UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-19360
MERIS LABORATORIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 77-0274078
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2890 Zanker Road, San Jose, California 95134
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
408-434-9200
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
The number of shares outstanding of the issuer's common stock is 8,010,535
shares as of August 9, 1996.
1
<PAGE>
INDEX
MERIS LABORATORIES, INC.
PAGE
PART I. FINANCIAL INFORMATION NO.
Item 1. Financial Statements (Unaudited, except for the Condensed
Consolidated Balance Sheet at December 31, 1995):
Condensed Consolidated Balance Sheets
at June 30, 1996 and December 31, 1995........................ 3
Condensed Consolidated Statements of Operations for the
Three and Six Month Periods ended June 30, 1996 and 1995...... 4
Condensed Consolidated Statements of Cash Flows for the Six
Month Periods ended June 30, 1996 and 1995.................... 5
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 23
Item 3. Defaults Upon Senior Securities............................... 29
Item 4. Submission of Matters to a Vote of Securities Holders......... 30
Item 6. Exhibits and Reports on Form 8-K.............................. 31
SIGNATURES .............................................................. 32
2
<PAGE>
Item 1.
<TABLE>
<CAPTION>
MERIS LABORATORIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, Dec.31,
1996 1995
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 33 $ 1,490
Restricted cash ......................................... 1,964 1,585
Accounts receivable, net ................................ 8,576 11,270
Income tax refund receivable ............................ 384 384
Supplies inventory ...................................... 641 749
Prepaid expenses and other current assets ............... 657 548
-------- --------
Total current assets .................................. 12,255 16,026
Property and equipment, net ................................ 1,807 2,283
Intangible and other assets, net ........................... 23,957 25,165
-------- --------
Total assets ........................................ $ 38,019 $ 43,474
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings ......................................... $ 7,650 $ 7,657
Current portion of long-term obligations ................ 551 544
Accounts payable ........................................ 4,544 3,767
Accrued expenses ........................................ 3,166 3,115
Note payable to Former Executive ........................ 1,526 1,526
Accrued litigation and investigation charges ............ 3,780 3,940
-------- --------
Total current liabilities ............................. 21,217 20,549
-------- --------
Convertible subordinated debt .............................. 10,871 10,824
Long-term obligations, less current portion ................ 245 469
-------- --------
Commitments and contingencies (Notes 7 and 8) .............. -- --
-------- --------
Shareholders' equity:
Common stock ............................................ 37,157 37,136
Additional paid-in capital .............................. 826 826
Accumulated deficit ..................................... (32,297) (26,330)
-------- --------
Total shareholders' equity ............................ 5,686 11,632
-------- --------
Total liabilities and shareholders' equity .......... $ 38,019 $ 43,474
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
<TABLE>
<CAPTION>
MERIS LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Six Months
Ended Ended
June 30, June 30,
--------------------- ---------------------
1996 1995 1996 1995
---------- --------- --------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Net revenues $ 9,487 $ 9,956 $19,384 $22,387
---------- --------- --------- ----------
Cost of services:
Salaries, wages and benefits 3,077 3,376 6,126 6,637
Supplies 1,384 1,240 2,766 2,483
Depreciation and amortization 838 1,180 1,752 2,355
Other cost of services 1,837 2,050 3,650 4,035
--------- --------- --------- ----------
Total costs of services 7,136 7,846 14,294 15,510
Selling, general and
administrative expenses 2,909 3,114 5,569 5,909
Provision for doubtful accounts 2,963 1,770 3,574 2,574
Litigation and investigation charges 250 400 250 700
Write-down of intangible assets 550 - 550 -
--------- --------- --------- ----------
Operating loss (4,321) (3,174) (4,853) (2,306)
Interest expense (579) (502) (1,160) (1,005)
Interest and other income, net 22 15 46 21
--------- --------- --------- ----------
Loss before income taxes (4,878) (3,661) (5,967) (3,290)
Provision for income taxes - - - 36
--------- --------- --------- ----------
Net loss $(4,878) $ (3,661) $ (5,967) $ (3,326)
========= ========= ========= ==========
Net loss per share $ (0.61) $ (0.46) $ (0.75) $ (0.42)
========= ========= ========= ==========
Weighted average shares outstanding 7,994 7,950 7,992 7,935
========= ========= ========= ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
<TABLE>
<CAPTION>
MERIS LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
---------------------
1996 1995
---------- ---------
(Unaudited)
<S> <C> <C>
Net cash used in operating activities $(750) $ (885)
---------- ---------
Cash flows from investing activities:
Cash expenditure for customer lists
and other assets related to acquisitions (344) (677)
Purchase of property and equipment,net (103) (231)
---------- ---------
Net cash used in investing activities (447) (908)
---------- ---------
Cash flows from financing activities:
Issuance of common stock for option exercises 21 132
Proceeds from bank borrowings, net of payments (7) 1,500
Payments on long-term obligations (274) (347)
Payment of distribution payable to related parties - (267)
---------- ---------
Net cash provided by (used in) financing activities (260) 1,018
---------- ---------
Net decrease in cash and cash equivalents (1,457) (775)
Cash and cash equivalents at beginning of period 1,490 3,115
---------- ---------
Cash and cash equivalents at end of period $ 33 $2,340
========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE>
MERIS LABORATORIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The accompanying condensed consolidated balance sheet of Meris
Laboratories, Inc. (the "Company") at June 30, 1996 and the condensed
consolidated statements of operations and of cash flows for the three and six
months ended June 30, 1996 and 1995, are unaudited. In the opinion of
management, these statements have been prepared on the same basis as the audited
consolidated financial statements and include all adjustments, consisting only
of normal recurring adjustments, necessary for the fair presentation of the
interim information. The data disclosed in these notes to condensed consolidated
financial statements for these periods are unaudited. The condensed consolidated
financial statements for the periods ended June 30, 1996 have been prepared
assuming that the Company will continue as a going concern. Management
recognizes that the Company will have to improve its operating results and
generate additional cash from operations. The Company continues its efforts to
find way to increase revenues and decrease costs.
NOTE 2 - NET LOSS PER SHARE:
Net loss per share is computed using the weighted average common shares and
common stock equivalents when dilutive. Common stock equivalents consist of the
Company's common stock issuable upon exercise of stock options (using the
treasury stock method, except when antidilutive). The convertible subordinated
debentures were not considered in the calculation of net loss per share because
their effect is antidilutive.
NOTE 3 - ACQUISITIONS:
In May 1996, the Company completed one acquisition in northern California,
with annualized revenues of approximately $500,000 for a total cash payment of
$5,000. The above acquisition includes future contingency payments subject to
attainment of certain collection and operating criteria.
The acquisition was accounted for under the purchase method of accounting
and, accordingly, the purchase price was allocated to the respective assets
acquired based on their estimated fair market value at the date of acquisition.
The results of operations of the acquisition are included in those of the
Company commencing from the acquisition date.
NOTE 4 - RESTRICTED CASH:
During 1994, in accordance with the terms of the unsecured convertible
senior subordinated debentures, the Company purchased a certificate of deposit
in the amount of $1,585,000 representing the full amount to satisfy the
Company's obligations owing to a former executive (the "Former Executive")
pursuant to and in connection with a promissory note dated October 28, 1992 (see
Note 6). Since the Company believes the Former Executive is indebted to the
6
<PAGE>
MERIS LABORATORIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Company in an amount in excess of the amount of the final payment in the
promissory note, the Company continues to hold the balance in a separate account
pending the outcome of the litigation. On February 21, 1996, the Company
deposited $379,000 (150% of the amount of the $253,000 judgement as required by
the court) to an account with a bank to perfect its appeal in connection with a
wrongful termination suit. See Part II. Other Information - Item 1. Legal
Proceedings.
NOTE 5 - LINE OF CREDIT:
On November 14, 1994, the Company obtained a $6.0 million accounts
receivable line of credit (the "Line of Credit") with a bank. In April 1995, the
Company entered into a one-year agreement to increase the Line of Credit from
$6.0 million to the lesser of $10.0 million or the borrowing base calculated
based upon eligible accounts receivable. On July 27, 1995, the Company entered
into a loan modification agreement in which the bank agreed to issue letters of
credit in an aggregate amount not to exceed (i) the lesser of the total Line of
Credit or the qualifying borrowing base minus (ii) any amounts outstanding under
the Line of Credit, provided that the amount of outstanding letters of credit
should not in any case exceed $2.0 million.
On December 8, 1995, the Company obtained a revision of certain covenants
consisting of a minimum quick ratio, a minimum tangible net worth, a maximum
senior liabilities to annualized earnings before interest, taxes, depreciation
and amortization (EBITDA) ratio, and a restricted amount of loss for the fiscal
year end of 1995. Borrowings under the Line of Credit are secured by
substantially all of the Company's assets. The interest rate may decrease or
increase based upon the Company's quarterly operating results. As of June 30,
1996, the Company's outstanding borrowings under the Line of Credit were $7.7
million. Such amount was substantially in excess of its available Line of
Credit. Additionally, the Company was in default of all the financial covenants
under the Line of Credit. The Line of Credit expired on April 20, 1996 and has
not been renewed. On June 4, 1996, the Company entered into an amendment to the
Line of Credit agreement (the "Amended Agreement"). Subject to the terms of the
Amended Agreement and in accordance with the terms of the debenture agreement
(the "Debenture Agreement") (see Note 6), the Company is prohibited from making
any further payments of accrued interest or principal on account of the
convertible subordinated debt. The Amended Agreement further states that the
bank will forbear from exercising its remedies under the Line of Credit
agreement until August 15, 1996, notwithstanding the Company's existing
defaults. On August 14, 1996, the Company entered into a forbearance agreement
with the bank which includes an extension of the current forbearance period to
September 15, 1996. Upon termination of the forbearance period, the bank may,
without notice to the Company, exercise any available remedies under the Line of
Credit and forbearance agreements. There can be no assurance that subsequent to
September 15, 1996, the Company will be successful in obtaining an additional
forbearance agreement. Failure to obtain the additional forbearance or a revised
7
<PAGE>
MERIS LABORATORIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
or replacement line of credit will have a material adverse effect on the
Company. Interest on borrowings under the Line of Credit is charged at the
bank's prime rate plus 3% (11.25% as of June 30, 1996).
NOTE 6 - CONVERTIBLE SUBORDINATED DEBT:
On November 14 and December 5, 1994, the Company completed a private
placement consisting of the sale of $11,000,000 of unsecured convertible senior
subordinated debentures (the "Debentures"). The Debentures carry a 10% interest
rate and require interest to be paid monthly. In addition, the Debentures mature
three years from the date of issue and are convertible sixty days from the date
of issuance, at the option of the holders, into 3,125,000 shares of the
Company's common stock at a conversion price based on certain antidilution
provisions in the Debenture Agreement. The Board of Directors have reserved an
aggregate of 3,125,000 shares of the Company's common stock for issuance upon
conversion of the Debentures, provided that the number of shares reserved for
issuance may be subject to change in the event of any further adjustment in the
conversion price of the Debentures.
If the Debentures are repaid at maturity and have not been converted into
common stock, the Company is required to issue warrants to purchase shares of
common stock equal to the number of shares into which the Debentures outstanding
would have been converted upon maturity. The warrants would be exercisable
immediately, generally expire four years following the maturity date and have an
exercise price equal to the conversion price at maturity.
