officers, employees and agents is required under Section 1701.13 of the Ohio General Corporation Law in those cases where the person to be indemnified has been successful on the merits or otherwise in defense of a lawsuit. Indemnification is permitted in third party actions where the indemnified person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and in criminal actions where he had no reasonable cause to believe his conduct was unlawful. Indemnification is also permitted in lawsuits brought by or on behalf of the corporation if the standards of conduct described above are met, except that no indemnification is permitted in respect to any matter in which the person is adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation unless a court shall determine that indemnification is fair and reasonable in view of all the circumstances of the case. In cases where indemnification is permissive, a determination as to whether the person met the applicable standard of conduct must be made either by the court, disinterested directors, by independent legal counsel, or by the shareholders. Such indemnification rights are specifically not deemed to be exclusive of other rights of indemnification by agreement or otherwise and the corporation is authorized to advance expenses incurred prior to the final disposition of a matter upon receipt of an undertaking to repay such amounts on a determination that indemnification was not permitted in the circumstances of the case. Under Section 1701.13 of the Ohio General Corporation Law, a corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the corporation, or who, while serving in such capacity, is or was at the request of the corporation, a director, officer, employee or agent of another corporation or legal entity or of an employee benefit plan, against liability asserted against or incurred by such person in any such capacity whether or not the corporation would have the power to provide indemnity under Section 1701.13 of the Ohio General Corporation Law. The Registrant has not applied for directors' and officers' liability insurance. The above discussion of the Registrant's Articles and of Section 1701.13 of the Ohio General Corporation Law is not intended to be exhaustive and is respectively qualified in its entirety by such Articles of Incorporation and statute. II-1 ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) EXHIBITS. EXHIBIT EXHIBIT NUMBER DESCRIPTION ------- ----------- 2 Agreement and Plan of Merger, dated as of July 5, 1996, as amended, among the Registrant, Cytology Indiana, Inc., Indiana Cytology Review Company, ER Group, Inc., CCWP Partners, Inc., and Carolina Cytology, Inc., (filed as Appendix A hereto, and incorporated herein by reference). 3(a) * Articles of Incorporation of the Registrant. 3(b) * Code of Regulations of the Registrant. 3(c) Proposed Amended and Restated Articles of Incorporation of the Registrant, (filed as part of Appendix A hereto, and incorporated herein by reference). 3(d) Proposed Amended and Restated Regulations of the Registrant, (filed as part of Appendix A hereto, and incorporated herein by reference). 3(e) * Form of Specimen Stock Certificate. 4(a) Articles FOURTH and FIFTH of the Registrant's Articles of Incorporation (contained in the Registrant's Articles of Incorporation filed as Exhibit 3(a) hereto) Articles II, VII and XI of the Registrant's Code of Regulations (contained in the Registrant's Code of Regulations filed as Exhibit 3(b) hereto). 4(b) Articles FOURTH, SIXTH, SEVENTH, EIGHTH, TENTH, and ELEVENTH, of the Registrant's Amended and Restated Articles of Incorporation (contained in the Registrant's Amended and Restated Articles of Incorporation filed as part of Appendix A hereto) and Articles I, V and VII of the Registrant's Amended and Restated Regulations (contained in the Registrant's Amended and Restated Code of Regulations filed as part of Appendix A hereto). 5 * Opinion of Porter, Wright, Morris & Arthur regarding legality. 8 * Opinion of Porter, Wright, Morris & Arthur regarding tax matters. 10(a) * Settlement Agreement among Neuromedical Systems, Inc. and the Registrant, Cytology Indiana, Inc., Indiana Cytology Review Company, ER Group, Inc., Cytology West, Inc., Carolina Cytology Licensing Company, Papnet Utah, Inc., Carolina Cytology Warrant Partnership, and GRK Partners, dated as of December 5, 1995. 10(b) * Letter of Intent among the Registrant and Cytology West, Inc., Cytology Indiana, Inc., Indiana Cytology Review Company, ER Group, Inc., CCWP Partners, Inc., Carolina Cytology, Inc., and Papnet Utah, Inc., dated February 1, 1995. 10(c) * Voting Agreement among the Registrant, Cytology Indiana, Inc., Indiana Cytology Review Company, ER Group, Inc., CCWP Partners, Inc., and Carolina Cytology, Inc., and certain shareholders of these entities dated July 5, 1996. 10(d) * Loan Agreement among the Registrant, Cytology Indiana, Inc., Indiana Cytology Review Company, ER Group, Inc., CCWP Partners, Inc., and Carolina Cytology, Inc., dated July 5, 1996, and the Side Letter thereof, dated July 16, 1996. II-2 10(e) * Loan Agreement between the Registrant and Cytology West, Inc. and Papnet Utah, Inc., dated March 14, 1996. 10(f) * Promissory Note and Security Agreement among Cytology West, Inc. and the Registrant dated April 5, 1996 and April 4, 1996 respectively. 10(g) * Guaranty executed by Carl Genberg, guaranteeing all obligation of Cytology West, Inc., dated April 4, 1996. 10(h) * Security Agreement granting a security interest in Neuromedical Systems, Inc. stock to the Registrant, executed by Carl Genberg on April 4, 1996. 10(i) * Amended and Restated 1995 Stock Option Plan of the Registrant. 23(a) Consent of Porter, Wright, Morris & Arthur (included in Exhibits 5 and 8). 23(b) * Consent of Ernst & Young, LLP. 24 * Powers of Attorney. 27 * Financial Data Schedule. 99 * Proxy Card. - --------------------- * Filed with this Registration Statement. (b) FINANCIAL STATEMENT SCHEDULES Schedules not listed above are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or the notes thereto. ITEM 22. UNDERTAKINGS. The undersigned Registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of the Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. The Registrant undertakes that every prospectus (i) that is filed pursuant to the immediately preceding paragraph, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Securities Act of 1933 and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the Registration Statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for II-3 indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Registration Statement, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request. The undersigned Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the companies being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Columbus, State of Ohio, on July 16, 1996. PAPNET OF OHIO, INC. By: /s/ David J. Richards ----------------------------------- David J. Richards, President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ David J. Richards President, Secretary and July 16, 1996 - ------------------------- Director David J. Richards *John P. Kennedy Vice President, Treasurer, July 16, 1996 - ------------------------- Assistant Secretary, and Director John P. Kennedy *S. Trevor Ferger Director July 16, 1996 - ------------------------- S. Trevor Ferger *Cecil J. Petitti Director July 16, 1996 - ------------------------- Cecil J. Petitti *Bryan Whipp Director July 16, 1996 - ------------------------- Bryan Whipp *By: /s/ David J. Richards ---------------------------------------------- David J. Richards, attorney-in-fact for each of the persons indicated II-5 AGREEMENT AND PLAN OF MERGER AMONG PAPNET OF OHIO, INC. AND CYTOLOGY INDIANA, INC. INDIANA CYTOLOGY REVIEW COMPANY ER GROUP, INC. CCWP PARTNERS, INC. CAROLINA CYTOLOGY, INC. TABLE OF CONTENTS Page ARTICLE I DEFINITIONS Section 1.01 Definitionst 1 Section 1.02 Interpretation 5 ARTICLE II THE MERGER Section 2.01 The Merger 6 Section 2.02 Effects of the Merger 6 Section 2.03 Articles of Incorporation and Regulations 6 Section 2.04 Directors and Officers 6 Section 2.05 Conversion; Lockup 6 Section 2.06 Tax Consequences 8 Section 2.07 Absence of Control 8 ARTICLE III EXCHANGE OF SHARES Section 3.01 Exchange of Certificates 8 Section 3.02 Dissenting Predecessor Company Shares 9 Section 3.03 Adjustments 9 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PREDECESSOR COMPANIES Section 4.01 Organization 10 Section 4.02 Capitalization 10 Section 4.03 Authority Relative to this Agreement 11 Section 4.04 Consents and Approvals; No Violations 11 Section 4.05 Financial Statements 11 Section 4.06 Absence of Certain Changes 11 Section 4.07 No Undisclosed Liabilities 12 ii Section 4.08 Information in Registration Statement 12 Section 4.09 No Default 12 Section 4.10 Litigation 12 Section 4.11 Compliance with Applicable Law 12 Section 4.12 Taxes 13 Section 4.13 ERISA 13 Section 4.14 Intellectual Property 14 Section 4.15 Change in Control 14 ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY Section 5.01 Organization 14 Section 5.02 Capitalization 14 Section 5.03 Authority Relative to this Agreement 15 Section 5.04 Consents and Approvals; No Violations 15 Section 5.05 Financial Statements 15 Section 5.06 Absence of Certain Changes 16 Section 5.07 No Undisclosed Liabilities 16 Section 5.08 Information in Registration Statement 16 Section 5.09 No Default 16 Section 5.10 Litigation 17 Section 5.11 Compliance with Applicable Law 17 Section 5.12 Taxes 17 Section 5.13 ERISA 17 Section 5.14 Intellectual Property 18 Section 5.15 Change in Control 18 ARTICLE VI COVENANTS Section 6.01 Covenants of the Predecessor Companies and the Company 18 Section 6.02 Additional Covenants of the Parties 20 Section 6.03 No Solicitation 21 Section 6.04 Access to Information 21 Section 6.05 Best Efforts 21 Section 6.06 Shareholders Meetings 21 Section 6.07 Affiliates 22 Section 6.08 [Reserved] 22 Section 6.09 Indemnification and Insurance 22 iii Section 6.10 [Reserved] 23 Section 6.11 [Reserved} 23 Section 6.12 Brokers or Finders 23 Section 6.13 Advisory Board 23 ARTICLE VII CONDITIONS Section 7.01 Conditions to Each Party's Obligation to Close and Effect the Merger 23 ARTICLE VIII TERMINATION AND AMENDMENT Section 8.01 Termination 26 Section 8.02 Effect of Termination 27 Section 8.03 Amendment 27 Section 8.04 Extension; Waiver 27 Section 8.05 Termination Payment 27 ARTICLE IX MISCELLANEOUS Section 9.01 Nonsurvival of Representations and Warranties 28 Section 9.02 Notices 28 Section 9.03 Descriptive Headings 29 Section 9.04 Counterparts 29 Section 9.05 Entire Agreement; Assignment 29 Section 9.06 Governing Law 29 Section 9.07 Specific Performance 29 Section 9.08 Expenses 30 Section 9.09 Publicity 30 Section 9.10 Parties in Interest 30 EXHIBITS 2.03(a) Articles of Incorporation of Surviving Corporation 2.03(b) Regulations of Surviving Corporation iv SCHEDULES 2.05(a) Conversion Ratios 2.05(c) Lockup Shares Table 4.02(a) Authorized and Issued Shares and Stock Rights of Predecessor Companies 4.02(b) Equity Interests Owned by Predecessor Companies; Voting Agreements 4.06 Certain Predecessor Company Changes Since March 31, 1996 4.14 Pending or Threatened Predecessor Company Intellectual Property Claims 5.02(a) Authorized and Issued Shares and Stock Rights of Company 5.02(b) Equity Interests Owned by Company; Voting Agreements 5.06 Certain Company Changes Since March 31, 1996 5.14 Pending or Threatened Company Intellectual Property Claims v AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of July 5, 1996, by and among Papnet of Ohio, Inc., an Ohio corporation (the "Company"), Cytology Indiana, Inc., an Ohio corporation ("CIN"), Indiana Cytology Review Company, an Ohio corporation ("INC"), ER Group, Inc., an Ohio corporation ("ERG"), CCWP Partners, Inc., an Ohio corporation ("CCWP"), and Carolina Cytology, Inc., an Ohio corporation ("CCI"), CIN, INC, ERG, CCWP, and CCI are hereinafter sometimes referred to collectively as the "Predecessor Companies" and individually as a "Predecessor Company." RECITALS A. The Boards of Directors of each of the Predecessor Companies and the Company have determined that it is in the best interests of their respective corporations and shareholders for them to enter into a business combination by which each of the Predecessor Companies shall simultaneously merge with and into the Company. B. The parties wish to set forth herein the terms and conditions upon which the Merger will be effected. STATEMENT OF AGREEMENT In consideration of the foregoing, and of their mutual representations, warranties, covenants and agreements contained herein, the parties agree as follows: ARTICLE I DEFINITIONS 1.01 DEFINITIONS. The following terms shall have the following meanings for the purposes of this Agreement: "ADVISORY BOARD" has the meaning specified in Section 6.13. "AFFILIATE" means, with respect to any specified Person, any other Person which, directly or indirectly, owns or controls, is under common ownership or control with, or is owned or controlled by, such specified Person. "AGREEMENT" means this Agreement and Plan of Merger, all Exhibits and Schedules hereto, and all amendments made hereto and thereto by written agreement among the parties. "BUSINESS DAY" means any day of the year other than (i) any Saturday or Sunday or (ii) any other day on which commercial banks located in New York City are generally closed for business. "CCI" has the meaning specified in the introductory paragraph. "CCI TRANSACTION" means the transaction involving CCI described in a letter which counsel for CCI has provided to counsel for the Company. "CERTIFICATE OF MERGER" has the meaning specified in Section 2.01. "CERTIFICATES" has the meaning specified in Section 3.01(a). "CIN" has the meaning specified in the introductory paragraph. "CLOSING" means the consummation and closing of the transactions contemplated herein. "CLOSING DATE" means the date on which the Closing occurs. "CODE" means the Internal Revenue Code of 1986, as amended. "COMPANY" has the meaning specified in the introductory paragraph. "COMPANY BENEFIT PLANS" has the meaning specified in Section 5.13(a). "COMPANY FINANCIAL STATEMENTS" has the meaning specified in Section 5.05. "COMPANY PERMITS" has the meaning specified in Section 5.11. "COMPANY SHARES" has the meaning specified in Section 5.02(a). "CONTRACT" means any contract, lease, commitment, understanding, sales order, purchase order, agreement, indenture, mortgage, note, bond, right, option, warrant, instrument, plan, permit or license, whether written or oral, which is intended or purports to be binding and enforceable. "DEFAULTING PARTY" has the meaning specified in Section 8.05. "DESIGNATED DIRECTORS" means David J. Richards, John P. Kennedy, Cecil J. Petitti, S. Trevor Ferger, Rodney M. Kinsey and Michael Blue, M.D. "DISSENTER'S RIGHTS" means rights, if any, of any shareholder of a Predecessor Company as a dissenter to the Merger under Section 1701.85 of the OGCL. "EFFECTIVE TIME" has the meaning specified in Section 2.01. 2 "ENFORCEABILITY EXCEPTIONS" means the limitations which may be placed on enforceability by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other laws of general applicability relating to or affecting creditors' rights and by general principles of equity. "ERG" has the meaning specified in the introductory paragraph. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "EXCHANGE ACT" means the Securities Exchange Act of 1934 as amended and the rules and regulations thereunder. "FINANCIAL STATEMENTS" has the meaning specified in Section 4.05. "GAAP" means United States generally accepted accounting principles in effect at the time. "GOVERNMENTAL AUTHORITY" means the government of the United States or any state or political subdivision thereof and any entity, body or authority exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "INFORMATION/PROXY STATEMENT" has the meaning specified in Section 4.08. "INTELLECTUAL PROPERTY" means any and all trademarks, trade names, service marks, patents, copyrights (including any registrations, applications, licenses or rights relating to any of the foregoing), technology, trade secrets, inventions, know-how, designs, computer programs, processes, and other intangible assets, properties and rights. "COMPANY INTELLECTUAL PROPERTY" means any and all Intellectual Property used by the Company in the conduct of its business and "PREDECESSOR INTELLECTUAL PROPERTY" means any and all Intellectual Property used by a Predecessor Company in the conduct of its business. "IRS" means the Internal Revenue Service. "KEY COMPANY SHAREHOLDERS" means David J. Richards, John P. Kennedy and Carl A. Genberg. "KNOWLEDGE" means, with respect to an individual making a representation to his or her "Knowledge," those facts and circumstances personally known by such individual; and with respect to an entity making a representation to its "Knowledge," those facts and circumstances personally known by any officer of such entity. "MANAGERS" has the meaning specified in Section 6.09. 3 "MATERIAL ADVERSE EFFECT" means, with respect to a party, a material adverse change in the business, operations, assets, liabilities, results of operations, cash flows or condition (financial or otherwise) of such party. "MERGER" means the Merger of the Predecessor Companies with and into the Company pursuant to the terms of this Agreement. "NASDAQ NMS" has the meaning specified in Section 6.05. "OGCL" means the Ohio General Corporation Law, Chapter 1701, OHIO REV. CODE. "PERSON" means an individual, firm, partnership, association, unincorporated organization, trust, corporation, or any other entity, including a government or any department, agency or instrumentality thereof. "PREDECESSOR BENEFIT PLANS" has the meaning specified in Section 4.13(a). "PREDECESSOR COMPANY" and "PREDECESSOR COMPANIES" have the meanings specified in the introductory paragraph. "PREDECESSOR COMPANY SHARES" has the meaning specified in Section 2.05(a). "PREDECESSOR PERMITS" has the meaning specified in Section 4.11. "REGISTRATION STATEMENT" has the meaning specified in Section 4.08. "RESTRICTED KCS SHARES" means the Surviving Corporation Shares which the Key Company Shareholders own immediately after the Merger in respect of their Company Shares owned immediately prior to the Merger. "SEC" means the Securities and Exchange Commission. "SECURITIES ACT" means the Securities Act of 1933 as amended and the rules and regulations thereunder. "STOCK RIGHTS" means, with respect to a party, any subscriptions, options, warrants, calls, rights, convertible securities or other agreements or commitments of any character obligating it to issue, transfer or sell any of its securities. "SURVIVING CORPORATION" means the Company as the surviving corporation in the Merger following the Effective Time. "SURVIVING CORPORATION SHARES" has the meaning specified in Section 2.05(a). 4 "TAX" or "TAXES" means all taxes, charges, fees, duties, levies or other assessments, including income, gross receipts, net proceeds, ad valorem, turnover, real and personal property (tangible and intangible), sales, use, franchise, excise, value added, stamp, leasing, lease, user, transfer, fuel, excess profits, occupational, interest equalization, windfall profits, severance, employee's income withholding, other withholding, unemployment and Social Security taxes, which are imposed by any Governmental Authority, and such term shall include any interest, penalties or additions to tax attributable thereto. 1.02 INTERPRETATION. The following provisions shall govern the interpretation of this Agreement: (a) "Herein" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section, Schedule or Exhibit. (b) Words importing the singular number only shall include the plural and vice versa and words importing the masculine gender shall include the feminine and neuter genders and vice versa and words importing individuals shall include Persons and vice versa. (c) The calculation of time within which or following which any act is to be done or step is to be taken pursuant to this Agreement excludes the date which is the reference day in calculating such period. (d) Whenever anything is required to be done or any action is required to be taken hereunder on or by a day which is not a Business Day, then such thing may be validly done and such action may be validly taken on or by the next succeeding day that is a Business Day. (e) Accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP. (f) As used in this Agreement reference to dollar amounts, unless otherwise specifically indicated, shall mean the lawful money of the United States of America. (g) The term "including" means including without limiting the generality of any description preceding such term, and, for purposes of this Agreement, the parties hereto agree that the rule of EJUSDEM GENERIS shall not be applicable to limit a general statement, which is followed by or referable to an enumeration of specific matters, to matters similar to the matters specifically mentioned. 5 ARTICLE II THE MERGER Section 2.01 THE MERGER. Upon the terms and subject to the conditions hereof, as promptly as practicable following the satisfaction or waiver of the conditions set forth in Article VII but in no event later than two days thereafter, unless the parties shall otherwise agree, a certificate of merger (the "Certificate of Merger") providing for the simultaneous merger of the Predecessor Companies with and into the Company shall be duly prepared, executed and filed by the Company, in accordance with the relevant provisions of the OGCL, and the parties hereto shall take any other actions required by law to make the Merger effective. Following the Merger, the Surviving Corporation, with all its purposes, objects, rights, privileges, powers and franchises, shall continue, and the Predecessor Companies shall cease to exist. The time the Merger becomes effective is referred to herein as the "Effective Time." Prior to the filing of the Certificate of Merger, the Closing shall take place at the offices of Porter, Wright, Morris & Arthur, 41 South High Street, Columbus, Ohio 43215. Section 2.02 EFFECTS OF THE MERGER. The Merger shall have the effects set forth in the OGCL. Section 2.03 ARTICLES OF INCORPORATION AND REGULATIONS. The Articles of Incorporation of the Surviving Corporation shall be as set forth in Exhibit 2.03(a). The Regulations of the Surviving Corporation shall be as set forth in Exhibit 2.03(b). Section 2.04 DIRECTORS AND OFFICERS. The directors and officers of the Company immediately prior to the Effective Time shall be the initial directors and officers of the Surviving Corporation. Any Designated Director who is not already a director of the Company immediately prior to the Effective Time shall be elected as a director of the Surviving Corporation. The Designated Directors shall serve until their successors shall have been duly elected or appointed and shall have qualified or until their earlier death, resignation or removal in accordance with the Articles of Incorporation and Regulations of the Surviving Corporation. Section 2.05 CONVERSION; LOCKUP. At the Effective Time, by virtue of the Merger and without any action on the part of the Surviving Corporation, any of the Predecessor Companies, or the holder of any of the securities of the Predecessor Companies (other than the approval and adoption of this Agreement by the shareholders of each party in conformity with the law of the State of Ohio): (a) Each share of capital stock of each of the Predecessor Companies ("Predecessor Company Shares") issued and outstanding shall be converted into the right to receive the number of fully paid and nonassessable shares of common stock, without par value, of the Surviving Corporation (the "Surviving Corporation Shares") as set forth on Schedule 2.05(a). (b) Each Predecessor Company Share which is held in the treasury of a Predecessor Company shall be cancelled and retired and cease to exist. (c) Shareholders of the Predecessor Companies receiving Surviving Corporation Shares shall be prohibited from transferring or selling the Surviving Corporation Shares during the one-year period commencing on the Closing Date; provided, however, that each shareholder shall be permitted to make sales (i) without limitation in privately negotiated transactions not required to be reported through NASDAQ NMS to persons who agree to be bound by these restrictions to which the transferor Shareholder is subject and (ii) in transactions required to be reported through NASDAQ NMS for that number of Surviving Corporation Shares received with respect to the conversion of the shareholder's shares in a particular Predecessor Company equal to the product of (A) the ratio of Surviving Corporation Shares received with respect to the conversion of the shareholder's shares in such Predecessor Company to the number of Surviving Corporation Shares so received by all shareholders of such Predecessor Company, times (B) the applicable number of Shares shown in the table set forth on Schedule 2.05(c) with respect to such Predecessor Company; and provided, further, that any such shareholder may at any time assign to any other such shareholder of any of the Predecessor Companies all or a portion of his rights to sell Surviving Corporation Shares provided for in clause (ii) above. (d) The Key Company Shareholders shall be prohibited from transferring or selling the Restricted KCS Shares during the one-year period commencing on the Closing Date; provided, however, that each Key Company Shareholder may (i) pledge up to 100,000 Restricted KCS Shares as security for loans subject to the limitation that the pledgee(s) shall agree not to sell more than an aggregate of 10,000 Restricted KCS Shares which have been pledged in any one of the four consecutive 90-day periods immediately following the Closing Date except for sales described in clause (ii) below and (ii) sell Restricted KCS Shares in privately negotiated transactions not required to be reported through NASDAQ NMS to persons who agree to be bound by these restrictions to which the Key Company Shareholder is subject. (e) Certificates representing the Surviving Corporation Shares held by the shareholders of the Predecessor Companies and by the Key Company Shareholders shall bear the following legend: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFERABILITY THAT ARE CONTAINED IN AN INSTRUMENT IN WRITING TO WHICH THE CORPORATION IS A PARTY (AN AGREEMENT AND PLAN OF MERGER DATED JULY __, 1996). THE CORPORATION WILL MAIL TO THE SHAREHOLDER A COPY OF SUCH RESTRICTIONS WITHIN FIVE DAYS AFTER RECEIPT OF WRITTEN REQUEST THEREFOR. 7 Section 2.06 TAX CONSEQUENCES. It is intended that the Merger shall constitute a reorganization within the meaning of Section 368(a)(1)(A) of the Code, and that this Agreement shall constitute a "plan of reorganization" for the purposes of Section 368 of the Code. Section 2.07 ABSENCE OF CONTROL. Subject to any specific provisions of this Agreement, it is the intent of the parties that the Company by reason of this Agreement shall not (until consummation of the transactions contemplated hereby) control, and shall not be deemed to control, directly or indirectly, any of the Predecessor Companies and shall not exercise, or be deemed to exercise, directly or indirectly, a controlling influence over the management or policies of any of the Predecessor Companies. ARTICLE III EXCHANGE OF SHARES Section 3.01 EXCHANGE OF CERTIFICATES. (a) At the Effective Time, the Surviving Corporation shall mail to each holder of record of a certificate or certificates which immediately prior to the Effective Time represented Predecessor Company Shares (the "Certificates") a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Surviving Corporation) and instructions for use in effecting the surrender of the Certificates in exchange for certificates representing Surviving Corporation Shares. Upon surrender of a Certificate to the Surviving Corporation, together with such letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor the certificates representing the whole Surviving Corporation Shares which such holder has the right to receive pursuant to the provisions of this Agreement, and the Certificate so surrendered shall forthwith be cancelled. If a certificate representing Surviving Corporation Shares is to be issued in a name other than that in which the Certificate surrendered in exchange therefor is registered, it shall be a condition to the issuance that such Certificate be properly endorsed (or accompanied by an appropriate instrument of transfer) and accompanied by evidence that any applicable stock transfer taxes have been paid or provided for. Until surrendered as contemplated by this Section, each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive the consideration specified herein; provided that in the event any holder of a Certificate exercises his Dissenter's Rights and becomes entitled to receive payment for his Predecessor Company Shares instead of the Surviving Corporation Shares into which such Predecessor Company Shares shall have been converted, the Surviving Corporation shall pay such holder the amount to which he is entitled for such Predecessor Company Shares, together with any other sums which it may owe him as a result of the Dissenter's Rights proceeding, upon his surrender to the Surviving Corporation of the certificate or certificates which immediately prior to the Effective Time represented the Predecessor Company Shares as to which his Dissenter's Rights were asserted, and the Surviving Corporation shall not thereafter be required to deliver to such holder any Surviving Corporation Shares. 8 Any certificates for Surviving Corporation Shares which remain unclaimed by the holders of Certificates for twelve months after the Effective Time shall be held by the Surviving Corporation, and any holders of Certificates who have not theretofore complied with this Section 3.01(a) shall thereafter receive delivery (subject to abandoned property, escheat or other similar laws) of the Surviving Corporation Shares issuable upon the conversion of their Certificates and any dividends payable on such Surviving Corporation Shares, without any interest thereon, only after delivering their Certificates and letters of transmittal to the Surviving Corporation, and otherwise complying with this Section 3.01(a). (b) No dividends or other distributions declared or made after the Effective Time with respect to Surviving Corporation Shares with a record date after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the Surviving Corporation Shares represented thereby until the holder of record of such Certificate shall surrender such Certificate. Following surrender of any such Certificate, there shall be paid to the record holder of the certificates representing whole Surviving Corporation Shares issued in exchange therefor, without interest, at the appropriate payment date (or promptly after surrender if the payment date has already occurred), the amount of dividends or other distributions with a record date after the Effective Time but prior to surrender. (c) Following the Effective Time, there shall be no further registration of transfers on the stock transfer books of any party of Predecessor Company Shares which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be cancelled and exchanged as provided in this Article III. (d) No certificate or scrip representing fractional Surviving Corporation Shares shall be issued upon the surrender for exchange of Certificates, such fractional share interests will not entitle the owner thereof to vote or to any rights of a shareholder of the Surviving Corporation, and no cash shall be paid in respect of any fractional shares. Section 3.02 DISSENTING PREDECESSOR COMPANY SHARES. If any holder of Predecessor Company Shares shall exercise Dissenter's Rights with respect to his Predecessor Company Shares, the affected Predecessor Company shall give the Surviving Corporation notice thereof and the Surviving Corporation shall have the right to participate in all negotiations and proceedings with respect to any such Dissenter's Rights. No Predecessor Company shall, except with the prior written consent of the Surviving Corporation, voluntarily make any payment with respect to, or settle or offer to settle, any such Dissenter's Rights. Section 3.03 ADJUSTMENTS. If, between the date of this Agreement and the Effective Time, any Company Shares or Predecessor Company Shares shall have been exchanged into a different number of shares or a different class by reason of any reclassification, recapitalization, split-up, combination, exchange of shares or readjustment, or a stock dividend thereon shall be declared with a record date within such period, the amount of Surviving Corporation Shares into which any 9 affected Predecessor Company Shares will be converted in the Merger shall be correspondingly adjusted. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PREDECESSOR COMPANIES Each of the Predecessor Companies represents and warrants to the Company and each of the other Predecessor Companies as follows: Section 4.01 ORGANIZATION. It is a corporation duly organized, validly existing and in good standing under the laws of the State of Ohio and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted. It is duly qualified or licensed and in good standing to do business in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except in such jurisdictions where the failure to be so duly qualified or licensed and in good standing would not in the aggregate have a Material Adverse Effect. It has heretofore delivered to the Company accurate and complete copies of the Articles of Incorporation and Regulations, as currently in effect, of such Predecessor Company, and the partnership agreement or other organizational documents of any Affiliate. Section 4.02 CAPITALIZATION. (a) Its authorized capital stock consists of the number and classes of shares set forth on Schedule 4.02(a), and as of the date hereof the number of shares of each such class which are issued and outstanding are as shown on Schedule 4.02(a). All of its issued and outstanding shares are duly authorized, validly issued, fully paid and nonassessable and free of preemptive rights. As of the date hereof, the number of its shares of any class issuable upon exercise of Stock Rights and the exercise price(s) thereof are as set forth on Schedule 4.02(a). Except as set forth on Schedule 4.02(a), since March 31, 1996, it has not issued any shares of its capital stock (nor securities substantially equivalent to capital stock) except upon exercise of Stock Rights granted prior to such date. Except as set forth in Schedule 4.02(a), and except for shares hereafter issued pursuant to the exercise of Stock Rights described in Schedule 4.02(a), there are not now, and at the Effective Time there will not be, any shares of capital stock (or securities substantially equivalent to capital stock) of such Predecessor Company issued and outstanding, or any outstanding Stock Rights. (b) Except for common shares of Neuromedical Systems, Inc. and except as shown on Schedule 4.02(b), it does not own, directly or indirectly, any capital stock or other equity securities of any corporation or have any direct or indirect equity or ownership interest in any business. Except as shown on Schedule 4.02(b), there are not now, and at the Effective Time there will not be, any voting trusts or other agreements or understandings to which it is a party or is bound with respect to the voting of its capital stock. 10 Section 4.03 AUTHORITY RELATIVE TO THIS AGREEMENT. It has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by its Board of Directors and no other corporate proceedings on the part of such Predecessor Company are necessary to authorize this Agreement or to consummate the transactions so contemplated (other than, with respect to the Merger, the approval and adoption of this Agreement by its shareholders in conformity with the OGCL). This Agreement has been duly and validly executed and delivered by such Predecessor Company and constitutes its valid and binding agreement, enforceable against such Predecessor Company in accordance with its terms, subject to the Enforceability Exceptions. Section 4.04 CONSENTS AND APPROVALS; NO VIOLATIONS. Except for applicable requirements of the Securities Act, and the filing and recordation of the Certificate of Merger as required by the OGCL, no filing with, and no permit, authorization, consent or approval of, any Governmental Authority is necessary for the consummation by such Predecessor Company of the transactions contemplated by this Agreement. None of the execution and delivery of this Agreement by such Predecessor Company, the consummation by it of the transactions contemplated hereby, or compliance by it with any of the provisions hereof will (a) conflict with or result in any breach of any provision of the Articles of Incorporation or Regulations of such Predecessor Company, (b) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any Contract to which such Predecessor Company is a party or by which it or any of its properties or assets may be bound, or (c) violate any order, writ, injunction, decree, statute, treaty, rule or regulation applicable to such Predecessor Company or any of its properties or assets. Section 4.05 FINANCIAL STATEMENTS. It has delivered to the other parties copies of its balance sheets as at March 31, 1996 and December 31 in each of the years 1993 through 1995, and the related statements of income for each of the three-months' period and fiscal years, respectively, then ended (its "Financial Statements"). All of its Financial Statements fairly present the financial condition and the results of operations of such Predecessor Company as at the respective dates thereof and for the periods referred to therein, all in accordance with GAAP (except for the absence of notes thereto and statements of changes in stockholders' equity and cash flow). Its Financial Statements reflect the consistent application of GAAP throughout the periods involved (except for the absence of notes thereto and statements of changes in stockholders' equity and cash flow). The representations and warranties in this Section 4.05 as they pertain to CCI are qualified to the extent they may be affected by the CCI Transaction. Section 4.06 ABSENCE OF CERTAIN CHANGES. Except as set forth in Schedule 4.06, since March 31, 1996, it has not taken any of the actions set forth in Sections 6.01(b) to (h), suffered any Material Adverse Effect, or entered into any transaction, or conducted its business or operations, other than in the ordinary and usual course of business and consistent with past practice. 11 Section 4.07 NO UNDISCLOSED LIABILITIES. At March 31, 1996, it did not have any material liabilities except those reflected in its Financial Statements for the period ending on such date. Since March 31, 1996, such Predecessor Company has not incurred any liabilities material to its business, operations or financial condition, except liabilities incurred in the ordinary and usual course of business and consistent with past practice and liabilities incurred in connection with this Agreement and the transactions contemplated herein. Section 4.08 INFORMATION IN REGISTRATION STATEMENT. None of the information supplied by it in writing for inclusion or incorporation by reference in the registration statement on Form S-4 to be filed with the SEC by the Company in connection with the issuance of Surviving Corporation Shares pursuant to the transactions contemplated hereby (the "Registration Statement") will, at the time the Registration Statement is filed with the SEC and at the time it becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. Any information statement or proxy statement of such Predecessor Company used in connection with any meeting of shareholders to be held in connection with the Merger (an "Information/Proxy Statement") will, at the date mailed to shareholders and at the time of the meeting of shareholders to be held in connection with the Merger, not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. Section 4.09 NO DEFAULT. It is not in default or violation (and no event has occurred which with notice or the lapse of time or both would constitute a default or violation) of any term, condition or provision of (a) its Articles of Incorporation or Regulations, (b) any Contract to which it is a party or by which it or any of its properties or assets may be bound, or (c) any order, writ, injunction, decree, statute, rule or regulation applicable to it, which defaults or violations would, in the aggregate, have a Material Adverse Effect or which would prevent or delay the consummation of the transactions contemplated hereby. Section 4.10 LITIGATION. There is no action, suit, or proceeding pending, or to the best Knowledge of such Predecessor Company threatened, involving it, at law or in equity, or before any Governmental Authority. Section 4.11 COMPLIANCE WITH APPLICABLE LAW. It holds all permits, licenses, variances, exemptions, orders and approvals of all Governmental Authorities necessary for the lawful conduct of its businesses (the "Predecessor Permits"), except for failures to hold such Predecessor Permits which would not, in the aggregate, have a Material Adverse Effect. It is in compliance with the terms of the Predecessor Permits, except where the failure so to comply would not have a Material Adverse Effect. Its businesses are not being conducted in violation of any applicable law, ordinance, rule, regulation, decree or order of any Governmental Authority, except for violations which in the aggregate do not and would not have a Material Adverse Effect. 12 Section 4.12 TAXES. It has duly filed all material federal, state, local and foreign tax returns required to be filed by it, and it has duly paid, caused to be paid or made adequate provision for the payment of all Taxes required to be paid in respect of the periods covered by such returns and has made adequate provision for payment of all Taxes anticipated to be payable in respect of all fiscal periods since the periods covered by such returns. All deficiencies and assessments asserted as a result of such examinations or other audits by federal, state, local or foreign taxing authorities have been paid, fully settled or adequately provided for in its Financial Statements, and no issue or claim has been asserted for Taxes by any taxing authority for any prior period, other than those heretofore paid or provided for. There are no outstanding agreements or waivers extending the statutory period of limitation applicable to any federal income tax return of such Predecessor Company. Section 4.13 ERISA. (a) With respect to each employee benefit plan (including any "employee benefit plan," as defined in Section 3(3) of ERISA), and any material bonus, pension, profit sharing, deferred compensation, incentive compensation, stock ownership, stock purchase, stock option, phantom stock, retirement, vacation, severance, disability, death benefit, hospitalization, insurance or other plan, arrangement or understanding (whether or not legally binding) (all the foregoing being herein called "Predecessor Benefit Plans"), maintained or contributed to by it, such Predecessor Company has made available to the other parties a true and correct copy of, where applicable, (i) the most recent annual report (Form 5500) filed with the IRS, (ii) such Predecessor Benefit Plan, (iii) each trust agreement and group annuity contract, if any, relating to such Predecessor Benefit Plan and (iv) the most recent actuarial report or valuation relating to a Predecessor Benefit Plan subject to Title IV of ERISA. None of its Predecessor Benefit Plans are multiemployer plans within the meaning of Section 3(37) of ERISA. Each of the Predecessor Benefit Plans covered by ERISA (i) has been operated in all material respects in accordance with ERISA, (ii) has not engaged in any prohibited transactions (as such term is defined in Section 406 of ERISA) and (iii) has met the minimum funding standards of Section 412 of the Code. No material Reportable Event (within the meaning of Section 4043 of ERISA) has occurred and is continuing with respect to any of its Predecessor Benefit Plans. It has not terminated any pension plan or withdrawn from any multiemployer pension plan. (b) With respect to its Predecessor Benefit Plans, in the aggregate, no event has occurred, and to the Knowledge of such Predecessor Company there exists no condition or set of circumstances which are reasonably likely to occur, in connection with which it would be subject to any liability, that would have a Material Adverse Effect (except liability for benefits claims and funding obligations payable in the ordinary course), under ERISA, the Code or any other applicable law. (c) With respect to its Predecessor Benefit Plans, in the aggregate, there are no funded benefit obligations for which contributions have not been made or properly accrued and there are no unfunded benefit obligations which have not been accounted for by reserves, or 13 otherwise properly footnoted in accordance with GAAP, on its financial statements referenced in Section 4.05, which obligations are reasonably likely to have a Material Adverse Effect. Section 4.14 INTELLECTUAL PROPERTY. Except as shown on Schedule 4.14, no claim is pending or, to its Knowledge is threatened, to the effect that its present or past operations infringe upon or conflict with the rights of others with respect to any Intellectual Property necessary to permit it to conduct its businesses as now operated, and no claim is pending or threatened to the effect that any of its Predecessor Intellectual Property is invalid or unenforceable. No Contract with any party exists which would impede or prevent the continued use by the Surviving Corporation of the entire right, title and interest of such Predecessor Company in and to its Predecessor Intellectual Property. Section 4.15 CHANGE IN CONTROL. It is not a party to any Contract which contains a "change in control" provision or "potential change in control" provision. ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to each of the Predecessor Companies as follows: Section 5.01 ORGANIZATION. It is a corporation duly organized, validly existing and in good standing under the laws of Ohio and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted. It is duly qualified or licensed and in good standing to do business in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except in such jurisdictions where the failure to be so duly qualified or licensed and in good standing would not in the aggregate have a Material Adverse Effect. Section 5.02 CAPITALIZATION. (a) The authorized capital stock of the Company consists of 8,000,000 shares of common stock, without par value ("Company Shares"), of which, as of the date hereof, 6,072,936 are issued and outstanding. All issued and outstanding shares of the Company are duly authorized, validly issued, fully paid and nonassessable and free of preemptive rights. As of the date hereof, the number of its shares of any class issuable upon exercise of Stock Rights and the exercise price(s) thereof are as set forth on Schedule 5.02(a). All Surviving Corporation Shares which are to be issued pursuant to the Merger or the other transactions contemplated hereby will be, when issued in accordance with the respective terms thereof, duly authorized, validly issued, fully paid and nonassessable and free of any preemptive rights in respect thereto. Except as set forth in Schedule 5.02(a), since March 31, 1996, the Company has not issued any shares of its capital stock (nor securities substantially equivalent to capital stock) except upon exercise of Stock Rights granted prior to such date. Except for Company Shares (Surviving Corporation Shares after the 14 Effective Time) hereafter issued pursuant to the exercise of Stock Rights described in Schedule 5.02(a), and except as contemplated hereby, there are not now, and at the Effective Time there will not be, any shares of capital stock (or securities substantially equivalent to capital stock) of the Company issued or outstanding or any outstanding Stock Rights. (b) Except for common shares of Neuromedical Systems, Inc. and except as shown on Schedule 5.02(b), the Company does not own, directly or indirectly, any capital stock or other equity securities of any corporation or have any direct or indirect equity or ownership interest in any business. There are not now, and at the Effective Time there will not be, any voting trusts or other agreements or understandings to which the Company is a party or is bound with respect to the voting of the capital stock of the Company. Section 5.03 AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of the Company and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions so contemplated (other than, with respect to the Merger, the approval and adoption of this Agreement by its shareholders in conformity with the OGCL). This Agreement has been duly and validly executed and delivered by the Company and constitutes a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, subject to the Enforceability Exceptions. Section 5.04 CONSENTS AND APPROVALS; NO VIOLATIONS. Except for applicable requirements of the Securities Act, and the filing and recordation of the Certificate of Merger as required by the OGCL, no filing with, and no permit, authorization, consent or approval of, any Governmental Authority is necessary for the consummation by the Company of the transactions contemplated by this Agreement. None of the execution and delivery of this Agreement by the Company, the consummation by the Company of the transactions contemplated hereby or compliance by the Company with any of the provisions hereof will (a) conflict with or result in any breach of any provision of the Articles of Incorporation or Regulations of the Company, (b) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any Contract to which the Company is a party or by which it or any of its properties or assets may be bound, or (c) violate any order, writ, injunction, decree, statute, treaty, rule or regulation applicable to the Company or any of its properties or assets. Section 5.05 FINANCIAL STATEMENTS. The Company has delivered to each of the Predecessor Companies copies of its balance sheets as at March 31, 1996 and December 31 in each of the years 1993 through 1995, and the related statements of income for each of the three-months' period and fiscal years, respectively, then ended (the "Company Financial Statements"). All of the Company Financial Statements fairly present the financial condition and the results of operations of the Company as at the respective dates thereof and for the periods referred to therein, all in accordance 15 with GAAP (except for the absence of notes thereto and statements of changes in stockholders' equity and cash flow). The Company Financial Statements reflect the consistent application of GAAP throughout the periods involved (except for the absence of notes thereto and statements of changes in stockholders' equity and cash flow). Section 5.06 ABSENCE OF CERTAIN CHANGES. Except as set forth in Schedule 5.06, since March 31, 1996, it has not taken any of the actions set forth in Sections 6.01(b) to (h), suffered any Material Adverse Effect, or entered into any transaction, or conducted its business or operations, other than in the ordinary and usual course of business and consistent with past practice. Section 5.07 NO UNDISCLOSED LIABILITIES. At March 31, 1996, the Company did not have any material liabilities except those reflected in the Company Financial Statements for the period ending on such date. Since March 31, 1996, the Company has not incurred any liabilities material to its business, operations or financial condition, except liabilities incurred in the ordinary and usual course of business and consistent with past practice and liabilities incurred in connection with this Agreement and the transactions contemplated herein. Section 5.08 INFORMATION IN REGISTRATION STATEMENT. None of the information with respect to the Company referenced in the Registration Statement will, at the time the Registration Statement is filed with the SEC and at the time it becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. Any Information/Proxy Statement of the Company used in connection with any meeting of shareholders to be held in connection with the Merger will, at the date mailed to shareholders and at the time of the meeting of shareholders to be held in connection with the Merger, not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The Registration Statement will comply in all material respects with the provisions of the Securities Act (including that it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make statements therein not misleading), except that no representation is made by the Company with respect to statements made therein based on information supplied by any Predecessor Company in writing for inclusion or incorporation by reference in the Registration Statement. Section 5.09 NO DEFAULT. The Company is not in default or violation (and no event has occurred which with notice or the lapse of time or both would constitute a default or violation) of any term, condition or provision of (a) its Articles of Incorporation or Regulations (b) any Contract to which the Company is a party or by which it or any of its properties or assets may be bound or (c) any order, writ, injunction, decree, statute, rule or regulation applicable to the Company, which defaults or violations would, in the aggregate, have a Material Adverse Effect or which would prevent or delay the consummation of the transactions contemplated hereby. 