Subject to the prior payment of certain senior indebtedness, the Company
may call the Debentures at any time. However, if the Debentures are called
within 30 months of the date of issue, or if the Company's common stock trades
below 200% of the conversion price for 20 days within a period of 30 consecutive
trading days immediately prior to the Company giving notice to call the
Debentures, the Company must issue warrants to purchase shares of common stock
equal to the number of shares into which the Debentures outstanding could have
been converted. The warrants would be exercisable immediately, expire on
November 1, 1999 and have an exercise price equal to the conversion price in
effect on the date of the call. The Company ascribed a value of $280,000 to the
warrants issuable upon the payment of the Debentures at maturity. The value
ascribed to the warrants was computed based upon an estimated spread between the
cost of funds associated with the Company's senior and subordinated borrowings,
recognizing the overall higher level of risk assumed by the Debenture holders.
This amount was recorded as a debt discount and is reflected as an offset to the
proceeds from the sale of the Debentures and is being amortized as interest
expense over three years.
Upon a change of control of the Company, the Debenture holders have a right
to "put" the Debentures back to the Company at a price that will achieve a 30%
internal rate of return, including interest. To the extent any warrants have
been issued as a result of previous calls, the warrant holders may "put" all or
8
<PAGE>
MERIS LABORATORIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
part of the warrants to the Company at a price that will result in a 30%
internal rate of return, including interest. However, in either instance, the
premium shall not exceed 150% of the original principal amount of the
Debentures.
The Debentures also require that certain criteria be met, including a
minimum earnings before income taxes to interest expense ratio, limitations on
minimum consolidated net worth and maximum senior indebtedness, limitations on
payment of other indebtedness junior to the Debentures, limitations on merging
or selling all, or substantially all, of the property or business of the Company
and a restriction on the repurchase of the Company's common stock. At December
31, 1995, the Company was in default of the minimum consolidated net worth
covenant for which the Company obtained a waiver of the default effective
through January 1, 1997 from the Debenture holders provided the Company's
minimum consolidated net worth remained greater than $9 million. As of June 30,
1996, the Company was in default of the amended minimum consolidated net worth
criteria. The Company is attempting to obtain a waiver of such default from the
Debenture holders. If the Company is unable to obtain a waiver of default, the
Debenture holders have the option, in addition to other remedies available to
them, to declare all Debentures to be due and payable together with interest
accrued thereon. Should the Debenture holders exercise such option, the
convertible subordinated debt will then be classified as current liability.
Additionally, as of June 30, 1996, the Company was in default of all the
financial covenants under the Line of Credit. The Line of Credit expired on
April 20, 1996 and has not been renewed. On June 4, 1996, the Company and its
bank entered into the Amended Agreement (see Note 5). Subject to the terms of
the Amended Agreement and in accordance with the terms of the Debenture
Agreement, the Company ceased making any further payments of accrued interest or
principal on accounts of the convertible subordinated debentures effective May
1, 1996. Such nonpayment is an event of default under the Debenture Agreement
resulting in assessment of interest on any unpaid interest and a decrease in the
conversion price of the debentures by 1% per month until the overdue amounts
have been paid in full. As a result, at June 30, 1996, the Debentures are
convertible into 3,125,000 shares. Interest payments may be deferred until such
time that events of default on the Line of Credit are cured or waived. Failure
to obtain a waiver of or cure the defaults under the Debenture Agreement, will
result in the entire principal and unpaid interest being due and payable.
Interest expense has been recorded and is included in accrued expenses at June
30, 1996.
9
<PAGE>
MERIS LABORATORIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As long as an original investor or certain transferee holds any Debentures,
any warrants issued in connection therewith or any shares of common stock issued
on conversion of the Debentures, the Company will have, as a member of its Board
of Directors, a director designated by such holders. The Debenture Agreement
provides for certain registration rights with respect to the Debentures, the
warrants issuable in connection therewith and the common stock issuable upon the
conversion of the Debentures. The Debenture Agreement also requires the Company
to place in escrow all remaining amounts due to the Former Executive of the
Company under a promissory note issued to him. Such amount has been recorded as
restricted cash at June 30, 1996. See Note 4 and Part II. Other Information -
Item 1. Legal Proceedings.
NOTE 7 - LITIGATION AND INVESTIGATION CHARGES:
On May 6, 1994, the Company was subpoenaed to furnish certain documents to
the Department of Health and Human Services ("HHS") with respect to the
Company's Medicare and Medicaid billing practices. On July 18, 1994, the Company
was subpoenaed to furnish certain documents to the Department of Defense with
respect to the Company's Civilian Health and Medical Program of Uniformed
Services ("CHAMPUS") billing practices. The Company believes these matters
relate to the investigations of such practices being conducted with respect to
other laboratories. On August 28, 1995, the Company was notified that a Qui Tam
action had been filed by two former employees under the False Claims Act. The
Company believes the Qui Tam action and billing investigations are related. The
investigations relate to billing certain panels and profiles, adding tests to
recognized panels and profiles, billing for tests deemed not to be medically
necessary, improper coding, billing for tests not performed, double billing and
other alleged improper practices. During the fourth quarter of 1995, as a result
of correspondence and discussions with government agencies relating to certain
issues under investigation, the Company recorded a charge of approximately
$2,000,000. The Company has produced the documents subpoenaed by the government
agencies and is currently engaged in discussions with representatives of the U.
S. Department of Justice and HHS regarding the investigations with the objective
of bringing the matter to closure.
As a consequence of the Company's review of the reimbursements it has
received from Medicare with respect to chemistry panels and certain questions
raised during the investigation, the Company determined that Medicare overpaid
the Company approximately $960,000 with respect to matters that were not the
subject of the original investigations. This amount was charged against net
revenues during September 1995. The Company repaid $350,000 of this amount in
1995 and is repaying the remaining balance in monthly installments of $50,000
commencing January 2, 1996.
NOTE 8 - CONTINGENCIES:
The Company is involved in various other lawsuits which are described in
detail under Part II - Other Information - Item 1. Legal Proceedings.
10
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Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
General
The Company's principal objective is to be a leading provider of
high-quality, low-cost clinical laboratory testing services in California. To
achieve this objective, the Company has focused its efforts on (i) continuing
implementation of technological improvements in its San Jose laboratory, which
the Company hopes will further reduce operating costs per test and enhance
levels of service, and (ii) increasing its volume of testing (accessions)
through the acquisition of laboratories and customer lists as well as through
internal growth. However, notwithstanding these efforts, the Company has
incurred substantial losses during the first six months of 1996 and in each of
its last three fiscal years. Increases in net revenues and/or reductions in
operating costs continue to be necessary for the Company to achieve
profitability. The Company must experience growth in testing volume through
acquisitions and/or internal growth. The Company's growth through acquisitions
has been hindered as a result of difficulties in securing acquisition financing
and, despite its marketing efforts, accessions (volume of business) are
decreasing. In addition, net revenues per test may continue to decrease and be
lower than the Company's historical net revenues per test. Unless revenues can
be increased, operating costs reduced , and/or financing is obtained, the
Company may not remain financially viable.
Given the increasing importance of managed care and other cost containment
arrangements in the health care industry in California, the Company must
strategically pursue laboratory service contracts with managed care providers
such as health maintenance organizations. The Company anticipates that an
increasing portion of its business will be attributable to these contracts. Such
contracts typically provide for payment on the basis of capitated fees rather
than fees for actual tests performed. Such contracts result in lower net
revenues per test, however, the Company believes that these contracts could also
result in identifiable referrals on a fee-for-service basis from the clients
participating in the managed care contracts, thereby improving the overall
performance of the arrangements. During the first half of 1996, managed care
arrangements represented approximately 4.2% of net revenues and 21.2% of total
accessions as compared to the year ended December 31, 1995 when such
arrangements represented approximately 5.3% of net revenues and 22.3% of total
accessions.
The Company's business mix has changed with a shift away from patient
billing and fee-for-service. An increasing percentage of the Company's business
is expected to be in managed care contracts and with third party payors where
reimbursements are less than at patient prices resulting in an increasing
portion of the Company's business being subject to contractual discounts. In
addition, third party payor reimbursement rates have and will continue to
11
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decrease. During the first six months of 1996, five of the HMOs previously
contracted with the Company chose to utilize other laboratory service providers.
While the Company believes the net revenues associated with these contracts are
not material, the Company believes it will face increasing competition with
respect to obtaining and retaining managed care contracts. To the extent that
reimbursement rates continue to decrease, contractual discounts continue to
increase and utilization under managed care arrangements increases (or the
identifiable fee-for-service revenues decrease), net revenues per test and
profitability will be adversely impacted. As stated above, if these trends
continue, and the Company fails to meet its objectives in increasing the volume
of accessions and decreasing costs, management believes the viability of the
Company would be adversely impacted.
As of June 30, 1996, the Company's outstanding borrowings under the line of
credit (the "Line of Credit") (see Note 5 of Notes to Condensed Consolidated
Financial Statements) were $7.7 million which was substantially in excess of its
available Line of Credit. Additionally, the Company was in default of all the
financial covenants under the Line of Credit. The Line of Credit expired on
April 20, 1996 and has not been renewed. On June 4, 1996, the Company and its
bank entered into an amendment to the Line of Credit Agreement (the "Amended
Agreement"). Subject to the terms of the Amended Agreement and in accordance
with the terms of the debenture agreement ("the Debenture Agreement") (see Note
6 of Notes to Condensed Consolidated Financial Statements), the Company is
prohibited from making any further payments of accrued interest or principal on
account of the convertible subordinated debentures (the "Debentures"). Such
nonpayment is an event of default under the Debenture Agreement and resulted in
the assessment of interest on any unpaid interest and reductions to the
conversion price of the Debentures by 1% per month until the overdue amounts
have been paid in full. The Amended Agreement further states that the bank will
forbear from exercising its remedies under the Line of Credit agreement until
August 15, 1996, notwithstanding the Company's existing defaults. On August 14,
1996, the Company entered into a forbearance agreement with the bank which
includes an extension of the current forbearance period to September 15, 1996.
Upon termination of the forbearance period, the bank may, without notice to the
Company, exercise any available remedies under the Line of Credit and
forbearance agreements.
As of June 30, 1996, the Company was in default of the minimum consolidated
net worth criteria under the Debenture Agreement. The Company is attempting to
obtain a waiver of such default from the Debenture holders. Additionally,
compliance with the terms of the Amended Agreement with respect to nonpayment of
accrued interest or principal on account of the Debentures constituted an event
of default under the Debenture Agreement. Interest payments may be deferred
until such time that events of default on the Line of Credit are cured or
waived. If the Company is unable to obtain a waiver of default, the Debenture
holders have the option, in addition to other remedies available to them, to
declare all Debentures to be due and payable together with interest accrued
thereon. Should the Debenture holders exercise such option, the convertible
subordinated debt will then be classified as current liability.
There can be no assurance that the Company will be able to cure the
defaults, be successful in obtaining an additional forbearance agreement or
12
<PAGE>
obtain a waiver of default (see Notes 5 and 6 of Notes to Condensed Consolidated
Financial Statements, Liquidity and Capital Resources and Part II. Other
Information - Item 3. Defaults Upon Senior Securities).
The Company's net revenues and results of operations are impacted in large
part by statutes and regulations governing Medicare and Medi-Cal and the
reimbursement policies of insurance companies and other third-party payors.