16 Section 5.10 LITIGATION. There is no action, suit, or proceeding pending, or to the best Knowledge of the Company threatened, involving it, at law or in equity, or before any Governmental Authority. Section 5.11 COMPLIANCE WITH APPLICABLE LAW. The Company holds all permits, licenses, variances, exemptions, orders and approvals of all Governmental Entities necessary for the lawful conduct of its businesses (the "Company Permits"), except for failures to hold such Company Permits which would not, in the aggregate, have a Material Adverse Effect. The Company is in compliance with the terms of the Company Permits, except where the failure so to comply would not have a Material Adverse Effect. The businesses of the Company are not being conducted in violation of any applicable law, ordinance, rule, regulation, decree or order of any Governmental Authority, except for violations which in the aggregate do not and would not have a Material Adverse Effect. Section 5.12 TAXES. The Company has duly filed all material federal, state, local and foreign tax returns required to be filed by it, and it has duly paid, caused to be paid or made adequate provision for the payment of all Taxes required to be paid in respect of the periods covered by such returns and has made adequate provision for payment of all Taxes anticipated to be payable in respect of all fiscal periods since the periods covered by such returns. All deficiencies and assessments asserted as a result of such examinations or other audits by federal, state, local or foreign taxing authorities have been paid, fully settled or adequately provided for in the Company Financial Statements, and no issue or claim has been asserted for Taxes by any taxing authority for any prior period, other than those heretofore paid or provided for. There are no outstanding agreements or waivers extending the statutory period of limitation applicable to any federal income tax return of the Company. Section 5.13 ERISA. (a) With respect to each employee benefit plan (including any "employee benefit plan", as defined in Section 3(3) of ERISA), and any material bonus, pension, profit sharing, deferred compensation, incentive compensation, stock ownership, stock purchase, stock option, phantom stock, retirement, vacation, severance, disability, death benefit, hospitalization, insurance or other plan, arrangement or understanding (whether or not legally binding) (all the foregoing being herein called "Company Benefit Plans"), maintained or contributed to by it, the Company has made available to the Predecessor Companies a true and correct copy of, where applicable, (i) the most recent annual report (Form 5500) filed with the IRS, (ii) such Company Benefit Plan, (iii) each trust agreement and group annuity contract, if any, relating to such Company Benefit Plan and (iv) the most recent actuarial report or valuation relating to a Company Benefit Plan subject to Title IV of ERISA. None of the Company Benefit Plans are multiemployer plans within the meaning of Section 3(37) of ERISA. Each of the Company Benefit Plans covered by ERISA (i) has been operated in all material respects in accordance with ERISA, (ii) has not engaged in any prohibited transactions (as such term is defined in Section 406 of ERISA) and (iii) has met the minimum funding standards of Section 412 of the Code. No material Reportable Event (within the meaning 17 of Section 4043 of ERISA) has occurred and is continuing with respect to any of the Company Benefit Plans. The Company has not terminated any pension plan or withdrawn from any multiemployer pension plan. (b) With respect to the Company Benefit Plans, in the aggregate, no event has occurred, and to the Knowledge of the Company there exists no condition or set of circumstances which are reasonably likely to occur, in connection with which it would be subject to any liability, that would have a Material Adverse Effect (except liability for benefits claims and funding obligations payable in the ordinary course), under ERISA, the Code or any other applicable law. (c) With respect to the Company Benefit Plans, in the aggregate, there are no funded benefit obligations for which contributions have not been made or properly accrued and there are no unfunded benefit obligations which have not been accounted for by reserves, or otherwise properly footnoted in accordance with GAAP, on its financial statements referenced in Section 5.05, which obligations are reasonably likely to have a Material Adverse Effect. Section 5.14 INTELLECTUAL PROPERTY. Except as shown on Schedule 5.14, no claim is pending or, to the Knowledge of the Company is threatened, to the effect that the present or past operations of the Company infringe upon or conflict with the rights of others with respect to any Intellectual Property, and no claim is pending or threatened to the effect that any of the Company Intellectual Property is invalid or unenforceable. No Contract with any party exists which would impede or prevent the continued use by the Surviving Corporation of the entire right, title and interest of the Company in and to the Company Intellectual Property. Section 5.15 CHANGE IN CONTROL. The Company is not a party to any Contract which contains a "change in control" or "potential change in control" provision. ARTICLE VI COVENANTS Section 6.01 COVENANTS OF THE PREDECESSOR COMPANIES AND THE COMPANY. During the period from the date of this Agreement and continuing until the Effective Time, the Predecessor Companies and the Company each agree that, except as expressly contemplated or permitted by this Agreement, or to the extent that the other parties shall otherwise consent in writing: (a) Each party shall carry on its respective businesses in the usual, regular and ordinary course, consistent with past practice, and use its best efforts to preserve intact its present business organization, keep available the services of its present officers and employees and preserve its relationships with customers, suppliers and others having business dealings with it. (b) No party shall, nor shall any party propose to, (i) declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in 18 respect of any of its capital stock, (ii) split, combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, (iii) repurchase, redeem or otherwise acquire any of its securities, or (iv) purchase any equity security of any other corporation. Notwithstanding the foregoing restrictions contained in this Section 6.01(b), a Predecessor Company may repurchase Predecessor Company Shares pursuant to and in accordance with a buy/sell agreement in effect on the date hereof, in which event the Surviving Corporation Shares allocated for such repurchased Predecessor Company Shares under Section 2.05(a) shall be reallocated pro-rata among the remaining outstanding Predecessor Company Shares of the relevant Predecessor Company. (c) No party shall authorize for issuance, issue, sell, deliver or agree or commit to issue, sell or deliver (whether through the issuance or granting of options, warrants, commitments, subscriptions, rights to purchase or otherwise) any stock of any class or any other securities (including indebtedness having the right to vote) or equity equivalents (including stock appreciation rights), except pursuant to the exercise of Stock Rights outstanding on the date hereof and disclosed in Schedules 4.02(a) and 5.02(a), or amend in any material respect any of the terms of any such securities or agreements outstanding on the date hereof. (d) No party shall amend or propose to amend its Articles of Incorporation or Regulations. (e) No party shall acquire, sell, lease, encumber, transfer or dispose of any assets outside the ordinary course of business, consistent with past practice, or any assets which are material to such party, except pursuant to obligations in effect on the date hereof, or enter into any commitment or transaction outside the ordinary course of business, consistent with past practice. (f) No party shall incur (which shall not be deemed to include entering into credit agreements, lines of credit or similar arrangements until borrowings are made under such arrangements) any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or warrants or rights to acquire any debt securities of such party or guarantee (or become liable for) any debt of others or make any loans, advances or capital contributions or mortgage, pledge or otherwise encumber any material assets or create or suffer any material lien thereupon other than in each case in the ordinary course of business consistent with prior practice. (g) No party shall pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business consistent with past practice or in accordance with their terms, of liabilities reflected or reserved against in, or contemplated by, the financial statements (or the notes thereto) of any party or incurred in the ordinary course of business consistent with past practice. 19 (h) No party shall change any of the accounting principles or practices used by it (except as required by GAAP). (i) No party shall agree to take any of the foregoing actions or take or agree to take any action that would or is reasonably likely to result in any of its representations and warranties set forth in this Agreement being untrue or in any of the conditions to the Merger set forth in Article VII not being satisfied. (j) Each of the parties shall give prompt notice to the other parties of: (i) any notice of, or other communication relating to, a default or event which, with notice or the lapse of time or both, would become a default, received by it subsequent to the date of this Agreement and prior to the Effective Time, under any Contract material to its financial condition, properties, businesses or results of operations; (ii) any notice or other communication from any third party alleging that the consent of such third party is or may be required in connection with the transactions contemplated by this Agreement, which consent, if required, would breach the representations contained in Articles IV and V; and (iii) any event or circumstance which may have a Material Adverse Effect. (k) The parties shall consult with each other before issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and in making any filings with any federal or state governmental or regulatory agency or with any national securities exchange with respect thereto, and shall also comply with Section 9.09 with respect thereto. (l) None of the parties hereto or the Surviving Corporation shall at any time hereafter take or agree to take any action that (without giving effect to any action taken or agreed to be taken by the other parties hereto or any of their Affiliates) would prevent the Surviving Corporation from accounting for the business combination to be effected by the Merger as a reorganization or a pooling of interests. Section 6.02 ADDITIONAL COVENANTS OF THE PARTIES. During the period from the date of this Agreement and continuing until the Effective Time, each of the parties agrees that it will not, without the prior written consent of the other parties, except as contemplated by this Agreement or required by law, (a) enter into, adopt, amend or terminate any Predecessor Company Benefit Plan or Company Benefit Plan or other employee benefit plan or any agreement, arrangement, plan or policy between such party and one or more of its directors or executive officers, or (b) except for normal increases in the ordinary course of business consistent with past practice that, in the aggregate, do not result in a material increase in benefits or compensation expense to such party, increase in any manner the compensation or fringe benefits of any director, officer or employee or pay any benefit not required by any plan and arrangement as in effect as of the date hereof or enter into any Contract to do any of the foregoing. 20 Section 6.03 NO SOLICITATION. No party nor any of its Affiliates, officers, directors, representatives or agents shall, directly or indirectly, solicit, initiate or encourage (including by way of furnishing information) any person, entity or group concerning any merger, sale of substantial assets outside the ordinary course of business, sale of shares of capital stock or similar transaction involving it other than the transactions contemplated by this Agreement. Each party shall promptly advise the other parties of any such inquiries or proposals. Section 6.04 ACCESS TO INFORMATION. Upon reasonable notice and subject to restrictions contained in confidentiality agreements to which such party is subject (from which such party shall use reasonable efforts to be released), the Predecessor Companies and the Company shall each afford to the officers, employees, accountants, counsel and other representatives of the other parties, access, during normal business hours during the period prior to the Effective Time, to all its properties, books, Contracts, commitments and records and, during such period, each of the Predecessor Companies and the Company shall furnish promptly to another party all information concerning its business, properties and personnel as such other party may reasonably request. Unless otherwise required by law or court order, the parties will hold any such information which is nonpublic in confidence until such time as such information otherwise becomes publicly available through no wrongful act of the parties, and in the event of termination of this Agreement for any reason each party shall promptly return all nonpublic documents obtained from any other party, and any copies or summaries made of such documents, to such other party. Section 6.05 BEST EFFORTS. Subject to the terms and conditions of this Agreement, each of the parties hereto agrees to use its best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement including (a) the prompt preparation and filing with the SEC of the Registration Statement, (b) such actions as may be required to have the Registration Statement declared effective under the Securities Act as promptly as practicable, including by consulting with each other as to, and responding promptly to, any SEC comments with respect thereto, (c) such actions as may be required to be taken under applicable state securities or Blue Sky laws in connection with the issuance of Surviving Corporation Shares contemplated hereby, (d) the preparation and filing of all other forms, registrations and notices required to be filed to consummate the transactions contemplated hereby and the taking of such actions as are necessary to obtain any requisite approvals, consents, orders, exemptions or waivers by any public or private third party, and (e) the Company using its best efforts to cause the Surviving Corporation Shares to be admitted for quotation on the NASDAQ National Market System ("NASDAQ NMS"), subject to official notice of issuance. Each party shall promptly consult with the other parties with respect to, provide any necessary information with respect to and provide the other parties (or their counsel) copies of, all filings made by such party with any Governmental Authority in connection with this Agreement and the transactions contemplated hereby. Section 6.06 SHAREHOLDERS MEETINGS. Each of the Predecessor Companies and the Company shall duly call, give notice of, convene and hold a meeting of its shareholders (or, in the case of 21 each party other than the Company, obtain the unanimous written consent of its shareholders) as promptly as practicable for the purpose of approving this Agreement and related matters and, in the case of the Company, approving the issuance of Surviving Corporation Shares pursuant hereto. Each of the parties will, through its respective Board of Directors, recommend to its respective shareholders approval of such matters and will coordinate and cooperate with respect to the timing of such meetings and written consents as soon as practicable after the date hereof, and shall use its best efforts to secure the approval of its shareholders for the transactions contemplated herein. Section 6.07 AFFILIATES. Prior to the Closing Date, each party shall deliver to the other parties a letter identifying all Persons who are, at the time this Agreement is submitted for approval to the shareholders of such party, "affiliates" of such party for purposes of Rule 145 under the Securities Act. Section 6.08 [Reserved] Section 6.09 INDEMNIFICATION AND INSURANCE. (a) In the event of any threatened or actual claim, action, suit, proceeding or investigation, whether civil, criminal or administrative, including any such claim, action, suit, proceeding or investigation in which any of the present or former officers or directors (the "Managers") of the Predecessor Companies is, or is threatened to be, made a party by reason of the fact that he is or was a director, officer, employee or agent of a Predecessor Company or an Affiliate thereof, or is or was serving at the request of a Predecessor Company or an Affiliate thereof as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, whether before or after the Effective Time, the parties hereto agree to cooperate and use their best efforts to defend against and respond thereto. It is understood and agreed that (i) prior to the Effective Time a Manager's Predecessor Company shall indemnify and hold him harmless, and from and after the Effective Time the Surviving Corporation shall indemnify and hold him harmless, as and to the full extent permitted by applicable law (including by advancing expenses promptly as statements therefor are received), against any losses, claims, damages, liabilities, costs, expenses (including attorneys' fees), judgments, fines and amounts paid in settlement in connection with any claim, action, suit, proceeding or investigation described in the first sentence of this Section 6.09, and (ii) in the event of any such claim, action, suit, proceeding or investigation (whether arising before or after the Effective Time), the Managers may retain counsel satisfactory to them, and the relevant Predecessor Company prior to the Effective Time, or the Surviving Corporation after the Effective Time, shall pay all fees and expenses of such counsel for the Managers promptly, as statements therefor are received, and will use its respective best efforts to assist in the vigorous defense of any such matter; provided that no Predecessor Company nor the Surviving Corporation shall be liable for any settlement effected without its prior written consent (which consent shall not be unreasonably withheld); and provided further that no party shall have any obligation hereunder to any Manager when and if a court of competent jurisdiction shall ultimately determine, and such determination shall have become final and non-appealable, that indemnification of such Manager in the manner contemplated hereby is prohibited by applicable law. Any Manager wishing to claim indemnification under this Section 6.09(a), upon learning of any such claim, action, suit, proceeding or investigation, shall notify the relevant 22 Predecessor Company and the Company prior to the Effective Time, and after the Effective Time the Surviving Corporation, thereof (provided that the failure to give such notice shall not affect any obligations hereunder, unless the indemnifying party is actually and materially prejudiced thereby). (b) The Company agrees that all rights to indemnification existing in favor of any Manager as provided in a Predecessor Company's Articles of Incorporation or Regulations, as in effect as of the date hereof, and in any agreement between such Predecessor Company and the Manager with respect to matters occurring prior to the Effective Time shall survive the Merger and shall continue in full force and effect for a period of not less than six years. (c) The provisions of this Section 6.09 are intended to be for the benefit of, and shall be enforceable by, each indemnified party and his or her heirs and representatives. Section 6.10 [Reserved]. Section 6.11 [Reserved]. Section 6.12 BROKERS OR FINDERS. Each of the Predecessor Companies and the Company represents, as to itself and its Affiliates, that no agent, broker, investment banker, financial advisor or other firm or person is or will be entitled to any broker's or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement, and each of them agree to indemnify and hold the others harmless from and against any and all claims, liabilities or obligations with respect to any other fees, commissions or expenses asserted by any person on the basis of any act or statement alleged to have been made by such party or its Affiliate. Section 6.13. ADVISORY BOARD. In order to coordinate the activities of the parties in taking all actions necessary or advisable to effect the Merger, the parties hereby appoint an interim advisory board (the "Advisory Board") consisting of the following persons: David J. Richards (Chairman), S. Trevor Ferger, Cecil J. Petitti, Thomas J. Kelley, Michael Blue, M.D., Rodney M. Kinsey and John P. Kennedy. The Advisory Board will meet periodically at the call of its Chairman or any other member of the Advisory Board, will review progress toward effecting the Merger and will use its best efforts to assist in the resolution of any issues which arise. However, the Advisory Board shall not have any authority to amend this Agreement or waive any party's obligations hereunder, except that this Agreement may be terminated by the vote of a majority of the Advisory Board as provided in Section 8.01. ARTICLE VII CONDITIONS Section 7.01 CONDITIONS TO EACH PARTY'S OBLIGATION TO CLOSE AND EFFECT THE MERGER. The respective obligation of each party to close the transactions contemplated herein and effect the 23 Merger shall be subject to the satisfaction at or prior to the Closing Date of the following conditions unless waived by all of the parties: (a) This Agreement shall have been approved and adopted by the shareholders of each party in accordance with the OGCL, and the issuance of Surviving Corporation Shares pursuant to the Merger and the other terms of this Agreement shall have been approved by the shareholders of the Company in accordance with the OGCL. (b) Other than the filing provided for by Section 2.01, all authorizations, consents, orders or approvals of, or declarations or filings with, or expirations or terminations of waiting periods imposed by, any Governmental Authority, and all required third party consents, the failure of which to obtain would have a Material Adverse Effect on the Surviving Corporation, taken as a whole, shall have been filed, occurred or obtained. The Company shall have received all state securities or "Blue Sky" permits and other authorizations necessary to issue the Surviving Corporation Shares pursuant to the Merger and the other terms of this Agreement. (c) The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings seeking a stop order. (d) No statute, rule, regulation, executive order, decree or injunction shall have been enacted, entered, promulgated or enforced by any court or Governmental Authority which prohibits the consummation of the Merger and shall be in effect. (e) The representations and warranties of each party set forth in this Agreement shall be true and correct as of the date of this Agreement, and shall also be true in all material respects (except for such changes as are contemplated by the terms of this Agreement and such changes as would be required to be made in the Schedules to this Agreement if such Schedules were to speak as of the Closing Date) on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date, except if and to the extent any failures to be true and correct would not, in the aggregate, have a Material Adverse Effect on the party. (f) From the date of this Agreement through the Closing Date no party shall have suffered any Material Adverse Effect (other than changes relating to the transactions contemplated by this Agreement). (g) Each party shall have performed all obligations required to be performed by it under this Agreement at or prior to the Closing Date, except where any failures to perform would not, in the aggregate, have a Material Adverse Effect on such party. (h) The opinion, based on representations of the Predecessor Companies and the Company, of Porter, Wright, Morris & Arthur, counsel to the Company, to the effect that: 24 (i) The Merger of the Predecessor Companies with and into the Company will constitute a reorganization within the meaning of Section 368(a)(1)(A) of the Code; (ii) No gain or loss will be recognized by the Predecessor Companies or the Company as a consequence of the Merger; (iii) No gain or loss will be recognized by the shareholders of the Predecessor Companies on the exchange of their Predecessor Company Shares for Surviving Corporation Shares (except for any gain or loss attributable to any cash received pursuant to the exercise of Dissenter's Rights or for fractional share interests to which they may be entitled); (iv) The federal income tax basis of the Surviving Corporation Shares received by the shareholders of the Predecessor Companies (including fractional share interests to which they may be entitled) for their Predecessor Company Shares will be the same as the federal income tax basis of the Predecessor Company Shares surrendered in exchange therefor; and (v) The holding period for the Surviving Corporation Shares received by shareholders of the Predecessor Companies in exchange for their Predecessor Company Shares will include the period for which the Predecessor Company exchanged therefor were held, provided that the exchanged Predecessor Company Shares were held as a capital asset by such shareholder on the date of the exchange. (i) At the Closing, each party shall have furnished the other parties with copies of (i) the resolutions duly adopted by its Board of Directors approving the execution and delivery of this Agreement and all other necessary or proper corporate action to enable it to comply with the terms of this Agreement, (ii) the resolutions duly adopted by its shareholders approving and adopting this Agreement and the Merger and (iii) the resolutions duly adopted by the Company's shareholders approving the issuance of Surviving Corporation Shares, such resolutions to be certified by the President or a Vice President and Secretary or an Assistant Secretary of the applicable party. (j) At the Closing, each party shall have furnished each of the other parties with an opinion, dated the Closing Date, of counsel to such party, to the effect that: (i) Such party is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Ohio; (ii) Such party has the corporate power to carry on its businesses as they are being conducted on the Closing Date; and 25 (iii) Such party has taken all required corporate action to approve and adopt this Agreement and this Agreement is a valid and binding obligation of such party, enforceable in accordance with its terms, subject to the Enforceability Exceptions. In rendering the foregoing opinion, such counsel may rely on certificates of officers and other agents of the party and public officials as to matters of fact provided such reliance is expressly noted in the opinion and the certificates of such officers, agents and public officials relied on are attached to the opinion. (k) At the time of the Closing, the shareholders of any Predecessor Company entitled to assert Dissenter's Rights shall own in the aggregate less than 10% of the outstanding shares of such Predecessor Company, and the shareholders of the Company entitled to assert Dissenter's Rights shall own in the aggregate less than 10% of the outstanding shares of the Company. (l) At the time of the Closing, the Company and Neuromedical Systems, Inc. shall have entered into a license agreement in substantially the form of the license agreement previously agreed to between Neuromedical Systems, Inc. and the parties for use with the Surviving Corporation, which license agreement provides that it shall become effective at the Effective Time. (m) At the time of the Closing, the Surviving Corporation Shares shall have been admitted for quotation on the NASDAQ NMS, subject to official notice of issuance. All actions, proceedings, instruments and documents required to carry out this Agreement, or incidental hereto, and all other legal matters shall have been approved by counsel to each party, and such counsel shall have received all documents, certificates and other papers reasonably requested by it in connection therewith. ARTICLE VIII TERMINATION AND AMENDMENT Section 8.01 TERMINATION. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the matters presented in connection with the Merger, by the shareholders of the Company or any or all of the Predecessor Companies: (a) by mutual consent of all of the parties; (b) by any of the parties if the Merger shall not have been consummated before September 30, 1996 (unless the failure to consummate the Merger by such date shall be due to the action or failure to act of the party seeking to terminate this Agreement); 26 (c) by any party if any permanent injunction or other order of a court or other competent authority preventing the consummation of the Merger shall have become final and non-appealable; (d) by any party if any required approval of the shareholders of such party or any other party shall not have been obtained by reason of the failure to obtain the required vote upon a vote held at a duly held meeting of shareholders or at any adjournment thereof for the purpose of obtaining such vote; or (e) by a vote of a majority of the Advisory Board. Section 8.02 EFFECT OF TERMINATION. In the event of the termination and abandonment of this Agreement pursuant to Section 8.01, this Agreement shall forthwith become void and have no effect, without any liability on the part of any party hereto or its Affiliates, directors, officers or shareholders, other than the provisions of Sections 6.04, 6.12, 8.05 and 9.08. Nothing contained in this Section 8.02 shall relieve any party from liability for any breach of this Agreement. Section 8.03 AMENDMENT. This Agreement may be amended by the parties hereto, by action taken or authorized by their respective Boards of Directors, at any time before or after approval of the matters presented in connection with the Merger by the shareholders of the parties but, after any such approval, no amendment shall be made which by law requires further approval by such shareholders without such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. Section 8.04 EXTENSION; WAIVER. At any time prior to the Effective Time, the parties hereto may, to the extent legally allowed, (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. Section 8.05 TERMINATION PAYMENT. In the event that (a) the Merger is not consummated by reason of a party's breach of this Agreement, or (b) a party fails to obtain the required approval of the Merger by the shareholders of such party (in either case, a "Defaulting Party), and this Agreement is thereafter terminated by any party hereto, in addition to bearing its pro-rata share of expenses pursuant to Section 9.08 of this Agreement, the Defaulting Party shall within thirty (30) days of the termination of this Agreement pay to the other parties the sum of Five Hundred Thousand Dollars ($500,000.00), which shall be shared among the other parties in proportion to the number of Surviving Corporation Shares which would have been owned by the shareholders of each such party immediately after the Effective Time had the Merger been consummated. The parties agree that such payment shall constitute liquidated damages, and not a penalty, and that such 27 payment shall be in lieu of any money damages suffered by any party by reason of the Defaulting Party's breach of this Agreement or failure to obtain shareholder approval. ARTICLE IX MISCELLANEOUS Section 9.01 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and warranties made herein shall not survive beyond the Effective Time. Section 9.02 NOTICES. All notices and other communications hereunder shall be in writing (and shall be deemed given upon receipt) if delivered personally, telecopied (which is confirmed) or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to the Company, to Papnet of Ohio, Inc. 6059 Memorial Drive Dublin, Ohio 43017 Attn: David J. Richards, President Facsimile: (614) 793-9376 with a copy to Porter, Wright, Morris & Arthur 41 South High Street Columbus, Ohio 43215 Attn: William J. Kelly, Jr., Esq. Facsimile: (614) 227-2100 and (b) if to the Predecessor Companies, to Carolina Cytology, Inc. CCWP Partners, Inc. c/o Rodney M. Kinsey 8651 Gairloch Court Dublin, Ohio 43017 Facsimile: (614) 889-1052 28 ER Group, Inc. c/o Thomas J. Kelley 8595 Milmichael Court Dublin, Ohio 43017 Facsimile: (614) 764-2501 Cytology Indiana, Inc. Indiana Cytology Review Company c/o Mr. Cecil J. Petitti Chaney & Petitti Insurance Agency 4266 Tuller Road Dublin, Ohio 43017 Facsimile: (614)764-1455 with a copy to Squire, Sanders & Dempsey 41 South High Street Suite 1300 Columbus, Ohio 43215 Attn: Daniel M. Maher, Esq. Facsimile: (614) 365-2499 Section 9.03 DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. Section 9.04 COUNTERPARTS. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. Section 9.05 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement (a) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof (other than the loan documents referenced in Section 9.08 below) and (b) shall not be assigned by operation of law or otherwise. Section 9.06 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio without regard to any applicable principles of conflicts of law. Section 9.07 SPECIFIC PERFORMANCE. The parties hereto agree that if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise 29 breached, irreparable damage would occur, no adequate remedy at law would exist and damages would be difficult to determine, and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or equity. Section 9.08 EXPENSES. Whether or not the Merger is consummated, all costs and expenses incurred by the parties in connection with this Agreement and the transactions contemplated hereby shall be shared by each of the parties in proportion to the number of Surviving Corporation Shares which are or would be owned by its shareholders immediately after the Effective Time. By separate loan documents, the parties have agreed upon the manner and terms of advances to be made by the Company for such expenses and certain other expenses, and upon the manner and terms of repayment of such advances in the event of the termination of this Agreement. Section 9.09 PUBLICITY. Except as otherwise required by law or the rules of any national securities exchange, for so long as this Agreement is in effect, no party shall issue or cause the publication of any press release or other public announcement with respect to the transactions contemplated by this Agreement without prior approval of the other parties, which approval shall not be unreasonably withheld. Section 9.10 PARTIES IN INTEREST. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other person or persons any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement, except pursuant to Section 6.09. [The remainder of this page is intentionally left blank] 30 IN WITNESS WHEREOF, the Company and each of the Predecessor Companies have caused this Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. PAPNET OF OHIO, INC. By: /s/ David J. Richards --------------------------------------- David J. Richards, President CYTOLOGY INDIANA, INC. By: /s/ S. Trevor Ferger --------------------------------------- S. Trevor Ferger, President INDIANA CYTOLOGY REVIEW COMPANY By: /s/ Cecil J. Petitti --------------------------------------- Cecil J. Petitti, President ER GROUP, INC. By: /s/ Thomas J. Kelley --------------------------------------- Thomas J. Kelley, President CAROLINA CYTOLOGY, INC. By: /s/ Rodney M. Kinsey --------------------------------------- Rodney M. Kinsey, President 31 CCWP PARTNERS, INC. By: /s/ Rodney M. Kinsey --------------------------------------- Rodney M. Kinsey, President 32 EXHIBIT 2.03(a) CERTIFICATE OF AMENDED AND RESTATED ARTICLES OF INCORPORATION OF PAPNET OF OHIO, INC. (adopted ________, 1996) David J. Richards, President, and John P. Kennedy, Assistant Secretary, of Papnet of Ohio, Inc. (the "Corporation"), with its principal offices located at Dublin, Franklin County, Ohio, do hereby certify that at a duly called meeting of all shareholders of the Corporation, such shareholders approved by the affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the shares entitled to vote thereon, the below resolution adopting the below Amended and Restated Articles of Incorporation, pursuant to Section 1701.72 of the Ohio Revised Code: RESOLVED, that the Amended and Restated Articles of Incorporation of the Corporation set forth below are hereby adopted as the amended and restated articles of incorporation of the Corporation: AMENDED AND RESTATED ARTICLES OF INCORPORATION FIRST: The name of said Corporation shall be NetMed, Inc. SECOND: The place in Ohio where its principal office is to be located is the City of Dublin, Franklin County, Ohio. THIRD: The purposes for which it is formed are to engage in any business or activity for which corporations may be formed under Sections 1701.01 through 1701.99, inclusive, of the Ohio Revised Code, as now enacted and as the same may hereafter be amended from time to time. FOURTH: A. AUTHORIZED SHARES. The total number of shares of all classes of stock which the Corporation shall have the authority to issue is Fifteen Million Five Hundred Thousand (15,500,000) consisting of: 1. Fifteen Million (15,000,000) shares of Common Stock, without par value (the "Common Stock"); 2. Two Hundred Fifty Thousand (250,000) shares of Voting Preferred Stock, without par value (the "Voting Preferred Stock"); and 3. Two Hundred Fifty Thousand (250,000) shares of Non-Voting Preferred Stock, without par value (the "Non-Voting Preferred Stock"). B. COMMON STOCK The holders of the Common Stock are entitled at all times to one vote for each share of Common Stock and to such dividends as the Board of Directors may in its discretion from time to time legally declare, subject, however, to the voting and dividend rights, if any, of the holders of the Voting Preferred Stock and the Non-Voting Preferred Stock. In the event of any liquidation, dissolution or winding up of the Corporation, the remaining assets of the Corporation after the payment of all debts and necessary expenses shall be distributed among the holders of the Common Stock pro rata in accordance with their respective holdings, subject, however, to the rights of the holders of the Voting Preferred Stock and the Non-Voting Preferred Stock then outstanding. The Common Stock is subject to all of the terms and provisions of the Voting Preferred Stock and the Non-Voting Preferred Stock as fixed by the Board of Directors as hereinafter provided. C. VOTING PREFERRED STOCK The Board of Directors is hereby expressly authorized to adopt amendments to the Articles of Incorporation to provide for the issuance of one or more series of Voting Preferred Stock, and to establish from time to time the number of shares to be included in each such series, to fix the designation, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions -2- thereof, including without limitation the following, and the shares of each series may vary from the shares of any other series in the following respects: (a) the division of such shares into series and the designation and authorized number of shares of each series; (b) the annual dividend rate on the shares; (c) the dates of payment of dividends, whether the dividends shall be cumulative and, if cumulative, the dates from which dividends shall accumulate; (d) the redemption price or prices for the particular series, if redeemable, and the terms and conditions of such redemption; (e) sinking fund requirements, if any; (f) the preference, if any, of the shares of such series in the event of any voluntary or involuntary liquidation, dissolution, or winding up of the affairs of the Corporation; (g) the right, if any, of the shares of such series to be converted into shares of any other series or class and the terms and conditions of such conversion; and (h) any other relative rights, preferences, and limitations of that series. The holders of Voting Preferred Stock shall be entitled at all times to one vote for each share of Voting Preferred Stock, voting as a class. D. NON-VOTING PREFERRED STOCK The Board of Directors is hereby expressly authorized to adopt amendments to the Articles of Incorporation to provide for the issuance of one or more series of Non-Voting Preferred Stock, and to establish from time to time the number of shares to be included in each such series, to fix the designation, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof, including without limitation the following, and the shares of each series may vary from the shares of any other series in the following respects: (a) the division of such shares into series and the designation and authorized number of shares of each series; -3- (b) the annual dividend rate on the shares; (c) the dates of payment of dividends, whether the dividends shall be cumulative and, if cumulative, the dates from which dividends shall accumulate; (d) the redemption price or prices for the particular series, if redeemable, and the terms and conditions of such redemption; (e) sinking fund requirements, if any; (f) the preference, if any, of the shares of such series in the event of any voluntary or involuntary liquidation, dissolution, or winding up of the affairs of the Corporation; (g) the right, if any, of the shares of such series to be converted into shares of any other series or class and the terms and conditions of such conversion; and (h) any other relative rights, preferences, and limitations of that series. Except as otherwise required by law, no holders of Non-Voting Preferred Stock shall be entitled to vote on any matter submitted to the shareholders of the Corporation. FIFTH: The Corporation, through its Board of Directors, shall have the right and power to repurchase any of its outstanding shares at such times, for such considerations and upon such terms and conditions as may be agreed upon between the Corporation and the selling shareholder or shareholders. SIXTH: No holders of shares of the Corporation shall have any pre- emptive right to subscribe for or to purchase any shares of the Corporation of any class, whether now or hereafter authorized. SEVENTH: The affirmative vote of the holders of the shares entitling them to exercise two-thirds of the voting power of the Corporation shall be required for the approval or authorization of any (i) merger or consolidation or (ii) sale, lease, exchange or other disposition of all or substantially all of the assets of the Corporation to or with any other corporation, person or other entity; provided, however, that such two-thirds voting requirement shall not be applicable if the Board of Directors of the Corporation shall have approved such a transaction described in clause (i) or (ii) by resolutions adopted by two-thirds of the members of the Board of Directors. Except as otherwise expressly provided in this Article Seventh, or elsewhere in these Articles, or in the Regulations of the Corporation, and notwithstanding any provision of the Ohio Revised Code now -4- or hereafter in force, requiring for any purpose the vote or consent of the holders of shares entitling them to exercise two-thirds, or any other proportion, of the voting power of the Corporation or of any class or classes of shares thereof, such action may be taken by the vote or consent of the holders of shares entitling them to exercise a majority of the voting power of the Corporation or of such class or classes of shares thereof. EIGHTH: The Board of Directors shall base the response of the Corporation to any "Acquisition Proposal" on the Board of Directors' evaluation of what is in the best interest of the Corporation. In evaluating what is in the best interest of the Corporation, the Board of Directors shall consider all relevant factors including, without limitation: (1) The best interest of the shareholders which, for this purpose, requires the Board of Directors to consider, among other factors, not only the consideration offered in the Acquisition Proposal in relation to the then current market price of the Corporation's shares, but also in relation to the current value of the Corporation in a freely negotiated transaction and in relation to the Board of Directors' then estimate of the future value of the Corporation as an independent entity or as the subject of a future Acquisition Proposal; and (2) Such other factors as the Board of Directors determines to be relevant, including, among other factors, the long-term and short-term interests of the Corporation and its subsidiaries and their businesses and properties and the social, legal, and economic effects upon the employees, suppliers, customers, creditors, and other affected persons, firms, and corporations and on the communities and geographical areas in which the Corporation and its subsidiaries operate or are located. "Acquisition Proposal" means any proposal for the consolidation or merger of the Corporation with or into another corporation, any share exchange involving the Corporation's outstanding capital stock, any liquidation or dissolution of the Corporation, any transfer of all or a material portion of the assets of the Corporation, and any tender offer or exchange offer for any of the Corporation's outstanding capital stock. NINTH: The Corporation shall indemnify any director, officer, incorporator or any former director or officer of the Corporation and any person who is or has served at the request of the Corporation as a director, officer or trustee of another corporation, partnership, joint venture, trust or other enterprise (and his or her heirs, executors and administrators) against expenses, including attorney fees, judgments, fines and amounts paid in settlement, actually and reasonably incurred by him or her by reason of the fact that he or she is or was such director, officer, incorporator or trustee in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative, to the full extent and according to the procedures and requirements set forth in the Ohio General Corporation Law as the same may be in effect from time to time. The indemnification provided herein shall not be deemed to restrict the right of the Corporation to (i) indemnify employees, agents and others as permitted by law, (ii) purchase and maintain insurance or provide similar protection on behalf of the directors, officers or -5- such other persons against liabilities asserted against them or expenses incurred by them arising out of their service to the Corporation as contemplated herein, and (iii) enter into agreements with such directors, officers, incorporators, employees, agents or others indemnifying them against any and all liabilities asserted against them or incurred by them arising out of their service to the Corporation as contemplated herein. TENTH: No shareholder shall have the right to vote cumulatively in the election of directors pursuant to and in accordance with Section 1701.69(B)(10) of the Ohio Revised Code. ELEVENTH: These Articles may be amended by the affirmative vote of the holders of shares entitling them to exercise a majority of the voting power of the Corporation on the proposal; provided, however, that the provisions set forth in Articles Eighth, Ninth, and Tenth, and this Article Eleventh, may not be altered, repealed or amended in any respect, and any new provisions inconsistent therewith may not be adopted, unless such action is approved by the affirmative vote of the holders of at least eighty percent (80%) of the outstanding shares of capital stock of the Corporation present in person or represented by proxy and entitled to vote on such matter at a meeting of shareholders called for that purpose, except that if the Board of Directors, by an affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the entire Board of Directors, recommends approval of such amendment to these Articles to the shareholders, such approval may be effected by the affirmative vote of the holders of at least a majority of the Corporation's outstanding shares of capital stock of the Corporation present in person or represented by proxy and entitled to vote on such matter at a meeting of shareholders called for that purpose. TWELFTH: These Amended and Restated Articles of Incorporation take the place of and supersede the existing Articles of Incorporation of the Corporation. -6- IN WITNESS WHEREOF, David J. Richards, President, and John P. Kennedy, Assistant Secretary, acting for and on behalf of the Corporation, have hereunto subscribed their names this ____ day of ______, 1996. PAPNET OF OHIO, INC. By: __________________________________ David J. Richards, President By: __________________________________ John P. Kennedy, Assistant Secretary -7- Exhibit 2.03(b) AMENDED AND RESTATED REGULATIONS OF NETMED, INC. (the "Corporation") (adopted on ______, 1996) ARTICLE I Meetings of Shareholders Section 1.01. ANNUAL MEETINGS. The annual meeting of shareholders of the Corporation shall be held at such time and on such business day as the Board of Directors may determine each year. The annual meeting shall be held at the principal office of the Corporation or at such other place within or without the State of Ohio as the Board of Directors may determine. The directors shall be elected thereat and such other business transacted as may properly be brought before the meeting. Section 1.02. SPECIAL MEETINGS. Special meetings of the shareholders of the Corporation may be called at any time by the Chairman of the Board, President or Chief Executive Officer or, in cases of such officers' absence from the United States, death or disability, any Vice President who is authorized in such circumstances to exercise the authority of the President, or by the Board of Directors by action at a meeting or by a majority of the directors acting without a meeting, or by shareholders holding fifty percent (50%) or more of the voting power of the then-outstanding shares entitled to vote in an election of directors. Such meetings may be held within or without the State of Ohio at such time and place as may be specified in the notice thereof. Section 1.03. NOTICE OF MEETINGS. Written notice of every annual or special meeting of the shareholders of the Corporation stating the time, place and purposes thereof shall be given to each shareholder entitled to notice as provided by law, not less than seven (7) nor more than ninety (90) days before the date of the meeting. Such notice may be given by or at the direction of the Chairman of the Board or Secretary of the Corporation, or such other officer as is designated by the Board of Directors, by personal delivery or by mail addressed to the shareholder at his last address as it appears on the records of the Corporation. Any shareholder may waive in writing notice of any meeting, either before or after the holding of such meeting, and, by attending any meeting without protesting the lack of proper notice prior to or at the commencement of the meeting, shall be deemed to have waived notice thereof. Section 1.04. PERSONS BECOMING ENTITLED BY OPERATION OF LAW OR TRANSFER. Every person who, by operation of law, transfer or any other means whatsoever, shall become entitled to any shares, shall be bound by every notice in respect of such shares which previously to the entering of his name and address on the records of the Corporation shall have been duly given to the persons from whom he derives his title to such shares. Section 1.05. QUORUM AND ADJOURNMENTS. Except as may be otherwise required by law or by the Articles of Incorporation or these Regulations, the holders of a majority of the shares entitled to vote at a meeting, present in person or by proxy, shall constitute a quorum; provided that any meeting duly called, whether a quorum is present or otherwise, may, by vote of the holders of the majority of the shares represented and entitled to vote thereat, adjourn from time to time, in which case no further notice of any such adjourned meeting need be given. Section 1.06. PRESIDING OFFICER. The Chairman of the Board, or such other member of the Board or officer as is designated by the Board of Directors, shall preside over meetings of the shareholders. The Secretary of the Corporation shall act as Secretary of the shareholders' meeting and shall record all of the proceedings of such shareholders' meeting provided that, in the absence of such officer, the presiding officer shall appoint another officer of the Corporation to act as Secretary of the meeting. Section 1.07. SHAREHOLDER PROPOSALS. At an annual or special meeting of shareholders, only such business shall be conducted, and only such proposals shall be acted upon, as shall have been properly brought before such meeting. To be properly brought before a meeting of shareholders, business must be (i) in the case of a special meeting, specified in the notice of the special meeting (or any supplement thereto), (ii) properly brought before the meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the meeting by a shareholder. For business to be properly brought before a meeting of shareholders by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than thirty (30) days nor more than sixty (60) days prior to the meeting of shareholders; provided, however, that, if less than forty (40) days' notice or prior public disclosure of the date of the meeting is given or made to the shareholders, notice by the shareholder to be timely must be so delivered or received not later than the close of business on the tenth day following the earlier of (i) the day on which such notice of the date of the meeting was mailed, or (ii) the day on which such public disclosure was made. A shareholder's notice to the Secretary shall set forth, as to each matter the shareholder proposes to bring before a meeting of shareholders, (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (ii) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business and any shareholders known by such shareholder to be supporting such proposal, (iii) the class and number of shares of the Corporation which are beneficially owned by the shareholder on the date of such shareholder's notice and by any other shareholders known by -2- such shareholder to be supporting such proposal on the date of such shareholder's notice, and (iv) any material interest of the shareholder in such proposal. Notwithstanding anything in these Regulations to the contrary, no business shall be conducted at a meeting of shareholders except in accordance with the procedures set forth in this Section 1.07. The presiding officer of the meeting of shareholders shall, if the facts warrant, determine and declare to the meeting that the business was not properly brought before the meeting in accordance with the procedures prescribed by these Regulations, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Section 1.08. CONDUCT OF VOTING. At all meetings of shareholders, unless the voting is conducted by inspectors, the proxies and ballots shall be received, and all questions relating to the qualification of voters, the validity of proxies and the acceptance or rejection of votes shall be decided, by the presiding officer of the meeting. If demanded by shareholders, present in person or by proxy, entitled to cast ten percent (10%) in number of votes entitled to be cast, or if ordered by the presiding officer of the meeting, the vote upon any election or question shall be taken by ballot and, upon like demand or order, the voting shall be conducted by two inspectors appointed by the presiding officer, in which event the proxies and ballots shall be received, and all questions relating to the qualification of voters, the validity of proxies and the acceptance or rejection of votes shall be decided, by such inspectors. Unless so demanded or ordered, no vote need be by ballot and voting need not be conducted by inspectors. No candidate for election as a director at a meeting shall serve as an inspector. Section 1.09. ACTION WITHOUT A MEETING. Anything contained in the Regulations to the contrary notwithstanding, any action which may be authorized or taken at a meeting of the shareholders may be authorized or taken without a meeting with the affirmative vote, or approval, and in a writing or writings signed by, all of the shareholders who would be entitled to notice of a meeting of the shareholders held for such purpose, which writings shall be filed with or entered upon the records of the Corporation. -3- ARTICLE II Directors Section 2.01. AUTHORITY. The business and affairs of the Corporation shall be managed by and under the direction of the Board of Directors. The Board of Directors may exercise all such authority and powers of the Corporation and do all such lawful acts and things as are not by statute or these Regulations directed or required to be exercised or done by the shareholders. Section 2.02. NUMBER. The number of directors may be determined by the vote of the holders of a majority of the voting power of the shares represented at any annual meeting or special meeting called for the purpose of electing directors or by resolutions adopted at a meeting of the Board of Directors by affirmative vote of a majority of the directors then in office, provided that: (i) the number of directors shall in no event be fewer than six (6) nor more than fifteen (15); (ii) no decrease in the number of directors shall have the effect of shortening the terms of any incumbent director and the class of directors to which he is elected; and (iii) no action shall be taken (whether through amendment of these Regulations or otherwise) to increase the number of directors provided in these Regulations from time to time unless at least sixty-six and two-thirds percent (66-2/3%) of the entire Board of Directors shall concur in such action. Section 2.03. CLASSES AND TERMS OF DIRECTORS. The directors shall be classified in respect of the time for which they severally hold office by dividing them into three (3) classes, each class consisting of one-third of the whole number of the board of directors with any number not evenly divisible by three (3) assigned to such class as the board of directors may direct. At the first election at which directors are divided into three (3) classes, the directors of the first class shall be elected for a term of one (1) year, the directors of the second class shall be elected for a term of two (2) years, and the directors of the third class shall be elected for a term of three (3) years. If at any time the full authorized board of directors should consist of less than nine (9) persons, the directors shall be classified into two (2) classes, each class consisting of one-half of the whole number of the board of directors, with a number not evenly divisible by two (2) assigned to such class as the board of directors may direct. At the first election at which directors are divided into two (2) classes, the directors of the first class shall be elected for a term of one (1) year and the directors of the second class shall be elected for a term of two (2) years. At each annual election thereafter at which directors are elected by class, the successors to the directors of the class whose terms expire in that year shall be elected to hold office for a term of years equal to the number of classes that there are to be, so that the term of office of one class of directors expires in each year. Each director shall serve until his successor shall be elected, or until his earlier resignation, removal from office or death. -4- In the event a change in the authorized number of directors causes a disparity to exist in the number of persons in the classes of directors, the board of directors shall designate the classes to which directors shall be elected so as to equalize the classes as nearly as feasible. Section 2.04. NOMINATION. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election as directors of the Corporation may be made at a meeting of shareholders by or at the direction of the directors, by any nominating committee or person appointed by the directors, or by any shareholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 2.04. Such nominations, other than those made by or at the direction of the directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than thirty (30) days nor more than sixty (60) days prior to the meeting; provided, however, that ,in the event that less than forty (40) days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the tenth day following the earlier of the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such shareholder's notice shall set forth (i) as to each person who is not an incumbent director whom the shareholder proposes to nominate for election as a director, (a) the name, age, business address and residence address of such person; (b) the principal occupation or employment of such person; (c) the class and number of shares of the Corporation which are beneficially owned by such person; and (d) any other information relating to such person that is required to be disclosed in solicitations for proxies for election of directors pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, or any successor provision; and (ii) as to the shareholder giving the notice, (a) the name and record address of such shareholder and (b) the class and number of shares of the Corporation which are beneficially owned by such shareholder. Such notice shall be accompanied by the written consent of each proposed nominee to serve as a director of the Corporation, if elected. The Corporation may require any proposed nominee to furnish such other information as may be reasonably required by the Corporation to determine the qualifications of such proposed nominee to serve as a director of the Corporation. The presiding officer of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the provisions of this Section 2.04; and if he should so determine, the defective nomination shall be disregarded. Section 2.05. REMOVAL OF DIRECTORS. Notwithstanding any other provision of the Articles of Incorporation or these Regulations (and notwithstanding the fact that some lesser percentage may be specified by the General Corporation Law of the State of Ohio, the Articles of Incorporation or these Regulations), any director or the entire Board of Directors of the Corporation may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least eighty percent (80%) of the outstanding shares of capital stock of the Corporation present in person -5- or represented by proxy and entitled to vote on the election of directors at a meeting of shareholders called for that purpose, except that if the Board of Directors, by an affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the entire Board of Directors, recommends removal of a director to the shareholders, such removal may be effected by the affirmative vote of the holders of at least a majority of the outstanding shares of capital stock of the Corporation present in person or represented by proxy and entitled to vote on the election of directors at a meeting of shareholders called for that purpose. Section 2.06. VACANCIES AND NEWLY-CREATED DIRECTORSHIPS. Vacancies and newly-created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office for a term expiring at the annual meeting of shareholders at which the term of the class to which they have been elected expires and until their successors are duly elected and qualified. If there are no directors in office, then an election of directors may be held in the manner provided by the General Corporation Law of the State of Ohio. Section 2.07. QUORUM AND ADJOURNMENT. A majority of the directors in office at the time shall constitute a quorum, provided that any meeting duly called, whether a quorum is present or otherwise, may, by vote of a majority of the directors present, be adjourned. At any meeting at which a quorum is present, all questions and business shall be determined by the affirmative vote of not less than a majority of the directors present, except as otherwise provided in the Articles of Incorporation or these Regulations or as otherwise authorized by law. Any action required or permitted to be taken at a meeting of the Board of Directors may be taken without a meeting if a unanimous written consent which sets forth the action is signed by each member of the Board of Directors and filed with the minutes of the proceedings of the Board of Directors. Section 2.08. REGULAR MEETINGS. After each annual meeting of shareholders at which directors shall have been elected, the Board of Directors shall meet as soon as practicable for the purpose of organization and the transaction of other business. Such first regular meeting shall be held at any place as may be designated by the Chairman of the Board or by action of the Board of Directors, or in default of such designation at the place of the holding of the immediately preceding meeting of shareholders. Any other regular meeting of the Board of Directors shall be held on such date and at any place as may be designated from time to time by the Chairman of the Board or by action of the Board of Directors. No notice of such regular meetings shall be necessary if held as hereinabove provided. Section 2.09. SPECIAL MEETINGS. Special meetings of the directors may be held at any time within or without the State of Ohio upon call by the Chairman of the Board, President, or Chief Executive Officer or, in the case of such officers' absence from the United States, death or disability, such other officer who is authorized in such circumstances to exercise the authority of the President, or by action of the Board of Directors or any three (3) members thereof. -6- Section 2.10. NOTICE OF MEETING. Except as provided in Section 2.09, the Secretary shall give or cause to be given to each director notice of each regular and special meeting of the Board of Directors. The notice shall state the time and place of the meeting. Notice is given to a director when it is delivered personally to him, left at his residence or usual place of business, or sent by telegraph or telephone or via overnight delivery, at least three (3) days before the time of the meeting or, in the alternative, by mail to his address as it shall appear on the records of the Corporation, at least five (5) days before the time of the meeting; provided, however, that notice of a special meeting which is called by the Chairman of the Board, President or Chief Executive Officer is given to a director when it is delivered personally to him or sent by telegraph or telephone at least twenty-four (24) hours before the time of the meeting. Unless these Regulations or a resolution of the Board of Directors provides otherwise, the notice need not state the business to be transacted at or the purposes of any regular or special meeting of the Board of Directors. No notice of any meeting of the Board of Directors need be given to any director who attends, or to any director who, in a writing executed and filed with the records of the meeting either before or after the holding thereof, waives such notice. Any regular or special meeting of the Board of Directors may be adjourned from time to time and be reconvened at the same or some other place and no notice need be given of any such adjourned meeting. Section 2.11. MEETING BY CONFERENCE TELEPHONE. Members of the Board of Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means constitutes presence in person at a meeting. Section 2.12. COMPENSATION. The Board of Directors shall have the authority to fix the compensation of the directors. The directors may be paid their expenses, if any, of attendance at each regular and special meeting of the Board of Directors or committees thereof. In addition, by resolution of the Board of Directors, a stated annual retainer and/or a fixed sum for attendance at each regular or special meeting of the Board of Directors or committees thereof, and other compensation for their services as such, may be paid to directors. A director who serves the Corporation in any other capacity also may receive compensation for such other services if approved by the Board of Directors. ARTICLE III Committees Section 3.01. COMMITTEES. The Board of Directors may appoint from among its members an executive committee and other committees composed of three (3) or more directors and delegate to these committees any of the powers of the Board of Directors, except the power to declare dividends or other distributions on stock, elect directors or members of any committee, recommend to the shareholders any action which requires shareholder approval, or approve any merger or share exchange. -7- Section 3.02. COMMITTEE PROCEDURE. The Board of Directors shall have the power to prescribe the manner in which proceedings of each committee shall be held. Unless the Board of Directors shall otherwise provide, the actions of each committee shall be governed by the following rules of procedure. A majority of the members of a committee shall constitute a quorum for the transaction of business and the act of a majority of those present at a meeting at which a quorum is present shall be the act of the committee. The members of a committee present at any meeting, whether or not they constitute a quorum, may appoint a director to act in the place of an absent member. Any action required or permitted to be taken at a meeting of a committee may be taken without a meeting, if a unanimous written consent which sets forth the action is signed by each member of the committee and filed with the minutes of the committee. The members of a committee may conduct any meeting thereof by conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means constitutes presence in person at a meeting. In the absence of any prescription by the Board of Directors or any applicable provision of these Regulations, each committee may prescribe the manner in which its proceedings shall be conducted. Section 3.03. DELEGATION. The Board of Directors may delegate to officers, employees or agents the performance of duties not specifically required by law or these Regulations to be performed by the Board of Directors. ARTICLE IV Officers Section 4.01. ELECTION. The officers of the Corporation shall include a Chairman of the Board, a President, a Chief Executive Officer (who shall also be either the Chairman of the Board or President of the Corporation), a Secretary, a Treasurer, and such number of Vice Presidents (which may include one or more Executive Vice Presidents and/or Senior Vice Presidents), Assistant Secretaries, Assistant Treasurers, and other officers as are, in the judgment of the Board, required to transact the business of the Corporation. All officers of the Corporation shall be elected and the compensation of all such officers may be fixed by the Board. Any two or more offices may be held by the same person. Any officers may, but no officer except the Chairman of the Board must, be chosen from among the Board of Directors. The officers of the Corporation shall have the authority, perform the duties and exercise the powers in the management of the Corporation usually incident to the offices held by them respectively, and/or such other authority, duties and powers as may be assigned to them from time to time by the Board of Directors or the Chief Executive Officer. Section 4.02. TERM. The officers of the Corporation shall be elected annually at the organizational meeting of the Board of Directors, or otherwise as determined by the Board of Directors, and shall hold office at the discretion of the Board of Directors. Any officer may be removed at any time, with or without cause, by the Board of Directors. A vacancy in any office, however created, may be filled by the Board of Directors at any regular or special meeting. -8- Section 4.03. CHAIRMAN OF THE BOARD. The Chairman of the Board, who shall be a member of the Board of Directors, shall be such officer who from time to time is so designated by the Board of Directors. The Chairman of the Board shall preside at all meetings of the shareholders and the Board of Directors and shall perform all duties incident to the office. He may sign and execute, in the name of the Corporation, all authorized deeds, mortgages, bonds, contracts, licenses and other instruments of every description. The Chairman of the Board shall have general and active management of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. Section 4.04. PRESIDENT. The President shall have the authority, perform the duties and exercise the powers usually incident to the office of President and/or assigned to him from time to time by the Board of Directors, the Chairman of the Board or the Chief Executive Officer. In the absence of the Chairman of the Board and the Chief Executive Officer, the President shall preside at all meetings of the shareholders and the Board of Directors. He may sign and execute, in the name of the Corporation, all authorized deeds, mortgages, bonds, contracts, licenses and other instruments of every description. Section 4.05. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer, who shall be either the Chairman or President of the Corporation, shall have full right, authority and power to control the personnel of the Corporation, and, except to the extent that the duties of an elected officer are prescribed or otherwise limited by the Board of Directors, by law or by these Regulations, to prescribe the duties of all officers of the Corporation, with such limitations thereon as he deems proper. He may sign and execute, in the name of the Corporation, all authorized deeds, mortgages, bonds, contracts, licenses and other instruments of every description. In the absence of the Chairman of the Board, the Chief Executive Officer shall preside at all meetings of the shareholders and the Board of Directors. The Chief Executive Officer shall perform all duties incident to the office of Chief Executive Officer and such other duties as are assigned to him by the Board of Directors. Section 4.06. VICE PRESIDENTS. The Vice President or Vice Presidents, at the request of the Chairman of the Board, President or Chief Executive Officer, or in the President's absence or during his inability to act, shall perform the duties and exercise the functions of the President, and when so acting shall have the powers of the President. If there be more than one Vice President, the Board of Directors may determine which one or more of the Vice Presidents shall perform any of such duties or exercise any of such functions, or if such determination is not made by the Board of Directors, Chairman of the Board, President or Chief Executive Officer may make such determination. The Vice President or Vice Presidents shall have such other powers and perform such other duties, and have such additional descriptive designations in their titles, if any, as are from time to time assigned to them by the Board of Directors, Chairman of the Board, President or Chief Executive Officer. Section 4.07. SECRETARY. The Secretary shall have the authority, perform the duties and exercise the powers usually incident to the office of the Secretary and/or assigned to him from time to time by the Board of Directors, the Chairman of the Board or the Chief Executive Officer. The -9- Secretary or such other officer of the Corporation as is designated by the Chairman of the Board or the Chief Executive Officer shall record the proceedings of the meetings of the shareholders and of the directors in a minute book maintained for such purpose. The Secretary shall see that all notices are duly given in accordance with the provisions of these Regulations or as required by law; and he shall be the custodian of the records of the Corporation and may witness any document on behalf of the Corporation, the execution of which is duly authorized. The Secretary shall see that the corporate seal is affixed to any document where required or desired. Section 4.08. TREASURER. The Treasurer shall have the authority, perform the duties and exercise the powers usually incident to the office of the Treasurer and/or assigned to him from time to time by the Board of Directors, the Chairman of the Board or the Chief Executive Officer. The Treasurer shall have charge of and be responsible for all funds, securities, receipts and disbursements of the Corporation, and shall deposit, or cause to be deposited, in the name of the Corporation, all monies or other valuable effects in such banks, trust companies or other depositories as shall, from time to time, be selected by the Board of Directors, Chairman of the Board, Chief Executive Officer or President. The Treasurer shall render to the Board of Directors, Chairman of the Board, President or Chief Executive Officer, whenever requested, an accounting of the financial condition of the Corporation. ARTICLE V Capital Stock Section 5.01. STOCK CERTIFICATES. The shares of the Corporation shall be represented by certificates signed by the Chairman of the Board, the President or a Vice President and by a second officer who may be the Secretary, an Assistant Secretary, the Treasurer, or an Assistant Treasurer, certifying the number of shares evidenced thereby. Such certificates may be sealed with the seal of the Corporation or a facsimile thereof. The signatures of the officers of the Corporation upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent or by a registrar other than the Corporation itself or its employee. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of issue. Each certificate shall set forth such information as is required by law. Section 5.02. SHARE LEDGER. The Corporation shall maintain a share ledger which contains the name and address of each shareholder and the number of shares of stock of each class which the shareholder holds. The share ledger may be in written form or in any other form which can be converted within a reasonable time into written form for visual inspection. The original or a duplicate of the share ledger shall be kept at the offices of a transfer agent for the particular class of stock, or, if none, at the executive offices of the Corporation. -10- Section 5.03. TRANSFERS. The shares of the Corporation shall be transferable in the manner prescribed by law. Transfers of shares shall be made on the share transfer books of the Corporation only by the person named in the certificate or by attorney lawfully constituted in writing and upon the surrender of the certificate therefor, which shall be canceled when the new certificate shall be issued. The Board of Directors shall have the power and authority to make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates of stock and may appoint transfer agents and registrars thereof. The duties of transfer agent and registrar may be combined. Section 5.04. NEW CERTIFICATES. The Corporation may issue a new certificate representing a share or shares of the Corporation in the place of any certificate theretofore issued by it alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the Corporation a bond sufficient to indemnify the Corporation and any transfer agent and/or registrar against any claim that may be made against it or them on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. A new certificate may be issued without requiring any bond when it is proper to do so. Section 5.05. UNCERTIFICATED SHARES. Anything contained in this Article V to the contrary notwithstanding, the directors may provide by resolution that some or all of any or all classes and series of shares of the Corporation shall be uncertificated shares, provided that such resolution shall not apply to (i) shares of the Corporation represented by a certificate until such certificate is surrendered to the Corporation in accordance with applicable provisions of Ohio law or (ii) any certificated security of the Corporation issued in exchange for an uncertificated security in accordance with applicable provisions of Ohio law. The rights and obligations of the holders of uncertificated shares and the rights and obligations of the holders of certificates representing shares of the same class and series shall be identical, except as otherwise expressly provided by law. ARTICLE VI Finances Section 6.01. CHECKS, DRAFTS. ETC. All checks, drafts and orders for the payment of money, notes and other evidences of indebtedness, issued in the name of the Corporation, shall be signed by such agents as may be designated from time to time by the Board of Directors or authorized officers of the Corporation. Section 6.02. ANNUAL STATEMENT OF AFFAIRS. The Chairman of the Board, Chief Executive Officer, President, a Vice President or Treasurer shall prepare or cause to be prepared annually a full and correct statement of the affairs of the Corporation, including a balance sheet and a financial statement of operations for the preceding fiscal year. -11- Section 6.03. FISCAL YEAR. The fiscal year of the Corporation shall be a calendar year end, with such fiscal year ending each year on December 31, unless otherwise provided by the Board of Directors. Section 6.04. DIVIDENDS. If declared by the Board of Directors at any meeting thereof, the Corporation may pay dividends on its shares in cash, property, or shares of the capital stock of the Corporation, unless such dividend is contrary to law or to a restriction contained in the Articles of Incorporation. ARTICLE VII Miscellaneous Section 7.01. BOOKS AND RECORDS. The Corporation shall keep correct and complete books and records of its accounts and transactions and minutes of the proceedings of its shareholders and Board of Directors and of any executive or other committee when exercising any of the powers of the Board of Directors. The books and records of the Corporation may be in written form or in any other form which can be converted within a reasonable time into written form for visual inspection. Minutes shall be recorded in written form but may be maintained in the form of a reproduction. The original or a certified copy of these Regulations shall be kept at the principal office of the Corporation. Section 7.02. CORPORATE SEAL. The Board of Directors shall provide a suitable seal, bearing the name of the Corporation, which shall be in the charge of the Secretary. The Board of Directors may authorize one or more duplicate seals and provide for the custody thereof. If the Corporation is required to place its corporate seal to a document, it is sufficient to meet the requirement of any law, rule, or regulation relating to a corporate seal to place the word "Seal" adjacent to the signature of the person authorized to sign the document on behalf of the Corporation. Section 7.03. VOTING UPON SHARES IN OTHER CORPORATIONS. Stock of other corporations which is registered in the name of, or beneficially owned by, the Corporation may be voted by the Chairman of the Board, the President, any Vice President, or a proxy appointed by any of them. The Board of Directors, however, may by resolution appoint some other person to vote such shares, in which case such person shall be entitled to vote such shares upon the production of a certified copy of such resolution. Section 7.04. EXECUTION OF DOCUMENTS. A person who holds more than one office in the Corporation may not act in more than one capacity to execute, acknowledge, or verify an instrument required by law to be executed, acknowledged, or verified by more than one officer. -12- Section 7.05. PROVISIONS IN ARTICLES OF INCORPORATION. These Regulations are at all times subject to the provisions of the Articles of Incorporation of the Corporation as the same may be in effect from time to time. Section 7.06. RECORD DATES. For any lawful purpose, including, without limitation, the determination of the shareholders who are entitled to: (i) receive notice of or to vote at a meeting of shareholders; (ii) receive payment of any dividend or distribution; (iii) receive or exercise rights of purchase of or subscription for, or exchange or conversion of, shares or other securities, subject to contract rights with respect thereto; or (iv) participate in the execution of written consents, waivers, or releases, the directors may fix a record date, which shall not be a date earlier than the date on which the record date is fixed and, in the cases provided for in clauses (i), (ii) and (iii) above, shall not be more than ninety (90) nor fewer than seven (7) days, unless the Articles of Incorporation or these Regulations specify a shorter or a longer period for such purpose, preceding the date of the meeting of the shareholders, or the date fixed for the payment of any dividend or distribution, or the date fixed for the receipt or the exercise of rights, as the case may be. Section 7.07. AMENDMENTS. These Regulations may be altered, changed or amended in any respect or superseded by new Regulations, in whole or in part, by the affirmative vote of the holders of shares entitling them to exercise a majority of the voting power of the Corporation on the proposal; provided, however, that: (i) the provisions set forth in this Section 7.07 (except with respect to clause (ii)) and in Sections 1.02, 1.07, 2.02, 2.03, 2.04, and 2.12 herein may not be repealed or amended in any respect unless such action is approved by the affirmative vote of the holders of shares entitling them to exercise at least sixty-six and two-thirds percent (66-2/3%) of the voting power of the Corporation on the proposal; and (ii) the provisions set forth in this Section 7.07 (with respect to this clause (ii) only) and in Section 2.05 may not be repealed or amended in any respect unless such action is approved by the affirmative vote of the holders of shares entitling them to exercise at least eighty percent (80%) of the voting power of the Corporation on the proposal. -13-
SCHEDULE 2.05(a) CONVERSION RATIOS Predecessor Number of Surviving Corporation Company Shares for Each Predecessor Company Share - ------- ----------------------------------------- Cytology Indiana, Inc. 1,121.6652 Indiana Cytology Review Company 4,491.7064 ER Group, Inc. 3,237.2643 CCWP Partners, Inc. 37.3971 Carolina Cytology, Inc. 1,487.6186
SCHEDULE 2.05(c) LOCKUP SHARES TABLE
Shares Shares Shares Shares Shares eligible eligible eligible eligible eligible for sale for sale for sale for sale for sale from 0-90 from 91-180 from 181- from 271- from 366 days* days* 270 days* 365 days* +* --------- ----------- --------- --------- --------- CIN 16,297 32,595 43,460 43,460 all INC 8,703 17,405 23,206 23,206 all CCI 19,955 39,910 53,214 53,214 all CCWP 5,045 10,090 13,453 13,453 all ERG 25,000 50,000 66,667 66,667 all Total 75,000 150,000 200,000 200,000 Shares
* Measured from Closing Date of Merger SCHEDULE 4.02(a) AUTHORIZED AND ISSUED SHARES AND STOCK RIGHTS OF PREDECESSOR COMPANIES
Shares Issuable Predecessor Issued since Issued and Upon Exercise Company Authorized(1) 3/31/96 Outstanding(1) of Stock Rights - ------- ------------- ------------ -------------- --------------- Cytology Indiana, Inc. 750(2) 0 750 0 Indiana Cytology Review Company 100 0 100 0 ER Group, Inc. 750 0 578 0 CCWP Partners, Inc. 10,000 0 9,150 0 Carolina Cytology, Inc. 1,500 0 905 0
- ----------------------- (1) Common stock. Unless otherwise indicated, all common stock is without par value. (2) $.10 par value SCHEDULE 4.02(b) EQUITY INTERESTS OWNED BY PREDECESSOR COMPANIES; VOTING AGREEMENTS
Voting Trust or Predecessor Name of Type of Nature of Similar Company Entity Entity Ownership Agreements - ------- ------- ------- --------- ---------- Cytology Indiana, Inc. None n/a n/a none Indiana Cytology None n/a n/a none Review Corporation ER Group, Inc. None n/a n/a * CCWP Partners, Inc. Carolina Cytology General General none Warrant Partnership Partnership Partner Carolina Cytology, Inc. Carolina Cytology General General none Licensing Company Partnership Partner
* ER Group, Inc. is a party to an agreement regarding the voting of the shares of one of its shareholders, Lorraine B. Rothrauff, who owns 100 shares. SCHEDULE 4.06 CERTAIN PREDECESSOR COMPANY CHANGES SINCE MARCH 31, 1996
Predecessor Company Nature of Action Date of Action - ------- ---------------- --------------- Cytology Indiana, Inc. None n/a Indiana Cytology None n/a Review Company ER Group, Inc. * 7/1/96 or later CCWP Partners, Inc. None n/a Carolina Cytology, Inc. None n/a
*Proposed and/or actual stock sales by Daniel Lee Thompson SCHEDULE 4.14 PENDING OR THREATENED PREDECESSOR COMPANY INTELLECTUAL PROPERTY CLAIMS
Predecessor Company Nature of Claims - ----------- ---------------- All As licensees for the Papnet Testing System (the "System"), all of the Predecessor Companies are subject to the United States Patent and Trademark Office (the "Office") re-examination of the patents which relate to the System. On May 2, 1995, the Office granted a request to re-examine three of the four patents relating to the System. The Office is relying on a third party's claim that prior patents and printed publications raise substantial new questions of patentability. Office actions dealing with two of the three patents have been received. For one patent, a number of claims were confirmed patentable and other claims were initially rejected. With respect to the other patent, all claims were initially rejected. There has been no action to date on the third patent. There is no certainty as to the ultimate outcome of any re-examination by the Office.
SCHEDULE 5.02(a) AUTHORIZED AND ISSUED SHARES AND STOCK RIGHTS OF COMPANY
Capital Stock Capital Stock Shares Issuable Not Stated in Issued Since Upon Exercise Section 5.02 3/31/96 of Stock Rights - ------------- ------------- --------------- None None *436,620 common shares
*Exercise price range from $0.88 to $11.00 SCHEDULE 5.02(b) EQUITY INTERESTS OWNED BY COMPANY;VOTING AGREEMENTS
Voting Trust or Name of Type of Nature of Similar Entity Entity Ownership Agreements - ------- ------- --------- ---------- Carolina Cytology General General none Warrant Partnership Partnership Partner Carolina Cytology General General none Licensing Company Partnership Partner
SCHEDULE 5.06 CERTAIN COMPANY CHANGES SINCE MARCH 31, 1996
Nature of Action Date of Action - ---------------- -------------- None n/a
SCHEDULE 5.14 PENDING OR THREATENED COMPANY INTELLECTUAL PROPERTY CLAIMS NATURE OF CLAIMS As a licensee for the Papnet Testing System (the "System"), the Company is subject to the United States Patent and Trademark Office (the "Office") re-examination of the patents which relate to the System. On May 2, 1995, the Office granted a request to re-examine three of the four patents relating to the System. The Office is relying on a third party's claim that prior patents and printed publications raise substantial new questions of patentability. Office actions dealing with two of the three patents have been received. For one patent, a number of claims were confirmed patentable and other claims were initially rejected. With respect to the other patent, all claims were initially rejected. There has been no action to date on the third patent. There is no certainty as to the ultimate outcome of any re-examination by the Office. The FDA recently warned the Company that certain promotional materials relating to the PAPNET-Registered Trademark-System appearing on the Company's World Wide Web site failed to comply with certain FDA premarket approval regulations. The FDA cited specific claims made in these materials and advised the Company that it should review these and other promotional materials to ensure compliance with the regulations. While the Company believes that the materials comply in all respects with applicable regulations, it has suspended access to these materials on its Web site pending FDA's evaluation of its detailed response to the warning letter. APPENDIX B SECTION 1701.85 OF THE OHIO GENERAL CORPORATION LAW @ 1701.85 QUALIFICATION AND PROCEDURES FOR DISSENTING SHAREHOLDERS (A)(1) A shareholder of a domestic corporation is entitled to relief as a dissenting shareholder in respect of the proposals described in sections 1701.74, 1701.76, and 1701.84 of the Revised Code, only in compliance with this section. (2) If the proposal must be submitted to the shareholders of the corporation involved, the dissenting shareholder shall be a record holder of the shares of the corporation as to which he seeks relief as of the date fixed for the determination of shareholders entitled to notice of a meeting of the shareholders at which the proposal is to be submitted, and such shares shall not have been voted in favor of the proposal. Not later than ten days after the date on which the vote on the proposal was taken at the meeting of the shareholders, the dissenting shareholder shall deliver to the corporation a written demand for payment to him of the fair cash value of the shares as to which he seeks relief, which demand shall state his address, the number and class of such shares, and the amount claimed by him as the fair cash value of the shares. (3) The dissenting shareholder entitled to relief under division (C) of section 1701.84 of the Revised Code in the case of a merger pursuant to section 1701.80 of the Revised Code and a dissenting shareholder entitled to relief under division (E) of section 1701.84 of the Revised Code in the case of a merger pursuant to section 1701.801 [1701.80.1] of the Revised Code shall be a record holder of the shares of the corporation as to which he seeks relief as of the date on which the agreement of merger was adopted by the directors of that corporation. Within twenty days after he has been sent the notice provided in section 1701.80 or 1701.801 [1701.80.1] of the Revised Code, the dissenting shareholder shall deliver to the corporation a written demand for payment with the same information as that provided for in division (A)(2) of this section. (4) In the case of a merger or consolidation, a demand served on the constituent corporation involved constitutes service on the surviving or the new entity, whether the demand is served before, on, or after the effective date of the merger or consolidation. (5) If the corporation sends to the dissenting shareholder, at the address specified in his demand, a request for the certificates representing the shares as to which he seeks relief, the dissenting shareholder, within fifteen days from the date of the sending of such request, shall deliver to the corporation the certificates requested so that the corporation may forthwith endorse on them a legend to the effect that demand for the fair cash value of such shares has been made. The corporation promptly shall return such endorsed certificates to the dissenting shareholder. A dissenting shareholder's failure to deliver such certificates terminates his rights as a dissenting shareholder, at the option of the corporation, exercised by written notice sent to the dissenting B-1 shareholder within twenty days after the lapse of the fifteen-day period, unless a court for good cause shown otherwise directs. If shares represented by a certificate on which such a legend has been endorsed are transferred, each new certificate issued for them shall bear a similar legend, together with the name of the original dissenting holder of such shares. Upon receiving a demand for payment from a dissenting shareholder who is the record holder of uncertificated securities, the corporation shall make an appropriate notation of the demand for payment in its shareholder records. If uncertificated shares for which payment has been demanded are to be transferred, any new certificate issued for the shares shall bear the legend required for certificated securities as provided in this paragraph. A transferee of the shares so endorsed, or of uncertificated securities where such notation has been made, acquires only such rights in the corporation as the original dissenting holder of such shares had immediately after the service of a demand for payment of the fair cash value of the shares. A request under this paragraph by the corporation is not an admission by the corporation that the shareholder is entitled to relief under this section. (B) Unless the corporation and the dissenting shareholder have come to an agreement on the fair cash value per share of the shares as to which the dissenting shareholder seeks relief, the dissenting shareholder or the corporation, which in case of a merger or consolidation may be the surviving or new entity, within three months after the service of the demand by the dissenting shareholder, may file a complaint in the court of common pleas of the county in which the principal office of the corporation that issued the shares is located or was located when the proposal was adopted by the shareholders of the corporation, or, if the proposal was not required to be submitted to the shareholders, was approved by the directors. Other dissenting shareholders, within that three-month period, may join as plaintiffs or may be joined as defendants in any such proceeding, and any two or more such proceedings may be consolidated. The complaint shall contain a brief statement of the facts, including the vote and the facts entitling the dissenting shareholder to the relief demanded. No answer to such a complaint is required. Upon the filing of such a complaint, the court, on motion of the petitioner, shall enter an order fixing a date for a hearing on the complaint and requiring that a copy of the complaint and a notice of the filing and of the date for hearing be given to the respondent or defendant in the manner in which summons is required to be served or substituted service is required to be made in other cases. On the day fixed for the hearing on the complaint or any adjournment of it, the court shall determine from the complaint and from such evidence as is submitted by either party whether the dissenting shareholder is entitled to be paid the fair cash value of any shares and, if so, the number and class of such shares. If the court finds that the dissenting shareholder is so entitled, the court may appoint one or more persons as appraisers to receive evidence and to recommend a decision on the amount of the fair cash value. The appraisers have such power and authority as is specified in the order of their appointment. The court thereupon shall make a finding as to the fair cash value of a share and shall render judgment against the corporation for the payment of it, with interest at such rate and from such date as the court considers equitable. The costs of the proceeding, including reasonable compensation to the appraisers to be fixed by the court, shall be assessed or apportioned as the court considers equitable. The proceeding is a special proceeding and final orders in it may be vacated, modified, or reversed on appeal B-2 pursuant to the Rules of Appellate Procedure and, to the extent not in conflict with those rules, Chapter 2505. of the Revised Code. If, during the pendency of any proceeding instituted under this section, a suit or proceeding is or has been instituted to enjoin or otherwise to prevent the carrying out of the action as to which the shareholder has dissented, the proceeding instituted under this section shall be stayed until the final determination of the other suit or proceeding. Unless any provision in division (D) of this section is applicable, the fair cash value of the shares that is agreed upon by the parties or fixed under this section shall be paid within thirty days after the date of final determination of such value under this division, the effective date of the amendment to the articles, or the consummation of the other action involved, whichever occurs last. Upon the occurrence of the last such event, payment shall be made immediately to a holder of uncertificated securities entitled to such payment. In the case of holders of shares represented by certificates, payment shall be made only upon and simultaneously with the surrender to the corporation of the certificates representing the shares for which the payment is made. (C) If the proposal was required to be submitted to the shareholders of the corporation, fair cash value as to those shareholders shall be determined as of the day prior to the day on which the vote by the shareholders was taken and, in the case of a merger pursuant to section 1701.80 or 1701.801 [1701.80.1] of the Revised Code, fair cash value as to shareholders of a constituent subsidiary corporation shall be determined as of the day before the adoption of the agreement of merger by the directors of the particular subsidiary corporation. The fair cash value of a share for the purposes of this section is the amount that a willing seller who is under no compulsion to sell would be willing to accept and that a willing buyer who is under no compulsion to purchase would be willing to pay, but in no event shall the fair cash value of a share exceed the amount specified in the demand of the particular shareholder. In computing such fair cash value, any appreciation or depreciation in market value resulting from the proposal submitted to the directors or to the shareholders shall be excluded. (D)(1) The right and obligation of a dissenting shareholder to receive such fair cash value and to sell such shares as to which he seeks relief, and the right and obligation of the corporation to purchase such shares and to pay the fair cash value of them terminates if any of the following applies: (a) The dissenting shareholder has not complied with this section, unless the corporation by its directors waives such failure; (b) The corporation abandons the action involved or is finally enjoined or prevented from carrying it out, or the shareholders rescind their adoption of the action involved; (c) The dissenting shareholder withdraws his demand, with the consent of the corporation by its directors; B-3 (d) The corporation and the dissenting shareholder have not come to an agreement as to the fair cash value per share, and neither the shareholder nor the corporation has filed or joined in a complaint under division (B) of this section within the period provided in that division. (2) For purposes of division (D)(1) of this section, if the merger or consolidation has become effective and the surviving or new entity is not a corporation, action required to be taken by the directors of the corporation shall be taken by the general partners of a surviving or new partnership or the comparable representatives of any other surviving or new entity. (E) From the time of the dissenting shareholder's giving of the demand until either the termination of the rights and obligations arising from it or the purchase of the shares by the corporation, all other rights accruing from such shares, including voting and dividend or distribution rights, are suspended. If during the suspension, any dividend or distribution is paid in money upon shares of such class or any dividend, distribution, or interest is paid in money upon any securities issued in extinguishment of or in substitution for such shares, an amount equal to the dividend, distribution, or interest which, except for the suspension, would have been payable upon such shares or securities, shall be paid to the holder of record as a credit upon the fair cash value of the shares. If the right to receive fair cash value is terminated other than by the purchase of the shares by the corporation, all rights of the holder shall be restored and all distributions which, except for the suspension, would have been made shall be made to the holder of record of the shares at the time of termination. B-4 Registration No. 333- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM S-4 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 PAPNET OF OHIO, INC. EXHIBITS EXHIBIT INDEX EXHIBIT EXHIBIT EXHIBIT INDEX NUMBER DESCRIPTION PAGE NUMBER ------- ----------- ----------- 2(a) Agreement and Plan of Merger, dated as of July 5, 1996, among the Registrant, Cytology Indiana, Inc., Indiana Cytology Review Company, ER Group, Inc., CCWP Partners, Inc., and Carolina Cytology, Inc.,(filed as Appendix A hereto, and incorporated herein by reference). 3(a) * Articles of Incorporation of the Registrant. 3(b) * Code of Regulations of the Registrant. 3(c) Proposed Amended and Restated Articles of Incorporation of the Registrant, (filed as part of Appendix A hereto, and incorporated herein by reference). 3(d) Proposed Amended and Restated Regulations of Registrant, (filed as part of Appendix A hereto, incorporated herein by reference). 3(e) * Form of Specimen Stock Certificate. 4(a) Articles FOURTH and FIFTH of the Registrant's Articles of Incorporation (contained in the Registrant's Articles of Incorporation filed as Exhibit 3(a) hereto) and Articles II, VII and XI of the Registrant's Code of Regulations (contained in the Registrant's Code of Regulations filed as Exhibit 3(b) hereto). 4(b) Articles FOURTH, SIXTH, SEVENTH, EIGHT, TENTH, and ELEVENTH, of the Registrant's Restated Articles of Incorporation (contained in the Registrant's Restated Articles of Incorporation filed as part of Appendix A hereto and Articles I, V, and VII of the Registrant's Amended and Restated Regulations (contained in the Registrant's Amended and Restated Regulations filed as part of Appendix A hereto. 5 * Opinion of Porter, Wright, Morris & Arthur regarding legality. 8 * Opinion of Porter, Wright, Morris & Arthur regarding tax matters. 10(a) * Settlement Agreement among Neuromedical Systems, Inc. and the Registrant, Cytology Indiana, Inc., Indiana Cytology Review Company, ER Group, Inc., Cytology West, Inc., Carolina Cytology Licensing Company, Papnet Utah, Inc., Carolina Cytology Warrant Partnership and GRK Partners dated as of December 5, 1995. 10(b) * Letter of Intent among the Registrant and Cytology West, Inc., Cytology Indiana, Inc., Indiana Cytology Review Company, ER Group, Inc., CCWP Partners, Inc., Carolina Cytology, Inc., and Papnet Utah, Inc., dated February 1, 1995. 10(c) * Voting Agreement among the Registrant, Cytology Indiana, Inc., Indiana Cytology Review Company, ER Group, Inc., CCWP Partners, Inc., and Carolina Cytology, Inc., and certain shareholders of these entities dated July 5, 1996. 10(d) * Loan Agreement between the Registrant, Cytology Indiana, Inc., Indiana Cytology Review Company, ER Group, Inc., CCWP Partners, Inc., and Carolina Cytology, Inc., dated July 5, 1996, and the Side Letter thereof, dated July 16, 1996. 10(e) * Loan Agreement between the Registrant and Cytology West, Inc. and Papnet Utah, Inc. dated March 14, 1996. 10(f) * Promissory Note and Security Agreement among Cytology West, Inc. and the Registrant dated April 5, 1996 and April 4, 1996 respectively. 10(g) * Guaranty executed by Carl Genberg, guaranteeing all obligations of Cytology West, Inc., dated April 4, 1996. 10(h) * Security Agreement, granting a security interest in Neuromedical Systems, Inc. stock to the Registrant, executed by Carl Genberg on April 4, 1996. 10(i) * Amended and Restated 1995 Stock Option Plan of the Registrant. 23(a) * Consent of Porter, Wright, Morris & Arthur (included in Exhibits 5 and 8(a)). 23(b) * Consent of Ernst & Young, LLP. 24 * Powers of Attorney. 27 * Financial Data Schedule. 99 * Proxy Card. - ----------------------- * Filed with this Registration Statement. EX-3.A 2 EXHIBIT 3.A ARTICLES OF INCORPORATION OF PAPNET OF OHIO, INC. The undersigned, a citizen of the United States, desiring to form a corporation, for profit, under Sections 1701.01 et seq. of the Revised Code of Ohio, does hereby certify: FIRST: NAME. The name of the corporation shall be PAPNET OF OHIO, INC. SECOND: PRINCIPAL OFFICE. The place in Ohio where its, principal office is to be located is 6472 Moors Place West, Dublin, Franklin County, Ohio, 43226. THIRD: PURPOSE. The purpose for which it is formed is to engage in any lawful act or activity for which corporations may be formed under Sections 1701.01 to 1701.98, inclusive, of the Ohio Revised Code. FOURTH: Shares. The maximum number of shares which the corporation is authorized to have outstanding is nine hundred (900) shares, all of which shall be common shares without par value. FIFTH: REPURCHASE OF SHARES. The corporation, through its Board of Directors, shall have the right and power to repurchase any of its outstanding shares at such price and upon such terms as may be agreed upon between the corporation and the selling shareholder or shareholders. SIXTH: CONFLICT OF INTEREST. A director or officer of the corporation shall not be disqualified by his office from dealing or contracting with the corporation as a vendor, purchaser, employee, agent or otherwise; nor shall any transaction, contract or act of the corporation be void or voidable or in any way affected or invalidated by reason of the fact that any director or officer or any firm of which of which such director or officer is a shareholder, director or officer, is in any way interested in such transaction, contract or act, provided the fact that such director, officer, firm or corporation is so interested shall be disclosed or shall be known to the Board of Directors or such members thereof as shall be present at any meeting of the Board of Directors, at which action upon any such contract, transaction or act shall be taken; nor shall any such director or officer be accountable or responsible to the corporation for or in respect of any such transaction, contract or act of the corporation, or for any gains or profits realized him by reason of the fact that he or any firm of which he is a member, or any corporation of which he is a shareholder, officer or director, is interested in such transaction, contract or act and any such director or officer, if such officer is a director, may be counted in determining the existence of a quorum at any meeting of the Board of Directors of the corporation which shall authorize or take action in respect of any such contract, transaction or act and may vote thereat to authorize, ratify or approve any such contract, transaction or act, with like force and effect as if he or any firm of which he is a member, or any corporation of which he is a shareholder, officer or director, were not interested in such transaction, contract or act. SEVENTH: INDEMNIFICATION. Every person who is director, officer, or employee of the corporation or a former director, officer or employee of the corporation, or a person who is serving or has served at the request of the corporation as a director, officer or employee of another corporation is hereby indemnified against expenses, judgments, decrees, fines, penalties or amounts paid in settlement in connection with the defense of any pending or threatened action, suit, or proceeding, criminal or civil, to which he is or may be made a party by reason of being or having been such director, officer or employee, provided he is determined by the directors of the corporation acting at a meeting at which a quorum consisting of directors who are not parties to or threatened with any such action, suit or proceeding is present (a) not to have been negligent or guilty of misconduct in the performance of his duty to the corporation of which he is such director, officer or 2 employee; (b) to have acted in good faith in what he reasonably believed to be the best interest of such corporation; and (c) in any matter the subject of a criminal action, suit, or proceeding, to have had no reasonable cause to believe that his conduct was unlawful; provided, however, no director who is a party to or threatened with any such action, suit or proceeding shall be qualified to vote on such matter. Alternatively such determinations may be made (a) by a court of competent jurisdiction, (b) by the shareholders of the corporation at a meeting held for such purpose by the affirmative vote of the holders of shares entitling them to exercise a majority of voting power of the corporation on such proposal or (c) adopted by the shareholders of the corporation without a meeting by the written consent of the holders of share entitling them to exercise two-thirds of the voting power on such proposal. Such indemnification shall not be deemed exclusive of any other rights to which such director, officer or employee may be entitled including, without limiting the generality of the foregoing, any insurance purchased by the corporation. EIGHTH: STATED CAPITAL. The amount of stated capital with which the corporation shall begin business is not less than Five Hundred Dollars ($500.00). IN WITNESS WHEREOF, I have hereunto subscribed my name this 25th day of October, 1989. /s/ David J. Richards ------------------------------------------- DAVID J. RICHARDS Incorporator End of Articles of Incorporation 3 ORIGINAL APPOINTMENT OF AGENT The undersigned, being the sole incorporator of PAPNET OF OHIO, INC. hereby appoints the below named, a natural person and resident in the county in which notice or demand required or permitted by statute to be served upon the corporation may be served: DAVID J. RICHARDS 5472 Moors Place West Dublin, Ohio 43220 Dated:October 25, 1989 /s/ David J. Richards ------------------------------------------- DAVID J. RICHARDS Incorporator 4 Presented by Sherrod Brown Charter No: 759614 Secretary of State --------------- Approved BB ---------------- Date 6/5/90 --------------------- Fee $45.00 ---------------------- 94071534601 CERTIFICATE OF AMENDMENT BY SHAREHOLDERS TO THE ARTICLES OF INCORPORATION OF PAPNET OF OHIO, INC. - ------------------------------------------------------------------------------ (NAME OF CORPORATION) David J. Richards ,who is: - -------------------------------- / / Chairman of the Board /x/ President / / Vice President (check one) and Carl Genberg ,who is: - ----------------------- /X/ Secretary / / Assistant Secretary (check one) of the above named Ohio corporation for profit do hereby certify that: (check the appropriate box and complete the appropriate statements) /X/ a meeting of the shareholders was duly called for the purpose of adopting this amendment and held on 1/1/90 at which meeting a quorum of the ------ shareholders was present in person or by proxy, and by the affirmative vote of the holders of shares entitling them to exercise 100% of the ---- voting power of the corporation. / / in a writing signed by all of the shareholders who would be entitled to notice of a meeting held for that purpose, the following resolution to amend the articles was adopted: To issue 100 additional shares of stock. IN WITNESS WHEREOF, the above named officers, acting for and on the behalf of the corporation, have hereto subscribed their names this 4th day of June, ---- ---- 1990. -- By /s/ David J. Richards ----------------------------------- (Chairman, President, Vice President) David J. Richards By /s/ Carl Genberg ----------------------------------- (Secretary, Assistant Secretary) Carl Genberg NOTE: Ohio law does not permit one officer to sign in two capacities. Two separate signatures are secured, even if this necessitates the election of a second officer before the filing can be made. 5 Presented by Sherrod Brown Charter No. 759614 --------------- Approved RB ---------------- Date 5/28/92 --------------------- Fee 8,535.00 ---------------------- CERTIFICATE OF AMENDMENT BY SHAREHOLDERS TO THE ARTICLES OF INCORPORATION OF PAPNET OF OHIO, INC. - ------------------------------------------------------------------------------ (NAME OF CORPORATION) David J. Richards ,who is: - -------------------------------- / / Chairman of the Board /x/ President / / Vice President (check one) and Carl Genberg ,who is: - ----------------------- /X/ Secretary / / Assistant Secretary (check one) of the above named Ohio corporation for profit do hereby certify that: (check the appropriate box and complete the appropriate statements) /x/ a meeting of the shareholders was duly called for the purpose of adopting this amendment and held on May 7 1992 at which meeting a quorum of ---------- the shareholders was present in person or by proxy, and by the affirmative vote of the holders of shares entitling them to exercise 87.2% of the ----- voting power of the corporation. / / in a writing signed by all of the shareholders who would be entitled to notice of a meeting held for that purpose, the following resolution to amend the articles was adopted: RESOLVED: that the Articles of Incorporation of the Corporation, as heretofore amended from time to time, be amended in order to increase the number of authorized shares of the Corporation from 1,000 to 2,400,000. RESOLVED: that the Articles of Incorporation of the Corporation, as heretofore amended from time to time, be amended in order to eliminate the pre-emptive rights of the shareholders of the Corporation set forth in Section 1701.75 of the Ohio Revised Code. IN WITNESS WHEREOF, the above named officers, acting for and on the behalf of the corporation, have hereto subscribed their names this 28th day of -- May, 1992. - ---- -- By /s/ David J. Richards ----------------------------------- (Chairman, President, Vice President) David J. Richards By /s/ Carl Genberg ----------------------------------- (Secretary, Assistant Secretary) Carl Genberg NOTE: Ohio law does not permit one officer to sign in two capacities. Two separate signatures are secured, even if this necessitates the election of a second officer before the filing can be made. 6 CERTIFICATE OF AMENDMENT Presented by BOB TAFT, Secretary of State Charter No. 759614 30 East Broad Street, 14th Floor --------------- Columbus, Ohio 43266-0418 Approved BB Form SH-AMD (January 1991) 04206-1380 ---------------- Date 7/15/94 --------------------- Fee $6,535.00 ---------------------- 94071534601 CERTIFICATE OF AMENDMENT BY SHAREHOLDERS TO THE ARTICLES OF INCORPORATION OF PAPNET OF OHIO, INC. - ------------------------------------------------------------------------------ (NAME OF CORPORATION) David J. Richards ,who is: - -------------------------------- / / Chairman of the Board /x/ President / / Vice President (check one) and John P. Kennedy ,who is: - ----------------------- /X/ Secretary / / Assistant Secretary (check one) of the above named Ohio corporation for profit do hereby certify that: (check the appropriate box and complete the appropriate statements) /X/ a meeting of the shareholders was duly called for the purpose of adopting this amendment and held on June 30, 1994 at which meeting a quorum of the ------- -- shareholders was present in person or by proxy, and by the affirmative vote of the holders of shares entitling them to exercise 74% of the -- voting power of the corporation. / / in a writing signed by all of the shareholders who would be entitled to notice of a meeting held for that purpose, the following resolution to amend the articles was adopted: BE IT RESOLVED, that Article FOURTH of the Articles of Incorporation of the Corporation as heretofore amended, be amended in order to increase the number of shares the Corporation is authorized to have outstanding, from 2,400,000 to 5,000,000 shares, all of which shall be common shares without par value. IN WITNESS WHEREOF, the above named officers, acting for and on the behalf of the corporation, have hereto subscribed their names this 14th day of July, ---- ---- 1994. -- By /s/ David J. Richards ----------------------------------- (Chairman, President, Vice President) David J. Richards By /s/ John P. Kennedy ----------------------------------- (Secretary, Assistant Secretary) John P. Kennedy NOTE: Ohio law does not permit one officer to sign in two capacities. Two separate signatures are secured, even if this necessitates the election of a second officer before the filing can be made. 7 CERTIFICATE OF AMENDMENT Presented by BOB TAFT, Secretary of State Charter No. 30 East Broad Street, 14th Floor --------------- Columbus, Ohio 43266-0418 Approved Form SH-AMD (January 1991) 05377-0109 ---------------- Date --------------------- Fee ---------------------- CERTIFICATE OF AMENDMENT [(stamp) Received BY SHAREHOLDERS TO THE ARTICLES OF INCORPORATION OF Dec 14, 1995] TAFT PAPNET OF OHIO, INC. Secretary of State - ------------------------------------------------------------------------------ (NAME OF CORPORATION) David J. Richards ,who is: - -------------------------------- / / Chairman of the Board /x/ President / / Vice President (check one) and John P. Kennedy ,who is: - ----------------------- /X/ Secretary / / Assistant Secretary (check one) of the above named Ohio corporation for profit do hereby certify that: (check the appropriate box and complete the appropriate statements) / / a meeting of the shareholders was duly called for the purpose of adopting this amendment and held on September 28, 1995 at which meeting a quorum of ------------ -- the shareholders was present in person or by proxy, and by the affirmative vote of the holders of shares entitling them to exercise 67% of the -- voting power of the corporation. / / in a writing signed by all of the shareholders who would be entitled to notice of a meeting held for that purpose, the following resolution to amend the articles was adopted: BE IT RESOLVED, that Article Fourth of the Articles of Incorporation of the Corporation as heretofore amended, be amended in order to increase the number of shares the Corporation is authorized to have outstanding, from 5,000,000 shares to 8,000,000, all of which shall be common shares without par value. IN WITNESS WHEREOF, the above named officers, acting for and on the behalf of the corporation, have hereto subscribed their names this 14th day of -- December, 1995. - -------- -- By /s/ David J. Richards ----------------------------------- (Chairman, President, Vice President) David J. Richards By /s/ John P. Kennedy ----------------------------------- (Secretary, Assistant Secretary) John P. Kennedy NOTE: Ohio law does not permit one officer to sign in two capacities. Two separate signatures are secured, even if this necessitates the election of a second officer before the filing can be made. 8 EX-3.B 3 EXHIBIT 3.B CODE OF REGULATIONS OF PAPNET OF OHIO, INC. ARTICLE I FISCAL YEAR Unless otherwise designated by resolution of the Board of Directors, the first fiscal year of the corporation after the adoption of this Code of Regulations shall end on December 31. Subsequently, the fiscal year of the corporation shall commence on the first day of January in each year and end on the last day of December, or by such other period as the Board of Directors may designate by resolution. ARTICLE II SHAREHOLDERS Section 1. MEETINGS OF SHAREHOLDERS (a) ANNUAL MEETING. The annual meeting of the shareholders of this corporation, for the election of Directors, the consideration of financial statements and other reports, and the transaction of such other business as may properly be brought before such meeting, shall be held at 9:30 a.m., on the first Tuesday in the third month following the end of the fiscal year in each year after 1989. The first annual meeting shall be held in 1990. Upon due notice, there may also be considered and acted upon at an annual meeting any matter which could properly be considered and acted upon at a special meeting, in which and for which purpose the annual meeting shall also be considered as, and shall be, a special meeting. In the event the annual meeting is not held or if Directors are not elected thereat, a special meeting may be called and held for that purpose. (b) SPECIAL MEETING. Special meetings of the shareholders may be held on any business day when called by any person or persons who may be authorized by law to do so. Calls for special meetings shall specify the purpose or purposes thereof, and no business shall be considered at any such meeting other than that specified in the call therefore. (c) PLACE OF MEETINGS. Any meeting of shareholders may be held at such place within or without the State of Ohio as may be designated in the Notice of said meeting. (d) NOTICE OF MEETING AND WAIVER OF NOTICE. (1) NOTICE. Written notice of the time, place and purposes of any meeting of shareholders shall be given to each shareholder entitled thereto not less than seven (7) days nor more than sixty (60) days before the date fixed for the meeting and as prescribed by law. Such notice shall be given either by personal delivery or mailed to each shareholder entitled to notice of or to vote at such meeting. If such notice is mailed, it shall be directed, postage prepaid, to the shareholders at their respective addresses as they appear upon the records of the corporation, and notice shall be deemed to have been given on the day so mailed. If any meeting is adjourned to another time or place, no notice as to such adjourned meeting need be given other than by announcement at the meeting at which such an adjournment is taken. No business shall be transacted at any such adjourned meeting except as might have been lawfully transacted at the meeting at which such adjournment was taken. (2) NOTICE TO JOINT OWNERS. All notices with respect to any shares tb which persons are entitled by joint or common ownership may be given to that one of such persons who 2 is named first upon the books of this corporation, and notice so given shall be sufficient notice to all the holders of such shares. (3) WAIVER. Notice of any meeting, however, may be waived in writing by any shareholder either before or after any meeting of shareholders, or by attendance at such meeting without protest prior to the commencement thereof. (e) SHAREHOLDERS ENTITLED TO NOTICE AND TO VOTE. If a record date shall not be fixed or the books of the corporation shall not be closed against transfers of shares pursuant to statutory authority, the record date for the determination of shareholders entitled to notice of or to vote at any meeting of shareholders shall be the close of business on the twentieth day prior to the date of the meeting, and only shareholders of record at such record date shall be entitled to notice of and to vote at such meeting. Such record date shall continue to be the record date for all adjournments of such meeting unless a new record date shall be fixed and notice thereof and of the date of the adjourned meeting be given to all shareholders entitled to notice in accordance with the new record date so fixed. (f) QUORUM. At any meeting of shareholders, the holders of shares entitling them to exercise a majority of the voting power of the corporation, present in person or by proxy, shall constitute a quorum for such meeting; provided, however, that no action required by law, the Articles, or these Regulations to be authorized or taken by the holders of a designated proportion of the shares of the corporation may be authorized or taken by a lesser proportion. The shareholders present in person or by proxy, whether or not a quorum be present, may adjourn the meeting from time to time without notice other than by announcement at the meeting. 