Pursuant to the Stark Bill, which became effective in early 1992, as amended by
the Omnibus Budget and Reconciliation Act of 1993, clinical laboratories are
generally prohibited from billing the Medicare program or, effective as of
January 1, 1995, Medi-Cal programs or the patient or any other payor, for
testing performed for Medicare or Medi-Cal patients when the physician ordering
the test (or a relative of such physician) has an investment interest or
compensation arrangement with the laboratory. Legislation was also enacted in
California which made it unlawful, as of January 1, 1995, for a physician to
refer a patient or specimen to a clinical laboratory in which the physician has
an ownership interest or from which the physician receives compensation,
regardless of the source of payment for such testing. Although it is difficult
to quantify, the Company believes these statutes and regulations have resulted
in less referrals to the Company.
Acquisition Program
A major element of the Company's business strategy has been to acquire
clinical laboratories and customer lists. Future acquisitions and retention of
existing business are necessary to achieve growth in net revenues, attain
profitability in the future and to leverage the Company's technological
improvements. However, as a result of difficulties in securing adequate
financing and other impediments resulting from the litigation and investigations
(see Part II. Other Information - Item 1. Legal Proceedings), the Company's
acquisition program has been hindered. Furthermore, the supply of potential
acquisition candidates could be adversely affected by changes in the regulatory
environment in which the Company operates.
13
<PAGE>
Statement of Operations Data
The following represents selected Statement of Operations data as a percentage
of net revenues:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
------------------ -------------------
1996 1995 1996 1995
-------- ------- -------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
Cost of services:
Salaries, wages and benefits 32.4 33.9 31.6 29.7
Supplies 14.6 12.5 14.3 11.1
Depreciation and amortization 8.8 11.8 9.0 10.5
Other cost of services 19.4 20.6 18.8 18.0
-------- --------- -------- --------
Total cost of services 75.2 78.8 73.7 69.3
Selling, general and administrative 30.7 31.3 28.7 26.4
Provision for doubtful accounts 31.2 17.8 18.5 11.5
Litigation and investigation charges 2.6 4.0 1.3 3.1
Write-down of intangible assets 5.8 - 2.8 -
-------- --------- -------- --------
Operating loss (45.5)% (31.9)% (25.0)% (10.3)%
======== ========= ======== ========
</TABLE>
Three Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1995
Net Revenues. Net revenues decreased 4.7% to $9.49 million for the three months
ended June 30, 1996 from $9.96 million for the same period in 1995. The decrease
in net revenues reflects a 14.4% decrease in testing volume resulting partly
from increased competition and from decreased utilization of the Company's
laboratory services by patients and clients. While there is a general trend
toward increased contractual discounts, including a reduction in the Medicare
reimbursement rate in 1996 of approximately 4% and an increase in discounts
associated with a shift to more contract payors, the Company believes the
Company's payor mix during the three months ended June 30, 1996 resulted in an
increase in net revenues per accession in excess of 10%.
Cost of Services. Total cost of services decreased 9.0% to $7.14 million for the
three months ended June 30, 1996 from $7.85 million for the same period in 1995.
The net decrease in cost of services reflects an increase in supplies expense
offset by a decrease in salaries, wages and benefits, depreciation and
amortization and other costs of services. As a percentage of net revenues, cost
of services decreased to 75.2% for the three months ended June 30, 1996 from
78.8% for the same period in 1995. This decrease is attributable to the decrease
in overall costs in relation to testing volume.
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Salaries, wages and benefits and other costs of services decreased as a result
of cost containment programs put in place during the latter part of 1995 through
June 30, 1996 which resulted in a 7% reduction in the number of employees as
well as a reduction in reference laboratory fees, courier costs and operating
expenses for PSCs and STAT laboratories. Supplies expense, primarily for
reagents and testing consumables, increased primarily due to the Company
bringing in-house approximately 17 tests throughout 1995 and 1996. This increase
is offset by a reduction in reference laboratory fees (included in other cost of
services). Depreciation and amortization expense decreased as a result of the
full depreciation of certain fixed assets and the write-down of certain
intangible balances during the year ended December 31, 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by 6.6% to $2.91 million for the three months
ended June 30, 1996 from $3.11 million for the same period in 1995. Selling,
general and administrative expenses as a percentage of net revenues decreased to
30.7% for the three months ended June 30, 1996 from 31.3% for the corresponding
period in 1995. The decrease in selling, general and administrative expenses
primarily resulted from the reduction in labor costs reflecting accrued
severance costs of $200,000 recorded during the three months ended June 30,
1995, an overall reduction in labor costs as a result of cost reduction efforts
and a reduction in commission expense as a direct result of the modification of
the Company's commission structure as well as decreased net revenues. Selling,
general and administrative full-time equivalent staff decreased 5% compared to
the same period in 1995.
Provision for Doubtful Accounts. The provision for doubtful accounts increased
67.4% to $2.96 million for the three months ended June 30, 1996 from $1.77
million for the same period in 1995. As a percentage of net revenues, the
provision for doubtful accounts increased to 31.2% of net revenues for the three
months ended June 30, 1996 from 17.8% of net revenues for the three months ended
June 30, 1995. Of the total provision amount, approximately $1.0 million
represents estimated uncollectible accounts due to the payor's inability to pay.
The remaining $1.96 million is largely attributable to the Company's efforts,
commencing in early 1996, to reduce its investment in accounts receivable and
increase cash flow by identifying accounts with inaccurate billing information.
The Company's initial efforts resulted in the resubmission of certain accounts
to third party payors for payment and obtaining more accurate data for patient
and client accounts. As a result of the resubmissions and the Company's
continuing efforts in pursuing the collection of outstanding receivable
balances, the Company identified, and accordingly recorded a provision for,
accounts receivable deemed to be uncollectible due to the application of payor
time constraints and the Company's current limitations in financial and
personnel resources to pursue collection of such accounts.
Litigation and Investigation Charges. The litigation and investigation charges
recorded in each of the three months ended June 30, 1996 and 1995 reflect
accruals for estimated professional fees and other costs to be incurred in
relation to existing litigation and investigations. The estimated costs are
determined based on actual costs incurred to date and management's best
estimates as to amounts to be incurred in the foreseeable future.
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Write-Down of Intangible Assets. During the three months ended June 30, 1996,
the Company recorded a write-down for the impairment of certain customer lists,
covenants not-to-compete, and goodwill aggregating approximately $550,000.
Recognition of such impairment is in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," which requires that
long-lived assets and certain identifiable intangibles held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Interest Expense. Interest expense increased 15.3% to $579,000 for the three
months ended June 30, 1996 from $502,000 for the same period in 1995. The
increase is primarily the result of increased borrowings resulting from
decreased cash collections coupled with higher interest rates.
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Net Revenues. Net revenues decreased 13.4% to $19.38 million for the six months
ended June 30, 1996 from $22.39 million for the same period in 1995. The
decrease in net revenues during 1996 reflects an 11.0% decrease in testing
volume. The trend toward increased contractual discounts, including a reduction
in the Medicare reimbursement rate in 1996 of approximately 4% and an increase
in discounts associated with a shift to more contract payors, resulted in a
decrease in net revenues per accession of approximately 2.7% for the six months
ended June 30, 1996. The decrease in testing volume is partly a result of
increased competition as well as decreased utilization of the Company's
laboratory services by patients and clients.
Cost of Services. Total cost of services decreased 7.8% to $14.29 million for
the six months ended June 30, 1996 from $15.51 million for the same period in
1995. As a percentage of net revenues, cost of services increased to 73.7% for
the six months ended June 30, 1996 from 69.3% for the same period in 1995. The
net decrease in cost of services reflects an increase in supplies expense offset
by a decrease in salaries, wages and benefits, depreciation and amortization and
other costs of services.
Salaries, wages and benefits and other costs of services decreased as a result
of on-going cost containment programs put in place during the latter part of
1995 through June 30, 1996 which resulted in a 7% reduction in the number of
employees as well as a reduction in reference laboratory fees, courier costs and
operating expenses for PSCs and STAT laboratories. Supplies expense, primarily
for reagents and testing consumables, increased primarily due to the Company
bringing in-house approximately 17 tests throughout 1995 and 1996. This increase
is offset by a reduction in reference laboratory fees (included in other cost of
services). Depreciation and amortization expense decreased as a result of the
full depreciation of certain fixed assets and the write-down of certain
intangible balances during the year ended December 31, 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by 5.6% to $5.57 million for the six months
ended June 30, 1996 from $5.91 million for the same period in 1995. Selling,
general and administrative expenses as a percentage of net revenues increased to
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28.2% for the six months ended June 30, 1996 from 26.4% for the corresponding
period in 1995. The decrease in selling, general and administrative expenses
primarily resulted from the reduction in labor costs reflecting accrued
severance costs of $200,000 recorded during the three months ended June 30,
1995, an overall reduction in labor costs as a result of cost reduction efforts
and a reduction in commission expense as a direct result of the modification of
the Company's commission structure as well as decreased net revenues. Selling,
general and administrative full-time equivalent staff decreased 5% compared to
the same period end in 1995.
Provision for Doubtful Accounts. The provision for doubtful accounts increased
38.9% to $3.57 million for the six months ended June 30, 1996 from $2.57 million
for the same period in 1995. As a percentage of net revenues, the provision for
doubtful accounts increased to 18.5% of net revenues for the six months ended
June 30, 1996 from 11.5% of net revenues for the three months ended June 30,
1995. Of the total provision amount, approximately $1.61 million represents
estimated uncollectible accounts due to the payor's inability to pay. The
remaining $1.96 million is largely attributable to the Company's efforts,
commencing in early 1996, to reduce its investment in accounts receivable and
increase cash flow by identifying accounts with inaccurate billing information.
The Company's initial efforts resulted in the resubmission of certain accounts
to third party payors for payment and obtaining more accurate data for patient
and client accounts. As a result of the resubmissions and the Company's
continuing efforts in pursuing the collection of outstanding receivable
balances, the Company identified, and accordingly recorded a provision for,
accounts receivable deemed to be uncollectible due to the application of payor
time constraints and the Company's current limitations in financial and
personnel resources to pursue collection of such accounts.
Litigation and Investigation Charges. The litigation and investigation charges
recorded in each of the six months ended June 30, 1996 and 1995 reflects
accruals for estimated professional fees and other costs to be incurred in
relation to existing litigation and investigations. The estimated costs are
determined based on actual costs incurred to date and management's best
estimates as to amounts to be incurred in the foreseeable future.
Write-Down of Intangible Assets. During the six months ended June 30, 1996, the
Company recorded a write-down for the impairment of certain customer lists,
covenants not-to-compete, and goodwill aggregating approximately $550,000.
Recognition of such impairment is in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," which requires that
long-lived assets and certain identifiable intangibles held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Interest Expense. Interest expense increased 15.4% to $1.16 million for the six
months ended June 30, 1996 from $1.00 million for the same period in 1995. The
increase is primarily the result of increased borrowings resulting from
decreased cash collections coupled with higher interest rates.
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Income Taxes
Income taxes are provided in accordance with Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes." The effective income
tax rate for the six months ended June 30, 1995 was lower than the federal
statutory rate due primarily from less than full benefit from operating losses
due to limited carryback opportunities and non-recognition of loss carryforwards
due to uncertainty regarding realization.