3 (g) ORGANIZATION OF MEETINGS. (1) PRESIDING OFFICER. The Chairman of the Board, or in his absence, the President, or in the absence of both of them, a Vice-President of the corporation shall call all meetings of the shareholders to order and shall act as Chairman thereof; if all are absent the shareholders shall elect a Chairman. (2) MINUTES. Tim Secretary of the corporation, or, in his absence, an Assistant Secretary, or, in the absence of both, a person appointed by the Chairman of the meeting, shall act as Secretary of the meeting and shall keep and make a record of the proceedings thereat. (h) ORDER OF BUSINESS. The order of business at all meetings of the shareholders, unless waived or otherwise determined by a vote of the holder or holders of the majority of the number of shares entitled to vote present in person or represented by proxy, shall be as follows: 1. Call meeting to order; 2. Selection of Chairman and/or Secretary, if necessary; 3. Proof of notice of meeting and presentment of affidavit thereof; 4. Roll call, including filing of proxies with Secretary; 5. Upon appropriate demand, appointment of inspector& of election; 6. Reading, correction and approval of previously unapproved minutes; 7. Reports of officers and committees; 8. If annual meeting, or meeting called for that purpose, election of Directors; 9. Unfinished business, if adjourned meeting; 10. Consideration in sequence of all other matters set forth in the call for and written notice of the meeting; 4 11. Adjournment. (i) VOTING. Except as provided by statute or in the Articles, every shareholder entitled to vote shall be entitled to cast one vote on each proposal submitted to the meeting for each share held of record by him on the record date for the determination of the shareholders entitled to vote at the meeting. At any meeting at which a quorum is present, all questions and business which may come before the meeting shall be determined by a majority of votes cast, except when a greater proportion is required by law, the Articles, or these Regulations. (j) PROXIES. A person who is entitled to attend a shareholders' meeting, to vote thereat, or to execute consents, waivers and releases, may be represented at such meeting or vote thereat, and execute consents, waivers, and releases, and exercise any of his rights, by proxy or proxies appointed by a writing signed by such person, or by his duly authorized attorney, as provided by the laws of the State of Ohio. (k) LIST OF SHAREHOLDERS. At any meeting of shareholders, a list of shareholders, alphabetically arranged, showing the number and classes of shares held by each on the record date applicable to such meeting, shall be produced on the request of any shareholder. Section 2. ACTION OF SHAREHOLDERS WITHOUT A MEETING. Any action which may be taken at a meeting of shareholders may be taken without a meeting if authorized by a writing or writing signed by all of the holders of shares who would be entitled to notice of a meeting for such purpose, which writing or writings shall be filed or entered upon the records of the corporation. 5 ARTICLE III DIRECTORS Section 1. GENERAL POWERS The business, power and authority of this corporation shall be exercised, conducted and controlled by a Board of Directors, except where the law, the Articles or these Regulations require action to be authorized or taken by the shareholders. Section 2. ELECTION, NUMBER AND QUALIFICATION OF DIRECTORS (a) ELECTION. The Directors shall be elected at the annual meeting of shareholders, or if not so elected, at a special meeting of shareholders called for that purpose. At any meeting of shareholders at which Directors are to be elected, only persons nominated as candidates shall be eligible for election. (b) NUMBER. The number of Directors, which shall not be less than the lesser of three (3) or the number of shareholders or record, may be fixed or changed at a meeting of the shareholders called for the purpose of electing Directors at which a quorum is present, by the affirmative vote of the holders of a majority of the shares represented at the meeting and entitled to vote on such proposal. The number of Directors elected shall be deemed to be the number of Directors fixed unless otherwise fixed by resolution adopted at the meeting at which such Directors are elected. (c) QUALIFICATION. Directors need not be shareholders of the corporation. 6 Section 3. TERM OF OFFICE OF DIRECTORS (a) TERM. Each Director shall hold office until the next annual meeting of the shareholders and until his successor has been elected or until his earlier resignation, removal from office, or death. Directors shall be subject to removal as provided by statute or by other lawful procedures and nothing herein shall be construed to prevent the removal of any or all Directors in accordance therewith. (b) RESIGNATION. A resignation from the Board of Directors shall be deemed to take effect immediately upon its being received by any incumbent corporate officer other than an officer who is also the resigning Director, unless some other time is specified therein. (c) VACANCY. In the event of any vacancy in the Board of Directors for any cause, the remaining Directors, though less than a majority of the whole Board, may fill any such vacancy for the unexpired term. Section 4. MEETINGS OF DIRECTORS (a) REGULAR MEETINGS. A regular meeting of the Board of Directors shall be held immediately following the adjournment of the annual meeting of the shareholders or a special meeting of the shareholders at which Directors are elected. The holding of such shareholders' meeting shall constitute notice of such Directors' meeting and such meeting may be held without further notice. Other regular meetings shall be held at such other times and places as may be fixed by the Directors. (b) SPECIAL MEETINGS. Special meetings of the Board of Directors may be held at any time upon call of the Chairman of the Board, the President, any Vice-President, or any two (2) Directors. 7 (c) PLACE OF MEETING. Any meeting of Directors may be held at such place within or without the State of Ohio as may be designated in the Notice of said meeting. (d) NOTICE OF MEETING AND WAIVER OF NOTICE. Notice of the time and place of any regular or special meeting of the Board of Directors (other than the regular meeting of Directors following the adjournment of the annual meeting of the shareholders or following any special meeting of the shareholders at which Directors are elected) shall be given to each Director by personal delivery, telephone, mail, telegram or cablegram at least forty-eight (48) hours before the meeting, which notice need not specify the purpose of the meeting. Such notice, however, may be waived in writing by any Director either before or after any such meeting, or by attendance at such meeting without protest prior to the commencement thereof. Section 5. QUORUM AND VOTING At any meeting of Directors, not less than one-half of the whole authorized number of Directors is necessary to constitute a quorum for such meeting, except that a majority of the remaining Directors in office constitutes a quorum for filling a vacancy in the Board. At any meeting at which a quorum is present, all acts, questions and business which may come before the meeting shall be determined by a majority of votes cast by the Directors present at such meeting, unless the vote of a greater number is required by the Articles, Regulations or By-Laws. Section 6. COMMITTEES (a) APPOINTMENT. The Board of Directors may from time to time appoint certain of its members (but in no event less than ,three) to act as a committee or committees in the intervals between meetings of the Board and may delegate to such committee or committees powers to be 8 exercised under the control and direction of the Board. Each such committee and each member thereof, shall serve at the pleasure of the Board. (b) EXECUTIVE COMMITTEE. In particular, the Board of Directors may create from its membership and define the powers and duties of an Executive Committee. During the intervals between meetings of the Board of Directors, the Executive Committee shall possess and may exercise all of the powers of the Board of Directors in the management and control of the business of the corporation to the extent permitted by law. All action taken by the Executive committee shall be reported to the Board of Directors at its first meeting thereafter. (c) COMMITTEE ACTION. Unless otherwise provided by the Board of Directors, a majority of the members of any committee appointed by the Board of Directors pursuant to this Section, shall constitute a quorum at any meeting thereof, and the act of a majority of the members. present at a meeting at which a quorum is present shall be the act of such committee. Action may be taken by any such committee without a meeting by a writing signed by all its members. Any such committee shall prescribe its own rules for calling and holding meetings and its method or procedure, subject to any rules prescribed by the Board of Directors, and shall keep a written record of all action taken by it. Section 7. ACTION OF DIRECTORS WITHOUT A MEETING Any action which may be taken at a meeting of Directors may be taken without a meeting if unauthorized by a writing or writings signed by all the Directors, which writing or writings shall be filed or entered upon the records of the corporation. 9 Section 8. COMPENSATION OF DIRECTORS The Board of Directors may allow compensation for attendance at meetings or for any special services, may allow compensation to members of any committee, and may reimburse any Director for his expenses in connection with attending any Board of Committee meeting. Section 9. ATTENDANCE AT MEETINGS OF PERSONS WHO ARE NOT DIRECTORS Unless waived by a majority of Directors in attendance, not less than twenty-four (24) hours before any regular or special meeting of the Board of Directors, any Director who desires the presence at such meeting of not more than one (1) person who is not a Director, shall so notify all other Directors, request the presence of such person at the meeting, and state the reason in writing. Such person will not be permitted to attend the Directors' meeting unless a majority of the Directors in attendance vote to admit such person to the meeting. Such vote shall constitute the first order of business for any such meeting of the Board of Directors. Such right to attend, whether granted by waiver or vote, may be revoked at any time during any such meeting by the vote of a majority of the Directors in attendance. ARTICLE IV OFFICERS Section 1. GENERAL PROVISIONS The Board of Directors shall elect a President,, a Secretary and a Treasurer, and may elect a Chairman of the Board, one or more Vice-Presidents, and such other officers and assistant officers as the Board may, from time to time, deem necessary. The Chairman of the Board, if any, and the President shall be Directors, but none of the other officers need be a Director. Any two or 10 more offices may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity if such instrument is required to be executed, acknowledged or verified by two or more officers. Section 2. POWERS AND DUTIES All officers as between themselves and the corporation, shall respectively have such authority and perform such duties as are customarily incident to their respective offices, and as may be specified from time to time by the Board of Directors, regardless of whether such authority and duties are customarily incident to such office. In the absence of any officer of the corporation, or for any other reason the Board of Directors may deem sufficient, the Board of Directors may delegate for the time being, the powers or duties of such officer, or any of them, to any other officer or to any Director. The Board of Directors may, from time to time, delegate to any officer authority to appoint and remove subordinate officers and to prescribe their authority and duties. Since the lawful purposes of this corporation include the acquisition and ownership of real property, personal property and property in the nature of patents, copyrights, and trademarks and the protection of the corporation's property rights in its patents, copyrights and trademarks, each of the officers of this corporation is empowered to execute any power of attorney necessary to protect, secure, or vest the corporation's interest in and to real property, personal property and its property protectable by patents, trademarks and copyrights registrations and to secure such patents, copyrights and trademark registrations. Section 3. TERM OF OFFICE AND REMOVAL (a) TERM. Each officer of the corporation shall hold office during the pleasure of the Board of Directors, and unless sooner removed by the Board of Directors, until the meeting of 11 the Board of Directors following the date of their election and until his successor is elected and qualified. (b) REMOVAL. The Board of Directors may remove any officer at any time, with or without cause by the affirmative vote of a majority of Directors in office. Section 4. COMPENSATION OF OFFICERS Unless compensation is otherwise determined by a majority of the Directors at a regular or special meeting of the Board of Directors, or unless such determination is delegated by the Board of Directors to another officer or officers, the President of the corporation from time to time shall determine the compensation to be paid to all officers and other employees for services rendered to the corporation. ARTICLE V INDEMNIFICATION OF DIRECTORS AND OFFICERS (a) RIGHT AND INDEMNIFICATION. Each Director, officer and member of a committee of this corporation, and any person who may have served at the request of this corporation as a Director, officer or member of a committee of any other corporation in which this corporation is a creditor, his heirs, executors and administrators, shall be indemnified by the corporation against all costs and expenses reasonably incurred by him concerning, or in connection with, the defense of any claim asserted or suit or proceeding brought against him by reason of his conduct or actions as a Director, officer or member of a committee of this corporation, or a Director, officer or member of a committee of such other corporation, whether or not he continues to be a Director, officer or member of a committee at the time of incurring such costs or expenses, except costs and expenses 12 incurred in relation to matters as to which such Director, officer or member of a committee shall have been willfully derelict in the performance of his duty as such Director, officer or member of a committee. Such costs and expenses shall include the costs of reasonable settlements (with or without suit), judgments, attorneys' fees, costs of suit, fines and penalties and other liabilities (other than amounts paid by any such person to this corporation or any such other corporation). (b) DEFINITION OF PERFORMANCE. For the purposes of this Article, a Director, officer or member of a committee shall conclusively be deemed not to have been willfully derelict in the performance of his duty as such Director, officer or member of a committee: (1) DETERMINATION BY SUIT. In a matter which shall have been the subject of a suit or proceeding in which he was a party which is disposed of by adjudication on the merits, unless he shall have been finally adjudged in such suit or proceeding to have been willfully derelict in the performance of his duty as such Director, officer or member of a committee; or (2) DETERMINATION BY COMMITTEE. In a matter not falling within (1) next preceding if either a majority of disinterested members of the Board of Directors or a majority of a committee of disinterested shareholders of the corporation, (excluding therefrom any Director, officer or member of a committee) selected as hereinafter provided shall determine that he was not willfully derelict. Such determination shall be made by the disinterested members of the Board of Directors except where such members shall determine that such matter should be referred to said committee of disinterested shareholders. (c) SELECTION OF COMMITTEE. The selection of a committee of shareholders provided above may be made by the Majority vote of the disinterested Directors or, if there be no disinterested Director or Directors, by the chief executive officer of the corporation. A Director or 13 shareholder shall be deemed disinterested in a matter if he has no interest therein other than as a Director or shareholder of the corporation as the case may be. The corporation shall pay the fees and expenses of the shareholders or Directors, as the case may be, incurred in connection with making a determination as above provided. (d) NON-COMMITTEE DETERMINATION. In the event that a Director, officer or member of a committee shall be found by some other method not to have been willfully derelict in the performance of his duty as such Director, officer or member of a committee, then such determination as to dereliction shall not be questions on the ground that it was made otherwise than as provided above. ARTICLE VII SHARE CERTIFICATES Section 1. TRANSFER AND REGISTRATION OF CERTIFICATES The Board of Directors shall have authority to make such rules and regulations, not inconsistent with law, the Articles or these Regulations, as it deems expedient concerning the issuance, transfer and registration of certificates for shares and the shares represented thereby and may appoint transfer agents and registrars thereof. Section 2. SUBSTITUTED CERTIFICATES Any person claiming that a certificate for shares has been lost, stolen or destroyed, shall make an affidavit or affirmation of that fact and, if required, shall give the corporation (and its registrar or registrars and its transfer agent or agents, if any) a bond of indemnity, in such form and with one or more sureties satisfactory to the Board, and, if required by the Board of Directors, shall 14 advertise the same in such manner as the Board of Directors may require, whereupon a new certificate may be executed and delivered of the same tenor and for the same number of shares as the one alleged to have been lost, stolen or destroyed. ARTICLE VIII SEAL The Directors may adopt a seal for the corporation which shall be in such form and of such style as is determined by the Directors. Failure to affix any such corporate seal shall not affect the validity of any instrument. ARTICLE IX CONSISTENCY WITH ARTICLES OF INCORPORATION If any provision of these Regulations shall be inconsistent with the corporation's Articles of Incorporation (and as they may be amended from time to time), the Articles of Incorporation (as so amended at the time) shall govern. ARTICLE X SECTION HEADINGS The headings contained in-this code of Regulations are for reference purposes only and shall not be construed to be part of and/or shall not affect, in any way, the meaning or interpretation of this Code of Regulations. 15 ARTICLE XI AMENDMENTS This Code of Regulations of the corporation (and as it may be amended from time to time) may be amended or added to by the affirmative vote or the written consent of the shareholders of record entitled to exercise a majority of the voting power on such proposal; provided, however, that if an amendment or addition is adopted by written consent without a meeting of the shareholders, it shall be the duty of the Secretary to enter the amendment or addition in the records of the corporation, and to mail a copy of such amendment or addition to each shareholder of record who would be entitled to vote thereon and did not participate in the adoption thereof. (End of Code of Regulations) 16 EX-3.E 4 EXHIBIT 3.E CERTIFICATE NO. SHARES [Crest] INCORPORATED UNDER THE LAWS OF THE STATE OF OHIO AUTHORIZED SHARES SHARES WITHOUT PAR VALUE --------- THIS CERTIFIES THAT IS THE HOLDER OF -------------------------------------------- SHARES WITHOUT PAR VALUE OF - ----------------------------------------------------- PAPNET OF OHIO, INC. FULLY PAID AND NON-ASSESSABLE, TRANSFERABLE ONLY ON THE BOOKS OF THE COMPANY BY THE HOLDER HEREOF IN PERSON OR BY ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED. DATED THIS DAY OF , 19 ----------------- ---------------------------------- --- - ----------------------------------- ---------------------------------------- Secretary President Dayton Legal Blank Co. CERTIFICATE NO. FOR SHARES WITHOUT PAR VALUE OF PAPNET OF OHIO, INC. ISSUED TO --------------------------------------- DATED --------------------------------------- FOR VALUE RECEIVED, HEREBY SELL, ASSIGN AND TRANSFER UNTO ------------------- - ---------------------------------------------------------------------------- SHARES BENEFICIALLY - ------------------------------------------------------- REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT ----------------------------------------------------------------------- TO TRANSFER THE SAID SHARES ON THE BOOKS OF THE WITHIN NAMED CORPORATION, WITH FULL POWER OF SUBSTITUTION IN THE PREMISES. DATED 19 ----------------------- --- IN PRESENCE OF --------------------------------- - ------------------------------------------------------------------------------- NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THIS CERTIFICATE, IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER. EX-5 5 EXHIBIT 5 [LETTERHEAD] 41 South High Street Columbus, Ohio 43215-6194 Telephone: 614-227-2000 Facsimile: 614-227-2100 Nationwide: 800-533-2794 ______, 1996 Papnet of Ohio, Inc. 6059 Memorial Drive Dublin, Ohio 43017 Re:Merger of Predecessor Companies Into Papnet of Ohio, Inc. Gentlemen: This opinion is furnished with respect to the Registration Statement on Form S-4 (the "Registration Statement") being filed by Papnet of Ohio, Inc. ("Papnet") with the Securities and Exchange Commission related to the registration of 4,850,033 shares of Papnet common stock, no par value (the "Stock"), to be issued in connection with the proposed merger (the "Merger") of Cytology Indiana, Inc., Indiana Cytology Review Company, ER Group, Inc., CCWP Partners, Inc., and Carolina Cytology, Inc. (collectively "Predecessor Companies"), with and into Papnet. We are counsel for Papnet and have participated in the preparation of the Registration Statement. We have reviewed the Agreement and Plan of Merger, dated as of July 5, 1996, among Papnet and the Predecessor Companies (the "Merger Agreement"), Papnet's Articles of Incorporation and Code of Regulations, the proposed Amended and Restated Articles of Incorporation and Regulations of Papnet, the corporate action taken to date in connection with the Registration Statement and the issuance and sale of the Stock, and such other documents and authorities as we deem relevant for the purpose of this opinion. Based upon the foregoing, we are of the opinion that: (a) upon the proper approval of the Merger Agreement by the shareholders of Papnet and the Predecessor Companies and its filing with the Ohio Secretary of State; (b) upon the proper approval of the Amended and Restated Articles of Incorporation of Papnet by the shareholders of Papnet and its filing with the Ohio Secretary of State; Papnet of Ohio, Inc. ______, 1996 Page -2- (c) upon compliance with the Securities Act of 1933, as amended, and with the Securities or "blue sky" laws of the states in which the Stock is to be offered for sale; and (d) upon satisfaction of all of the conditions stated in the Merger Agreement and at the "Effective Time," as defined in the Merger Agreement; the Stock, when issued and delivered as provided in the Merger Agreement in accordance with the resolutions heretofore adopted by the Board of Directors and shareholders of Papnet, will be legally issued, fully paid, and nonassessable. We consent to the filing of this opinion as an exhibit to the Registration Statement. Very truly yours, PORTER, WRIGHT, MORRIS & ARTHUR EX-8 6 EXHIBIT 8 [LETTERHEAD] __________, 1996 Papnet of Ohio, Inc. 6059 Memorial Drive Dublin, Ohio 43017 Gentlemen: We have acted as counsel in connection with the proposed merger (the "Merger") of Cytology Indiana, Inc., an Ohio corporation, Indiana Cytology Review Corporation, an Ohio corporation, ER Group, Inc., an Ohio corporation, CCWP Partners, Inc., an Ohio corporation, and Carolina Cytology, Inc., an Ohio corporation, (the foregoing companies referred to individually as a "Predecessor Company" and collectively as the "Predecessor Companies") with and into Papnet of Ohio, Inc., an Ohio corporation (the "Company"), pursuant to which the stockholders of the Predecessor Companies will receive shares of common stock, without par value, of the Company ("Company Shares") subject to the Agreement and Plan of Merger, dated as of July 5, 1996, by and among the Predecessor Companies and the Company (the "Merger Agreement") in exchange for their shares of the outstanding common stock of the Predecessor Companies. At your request, and pursuant to Section 7.01(h) of the Merger Agreement, we are rendering our opinion concerning certain federal income tax consequences of the Merger. In that connection, we have examined and relied upon originals, or copies certified or otherwise identified to our satisfaction, of such records, documents and other instruments, and such other matters of fact and law, as we have considered necessary or appropriate for the purposes of this opinion, including an examination of: (i) the Merger Agreement and the other documents and agreements referred to therein; and (ii) the Information Statement/Prospectus (the "Prospectus") relating to the Merger and included in the Registration Statement of the Company on Form S-4 filed by the Company with the Securities and Exchange Commission. In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to the original documents of all documents submitted to us as certified or photostatic copies, and the authenticity of the originals of such latter documents. For purposes of the opinions set forth below, we have assumed the accuracy and completeness of the statements and representations (which statements and representations we have neither investigated nor verified and upon which we are entitled to rely) contained, respectively, in certain certificates of the officers of the Company and the Predecessor Companies and certain stockholders of the Predecessor Companies, and that the certificates will be executed as of the Effective Time as defined in the Merger Agreement. We have also assumed that the transactions Papnet of Ohio, Inc. ______________, 1996 Page 2 contemplated by the Merger Agreement have been consummated in accordance with the Merger Agreement, the Merger constitutes a merger pursuant to the applicable provisions of the laws of the State of Ohio, and the facts, statements and other information contained in the Prospectus relating to the Merger are true, correct and complete in all material respects. The opinions set forth below are based upon, and the section numbers cited herein refer to, the Internal Revenue Code of 1986, as amended (the "Code"), the Treasury Regulations promulgated thereunder, the administrative interpretations thereof and the judicial decisions with respect thereto, all as currently in effect, and are further based upon the assumption that the documents, certifications and representations referred to in the two preceding paragraphs have been finalized and executed at the Effective Time. In reliance on the assumptions and the representations set forth above and the continued accuracy and completeness of the statements and certifications identified above, and further assuming that the stockholders of the Predecessor Companies do not, for a sufficient period of time to meet the continuity of interest requirements for a reorganization, sell, exchange, transfer by gift or otherwise dispose of a number of Company Shares received in the Merger that would reduce the ownership of Company Shares by the former stockholders of the Predecessor Companies to a number of shares having a value, as of the date of the Merger, of less than 50 percent of the total value of all the formerly outstanding stock of the Predecessor Companies as of the same date, we are of the opinion that: (1) The Merger of the Predecessor Companies with and into the Company will constitute a reorganization within the meaning of Section 368(a) of the Code. (2) The Predecessor Companies and the Company will each be "a party to a reorganization" within the meaning of Section 368(b) of the Code. (3) None of the Predecessor Companies nor the Company will recognize gain or loss (except for the inclusion in income of amounts resulting from any required change in accounting methods or similar items) as a result of the Merger. (4) No gain or loss will be recognized by the stockholders of the Predecessor Companies upon the exchange of their respective shares of a Predecessor Company stock for Company Shares pursuant to the Merger, except that a stockholder of a Predecessor Company will recognize gain, if any, upon receipt of cash in payment of dissenter's rights of appraisal. Papnet of Ohio, Inc. ______________, 1996 Page 3 (5) The federal income tax basis of the Company Shares received by the stockholders of the Predecessor Companies in exchange for their Predecessor Company stock will be the same federal income tax basis of the Predecessor Company stock surrendered in the exchange therefor. (6) The holding period for the Company Shares received by the stockholders of the Predecessor Companies in exchange for their Predecessor Company stock will include the period for which the Predecessor Company stock exchanged therefor were held, provided the exchanged Predecessor Company stock was held as a capital asset by such stockholder on the date of the Merger. We have given this opinion pursuant to Section 7.01(h) of the Agreement in connection with the transactions contemplated thereby and such opinion is not to be relied upon for any other purpose. This opinion may not be applicable to: (1) a Predecessor Company stockholder whose Predecessor Company stock is not held as a capital asset; (2) a Predecessor Company stockholder who is subject to special treatment under the Code, including without limitation, insurance companies, dealers in securities, financial institutions, tax-exempt investors or non-United States citizens; or (3) the extent that the Company and/or the Predecessor Companies are investment companies within the meaning of Section 368 of the Code. This opinion assumes that no Predecessor Company was formed, and no stockholder acquired stock in any Predecessor Company, in contemplation of or to effectuate the Merger. In addition to the assumptions and exclusions above, no opinion is expressed herein concerning the tax treatment of the Merger under other provisions of the Code and the Treasury Regulations issued thereunder, including, without limitation: (1) the exchange of any shares of a Predecessor Company in the Merger that were acquired by the holder thereof pursuant to any employee stock option or employee stock purchase plan or otherwise as compensation; (2) the effect of Section 731(c) on any subsequent distribution of the Company Shares by a Predecessor Company stockholder; and (3) the effect of state, local, and foreign tax laws. Furthermore, no opinion is expressed herein about the tax treatment of any conditions existing at the time of, or effects resulting from, the transaction that are not specifically addressed by the foregoing opinion. You should be aware that this opinion represents our conclusions as to the application of existing law and is based on the certifications and representations given as of the date hereof. The statutory provisions, regulations, interpretations, and other authorities upon which our opinion is based are subject to change, and such changes could apply retroactively. In addition, no advance ruling has been obtained from the Internal Revenue Service, and there can be no assurance that positions contrary to those stated in our opinion will not be taken by the Internal Revenue Service. No person other than the addressee named herein may rely on this opinion for any purpose. Papnet of Ohio, Inc. ______________, 1996 Page 4 We hereby consent to the use of this opinion as an exhibit to the Registration Statement. By giving this consent, however, we do not admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Commission thereunder. Very truly yours, PORTER, WRIGHT, MORRIS & ARTHUR EX-10.A 7 EXHIBIT 10.A SETTLEMENT AGREEMENT This SETTLEMENT AGREEMENT ("Agreement"), dated as of December 5,1995, is by and between NEUROMEDICAL SYSTEMS, INC., a Delaware corporation ("NSI"), with its principal place of business at Two Executive Boulevard, Suffern, New York 10901, and Papnet of Ohio, Inc., an Ohio corporation ("Papnet Ohio"), Cytology Indiana, Inc., an Ohio corporation, Indiana Cytology Review Corporation, an Ohio corporation, ER Group, Inc., an Ohio corporation, Cytology West, Inc., a Delaware corporation, Carolina Cytology Licensing Company, an Ohio general partnership, Papnet Utah, Inc., a Nevada corporation (individually, a "Licensee" and, collectively, the "Licensees"), Carolina Cytology Warrant Partnership, an Ohio general partnership "CCWP"), and GRK Partners, an Ohio general partnership ("GRK") WHEREAS, NSI has entered into the following licensing agreements: (i) Agreement by and between NSI and Papnet Ohio (Kentucky and Standard Metropolitan Statistical Area For Chicago, Illinois), dated March 23, 1990, as amended February 3, 1992 and March 30, 1992; (ii) Agreement by and between NSI and Papnet Ohio, dated October 29, 1989, as amended March 22, 1990, December 4, 1990, January 31, 1991 and March 30, 1992; (iii) Agreement by and between NSI and Cytology West, Inc. dated June 27, 1990, as amended February 4, 1992 and May 18, 1992; (iv) Agreement by and between NSI and ER Group, Inc., dated May 20, 1991, as amended January 30, 1992 and August 31, 1992; (v) Agreement by and between NSI and I-A Cytology (now named Cytology Indiana, Inc. and Indiana Cytology Review Company), dated August 29,1990, as amended February 3, 1992 and August 26, 1992; (vi) Agreement by and between NSI and Carolina Cytology Licensing Company, not dated, as amended March 1, 1993; and (vii) an Agreement by and between NSI and Papnet Utah, Inc. (collectively, the "Previous License Agreements"); and WHEREAS, the Licensees, CCWP, and any partners therein are considering whether to effect a combination by merger or otherwise of some or ALL of them (the "Merger"), with a single entity to be the surviving corporation (the "Surviving Corporation"); and WHEREAS, NSI and the Licensees desire that NSI and each Licensee (or the Surviving Corporation, immediately following the effectiveness of the Merger), enter into an Amended and Restated Agreement, in the form attached hereto as Exhibit A (the "Amended License Agreement"), to amend and restate NSI's previous license agreements with Licensees to provide for the licensing of the PAPNET- REGISTERED TRADEMARK- System, NSI Technology, and other Intellectual Property of NSI as defined in the Amended License Agreement; and WHEREAS, Papnet Ohio, Cytology Indiana, Inc., Indiana Cytology Review Company, ER Group, Inc., CCWP, and GRK (collectively, the "Holders") each own Warrants ("Warrants") to purchase shares of NSI's $.0001 par value Common Stock ("Common Stock"), and have elected to exercise such Warrants effective upon the completion of an offering to the public by NSI of the Common Stock (the "Initial Public Offering"); and WHEREAS, the parties now desire to clarify certain issues and to settle and compromise certain matters between them. NOW THEREFORE, in consideration of the foregoing and of the mutual covenants herein contained, it is hereby agreed and acknowledged as follows: 1. THE MERGER. Subject to the terms and conditions contained herein, NSI hereby consents to the Merger. 2. USE OF CORPORATE NAME. The Licensees hereby acknowledge and agree that NSI is the sole and exclusive owner of all current, pending and future worldwide patents and patent rights, copyrights, trademarks, trade names, trade secrets, know-how, utility models, improvements thereon and other intellectual property rights (including, without limitation, all applications and registrations with respect thereto) in and to, and the use of, PAPNET-REGISTERED TRADEMARK-, the PAPNET-REGISTERED TRADEMARK- System, and the PAPNET-REGISTERED TRADEMARK- Service (as those terms are defined in the Amended License Agreement). The Licensees further agree that, within ninety (90) days following the effective date of the Merger, the Surviving Corporation shall forever thereafter cease use of "PAPNET" in its corporate name, and shall release to NSI all rights and claims to the use of the "PAPNET" name which it may previously have had or asserted, except as such use is permitted under the Amended License Agreement. In the event that the Merger has not become effective by September 30, 1996, each Licensee shall forever thereafter cease use of "PAPNET" in its corporate or partnership name, and each Licensee shall release to NSI all rights and claims to the use of the "PAPNET" name which it may previously have had or asserted, except as such use is permitted under the Amended License Agreement. 3. AMENDED LICENSE AGREEMENT. NSI and the Licensees each hereby agree that NSI and the Surviving Corporation shall enter into the Amended License Agreement on the effective date of the Merger, or immediately thereafter, and that the Amended License Agreement will supersede and replace all Previous License Agreements made between NSI and the Licensees. Upon the occurrence of an Execution Event (as defined below) with respect to any Licensee, NSI and such Licensee agree to execute a separate license agreement in substantially the form of the Amended License Agreement, with appropriate changes with respect to such matters as each Licensee's Licensed Territory, and proportionate share of Revenue and related Slide and additional Royalty caps under Article 3 of the Amended License Agreement. For this purpose, an "Execution Event" with respect to any Licensee is the earliest to occur of the following events: (i) written notice given by such Licensee to NSI that such Licensee will not participate in the Merger, (ii) the occurrence of the Merger without the participation of such Licensee, or (iii) the failure of such Licensee to participate in and effect the Merger by September 30,1996. 2 4. PAST DUE ROYALTIES AND PAYMENTS. NSI agrees to pay to Licensees or the Surviving Corporation, at or before the time of execution of the Amended License Agreement, all royalty payments due under the Previous License agreements which have been accrued and remain unpaid at the time of execution of the Amended License Agreement. All royalties accruing subsequent to execution of the Amended License Agreement shall be payable in accordance with the terms and provisions of the Amended License Agreement. Licensees will pay, at or before the time of execution of the Amended License Agreement, all advances from NSI or accounts payable to NSI under the Previous License Agreements which have been accrued and remain unpaid at the time of execution of the Amended License Agreement. The mutual releases contained in Section 5 of this Agreement shall not alter the obligations contained in this Section 4. 5. MUTUAL RELEASES; WAIVER. 5.1. Subject to performance of all material obligations of NSI under this Agreement, the Licensees, CCWP and GRK hereby forever discharge and release NSI and its officers, directors, employees, agents, advisors, representatives and controlling persons from any and all manner of claims, demands, damages, actions, causes of action, suits or liabilities whatsoever of every name and nature, both in law or in equity by the Licensees, CCWP, GRK or any of their predecessors in interest or of their affiliates arising out of facts or circumstances occurring or existing on or prior to the date of this Agreement; PROVIDED, HOWEVER, that the licensees, CCWP and GRK do not release any claims against any such persons for any breach of NSI's obligations or representations and warranties under this Agreement or with respect to matters otherwise subject to indemnification pursuant to the Previous License Agreements for liability to third parties. 5.2. Subject to performance of all material obligations of a Licensee, of CCWP, or of GRK under this Agreement, NSI hereby forever discharges and releases each such person, and its respective officers, directors, employees, agents, advisors, representatives, partners and controlling persons from any and all manner of claims, demands, damages, actions, causes of action, suits or liabilities whatsoever of every name and nature, both in law or in equity by NSI or any of its affiliates arising out of facts or circumstances occurring or existing on or prior to the date of this Agreement; PROVIDED, HOWEVER, that NSI does not release any claims against any such person for any breach of such person's obligations or representations and warranties under this Agreement or with respect to matters otherwise subject to indemnification pursuant to the Previous License Agreements for liability to third parties. 5.3 Subject to the Performance of all material obligations of NSI under this Agreement, on the one hand, and the performance of all material obligations of Licensees on the other, and except as provided in Section 4 hereof, from the date hereof and continuing until the execution and delivery of the Amended License Agreement, NSI hereby waives any breaches by Licensees of the Previous License Agreements, and Licensees waive any breaches by NSI of the Previous License Agreements, but in each case only to the extent that the breach would not also be a breach the Amended 3 License Agreement If the Amended License Agreement Were in Effect at the Time. 6. ADDITIONAL NSI SHARES. As further consideration for the agreements of the Holders under this Agreement, in the event that NSI commences the Initial Public Offering on or before December 30, 1995, NSI agrees to pay to the Holders the amounts listed on Exhibit B hereto, which in the case of the Holders who are also Licensees, shall be deemed to be a rebate of license fees previously paid by them to NSI. Such amounts shall be payable in shares of Common Stock (the "Shares"), valued at the price to the public per share of Common Stock in the Initial Public Offering, less any underwriting discounts or commissions. At each Holder's option, to be exercised by written notice to NSI during the ten-day period following the closing of the Initial Public Offering, the Holder may elect to receive some or all of the amount listed on Exhibit B in cash. In the event a Holder does not provide such written notice to NSI during such ten-day period, the entire amount payable to such Holder shall be payable in shares. All amounts payable under this Section 6 shall be payable by NSI within ten days after the end of such ten-day election period. Upon issuance to the Holders, the shares shall be fully paid and nonassessable, free of any liens or encumbrances, and shall not be subject to any restrictions on transfer by the Holders. In the event that the Initial Public Offering has not been commenced on or before December 30, 1995, in lieu of the payments provided in this Section 6, the exercise price of each Holder's Warrants will be reduced to $.0001 per share of Common Stock on such date, and the Warrants shall be amended accordingly, Without further act or deed by the Holder or NSI. 7. FURTHER ASSURANCES. Each party hereto shall do and perform or cause to be done and performed all further acts and things and shall execute and deliver all other agreements, certificates, instruments, and documents as any other party hereto reasonably may request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. 8. REPRESENTATIONS AND WARRANTIES OF LICENSEES. Each Licensee hereby represents and warrants to NSI (each Licensee representing and warranting as to itself only) as follows: 8.1. ORGANIZATION. the licensee is a corporation or partnership duly organized and validly existing under the laws of its state of incorporation or organization, and if the Licensee is a corporation, it is in good standing under the laws of its state of organization. The Licensee has the requisite corporate or partnership power to own or lease its properties and assets and to carry on its business as now conducted. 8.2. AUTHORITY RELATIVE TO THIS AGREEMENT. The Licensee has the right, power and authority to enter into this Agreement and to perform all of its obligations hereunder. This Agreement has been authorized by all necessary corporate or partnership action of, has been duly executed and 4 delivered by, and constitutes the valid and binding obligation of, the Licensee, enforceable in accordance with its terms. 8.3. NO CONFLICTS; NO CONSENTS. Except for filings necessary to effect the Merger and the registration of shares of the Surviving Corporation to be issued in the Merger, the execution, delivery and performance of this Agreement by the Licensee will not result in a breach in the terms or conditions of, or constitute a default under, or violate, or conflict with, or require, as the case may be: (i) any provision of any law, regulation or ordinance applicable to the Licensee, (ii) the Partnership Agreement or the Articles of Incorporation, Certificate of Incorporation, Bylaws or Regulations of the Licensee, (iii) any material agreement, lease, mortgage or other instrument or undertaking, oral or written, to which the Licensee is a party or by which it or any of its properties or assets is or may be bound or affected, or (iv) any judgment, order, writ, injunction or decree of any governmental authority. 9. REPRESENTATIONS AND WARRANTIES OF CCWP AND GRK. Each of CCWP and GRK hereby represents and warrants to NSI (each of them representing and warranting as to itself only) as follows: 9.1. ORGANIZATION. Each of CCWP and GRK is a partnership duly organized and validly existing under the laws of Ohio, and has the requisite partnership power to own or lease its properties and assets and to carry on its business as now conducted. 9.2. AUTHORITY RELATIVE TO THIS AGREEMENT. Each of CCWP and GRK has the right, power and authority to enter into this Agreement and to perform all of its obligations hereunder. This Agreement has been duly and validly executed and delivered by, and constitutes the valid and binding obligation of, each of CCWP and GRK, enforceable in accordance with its terms. 9.3. NO CONFLICTS; NO CONSENTS. The execution, delivery and performance of this Agreement by each of CCWP and GRK will not result in a breach in the terms or conditions of, or constitute a default under, or violate, or conflict with, or require, as the case may be: (i) any provision of any law, regulation or ordinance applicable to each of CCWP and GRK, (ii) the Partnership Agreement of each of CCWP and GRK, (iii) any material agreement, lease, mortgage or other instrument or undertaking, oral or written, to which each of CCWP and GRK is a party or by which it or any of its properties or assets is or may be bound or affected, or (iv) any judgment, order, writ, injunction or decree of any governmental authority. 1O. REPRESENTATIONS AND WARRANTIES OF NSI. NSI hereby represents and warrants to Licensees, CCWP and GRK as follows: 10.1. ORGANIZATION. NSI is a corporation duly organized, validly existing and in good standing under the laws of Delaware. NSI has the requisite corporate power to own or lease its 5 properties and assets and to carry on its business as now conducted. 10.2. AUTHORITY RELATIVE TO THIS AGREEMENT. NSI has the right, power and authority to enter into this Agreement and to perform all of its obligations hereunder. This Agreement has been authorized by all necessary corporate action of, has been duly executed and delivered by, and constitutes the valid and binding obligation of, NSI, enforceable in accordance with its terms. 10.3. NO CONFLICTS; NO CONSENTS. The execution, delivery and performance of this Agreement by NSI will not result in a breach in the terms or conditions of, or constitute a default under, or violate, or conflict with, or require, as the case may be: (i) any provision of any law, regulation or ordinance applicable to NSI, (ii) the Certificate of Incorporation or Bylaws of NSI, (iii) any material agreement, lease, mortgage or other instrument or undertaking, oral or written, to which NSI is a party or by which it or any of its properties or assets is or may be bound or affected, or (iv) any judgment, order, writ, injunction or decree of any governmental authority. 11. MISCELLANEOUS. 11.1. RULES OF CONSTRUCTION. As used in this Agreement, neutral pronouns and any variations thereof shall be deemed to include the feminine and masculine and all terms used in the singular shall be deemed to include the plural, and vice versa, as the context may require. The words "hereof", "herein" and "hereunder" and other words of similar import refer to this Agreement as a whole, including the Exhibits hereto, as the same may from time to time be amended or supplemented, and not to any subdivisions contained in this Agreement. The word "including" when used herein is not intended to be exclusive and means "including, without limitation." References herein to "dollars," "U.S. $," and "I" are to United States dollars. References herein to Paragraph, Section, subsection or Exhibit shall refer to the appropriate Paragraph, Section, subsection or Exhibit in or to this Agreement. 11.2. ASSIGNMENT. This Agreement is not assignable by any party without the prior written consent of the other parties, which consent shall not be unreasonably withheld. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. 11.3. WAIVER; REMEDIES. No failure on the part of any party to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 11.4. SEVERABILITY. If any provision of this Agreement is determined by a court of competent jurisdiction to be invalid or unenforceable, such determination shall not affect the validity or enforceability of any other part or provision of this Agreement. 6 11.5. CHOICE OF LAW. This Agreement and the performance hereof shall be governed by and construed in accordance with the laws of the State of Ohio (without giving effect to principles of conflicts of laws). 11.6. NOTICE. All notices, invoices, consents or other communications required or permitted to be given by any party to another shall be in writing (including facsimile or similar writing) and shall be given by facsimile, Federal Express or similar courier service, or by certified or registered mail, postage prepaid as follows: (a) If to NSI, to: Neuromedical Systems, Inc. Two Executive Boulevard Suffern, New York 10901-4164 Attn.: John B. Henneman, III Vice President of Corporate Development and General Counsel Facsimile: (914) 368-3896 With a copy to: Fried, Frank, Harris, Shriver & Jacobson One New York Plaza New York, New York 10004 Attn.: Paul M. Reinstein, Esq. Facsimile: (212) 859-8686 (b) If to the Licensees, to GRK or to the Surviving Corporation, to: Papnet of Ohio, Inc. 6059 Memorial Drive Dublin, Ohio 43017 Attn: David M. Richards, President Cytology West, Inc. 3753 Howard Hughes Parkway Suite 200 Las Vegas, Nevada 89109 Attn: Carl Genberg, President Facsimile: (702) 892-3940 7 Carolina Cytology c/o Rodney M. Kinsey, Sr. 8651 Gairloch Court Dublin, Ohio 43017 Facsimile: (614) 889-1052 ER Group, Inc. c/o Mr. Thomas Kelley 8598 Milmichael Court Dublin, Ohio 43017 Facsimile: (614) 764-2501 Cytology Indiana, Inc. Indiana Cytology Review Company c/o Mr. Cecil J. Petitti Chaney & Petitti Insurance Agency 4266 Tuller Road Dublin, Ohio 43017 Facsimile: (614) 764-1455 Papnet Utah, Inc. c/o Mr. Kent Dawson 626 South Third Street Las Vegas, Nevada 89101 Facsimile: (702) 383-8495 With copies to: Porter, Wright, Morris & Arthur 41 South High Street Columbus, Ohio 43215 Attn: William J. Kelly, Jr., Esq. Facsimile: (614) 227-2100 Gallagher & Kennedy 2600 North Central Avenue Phoenix, Arizona 85004-3020 Attn: Michael Ahearn, Esq. Facsimile: (602) 257-4959 8 Squire, Sanders & Dempsey 1300 Huntington Center 41 South High Street Columbus, Ohio 43215 Attn: Daniel M. Maher, Esq. Facsimile: (614) 365-2499 or at such other address or facsimile number (or other similar number) as any party may from time to time specify to the other parties hereto. 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 facsimile (provided the appropriate answer back is received) thereof and shall be conclusively presumed to have been received on the second business day following the date of mailing or, in case of personal delivery, the actual day of personal delivery thereof, or, in the case of facsimile delivery, when such facsimile is transmitted, except that a change of address shall not be effective until actually received. 11.7. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all previous proposals, both oral and written, negotiations, representations, commitments, writings and all other communications between the parties. It may not be released, discharged, changed or modified except by an instrument in writing signed by a duly authorized representative of each of the parties. 11.8. HEADINGS. The headings used in this Agreement are for reference purposes only and shall not be construed to limit or further define any term or provisions hereof. 11.9. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement by a duly authorized representative as of the date first written above. NEUROMEDICAL SYSTEMS, INC. By: /s/ Mark R. Rutenberg ----------------------------- Mark R. Rutenberg, President and Chief Executive Officer 9 PAPNET OF OHIO, INC. By: /s/ David Richards ----------------------------- David R. Richards, President CYTOLOGY INDIANA, INC. By: /s/ S. Trevor Ferger ---------------------------- President INDIANA CYTOLOGY REVIEW COMPANY By: /s/ Cecil J. Petitti ---------------------------- President PAPNET WEST LIMITED PARTNERSHIP By: /s/ Carl Genberg ---------------------------- General Partner ER GROUP, INC. By: /s/ Thomas J. Kelley ---------------------------- President 10 CAROLINA CYTOLOGY LICENSING COMPANY By: /s/ Rodney Kinsey ---------------------------- President CAROLINA CYTOLOGY WARRANT COMPANY By: /s/ Rodney Kinsey ---------------------------- President CYTOLOGY WEST, INC. By: /s/ Carl Genberg ---------------------------- President PAPNET UTAH, INC. By: /s/ Kent Dawson ---------------------------- President 11 GRK PARTNERSHIP By: /s/ David J. Richards ---------------------------- David J. Richards, a Partner By: /s/ Carl Genberg ---------------------------- Carl Genberg, a Partner By: /s/ John P. Kennedy ---------------------------- John Kennedy, a Partner 12 Exhibit A AMENDED AND RESTATED AGREEMENT THIS AMENDED AND RESTATED AGREEMENT, dated as of _________________, 1995, is by and between NEUROMEDICAL SYSTEMS, INC., a Delaware corporation ("NSI"), with its principal place of business at Two Executive Boulevard, Suffern, New York 10901, and ____________, a Delaware corporation ("Licensee"), with its principal place of business at ____________________ (this "Agreement"). This Agreement supersedes and replaces any and all prior agreements by and between NSI and Licensee and any of its predecessors-in-interest, including, without limitation, Papnet of Ohio, Inc., an Ohio corporation ("Papnet of Ohio"), Papnet Indiana Limited Partnership, an Ohio limited partnership, Papnet West Limited Partnership, an Ohio limited partnership, ER Group, Inc., an Ohio corporation, Carolina Cytology Licensing Company, an Ohio general partnership, Cytology West, Inc., a Delaware corporation, and Papnet Utah, Inc., a Nevada corporation. WHEREAS, NSI has designed, developed and produces the PAPNET-Registered Trademark- Testing System ("PAPNET-Registered Trademark-," "PAPNET-Registered Trademark- System" or "PAPNET-Registered Trademark- Testing"), which is a semi-automated system for the review of cell, tissue or body fluid specimens ("Slides") including, but not limited to, cervical cytology specimens; WHEREAS, the PAPNET-Registered Trademark- System consists of a scanning system (the "Scanner"), which processes Slides and stores digital images of certain portions of such Slides on a digital tape ("PAPNET-Registered Trademark-Images"), and a proprietary review station (the "Review Station"), which, among other things, permits a cytotechnologist trained by NSI to review the images stored on the digital tape; WHEREAS, NSI markets and sells PAPNET-Registered Trademark- Testing as a service, by which end-user laboratories submit Slides to one of NSI's central facilities for processing on a Scanner ("Scanning Centers"), and NSI returns such Slides and the related digital tape containing PAPNET-Registered Trademark-Images to such laboratories so that NSI-trained cytotechnologists employed by such laboratories may review the Slides and the related PAPNET-Registered Trademark- Images using a licensed, leased or purchased Review Station (the scanning of Slides and the use of the Review Station (whether by license, lease or purchase) are collectively referred to herein as the "PAPNET-Registered Trademark- Service"); WHEREAS, NSI has been granted patents #4,965,725, #5,287,182, #5,287,272, and _______ by the United States government, covering the use of neural networks for the classification of cell, tissue or body fluid specimens, and has certain other patents and patent applications issued and pending in the United States and elsewhere and has or will have certain other patents in development relating to the PAPNET-Registered Trademark- System or the PAPNET-Registered Trademark-Service (the "Patents"); and WHEREAS, NSI has used the trademarks and trade names "Neuromedical Systems", "NSI", "PAPNET-Registered Trademark-" and its "box" logo and may use other names or marks to identify or describe the PAPNET-Registered Trademark-Service (the Patents and all pending and future worldwide patents and patent rights, copyrights, trademarks, trade names, trade secrets, know-how, utility models, improvements thereon and other intellectual property rights in and to the PAPNET-Registered Trademark- System or the PAPNET-Registered Trademark-Service, including without limitation, all applications and registrations with respect thereto, are collectively referred to as the "Intellectual Property"); and WHEREAS, Licensee acknowledges NSI's exclusive right in and to the Intellectual Property and the use thereof and NSI acknowledges Licensee's limited rights to use the Intellectual Property as provided herein; and WHEREAS, NSI wishes to enter into this Agreement with Licensee to amend and restate its previous agreement with Licensee and any of its predecessors-in-interest and to reflect the business combination into Licensee of Papnet of Ohio, Inc. Papnet Indiana Limited Partnership, Papnet West Limited Partnership, Cytology West, Inc., Carolina Cytology Licensing Company, ER Group, Inc., and Papnet Utah, Inc., which were formerly licensees of NSI; and NOW THEREFORE, in consideration of the foregoing and of the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is hereby agreed as follows: 1. DEFINITIONS. For purposes of this Agreement, capitalized terms shall have the meanings set forth below: "Agreement" shall have the meaning set forth under the preamble hereto. "Client" shall mean the ultimate laboratory purchaser of the PAPNET- Registered Trademark- Service from NSI and the Licensee. "End User License" shall mean the form of agreement attached hereto as Exhibit A, as the same may be amended from time to time. "FDA" shall mean the United States Food and Drug Administration. "Indemnifying Party" shall have the meaning set forth under Section 10.3 of this Agreement. "Indemnified Person" shall have the meaning set forth under Section 10.3 of this Agreement. "Intellectual Property" shall have the meaning set forth under the fifth recital of this Agreement. "Lease Service Costs" shall mean the charges to Licensee per Slide for all service provided by NSI in processing slides from Clients in the Licensed Territory. This charge will cover all costs of NSI related to the processing of Slides by the laboratory, including but not limited to Slide processing, review stations, DATs, upgrades, software, hardware, transportation costs (except Slide 2 Transportation Costs), training costs and all other such costs. The charge shall be the lower of: a) $1.00 per Slide, or b) NSI's average actual equipment cost per Slide for the acquisition of Scanners and related equipment used in rendering the PAPNET-Registered Trademark- Service. The per Slide charge under this paragraph in any year shall be calculated by dividing the average capitalized cost to NSI as recorded on its books of account of the Scanners and related equipment (i) by the average useful life thereof for depreciation purposes and (ii) then by the actual annual average processing volume of such equipment. The foregoing calculation shall be made annually, based upon cost, depreciation and processing volume data from the preceding fiscal year. This method will be the same method used to determine the cost to Licensee of any future equipment or service. "Licensed Territory" shall mean the States of Ohio, Arizona, Georgia, Kentucky, Missouri, Nevada, North Carolina and Utah and San Diego County, California and the standard metropolitan statistical area of Chicago, Illinois. "Licensee" shall have the meaning set forth under the preamble of this Agreement. "Loss" shall have the meanings set forth under Section 10.1 and 10.2 of this Agreement. "Multistate National Laboratories" shall mean any clinical laboratory companies that process more than 750,000 Slides annually, and which either (i) have Slide processing laboratories both within and without the Licensed Territory, or (ii) are located outside the Licensed Territory and have ten percent (10%) or more of their annual Slide volume originating from patients located within the Licensed Territory. The parties will annually evaluate the Slide volumes of clinical laboratory companies in the United States to identify the laboratory companies that meet this definition. "Notice" shall have the meaning set forth under Section 10.3 of this Agreement. "Notice of Defense" shall have the meaning set forth under Section 10.3 of this Agreement. "NSI" shall mean Neuromedical Systems, Inc. and its subsidiaries. "NSI Technology" shall mean any and all applications, modifications, refinements and improvements of the Patents and Intellectual Property, whether or not patented, including but not limited to the application of neural network technology to the classification of Slides and any patents, patent rights, copyrights, trademarks, trade names, trade secrets, know-how, utility models, improvements thereon and other intellectual property rights developed or acquired by NSI to assist in the sale, processing or enhancement of the PAPNET-Registered Trademark- System or the PAPNET-Registered Trademark- Service or products related thereto. "PAPNET-Registered Trademark-" shall have the meaning set forth under the first recital of this Agreement. "PAPNET-Registered Trademark- Images" shall have the meaning set forth under the second recital of this Agreement. 3 "Papnet of Ohio" shall have the meaning set forth under the preamble to this Agreement. "PAPNET-Registered Trademark- Service" shall have the meaning set forth under the third recital of this Agreement. "PAPNET-Registered Trademark- System" shall have the meaning set forth under the first recital of this Agreement. "PAPNET-Registered Trademark- Testing" shall have the meaning set forth under the first recital of this Agreement. "Patents" shall have the meaning set forth under the fourth recital of this Agreement. "Person" shall have the meaning ascribed to such term under Section 13(d) of the Securities Exchange Act of 1934. "Proprietary Materials" shall have the meaning set forth under Section 9.1 of this Agreement. "Revenue Slide" shall mean a Slide processed using the PAPNET-Registered Trademark- System or the PAPNET-Registered Trademark- Service for which any charge is made by NSI. "Review Station" shall have the meaning set forth under the second recital of this Agreement. "Royalties" shall have the meaning set forth under Section 3.1 of this Agreement. "Scanner" shall have the meaning set forth under the second recital of this Agreement. "Scanning Centers" shall have the meaning set forth under the third recital of this Agreement. "Slides" shall have the meaning set forth under the first recital of this Agreement. "Slide Transportation Costs" shall mean the actual costs to NSI of transporting Revenue Slides between the Clients in the Licensed Territory and the applicable Scanning Center. "Term" shall have the meaning set forth under Section 12(a) of this Agreement. "Territory Gross Revenues" shall mean all sales, revenues or receipts recognized by NSI as sales or revenue under generally accepted accounting principles consistently applied, arising directly or indirectly from the sale, licensing or use of the PAPNET-Registered Trademark- System, PAPNET-Registered Trademark- Service, and/or any NSI Technology within the Licensed Territory, without any allowances, credits or deductions (other than such as would constitute price rebates, in the form of discounts or other reductions in the effective price per Slide charged to Clients), regardless of whether such sales, revenues or 4 receipts are attributable to Licensee's activities within the Licensed Territory. "Worldwide Gross Revenues" shall mean all sales, revenues (regardless of whether such revenues are characterized as operating or non-operating revenues on NSI's consolidated financial statements) or receipts recognized by NSI as sales or revenue under generally accepted accounting principles consistently applied (and expressed in U.S. Dollars), without any allowances, credits or deductions (other than such as would constitute price rebates, in the form of discounts or other reductions in the effective price per Slide charged to Clients). 2. DISTRIBUTION AND MARKETING. 2.1 DISTRIBUTION RIGHTS. Upon the terms and subject to the conditions of this Agreement, NSI hereby grants to Licensee during the Term of this Agreement an exclusive right and license to sell the PAPNET-Registered Trademark- Service and any and all other NSI Technology in the Licensed Territory. Notwithstanding the foregoing, the grant of exclusive rights to Licensee hereunder shall not prohibit NSI from conducting sales activities in the Licensed Territory directly through NSI's national sales force and marketing in the Licensed Territory, provided that NSI gives Licensee reasonable advance notice of such activities. 2.2 MARKETING AND SALES. (a) Licensee agrees to use reasonable efforts to promote and sell the PAPNET-Registered Trademark- Service within the Licensed Territory. Licensee will conduct such activities as it undertakes in accordance with marketing and sales policies and procedures of uniform national application promulgated from time to time by NSI's Vice President of Marketing and Sales, its Director of Sales, or such other person as NSI shall appoint for such purpose. Licensee will provide periodic sales reports and other sales-related information and internal reports to NSI as provided in such uniform policies adopted by NSI from time to time, and otherwise on the same basis as such information and reports are provided to Licensee's management, including assistance to NSI's Director of Sales in the preparation of monthly master production schedules. Licensee's Sales Manager shall also have access to such NSI sales data on the same basis as NSI's Director of Sales and shall promptly receive copies of internal NSI reports related to same. Notwithstanding the foregoing, NSI data relating to regions outside of the Licensed Territory (including aggregate national data) for any fiscal period of NSI shall not be required to be made available to Licensee until after NSI has filed its applicable periodic report as required under Section 13 of the Securities Exchange Act of 1934, and any material nonpublic sales information of Licensee for any fiscal period of Licensee shall not be required to be made available to NSI until after Licensee has filed its applicable periodic report as required under Section 13 of the Securities Exchange Act of 1934. All data and reports of a party provided to the other under this Section 2.2(a) shall be received by such other party subject to reasonable policies of the providing party regarding the use and disclosure of confidential information as the same are applicable to the providing party's officers and employees. (b) NSI shall have authority over the marketing and selling materials and methods relating 5 to the PAPNET-Registered Trademark- Service. Licensee shall provide only NSI-approved marketing materials to Clients. NSI shall make available to Licensee, for a charge not to exceed NSI's actual per-unit incremental cost (exclusive of charges for design and other creative services), all such brochures, pamphlets, reprints and other marketing and sales materials as are available to NSI, in sufficient quantities for Licensee to conduct efficient marketing activities in the Licensed Territory; provided, however, that if use of any such materials is mandated by NSI, NSI shall bear the entire costs thereof. Licensee may also reproduce marketing materials obtained from NSI for use in conducting Licensee's marketing activities, provided that such reproduction shall be of equal or better quality. As requested by Licensee, NSI will use reasonable efforts to make available to Licensee other information, data, reprints and public speakers to aid in the promotion of the PAPNET-Registered Trademark- Service within the Licensed Territory, on reasonable terms and conditions. (c) Licensee shall obtain prior written approval from NSI for the use of any marketing materials for the PAPNET-Registered Trademark- Service which may be independently developed by Licensee. Any such request shall be made in writing to NSI's Vice President of Marketing, with a copy to NSI's General Counsel. NSI will promptly respond in writing to any such request; failure to respond within 30 days of receipt of any such request which has been delivered by certified mail shall constitute approval by NSI of such materials. NSI will have the ability to approve or deny use of such materials in the exercise of its reasonable discretion. All marketing materials independently developed by Licensee incorporating the Intellectual Property or relating to the PAPNET-Registered Trademark- System or the PAPNET-Registered Trademark- Service shall clearly indicate Licensee's relationship with NSI. (d) Should NSI engage in advertising in visual, audio or print media or direct mail or direct response campaigns, or other similar methods of promoting the PAPNET-Registered Trademark- Service, which are substantially national in scope and tenor, NSI shall conduct a level of such promotional efforts in the Licensed Territory proportionate to the level of population within the Licensed Territory. NSI shall bear the cost of any such advertising or promotional activities which it conducts within the Licensed Territory. (e) NSI agrees to use reasonable efforts to inform Licensee of its marketing and sales efforts in the Licensed Territory. NSI will use reasonable efforts to provide Licensee the opportunity to participate in the implementation of marketing policies, strategies, and programs and will use its reasonable efforts to provide a representative of Licensee the opportunity to attend, either by phone or in person, all relevant meetings and other programs of NSI that relate to implementation of such policies, strategies and programs, or to any marketing, sales or customer relations activities in the Licensed Territory. (f) NSI agrees to cooperate with Licensee and to provide without charge its facilities and employees in arranging and conducting product demonstrations, tours of NSI facilities, meetings with NSI executives, and similar activities in connection with Licensee's marketing, sales and public relations efforts, upon reasonable prior notice and during normal business hours. 2.4 SALES PERSONNEL. Licensee will consult with and give reasonable consideration to NSI's 6 evaluations and recommendations regarding the employment and retention of sales representatives of Licensee who market and sell the PAPNET-Registered Trademark- Service, and such evaluations and recommendations will be based upon criteria similar to those employed by NSI in the hiring and retention of its own sales force. NSI shall provide without cost to Licensee initial and periodic training of Licensee's sales personnel to the same extent and on the same basis that such training is provided to NSI's sales personnel, and shall keep Licensee's sales personnel updated with appropriate sales materials and other information. Licensee agrees to cause its sales personnel to participate in periodic marketing or sales meetings and conference calls conducted by NSI for its national sales force, and NSI will bear the costs of travel and lodging for meetings or other programs at which attendance by Licensee's sales personnel is requested by NSI. 2.5 INTELLECTUAL PROPERTY. NSI hereby grants Licensee an irrevocable right to use during the Term of this Agreement, for the purpose of Licensee's marketing and sale of the PAPNET-Registered Trademark- Service in accordance with and subject to the terms of this Agreement, the copyrights, trademarks, and trade names used by NSI to identify PAPNET-Registered Trademark- or the PAPNET-Registered Trademark- Service. Licensee agrees to comply with such written policies of general application which NSI shall from time to time adopt concerning the use of NSI's copyrights, trademarks and trade names by NSI personnel, distributors and other representatives. Licensee shall have the right to reproduce NSI's trademarks and logos on its business cards, letterhead stationery, and corporate communications, provided that such materials indicate Licensee's relationship with NSI. Licensee shall not use NSI's copyrights, trademarks or trade names in a disparaging manner. Licensee shall not take any action which is inconsistent with NSI's ownership of its copyrights, trademarks and trade names, and agrees that each of the foregoing shall inure to the benefit of NSI. NSI agrees to include correct trademark, trade name, copyright, trade secret and patent notices for the PAPNET-Registered Trademark- System and the PAPNET-Registered Trademark- Service on all materials and equipment where appropriate. Licensee shall not remove, alter, cover, obfuscate or otherwise deface any NSI trademark, trade name, patent, trade secret or copyright notice on the PAPNET-Registered Trademark- System or any part thereof or on any promotional or advertising material used in conjunction with or for the PAPNET-Registered Trademark- System or the PAPNET-Registered Trademark- Service. The foregoing provisions shall also apply to any other NSI Technology licensed to Licensee hereunder. Licensee agrees not to represent that any product or service sold by it in conjunction with the PAPNET-Registered Trademark- System or the PAPNET-Registered Trademark- Service, and which is not licensed by NSI, is a product or service manufactured, provided or endorsed by NSI. 2.6 NATURE AND SCOPE OF APPOINTMENT. Licensee shall not knowingly market, distribute, sell or license the PAPNET-Registered Trademark- System or the PAPNET-Registered Trademark- Service outside of the Licensed Territory or for any use, other than as permitted by NSI; provided, however, that activities of Licensee outside the Licensed Territory reasonably incidental to marketing and sales activities within the Licensed Territory shall not be a violation of this Section 2.6. Licensee shall not, nor shall it encourage or assist any third party to, make use of the PAPNET-Registered Trademark- System other than as permitted or recommended by NSI and indicated by the PAPNET-Registered Trademark- System's labeling. Nothing contained in this Agreement shall prohibit NSI from making, using, licensing, distributing, selling or granting any rights in and to the PAPNET-Registered Trademark- System or the PAPNET-Registered Trademark- Service outside of the Licensed Territory so long as there is no material effect on Licensee's exclusive rights within the Licensed Territory. 7 2.7 REGULATORY COMPLIANCE. NSI agrees to promptly advise Licensee in writing of its policies with regard to governmental regulations affecting the PAPNET-Registered Trademark- System or the PAPNET-Registered Trademark- Service and any changes in such policies which may occur from time to time. Licensee agrees that any marketing or use of the PAPNET-Registered Trademark- System or the PAPNET-Registered Trademark- Service shall conform to NSI's practices or policies with respect to compliance with governmental regulations. Licensee agrees to use its reasonable efforts to cause its sales force to operate in strict compliance with NSI's policies and practices, and generally with all applicable governmental regulations applicable to their activities. 2.8 GOVERNMENTAL RESTRICTIONS. To the extent that any court, governmental body or regulatory agency with jurisdiction over NSI or Licensee restricts or prohibits the marketing, distribution, provision or licensing of the PAPNET-Registered Trademark- System or the PAPNET-Registered Trademark- Service, Licensee's rights hereunder shall be subject to and limited by any such restriction or prohibition without liability to NSI of any type or nature except as expressly provided herein to the contrary. 2.9 UPGRADES; IMPROVEMENTS. The provisions of this Agreement and the marketing and royalty rights of Licensee hereunder shall apply to any and all upgrades and improvements of the PAPNET-Registered Trademark- System or the PAPNET-Registered Trademark- Service, whether or not patented, as well as any other product or service marketed or sold by NSI which is defined as "NSI Technology" hereunder. 3. ROYALTIES. 3.1 AMOUNT AND PAYMENT. (a) With respect to each fiscal month during the Term of this Agreement NSI shall be obligated to pay Licensee Royalties equal to fifty percent (50%) of the amount by which Territory Gross Revenues recognized by NSI during such month exceeds the sum of the Lease Service Costs and Slide Transportation Costs associated with the Slides processed during such month; provided, however, that the total amount of Royalties payable under this Section 3.1(a) with respect to any fiscal year of NSI shall not exceed the amount of Royalties determined with respect to Territory Gross Revenues recognized by NSI from the processing of the first 12,175,000 Revenue Slides for such fiscal year which originate in the Licensed Territory. (b) Notwithstanding the provisions of Section 3.1(a), in the event that the aggregate amount of monthly Royalties paid with respect to any fiscal year of NSI shall be less than four and fifteen hundredths percent (4.15%) of NSI's Worldwide Gross Revenues for such fiscal year, NSI shall pay to Licensee as additional Royalties the amount of such difference; provided, however, that the total amount of Royalties payable under this Section 3.1(b) with respect to any fiscal year of NSI shall not exceed an amount equal to (i) Twenty Three Million Dollars ($23,000,000), less (ii) the total amount of Royalties payable under Section 3.1(a) with respect to such fiscal year. (c) The Royalties due with respect to any fiscal month shall be reported by NSI to Licensee within fifteen (15) days after the conclusion of such month, and shall be paid by NSI to 8 Licensee as soon as possible, but not later than thirty (30) days, after the conclusion of such month. Any additional Royalties payable pursuant to Section 3.1(b) shall be reported and paid by NSI to Licensee not later than ninety (90) days after the end of the fiscal year with respect to which such additional Royalties are due. Royalty reports furnished by NSI to Licensee pursuant to this Section 3.1(c) shall set forth the calculation of the Royalties in reasonable detail so that Licensee can determine the accuracy thereof. Royalties shall be paid by check or wire transfer. (d) NSI's obligation to pay any Royalties due under this Section 3.1 shall not be subject to any conditions or limitations other than as provided in this Section. (e) For purposes of determining Licensee's share of Territory Gross Revenues during any applicable period, there shall be included in Territory Gross Revenues during such period a proportionate share of gross revenues recognized by NSI arising directly or indirectly from the sale, licensing or use of the PAPNET-Registered Trademark- System, PAPNET-Registered Trademark-Service, and/or any NSI Technology to Multistate National Laboratories, without any allowances, credits or deductions (other than such as would constitute price rebates, in the form of discounts or other reductions in the effective price per Slide charged to Clients), regardless of whether the Revenue Slides attributable to such Multistate National Laboratories actually originate in the Licensed Territory. Such proportionate share shall be equal to the ratio which the population of the Licensed Territory bears to the population of the United States, as determined from time to time from the most recently available United States census data. As of the date of this Agreement, such ratio is ___ percent. In determining the amount of Royalties payable during any applicable period with respect to such proportionate share of gross revenues, an amount representing Lease Service Costs and Slide Transportation Costs will be deducted from Territory Gross Revenues. Such costs shall be determined by multiplying the average per Revenue Slide Lease Service Costs and Slide Transportation Costs in the Licensed Territory times the number of Revenue Slides represented by the proportionate share of gross revenues from Multistate National Laboratories included in the Territory Gross Revenues. (f) In the event that the PAPNET-Registered Trademark- System, PAPNET-Registered Trademark- Service, and/or any NSI Technology is ever applied by NSI to the processing of Slides other than cervical cytology specimens (I.E.,"PAP" smears), the parties will in good faith negotiate an increase in the Royalties cap contained in Section 3.1(a) above to accord Licensee a share of the additional Territory Gross Revenues attributable to such new Slide processing business, which is proportionate to the ratio which the population in the Licensed Territory bears to the total population of the United States at the time. 3.2 BOOKS AND RECORDS. NSI agrees to keep full and accurate books and records showing all billings, Territory Gross Revenues, Worldwide Gross Revenues. Lease Service Costs, Slide Transportation Costs and Revenue Slide geographic origin in sufficient detail to enable Royalties to be determined and paid by it under this Article 3. NSI further agrees that Licensee and its representatives shall be permitted to inspect such books and records from time to time during regular business hours and to make such copies thereof as reasonably appropriate. Licensee shall be entitled to have such books and records audited by a certified public accountant at Licensee's expense, and 9 NSI agrees to place at the disposal of Licensee's accountant all books and records necessary or desirable in connection with such audit and to give such auditor reasonable assistance and cooperation. The cost of any such inspection or audit shall be borne by Licensee. 3.3 CALCULATION OF GROSS REVENUES. The determination of NSI's independent auditor as to Worldwide Gross Revenues for any fiscal year shall be deemed presumptively correct. If disputed, Licensee shall have the right to make reasonable inquiry as to the method by which Worldwide Gross Revenues have been calculated and NSI shall instruct its auditor to provide a prompt and thorough response to such inquiry. Any and all disputes concerning the determination of Territory Gross Revenues or Worldwide Gross Revenues shall be subject to arbitration as provided in Section 13 of this Agreement. 3.4 REMEDY FOR NON-PAYMENT OF ROYALTIES. Without limiting any other rights or remedies to which Licensee may be entitled hereunder, in the event of the failure of NSI to pay Licensee any Royalties when required to be paid under Section 3.1(c), interest thereon shall accrue monthly at the rate of 1.5% (18% per annum). 4. CONTRACT TERMS AND PROCEDURES; CLIENT TRAINING AND SERVICE. 4.1 GENERAL. NSI shall provide Licensee with its standard form or forms of End User License and other forms of contracts to be executed between NSI and Clients, which shall be used by Licensee and NSI in the Licensed Territory. Licensee and NSI shall cooperate in negotiating the definitive terms of such contracts between NSI and Clients in the Licensed Territory. NSI agrees to comply with the terms of any End User License it enters into with Clients. 4.2 CONTRACTING OBLIGATIONS OF NSI. NSI shall enter into contracts with Clients in the Licensed Territory under the same terms, conditions, charges, added customer benefits, and exceptions as it does in the remainder of the United States. NSI shall not refuse to enter into or delay entering into any contract with a Client in the Licensed Territory except upon grounds stated in NSI's written policies and procedures of uniform national application which have been provided to Licensee. In the event of such a delay or refusal, NSI shall promptly provide written notice to Licensee of such delay or refusal and the detailed grounds therefor, and shall cooperate with Licensee's efforts to remedy any noted deficiencies. 4.3 NONDISCRIMINATION. NSI agrees that pricing, discounts and concessions, delivery schedules, and other contract terms of the PAPNET- Registered Trademark- Service provided to Clients within the Licensed Territory, as well as the quality and timeliness of service to them, will be no less favorable to such Clients than for laboratories, insurance companies or other purchasers in any other region or locality within the United States, except to the extent that NSI can demonstrate that any variance in pricing, discounts and concessions, or other contract terms is proportionate to differences in the cost of servicing a particular customer. Notwithstanding the foregoing, if NSI shall enter into agreements with laboratories, insurance companies or other purchasers on economic or business terms materially different than provided to Clients within the Licensed Territory, at Licensee's 10 request, NSI shall extend such differing terms to Clients in the Licensed Territory with comparable costs of service. In order to assess NSI's compliance with this Section 4.3, NSI will permit Licensee to inspect, during normal business hours, NSI's contract files for Clients located outside of the Licensed Territory. The provisions of this Section 4.3 shall not impose any obligation on NSI to extend pricing, discounts, concessions, or other contract terms applicable to Multistate National Laboratories to Clients in the Licensed Territory. 4.4 TRAINING AND REVIEW STATIONS. NSI shall provide training in the operation and maintenance of the Review Station and the evaluation of PAPNET-Registered Trademark- Images to personnel of Clients in the Licensed Territory, on terms and schedules comparable to those offered to Clients outside the Licensed Territory. NSI will notify Licensee of any anticipated delays in the delivery of Review Stations or in training of Client personnel of greater than thirty (30) days after execution and delivery of the End User License and other standard contract forms required by NSI. 6. REPRESENTATIONS AND WARRANTIES OF NSI. NSI (which term, for purposes of this Article 6, does not include subsidiaries) hereby represents and warrants to Licensee as follows: 6.1 ORGANIZATION. NSI is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. NSI has the corporate power to own or lease its properties and assets and to carry on its business as now conducted. 6.2 AUTHORITY RELATIVE TO THIS AGREEMENT. NSI has the right, power and authority to enter into this Agreement and to perform all of its obligations hereunder. This Agreement has been authorized by all necessary corporate action of, has been duly executed and delivered by, and constitutes the valid and binding obligation of, NSI, and is enforceable in accordance with its terms. 6.3 NO CONFLICTS; NO CONSENTS. The execution, delivery and performance of this Agreement will not result in a breach in the terms or conditions of, or constitute a default under, or violate, or conflict with, or require, as the case may be: (i) any provision of any law, regulation or ordinance; (ii) the Certificate of Incorporation or Bylaws of NSI; (iii) any agreement, lease, mortgage or other instrument or undertaking, oral or written, to which NSI is a party or by which it or any of its properties or assets is or may be bound or affected; (iv) any judgment, order, writ, injunction or decree of any governmental authority, or (v) any action of or by, or filing with, any governmental authority. The execution and delivery of this Agreement do not and, except for any approvals, permits and licenses required to market the PAPNET-Registered Trademark- Service in the Licensed Territory, the performance of this Agreement will not, require any action, consent or approval of any person, entity or governmental authority. 6.4 LITIGATION. Except as disclosed in Schedule 6.4 hereto, there is no pending or, to the knowledge of NSI, threatened legal, administrative, arbitration or other proceeding or governmental investigation which is likely to have a material adverse effect on NSI or the performance by NSI of 11 its obligations under this Agreement. 7. REPRESENTATIONS AND WARRANTIES OF LICENSEE. Licensee hereby represents and warrants to NSI as follows: 7.1 ORGANIZATION. Licensee is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Licensee has the corporate power to own or lease its properties and assets and to carry on its business as now conducted. 7.2 AUTHORITY RELATIVE TO THIS AGREEMENT. Licensee has the right, power and authority to enter into this Agreement and to perform all of its obligations hereunder. This Agreement has been authorized by all necessary corporate action of, has been duly executed and delivered by, and constitutes the valid and binding obligation of, Licensee, enforceable in accordance with its terms. 7.3 NO CONFLICTS; NO CONSENTS. The execution, delivery and performance of this Agreement will not result in a breach in the terms or conditions of, or constitute a default under, or violate, or conflict with, or require, as the case may be: (i) any provision of any law, regulation or ordinance, (ii) the Certificate of Incorporation or Bylaws of Licensee, (iii) any agreement, lease, mortgage or other instrument or undertaking, oral or written, to which Licensee is a party or by which it or any of its properties or assets is or may be bound or affected, (iv) any judgment, order, writ, injunction or decree of any governmental authority, or (v) any action of or by, or filing with, any governmental authority. The execution and delivery of this Agreement do not, and except for any approvals, permits and licenses required to market the PAPNET-Registered Trademark- Service in the Licensed Territory, the performance of this Agreement will not, require any action, consent or approval of any person, entity or governmental authority. 7.4 LITIGATION. There is no pending or, to the knowledge of Licensee, threatened legal, administrative, arbitration or other proceeding or governmental investigation which is likely to have a material adverse effect on Licensee or the performance by Licensee of its obligations under this Agreement. 8. LIMITATIONS ON WARRANTIES AND LIABILITY. 8.1 NO WARRANTIES. EXCEPT AS OTHERWISE PROVIDED HEREIN, NEITHER NSI NOR LICENSEE MAKES ANY REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE PAPNET-Registered Trademark- SYSTEM OR THE PAPNET-Registered Trademark- SERVICE, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE OR THAT THE PAPNET-Registered Trademark- SYSTEM OR THE PAPNET-Registered Trademark- SERVICE AS DEVELOPED AND DESIGNED WILL MEET ANY REQUIREMENTS OF OR WILL PERFORM ERROR FREE OR IN CONFORMANCE WITH THE NEEDS OR REQUIREMENTS OF LICENSEE OR ANY CLIENT. 12 8.2 INSURANCE COVERAGE. NSI agrees to obtain and maintain insurance coverage as is appropriate to cover any claims arising out of any injury to person or property resulting from use of the PAPNET-Registered Trademark-System, the PAPNET-Registered Trademark- Service, or other NSI Technology. NSI shall maintain coverage in the amount of __________________ per claim and ________________ in the aggregate. NSI agrees to name Licensee as an additional insured under the terms of the insurance policy or policies and to provide a copy of the insurance policy or policies to Licensee. 9. OWNERSHIP AND INTELLECTUAL PROPERTY PROTECTION. 9.1 OWNERSHIP OF PAPNET-Registered Trademark- SYSTEM. Licensee acknowledges and agrees that NSI is the sole and exclusive owner of the Intellectual Property embodied in the PAPNET-Registered Trademark- System, all information, materials, clinical and test data reports and filings produced in connection with any required regulatory approvals, permits and licenses, and all information, reports, specifications, source code, object code, documentation, diagrams, flow charts and any other tangible or intangible materials of any type whatsoever relating to the PAPNET-Registered Trademark- System and derived or produced by or on behalf of NSI (collectively, the "Proprietary Materials"). No provision contained in this Agreement shall be construed to transfer to Licensee any title or ownership interest in the Proprietary Materials or any Intellectual Property embodied in the PAPNET-Registered Trademark- System or the PAPNET-Registered Trademark- Service. 9.2 SCOPE OF USE. Licensee shall not, and shall not knowingly assist any third party to, (a) modify or alter, create or attempt to create, by reverse engineering or otherwise, translate or decompile, translate or transfer, or otherwise attempt to derive the source code, structure or algorithms of, the PAPNET-Registered Trademark- System or any part thereof, (b) use or adapt the PAPNET-Registered Trademark- System or any part thereof in any way, otherwise than in connection with the marketing or sale of the PAPNET-Registered Trademark- Service, (c) use the PAPNET-Registered Trademark- System or any part thereof to create a derivative work of the PAPNET-Registered Trademark- System or (d) rent, lease or otherwise provide temporary access to the PAPNET-Registered Trademark- System or any part thereof, except as incidental to marketing and sales activities otherwise permitted under this Agreement. 9.3 CONTROL OF INTELLECTUAL PROPERTY PROTECTION. NSI shall at all times retain the sole and exclusive right to pursue, secure, maintain, protect and enforce its Intellectual Property rights in and to, or arising out of or related to, the PAPNET-Registered Trademark- System or the PAPNET-Registered Trademark-Service. 9.4 PAPNET-Registered Trademark- SYSTEM NAME. NSI shall have the right in its sole discretion to select and include any trademark or trade name to identify the PAPNET-Registered Trademark- System, provided that Licensee will have only the same rights with respect to any such trademark or trade name as it does to other trademarks and trade names of NSI hereunder. 9.5 PROTECTION OF INTELLECTUAL PROPERTY. Licensee shall use its reasonable efforts to protect and maintain the protection of the Intellectual Property, as the same may be modified, upgraded or enhanced from time to time. Upon NSI's request, Licensee shall, at NSI's sole cost and expense, assist NSI in securing, maintaining and enforcing NSI's Intellectual Property rights in and to the 13 PAPNET-Registered Trademark- System or the PAPNET-Registered Trademark-Service, including, but not limited to, undertaking any and all necessary and appropriate actions in accordance with NSI's requests. 9.6 NOTICE OF INFRINGEMENT. Licensee shall promptly notify NSI of any infringement of any Intellectual Property right of NSI with respect to the PAPNET-Registered Trademark- System or the PAPNET-Registered Trademark- Service which is known to Licensee. Upon reasonable notice of infringement, NSI shall have the right, but not the obligation, to bring any suit or action for infringement of its Intellectual Property at its own expense. Licensee shall, if requested by NSI, actively assist in the prosecution of such action. All costs for such assistance shall be paid by NSI. 9.7 INFRINGEMENT. If, as a result of any claim of infringement, Licensee or NSI is permanently enjoined from selling the PAPNET-Registered Trademark-Service or using the PAPNET-Registered Trademark- System, as the case may be, by a final, nonappealable decree of a court of competent jurisdiction, NSI shall, if possible, replace or modify the PAPNET-Registered Trademark- System or PAPNET-Registered Trademark- Service so that the PAPNET-Registered Trademark-Service or PAPNET-Registered Trademark- System is non-infringing, or procure for Licensee the right to continue to sell the PAPNET-Registered Trademark- Service or use the PAPNET-Registered Trademark- System that is subject to such decree. In the event that Licensee or NSI is either preliminarily or permanently enjoined from marketing and distributing the PAPNET-Registered Trademark-Service in the Licensed Territory, but NSI is legally free to offer the PAPNET-Registered Trademark- Service in other parts of the United States or the world, then Licensee shall continue to be entitled for the period it is so enjoined during the Term of this Agreement to Royalties as provided in Section 3.1(b) of this Agreement. Except for the indemnification provided in Section 10.1(ii), the foregoing states the entire liability of Licensee or NSI, as the case may be, to the other with respect to infringement of any proprietary rights of any third party, and Licensee and NSI hereby expressly waive any other such liabilities that each may have against the other and its directors, officers, employees, agents, representatives and affiliates. 10. INDEMNIFICATION. 10.1 INDEMNIFICATION BY NSI. NSI shall, at its sole cost and expense, indemnify and hold Licensee and its directors, officers, employees, agents, representatives and affiliates harmless with respect to any liabilities, damages, losses, costs and expenses, including reasonable attorney's fees (any or all of the foregoing being hereinafter referred to as a "Loss"), insofar as such Loss arises out of or is based upon (i) a misrepresentation or breach (or alleged misrepresentation or breach) by NSI of its warranties, covenants and agreements contained herein, (ii) a claim that the PAPNET-Registered Trademark-System, the PAPNET-Registered Trademark- Service, the Intellectual Property, the Patents, or the NSI Technology licensed hereunder, as used within the scope of this Agreement, infringes or violates any proprietary rights of any third party; or (iii) any injury to person or property resulting from use of the PAPNET-Registered Trademark- System, the PAPNET-Registered Trademark- Service, or other NSI Technology, except to the extent that such injury is proximately caused by the gross negligence or intentional misconduct of Licensee or Licensee's employees. 10.2 INDEMNIFICATION BY LICENSEE. Licensee shall, at its sole cost and expense, indemnify and hold NSI and its directors, officers, employees, agents, representatives and affiliates harmless 14 with respect to any liabilities, damages, losses, costs and expenses, including reasonable attorney's fees (any or all of the foregoing being hereinafter referred to as a "Loss"), insofar as such Loss arises out of or is based upon a misrepresentation or breach (or alleged misrepresentation or breach) by the Licensee of its warranties, covenants and agreements contained herein. 10.3 NOTICE OF CLAIM; DEFENSE. Each person indemnified under Sections 10.1 and 10.2 above (an "Indemnified Person") agrees that, upon the service of a summons or other initial legal process upon the Indemnified Person in any action or proceeding, or upon the Indemnified Person's receipt of written notification of the commencement of any investigation, inquiry, or proceeding in respect of which indemnity may be sought by the Indemnified Person under Section 10.1 or 10.2 above, the Indemnified Person will promptly give written notice (the "Notice") of such service or notification to the party from whom indemnification may be sought hereunder (the "Indemnifying Party"). No indemnification provided for in Section 10.1 or 10.2 above shall be available to any Indemnified Person who shall fail so to give the Notice, if the Indemnifying Party to whom such Notice was not given was unaware of the action, suit, investigation, inquiry or proceeding to which the Notice would have related, to the extent the Indemnifying Party was prejudiced by the failure to give the Notice; but the omission so to notify such Indemnifying Party of any such service or notification shall not relieve such Indemnifying Party from any liability which it may have to any Indemnified Person for contribution or otherwise than on account of such Sections. An Indemnifying Party shall be entitled at its own expense to participate in the defense of any action, suit or proceeding against, or investigation or inquiry of, an Indemnified Person. An Indemnifying Party shall be entitled, if it so elects within a reasonable amount of time after receipt of the Notice, by giving written notice (herein called the "Notice of Defense") to all Indemnified Persons, to assume the entire defense of such action, suit, investigation, inquiry or proceeding, in which event such defense shall be conducted, at the expense of the Indemnifying Party, by counsel chosen by the Indemnifying Party reasonably satisfactory to the Indemnified Persons; PROVIDED, HOWEVER, that (i) if any Indemnified Person reasonably determines that there may be a conflict between the positions of the Indemnifying Party and of such Indemnified Person in conducting the defense of such action, suit, investigation, inquiry or proceeding or that there may be legal defenses available to such Indemnified Person different from or in addition to those available to the Indemnifying Party, then counsel for the Indemnified Person shall be entitled to conduct the defense to the extent reasonably determined by such counsel to be necessary to protect the interests of the Indemnified Person and (ii) in any event, the Indemnified Person shall be entitled to have counsel chosen by such Indemnified Person participate in, but not conduct, the defense. If, within a reasonable time after receipt of the Notice, an Indemnifying Party gives a Notice of Defense and the counsel chosen by the Indemnifying Party is reasonably satisfactory to the Indemnified Person, the Indemnifying Party will not be liable under Section 10.1 or 10.2 for any legal or other expenses subsequently incurred by the Indemnified Person in connection with the defense of the action, suit, investigation, inquiry or proceeding, except that (A) the Indemnifying Party shall bear the legal and other expenses incurred in connection with the conduct of the defense as referred to in clause (i) of the proviso to the preceding sentence and (B) the Indemnifying Party shall bear such other expenses as it has authorized to be incurred by the Indemnified Person. If, within a reasonable time after receipt of the Notice, no Notice of Defense has been given, the Indemnifying Party shall be responsible for any 15 legal or other expenses incurred by the Indemnified Persons in connection with the defense of the action, suit, investigation, inquiry or proceeding. No Indemnifying Party will, without the prior written consent of an Indemnified Person, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder unless such settlement, compromise or consent includes an unconditional release of such Indemnified Person and each controlling person thereof from all liability arising out of such claim, action, suit or proceeding. 11. CONFIDENTIALITY. During the Term of this Agreement and thereafter, each of NSI and Licensee shall keep strictly confidential all information of the other which is secret and proprietary. The parties shall not reveal or disclose the same to any person or entity without the prior written consent of the other party; provided, however, that either party may disclose such information pursuant to a subpoena, order, statute, rule or other legal requirement promulgated or imposed by a court or by a judicial, regulatory or legislative body or agency in which such party is involved; and provided, further, that either party may disclose to the extent its counsel determines in good faith that such disclosure is necessary to comply with applicable securities laws. In the event that either party discloses such confidential information in accordance with the previous sentence, such party shall immediately notify the other party. 12. TERM AND TERMINATION. (a) The initial Term of this Agreement shall continue from the date hereof until December 31, 2025. The Term of this Agreement may be extended by the Licensee for an additional twenty (20) year Term upon written notice to NSI within six (6) months preceding the expiration of the initial Term, and the payment to NSI of a renewal fee equal to the net present value of twenty (20) years of annual Royalties at the average monthly rate payable in the twelve months immediately preceding the date of the notice, determined by using a discount rate equal to the prevailing prime rate on the date of the notice, as published in the Wall Street Journal. (b) This Agreement may not be terminated or cancelled except upon the expiration of its initial or additional Term other than by written agreement of the parties. (c) Upon termination of this Agreement (i) Licensee shall, at its expense, return to NSI any of NSI's marketing literature, packaging or Confidential Information and all copies thereof in its possession and certify in writing that the same have been returned and deliver to NSI all information as is necessary and useful for NSI to market the PAPNET-Registered Trademark- Service, including, without limitation, information in possession of Licensee relating to Clients, (ii) Licensee shall immediately cease representing itself as authorized to sell NSI products and services, and (iii) the parties shall otherwise cooperate in order to effect an orderly termination. 13. ARBITRATION. 16 Except as otherwise provided herein, the parties hereto agree that the sole and exclusive remedy for any dispute between the parties arising out of or relating to this Agreement shall be resolved by arbitration conducted in The City of Columbus, Ohio in accordance with the Commercial Arbitration Rules then obtaining of the American Arbitration Association, except that the arbitrators shall have no power to alter or modify any express provision of this Agreement, or to render any award which by its terms effects any such alteration or modification. Judgment upon the award rendered may be entered by any court having jurisdiction in the State of Ohio. If any action or proceeding is brought to enforce the decision of the arbitrators, the prevailing party shall be entitled to recover its reasonable attorney's fees and other costs incident to such action or proceeding. The provisions of this Article 13 shall not affect the right of any party to seek provisional legal or equitable remedies. The law of Ohio shall be applied to any dispute under arbitration. The parties warrant and represent that the filing of an arbitration demand will not prevent, allow, or excuse the parties from meeting their obligations under this Agreement during the time any such dispute is being resolved. Day to day business functions will continue uninterrupted during the arbitration period. 14. MISCELLANEOUS. 14.1 RULES OF CONSTRUCTION. (a) As used in this Agreement, neutral pronouns and any variations thereof shall be deemed to include the feminine and masculine and all terms used in the singular shall be deemed to include the plural, and vice versa, as the context may require. The words "hereof", "herein" and "hereunder" and other words of similar import refer to this Agreement as a whole, including the Annexes hereto, as the same may from time to time be amended or supplemented, and not to any subdivisions contained in this Agreement. The word "including" when used herein is not intended to be exclusive and means "including, without limitation". References herein to "dollars", "United States $" and "$" are to United States dollars. References herein to Article, Section, subsection or Exhibit shall refer to the appropriate Article, Section, subsection or Exhibit in or to this Agreement. (b) The following guiding and primary rules of construction shall be applied to this Agreement and to any dispute hereunder: (i) that the terms of this Agreement will be construed against termination of this Agreement or forfeiture of any right hereunder; (ii) that the terms of this Agreement will be construed in favor of providing Licensee the opportunity to maximize the economic benefits available hereunder from the promotion of the PAPNET-Registered Trademark- System, the PAPNET-Registered Trademark- Service and the NSI Technology in the Licensed Territory, and to realize its proportionate share under Section 3.1(b) hereof of the worldwide market for the PAPNET-Registered Trademark- System, the PAPNET-Registered Trademark- Service and the NSI Technology; (iii) that each term of this Agreement will be construed, wherever reasonable, in a 17 manner consistent with the understanding of the term by the parties as manifested by their established course of dealing; and (iv) that each term of this Agreement imposes on the parties an obligation of good faith and fair dealing in its performance and enforcement. 14.2 NO ADVERSE ACTIONS. Licensee agrees to take no action that could materially adversely affect the business, operations or prospects of NSI. NSI agrees to take no action that could materially adversely affect the business, operations or prospects of Licensee. 14.3 INDEPENDENT CONTRACTORS. It is expressly agreed that the parties hereto are acting hereunder as independent contractors and not joint venturers, and under no circumstances shall any of the employees of one party be deemed the employees of the other for any purpose. This Agreement shall not be construed as authority for either party to act for the other party in any agency or other capacity, or to make commitments of any kind for the account of or on behalf of the other except to the extent and for the purposes expressly provided for and set forth herein. 14.4 ASSIGNMENT; SUBLICENSING. This Agreement and the licenses herein granted are not assignable by either party (nor are the licenses sublicensable by Licensee) without the prior written consent of the other party, which consent shall not be unreasonably withheld; provided, however, that Licensee may assign this Agreement to any corporation which is a wholly-owned subsidiary of Licensee without such consent. Neither party may pledge or otherwise grant a security interest in this Agreement or the licenses granted hereby, but may grant a security interest in any payments to which it is entitled hereunder. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. 14.5 WAIVER; REMEDIES. No failure on the part of any party to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 14.6 SEVERABILITY. If any provision of this Agreement is determined by a court of competent jurisdiction to be invalid or unenforceable, such determination shall not affect the validity or enforceability of any other part or provision of this Agreement. 14.7 CHOICE OF LAW. This Agreement and the performance hereof shall be governed by and construed in accordance with the laws of the State of Ohio (without giving effect to principles of conflicts of laws). 14.8 NOTICE. All notices, invoices, consents or other communications required or permitted to be given by either party to the other shall be in writing (including facsimile or similar writing) and shall be given by facsimile, Federal Express or similar courier service, or by certified or registered 18 mail, postage prepaid as follows: (a) If to NSI: Neuromedical Systems, Inc. Two Executive Boulevard Suffern, New York 10901-4164 Attn: John B. Henneman, III Vice President of Corporate Development and General Counsel Facsimile: (914) 368-3896 With a copy to: Fried, Frank, Harris, Shriver & Jacobson One New York Plaza New York, New York 10004 Attn: Paul M. Reinstein Facsimile: (212) 859-4000 (b) If to Licensee: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . or at such other address or facsimile number (or other similar number) as any party may from time to time specify to the other party hereto. 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 facsimile (provided the appropriate answer back is received) thereof and shall be conclusively presumed to have been received on the second business day following the date of mailing or, in case of personal delivery, the actual day of personal delivery thereof, or, in the case of facsimile delivery, when such facsimile is transmitted, except that a change of address shall not be effective until actually received. 14.9 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all previous proposals, both oral and written, negotiations, representations, commitments, writings and all other communications between the parties with respect to such subject matter. It may not be released, discharged, changed or modified except by an instrument in writing signed by a duly authorized representative of each of the parties. 14.10 HEADINGS. The headings used in this Agreement are for reference purposes only and 19 shall not be construed to limit or further define any term or provisions hereof. 14.11 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement by a duly authorized representative as of the date first written above. NEUROMEDICAL SYSTEMS, INC. By: . . . . . . . . . . Mark R. Rutenberg, President and Chief Executive Officer . . . . . . . . . . . . By: . . . . . . . . . . President 20 EXHIBIT B AMOUNTS PAYABLE TO HOLDERS