Variability of Quarterly Results
In the past, the Company's net revenues and results of operations have
fluctuated from quarter to quarter, and the Company anticipates that such
fluctuations will continue in the future. Variations in payor mix, and the
frequency, timing and size of recent and future acquisitions, if any, contribute
to the quarterly variability of net revenues and operating results. Inherent in
the clinical laboratory industry are challenges in billing and collecting
accounts receivable balances. Consequently, interim results of operations are
from time to time subject to fluctuations resulting from the Company's
recognition of certain identified uncollectible accounts.
Costs of continuing litigation and management participation in ongoing
litigation and investigations are significant and have had, and may continue to
have, a material adverse effect on the quarterly variability of the Company's
operations. The Company's operations also experience seasonal trends that the
Company believes affect all clinical laboratory companies. In addition,
regulatory changes, reimbursement policies of governmental agencies, insurance
companies and other third-party payors, and actions by the Company or its
competitors, may cause fluctuations in, and adversely affect, the Company's net
revenues and results of operations. Managed care contracts are generally
executed for periods of at least one year. The execution of new, or the loss of
existing, managed care contracts could also result in significant fluctuations
in the Company's operations.
Liquidity and Capital Resources
Net cash used in operating activities totaled $750,000 for the six months
ended June 30, 1996.
As of June 30, 1996, the Company had $33,000 in cash and cash equivalents,
$1.96 million in restricted cash and $7.65 million of current borrowings under
the Line of Credit that expired on April 20, 1996. Management believes that cash
to be generated from operations, together with existing cash balances, will not
be sufficient to satisfy the Company's cash requirements for the foreseeable
future. The Company's cash position may be further adversely impacted by an
unfavorable outcome of any of the existing litigation and/or billing
investigations. Additional financing from outside sources will be required
during 1996 to remain viable. There can be no assurance that any such amounts
may be obtained at terms acceptable to the Company.
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Capital expenditures during the six months ended June 30, 1996 totaled
$447,000. Of the total, the Company paid an aggregate of approximately $344,000
with respect to payments made on customer lists acquired prior to January 1,
1996. In addition, the Company purchased approximately $103,000 of computer and
laboratory equipment.
The Company is currently involved in a number of lawsuits including two
derivative suits, one class action suit, litigation involving its former
Chairman, President, and Chief Executive Officer (the "Former Executive") and
other matters. Certain of the Company's billing practices are under
investigation by the U.S. Department of Health and Human Services, the
Department of Defense and the Department of Justice. These investigations relate
to practices of laboratories in the billing of groups of tests (i.e., panels and
profiles) and billing tests that have been added to recognized panels and
profiles, billing for tests deemed not to be medically necessary, billing for
tests not performed, double billing and other matters. In connection with these
matters, in 1995 the Company accrued $2.0 million in addition to the $250,000
previously accrued. In connection with these investigations and the Company's
review of its Medicare reimbursements, the Company identified certain Medicare
overpayments aggregating approximately $960,000 with respect to matters that
were not the subject of the original investigation. The Company paid Medicare
$350,000 on December 18, 1995, and is repaying the remaining balance of the
overpayment in monthly installments of $50,000 commencing January 2, 1996. Costs
of continuing litigation and management participation in ongoing litigation and
investigations are significant and have had a material adverse effect on the
Company's operations, both financially and with respect to diversion of
management's attention from operations of the Company. An unfavorable outcome in
any of these lawsuits or investigations would have a material adverse effect on
the Company's results of operations. Additionally, litigation and investigation
charges to date have contributed to the Company being in default of its
covenants relating to the Line of Credit and the Debenture Agreements (see
discussion regarding forbearance and waiver, respectively, below), and could
prohibit the Company from securing sufficient capital to conduct its ongoing
operations. The ultimate outcome of these litigation matters and investigations
is uncertain.
In October 1992, the Company and the Former Executive entered into an
agreement (the "Settlement Agreement") for the purpose of resolving certain
disputes between them. The Settlement Agreement is further described in Part II.
Other Information - Item 1. Legal Proceedings. The Company paid cash in the
amount of $9.0 million for the repurchase of all of the Company's common stock
held by the Former Executive. Additionally, the Company issued a three-year
secured promissory note (the "Promissory Note") in the principal amount of $4.4
million which required installment payments on April 15, 1993 and October 28,
1993, 1994 and 1995, of which $1.41 million and $1.47 million in principal were
paid during 1993 and 1994, respectively.
On August 11, 1994, the Superior Court of the State of California for the
County of Santa Clara entered an order in relation to the Brown action (see Part
II. Other Information - Item 1. Legal Proceedings) directing the Company to,
within 10 days, (i) deposit with a bank escrow, to be held in trust, the balance
of approximately $3.17 million (including $1.47 million in principal paid in
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1994 as described above) owing to the Former Executive under the Promissory Note
and (ii) indemnify the Former Executive for legal fees and expenses incurred in
the amount of approximately $364,000, and to continue to indemnify him for legal
fees and expenses, as he contends is required by and subject to the provisions
of the Settlement Agreement. The decision was appealed. To perfect the appeal,
the Company deposited with the Superior Court the sum of $546,000 as security
for the payment of the legal fees portion of the order. In connection with and
using the proceeds from a bank line of credit, the Company paid the October 28,
1994 installment under the Promissory Note and deposited in an account with a
bank the remaining principal and interest balance of $1,585,000 provided for
thereunder as restricted cash available to satisfy future payment obligations
and may be required to be paid under the Promissory Note. Since the Company
believes the Former Executive is indebted to the Company in an amount in excess
of the amount of the final payment on the Promissory Note, and the Company, as
well as the plaintiffs in the Mills and Brown actions, are seeking rescission of
the Settlement Agreement (see Part II. Other Information - Item 1. Legal
Proceedings), the Company has not made the final payment under the Promissory
Note. On September 26, 1995, the appellate court entered an order reversing the
lower court's decision and sustaining the Company's position. On December 26,
1995, the sum deposited as security for the appeal of $546,000 was returned to
the Company. The court has also held that the deposit made by the Company of
$1,585,000 with the bank satisfies the earlier injunction insofar as it relates
to the Promissory Note payment.
In April 1995, the jury in a wrongful termination suit brought by a former
employee (see Part II. Other Information - Item 1. Legal Proceedings) returned
awards against the Company and in favor of such former employee in an amount
aggregating $300,000. Subsequently, the judge consolidated certain of the awards
and entered judgment for $253,000. Both parties have appealed. Unless modified
or set aside on appeal, the judgement will have to be satisfied from existing
cash resources, if available. Approximately $300,000 has been accrued for this
matter at June 30, 1996.
On July 27, 1995, the Company entered into an amendment of its Line of
Credit agreement in which the bank agreed to issue letters of credit in an
aggregate amount not to exceed (i) the lesser of the total Line of Credit or the
qualifying borrowing base minus (ii) any amounts outstanding under the Line of
Credit, provided that the amount of outstanding letters of credit should not in
any case exceed $2.0 million. The Line of Credit agreement contained certain
financial covenants including a minimum quick ratio, a maximum debt to net worth
ratio, a minimum tangible net worth and profitability on a monthly basis. As of
September 30, 1995, the Company was in default of the quarterly profitability
covenant as well as certain other ratio covenants under the Line of Credit. In
addition, the failure by the Company to make the final payment on a Promissory
Note (see Part II. Other Information - Item 1. Legal Proceedings) is a default
under the Line of Credit. The Company obtained a waiver from the bank of all
defaults. In conjunction with obtaining such waiver, on December 8, 1995, the
covenants were amended to require a minimum quick ratio, minimum tangible net
worth, maximum loss for the year ended December 31, 1995, and a maximum senior
liabilities to earnings before interest expense, income taxes, depreciation and
amortization (EBITDA) ratio. As of December 31, 1995, the Company was in default
of all financial covenants under the Line of Credit and unsecured senior
20
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subordinated Debentures. The Company obtained a waiver of such default from the
holders of the Debentures effective through January 1, 1997 provided that the
Company's net worth remains greater than $9 million. The Company has also
obtained a waiver of such default from the bank as of December 31, 1995. See
Notes 5 and 6 of Notes to Condensed Consolidated Financial Statements.
At June 30, 1996, the Company's outstanding borrowings under the Line of
Credit were $7.7 million which was substantially in excess of its available Line
of Credit (see Note 5 of Notes to Condensed Consolidated Financial Statements).
Additionally, the Company was in default of all the financial covenants under
the Line of Credit. The Line of Credit expired on April 20, 1996 and has not
been renewed. On June 4, 1996, the Company entered into an amendment to the Line
of Credit agreement (the "Amended Agreement"). Subject to the terms of the
Amended Agreement and in accordance with the terms of the debenture agreement
(the "Debenture Agreement") (see Note 6 of Notes to Condensed Consolidated
Financial Statements), the Company is prohibited from making any further
payments of accrued interest or principal on account of the convertible
subordinated debt. The Amended Agreement further states that the bank will
forbear from exercising its remedies under the Line of Credit agreement until
August 15, 1996, notwithstanding the Company's existing defaults. On August 14,
1996, the Company entered into a forbearance agreement with the bank which
includes an extension of the forbearance period to September 15, 1996. Upon
termination of the forbearance period, the bank may, without notice to the
Company, exercise any available remedies under the Line of Credit and
forbearance agreements. In the event that the bank exercises remedies available
to it, other financing will have to be secured in order for the Company to
continue its operations. There can be no assurance that such other financing
will be available or, if available, will be on terms acceptable to the Company
(see Part II. Other Information - Item 3. Defaults Upon Senior Securities).
Interest on the bank borrowings under the Line of Credit is charged at the
bank's prime rate plus 3% (11.25% as of June 30, 1996).
As of June 30, 1996, the Company was also in default of the minimum
consolidated net worth criteria under the Debenture Agreement. The Company is
attempting to obtain a waiver of default from the Debenture holders. There can
be no assurance that such waiver will be obtained. Additionally, compliance with
the terms of the Amended Agreement with respect to nonpayment of accrued
interest or principal on account of the Debentures constituted an event of
default under the Debenture Agreement. Interest payments may be deferred until
such time that events of default on the Line of Credit are cured or waived. If
the Company is unable to obtain a waiver of default, the Debenture holders have
the option, in addition to other remedies available to them, to declare all
Debentures to be due and payable together with interest accrued thereon. Should
the Debenture holders exercise such option, the convertible subordinated debt
will then be classified as current liability.
The Company currently has no material commitments for capital expenditures.
The Company anticipates making expenditures to improve its financial and billing
systems and facilities in the foreseeable future subject to cash availability.
If and when financing and other opportunities become available, the Company also
plans to continue increasing testing volume through its acquisition program (see
Acquisition Program). The Company believes that in addition to internal sales
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efforts, acquisitions will continue to be necessary to achieve growth in net
revenues and achieve operating income in the future. There can be no assurance,
however, that the Company will be successful in implementing improvements to its
financial and billing systems and facilities, or that, if implemented, would
have a positive impact on the Company's results of operations. There can also be
no assurance that the Company will effect any future acquisitions, or if
effected, such acquisitions would have a positive impact on the Company's
results of operations.