HOLDERS AMOUNT ------- ------ Papnet of Ohio, Inc. $752,445 Cytology Indiana, Inc. $ 96,029 Indiana Cytology Review $ 45,460 Company ER Group, Inc. $285,808 Carolina Cytology Warrant $285,808 Partnership GRK Partners $186,211
EX-10.B 8 EXHIBIT 10.B CYTOLOGY WEST, INC. 3753 Howard Hughes Parkway Suite 200 Las Vegas, Nevada 89109 February 1, 1995 To: Each of the Target Entities (as identified on Exhibit A annexed hereto) Gentlemen: This letter of intent summarizes the understanding reached in discussions which have occurred among Cytology West, Inc., a Delaware corporation ("CWI"), and each of the Licensee Corporations and Licensee Partnerships identified on EXHIBIT A annexed hereto (collectively, the "Target Entities") concerning a proposed acquisition (the "Proposed Acquisition") by CWI of the Target Entities. 1. PROPOSED ACQUISITION. CWI will issue shares of its common stock as the consideration in the Proposed Acquisition, with the specific form and structure of the Proposed Acquisition (e.g., stock for assets, stock for equity interests, merger) to be agreed upon by CWI and each of the Target Entities (collectively, the "Parties") after review of tax, accounting, regulatory, contract, consent, diligence and other appropriate issues. An S-4 Registration Statement will be filed by CWI with, and be declared effective by, the Securities and Exchange Commission (the "SEC") in connection with the Proposed Acquisition as required by the Securities Act of 1933, as amended (the "1933 Act"), and applicable state Blue Sky laws. The common stock of CWI will concurrently be registered under the Securities Exchange Act of 1934, as amended (the "1934 Act"). It is contemplated that the common stock of CWI will, upon declaration by the SEC of the effectiveness of the registrations and the consummation of the Proposed Acquisition, be traded on NASDAQ. 2. VALUATION. Upon consummation of the Proposed Acquisition, the then existing equity holders of CWI will then own, and the holders of each of the Target Entities will receive in exchange for their equity interests In their respective Target Entity and thereafter own, common stock of CWI in an aggregate amount for CWI and each Target Entity which reflects the relative values of each of the Parties immediately prior to the consummation of the Proposed Acquisition (the "Relative Values"). The Parties have preliminarily determined their Relative Values by the following formula (the "Relative Valuation Formula"): RV = LV + AV + WV --------------- TLV + TAV + TWV Where: RV = the Relative Value in dollars of a Party; February 1, 1995 Page 2 LV = the dollar value of a Party's license with Neuromedical Systems, Inc. (an "NSI License"), determined by multiplying $0.81 times the population (based on 1994 census data) of the territory covered by the NSI License, which dollar value in shown in column 3 of the table on EXHIBIT B annexed hereto (the "License Value"); AV = the dollar value of the sum of the following assets and liabilities of a Party immediately existing prior to the consummation of the Proposed Acquisition and which are in the case of a Target Entity, acquired by CWT upon consummation of the Proposed Acquisition: (a) the cash of the Party plus (b) the book value of all other assets of the Party other than the NSI License and NSI Warrants (as defined below), if any, and any other intangible assets of the Party, less (c) the amount of any liabilities of the Party (the "Assets Value"); WV = the dollar value of any warrants to purchase shares of common stock of Neuromedical Systems, Inc. ("NSI") ("NSI Warrants") held by a Party immediately existing prior to the consummation of the Proposed Acquisition and which are in the case of a Target Entity, acquired by CWI upon consummation of the Proposed Acquisition (the "Warrant Value"). The Warrant Value is determined by multiplying (a) the aggregate number of shares of NSI common stock into which the NSI warrants are exercisable by (b) an amount equal to the difference between (i) $2.50, the agreed per share fair market value of NSI common stock (the "NSI Per Share Value,), and (ii) the warrant exercise price for each share of NSI common stock into which the NSI Warrants are exercisable; TLV = the total License Values of the Parties, as shown in column 3 of the table on EXHIBIT B; TAV = the total Assets Values of the Parties; and TWV = the total Warrant Values of the Parties. February 1, 1995 Page 3 The Parties' preliminary determination of Relative Values is set forth in column 11 of the table on EXHIBIT B, and assumes for purposes of such preliminary determination that the represented territory populations are accurate and that the Warrant Values and Assets Values with respect to each of the Parties will be as set forth in columns 8 and 9, respectively, of such table. The Definitive Agreements (as hereinafter defined) will get forth the agreed Assets Value of each of the Parties for purposes of determining the Final Formula Derived Relative Values (as provided below), which agreed upon Assets Value shall also be the minimum Assets Value actually acquired by CWI from the Party at the time of the consummation of the Proposed Acquisition. The Definitive Agreements will permit each Target Entity to determine, prior to consummation of the Proposed Acquisition, whether or not to include any NSI Warrants held by such Target Entity in the assets to be acquired by CWI. However, each Target Entity presently anticipates that it would so include all of its NSI Warrants. The Relative Values of the Target Entities will be determined as of the consummation of the Proposed Acquisition (and following the determination with regard to the Assets Values and NSI Warrants to be included in the Proposed Acquisition) by the Relative Valuation Formula, using the License Values and the NSI Per Share Value as set forth on EXHIBIT B and the then actual warrant exercise price in effect for the applicable NSI Warrants (the "Final Formula Derived Relative Values"). Prior to the consummation of the Proposed Acquisition, CWI and Papnet of Ohio, Inc. will retain an investment banking firm acceptable to each of the parties to render an opinion to CWI and Papnet of Ohio, Inc. that the terms of the Proposed Acquisition, it based upon the Final Formula Derived Relative Values, are fair from the standpoint of the equity holders of CWI and Papnet of Ohio, Inc. (the "Fairness Opinion"). Subject to the rendering of the Fairness Opinion, the Relative Values for purposes of allocating ownership of the CWI common stock shall be the Final Formula Derived Relative Values and not the Final Formula Derived Relative Values, shall be a final and conclusive determination binding upon all of the parties to the Proposed Acquisition. If the Fairness Opinion is not rendered without material qualification, any Party will be permitted to withdraw from the Proposed Acquisition. The Proposed Acquisition will be structured from a tax standpoint so that (a) the existing equity holders of the Target Entities will not recognize gain or loss for income tax purposes upon consummation of the Proposed Acquisition and (b) the consummation of the Proposed Acquisition will not result in the imposition of any material tax liability on CWI. From an accounting standpoint, consideration will be given to structuring the Proposed Acquisition to account for it as a "pooling of interests." 3. CONDITIONS. The obligation of each of the Parties to consummate the Proposed Acquisition will be subject to satisfaction of the requirements set forth in sections 1 and 2 and to the February 1, 1995 Page 4 following conditions precedent, in addition to any other conditions contained herein or in the Definitive Agreements: (a) POST-CLOSING GOVERNANCE OF CWI. The Certificate of Incorporation and Bylaws of CWI will be in a form mutually acceptable to the Parties (as reflected in exhibits to the Definitive Agreements). The Board of Directors of CWI an of the Closing will consist of seven persons, and will include Richards, Dawson, Genberg and Kennedy, and three additional persons chosen one each by Carolina Cytology, ER Group and Missouri from among Kelley, Petitti, Ferger and Kinsey. CWI will attempt to obtain Directors' and Officers' insurance in amounts and containing coverage acceptable to the Board of Directors of CWI. Genberg shall have agreed to be employed by and serve as the Chief Executive officer of CWI on terms and conditions mutually acceptable to Genberg and CWI. (b) MARKET MAKER. Each of the Parties shall be reasonably assured that at least one reputable investment banking firm acceptable to each of the Parties will make a market in CWI common stock upon consummation of the Proposed Acquisition. The Ohio Company, McDonald & Company and Advest each has been deemed acceptable by each of the Parties. (c) NSI MATTERS. NSI shall have consented to the Proposed Acquisition and agreed to modify its license agreements with each of the Parties, effective on or before consummation of the Proposed Acquisition, into either a single license agreement with CWI (if modified upon consummation of the Proposed Acquisition) or separate modified license agreements with each of the Parties (if modified before consummation of the Proposed Acquisition) (collectively, the "Modified License Agreement"). The Modified License Agreement shall be acceptable in form and substance to each of the Parties. The Parties contemplate that the Modified License Agreement will improve business relations without materially changing the aggregate economics of the license agreements presently in effect. (d) DEFINITIVE AGREEMENTS. All of the Parties shall have entered into definitive agreements among all of them (the "Definitive Agreements") with respect to the Proposed Acquisition containing mutually acceptable representations, warranties, covenants, closing conditions and other provisions. (e) BOARD AND SHAREHOLDER APPROVALS. The Boards of Directors (or comparable governing bodies) of each of the Parties shall have approved the execution and delivery of the Definitive Agreements and the consummation of the Proposed Acquisition. In addition, all requisite approvals of the shareholders (or other equity holders) of each of the Parties shall have been obtained and no dissenters, rights (or comparable rights) shall have been asserted by any such shareholder or other such equity holder. February 1, 1995 Page 5 (f) ACQUISITION OF ALL TARGET ENTITIES. The Proposed Acquisition shall be consummated simultaneously with respect to each of the Target Entities. (g) NSI WARRANTS. The Parties shall have reached mutual agreement regarding the timing and method for exercise of the NSI Warrants to be held by CWI following consummation of the Proposed Acquisition. 4. INTERIM PERIOD; EXECUTION OF DEFINITIVE AGREEMENTS. (a) PRELIMINARY NSI MATTERS. Following execution of this letter of intent, each of the Parties, through Genberg, Richards and Kinsey, each of whom is hereby appointed by the Parties for such purposes, shall exercise reasonable efforts to obtain, prior to February 28, 1995, preliminary consent from NSI to the Proposed Acquisition and to undertake negotiations with NSI with regard to the form of Modified License Agreement. (b) DEFINITIVE AGREEMENT. Upon receipt of the preliminary approval of NSI described in subsection (a) above, the Parties will use reasonable efforts to complete their negotiations and due diligence with respect to the Proposed Acquisition. Subject to the mutual satisfaction of the Parties with the results of such due diligence, the Parties will prepare and execute Definitive Agreements with regard to the Proposed Acquisition, with the intention of entering into the Definitive Agreements as promptly as practicable. (c) DUE DILIGENCE. Prior to the execution of Definitive Agreements, the Parties will complete their review of any and all matters that any of them deem necessary or appropriate, including, without limitation, all material contracts, books and records, title to and condition of assets, legal and regulatory issues, environmental compliance and labor and employment matters. The Parties recognize that certain financial and non-financial information will be required of each of them in connection with the contemplated registrations and agree to provide such information and other cooperation which may he reasonably requested in connection therewith. (d) CONFIDENTIALITY. None of the Parties shall disclose to any person (other than its employees, officers, directors, equity holders and representatives who need to know such information for purposes of pursuing the Proposed Acquisition) (i) the fact that discussions or negotiations are taking place concerning a Proposed Acquisition, (ii) any of the terms, conditions or other facts with respect to the Proposed Acquisition, including the status thereof, or (iii) any other non-public information furnished to any of the Parties pursuant to this letter of intent; provided, however, that Papnet of Ohio, Inc. may make such disclosures as it determines in good faith are required to be made under applicable federal and state securities laws. Prior to delivery, by any of the Parties to any of the other Parties, of information for which the delivering Party seeks confidential treatment, the Parties receiving such information shall, at the request of the delivering February 1, 1995 Page 6 Party, enter into a non-disclosure agreement containing additional terms and conditions relating to confidentiality. 5. COSTS AND EXPENSES. Certain costs and expenses will be incurred by or on behalf of some or all of the Parties in connection with the negotiation and consummation of the Proposed Acquisition, including, without limitation, accounting, legal, underwriting, fairness opinion and other coats and expenses (collectively, the "Transaction Expenses"). Each of the Parties does hereby (a) authorize Genberg, Richards and Kinsey to incur Transaction Expenses on behalf of the Parties (or any of them) and (b) agree to pay (either directly or by reimbursement, as directed by Genberg, Richards or Kinsey) its "Pro Rata Share, (as defined below) of any Transaction Expenses approved in advance of incurrence by Genberg, Richards or Kinsey in the event that, for any reason, the Proposed Acquisition is not consummated; provided, however, that in no event shall any Party be required to bear any Transaction Expenses incurred after it provides written notice to the other Parties of termination as provided for in Section 6. For purposes of this section 5, the "Pro Rata Share" of each Party is equal to its preliminary Relative Value set forth in column 11 of the table on EXHIBIT B. If the Proposed Acquisition is consummated, those Transaction Expenses which are reasonably incurred and approved in advance of incurrence by Genberg, Richards or Kinsey shall be borne by CWI. 6. EXPIRATION. This letter of intent shall expire, and be of no force or effect, unless fully executed by each of the Target Entities by February 7, 1995. Any of the Parties may for any reason terminate its proposed participation in the Proposed Acquisition at any time prior to the execution by it of the Definitive Agreements by giving written notice thereof to the other Parties. 7. GOVERNING LAW. This letter of intent shall be governed by and construed in accordance with the internal laws, and not the laws pertaining to conflicts of laws, of the State of Nevada. 8. COUNTERPARTS. This latter of intent may be signed in multiple counterparts, any one of which need not contain the signatures of more than CWI and one Target Entity, but all such counterparts taken together shall constitute one and the same agreement. 9. INTEGRATION; AMENDMENTS. This letter of intent sets forth the complete and entire understanding of the Parties with respect to the subject matter hereof, and may not be amended except in writing by all of the Parties. 10. NON-BINDING NATURE OF LETTER; BINDING PROVISIONS. Except as hereinafter provided with respect to the binding nature of certain provisions hereof, (a) this letter of intent is intended only to express the mutual good faith intentions of the Parties and is not intended to constitute a binding agreement, (b) any of the Parties may at any time and in its sole discretion discontinue discussions concerning the Proposed Acquisition and/or terminate its proposed participation in the Proposed February 1, 1995 Page 7 Acquisition as provided in section 6 and (c) each of the Parties reserves the right at any time prior to execution of the Definitive Agreements to refuse to enter into the Definitive Agreements. The Parties understand that no contract, agreement, arrangement or understanding providing for the acquisition (or offer to acquire) any of the Target Entities or for the purchase (or offer to purchase) or for voting of any of the equity securities of any of the Target Entities shall be deemed to exist between or among CWI and any of the Target Entities or their respective equity holders unless and until each of the Parties and all other necessary parties have executed fully and delivered mutually acceptable Definitive Agreements containing such covenants, representations, warranties, closing conditions and other provisions as the Parties may agree upon. Notwithstanding any provision contained in this Section 10 or elsewhere in this letter of intent to the contrary, upon execution of this letter of intent by each of the Target Entities pursuant to Section 6, the provisions of Sections 4(d), 5, 6, 7, 8, 9 and 10 shall represent the binding agreements of each of the Parties and shall survive any termination of this letter of intent or the discussions concerning the Proposed Acquisition. If this letter of intent accurately sets forth the understanding of the Parties, please so indicate by executing this original letter of intent and the enclosed duplicate original letters of intent where provided below and returning each of them to me. I will distribute an original fully executed letter of intent to each of the Target Entities for its files. Very truly yours, CYTOLOGY WEST, INC. By/s/ Carl Genberg ------------------------------------------ Carl Genberg Its: President APPROVED, ACCEPTED AND AGREED: Papnet Indiana L.P., Cytology Indiana, Inc. By:/s/ Joseph Blancato Date:Feb. 1, 1995 -------------------------------- ------------------------ Its: -------------------------- Papnet of Ohio, Inc. By:/s/ David J. Richards Date:Feb. 1, 1995 -------------------------------- ------------------------ Its:President -------------------------- February 1, 1995 Page 8 Carolina Cytology, Inc. By:/s/ Rodney Kinsey Date:Feb. 8, 1995 -------------------------------- ------------------------ Its: -------------------------- ER Group, Inc. By:/s/ Thomas Kelley Date:Feb. 8, 1995 -------------------------------- ------------------------ Its: President -------------------------- Papnet Utah, Inc. By:/s/ Kent Dawson Date:Feb. 7, 1995 -------------------------------- ------------------------ Its: -------------------------- By: Date: -------------------------------- ------------------------ Its: -------------------------- EXHIBIT A TARGET ENTITIES PAPNET OF OHIO, INC. PAPNET INDIANA LIMITED PARTNERSHIP E R GROUP, INC. CAROLINA CYTOLOGY GENERAL AND WARRANT PARTNERSHIP PAPNET UTAH, INC. EXHIBIT B - CALCULATION METHOD-PERCENTAGE OF SHARES BY POPULATION, WARRANTS, CASH. PAPNET OF OHIO, INC. NOTE - ------------------------------ ---------------------------- Share Price $15.00 Agreed to by the parties. Shares 1,560,000 Calculated on effective date of acquisition, this figure is not exact. Cash assets 600,000 Calculated on effective date of acquisition, including costs and fees as credit. NSI Warrants 1,505,000 Calculated on effective date of acquisition. NSI share Value $2.50 AGREED TO BY PARTIES AS OF THE DATE OF THE DATE OF THIS AGREEMENT. Exercise Price $0.01 As agreed with NSI. FORMULA FOR CALCULATING PER PERSON VALUE OF PAPNET OF OHIO: - ---------------------------------------------------------- Papnet of Ohio Market Cap 23,400,000 Less Assets ($600,000) Less NSI Warrants ($3,777,550) Net Value of Territor 19,022,450 TERRITORY PER CAPITA VALUE - -------------------------- Chicago 8,476,000 Based on 1994 Yr. End Population Ohio 11,119,000 Based on 1994 Yr. End Population Kentucky 3,804,000 Based on 1994 Yr. End Population Total Population 23,399,000 VALUE PER CAPIT $0.81
% VALUE % OF VALUE OF VALUE OF % OF TOTAL POPULATION* POPULATION POPULATION WARRANTS E/P WARRANTS WARRANTS CASHCASH TOTAL VALUE VALUE Ohio* 23,299 44.29% $19,022,450 1,505,000 $0.01 51% $3,747,450 $600,000 $23,369,900 46.15% West* 8,337 15.78% $6,777,647 0 $400,000 $7,177,647 14.18% Missouri* 5,249 9.94% $4,267,227 280,000 $0.49 10% $562,800 $0 $4,830,027 9.54% Utah* 1,880 3.56% $1,528,365 0 $0 $1,528,365 3.02% Georgia* 6,968 13.19% $5,664,705 571,731 $0.49 20% $1,149,179 $70,000 $6,883,884 12.60% North Carolina* 6,968 12.24% $5,685,029 571,731 $0.49 20% $1,149,179 $10,000 $6,844,208 13.52% Totals 52,826 100% 49,945,423 2,928,462 100% $6,608,609 $1,080l000 $50,634,031 100%
*1994 Year End Population SIDE LETTER AGREEMENT Re: Cytology West Inc. Letter of Intent dated February 1, 1995 The parties below have signed a Letter of Intent to effect a combination. A deadline of February 28, 1995, is given to Neuromedical Systems, Inc. to complete negotiations and finalize a new License Agreement for all of the parties. It is the intent of the parties to continue to operate under the non-binding Letter of Intent until such time as any party provides written notice of withdrawal as provided for in the Letter of Intent that they no longer are interested in pursuing the merger. The February 28, 1995, date is put into the agreement for the sole purpose of providing a deadline against which NSI will operate. The parties also agree to give Tom Kelly veto power over any expense to be incurred prior to the time when a new license agreement is reached. Any expense so incurred will have to be approved by the Kinsey, Richards, Genberg committee and also by Tom Kelly before they are incurred. APPROVED, ACCEPTED AND AGREED: Papnet of Ohio, Inc. - ----------------------------------- By:/s/ David J. Richards Date:2/3/95 -------------------------------- ---------------------------------- Its:President -------------------------- - ----------------------------------- By:/s/ Cecil J. Petitti Date:2/3/95 -------------------------------- ---------------------------------- Its: -------------------------- - ----------------------------------- Carolina Cytology All - ----------------------------------- By:/s/ Rodney Kinsey Date:2/8/95 -------------------------------- ---------------------------------- Its: -------------------------- ER Group, Inc. - ----------------------------------- By:/s/ Thomas Kelley Date:2/8/95 -------------------------------- ---------------------------------- Its:President -------------------------- - ----------------------------------- By:/s/ Kent Dawson Date:2/22/95 -------------------------------- ---------------------------------- Its: -------------------------- EX-10.C 9 EXHIBIT 10.C VOTING AGREEMENT This Voting Agreement, dated as of July 5, 1996, by and among Papnet of Ohio, Inc., an Ohio corporation (the "Company"), Cytology Indiana, Inc., an Ohio corporation ("CIN"), Indiana Cytology Review Company, an Ohio corporation ("INC"), ER Group, Inc., an Ohio corporation ("ERG"), CCWP Partners, Inc., an Ohio corporation ("CCWP") and Carolina Cytology, Inc., an Ohio corporation ("CCI") (the Company, CIN, INC, ERG, CCWP and CCI are hereinafter collectively referred to as the "Constituent Corporations") and each of the individual shareholders of the Constituent Corporations executing this Agreement ("Shareholders"). RECITALS A. The Constituent Corporations have agreed to a merger in which the Company will be the surviving corporation (the "Merger"), pursuant to an Agreement and Plan of Merger dated as of July 5, 1996 (the "Merger Agreement"). B. The persons executing this Agreement as Shareholders own substantial blocks of voting shares in one or more of the Constituent Corporations ("Shares") and were parties to a Voting Agreement, dated May 31, 1996, which has been terminated. C. In order to facilitate the Merger and its approval by the other shareholders of the Constituent Corporations, the Shareholders have agreed to vote their shares in favor of the Merger. STATEMENT OF AGREEMENT In consideration of their mutual promises therein, and as additional consideration and inducement to the Constituent Corporations to perform their obligations under the Merger Agreement, the parties agree as follows: 1. VOTING AGREEMENT. Each Shareholder severally agrees and covenants with the Constituent Corporations and each of the other Shareholders that at any meeting of the shareholders of any of the Constituent Corporations called to vote upon the Merger and the Merger Agreement or at any adjournment thereof or in any other circumstance upon which a vote, consent or other approval with respect to the Merger and the Merger Agreement is sought, such Shareholder shall vote (or cause to be voted) such Shareholder's Shares in favor of the Merger, the approval of the Merger Agreement and each of the other transactions contemplated by the Merger Agreement. 2. COVENANTS. Each Shareholder severally agrees and covenants with the Constituent Corporations and each of the other Shareholders that such Shareholder shall not (a) grant any proxy, power-of-attorney or other authorization in or with respect to his Shares, except to vote such Shares as provided in this Agreement, or (b) deposit such Shares into a voting trust or enter into a voting agreement or arrangement with respect to such Shares. 3. GRANT OF IRREVOCABLE PROXY. Each Shareholder irrevocably grants to, and appoints John P. Kennedy and Cecil J. Pettiti, and each of them individually, such Shareholder's proxy and attorney-in-fact (with full power of substitution), for and in the name, place and stead of such Shareholder, to vote such Shareholder's Shares in each Constituent Corporation, or grant a consent or approval with respect to such Shares, in favor of the Merger, the approval of the Merger Agreement and each of the other transactions contemplated by the Merger Agreement, and hereby revokes any proxies heretofore given. 4. SECURITIES LAWS. Each of the obligations of Shareholder under this Agreement is conditioned upon the filing and effectiveness of a registration statement on Form S-4 under the Securities Act of 1933, as amended, covering the offering and sale of the Surviving Corporation Shares (as such term is defined in the Merger Agreement) to be issued in the Merger. 5. TERMINATION. This Agreement, and all rights and obligations of the parties hereunder, shall terminate upon the first to occur of the Effective Time (as such term is defined in the Merger Agreement) or the date upon which the Merger Agreement is terminated in accordance with its terms. 6. REMEDIES. Each Shareholder agrees that irreparable damage would occur and that the Constituent Corporations and the other Shareholders would not have an adequate remedy at law in the event that such Shareholder failed to perform his obligations hereunder or otherwise breaches this Agreement. It is accordingly agreed that any party seeking to enforce this Agreement shall be entitled to an injunction or injunctions to prevent breaches by any Shareholder and to enforce specifically the terms and provisions of this Agreement in any state or federal court located in Franklin County, Ohio, this being in addition to any other remedy which may be available at law or in equity. In addition, each of the parties hereto (a) consents to submit to the personal jurisdiction of any state or federal court located in Franklin County in the event any dispute arises out of this Agreement or any of the transactions contemplated hereby; (b) agrees that such party will not attempt to deny or defeat such personal jurisdiction by motion or other request; and (c) agrees that such party will not bring any action relating to this Agreement or the transactions contemplated hereby in any court other than a state or federal court located in Franklin County, Ohio. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above. PAPNET OF OHIO, INC. By: /s/ David J. Richards -------------------------------------------- David J. Richards, President 2 CYTOLOGY INDIANA, INC. By: /s/ S. Trevor Ferger ------------------------------------------- S. Trevor Ferger, President INDIANA CYTOLOGY REVIEW COMPANY By: /s/ Cecil J. Petitti --------------------------------------------- Cecil J. Petitti, President ER GROUP, INC. By: /s/ Thomas J. Kelley --------------------------------------------- Thomas J. Kelley, President CAROLINA CYTOLOGY, INC. By: /s/ Rodney M. Kinsey -------------------------------------------- Rodney M. Kinsey, President CCWP PARTNERS, INC. By: /s/ Rodney M. Kinsey --------------------------------------------- Rodney M. Kinsey, President 3 SHAREHOLDERS: /s/ David J. Richards ----------------------------------------------- David J. Richards /s/ John P. Kennedy ----------------------------------------------- John P. Kennedy ----------------------------------------------- Carl A. Genberg ----------------------------------------------- Kent J. Dawson /s/ Rodney M. Kinsey ----------------------------------------------- Rodney M. Kinsey /s/ Michael S. Blue ----------------------------------------------- Michael S. Blue, M. D. /s/ David M. Smith ----------------------------------------------- David M. Smith /s/ David Allen ----------------------------------------------- David Allen 4 /s/ James Derck ----------------------------------------------- James Derck /s/ Alan F. Weisenberg ----------------------------------------------- Alan F. Weisenberg 5 EX-10.D 10 EXHIBIT 10.D LOAN AGREEMENT This Agreement, dated as of July 5, 1996, by and among Papnet of Ohio, Inc., an Ohio corporation ("Papnet"), Cytology Indiana, Inc., an Ohio corporation ("CIN"), Indiana Cytology Review Company, an Ohio corporation ("INC"), ER Group, Inc., an Ohio corporation ("ERG"), CCWP Partners, Inc., an Ohio corporation ("CCWP") and Carolina Cytology, Inc., an Ohio corporation ("CCI"). CIN, INC, ERG, CCWP and CCI are hereinafter sometimes collectively referred to as the "Borrowers" and individually as a "Borrower." RECITALS A. Papnet and the Borrowers were parties to a Loan Agreement, dated as of March 14, 1996, which has been terminated (the "Initial Loan Agreement"). Papnet made advances to the Borrowers under the Initial Loan Agreement in the amounts set forth opposite their respective names on Exhibit A attached hereto and incorporated herein (the "Initial Advances"). B. Pursuant to an Agreement and Plan of Merger of even date (the "Merger Agreement"), the parties have agreed that CIN, INC, ERG, CCWP and CCI will merge with and into Papnet (the "Merger"). Certain capitalized terms not otherwise defined herein shall have the meanings as defined in the Merger Agreement. C. Pending the effectiveness of the Merger, Papnet has agreed, subject to the terms and conditions contained in this Agreement, to make certain advances (hereinafter called an "Advance" or "Advances") on behalf of the Borrowers to pay certain expenses of the Merger and to fund business operations of the Borrowers. D. The parties wish to set forth in this Agreement the terms and conditions on which the Initial Advances will be repaid and the Advances made under this Agreement will be made and repaid. STATEMENT OF AGREEMENT 1. ADVANCES OF MERGER AND OFFERING EXPENSES. Through the Effective Date, Papnet agrees to make such Advances on behalf of each Borrower as are necessary to pay such Borrower's pro-rata share of expenses incurred in connection with the Merger. Papnet may incur and pay legal, accounting, printing, filing, travel, meeting and other expenses in connection with the Merger, or may pay such expenses reasonably incurred by any Borrower, and shall allocate a pro-rata share of all of such expenses to each Borrower in the proportion provided in the Merger Agreement. Such amounts will be considered an Advance to each Borrower hereunder, in the proportion provided in the Merger Agreement, as of the date that such amounts are actually paid by Papnet. Papnet shall keep adequate books and records of such expenses which shall be available for inspection by any Borrower during normal business hours upon reasonable prior notice. 2. ADVANCES OF OPERATING EXPENSES. Through the Effective Date, Papnet agrees to make such Advances to or on behalf of each Borrower individually as are necessary to pay reasonable expenses of ordinary business operations of such Borrower, as approved by Papnet. Each such Advance shall be made to or on behalf of a Borrower upon receipt of the Borrower's application therefor and disbursement instructions, which shall be in a form as Papnet shall reasonably prescribe, and will be considered an Advance to such Borrower hereunder. The reasonableness of any expenses for which Advances are requested, and the amount of any Advance, shall be determined by Papnet in its sole discretion. 3. REPAYMENT. The total amount of the Initial Advances and the Advances hereunder to or on behalf of a Borrower shall be repaid, with interest at the rate of seven percent (7.00%) per annum, sixty days after the Termination Date, as defined in Section 5. Each Borrower may pay the unpaid principal amount of any Advance made to or on behalf of it in whole or in part at any time and from time to time. Each such payment of principal may be made without the payment of accrued and unpaid interest thereon. Interest shall be calculated on the basis of a 360-day year for the actual number of days the principal balance is unpaid. After maturity, whether such maturity occurs by lapse of time or acceleration, interest on the unpaid balance of any Initial Advances Advances (and interest thereon accrued through maturity) shall accrue at the rate of twenty four percent (24.00%) per annum until all Advances and accrued interest are repaid in full. The Initial Advances and Advances to each Borrower shall be evidenced by one or more promissory notes in the form of Exhibit B to this Agreement, or by one or more notes subsequently executed in substitution therefor. 4 STATEMENTS. On the 25th day of each month during the term of this Agreement, Papnet shall deliver to each Borrower a statement showing, for the immediately preceding month, all Advances made to or on behalf of such Borrower, all payments or partial payments of the principal amount of Advances by the Borrower, the accrued and unpaid interest on the Advances, if any, and such other information as may be necessary or appropriate. Each Borrower hereto agrees that it will immediately notify Papnet of any error in any monthly statement delivered to it, and the failure to do so within five (5) business days shall be deemed to be a waiver of any claimed error. Papnet's allocation of Advances to any Borrower shall be presumed correct, and in the event of any dispute concerning the amount, manner of calculation or allocation of any Advance as shown on any statement, the party disputing the statement shall have the burden of demonstrating any error. 5. TERMINATION. Papnet's right and ability to make Advances hereunder shall terminate upon a date (the "Termination Date") which is the earlier to occur of (a) the closing of the Merger, or (b) the termination of the Merger Agreement as provided in Article VIII thereof. 6. SECURITY. As security for the Initial Advances and Advances to or on behalf of it hereunder, each Borrower shall pledge to Papnet all of the common shares of Neuromedical Systems, Inc. currently owned by it, pursuant to the terms of a Security Agreement in the form attached hereto as Exhibit C. 7. REPRESENTATIONS AND WARRANTIES OF BORROWERS. In addition to the representations and warranties of each Borrower contained in the Merger Agreement, upon which each Borrower agrees 2 that Papnet may rely for purposes of this Agreement, each Borrower represents and warrants to Papnet that: (a) The Board of Directors of the Borrower has duly authorized the execution and delivery of this Agreement and of the documents contemplated herein, and this Agreement and such documents constitute valid and binding obligations of the Borrower enforceable in accordance with their terms, subject to the Enforceability Exceptions. (b) The execution of this Agreement and related documents and the compliance by the Borrower with all the provisions thereof: (i) are within the corporate powers of the Borrower; and (ii) will not conflict with, result in any breach in any of the provisions of, constitute a default under, or result in the creation of any lien or encumbrance upon any property of the Borrower under the provisions of, any agreement, charter instrument, bylaw, or other instrument to which the Borrower is a party or by which it may be bound. 8. EVENTS OF DEFAULT. An "Event of Default" with respect to a Borrower shall exist if any of the following occurs and is continuing: (a) the Borrower fails to pay any amount hereunder when due, or fails to perform or observe any covenant contained in Article VI of the Merger Agreement; (b) any warranty, representation or other statement by or on behalf of the Borrower contained in this Agreement, the Merger Agreement, or in any instrument furnished in compliance with or in reference to this Agreement is false or misleading in any material respect; (c) the Borrower becomes insolvent or bankrupt, or makes an assignment for the benefit of creditors, or consents to the appointment of a trustee, receiver or liquidator; or (d) bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings are instituted by or against the Borrower. 9. DEFAULT REMEDIES. (a) ACCELERATION. If an Event of Default exists with respect to a Borrower, Papnet may immediately exercise any right, power or remedy permitted to it by law, and shall have, in particular, without limiting the generality of the foregoing, the right to declare the entire principal and all interest accrued on all Advances then outstanding to or on behalf of such Borrower pursuant to this Agreement to be forthwith due and payable, without any presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by each Borrower. 3 (b) NONWAIVER. No course of dealing on the part of Papnet nor any delay or failure on the part of Papnet to exercise any right shall operate as a waiver of such right or otherwise prejudice Papnet's rights, powers and remedies. 10. MISCELLANEOUS. (a) NOTICES. All communications under this Agreement shall be in writing and shall be mailed by first class mail, postage prepaid. Any notice so addressed and mailed shall be deemed given when so mailed. (b) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the heirs, successors and assigns of each of the parties. (c) AMENDMENT AND WAIVER. This Agreement may be amended, and the observance of any term of this Agreement may be waived, with (and only with) the written consent of the parties hereto. (d) DUPLICATE ORIGINALS. Duplicate originals of this Agreement may be signed by the parties, each of which shall be an original but all of which together shall constitute one and the same instrument. (e) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio applicable to contracts made and performed entirely within such state, without regard to principles of conflicts of laws. (f) CONSENT TO JURISDICTION AND WAIVER OF OBJECTION TO VENUE. Each party agrees that any legal action or proceeding with respect to this Agreement or the notes or the transactions contemplated hereby may be brought in the Court of Common Pleas of Franklin County, Ohio, or in the United States District Court for the Southern District of Ohio, Eastern Division, and each party hereby irrevocably submits to and accepts generally and unconditionally the jurisdiction of those courts with respect to its person, property and revenues and irrevocably consents to service of process in any such action or proceeding by the mailing thereof by U.S. mail to such party at the address set forth in the Merger Agreement. Each party hereby irrevocably waives any objection to the laying of venue of any such suit or proceeding in the above described courts, and unconditionally waives and agrees not to plead or claim that any such suit or proceeding brought in any such court has been brought in an inconvenient forum. (g) WAIVER OF JURY TRIAL. THE PARTIES ACKNOWLEDGE THAT, AS TO ANY AND ALL DISPUTES THAT MAY ARISE BETWEEN THE PARTIES, THE COMMERCIAL NATURE OF THE TRANSACTION OUT OF WHICH THIS AGREEMENT ARISES WOULD MAKE ANY SUCH DISPUTE UNSUITABLE FOR TRIAL BY JURY. ACCORDINGLY, EACH OF THE PARTIES TO THIS AGREEMENT HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY AS TO ANY AND ALL DISPUTES THAT MAY ARISE 4 RELATING TO THIS AGREEMENT OR TO ANY OF THE OTHER INSTRUMENTS OR DOCUMENTS EXECUTED IN CONNECTION HEREWITH. IN WITNESS WHEREOF, the parties have each caused this Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. PAPNET OF OHIO, INC. By: /s/ David J. Richards --------------------------------------------- David J. Richards, President BORROWERS: CYTOLOGY INDIANA, INC. By: /s/ S. Trevor Ferger --------------------------------------------- S. Trevor Ferger, President INDIANA CYTOLOGY REVIEW COMPANY By: /s/ Cecil J. Petitti --------------------------------------------- Cecil J. Petitti, President ER GROUP, INC. By: /s/ Thomas J. Kelley --------------------------------------------- Thomas J. Kelley, President 5 CAROLINA CYTOLOGY, INC. By: /s/ Rodney M. Kinsey --------------------------------------------- Rodney M. Kinsey, President CCWP PARTNERS, INC. By: /s/ Rodney M. Kinsey --------------------------------------------- Rodney M. Kinsey, President 6 EXHIBIT A SCHEDULE OF INITIAL ADVANCES COMPANY NAME AMOUNT OF INITIAL ADVANCES - ------------ -------------------------- Cytology Indiana, Inc. $50,713 Indiana Cytology Review Company $27,307 ER Group, Inc. $70,890 CCWP Partners, Inc. $27,994 Carolina Cytology, Inc. $50,304 EXHIBIT B PROMISSORY NOTE Columbus, Ohio $ , 1996 FOR VALUE RECEIVED, the undersigned promises to pay to the order of PAPNET OF OHIO, INC. (hereinafter called the "Lender," which term shall include any holder hereof) at such place as the Lender may designate or, in the absence of such designation, at any of the Lender's offices, the sum of $ or so much of such sum as shall have been advanced by the Lender at any time and not hereafter repaid (hereinafter referred to as "Advances") pursuant to the Loan Agreement of even date (the "Agreement") together with interest provided and payable at the time(s) and in the manner(s) provided in the Agreement. Each such Advance shall be made to the undersigned upon receipt by the Lender of the undersigned's application therefor and disbursement instructions, which shall be in such form as the Lender shall from time to time reasonably prescribe. The Lender shall be entitled to rely on any oral or telephonic communication requesting an Advance and/or providing disbursement instructions hereunder, which shall be received by it in good faith from anyone reasonably believed by the Lender to be the undersigned, or the undersigned's authorized agent. Each request for an Advance shall constitute a warranty and representation by the undersigned that no event of default hereunder, under the Agreement, or under any related loan documents has occurred and is continuing and that no event or circumstance which would constitute such an event of default, but for the requirement that notice be given or time elapse or both, has occurred and is continuing. The undersigned agrees that all Advances made by the Lender will be evidenced by entries made by the Lender into records maintained by the Lender. The undersigned further agrees that the sum or sums shown such records shall be rebuttably presumptive evidence of the amount of the Advances and of the amount of any accrued interest. INTEREST Interest will accrue on the unpaid balance of the Advances until paid at the rate of 7% per annum. Upon maturity, whether by acceleration or otherwise, interest will accrue on the unpaid balance of the Advances and unpaid interest, if any, until paid at the rate of 24% per annum. All interest shall be calculated on the basis of a 360 day year for the actual number of days the Advances or any part thereof remain unpaid. There shall be no penalty for prepayment. MANNER OF PAYMENT The Advances and accrued interest thereon shall be due and payable sixty days after the Termination Date, as defined in the Agreement, and at maturity, whether by acceleration or otherwise. SECURITY The obligations of the undersigned hereunder are secured by a Security Agreement of even date, granting Lender a security interest in certain property of the undersigned (the "Collateral"). The Lender shall not be bound to take any steps necessary to preserve any rights in the Collateral against prior parties. If any obligation evidenced by this Note is not paid when due, the Lender may, at its option, demand, sue for, collect or make any compromise or settlement it deems desirable with reference to the Collateral, and shall have the rights of a secured party under the laws of the State of Ohio, and the undersigned shall be liable for any deficiency. DEFAULT Upon the occurrence of any of the events of default set forth in the Agreement, then the Lender may, at its option, without notice or demand, accelerate the maturity of the obligations evidenced hereby, which obligations shall become immediately due and payable. In the event the Lender shall institute any action for the enforcement or collection of the obligations evidenced hereby, the undersigned agrees to pay all costs and expenses of such action, including reasonable attorneys' fees, to the extent permitted by law. GENERAL PROVISIONS The undersigned, and any indorser, surety, or guarantor, hereby severally waive presentment, notice of dishonor, protest, notice of protest, and diligence in bringing suit against any of them, and consent that, without discharging any of them, the time of payment may be extended an unlimited number of times before or after maturity without notice. The Lender shall not be required to pursue the undersigned, including any guarantor, or to exercise any rights against any Collateral herefor before exercising any other such rights. The obligations evidenced hereby may from time to time be evidenced by another note or notes given in substitution, renewal or extension hereof. Any security interest which secures the obligations evidenced hereby shall remain in full force and effect notwithstanding any such substitution, renewal, or extension. The captions used herein are for references only and shall not be deemed a part of this Note. If any of the terms or provisions of this Note shall be deemed unenforceable, the enforceability of the remaining terms and provisions shall not be affected. This Note shall be governed by and construed in accordance with the laws of the State of Ohio. WAIVER OF RIGHT TO TRIAL BY JURY THE UNDERSIGNED ACKNOWLEDGES THAT, AS TO ANY AND ALL DISPUTES THAT MAY ARISE BETWEEN THE UNDERSIGNED AND THE LENDER, THE COMMERCIAL NATURE OF THE TRANSACTION OUT OF WHICH THIS NOTE ARISES 2 WOULD MAKE ANY SUCH DISPUTE UNSUITABLE FOR TRIAL BY JURY. ACCORDINGLY, THE UNDERSIGNED HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY AS TO ANY AND ALL DISPUTES THAT MAY ARISE RELATING TO THIS NOTE OR TO ANY OF THE OTHER INSTRUMENTS OR DOCUMENTS EXECUTED IN CONNECTION HEREWITH. WARRANT OF ATTORNEY The undersigned authorizes any attorney at law to appear in any Court of Record in the State of Ohio or in any state or territory of the United States after the above indebtedness becomes due, whether by acceleration or otherwise, to waive the issuing and service of process, and to confess judgment against undersigned in favor of the Lender for the amount then appearing due together with costs of suit, and thereupon to waive all errors and all rights of appeal and stays of execution. The attorney at law authorized hereby to appear for the undersigned may be an attorney at law representing the Lender, and the undersigned hereby expressly waives any conflict of interest that may exist by virtue of such representation. WARNING-BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE. ------------------------------------------- By: ---------------------------------------- Its: ---------------------------------------- 3 EXHIBIT C SECURITY AGREEMENT CERTIFICATED STOCK The undersigned (hereinafter called "Debtor" whether one or more), for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, hereby grants, pledges and assigns to Papnet of Ohio, Inc. (hereinafter called "Lender"), a security interest in the following stock, whether Debtor's interest therein be now owned or existing or hereafter arising or acquired, together with all substitutions, replacements, exchanges, reissues and additions therefor or thereto, all books and records relating thereto, all dividends and distributions arising therefrom, payable thereon or distributed in respect thereto, whether in cash, property, stock or otherwise, and whether now or hereafter declared, paid or made, and together with the right to receive and receipt therefor, and all cash and non-cash proceeds thereof including, but not limited to, notes, drafts, checks, instruments and deposit and money market accounts:
No. of Shares Certificate and Class Issuer Number(s) - ------------- ------ ----------- Common Shares, $.0001 par value Neuromedical Systems, Inc.
(all of the foregoing hereinafter sometimes called the "Collateral"). Except as otherwise provided in this agreement, Debtor shall have the right to receive all dividends arising with respect to the Collateral paid in cash or in other property, but Debtor shall have no right to receive any dividend in respect of the Collateral paid in stock of the Issuer or in the stock of corporations other than the Issuer or paid out of the proceeds of the sale or condemnation of any property of the Issuer or upon or in the course of dissolution or liquidation (whether partial or otherwise) or winding up of the Issuer or which in any way shall be chargeable to or payable out of capital, capital surplus or paid in surplus. Debtor shall not have the right to receive any dividends arising with respect to the Collateral if a default exists in the observance and performance of any of the terms of this agreement, or of any of the Obligations, or if ownership of the Collateral has been registered in the name of Lender or any nominee of Lender or any sub-agent appointed by Lender pursuant to paragraph 7 of this agreement, and all dividends arising under such circumstances shall be paid to Lender and, at Lender's option, may be applied to the Obligations in such order as Lender may elect or be held as security therefor. The security interest hereby granted is to secure the prompt and full payment and complete performance of all Obligations of Debtor to Lender. The word "Obligations" is used in its most comprehensive sense and includes, without limitation, all indebtedness, debts and liabilities (including principal, interest, late charges, collection costs, attorneys' fees to the extent permitted by law, and the like) of Debtor to Lender, whether now existing or hereafter arising, either created by Debtor alone or together with another or others, primary or secondary, secured or unsecured, absolute or contingent, liquidated or unliquidated, direct or indirect, whether evidenced by note, draft, application for letter of credit or otherwise, and any and all renewals of or substitutes therefor. The word "Obligations" shall include, BUT NOT BE LIMITED TO, all indebtedness owed by Debtor to Lender by reason of credit extended or to be extended to Debtor pursuant to a Loan Agreement of even date and related documents. It is Debtor's express intention that this agreement and the continuing security interest granted hereby, in addition to covering all present Obligations of Debtor to Lender, shall extend to all future Obligations of Debtor to Lender, whether or not such Obligations are reduced or entirely extinguished and thereafter increased or reincurred, whether or not such Obligations are related to the indebtedness identified above by class, type or kind and whether or not such Obligations are specifically contemplated by Debtor and Lender as of the date hereof. The absence of any reference to this agreement in any documents, instruments or agreements evidencing or relating to any Obligation secured hereby shall not limit or be construed to limit the scope or applicability of this agreement. 1. GENERAL COVENANTS. Debtor represents, warrants and covenants as follows: (a) Unless Lender compels registration of ownership of the Collateral in the name of Lender or any nominee of Lender or any sub-agent appointed by Lender pursuant to paragraph 7 of this agreement, Debtor is and shall remain the sole owner and registered holder of the Collateral. (b) Except for the security interest granted hereby, the Collateral is and shall remain free from any and all security interests, liens, encumbrances, claims and interests. (c) The Issuer is duly organized, validly existing and is in good standing, and each share of stock comprising the Collateral is or, upon delivery to Lender shall be, duly authorized, authenticated, issued and delivered and enforceable in accordance with its terms and not in default. (d) Each share of stock comprising the Collateral is fully paid and nonassessable and, except as otherwise indicated in the certificates representing the shares, is transferable in its present form upon delivery without restriction or limitation on the books and records of its Issuer. (e) Debtor shall, at Debtor's expense, perform, do, make, procure, execute and deliver all acts, things, writings and other assurances as Lender may at any time request or require to protect, assure or enforce Lender's interests, rights and remedies created by, provided in or emanating from this agreement. (f) Debtor shall not create, permit or suffer to exist, and shall take such action as is necessary to remove, any claim to or interest in or lien or encumbrance upon the Collateral, other than the security interest granted hereby, and shall defend the right, title and interest of Lender in and to the Collateral against all claims and demands of all persons and entities at any time claiming the same or any interest therein. -2- (g) Subject to any limitation stated therein or in connection therewith, all information furnished by Debtor concerning the Collateral or otherwise in connection with the Obligations, is or shall be at the time the same is furnished, accurate, correct and complete in all material respects. 2. VOTING. With respect to any Collateral not registered in the name of Lender or Lender's nominee or sub-agent pursuant to paragraph 7 of this agreement, during the term of this agreement, and so long as (i) there is no default in the observance and performance of any of the terms of this agreement or of any of the Obligations, and (ii) Lender has not notified Debtor of Lender's election to exercise any voting rights relating to the Collateral, Debtor shall have the right to exercise such voting rights on all corporate questions. 3. SUBSTITUTED AND ADDITIONAL SECURITIES. If during the term of this agreement any stock dividend, exchange, conversion, reclassification, readjustment or other change is paid, declared or made with respect to the Collateral, all new, substituted and additional securities issued in respect to the Collateral shall be deemed pledged to Lender under the terms of this agreement in the same manner as the Collateral originally pledged hereunder. 4. WARRANTS AND OPTIONS. If during the term of this agreement subscription warrants or options are issued in connection with the Collateral or any other securities at the time pledged to Lender hereunder, such warrants and options shall be immediately assigned by Debtor to Lender, and all new securities acquired by Debtor in connection therewith shall be immediately assigned to Lender under the terms of this agreement in the same manner as the Collateral originally pledged hereunder. 5. PRESERVATION AND DISPOSITION OF COLLATERAL. (a) Debtor shall advise Lender promptly, in writing and in reasonable detail, (i) of any material encumbrance upon or claim asserted against any of the Collateral; and (ii) of the occurrence of any event that would have a material effect upon the aggregate value of the Collateral or upon the security interest of Lender. (b) Debtor shall pay promptly when due all taxes, assessments, charges or levies upon the Collateral or in respect to the income or profits therefrom or the transfer or registration thereof. (c) At its option, Lender may discharge taxes, liens, security interests or other encumbrances at any time levied or placed on or arising in connection with the Collateral. Debtor agrees to reimburse Lender upon demand for any payment made or any expense incurred (including reasonable attorneys' fees to the extent permitted by law) by Lender pursuant to the foregoing authorization. Should Debtor fail to pay said sum to Lender upon demand, interest shall accrue thereon, from the date of demand until paid in full, at the highest rate set forth in any document or instrument evidencing any of the Obligations. -3- 6. EXTENSIONS AND COMPROMISES. With respect to any Collateral pledged to Lender as security for the Obligations, Debtor assents to all extensions or postponements of the time of payment thereof or any other indulgence in connection therewith, to each substitution, exchange or release of Collateral, to the addition or release of any party primarily or secondarily liable, to the acceptance of partial payments thereon and to the settlement, compromise or adjustment thereof, all in such manner and at such time or times as Lender may deem advisable. Lender shall have no duty as to the collection or protection of Collateral or any income therefrom, nor as to the preservation of any right pertaining thereto, beyond the safe custody of Collateral in the possession of Lender. 7. LENDER'S APPOINTMENT AS ATTORNEY-IN-FACT. Debtor hereby irrevocably constitutes and appoints Lender and any officer or agent thereof, with full power of substitution, as Debtor's true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of Debtor and in the name of Debtor or in Lender's own name, from time to time in Lender's discretion, for the purpose of carrying out the terms of this agreement, to take any and all appropriate action and to execute any and all documents and instruments that may be necessary or desirable to accomplish the purpose of this agreement. Debtor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. Lender may, in its discretion, register ownership of any of the Collateral in the name of Lender or any nominee of Lender or any sub-agent appointed by Lender, or may designate a nominee or sub-agent for the purpose of retaining physical possession of the instruments, certificates and similar writings representing any of the Collateral, indorsed or assigned in blank or in favor of Lender or Lender's nominee or sub-agent. Debtor hereby consents and agrees that the Issuer or any obligor in respect of the Collateral or any registrar or transfer agent or trustee for any of the Collateral shall be entitled to accept the provisions hereof as conclusive evidence of the rights of Lender to effect any transfer pursuant to this paragraph 7, notwithstanding any other notice or direction to the contrary heretofore or hereafter given. The powers conferred upon Lender hereunder are solely to protect its interests in the Collateral and shall not impose any duty upon Lender to exercise any such powers. Lender shall be accountable only for amounts that Lender actually receives as a result of the exercise of such powers and neither Lender nor any of its officers, directors, employees or agents shall be responsible to Debtor for any act or failure to act, except for Lender's own gross negligence or willful misconduct. 8. DEFAULT. If any event of default in the payment of any of the Obligations or in the performance of any of the terms, conditions, or provisions of any instrument or document evidencing the Obligations secured by this agreement or in the performance of any covenant contained herein shall occur and be continuing; or if any warranty, representation or statement made or furnished to Lender by Debtor proves to have been false in any material respect when made or furnished; or if -4- Lender shall for any reason deem itself insecure as to the prospect of payment of any of the Obligations: (a) Lender may, at its option and without notice, declare the unpaid balance of any or all of the Obligations immediately due and payable and this agreement and any or all of the Obligations in default. (b) All payments received by Debtor under or in connection with any of the Collateral shall be held by Debtor in trust for Lender, shall be segregated from other funds of Debtor and shall forthwith upon receipt by Debtor be turned over to Lender in the same form as received by Debtor (duly indorsed by Debtor to Lender, if required). Any and all such payments so received by Lender (whether from Debtor or otherwise) may, in the sole discretion of Lender, be held by Lender as collateral security for, and/or then or at any time thereafter be applied in whole or in part by Lender against, all or any part of the Obligations in such order as Lender may elect. Any balance of such payments held by Lender and remaining after payment in full of all the Obligations shall be paid over to Debtor or to whomsoever may be lawfully entitled to receive the same. Nothing set forth in this subparagraph (b) shall authorize or be construed to authorize Debtor to sell or otherwise dispose of any Collateral. (c) Lender and its nominees and sub-agents shall have the rights and remedies of a secured party under this agreement, under any other instrument or agreement securing, evidencing or relating to the Obligations and under the law of the State of Ohio. To the extent permitted by applicable law, Debtor waives all claims, damages and demands against Lender arising out of the repossession, retention, sale or disposition of the Collateral. Debtor agrees that Lender need not give more than seven (7) days' notice (which notification shall be deemed given when mailed, postage prepaid, addressed to Debtor at Debtor's address set forth at the beginning of this agreement, or when telecopied or telegraphed to that address or when telephoned or otherwise communicated orally to Debtor or any agent of Debtor at that address), if any, of the time and place of any public sale or of the time after which a private sale may take place and that such notice is reasonable notification of such matters. Debtor shall remain liable for any deficiency if the proceeds of any sale or disposition of the Collateral are insufficient to pay all amounts to which Lender is entitled. Debtor shall also be liable for the costs of collecting any of the Obligations or otherwise enforcing the terms thereof or of this agreement including reasonable attorneys' fees to the extent permitted by law. 9. GENERAL. Any provision of this agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Lender shall not be deemed to have waived any of its rights hereunder or under any other agreement, instrument or paper signed by Debtor unless such waiver be in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. All of Lender's rights and remedies, whether -5- evidenced hereby or by any other agreement, instrument or paper, shall be cumulative and may be exercised singularly or concurrently. Any written demand upon or written notice to Debtor shall be effective when deposited in the mails addressed to Debtor at the address shown at the beginning of this agreement. This agreement and all rights and obligations hereunder, including matters of construction, validity and performance, shall be governed by the law of the State of Ohio. The provisions hereof shall, as the case may require, bind or inure to the benefit of, the respective heirs, successors, legal representatives and assigns of Debtor and Lender. IN WITNESS WHEREOF, Debtor has signed this agreement this day of March, 1996. DEBTOR: ---------------------------------- By: ------------------------------ Its: ------------------------------ -6- PAPNET OF OHIO, INC. July 16, 1996 ER Group, Inc. ("ERG") Carolina Cytology, Inc. ("CCI") CCWP Partners, Inc. ("CCWP") Subject: Loan Agreement Gentlemen: Papnet of Ohio, Inc. ("Papnet") is issuing this letter to each of you, to induce you to execute and in consideration of you executing the Loan Agreement (a copy of which is attached hereto), committing as follows: (1) Notwithstanding its discretion with regard to the payment of such expenses under Section 1 of the Loan Agreement, Papnet agrees to and shall in all events as Advances (as defined in the Loan Agreement) to CCWP and CCI pay or reimburse up to at least $20,000 of invoices for legal fees and expenses incurred by CCWP and CCI in connection with the Merger (as defined in the Loan Agreement), with the same to be done promptly following submission of such invoices by CCWP and CCI. (2) As regards Section 3 of the Loan Agreement, any expense incurred by any of ERG, CCWP or CCI (a "Borrower") prior hereto or hereafter in connection with the Merger which is not paid by Papnet to or on behalf of such Borrower under the Loan Agreement (an "Unreimbursed Merger Expense") shall be treated as a repayment by such Borrower of Initial Advances (as defined in the Loan Agreement) and of Advances made or to be made by Papnet as of the date of payment of such Unreimbursed Merger Expense by such Borrower to the extent the amount of such Unreimbursed Merger Expense exceeds such Borrower's share of the Merger expenses provided for in the Merger Agreement (as defined in the Loan Agreement). (3) Notwithstanding Section 4 of the Loan Agreement, a failure to notify Papnet of any error in any monthly statement will not be deemed to be a waiver by you of any claimed error. (4) Notwithstanding Section 6 of the Loan Agreement, Papnet acknowledges that only a portion of your common shares of Neuromedical Systems, Inc. are being pledged. (5) Schedule A to the Loan Agreement has not yet been completed, and the final Schedule A will be subject to the approval of each of you prior to its taking effect. (6) With respect to the Security Agreement executed by each of you pursuant to the Loan Agreement, you will not be considered to be in default under Section 8 of said Security Agreement until Papnet has give you 30 days' written notice thereof and you have failed to cure the same within such 30-days' period. Sincerely, PAPNET OF OHIO, INC. By:/s/ David J. Richards -------------------------------- David J. Richards, President EX-10.E 11 EXHIBIT 10.E EXHIBIT 10(e) LOAN AGREEMENT This Agreement, dated as of March 14, 1996, by and among Papnet of Ohio, Inc., an Ohio corporation ("Papnet"), Cytology West, Inc., a Delaware corporation ("CWI"), Cytology Indiana, Inc., an Ohio corporation ("CIN"), Indiana Cytology Review Corporation, an Ohio corporation ("INC"), ER Group, Inc., an Ohio corporation ("ERG"), CCWP Partners, Inc., an Ohio corporation ("CCWP"), Carolina Cytology, Inc., an Ohio corporation ("CCI"), and Papnet Utah, Inc., a Nevada corporation ("PUI"). CWI, CIN, INC, ERG, CCWP, CCI and PUI are hereinafter sometimes collectively referred to as the "Borrowers" and individually as a "Borrower." RECITALS A. Pursuant to an Agreement and Plan of Merger of even date (the "Merger Agreement"), the parties have agreed that Papnet, CIN, INC, ERG, CCWP, CCI and PUI will merge with and into CWI (the "Merger"). Certain capitalized terms not otherwise defined herein shall have the meanings as defined in the Merger Agreement. B. Pending the effectiveness of the Merger, Papnet has agreed, subject to the terms and conditions contained in this Agreement, to make certain advances (hereinafter called an "Advance" or "Advances") on behalf of the Borrowers to pay certain expenses of the Merger and an anticipated Initial Public Offering by the Surviving Corporation, and to fund business operations of the Borrowers. C. The parties wish to set forth in this Agreement the terms and conditions on which such Advances will be made and repaid. STATEMENT OF AGREEMENT 1. ADVANCES OF MERGER AND OFFERING EXPENSES. Through the Effective Date, Papnet agrees to make such Advances on behalf of each Borrower as are necessary to pay such Borrower's pro-rata share of expenses incurred in connection with the Merger or the Initial Public Offering. Papnet may incur and pay legal, accounting, printing, filing, travel, meeting and other expenses in connection with the Merger or the Initial Public Offering, or may pay such expenses reasonably incurred by any Borrower, and shall allocate a pro-rata share of all of such expenses to each Borrower in the proportion provided in the Merger Agreement. Such amounts will be considered an Advance to each Borrower hereunder, in the proportion provided in the Merger Agreement, as of the date that such amounts are actually paid by Papnet. Papnet shall keep adequate books and records of such expenses which shall be available for inspection by any Borrower during normal business hours upon reasonable prior notice. 2. ADVANCES OF OPERATING EXPENSES. Through the Effective Date, Papnet agrees to make such Advances to or on behalf of each Borrower individually as are necessary to pay reasonable expenses of ordinary business operations of such Borrower, as approved by Papnet. In the case of CWI, such expenses shall include reasonable expenses necessary to the development of technologies acquired from GDP Technologies, Inc. Each such Advance shall be made to or on behalf of a Borrower upon receipt of the Borrower's application therefor and disbursement instructions, which shall be in a form as Papnet shall reasonably prescribe, and will be considered an Advance to such Borrower hereunder. The reasonableness of any expenses for which Advances are requested, and the amount of any Advance, shall be determined by Papnet in its sole discretion. 3. REPAYMENT. The total amount of Advances to or on behalf of a Borrower shall be repaid, with interest at the rate of seven percent (7.00%) per annum, sixty days after the Termination Date, as defined in Section 5. Each Borrower may pay the unpaid principal amount of any Advance made to or on behalf of it in whole or in part at any time and from time to time. Each such payment of principal may be made without the payment of accrued and unpaid interest thereon. Interest shall be calculated on the basis of a 360-day year for the actual number of days the principal balance is unpaid. After maturity, whether such maturity occurs by lapse of time or acceleration, interest on the unpaid balance of any Advances (and interest thereon accrued through maturity) shall accrue at the rate of twenty four percent (24.00%) per annum until all Advances and accrued interest are repaid in full. Advances to each Borrower shall be evidenced by one or more promissory notes in the form of Exhibit A to this Agreement, or by one or more notes subsequently executed in substitution therefor. 4 STATEMENTS. On the 25th day of each month during the term of this Agreement, Papnet shall deliver to each Borrower a statement showing, for the immediately preceding month, all Advances made to or on behalf of such Borrower, all payments or partial payments of the principal amount of Advances by the Borrower, the accrued and unpaid interest on the Advances, if any, and such other information as may be necessary or appropriate. Each Borrower hereto agrees that it will immediately notify Papnet of any error in any monthly statement delivered to it, and the failure to do so within five (5) business days shall be deemed to be a waiver of any claimed error. Papnet's allocation of Advances to any Borrower shall be presumed correct, and in the event of any dispute concerning the amount, manner of calculation or allocation of any Advance as shown on any statement, the party disputing the statement shall have the burden of demonstrating any error. 5. TERMINATION. Papnet's right and ability to make Advances hereunder shall terminate upon a date (the "Termination Date") which is the earlier to occur of (a) the closing of the Merger, or (b) the termination of the Merger Agreement as provided in Article VIII thereof. 6. SECURITY. As security for Advances to or on behalf of it hereunder, each Borrower other than CWI shall pledge to Papnet all of the common shares of Neuromedical Systems, Inc. currently owned by it, pursuant to the terms of a Security Agreement in the form attached hereto as Exhibit B. As security for Advances to or on behalf of it, CWI shall grant Papnet a security interest in its assets pursuant to the terms of a Security Agreement in the form attached hereto as Exhibit C. 7. REPRESENTATIONS AND WARRANTIES OF BORROWERS. In addition to the representations and warranties of each Borrower contained in the Merger Agreement, upon which each Borrower agrees that Papnet may rely for purposes of this Agreement, each Borrower represents and warrants to Papnet that: 2 (a) The Board of Directors of the Borrower has duly authorized the execution and delivery of this Agreement and of the documents contemplated herein, and this Agreement and such documents constitute valid and binding obligations of the Borrower enforceable in accordance with their terms, subject to the Enforceability Exceptions. (b) The execution of this Agreement and related documents and the compliance by the Borrower with all the provisions thereof: (i) are within the corporate powers of the Borrower; and (ii) will not conflict with, result in any breach in any of the provisions of, constitute a default under, or result in the creation of any lien or encumbrance upon any property of the Borrower under the provisions of, any agreement, charter instrument, bylaw, or other instrument to which the Borrower is a party or by which it may be bound. 8. EVENTS OF DEFAULT. An "Event of Default" with respect to a Borrower shall exist if any of the following occurs and is continuing: (a) the Borrower fails to pay any amount hereunder when due, or fails to perform or observe any covenant contained in Article VI of the Merger Agreement; (b) any warranty, representation or other statement by or on behalf of the Borrower contained in this Agreement, the Merger Agreement, or in any instrument furnished in compliance with or in reference to this Agreement is false or misleading in any material respect; (c) the Borrower becomes insolvent or bankrupt, or makes an assignment for the benefit of creditors, or consents to the appointment of a trustee, receiver or liquidator; or (d) bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings are instituted by or against the Borrower. 9. DEFAULT REMEDIES. (a) ACCELERATION. If an Event of Default exists with respect to a Borrower, Papnet may immediately exercise any right, power or remedy permitted to it by law, and shall have, in particular, without limiting the generality of the foregoing, the right to declare the entire principal and all interest accrued on all Advances then outstanding to or on behalf of such Borrower pursuant to this Agreement to be forthwith due and payable, without any presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by each Borrower. 3 (b) NONWAIVER. No course of dealing on the part of Papnet nor any delay or failure on the part of Papnet to exercise any right shall operate as a waiver of such right or otherwise prejudice Papnet's rights, powers and remedies. 10. MISCELLANEOUS. (a) NOTICES. All communications under this Agreement shall be in writing and shall be mailed by first class mail, postage prepaid. Any notice so addressed and mailed shall be deemed given when so mailed. (b) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the heirs, successors and assigns of each of the parties. (c) AMENDMENT AND WAIVER. This Agreement may be amended, and the observance of any term of this Agreement may be waived, with (and only with) the written consent of the parties hereto. (d) DUPLICATE ORIGINALS. Duplicate originals of this Agreement may be signed by the parties, each of which shall be an original but all of which together shall constitute one and the same instrument. (e) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio applicable to contracts made and performed entirely within such state, without regard to principles of conflicts of laws. (f) CONSENT TO JURISDICTION AND WAIVER OF OBJECTION TO VENUE. Each party agrees that any legal action or proceeding with respect to this Agreement or the notes or the transactions contemplated hereby may be brought in the Court of Common Pleas of Franklin County, Ohio, or in the United States District Court for the Southern District of Ohio, Eastern Division, and each party hereby irrevocably submits to and accepts generally and unconditionally the jurisdiction of those courts with respect to its person, property and revenues and irrevocably consents to service of process in any such action or proceeding by the mailing thereof by U.S. mail to such party at the address set forth in the Merger Agreement. Each party hereby irrevocably waives any objection to the laying of venue of any such suit or proceeding in the above described courts, and unconditionally waives and agrees not to plead or claim that any such suit or proceeding brought in any such court has been brought in an inconvenient forum. (g) WAIVER OF JURY TRIAL. THE PARTIES ACKNOWLEDGE THAT, AS TO ANY AND ALL DISPUTES THAT MAY ARISE BETWEEN THE PARTIES, THE COMMERCIAL NATURE OF THE TRANSACTION OUT OF WHICH THIS AGREEMENT ARISES WOULD MAKE ANY SUCH DISPUTE UNSUITABLE FOR TRIAL BY JURY. ACCORDINGLY, EACH OF THE PARTIES TO THIS AGREEMENT HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY AS TO ANY AND ALL DISPUTES THAT MAY ARISE 4 RELATING TO THIS AGREEMENT OR TO ANY OF THE OTHER INSTRUMENTS OR DOCUMENTS EXECUTED IN CONNECTION HEREWITH. IN WITNESS WHEREOF, the parties have each caused this Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. PAPNET OF OHIO, INC. By: /s/ David J. Richards ------------------------------------ David J. Richards, President BORROWERS: CYTOLOGY WEST, INC. By: /s/ Carl Genberg ------------------------------------ Carl Genberg, President CYTOLOGY INDIANA, INC. By: ------------------------------------ President INDIANA CYTOLOGY REVIEW COMPANY By: ------------------------------------ President 5 ER GROUP, INC. By: ------------------------------------ Thomas J. Kelley, President CAROLINA CYTOLOGY, INC. By: ------------------------------------ Rodney M. Kinsey, President CCWP PARTNERS, INC. By: ------------------------------------ Rodney M. Kinsey, President PAPNET UTAH, INC. By: /s/ Kent Dawson ------------------------------------ President 6 EX-10.F 12 EXHIBIT 10.F PROMISSORY NOTE Columbus, Ohio $585,000.00 April 5, 1996 FOR VALUE RECEIVED, the undersigned promises to pay to the order of PAPNET OF OHIO, INC. (hereinafter called the "Lender," which term shall include any holder hereof) at such place as the Lender may designate or, in the absence of such designation, at any of the Lender's offices, the sum of $585,000.00 or so much of such sum as shall have been advanced by the Lender at any time and not hereafter repaid (hereinafter referred to as "Advances") pursuant to the Loan Agreement dated as of March 14, 1996 (the "Agreement") together with interest provided and payable at the time(s) and in the manner(s) provided in the Agreement. Each such Advance shall be made to the undersigned upon receipt by the Lender of the undersigned's application therefor and disbursement instructions, which shall be in such form as the Lender shall from time to time reasonably prescribe. The Lender shall be entitled to rely on any oral or telephonic communication requesting an Advance and/or providing disbursement instructions hereunder, which shall be received by it in good faith from anyone reasonably believed by the Lender to be the undersigned, or the undersigned's authorized agent. Each request for an Advance shall constitute a warranty and representation by the undersigned that no event of default hereunder, under the Agreement, or under any related loan documents has occurred and is continuing and that no event or circumstance which would constitute such an event of default, but for the requirement that notice be given or time elapse or both, has occurred and is continuing. The undersigned agrees that all Advances made by the Lender will be evidenced by entries made by the Lender into records maintained by the Lender. The undersigned further agrees that the sum or sums shown such records shall be rebuttably presumptive evidence of the amount of the Advances and of the amount of any accrued interest. INTEREST Interest will accrue on the unpaid balance of the Advances until paid at the rate of 7% per annum. Upon maturity, whether by acceleration or otherwise, interest will accrue on the unpaid balance of the Advances and unpaid interest, if any, until paid at the rate of 24% per annum. All interest shall be calculated on the basis of a 360 day year for the actual number of days the Advances or any part thereof remain unpaid. There shall be no penalty for prepayment. MANNER OF PAYMENT The Advances and accrued interest thereon shall be due and payable one hundred eighty (180) days after the Termination Date, as defined in the Agreement, and at maturity, whether by acceleration or otherwise. SECURITY The obligations of the undersigned hereunder are secured by a Security Agreement of even date, granting Lender a security interest in certain property of the undersigned (the "Collateral"). The Lender shall not be bound to take any steps necessary to preserve any rights in the Collateral against prior parties. If any obligation evidenced by this Note is not paid when due, the Lender may, at its option, demand, sue for, collect or make any compromise or settlement it deems desirable with reference to the Collateral, and shall have the rights of a secured party under the laws of the State of Ohio, and the undersigned shall be liable for any deficiency. DEFAULT Upon the occurrence of any of the events of default set forth in the Agreement, then the Lender may, at its option, without notice or demand, accelerate the maturity of the obligations evidenced hereby, which obligations shall become immediately due and payable. In the event the Lender shall institute any action for the enforcement or collection of the obligations evidenced hereby, the undersigned agrees to pay all costs and expenses of such action, including reasonable attorneys' fees, to the extent permitted by law. GENERAL PROVISIONS The undersigned, and any indorser, surety, or guarantor, hereby severally waive presentment, notice of dishonor, protest, notice of protest, and diligence in bringing suit against any of them, and consent that, without discharging any of them, the time of payment may be extended an unlimited number of times before or after maturity without notice. The Lender shall not be required to pursue the undersigned, including any guarantor, or to exercise any rights against any Collateral herefor before exercising any other such rights. The obligations evidenced hereby may from time to time be evidenced by another note or notes given in substitution, renewal or extension hereof. Any security interest which secures the obligations evidenced hereby shall remain in full force and effect notwithstanding any such substitution, renewal, or extension. The captions used herein are for references only and shall not be deemed a part of this Note. If any of the terms or provisions of this Note shall be deemed unenforceable, the enforceability of the remaining terms and provisions shall not be affected. This Note shall be governed by and construed in accordance with the laws of the State of Ohio. WAIVER OF RIGHT TO TRIAL BY JURY THE UNDERSIGNED ACKNOWLEDGES THAT, AS TO ANY AND ALL DISPUTES THAT MAY ARISE BETWEEN THE UNDERSIGNED AND THE LENDER, THE COMMERCIAL NATURE OF THE TRANSACTION OUT OF WHICH THIS NOTE ARISES -2- WOULD MAKE ANY SUCH DISPUTE UNSUITABLE FOR TRIAL BY JURY. ACCORDINGLY, THE UNDERSIGNED HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY AS TO ANY AND ALL DISPUTES THAT MAY ARISE RELATING TO THIS NOTE OR TO ANY OF THE OTHER INSTRUMENTS OR DOCUMENTS EXECUTED IN CONNECTION HEREWITH. WARRANT OF ATTORNEY The undersigned authorizes any attorney at law to appear in any Court of Record in the State of Ohio or in any state or territory of the United States after the above indebtedness becomes due, whether by acceleration or otherwise, to waive the issuing and service of process, and to confess judgment against undersigned in favor of the Lender for the amount then appearing due together with costs of suit, and thereupon to waive all errors and all rights of appeal and stays of execution. The attorney at law authorized hereby to appear for the undersigned may be an attorney at law representing the Lender, and the undersigned hereby expressly waives any conflict of interest that may exist by virtue of such representation. WARNING-BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE. CYTOLOGY WEST, INC. By: /s/ Carl A. Genberg ----------------------------------------- Carl A. Genberg, President -3- SECURITY AGREEMENT EQUIPMENT, FIXTURES, INVENTORY, RECEIVABLES AND INTANGIBLES Cytology West, Inc., a corporation organized under the law of the State of Delaware, with principal offices located at 3753 Howard Hughes Parkway, Suite 200, Las Vegas, NV 89109 (hereinafter called "Debtor"), for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, hereby grants, pledges and assigns to Papnet of Ohio, Inc. (hereinafter called "Lender"), a security interest in the following property, whether Debtor's interest therein as owner, co-owner, lessee, consignee, secured party or otherwise be now owned or existing, or hereafter arising or acquired, and wherever located, together with all substitutions, replacements, additions and accessions therefor or thereto, all replacement and repair parts therefor, all documents including, but not limited to, negotiable documents, documents of title, warehouse receipts, storage receipts, dock receipts, dock warrants, express bills, freight bills, airbills, bills of lading and other documents relating thereto, all products thereof and all cash and non-cash proceeds thereof including, but not limited to, notes, drafts, checks, instruments, insurance proceeds, indemnity proceeds, warranty and guaranty proceeds and proceeds arising in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the following property by any governmental body, authority, bureau or agency (or any person acting under color of governmental authority): (a) All of Debtor's machinery, equipment, tools, furniture, furnishings and fixtures including, but not limited to, all manufacturing, fabricating, processing, transporting and packaging equipment, communication systems, and computing and data processing systems (hereinafter sometimes called the "Equipment"; (b) All of Debtor's inventory including, but not limited to, parts, supplies, raw materials, work in process, finished goods, materials used or consumed in Debtor's business, repossessed and returned goods (hereinafter sometimes called the "Inventory"); (c) All of Debtor's accounts, accounts receivable, royalties receivable, contract rights, guaranties of accounts, accounts receivable and contract rights and security therefor, chattel paper, income tax refunds, instruments, negotiable documents, notes, drafts, acceptances and other forms of obligations and receivables arising from or in connection with the operation of Debtor's business including, but not limited to, those arising from or in connection with Debtor's sale, lease or other disposition of Inventory, deposit accounts, and all books, records, ledger cards, computer programs and other documents or property at any time evidencing or relating to the foregoing receivables (hereinafter sometimes called the "Receivables"); and (d) All of Debtor's general intangibles, trade names, trademarks, trade secrets, goodwill, patents, patent applications, copyrights, licenses and franchises, excluding patents and patent applications relating to technologies acquired by Debtor from GDP Technologies, Inc., a Colorado corporation, and the license from Neuromedical Systems, Inc. ("NSI"), as most recently amended pursuant to the Settlement Agreement among the Debtor, NSI and certain other parties dated as of December 5, 1996 (hereinafter sometimes called the "Intellectual Property") (all of the foregoing hereinafter sometimes called the "Collateral"). The security interest hereby granted is to secure the prompt and full payment and complete performance of all Obligations. The word "Obligations" means all indebtedness owed by Debtor to Lender by reason of Advances made to or on behalf of Debtor pursuant to a Loan Agreement of even date and related documents. It is Debtor's express intention that this agreement and the continuing security interest granted hereby, in addition to covering all present Obligations of Debtor to Lender, shall extend to all future Obligations of Debtor to Lender, whether or not such Obligations are reduced or entirely extinguished and thereafter increased or reincurred, whether or not such Obligations are related to the indebtedness identified above by class, type or kind and whether or not such Obligations are specifically contemplated by Debtor and Lender as of the date hereof. The absence of any reference to this agreement in any documents, instruments or agreements evidencing or relating to any Obligation secured hereby shall not limit or be construed to limit the scope or applicability of this agreement. 1. GENERAL COVENANTS. Debtor represents, warrants and covenants as follows: (a) Except for the security interest granted hereby, (i) Debtor is, or as to Collateral arising or to be acquired after the date hereof, shall be, the sole and exclusive owner of the Collateral, and the Collateral is and shall remain free from any and all liens, security interests, encumbrances, claims and interests; and (ii) no security agreement, financing statement, equivalent security or lien instrument or continuation statement covering any of the Collateral is on file or of record in any public office. (b) Debtor shall not create, permit or suffer to exist, and shall take such action as is necessary to remove, any claim to or interest in or lien or encumbrance upon the Collateral, other than the security interest granted hereby, and shall defend the right, title and interest of Lender in and to the Collateral against all claims and demands of all persons and entities at any time claiming the same or any interest therein. (c) Debtor's principal place of business/chief executive office is located at the address set forth at the beginning of this agreement and Debtor has no other place of business; and, unless Lender consents in writing to a change in the location of the Equipment, Inventory or Debtor's records concerning the Receivables prior to such a change in location, the Equipment, Inventory and Debtor's records concerning the Receivables shall be kept at that address . (d) At least thirty (30) days prior to the occurrence of any of the following events, Debtor shall deliver to Lender written notice of such impending events: (i) a change in Debtor's -2- principal place of business or chief executive office; (ii) the opening or closing of any place of business; or (iii) a change in Debtor's name, identity or corporate structure. (e) Subject to any limitation stated therein or in connection therewith, all information furnished by Debtor concerning the Collateral or otherwise in connection with the Obligations, is or shall be at the time the same is furnished, accurate, correct and complete in all material respects. (f) The Collateral is and shall be used primarily for business purposes. 2. COLLECTION OF RECEIVABLES. Debtor shall, unless otherwise directed by Lender, collect all of Debtor's Receivables. With respect to any Receivables collected by the Lender, Debtor authorizes Lender to indorse the name of Debtor upon any checks or other items received in payment of any Receivable and to do any and all things necessary in order to reduce the same to money. All amounts received by Lender representing payment of Receivables may be applied by Lender to the payment of the Obligations in such order of preference as Lender may determine, or Lender may, at its option, impound all or any portion of such amounts and retain said amounts as security for the payment of the Obligations, with the right on the part of Debtor, upon approval by Lender, to obtain the release of all or part of such impounded amounts. Lender may, however, at any time, apply all or any part of such impounded amounts as aforesaid. If so directed by Lender, Debtor shall hold all payments of any Receivable in trust for Lender and shall forthwith deliver the same to Lender in the form received by Debtor without commingling with any funds of Debtor. Debtor also authorizes Lender at any time, without notice, to appropriate and apply any balances, credits, property, deposits, accounts or money of or owing to Debtor in Lender's possession, custody or control to the payment of any of the Obligations. If any of Debtor's Receivables arise out of contracts with or orders from the United States or any State or any department, agency or instrumentality thereof, Debtor shall immediately notify Lender thereof in writing and shall execute any instrument and take any steps required by Lender in order that all money due and to become due under such contract or order shall be assigned to Lender and due notice thereof given to the appropriate governmental agency. Debtor agrees to execute, deliver, file and record all such notices, affidavits, assignments, financing statements and other instruments as shall in the judgment of Lender be necessary or desirable to evidence, validate and perfect the security interest of Lender in the Receivables. Lender shall have the right to notify any persons or entities owing any Receivables and to demand and receive payment, but Lender shall have no duty so to do. Upon request of Lender at any time, Debtor shall notify such account debtors and shall indicate on all invoices to such account debtors that the accounts are payable to Lender. 3. INSURANCE. Debtor shall have and maintain insurance at all times with respect to all Equipment and Inventory (i) insuring against risks of fire (including so-called extended coverage), explosion, theft, sprinkler leakage and such other casualties as Lender may designate, and (ii) -3- insuring against liability for personal injury and property damage relating to the Equipment and Inventory, containing such terms, in such form, for such periods and written by such companies as may be satisfactory to Lender, such insurance to be payable to Lender and Debtor as their interests may appear. 4. INSPECTION. Debtor shall at all times keep accurate and complete records of the Receivables and Debtor shall, at all reasonable times and from time to time, allow Lender, by or through any of its officers, agents, attorneys or accountants, to examine, inspect and make extracts from Debtor's books and records and to arrange for verification of the Receivables directly with account debtors or by other methods and to examine and inspect the Collateral wherever located. 5. FURTHER ASSURANCES. Debtor shall perform, do, make, execute and deliver all such additional and further acts, things, deeds, assurances and instruments as Lender may require to more completely vest in and assure to Lender its rights hereunder and in or to the Collateral. 6. PRESERVATION AND DISPOSITION OF COLLATERAL. (a) Debtor shall advise Lender promptly, in writing and in reasonable detail, (i) of any material encumbrance upon or claim asserted against any of the Collateral; (ii) of any material change in the composition of the Collateral; and (iii) of the occurrence of any other event that would have a material effect upon the aggregate value of the Collateral or upon the security interest of Lender. (b) Debtor shall not sell or otherwise dispose of the Collateral; provided, however, that until default, Debtor may use the Equipment and Inventory in any lawful manner not inconsistent with this agreement or with the terms or conditions of any policy of insurance thereon and may also sell or otherwise dispose of the Inventory in the ordinary course of Debtor's business. A disposition in the ordinary course of business shall not include a transfer in partial or total satisfaction of a debt. (c) Debtor shall keep the Collateral in good condition and shall not misuse, abuse, secrete, waste or destroy any of the same. (d) Debtor shall not use the Collateral in violation of any statute, ordinance, regulation, rule, decree or order. (e) Debtor shall pay promptly when due all taxes, assessments, charges or levies upon the Collateral or in respect to the income or profits therefrom, except that no such charge need be paid if (i) the validity thereof is being contested in good faith by appropriate proceedings; (ii) such proceedings do not involve any danger of sale, forfeiture or loss of any Collateral or any interest therein; and (iii) such charge is adequately reserved against in accordance with generally accepted accounting principles. -4- (f) At its option, Lender may discharge taxes, liens, security interests or other encumbrances at any time levied or placed on the Collateral and may pay for the maintenance and preservation of the Collateral. Debtor agrees to reimburse Lender upon demand for any payment made or any expense incurred (including reasonable attorneys' fees to the extent permitted by law) by Lender pursuant to the foregoing authorization. Should Debtor fail to pay said sum to Lender upon demand, interest shall accrue thereon, from the date of demand until paid in full, at the highest rate set forth in any document or instrument evidencing any of the Obligations. (g) Upon Lender's request at any time or times, Debtor shall assign and deliver to Lender any Collateral and shall furnish to Lender additional collateral of value and character satisfactory to Lender as security for the Obligations. 7. EXTENSIONS AND COMPROMISES. With respect to any Collateral held by Lender as security for the Obligations, Debtor assents to all extensions or postponements of the time of payment thereof or any other indulgence in connection therewith, to each substitution, exchange or release of Collateral, to the addition or release of any party primarily or secondarily liable, to the acceptance of partial payments thereon and to the settlement, compromise or adjustment thereof, all in such manner and at such time or times as Lender may deem advisable. Lender shall have no duty as to the collection or protection of Collateral or any income therefrom, nor as to the preservation of rights against prior parties, nor as to the preservation of any right pertaining thereto, beyond the safe custody of Collateral in the possession of Lender. 8. FINANCING STATEMENTS. At the request of Lender, Debtor shall join with Lender in executing one or more financing statements in a form satisfactory to Lender and shall pay the cost of filing the same in all public offices wherever filing is deemed by Lender to be necessary or desirable. A carbon, photographic or other reproduction of this agreement or of a financing statement shall be sufficient as a financing statement. 9. LENDER'S APPOINTMENT AS ATTORNEY-IN-FACT. Debtor hereby irrevocably constitutes and appoints Lender and any officer or agent thereof, with full power of substitution, as Debtor's true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of Debtor and in the name of Debtor or in Lender's own name, from time to time in Lender's discretion, for the purpose of carrying out the terms of this agreement, to take any and all appropriate action and to execute any and all documents and instruments that may be necessary or desirable to accomplish the purposes of this agreement and, without limiting the generality of the foregoing, hereby grants to Lender the power and right, on behalf of Debtor, without notice to or assent by Debtor: (a) To execute, file and record all such financing statements, certificates of title and other certificates of registration and operation and similar documents and instruments including, but not limited to, those relating to aircraft or marine vessels, as Lender may deem necessary or desirable to protect, perfect and validate Lender's security interest. -5- (b) Upon the occurrence and continuance of any event of default under paragraph 10 hereof, (i) to sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with accounts and other documents relating to the Collateral; (ii) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any part thereof and to enforce any other right in respect of any Collateral; (iii) to defend any suit, action or proceeding brought against Debtor with respect to any Collateral; (iv) to settle, compromise or adjust any suit, action or proceeding described above and, in connection therewith, to give such discharges or releases as Lender may deem appropriate; and (v) generally, to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Lender were the absolute owner thereof for all purposes, and to do, at Lender's option and Debtor's expense, at any time or from time to time, all acts and things which Lender deems necessary to protect, preserve or realize upon the Collateral and Lender's security interest therein, in order to effect the intent of this agreement, all as fully and effectively as Debtor might do. Debtor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. The powers conferred upon Lender hereunder are solely to protect its interests in the Collateral and shall not impose any duty upon Lender to exercise any such powers. Lender shall be accountable only for amounts that Lender actually receives as a result of the exercise of such powers and neither Lender nor any of its officers, directors, employees or agents shall be responsible to Debtor for any act or failure to act, except for Lender's own gross negligence or willful misconduct. 10. DEFAULT. If any event of default in the payment of any of the Obligations or in the performance of any of the terms, conditions, or provisions of any instrument or document evidencing the Obligations secured by this agreement or in the performance of any covenant contained herein shall occur and be continuing; or if any warranty, representation or statement made or furnished to Lender by Debtor proves to have been false in any material respect when made or furnished: (a) Lender may, at its option and without notice, declare the unpaid balance of any or all of the Obligations immediately due and payable and this agreement and any or all of the Obligations in default. (b) All payments received by Debtor under or in connection with any of the Collateral shall be held by Debtor in trust for Lender, shall be segregated from other funds of Debtor and shall forthwith upon receipt by Debtor be turned over to Lender in the same form as received by Debtor (duly indorsed by Debtor to Lender, if required). Any and all such payments so received by Lender (whether from Debtor or otherwise) may, in the sole discretion of Lender, be held by Lender as collateral security for, and/or then or at any time thereafter be applied in whole or in part by Lender against, all or any part of the Obligations in such order as Lender may elect. Any balance of such payments held by Lender and remaining after payment in full of all the Obligations shall be -6- paid over to Debtor or to whomsoever may be lawfully entitled to receive the same. Nothing set forth in this subparagraph (b) shall authorize or be construed to authorize Debtor to sell or otherwise dispose of any Collateral except as provided in subparagraph 6(b) hereof. (c) Lender shall have the rights and remedies of a secured party under this agreement, under any other instrument or agreement securing, evidencing or relating to the Obligations and under the laws of the States of Ohio and Nevada. Without limiting the generality of the foregoing, Lender shall have the right to take possession of the Collateral and all books and records relating to the Collateral and for that purpose Lender may enter upon any premises on which the Collateral or books and records relating to the Collateral or any part thereof may be situated and remove the same therefrom. Debtor expressly agrees that Lender, without demand of performance or other demand, advertisement or notice of any kind (except the notices specified below of time and place of public sale or disposition or time after which a private sale or disposition is to occur) to or upon Debtor or any other person or entity (all and each of which demands, advertisements and/or notices are hereby expressly waived), may forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase or sell or otherwise dispose of and deliver the Collateral (or contract to do so), or any part thereof, in one or more parcels at public or private sale or sales, at any of Lender's offices or elsewhere at such prices as Lender may deem best, for cash or on credit or for future delivery without assumption of any credit risk. Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in Debtor. Debtor further agrees, at Lender's request, to assemble the Collateral and to make it available to Lender at such places as Lender may reasonably select, whether at Debtor's premises or elsewhere. Debtor further agrees to allow Lender to use or occupy Debtor's premises, without charge, for the purpose of effecting Lender's remdies in respect of the Collateral. Lender shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any or all of the Collateral or in any way relating to the rights of Lender hereunder, including reasonable attorneys' fees to the extent permitted by law and reasonable legal expenses, to the payment in whole or in part of the Obligations, in such order as Lender may elect, and only after so paying over such net proceeds and after the payment by Lender of any other amount required by any provision of law, need Lender account for the surplus, if any, to Debtor. To the extent permitted by applicable law, Debtor waives all claims, damages and demands against Lender arising out of the repossession, retention, sale or disposition of the Collateral. Debtor agrees that Lender need not give more than seven (7) days' notice (which notification shall be deemed given when mailed, postage prepaid, addressed to Debtor at Debtor's address set forth at the beginning of this agreement or when telecopied or telegraphed to that address or when telephoned or otherwise communicated orally to Debtor or any agent of Debtor at that address) of the time and place of any public sale or of the time after which a private sale may take place and that such notice is reasonable notification of such matters. Debtor shall remain liable for any deficiency if the proceeds of any sale or disposition of the Collateral are insufficient to pay all amounts to which Lender is entitled. Debtor shall also be liable for the costs of collecting any of the Obligations or otherwise enforcing -7- the terms thereof or of this agreement including reasonable attorneys' fees to the extent permitted by law. (d) In the event of a default, in lieu of exercising its remedies with respect to the Collateral provided in this Section 10, Lender may apply the amount of the outstanding Obligations secured hereby to the purchase of common shares of Debtor at a price of $8.50 per share (the "Conversion Price"), and Debtor agrees to sell such number of shares to Lender. Debtor agrees to maintain sufficient authorized and unissued shares sufficient to discharge its obligations under this paragraph, and that upon issuance to Lender as provided herein, such shares shall be duly authorized, validly issued, fully paid and nonassessable, and free of any lien, claim, preemptive right or other restriction, except for restrictions on transfer necessary to comply with applicable securities laws. If subsequent to the date of this Agreement the Debtor issues common stock representing more than 1% of the outstanding common equity of Debtor on a fully diluted basis for a consideration per share with a value of less than $8.50, other than upon the exercise of stock options or warrants outstanding on the date hereof, then the Conversion Price shall be reduced to a price equal to such value. In case the Debtor shall (i) pay a dividend on its common stock in common stock, (ii) subdivide its outstanding shares of common stock, or (iii) combine its outstanding shares of common stock into a small number of shares, then, in such an event, the Conversion Price in effect immediately prior thereto shall be adjusted proportionately so that the adjusted Conversion Price will bear the same relation to the Conversion Price in effect immediately prior to any such event as the total number of shares of common stock outstanding immediately prior to any such event shall bear to the total number of shares of common stock outstanding immediately after such event. 