The Management's Discussion and Analysis of Financial Condition and Results
of Operations section above and other sections of this Quarterly Report on Form
10-Q may contain certain forward-looking statements that involve risks and
uncertainties. Potential risks and uncertainties relating to such
forward-looking statements and the Company in general include, without
limitation, the risk that the Company will be unable to cure and/or obtain
waivers of the defaults under the Line of Credit and the Debenture Agreements,
that the bank and Debenture holders will exercise their remedies, the Company's
inability to generate cash from operations or to secure additional financing
from outside sources sufficient to satisfy the Company's cash requirements in
the foreseeable future, continued competitive pressures for clients and
acquisition targets, continued decrease in reimbursement rates and increased
promulgation of government regulation which negatively impact the Company's
results of operations. Furthermore, there can be no assurance that the Company
will be successful in decreasing costs, or that there will be an increase in the
number of accessions performed, or that the Company will return to
profitability. These risks and other risks are discussed in more detail in the
Company's Securities and Exchange Act filings.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Settlement Agreement with Former Executive
On October 28, 1992, the Company entered into an agreement (the "Settlement
Agreement") with its former Chairman, President and Chief Executive Officer (the
"Former Executive") for the purpose of resolving certain disputes between the
Former Executive and the Company. The agreement provided for the Former
Executive's resignation from the Company's Board of Directors and the Company's
purchase of all of the Former Executive's 1,176,440 shares of common stock of
the Company. The Settlement Agreement also provided that for a ten-year period,
the Former Executive will refrain from competing with the Company in certain
areas or from taking certain actions, such as the purchase of any voting
securities of the Company, to influence the Company's management. The Settlement
Agreement also contains mutual general releases among the Former Executive, the
Company and certain of the Company's officers and directors. The purchase of the
Former Executive's shares and the effectiveness of the other terms of the
Agreement were conditioned upon the closing price of the Company's common stock
(as quoted on the Nasdaq National Market System) reaching at least $7-5/8 per
share, which occurred on November 2, 1992. The transaction closed on November 3,
1992. Of the total consideration, the Company allocated $10,315,908 to the
repurchase of common stock based upon an evaluation by an independent third
party. A total of $2,984,000 was initially allocated to the covenant
not-to-compete. During the fourth quarter of 1993, the Company wrote off the
unamortized balance of the intangible asset relating to the Settlement
Agreement.
Pursuant to the Settlement Agreement, the Company paid the Former Executive
cash in the amount of $9,000,000 and issued the three-year secured Promissory
Note in the principal amount of $4,400,000 bearing interest at a rate of 3.85%
per year. The Promissory Note requires installment payments on April 15, 1993
and on October 28, 1993, 1994 and 1995. On August 11, 1994, the Company was
directed by a court order to deposit with a bank escrow, to be held in trust,
the outstanding balance under the Promissory Note. See discussion of the Brown
action below for additional information with respect to the final payment under
the Promissory Note.
In consideration of the non-competition agreement, the Company also agreed
to make certain additional payments to the Former Executive (the "Contingent
Payments") computed by a formula based upon the trading price of the Company's
common stock on certain future dates, or on the sale of all or substantially all
of the Company's assets or a merger, consolidation or other transaction in which
more than 50% of the Company's voting stock is transferred, upon the
consideration per share paid in such transaction. The maximum amount the Former
Executive could have received pursuant to the Contingent Payments provision was
$4,700,000. Under the Settlement Agreement, the Company's obligation to make
Contingent Payments expired on October 28, 1995. No Contingent Payments were
made and the Company believes none were payable, however, the Contingent
Payments are part of the Former Executive's cross-complaint in the Brown action
(see below).
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The Settlement Agreement is the subject of the derivative suits discussed
below and of the cross-complaints filed therein. The plaintiffs in such
derivative suits are seeking rescission of the Settlement Agreement as does the
Company as an alternative remedy in its cross complaint against the Former
Executive for damages in the Brown action. In addition, the Former Executive is
seeking payment of the amount of the Contingent Payments in his cross complaint
filed in the Brown action.
Wrongful Termination Suit
On August 27, 1992, a former employee of the Company filed suit against the
Company in the Superior Court of Santa Clara County, California, alleging breach
of contract, wrongful constructive termination in violation of public policy and
defamation. The case was tried and, in April 1995, the jury returned awards
aggregating $300,000 against the Company and in favor of the former employee.
Subsequently, the judge consolidated certain of the awards and entered judgment
for $253,000. The plaintiff and the Company have appealed the judgement. As of
December 31, 1995, the Company perfected its appeal through a $379,000 surety
bond (150% of the amount of the $253,000 judgement as required by the court
rules). On February 21, 1996, the Company deposited in an account with a bank
$379,000 provided for thereunder as restricted cash. The Company accrued
approximately $300,000 at June 30, 1996 in connection with this matter.
Derivative Suits
On September 14, 1992, four shareholders filed a lawsuit in the Superior
Court of the County of San Mateo, California, seeking to pursue various claims
on a derivative basis (the "Mills action"). The suit has been transferred to the
Superior Court of Santa Clara County, California. It is now in its Third Amended
Complaint, and two of the original plaintiffs have withdrawn. The defendants are
the Company and certain current and former directors of the Company, including
the Former Executive. The Third Amended Complaint alleges various breaches of
fiduciary duty by the Company's directors and seeks a declaration that the
Settlement Agreement is invalid, a constructive trust for commissions paid under
an agreement between the Company and Harmet Associates, an injunction
prohibiting the Company in any securities offering from coupling the offering to
the survival, as directors, of members of its Board of Directors (the "Board"),
the reformation of the Board, an investigation by independent Board members of
the Company's quality assurance procedures, compensatory and exemplary damages
in an unspecified amount, an order requiring all damages to be placed in a trust
fund for the benefit of the Company's shareholders so long as any defendant
remains an officer or director of the Company, and compensation to the
plaintiffs and attorneys fees in unspecified amounts. The Company believes that
the Third Amended Complaint is without merit and is defending the lawsuit.
Answers have been filed by all defendants.
In May 1994, a cross-complaint was filed in the Mills action by the Former
Executive which named certain current and former directors, officers and
employees as cross-defendants. The cross-complaint seeks indemnity for the
claims made against the Former Executive in the Third Amended Complaint referred
to above, and for legal fees and expenses allegedly incurred in defending such
claims. The defendants believe such claims to be without merit and are defending
the cross-complaint. An answer has been filed on behalf of the defendants.
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On July 1, 1993, a demand was made on the Board to pursue the allegations
contained in a derivative lawsuit filed in the Superior Court of the State of
California for the County of Santa Clara against the Company and certain of its
current and former directors including the Former Executive (the "Brown
action"). On July 12, 1993, the Board appointed a special committee (the
"Special Committee") comprised of outside directors to investigate the
allegations and to evaluate whether the Company should pursue the lawsuit. On
September 30, 1993, the Special Committee determined that the allegations in the
Complaint were unfounded, that the claims alleged thereon lack merit, and that
it is not in the best interest of the Company for the litigation to proceed,
either in the name of the plaintiffs derivatively on behalf of the Company or
through the substitution of the Company as plaintiff. On that basis, the Special
Committee determined that the Company should take appropriate steps to seek
dismissal of the action. The Company and the individual defendants moved for
summary judgment dismissing the action. The motion was denied. The Company's
attempt for writ review by an appellate court of the order denying summary
judgment was also denied.
The Brown action is now in its Second Amended Complaint. The defendants are
the Company, certain current and former directors of the Company, including the
Former Executive, the Company's independent accountants and a principal of such
accounting firm. The Second Amended Complaint alleges certain breaches of
fiduciary duty by the Company's directors, negligence, conspiracy, breach of
contract and negligent misrepresentation and seeks an order that the Settlement
Agreement be rescinded and the Former Executive to return all money received
under the Settlement Agreement to the Company, compensatory damages against
certain defendants in the amount of $35,000,000, exemplary damages in an
unspecified amount against the same defendants, an order requiring all damages
be placed in trust for the benefit of the Company's shareholders so long as any
defendant remains an officer or director of the Company, a declaration that the
individual defendants did not act in good faith and are not entitled to
indemnification, an injunction prohibiting the Company from indemnifying
individual defendants and compensation to the plaintiffs and attorneys fees in
unspecified amounts. The Company believes that the Second Amended Complaint is
without merit and is defending the lawsuit. Answers have been filed by all
defendants.
On October 29, 1993, the Former Executive filed an answer and a
cross-complaint in the Brown action naming as cross-defendants the Company and
certain of its present and former officers, directors and employees. The
cross-complaint has subsequently been amended and has added the Company's
independent accountants, another director and another former employee of the
Company as additional cross-defendants. As amended, the cross-complaint seeks
indemnification for expenses allegedly incurred by the Former Executive in
connection with various legal proceedings and for such future damages as may be
incurred by the Former Executive, compensatory and other damages for defamation
allegedly committed by the Company and one of its officers, compensatory and
other damages and injunctive relief for various unfair business practices
alleged to have been committed by the defendants, damages for breach of
contract, breach of the implied covenant of good faith and fair dealing,
conspiracy and intentional interference with contract, the gravamen of which is
that the cross-defendants deprived the Former Executive of his potential stock
appreciation rights (i.e. the Contingent Payments) under the Settlement
25
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Agreement by allegedly operating the Company in such a way as to decrease the
value of the Company's common stock and damages for violation of and conspiracy
to violate the Racketeer Influenced and Corrupt Organization Act ("RICO"). All
damage claims are for unspecified amounts to be determined by the proof or the
Court. RICO damages are requested to be trebled. The Company is defending the
cross-complaint. Its demurrer to the RICO claim was sustained with leave to
amend and an amendment has been filed. The Company had demurred again. The
demurrer is pending.
On August 11, 1994, the Superior Court of the State of California for the
County of Santa Clara entered an order in relation to the Brown action directing
the Company to, within 10 days, (i) deposit with a bank escrow, to be held in
trust, the balance of approximately $3.17 million (to be paid to the Former
Executive in two installments of $1,585,000 each on October 28, 1994 and 1995)
under the Promissory Note and (ii) indemnify the Former Executive for legal fees
and expenses allegedly incurred in the amount of approximately $364,000, and to
continue to indemnify him for legal fees and expenses, as he contends is
required by and subject to the provisions of the Settlement Agreement. In
connection with and using the proceeds from a bank line of credit and the
private placement of convertible subordinated debentures, the Company paid the
October 28, 1994 installment under the Promissory Note and deposited in an
account with a bank the remaining principal and interest balance of $1,585,000
provided for thereunder as restricted cash available to satisfy future payment
obligations as may be required to be paid under the Promissory Note. Since the
Company believes the Former Executive is indebted to the Company in an amount in
excess of the amount of the final payment on the Promissory Note, and the
Company, as well as the plaintiffs in the Mills and Brown actions, are seeking
rescission of the Settlement Agreement, in lieu of making the final note
payment, the Company continues to hold the balance in a separate account pending
the outcome of the litigation. The Company appealed the indemnification for
legal fees and expense portion of the decision, and, on September 26, 1995, the
appellate court entered an order reversing the lower court's decision and
sustaining the Company's position. On December 26, 1995, pursuant to court
order, the sum deposited as security for the appeal of $546,000 was returned to
the Company.