11. GENERAL. Any provision of this agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Lender shall not be deemed to have waived any of its rights hereunder or under any other agreement, instrument or paper signed by Debtor unless such waiver be in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. All of Lender's rights and remedies, whether evidenced hereby or by any other agreement, instrument or paper, shall be cumulative and may be exercised singularly or concurrently. Any written demand upon or written notice to Debtor shall be effective when deposited in the mails addressed to Debtor at the address shown at the beginning of this agreement. This agreement and all rights and obligations hereunder, including matters of construction, validity and performance, shall be governed by the law of the State of Ohio. The provisions hereof shall, as the case may require, bind or inure to the benefit of, the respective successors and assigns of Debtor and Lender. -8- IN WITNESS WHEREOF, Debtor has signed this agreement this 4th day of April, 1996. DEBTOR: CYTOLOGY WEST, INC. By: /s/ CARL GENBERG ------------------------------------ Carl A. Genberg, President -9- EX-10.G 13 EXHIBIT 10.G GUARANTY For the purpose of inducing Papnet of Ohio, Inc. (hereinafter referred to as "Lender") to lend money or advance credit to, or renew, extend or forbear from demanding immediate payment of the Obligations (as such term is defined below) of Cytology West, Inc. (hereinafter referred to as "Debtor") the undersigned (hereinafter referred to as "Guarantor"), hereby unconditionally guarantees the prompt and full payment to Lender when due, whether by acceleration or otherwise, of all Obligations for which Debtor is now or may hereafter become liable to Lender. The word "Obligations" means all indebtedness, debts and liabilities (including principal, interest, late charges, collection costs, attorneys' fees and the like) of Debtor to Lender pursuant to that certain Loan Agreement and related loan documents dated March 14, 1996. Guarantor hereby promises that if the Obligations are not paid promptly when due, upon request of Lender he will pay the Obligations to Lender, irrespective of any action or lack of action on Lender's part in connection with the acquisition, perfection, possession, enforcement or disposition of any or all Obligations or any or all security therefor or otherwise, and further irrespective of any invalidity in any or all Obligations, the unenforceability thereof or the insufficiency, invalidity or unenforceability of any security therefor. Guarantor waives notice of any and all acceptances of this Guaranty. Lender's rights hereunder shall be reinstated and revived, and this Guaranty shall be fully enforceable, with respect to any amount at any time paid on account of the Obligations which thereafter shall be required to be restored or returned by Lender as a result of the bankruptcy, insolvency or reorganization of Debtor, Guarantor, or any other person, or as a result of any other fact or circumstance, all as though such amount had not been paid. Guarantor waives presentment, demand, protest, notice of protest and notice of dishonor or other nonpayment of any and all Obligations and further waives notice of sale or other disposition of any collateral or security now held or hereafter acquired by Lender. Guarantor agrees that no extension of time, whether one or more, nor any other indulgence granted by Lender to Debtor, or to Guarantor, and no omission or delay on Lender's part in exercising any right against, or in taking any action to collect from or pursue Lender's remedies against Debtor or Guarantor, will release, discharge or modify the duties of Guarantor. Guarantor agrees that Lender may, without notice to or further consent from Guarantor, release or modify any collateral, security or other guaranties now held or hereafter acquired, or substitute other collateral, security or other guaranties, and no such action will release, discharge or modify the duties of Guarantor hereunder. Guarantor further agrees that Lender will not be required to pursue or exhaust any of its rights or remedies against Debtor or Guarantor, with respect to payment of any of the Obligations, or to pursue, exhaust or preserve any of its rights or remedies with respect to any collateral, security or other guaranties given to secure the Obligations, or to take any action of any sort, prior to demanding payment from or pursuing its remedies against Guarantor. Guarantor shall not be liable to Lender hereunder for more than $300,000 in principal amount of the Obligations, plus interest, late charges, collection costs, attorneys' fees and the like as provided for in the Obligations. Nothwithstanding the foregoing limitation, Lender may permit the Obligations of Debtor to exceed the liability of Guarantor to Lender hereunder. Guarantor agrees that any legal suit, action or proceeding arising out of or relating to this Guaranty may be instituted in a state or federal court of appropriate subject matter jurisdiction in the State of Ohio; waive any objection which he may have now or hereafter to the venue of any such suit, action or proceeding; and irrevocably submits to the jurisdiction of any such court in any such suit, action or proceeding. WAIVER OF RIGHT TO TRIAL BY JURY GUARANTOR ACKNOWLEDGES THAT, AS TO ANY AND ALL DISPUTES THAT MAY ARISE BETWEEN GUARANTOR AND LENDER, THE COMMERCIAL NATURE OF THE TRANSACTION OUT OF WHICH THIS GUARANTY ARISES WOULD MAKE ANY SUCH DISPUTE UNSUITABLE FOR TRIAL BY JURY. ACCORDINGLY, GUARANTOR HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY AS TO ANY AND ALL DISPUTES THAT MAY ARISE RELATING TO THIS GUARANTY OR TO ANY OF THE OTHER INSTRUMENTS OR DOCUMENTS EXECUTED IN CONNECTION HEREWITH. Guarantor hereby authorizes any attorney at law to appear for him in any action on any or all Obligations guaranteed hereby at any time after such Obligations become due, whether by acceleration or otherwise, in any court of record in or of the State of Ohio or elsewhere, to waive the issuing and service of process against, and confess judgment against Guarantor in favor of Lender for the amount that may be due, including interest, late charges, collection costs, attorneys' fees and the like as provided for in said Obligations, and costs of suit, and to waive and release all errors in said proceedings and judgments, and all petitions in error and rights of appeal from the judgments rendered. The attorney at law authorized hereby to appear for the Guarantor may be an attorney at law representing the Lender, and Guarantor hereby expressly waives any conflict of interest that may exist by virtue of such representation. If any Obligation of Debtor is assigned by Lender, this Guaranty will inure to the benefit of Lender's assignee, and to the benefit of any subsequent assignee, to the extent of the assignment or assignments, provided that no assignment will operate to relieve Guarantor from any duty to Lender hereunder with respect to any unassigned Obligation. In the event that any one or more of the provisions contained in this Guaranty or any application thereof shall be determined to be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and any other applications thereof shall not in any way be affected or impaired thereby. This Guaranty shall be construed in accordance with the laws of the State of Ohio. As security for payment by Guarantor hereunder, Guarantor has, by a Security Agreement of even date, granted Lender a security interest in certain property of (hereinafter the 2 "Collateral").Lender shall not be bound to take any steps necessary to preserve any rights in the Collateral against prior parties. If any Obligations hereunder are not paid when due, Lender may, at its option, demand, sue for, collect or make any compromise or settlement it deems desirable with reference to the Collateral, and shall have the rights of a secured party under the law of the State of Ohio. Guarantor shall be liable for any deficiency. Executed and delivered at Las Vegas, Nevada this 4th day of April, 1996. GUARANTOR: /s/ CARL A. GENBERG ------------------------------------------------- Carl A. Genberg WARNING--BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE. 3 EX-10.H 14 EXHIBIT 10.H SECURITY AGREEMENT CERTIFICATED STOCK The undersigned (hereinafter called "Debtor"), for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, hereby grants, pledges and assigns to Papnet of Ohio, Inc. (hereinafter called "Lender"), a security interest in the following stock, whether Debtor's interest therein be now owned or existing or hereafter arising or acquired, together with all substitutions, replacements, exchanges, reissues and additions therefor or thereto, all books and records relating thereto, all dividends and distributions arising therefrom, payable thereon or distributed in respect thereto, whether in cash, property, stock or otherwise, and whether now or hereafter declared, paid or made, and together with the right to receive and receipt therefor, and all cash and non-cash proceeds thereof including, but not limited to, notes, drafts, checks, instruments and deposit and money market accounts: No. of Shares Certificate and Class Issuer Number(s) - --------------- ------ --------- 17,150 Common Shares, $.0001 par value Neuromedical Systems, Inc. 121 (all of the foregoing hereinafter sometimes called the "Collateral"). Except as otherwise provided in this agreement, Debtor shall have the right to receive all dividends arising with respect to the Collateral paid in cash or in other property, but Debtor shall have no right to receive any dividend in respect of the Collateral paid in stock of the Issuer or in the stock of corporations other than the Issuer or paid out of the proceeds of the sale or condemnation of any property of the Issuer or upon or in the course of dissolution or liquidation (whether partial or otherwise) or winding up of the Issuer or which in any way shall be chargeable to or payable out of capital, capital surplus or paid in surplus. Debtor shall not have the right to receive any dividends arising with respect to the Collateral if a default exists in the observance and performance by Debtor of any of the terms of this agreement, or of any of the Obligations, or if ownership of the Collateral has been registered in the name of Lender or any nominee of Lender or any sub-agent appointed by Lender pursuant to paragraph 7 of this agreement, and all dividends arising under such circumstances shall be paid to Lender and, at Lender's option, may be applied to the Obligations in such order as Lender may elect or be held as security therefor. The security interest hereby granted is to secure the prompt and full payment and complete performance of all Obligations of Debtor to Lender. The word "Obligations" means all indebtedness owed by Debtor to Lender by reason of a certain Guaranty executed and delivered by Debtor to Lender of even date, which guarantees payment of certain Advances made by Lender to or on behalf of Cytology West, Inc., a Delaware corporation, pursuant to a Loan Agreement and related documents dated March 14, 1996. 1. GENERAL COVENANTS. Debtor represents, warrants and covenants as follows: (a) Unless Lender compels registration of ownership of the Collateral in the name of Lender or any nominee of Lender or any sub-agent appointed by Lender pursuant to paragraph 7 of this agreement, Debtor is and shall remain the sole owner and registered holder of the Collateral. (b) Except for the security interest granted hereby, the Collateral is and shall remain free from any and all security interests, liens, encumbrances, claims and interests. (c) Each share of stock comprising the Collateral is fully paid and nonassessable and, except as otherwise indicated in the certificates representing the shares, is transferable in its present form upon delivery without restriction or limitation on the books and records of its Issuer. (d) Debtor shall, at Debtor's expense, perform, do, make, procure, execute and deliver all acts, things, writings and other assurances as Lender may at any time request or require to protect, assure or enforce Lender's interests, rights and remedies created by, provided in or emanating from this agreement. (e) Debtor shall not create, permit or suffer to exist, and shall take such action as is necessary to remove, any claim to or interest in or lien or encumbrance upon the Collateral, other than the security interest granted hereby, and shall defend the right, title and interest of Lender in and to the Collateral against all claims and demands of all persons and entities at any time claiming the same or any interest therein. (f) Subject to any limitation stated therein or in connection therewith, all information furnished by Debtor concerning the Collateral or otherwise in connection with the Obligations, is or shall be at the time the same is furnished accurate, correct and complete in all material respects. 2. VOTING. With respect to any Collateral not registered in the name of Lender or Lender's nominee or sub-agent pursuant to paragraph 7 of this agreement, during the term of this agreement, and so long as (i) there is no default by Debtor in the observance and performance of any of the terms of this agreement or of any of the Obligations, and (ii) Lender has not notified Debtor of Lender's election to exercise any voting rights relating to the Collateral, Debtor shall have the right to exercise such voting rights on all corporate questions. 3. SUBSTITUTED AND ADDITIONAL SECURITIES. If during the term of this agreement any stock dividend, exchange, conversion, reclassification, readjustment or other change is paid, declared or made with respect to the Collateral, all new, substituted and additional securities issued in respect to the Collateral shall be deemed pledged to Lender under the terms of this agreement in the same manner as the Collateral originally pledged hereunder. -2- 4. WARRANTS AND OPTIONS. If during the term of this agreement subscription warrants or options are issued in connection with the Collateral or any other securities at the time pledged to Lender hereunder, such warrants and options shall be immediately delivered and pledged by Debtor to Lender, and all new securities acquired by Debtor in connection therewith shall be immediately delivered and pledged to Lender under the terms of this agreement in the same manner as the Collateral originally pledged hereunder. 5. PRESERVATION AND DISPOSITION OF COLLATERAL. (a) Debtor shall advise Lender promptly, in writing and in reasonable detail, (i) of any material encumbrance upon or claim asserted against any of the Collateral; and (ii) of the occurrence of any event that would have a material effect upon the aggregate value of the Collateral or upon the security interest of Lender. (b) Debtor shall pay promptly when due all taxes, assessments, charges or levies upon the Collateral or in respect to the income or profits therefrom or the transfer or registration thereof. (c) At its option, Lender may discharge taxes, liens, security interests or other encumbrances at any time levied or placed on or arising in connection with the Collateral. Debtor agrees to reimburse Lender upon demand for any payment made or any expense incurred (including reasonable attorneys' fees to the extent permitted by law) by Lender pursuant to the foregoing authorization. Should Debtor fail to pay said sum to Lender upon demand, interest shall accrue thereon, from the date of demand until paid in full, at the highest rate set forth in any document or instrument evidencing any of the Obligations. 6. EXTENSIONS AND COMPROMISES. With respect to any Collateral pledged to Lender as security for the Obligations, Debtor assents to all extensions or postponements of the time of payment thereof or any other indulgence in connection therewith, to each substitution, exchange or release of Collateral, to the addition or release of any party primarily or secondarily liable, to the acceptance of partial payments thereon and to the settlement, compromise or adjustment thereof, all in such manner and at such time or times as Lender may deem advisable. Lender shall have no duty as to the collection or protection of Collateral or any income therefrom, nor as to the preservation of any right pertaining thereto, beyond the safe custody of Collateral in the possession of Lender. 7. LENDER'S APPOINTMENT AS ATTORNEY-IN-FACT. Debtor hereby irrevocably constitutes and appoints Lender and any officer or agent thereof, with full power of substitution, as Debtor's true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of Debtor and in the name of Debtor or in Lender's own name, from time to time in Lender's discretion, for the purpose of carrying out the terms of this agreement, to take any and all appropriate action and to execute any and all documents and instruments that may be necessary or desirable to accomplish the purpose of this agreement. -3- Debtor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. In the event of any default by Debtor in the observance and performance of any of the terms of this agreement or any of the Obligations, Lender may at any time thereafter, in its discretion, register ownership of any of the Collateral in the name of Lender or any nominee of Lender or any sub-agent appointed by Lender, or may designate a nominee or sub-agent for the purpose of retaining physical possession of the instruments, certificates and similar writings representing any of the Collateral, indorsed or assigned in blank or in favor of Lender or Lender's nominee or sub-agent. Debtor hereby consents and agrees that the Issuer or any obligor in respect of the Collateral or any registrar or transfer agent or trustee for any of the Collateral shall be entitled to accept the provisions hereof as conclusive evidence of the rights of Lender to effect any transfer pursuant to this paragraph 7, notwithstanding any other notice or direction to the contrary heretofore or hereafter given. The powers conferred upon Lender hereunder are solely to protect its interests in the Collateral and shall not impose any duty upon Lender to exercise any such powers. Lender shall be accountable only for amounts that Lender actually receives as a result of the exercise of such powers and neither Lender nor any of its officers, directors, employees or agents shall be responsible to Debtor for any act or failure to act, except for Lender's own gross negligence or willful misconduct. 8. DEFAULT. If any event of default in the payment of any of the Obligations or in the performance of any of the terms, conditions, or provisions of any instrument or document evidencing the Obligations secured by this agreement or in the performance of any covenant contained herein shall occur and be continuing; or if any warranty, representation or statement made or furnished to Lender by Debtor proves to have been false in any material respect when made or furnished: (a) Lender may, at its option and without notice, declare the unpaid balance of any or all of the Obligations immediately due and payable and this agreement and any or all of the Obligations in default. (b) All payments received by Debtor under or in connection with any of the Collateral shall be held by Debtor in trust for Lender, shall be segregated from other funds of Debtor and shall forthwith upon receipt by Debtor be turned over to Lender in the same form as received by Debtor (duly indorsed by Debtor to Lender, if required). Any and all such payments so received by Lender (whether from Debtor or otherwise) may, in the sole discretion of Lender, be held by Lender as collateral security for, and/or then or at any time thereafter be applied in whole or in part by Lender against, all or any part of the Obligations in such order as Lender may elect. Any balance of such payments held by Lender and remaining after payment in full of all of the Obligations shall be paid over to Debtor or to whomsoever may be lawfully entitled to receive the same. Nothing set forth in this subparagraph (b) shall authorize or be construed to authorize Debtor to sell or otherwise dispose of any Collateral. -4- (c) Lender and its nominees and sub-agents shall have the rights and remedies of a secured party under this agreement, under any other instrument or agreement securing, evidencing or relating to the Obligations and under the laws of the State of Ohio. To the extent permitted by applicable law, Debtor waives all claims, damages and demands against Lender arising out of the repossession, retention, sale or disposition of the Collateral. Debtor agrees that Lender need not give more than ten (10) days' notice (which notification shall be deemed given when mailed, postage prepaid, addressed to Debtor at Debtor's address set forth at the beginning of this agreement, or when telecopied or telegraphed to that address or when telephoned or otherwise communicated orally to Debtor or any agent of Debtor at that address), if any, of the time and place of any public sale or of the time after which a private sale may take place and that such notice is reasonable notification of such matters. Debtor shall remain liable for any deficiency if the proceeds of any sale or disposition of the Collateral are insufficient to pay all amounts to which Lender is entitled. Debtor shall also be liable for the costs of collecting any of the Obligations or otherwise enforcing the terms thereof or of this agreement including reasonable attorneys' fees to the extent permitted by law. 9. GENERAL. Any provision of this agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Lender shall not be deemed to have waived any of its rights hereunder or under any other agreement, instrument or paper signed by Debtor unless such waiver be in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. All of Lender's rights and remedies, whether evidenced hereby or by any other agreement, instrument or paper, shall be cumulative and may be exercised singularly or concurrently. Any written demand upon or written notice to Debtor shall be effective when deposited in the mails addressed to Debtor at the address shown at the beginning of this agreement. This agreement and all rights and obligations hereunder, including matters of construction, validity and performance, shall be governed by the laws of the State of Ohio. The provisions hereof shall, as the case may require, bind or inure to the benefit of the respective successors and assigns of Debtor and Lender. IN WITNESS WHEREOF, Debtor has signed this agreement this 4th day of April, 1996. DEBTOR: /s/ CARL GENBERG --------------------------------------- Carl Genberg -5- EX-10.I 15 EXHIBIT 10.I PAPNET OF OHIO, INC. AMENDED AND RESTATED 1995 STOCK OPTION PLAN 1. PURPOSE. This plan (the "Plan") is intended as an incentive and to encourage stock ownership by certain key associates, officers, directors, consultants and advisers who render services to PAPNET OF OHIO, INC., an Ohio corporation (the "Company"), and any current or future subsidiaries or parent of the Company (the "Company Group"), by the granting of stock options (the "Options") as provided herein. By encouraging such stock ownership, the Company seeks to attract, retain and motivate employees, officers, directors, consultants and advisers of training, experience and ability. The Options granted under the Plan may be either incentive stock options ("ISOs") which meet the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or options which do not meet such requirements ("Non-statutory Options"). 2. EFFECTIVE DATE. The Plan shall become effective on September 28, 1995, the date the Plan was approved by a majority of the shares of common stock of the Company entitled to vote thereon (the "Effective Date"). 3. ADMINISTRATION. (a) The Plan shall be administered by the Board of Directors of the Company (the "Board"), which may, to the full extent permitted by law, delegate all or any of its powers under the Plan to a committee (the "Committee") which consists of not fewer than two members of the Board. If the Committee is so appointed and to the extent such powers are delegated, all references to the Board in the Plan shall mean and relate to the Committee. If any class of equity securities of the Company is registered under section 12 of the Securities Exchange Act of 1934, as amended (the "1934 Act"), all members of the Committee will be "disinterested persons" as defined in Rule 16b-3(c)(2)(i) promulgated under the 1934 Act (or any successor rule of like tenor and effect) and "outside directors" as defined in section 162(m) of the Code and the regulations promulgated thereunder. (b) Subject to the provisions of the Plan, the Board is authorized to establish, amend and rescind such rules and regulations as it may deem appropriate for its conduct and for the proper administration of the Plan, to make all determinations under and interpretations of, and to take such actions in connection with, the Plan or the Options granted thereunder as it may deem necessary or advisable. All actions taken by the Board under the Plan shall be final and binding on all persons. No member of the Board shall be liable for any action taken or determination made relating to the Plan, except for gross negligence or willful misconduct. (c) Each member of the Board shall be indemnified by the Company against costs, expenses and liabilities (other than amounts paid in settlements to which the Company does not consent, which consent shall not be unreasonably withheld) reasonably incurred by such member in connection with any action taken in relation to the Plan to which he or she may be a party by reason of service as a member of the Board, except in relation to matters as to which he or she shall be adjudged in such action to be personally guilty of gross negligence or willful misconduct in the performance of his or her duties. The foregoing right to indemnification shall be in addition to such other rights as the Board member may enjoy as a matter of law, by reason of insurance coverage of any kind, or otherwise. 4. ELIGIBILITY. (a) ISOs and Non-statutory Options may be granted to such key associates of the Company Group, and Non-statutory Options only may be granted to directors who are not employees of and to consultants and advisers who render services to the Company Group, as the Board shall select from time to time (the "Optionees"). More than one Option may be granted to an individual under the Plan. (b) No ISO may be granted to an individual who, at the time an ISO is granted, is considered under Section 422(b)(6) of the Code to own stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or of its parent or any subsidiary corporation; PROVIDED, HOWEVER, this restriction shall not apply if at the time such ISO is granted the option price per Share of such ISO shall be at least 110% of the fair market value of such Share, and such ISO by its terms is not exercisable after the expiration of five years from the date it is granted. This subparagraph 4(b) has no application to Options granted under the Plan as Non-statutory Options. (c) The aggregate fair market value (determined as of the date the ISO is granted) of Shares with respect to which ISOs are exercisable for the first time by any Optionee during any calendar year under the Plan or any other ISO plan of the Company or the Company Group may not exceed $100,000. If an ISO which exceeds the $100,000 limitation of this subparagraph 4(c) is granted, the portion of such Option which is exercisable for Shares in excess of the $100,000 limitation shall be treated as a Non-statutory Option pursuant to Section 422(d) of the Code. Except as otherwise expressly provided in the immediately preceding sentence, this subparagraph 4(c) has no application to Options granted under the Plan as Non-statutory Options. 5. STOCK SUBJECT TO PLAN. The stock subject to Options under the Plan shall be shares of the common stock, no par value, of the Company ("Shares"). The Shares issued pursuant to Options granted under the Plan may be authorized and unissued Shares, Shares purchased on the open market or in a private transaction, or Shares held as treasury stock. The aggregate number of Shares for which Options may be granted under the Plan shall not exceed 150,000 shares, subject to adjustment in accordance with the terms of paragraph 12 hereof. Any Shares subject to an Option which for any reason expires or is terminated unexercised as to such Shares and any Shares reacquired by the Company pursuant to any forfeiture or any repurchase right hereunder may again be the subject of an Option under the Plan. The Board, in its sole discretion, may permit the exercise of any Option as to full Shares or fractional Shares. Proceeds from the sale of Shares under Options shall constitute general funds of the Company. 2 6. TERMS AND CONDITIONS OF OPTIONS. (a) At the time of grant, the Board shall determine whether the Options granted are to be ISOs or Non-statutory Options and shall enter into stock option agreements with the recipients accordingly. All Options granted shall be authorized by the Board and, within a reasonable time after the date of grant, shall be evidenced by stock option agreements in writing ("Stock Option Agreements"), in such form and containing such terms and conditions not inconsistent with the provisions of this Plan as the Board shall from time to time determine. Any action under paragraph 12 may be reflected in an amendment to or restatement of such Stock Option Agreements. (b) The Board may grant Options having terms and provisions which vary from those specified in the Plan if such Options are granted in substitution for, or in connection with the assumption of, existing options granted by another corporation and assumed or otherwise agreed to be provided for by the Company pursuant to or by reason of a transaction involving a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation to which the Company is a party. 7. PRICE. The option price per Share (the "Option Price") of each Option granted under the Plan shall be determined by the Board; PROVIDED, HOWEVER, the Option Price of each ISO granted under the Plan shall not be less than the fair market value (determined without regard to any restrictions other than a restriction which, by its terms, will never lapse) of a Share on the date of grant of such Option. An Option shall be considered granted on the date the Board acts to grant the Option or such later date as the Board shall specify. 8. OPTION PERIOD. The period during which the Option may be exercised (the "Option Period") shall be determined by the Board; PROVIDED, HOWEVER, any ISO granted under the Plan shall have an Option Period which does not exceed 10 years from the date the ISO is granted. 9. NON-TRANSFERABILITY OF OPTIONS. An Option shall not be transferable by the Optionee otherwise than by will or the laws of descent and distribution and may be exercised, during the lifetime of the Optionee, only by him or by his guardian or legal representative. Notwithstanding the foregoing, an Optionee may transfer a Non-Statutory Option to members of his or her immediate family (as defined in Rule 16a-1 promulgated under the 1934 Act), to one or more trusts for the benefit of such family members or to partnerships in which such family members are the only partners if (a) the stock option agreement with respect to such Non-Statutory Option as approved by the Committee expressly so provides and (b) the Optionee does not receive any consideration for the transfer. Non-Statutory Options held by such transferees are subject to the same terms and conditions that applied to such Non-Statutory Options immediately prior to transfer. 10. EXERCISE OF OPTIONS. (a) Options granted hereunder will be exercisable upon the terms and conditions and in accordance with the vesting percentages determined by the Board in its sole discretion. Notwithstanding the foregoing or the terms and conditions of any Stock Option Agreement to the 3 contrary, (i) in the event of the Optionee's termination of employment as specified in subparagraph 11(a), the Options shall be exercisable to the extent and for the period specified in subparagraph 11(a); (ii) in the event of the Optionee's termination of employment as a result of disability or death as specified in subparagraph 11(b), the Options shall be exercisable to the extent and for the period specified in subparagraph 11(b); (iii) in the event of a merger, reorganization or sale of all or substantially all of the assets of the Company as specified in subparagraph 12(c), the Options shall be exercisable to the extent and for the period specified in subparagraph 12(c); and (iv) in the event of a change in control, as defined herein, all Options held by Optionee shall become exercisable for the period specified in subparagraph 12(d). (b) An Option shall be exercisable only upon delivery of a written notice to the Board, any member of the Board, the Company's Treasurer, or any other officer of the Company designated by the Board to accept such notices on its behalf, specifying the number of Shares for which it is exercised. (c) Within five business days following the date of exercise of an Option, the Optionee or other person exercising the Option shall make full payment of the Option Price (i) in cash; (ii) with the consent of the Board, by tendering previously acquired Shares (valued at their fair market value as of the date of tender); (iii) with the consent of the Board, and to the extent permitted by applicable law, with a full recourse promissory note of the Optionee for the portion of the Option Price in excess of the par value of Shares subject to the Option, under terms and conditions determined by the Board and in cash for the par value of the Shares; (iv) with the consent of the Board, any combination of (i), (ii), or (iii); or (v) with the consent of the Board, if the Shares subject to the Option have been registered under the Securities Act of 1933, as amended (the "1933 Act"), and there is a regular public market for the Shares, by delivering to the Company on the date of exercise of the Option written notice of exercise together with: (A) written instructions to forward a copy of such notice of exercise to a broker or dealer as defined in Section 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and designated in such notice ("Broker"), and to deliver to the specified account maintained with the Broker by the person exercising the Option a certificate for the Shares purchased upon the exercise of the Option, and (B) a copy of irrevocable instructions to the Broker to deliver promptly to the Company a sum equal to the purchase price of the Shares purchased upon exercise of the Option. (d) The Optionee or other person exercising such Option shall pay to the Company an amount equal to the withholding amount required to be made less any amount withheld by the Company under paragraph 17. If previously acquired Shares are to be used to pay the exercise price of an ISO, the Company prior to such payment must be furnished with evidence satisfactory to it that the acquisition of such Shares and their transfer in payment of the exercise price satisfy the requirements of Section 422 of the Code and other applicable laws. 4 11. TERMINATION OF EMPLOYMENT. (a) Upon termination of an Optionee's employment with the Company Group, other than termination of employment by reason of disability or death or for cause, the Optionee shall have 30 days after the date of termination of employment (but not later than the expiration date of the Stock Option Agreement) to exercise all Options held by him or her to the extent the same were exercisable on the date of termination; PROVIDED, HOWEVER, if such termination is due to the Optionee's retirement with the consent of the Company, such Option shall then be exercisable to the extent of 100% of the Shares subject thereto. The Board shall determine in each case whether a termination of employment shall be considered a retirement with the consent of the Company and, subject to applicable law, whether a leave of absence shall be considered a termination of employment. The Board may cancel an Option during the 30-day period after termination of employment referred to in this paragraph if the Optionee engages in employment or activities contrary, in the sole opinion of the Board, to the best interests of the Company or any parent or subsidiary of the Company. (b) Upon termination of an Optionee's employment by reason of disability, as defined in subparagraph 27(a) of this Plan, or death, the Optionee or the Optionee's personal representative, or the person or persons to whom his or her rights under the Options pass by will or the laws of descent or distribution, shall have one year after the date of termination of employment by reason of disability or death (but not later than the expiration date of the Stock Option Agreement) to exercise all Options held by Optionee to the extent the same were exercisable on the date of the Optionee's termination of employment; PROVIDED, HOWEVER, the Board may, but shall not be required to, permit, in its discretion, the exercise of all or any portion of any Option granted to such Optionee not otherwise exercisable. (c) Upon termination of an Optionee's employment for cause, as defined herein, all Options held by such Optionee shall terminate effective on the date of termination of employment. 12. STOCK SPLITS; MERGERS; REORGANIZATIONS; SALE OF ASSETS. (a) In the event of a stock split, stock dividend, combination or exchange of shares, exchange for other securities, reclassification, reorganization, redesignation or other change in the Company's capitalization, the aggregate number of Shares for which Options may be granted under this Plan, the number of Shares subject to outstanding Options and the Option Price of the Shares subject to outstanding Options shall be proportionately adjusted or substituted to reflect the same. The Board shall make such other adjustments to the Options, the provisions of the Plan and the Stock Option Agreements as may be appropriate and equitable, which adjustments may provide for the elimination of fractional Shares. (b) In the event of a change of the Common Stock resulting from a merger or similar reorganization as to which the Company is the surviving corporation, the number and kind of Shares which thereafter may be purchased pursuant to an Option under the Plan and the number and kind of Shares then subject to Options granted hereunder and the price per Share thereof shall 5 be appropriately adjusted in such manner as the Board may deem equitable to prevent dilution or enlargement of the rights available or granted hereunder. (c) Except as otherwise determined by the Board, a merger or a similar reorganization which the Company does not survive (other than a merger or similar reorganization involving only a change in the state of incorporation or an internal reorganization not involving a change in control as defined herein), or a sale of all or substantially all of the assets of the Company, shall cause every Option hereunder to terminate, to the extent not then exercised, unless any surviving entity agrees to assume the obligations hereunder; provided, however, that, in the case of such a merger or similar reorganization, or such a sale of all or substantially all of the assets of the Company, if there is no such assumption, the Board may provide that some or all of the unexercised portion of any one or more of the outstanding Options shall be immediately exercisable and vested as of such date prior to such merger, similar reorganization or sale of assets as the Board determines. (d) If a change in control, as defined herein, occurs, all outstanding options granted under this Plan shall then be immediately exercisable to the extent of 100% of the Shares subject thereto notwithstanding any contrary waiting or vesting periods specified in this Plan or in any applicable Stock Option Agreement. 13. SALE OF OPTION SHARES. If any class of equity securities of the Company is registered pursuant to Section 12 of the 1934 Act, any Optionee or other person exercising the Option who is subject to Section 16 of the 1934 Act by virtue of his or her relationship to the Company shall not sell or otherwise dispose of the Shares subject to Option unless at least six months have elapsed from the date of grant of the Option. 14. RIGHTS AS SHAREHOLDER. The Optionee shall have no rights as a shareholder with respect to any Shares covered by an Option until the date of issuance of a stock certificate to the Optionee for such Shares. 15. NO CONTRACT OF EMPLOYMENT. Nothing in the Plan or in any Option or Stock Option Agreement shall confer on any Optionee any right to continue in the employ or service of the Company or any parent or subsidiary of the Company or interfere with the right of the Company to terminate such Optionee's employment or other services at any time. The establishment of the Plan shall in no way, now or hereafter, reduce, enlarge or modify the employment relationship between the Company or any parent or subsidiary of the Company and the Optionee. Options granted under the Plan shall not be affected by any change of duties or position of the Optionee with the Company. 16. AGREEMENTS AND REPRESENTATIONS OF OPTIONEES. As a condition to the exercise of an Option, the Board may, in its sole determination, require the Optionee to represent in writing that the Shares being purchased are being purchased only for investment and without any present intent at the time of the acquisition of such Shares to sell or otherwise dispose of the same. 17. WITHHOLDING TAXES. The Company's obligation to deliver Shares upon exercise of an Option shall be subject to the Optionee's satisfaction of all applicable federal, state or local tax withholding obligations. The Company shall have the right to withhold from any salary, wages, 6 or other compensation for services payable by the Company to or with respect to an Optionee, amounts sufficient to satisfy any federal, state or local withholding tax liability attributable to such Optionee's (or any beneficiary's or personal representative's) receipt or disposition of Shares purchased under any Option or to take any such other action as it deems necessary to enable it to satisfy any such tax withholding obligations. The Board, in its sole discretion, may permit Optionees to elect to have Shares that would be acquired upon exercise of Options (valued at their fair market value as of the date of exercise) withheld by the Company in satisfaction of such Optionees' withholding tax liabilities. 18. EXCHANGES. The Board may permit the voluntary surrender of all or a portion of any Option granted under the Plan to be conditioned upon the granting to the Optionee of a new Option for the same or a different number of Shares as the Option surrendered, or may require such voluntary surrender as a condition precedent to a grant of a new Option to such Optionee. Subject to the provisions of the Plan, such new Option shall be exercisable at the same price, during such period and on such other terms and conditions as are specified by the Board at the time the new Option is granted. Upon surrender, the Options surrendered shall be cancelled and the Shares previously subject to them shall be available for the grant of other Options. 19. REPURCHASE OF SHARES BY THE COMPANY. Any Shares purchased or acquired upon exercise of an Option may, in the sole discretion of the Board, be subject to repurchase by or forfeiture to the Company if and to the extent and at the repurchase price, if any, specifically set forth in the Stock Option Agreement pursuant to which the Shares were purchased or acquired. Certificates representing Shares subject to such repurchase or forfeiture may be subject to such escrow and stock legending provisions as may be set forth in the Stock Option Agreement pursuant to which the Shares were purchased or acquired. 20. CONFIDENTIALITY AGREEMENTS. Upon the Company's request, each Optionee shall execute, prior to or contemporaneously with the grant of any Option hereunder, the Company's then standard form of agreement relating to nondisclosure of confidential information, noncompetition and/or assignment of inventions and related matters. 21. COMPLIANCE WITH LAWS AND REGULATIONS. The Plan, the grant and exercise of Options thereunder, and the obligation of the Company to sell and deliver the Shares under such Options, shall be subject to all applicable federal and state laws, rules and regulations and to such approvals by any government or regulatory agency as may be required. Options issued under the Plan shall not be exercisable prior to (i) the date upon which the Company shall have registered the Shares for which Options may be issued hereunder under the 1933 Act, and (ii) the completion of any registration or qualification of such Shares under state law, or any ruling or regulation of any governmental body which the Company shall, in its sole discretion, determine to be necessary or advisable in connection therewith, or alternatively, unless the Company shall have received an opinion from counsel to the Company stating that the exercise of such Options may be effected without registering the Shares subject to such Options under the l933 Act, or under state or other law. 22. ASSUMPTION. The Plan may be assumed by the successors and assigns of the Company. 7 23. EXPENSES. All expenses and costs in connection with administration of the Plan shall be borne by the Company. 24. AMENDMENT, MODIFICATION AND TERMINATION OF THE PLAN. The Board may terminate, amend or modify the Plan at any time without further action on the part of the shareholders of the Company; PROVIDED, HOWEVER, that (a) in no event shall any amendment be made to the Plan which would cause the ISOs granted hereunder to fail to qualify as incentive stock options under the Code; (b) any amendment to the Plan which requires the approval of the shareholders of the Company under the Code or the regulations promulgated thereunder shall be subject to approval by the shareholders of the Company in accordance with the Code or such regulations; and (c) any amendment to the Plan which requires the approval of the shareholders of the Company under the rules promulgated under Section 16 of the 1934 Act shall be subject to the approval of the shareholders of the Company in accordance with such rules. No amendment, modification or termination of the Plan shall in any manner adversely affect any Option previously granted to an Optionee under the Plan without the consent of the Optionee or the transferee of such Option. With the consent of the Optionee affected, the Board may amend outstanding Options or related agreements in a manner not inconsistent with the Plan. The Board shall have the right to amend or modify the terms and provisions of the Plan and of any outstanding ISO's granted under the Plan to the extent necessary to qualify any or all such Options for such favorable federal income tax treatment (including deferral of taxation upon exercise) as may be afforded incentive stock options under Section 422 of the Code. 25. TERM OF PLAN. The Plan shall become effective on the Effective Date. The Plan shall terminate on the tenth anniversary of the Effective Date, or such earlier date as may be determined by the Board. Termination of the Plan, however, shall not affect the rights of Optionees under Options previously granted to them, and all unexpired Options shall continue in force and operation after termination of the Plan except as they may lapse or be terminated by their own terms and conditions. 26. LIMITATION OF LIABILITY. The liability of the Company under this Plan or in connection with any exercise of an Option is limited to the obligations expressly set forth in the Plan and in any Stock Option Agreements, and no term or provision of this Plan or of any Stock Option Agreements shall be construed to impose any further or additional duties, obligations or costs on the Company not expressly set forth in the Plan or the Stock Option Agreements. 27. DEFINITIONS. (a) DISABILITY. "Disability," as used herein, shall mean a physical or mental condition resulting from bodily injury, disease, or mental disorder which renders the Optionee incapable of continuing the Optionee's usual and customary employment or service with the Company Group. (b) FAIR MARKET VALUE. If the Shares are publicly traded, the term "fair market value" as used in this Plan shall mean (a) the closing price quoted in the NASDAQ National Market System, if the shares are so quoted, (b) the last quote reported by NASDAQ for small-cap 8 issues, if the shares are so quoted, (c) the mean between the bid and asked prices as reported by NASDAQ, if the Shares are so quoted, or (d) if the Shares are listed on a securities exchange, the closing price at which the Shares are quoted on such exchange, in each case at the close of the date immediately before the Option is granted or, if there be no quotation or sale on that date, the next previous date on which the Shares were quoted or traded. In all other cases, the fair market value shall be determined by and in accordance with procedures established in good faith by the Board and with respect to ISOs, conforming to regulations issued by the Internal Revenue Service regarding incentive stock options. (c) KEY ASSOCIATES. The term "key associates" shall include those executive, administrative, operational and managerial employees who are determined by the Board to be eligible for Options under the Plan. (d) PARENT AND SUBSIDIARY. The terms "subsidiary" and "parent" as used in the Plan shall have the respective meanings set forth in sections 424(f) and (e) of the Code. (e) TERMINATION FOR CAUSE. The term "termination of employment for cause" shall mean termination of employment for (a) the commission of an act of dishonesty, including but not limited to misappropriation of funds or property of the Company; (b) the engagement in activities or conduct injurious to the reputation of the Company; (c) the conviction or entry of a guilty or no contest plea to a misdemeanor involving an act of moral turpitude or a felony; (d) the violation of any of the terms and conditions of any written agreement the Optionee may have from time to time with the Company Group (following 30 days' written notice from the Company specifying the violation and the employee's failure to cure such violation within such 30-day period); or (e) any refusal to comply with the written directives, policies or regulations established from time to time by the Board. (f) CHANGE IN CONTROL. A "change in control" shall be deemed to have taken place if, as a result of a tender offer, merger, consolidation, sale of assets or contested election, or any combination of the foregoing transactions (a "Transaction"), the persons who were directors of the Company immediately before the Transaction shall cease to constitute a majority of the Board of Directors of the Company or of any successor to the Company; provided, however, that any Transaction shall not be deemed to be a change in control if the Transaction causing such change shall have been approved by the affirmative vote of at least a majority of the members of the Board of Directors of the Company in office immediately prior to the change in control. PAPNET OF OHIO, INC. Adopted September 28, 1995 By: /s/ David J. Richards ------------------------------------ Amended July 8, 1996 David J. Richards, President 9 EX-23 16 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated March 22, 1996, except for Note 8 as to which the date is July 15, 1996 on the financial statements of Papnet of Ohio, Inc.; our report dated March 22, 1996, except for Note 4 as to which the date is July 15, 1996 on the financial statements of ER Group, Inc.; our report dated March 22, 1996 except for Note 4 as to which the date is July 15, 1996 on the combined financial statements of Carolina Cytology, Inc. and CCWP Partners, Inc.; our report dated March 22, 1996, except for Note 5 as to which the date is July 15, 1996 on the financial statements of Indiana Cytology Review Corporation; and our report dated March 22,1996 except for Note 4 as to which the date is July 15, 1996 on the financial statements of Cytology Indiana, Inc. in the Registration Statement (Form S-4 No. 33-00000) and related Prospectus of Papnet of Ohio, Inc. for the registration of 4,850,033 shares of its Common Stock. ERNST & YOUNG LLP Columbus, Ohio July 15, 1996 EX-24 17 EXHIBIT 24 POWER OF ATTORNEY Each of the undersigned officers and directors of Papnet of Ohio, Inc., an Ohio corporation (the "Company"), hereby appoints David J. Richards, as his true and lawful attorney-in-fact, with power to act without the others, as his true and lawful attorney-in-fact, in his name and on his behalf, and in any and all capacities stated below, to sign and to cause to be filed with the Securities and Exchange Commission the Company's Registration Statement on Form S-4 (the "Registration Statement") to register under the Securities Act of 1933, as amended, a maximum of 7,000,000 authorized and unissued shares of common stock, no par value (the "Common Stock"), of the Company (as such number of shares may be adjusted from time to time for stock dividends, stock splits, or similar transactions affecting the Common Stock of the Company generally), in connection with the Agreement and Plan of Merger, dated July 5, 1996, and all amendments thereto, among the Company, Cytology Indiana, Inc., Indiana Cytology Review Company, ER Group, Inc., CCWP Partners, Inc., and Carolina Cytology, Inc., and any and all amendments, including post-effective amendments, to the Registration Statement, hereby granting unto such attorney-in-fact, full power and authority to do and perform in the name and on behalf of each of the undersigned, in any and all such capacities, every act and thing whatsoever necessary to be done in and about the premises as fully as the undersigned could or might do in person, hereby granting to each such attorney-in-fact full power of substitution and revocation, and hereby ratifying all that any such attorney-in-fact or his substitute may do by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 5th day of July, 1996. Signature: Title: /s/ John P. Kennedy Director, Treasurer and Assistant Secretary - ------------------------------- John P. Kennedy /s/ S. Trevor Ferger Director - ------------------------------- S. Trevor Ferger /s/ Cecil J. Petitti Director - ------------------------------- Cecil J. Petitti /s/ Bryan Whipp Director - ------------------------------- Bryan Whipp EX-27 18 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PAPNET OF OHIO, INC. FORM S-4 FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE THREE MONTHS ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR 3-MOS DEC-31-1995 DEC-31-1996 DEC-31-1995 MAR-31-1996 811,359 599,550 0 0 75,993 58,962 0 0 0 0 938,373 780,108 41,939 41,939 24,623 26,123 8,945,789 9,419,540 174,392 144,794 0 0 0 0 0 0 1,779,465 1,779,465 4,682,694 5,036,869 8,945,789 9,419,540 48,000 13,553 48,000 13,553 0 0 573,149 149,727 (1,715,399) 0 0 0 264 0 1,256,230 (131,439) (68,715) (52,575) 0 0 0 0 0 0 0 0 1,324,945 (78,864) .21 (.01) .21 (.01)
EX-99 19 EXHIBIT 99 PAPNET OF OHIO, INC. PROXY FOR SPECIAL MEETING ___________, 1996 The undersigned hereby appoints David J. Richards or John P. Kennedy, and each of them, with full power of substitution, in the name, place and stead of the undersigned, to vote at the Special Meeting of Shareholders of Papnet of Ohio, Inc. on September __, 1996 at ______.m. Eastern Standard Time, or at any adjournment thereof, upon the number of votes that the undersigned would be entitled to vote if personally present, upon the following matters: 1. Approval of the Agreement and Plan of Merger, dated July 5, 1996 among the Company and Cytology Indiana, Inc., Indiana Cytology Review Company, ER Group, Inc., CCWP Partners, Inc., and Carolina Cytology, Inc. (the "Merger Agreement"), and the Amended and Restated Articles of Incorporation and the Amended and Restated Regulations provided for in the Merger Agreement. ( ) For approval of the Merger Agreement and the Amended and Restated Articles of Incorporation and the Amended and Restated Regulations provided for in the Merger Agreement. ( ) Against approval of the Merger Agreement and the Amended and Restated Articles of Incorporation and Regulations provided for in the Merger Agreement. ( ) Abstain 2. In their discretion, the proxies are authorized to vote upon such other business as may properly come before the Special Meeting or any adjournments thereof. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. This proxy will be voted in accordance with the instructions given above. If no instructions are given, this proxy will be voted FOR the matters described in Items 1 and 2 above. Dated: ________________, 1996 ______________________________________ Signature ______________________________________ Print Name NOTE: THIS INSTRUMENT MUST BE SIGNED BY THE REGISTERED HOLDER AND THE SIGNATURE SHOULD CORRESPOND EXACTLY WITH THE NAME AS IT IS SHOWN HEREON. WHEN SIGNING AS AN ATTORNEY, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE YOUR FULL TITLE AS SUCH. IN CASE OF JOINT TENANCY, CO-EXECUTORS, OR CO-TRUSTEES, BOTH SHOULD SIGN. -----END PRIVACY-ENHANCED MESSAGE-----