Company's Claim Against Former Officer and Others
On October 6, 1993, the Company filed in the United States District Court
for the Northern District of California, a complaint against the Former
Executive and certain other defendants, including certain of the plaintiffs in
the Mills and Brown actions. The Court granted defendants' motion to dismiss
various portions of the complaint, and, on May 25, 1994, at the Company's
request, dismissed the action without prejudice. On June 10, 1994, the Company
filed a similar suit as a cross-complaint in the Brown action against the Former
Executive and certain of the defendants in the Federal action. The Company's
cross-complaint is in its third amendment as the result of the defendants'
successful demurrer to certain causes of action alleged by the Company,
including those based on violation of, and conspiracy to violate, RICO and civil
conspiracy. The Company's most recently filed cross-complaint alleges breach of
contract, promissory fraud, constructive fraud, defamation, conspiracy, breach
of fiduciary duty, abuse of process, interference with contract, interference
26
<PAGE>
with prospective economic advantage, and violation of California Corporation
Code Section 15402. It seeks compensatory and punitive damages, trebling of
certain damages, indemnification, rescission of the Settlement Agreement,
rescission of a consulting agreement between the Company and another former
employee and defendant and certain injunctive relief. The cross-defendants have
answered the cross-complaint.
SEC Investigation
Commencing in July 1993 the Company became involved in an investigation by
the Commission relating to certain accounting, public reporting and other
matters. As a result of this investigation, in August 1994, the Company elected
to make certain revisions in its 1992 and 1993 financial statements. On
September 26, 1994, pursuant to settlement offers by the Company and two of its
officers, in which neither it nor they admitted or denied any wrongdoing, the
Commission issued an order (the "Order") finding that the Company had violated
certain provisions of the Securities Act of 1933 and the Securities Exchange Act
of 1934 and certain rules thereunder and that the two officers, by virtue of
their positions in the Company and consequent responsibility for certain matters
underlying the investigation, were a cause of certain of the Company's
violations. The Order contained no finding that the Company or any of its
officers or directors or employees, including the two officers, knowingly or
intentionally committed any violations of laws, and the Commission imposed no
fines or penalties on the Company or any individuals. The settlement was entered
into without any admission or denial of wrongdoing. The Company believes that
the Order resolves the Commission's investigation; however, there is no
assurance that the Company will not be subject to further investigations or
litigation related to this matter (see Class Action Suit below).
Class Action Suit
On February 23, 1995, two shareholders of the Company owning an alleged
aggregate of 3,161 shares of the Company's common stock filed a suit in the
United States District Court for the Northern District of California. The suit
seeks to proceed as a class action suit and purports to be based on the Order
issued by the Commission on September 26, 1994. The Company, certain current and
former officers and directors and certain of its investment bankers, attorneys
and independent accountants were named defendants. The complaint alleges
violations of Federal and state securities laws and seeks monetary damages in an
unspecified amount and equitable relief based on alleged misrepresentations
contained in a registration statement and a prospectus filed with the Commission
and alleged fraudulent acts and practices of the defendants. A motion to dismiss
the complaint was filed by the defendants. Motions to dismiss the complaint have
been granted with respect to certain claims, granted with leave to amend with
respect to other claims and denied with respect to the scienter based securities
laws claims against the Company and two of its officers. Plaintiffs have filed
an amended complaint against the Company, four of its former and current
officers and its independent accountants. A motion to dismiss the amended
complaint with respect to the independent accountant has been granted, and a
motion to dismiss with respect to other defendants was denied. The Company
believes the amended complaint is without merit and is defending the law suit. A
decision on motions to certify and decertify the class action is pending.
27
<PAGE>
Investigations of Billing Practices; Qui Tam Suit
On May 6, 1994, the Company was subpoenaed to furnish certain documents to
the Department of Health and Human Services ("HHS") with respect to the
Company's Medicare and Medicaid billing practices. On July 18, 1994, the Company
was subpoenaed to furnish certain documents to the Department of Defense with
respect to the Company's Civilian Health and Medical Program of Uniformed
Services ("CHAMPUS") billing practices. The Company believes these matters
relate to the investigations of such practices being conducted with respect to
other laboratories. On August 28, 1995, the Company was notified that a Qui Tam
action had been filed by two former employees under the False Claims Act. The
Company believes the Qui Tam action and billing investigations are related. The
investigations relate to billing certain panels and profiles, adding tests to
recognized panels and profiles, billing for tests deemed not to be medically
necessary, improper coding, billing for tests not performed, double billing and
other alleged improper practices. During the fourth quarter of 1995, as a result
of correspondence and discussions with government agencies relating to certain
issues under investigation, the Company recorded a charge of approximately
$2,000,000. The Company has produced the documents subpoenaed by the government
agencies and is currently engaged in discussions with representatives of the U.
S. Department of Justice and HHS regarding the investigations with the objective
of bringing the matter to closure.
As a consequence of the Company's review of the reimbursements it has
received from Medicare with respect to chemistry panels and certain questions
raised during the investigation, the Company determined that Medicare overpaid
the Company approximately $960,000 with respect to matters that were not the
subject of the original investigations. This amount was charged against net
revenues for the three months ended September 30, 1995. The Company repaid
$350,000 of this amount during 1995 and is repaying the remaining balance in
monthly installments of $50,000 commencing January 2, 1996.
Other Suits
Members of the Company's current management are defendants in certain legal
actions, including the actions described above, that have been brought by former
employees and shareholders of the Company. These actions are believed to be
without merit and are being defended with the Company's assistance.
Additionally, the Company is involved in various other lawsuits and legal
matters in the ordinary course of business. It is the opinion of management that
the ultimate resolution of these lawsuits and legal matters will not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
28
<PAGE>
Item 3. Defaults Upon Senior Securities
At June 30, 1996, the Company's outstanding borrowings under the Line of
Credit were $7.7 million which was substantially in excess of its available Line
of Credit. Additionally, the Company was in default of all the financial
covenants under the Line of Credit. The Line of Credit expired on April 20, 1996
and has not been renewed. On June 4, 1996, the Company entered into an amendment
to the Line of Credit agreement (the "Amended Agreement") with its bank (see
Note 5 of Notes to Condensed Consolidated Financial Statements). Subject to the
terms of the Amended Agreement and in accordance with the terms of the debenture
agreement (the "Debenture Agreement") (see Note 6 of Notes to Condensed
Consolidated Financial Statements), the Company is prohibited from making any
further payments of accrued interest or principal on account of the convertible
subordinated debt. As a result, the Company ceased making interest payments to
the debenture holders. Such nonpayment is an event of default under the
Debenture Agreement which resulted in the assessment of interest on any unpaid
interest and reductions to the conversion price of the Debentures. Interest
expense has been recorded and is included in accrued expenses at June 30, 1996.
The Amended Agreement further states that the bank will forbear from exercising
its remedies under the Line of Credit and forbearance agreements until August
15, 1996, notwithstanding the Company's existing defaults. On August 14, 1996,
the Company entered into a forbearance agreement with the bank which includes an
extension of the forbearance period to September 15, 1996. Upon termination of
the forbearance period, the bank may, without notice to the Company, exercise
any available remedies under the Line of Credit and forbearance agreements. If
the Company is unable to obtain an additional forbearance or a revised or
replacement line of credit, certain provisions of the Debenture Agreement could
become effective including provisions with respect to future payments to
Debenture holders and reductions to the conversion price.
As of June 30, 1996, the Company was also in default of the minimum
consolidated net worth criteria under the Debenture Agreement. The Company is
attempting to obtain a waiver of default from the Debenture holders. There can
be no assurance that such waiver will be obtained. Additionally, compliance with
the terms of the Amended Agreement with respect to nonpayment of accrued
interest or principal on account of the Debentures constituted an event of
default under the Debenture Agreement. Interest payments may be deferred until
such time that events of default on the Line of Credit are cured or waived.
There can be no assurance that such waiver will be obtained. If the Company is
unable to obtain a waiver of default, the Debenture holders have the option, in
addition to other remedies available to them, to declare all Debentures to be
due and payable together with interest accrued thereon. Should the Debenture
holders exercise such option, the convertible subordinated debt will then be
classified as current liability. In the event that the bank and Debenture
holders exercise remedies available to them, other financing will have to be
secured in order for the Company to continue its operations. There can be no
assurance that such other financing will be available or, if available, will be
on terms acceptable to the Company.
29
<PAGE>
Item 4. Submission of Matters to a Vote of Securities Holders
The following proposals were adopted at the Company's Annual Meeting of
Shareholders held on May 21, 1996 by the margin indicated:
To ratify the appointment of Price Waterhouse as the Company's independent
auditors for 1996 --
VOTES
-------
FOR 6,166,315
AGAINST 25,277
ABSTAIN 5,375
BROKER NON-VOTE 0
At the meeting, directors were also elected. Following are the names of such
directors and the votes cast for and withheld for their election --
VOTES
VOTES WITHHELD
------- ----------
Henry E. Bose 6,081,893 115,074
Robert J. Cresci 6,080,994 115,973
Stephen B. Kass 6,079,676 117,291
Stephen P. Monticelli 6,091,994 104,973
William E. Neeley, M.D. 6,090,111 106,856
Henry W. Poett III 6,081,994 114,973
Donald R. Stroben 6,091,994 104,973
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 -- Asset Purchase Agreement dated as of May 16, 1996 among the
Registrant, Rocel Clinical Diagnostics, Inc., Celia Blando, and Romeo
Torres.
Exhibit 10.2 -- Amended Line of Credit agreement with Silicon Valley Bank
signed by the Company on June 4, 1996.
Exhibit 10.3 -- Forbearance Agreement with Silicon Valley Bank signed by
the Company on August 14, 1996.
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
On June 7, 1996, the Company filed a Current Report (Form 8-K) under Item 5
with respect to a press release issued by the Company announcing an agreement
for the Company to acquire Medical Science Institute ("MSI") a clinical
laboratory located in Burbank, California. On May 1, 1996, the Company issued a
second press release announcing the termination of the agreement for the Company
to acquire the outstanding shares of MSI. The stock purchase agreement was an
integral part of the overall agreement for the Company to acquire MSI. The
second press release was inadvertently dated May 23, 1996; it should have been
dated May 31, 1996, the date it was issued.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERIS LABORATORIES, INC.
By: /s/ Thurman Jordan
--------------------------------------
Thurman Jordan
Senior Vice President - Finance
(Duly authorized Officer and Principal
Financial and Accounting Officer)
Date: August 16, 1996
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EXHIBIT INDEX
Exhibit
Number Document
- ------- --------
10.1 Asset Purchase Agreement dated as of May 16, 1996 among
the Registrant, Rocel Clinical Diagnostics, Inc., Celia
Blando, and Romeo Torres. (Exhibit G to this exhibit is
currently not available for filing and is anticipated to be
filed with the Quarterly Report on Form 10-Q for the period
ended September 30, 1996.)
10.2 Amended Line of Credit agreement with Silicon Valley Bank
signed by the Company on June 4, 1996.
10.3 Forbearance Agreement with Silicon Valley Bank signed by the
Company on August 14, 1996.
27 Financial Data Schedule
33
ASSET PURCHASE AGREEMENT
This Agreement is made as of May 16, 1996, by and among MERIS LABORATORIES,
INC., a California corporation with offices at 2890 Zanker Road, San Jose,
California 95134 (the "Purchaser"), and ROCEL Clinical Diagnostics, Inc., a
California corporation (the "Seller") with offices at 2470 Alvin Ave. #7, San
Jose, California 95121, and CELIA BLANDO, and ROMEO TORRES, individuals
(collectively the "Shareholders"). The Seller and the Shareholders are sometimes
referred to herein collectively as the "Sellers."
A. The Seller is in the business of providing commercial clinical
laboratory services (the "Business").
B. The Shareholders own all of the partnership interests in the Seller.
C. The Seller desires to sell and the Purchaser desires to purchase certain
of the assets relating to the Business.
NOW, THEREFORE, in consideration of the mutual agreements, representations
and warranties contained in this Agreement, the parties agree as follows:
1. Sale and Purchase of Purchased Assets.
a. Purchase and Sale. Subject to the terms and conditions contained in this
Agreement, at the Closing (as defined below) the Seller shall sell, assign,
transfer and convey to the Purchaser, free and clear of all liens and
encumbrances, and the Purchaser shall purchase from the Seller, subject to
Section 1(b) below, the following tangible and intangible personal property
owned by the Seller and used in, derived from or necessary to the operation of
the Business (collectively, the "Purchased Assets"). Without limiting the
foregoing, the Purchased Assets shall be deemed to include the following:
(i) The list of clients and payors of the Business as set forth in Exhibit
A hereto (the "Customer List"), and the continuing business relationships with
such parties that relate to the Business;
(ii) All right, title and interest in the equipment, furniture, fixtures,
vehicles, computers and telecommunications equipment listed and described in
Exhibit B hereto (the "Equipment");
(iii) All of the Seller's rights under the leases, service contracts and
other agreements listed on Exhibit C hereto (the "Assigned Contracts"),
commencing as of the Closing Date;
(iv) All patents, trademarks, trade names, business names, service marks,
trade secrets, logos and copyrights, and all applications and registrations
therefor, which relate to the Business;
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(v) All prepaid expenses, deposits (including, without limitation, deposits
under the Assigned Contracts), supplies, reagents and inventory relating to the
Business; and
(vi) Work in process of the Business with respect to accessions received
prior to the Closing.
b. Property Excluded. The Purchased Assets shall not be deemed to include
any of the following assets of the Seller:
(i) Cash, other forms of bank deposits and stock, other securities and
accounts receivable; and
(ii) Personal property of the Seller which is not necessary to the
Business.
c. Liabilities. Except as expressly provided herein with respect to the
Assigned Contracts, Purchaser shall not assume, or take title to the Purchased
Assets subject to, or in any way be liable or responsible for, any liabilities
or obligations of any kind of the Sellers and the Sellers shall continue to
remain responsible for the same. Without limiting the generality of the
foregoing, the Purchaser shall not assume or take title to the Purchased Assets
subject to any of the following: (i) Except as specifically included in the
Assigned Contracts, any obligations of the Seller outstanding on the Closing
Date or arising after the Closing Date;
(ii) Any liability or obligation of the Sellers arising from claims for
personal injury (including death) or damage to property, including (without
limitation) in respect of any laboratory testing services provided by the
Sellers or any negligence, malpractice or other wrongful action in connection
therewith;
(iii) Any liability or obligation of the Seller, or any of their employees,
for any federal, state, local or foreign income, sales, use and other taxes,
including, without limitation, any of such taxes arising out of or in connection
with the purchase of the Purchased Assets by the Purchaser hereunder;
(iv) Any liability or obligation in respect of any plan, agreement,
arrangement or understanding under which benefits or compensation are provided
by the Seller for the employees of the Business (including but not limited to,
any contract or other obligation for health insurance, accrued vacation,
severance pay or other benefits, or any commissions or revenue or profit sharing
or other compensation for or on sales of accounts on the Customer List);
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(v) Any liability or obligation of the Seller based upon or arising under
any contract or agreement existing prior to or at the time of Closing, including
any contract with anyone on the Customer List for the provision of laboratory
testing services, other than pursuant to an Assigned Contract, from and after
the Closing Date;
(vi) Any lien, encumbrance, security interest or charge of any nature
whatsoever; or
(vii) Any liabilities or obligations arising from litigation to which
either of the Sellers is or would be a party that is pending, threatened or
based upon facts that arise prior to the Closing.
d. Closing and Closing Date. Unless otherwise agreed by the parties, the
consummation of the transactions contemplated by this Agreement shall take place
at a closing (the "Closing") to be held at the offices of the Purchaser, at the
address listed above, at the close of business (which shall be no later than
11:30 p.m. local time), on May 16, 1996, or such other time or date as the
Seller and the Purchaser shall mutually agree, such time and date being referred
to herein as the "Closing Date." At the Closing, (i) the Purchaser and each of
the Sellers shall enter into the Non-competition Agreement in the form attached
hereto as Exhibit D (the "Non-competition Agreement"), (ii) the Seller shall
deliver to the Purchaser an executed Bill of Sale in the form attached hereto as
Exhibit E, evidencing the purchase and sale of the Purchased Assets, and (iii)
the Sellers shall deliver to the Purchaser all title documents relating to the
Purchased Assets, duly executed or endorsed for transfer to the Purchaser to the
Purchaser's reasonable satisfaction. The Non-competition Agreement and the Bill
of Sale are referred to herein collectively as the "Related Agreements".
e. Assumption. Effective upon the Closing, the Purchaser will assume the
Assigned Contracts, only with respect to the obligations of the Seller arising
thereunder from and after the later of the Closing Date or the date of the
written assignment.
2. Purchase Price; Terms of Payment.
a. Purchase Price. The purchase price to be paid for the Purchased Assets
and the related covenants set forth in the Related Agreements (the "Purchase
Price") shall consist of the following: (i) the Closing Payment (as described in
Section 2(b) below); and (ii) the Contingent Payments (as described in Section
2(c) below).
b. Closing Payments. As part of the Purchase Price, the Purchaser shall pay
to the Seller the amount of five thousand dollars ($5,000) (the "Closing
Payment").
c. Contingent Payments
3
<PAGE>
(i) Terms of Payment. As part of the Purchase Price, the Purchaser also
will (subject to the conditions set forth herein) make eight (8) additional
payments (each a "Contingent Payment") on the basis of Net Collections (as
defined below) and Net Collections Per Accession (as defined below) for each of
the three (3) full calendar month periods (each, a "Revenue Period") commencing
June 1, 1996. The Contingent Payment for each Revenue Period shall be made by
bank check delivered by the Purchaser no later than thirty (30) days following
the end of such Revenue Period.
(ii) Computation of Amounts. The Contingent Payment for each Revenue Period
shall be equal to the amount of Net Collections for such Revenue Period
multiplied by (A) twenty five percent (25%) for those Revenue Periods in which
Net Collections per Accession equal or exceed $40.00, or (B) twenty percent
(20.0%) for those Revenue Periods in which Net Revenue per Accession are equal
to or greater than $30.00 but less than $40.00; provided that no Contingent
Payment shall be due for any Revenue Period for which Net Collections total less
than $90,000 or Net Collections Per Accession are less than $30.00.
(iii) Definitions. For the purposes of this Section 2, "Net Collections"
for any Revenue Period means cash collections (net of refunds and adjustments)
from Active Accounts (i.e., those identified as "Active Accounts" on the
Customer List) for services performed since March 26, 1996 and until the end of
such Revenue Period; provided that Net Collections for any given Revenue Period
will first exclude any portion of cash collections for an Active Account which
represents collections from billings of the Purchaser for clients of both the
Seller and the Purchaser prior to the Closing (based upon the average charges
during the three months preceding the Closing as indicated on the Customer
List); and provided further that with respect to any account for which average
monthly billings for the three (3) full calendar months prior to the Closing is
less than $200.00 (which are so identified on the Customer List), then Net
Collections for such accounts will exclude amounts received by Meris in excess
of the Maximum Collection amount shown on the Customer List. "Net Collections
Per Accession" for any Revenue Period means Net Collections for such Revenue
Period divided by the total number of accessions processed during such Revenue
Period, as determined in accordance with the Purchaser's standard billing
procedures. "Accession" means a patient encounter regardless of the number of
tests ordered for such patient or the location where such tests are performed.
The Purchaser shall count the Accession in the Revenue Period in which the
primary payment is received on such Accession. (i.e., if a subsequent payment
such as a patient copay is received, the Accession will not be counted again).
(iv) No Representations. The Seller acknowledges and agrees that the
Purchaser has made no representation or warranty with respect to the amount of
Net Collections or Net Collections Per Accession to be received after the
Closing, and that the Purchaser will be entitled, in its sole discretion, to
determine the terms, including pricing and special services, if any, to any
account.
4
<PAGE>
(v) Accounting. The Purchaser shall provide a monthlyreporting of the gross
charges billed and Net Collections received by the Purchaser for the clients on
the Customer List. The Seller and its representatives shall be entitled to
review those books and records of the Purchaser relating to the determination of
each Contingent Payment.
d. Allocation of Purchase Price. The Purchase Price shall be allocated as
provided in Exhibit F hereto for purposes of complying with the requirements of
Section 1060 of the Internal Revenue Code of 1986. Each party hereto agrees to
prepare its federal and state income tax returns for all current and future tax
reporting periods and file Form 8594 (and corresponding state forms) with
respect to this transaction in a manner consistent with the allocations set
forth in said Exhibit F. If any state or federal taxing authority challenges
such allocation, the party receiving notice of such challenge shall give the
other prompt written notice of such challenge, and the parties shall cooperate
in good faith in responding to it in order to preserve the effectiveness of such
allocation, and shall take no position in any tax proceeding inconsistent
therewith. The allocation set forth on Exhibit F assumes a total purchase price
of $300,000; in the event that the actual Purchase Price shall be higher or
lower than such amount, an equivalent adjustment shall be made in the portion of
the Purchase Price allocated to the Client List and Goodwill.
e. Taxes. The Seller shall pay all sales, use, transfer, excise or other
similar taxes, if any, arising out of the transfer of the Purchased Assets, or
otherwise as a consequence of the transactions contemplated by this Agreement.
3. Representations and Warranties of the Sellers. Each of the Sellers,
jointly and severally, represents and warrants to the Purchaser that:
a. Organization. The Seller is a corporation duly organized, validly
existing and in good standing under the laws of the State of California and has
the requisite corporate power and authority to own, lease and operate its
properties and to transact its business as it is now being conducted, holds all
licenses and permits known by the Seller to be necessary and required therefor,
and is duly qualified or licensed to do business and is in good standing in each
place and jurisdiction where the nature of the business conducted by it or the
ownership, lease or operation of its properties requires such license or
qualification. The Seller has no subsidiaries and holds no equity investment in
any other person or entity. The Shareholders own of record and beneficially all
of the stock or other interests of the Seller, and no person has any right to
acquire any securities or interests of the Seller.
b. Title to Purchased Assets. The Seller has and will convey on the Closing
Date full, absolute, good and marketable title to the Purchased Assets, free and
clear of all security interests, mortgages, liens (including, but not limited
to, liens with respect to taxes), attachments, orders of court, rights of
redemption, debts, claims, charges, or other encumbrances of any kind whatsoever
and not subject to any continuing commission, profit or revenue sharing or other
compensation contract or obligation that could apply to the Purchaser or the
Purchased Assets.
5
<PAGE>
c. Due Authority; Valid and Binding Agreements. The Seller has the power
and authority to enter into and be bound by the terms and conditions of this
Agreement and the Related Agreements and to carry out its obligations pursuant
hereto and thereto. Each of this Agreement and the Related Agreements is a
legal, valid and binding obligation of the Seller, enforceable against the
Seller in accordance with its terms.
d. No Conflicts or Violations. Neither the execution and delivery of this
Agreement and the Related Agreements nor the consummation of the transactions
contemplated hereby and thereby will (i) conflict with or result in any
violation of or constitute a default under any agreement, mortgage, bond,
indenture, franchise or other instrument or obligation to which either of the
Sellers are a party or by which they are bound, (ii) result in the creation of
any lien or other encumbrance upon the Purchased Assets pursuant to the terms of
any such mortgage, bond, indenture, franchise or other instrument or obligation,
(iii) violate any judgment, order, injunction, decree or award of any court,
administrative agency or governmental body against, or binding upon, either
Seller or upon any of the Purchased Assets, (iv) constitute a violation by
either Seller of any law or regulation of any jurisdiction in which such Seller
conducts its business, (v) result in the breach of any of the terms or
conditions of, or constitute a default under, or otherwise cause any impairment
of, any permit or license or other governmental authorization held by the
Seller, or (vi) result in any liability or expense to the Purchaser under any
collective bargaining agreements to which the Seller is a party.
e. Customer List. The Customer List is a true and correct list of the names
and addresses of all customers, clients and payors of the Business as of the
date hereof and (as shall be supplemented by the Seller in writing) as of the
Closing, and, to the best of each Shareholder's knowledge, the Seller maintains
good continuing business relations with each client and payor thereon. To the
knowledge of the Shareholders and except as disclosed in writing to the
Purchaser, since January 1, 1996, there has been no occurrence or circumstance
in which (A) any customer, client or payor listed on the Customer List has
canceled or significantly curtailed its purchase or referral of laboratory
testing services from the Seller, (B) any customer, client or payor having a
contractual relationship with the Seller which by its terms is subject to
renewal within twelve months of the date of this Agreement has informed either
Seller that he, she or it does not intend to renew such contractual
relationship, or (C) any customer, client or payor contract for the provision of
testing services has been lost or not renewed as a result of such customer,
client or payor becoming party to any managed care or similar arrangement. None
of the Sellers is aware that any client or payor listed on the Customer List (A)
intends to cease or reduce the purchase or referral of testing services
following the Closing, or (B) is subject to any agreement or understanding which
would prohibit such customer, client or payor from purchasing additional
clinical laboratory testing services from the Purchaser following the Closing
Date. Seller is not a party to any agreement or understanding with any HMO, IPA,
PPO, insurance provider, third party payor or other similar entity for the
provision of laboratory testing services that is not listed on Exhibit C.
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f. Financial Information; Asset Listing. The financial statements of the
Business for the fiscal year ended December 31, 1995, and for the four (4) month
period ended April 30, 1996, attached to this Agreement as Exhibit G or provided
by Seller before September 30, 1996 (including, in each case, a balance sheet
and income statement) are complete and correct and have been prepared in
accordance with the cash basis method of accounting applied on a consistent
basis throughout the periods indicated and with each other, and fairly and
accurately set forth the operating results of the Seller as of the dates and for
the periods indicated therein. Since the date of such financial statements,
there has not been any adverse change in the revenues from that reflected in
such financial statements. The revenues set forth in such financial statements
represent only the revenues from those customers and customer accounts relating
to the Business and included in the Customer List. Exhibit G also includes an
accurate and complete schedule of the Seller's gross charges, net collections
and accessions from customers and payors on the Customer List for each calendar
month in the twelve (12) months ended April 30, 1996.
g. No Violation of Law.
(i) The Business has been conducted in compliance with all applicable laws
and regulations of federal, state and local governmental authorities (including
without limitation laws relating to Medicare and Medicaid). The Seller
possesses, and is in compliance with, all licenses, permits, approvals and other
governmental authorizations necessary to the conduct of the Business (a listing
of which licenses, permits and approvals has been provided to the Purchaser). No
governmental authority which licenses or audits the Sellers has conducted any
audit during the last five (5) years.
(ii) The Seller has complied with all applicable Blue Cross/Blue Shield,
Medicare, Medicaid, CHAMPUS and all other third party payor billing policies,
procedures, limitations and restrictions (including, but not limited to, the
laboratory billing restrictions in Section 1833(h) of the Social Security Act,
42 U.S.C. ss. 13951(h)).
(iii) There is no pending or, to the knowledge of either Shareholder,
threatened recoupment or penalty action or proceeding against the Seller under
the Medicare or Medicaid programs or by Blue Cross/Blue Shield or by any other
third party payor.
(iv) No person has an ownership interest in the Business or any
compensation, lease, rebate, discount or other remuneration arrangement with the
Sellers triggering the restrictions of the provisions of the Stark Act, Section
1877 of the Social Security Act, 42 U.S.C. ss. 1395nn (as the same has been
amended by the Omnibus Budget and Reconciliation Act of 1993) or in violation of
the provisions of the Medicare-Medicaid Anti-Fraud and Abuse Amendments, Section
1128(b) of the Social Security Act, 42 U.S.C. ss. 1320a-7b(b) or of California
Business and Professions Code Section 650 or California Labor Code Section 3215
(as the same have been amended by the Physician Ownership and Referral Act of
1933).
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(v) The Seller has fully complied with the requirements of theStark Act
(including without limitation submission of the reports and completion of the
laboratory reference form required by such Act).
(vi) Neither the Seller or its agents, or managing employees (as defined as
42 U.S.C. ss. 1320a-5), has been excluded or is subject to exclusion from
participation in federal or state health care programs pursuant to Section 1128
of the Social Security Act, 42 U.S.C. ss. 1320a-7 or related regulations or
other federal or state laws and regulations and no such action is pending or has
been threatened against such persons.
(vii) Neither the Seller or its employees, agents or independent
contractors, has participated in or caused (i) any false statement or omission
or misrepresentation of fact in any application or claim for payment under
Medicare or a state application or claim, or (ii) any application or claim for
payment otherwise in violation of Section 1128A, 1128B or 1877 of the Social
Security Act, 42 U.S.C. ss.ss. 1320a-7a, 1320a-7b and 1395nn; the False Claims
Act, 31 U.S.C. ss. 3729 et seq.; the False Statements Act, 18 U.S.C. ss. 2002;
the Program Fraud Civil Penalties Act, 31 U.S.C. ss. 3801 et seq.; or related
regulations or other federal or state laws and regulations.
h. Litigation, etc. There are no suits, actions or administrative,
arbitration, unfair labor practice, worker's compensation or other proceedings
or governmental investigations, pending or threatened against or relating,
directly or indirectly, to the Purchased Assets or the Business, and there are
no judgments, orders, injunctions, decrees, stipulations or awards (whether
rendered by a court, administrative agency or by arbitration, pursuant to a
grievance or other procedure) against or relating to either the Seller or the
Purchased Assets which could result in a material adverse effect, or any lien or
other encumbrance, on the Purchased Assets.
i. Brokers, Finders and Consultants. Each of the Sellers jointly and
severally shall indemnify and defend the Purchaser and hold it harmless against
any claims for any expenses, fees or commissions of any broker, finder or
consultant retained by or working on behalf of either of the Sellers.
j. Assignability of Contracts; No Default. The Seller has no reason to
believe that assignments or other transfers of the Assigned Contracts (on terms
at least as favorable to the Purchaser) will not be obtained for transfer to the
Purchaser in accordance with Section 5(f) hereof at or prior to the Closing,
without default, penalty or other similar restriction. No default or condition
permitting declaration of default exists with respect to any of the Assigned
Contracts. The Seller is not aware of any payments (other than payment for rent
under Assigned Contracts relating to leased property) that will be required in
the future to be made under the Assigned Contracts.
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k. Certain Schedules. The Purchaser's test menu (including prices)that has
been provided to the Seller will be appropriate to service the accounts on the
Customer List, except for the modifications for custom panels, individual tests
and special client and/or patient prices listed on Exhibit H attached hereto.
There are no custom panels or special pricing arrangements with accounts on the
Customer List that are not reflected in such Exhibit H. The description of the
Seller's courier routes, pick up times and pick up locations provided verbally
or in writing to the Purchaser are accurate and complete.
l. Taxes. All sales and use taxes, real and personal property taxes, gross
receipts taxes, documentary transfer taxes, employment taxes, withholding taxes,
unemployment insurance contributions and other taxes or governmental charges of
any kind, however denominated, for which the Purchaser could become liable as a
result of acquiring the Purchased Assets or which could result in a lien on or
charge against the Purchased Assets (collectively, "Taxes") have been or will be
paid for all periods prior to and including the Closing Date. The Sellers have
duly and timely filed (or will file prior to the Closing Date) all returns and
reports of Taxes required to be filed prior to such date. There are not, and as
of the Closing will not be, any liens for Taxes on any of the Purchased Assets
(other than liens for Taxes not yet due and payable). The Seller has complied
with all record keeping and tax reporting obligations relating to income and
employment taxes due with respect to compensation paid to Employees. The Sellers
are not "foreign persons" within the meaning of Section 1445(f)(3) of the Code.
There are no pending or threatened proceedings with respect to Taxes. No
agreement or arrangement regarding compensation which will be assumed by the
Purchaser provides for any payments which could result in a nondeductible
expense to the Purchaser pursuant to Section 280G of the Code or an excise tax
to the recipient of such payment pursuant to Section 4999 of the Code.
m. Inventory. As of the Closing Date, the Purchased Assets shall include an
inventory of drawing supplies (including, without limitation, drawing supplies
located in client offices) that is sufficient for at least thirty (30) days of
operations at the same volume as for the thirty (30) day period preceding the
Closing Date.
n. Health, Safety, Employment and Environmental Matters.
(i) The Seller is in compliance with all federal, state, local and foreign
health and occupational safety laws and all federal, state, local and foreign
laws related to employment and employment practices, compensation and benefits,
which are applicable to the Seller or the Business, and the Sellers have
conducted the Business in compliance with the foregoing provisions.
(ii) The Seller is in compliance with the terms and conditions of all
environmental permits, licenses, and other authorizations required under
applicable laws relating in any way to pollution of the environment, and the
Seller has conducted the Business in compliance with the foregoing provisions.
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(iii) The Seller is in compliance with all applicable federal, state, local
and foreign laws relating to emissions, discharges, and releases of hazardous
materials into the environment and the generation, treatment, storage,
transportation and disposal of hazardous wastes, including, without limitation,
any applicable provisions of the Resource Conservation and Recovery Act of 1976
or the Comprehensive Environmental Response, Compensation and Liability Act of
1980, and the Seller has conducted the Business in compliance with the foregoing
provisions.
(iv) There are no conditions at, on, under or related to, any real property
of the Seller or at which they conduct or have conducted any of their operations
or business which presently or potentially pose a significant hazard to human
health or the environment, whether or not in compliance with law, and there has
been no production, use, treatment, storage, transportation or disposal by the
Seller of any Hazardous Substance, as hereinafter defined, at or on such real
property nor any release or threatened release by the Sellers of any Hazardous
Substance, pollutant or contaminant into or upon or over the real property or
into or upon ground or surface water at or within 2,000 feet of the boundaries
of such real property except in compliance with applicable law. No Hazardous
Substance is now or ever have been stored by the Seller on such real property in
underground tanks, pits or surface impoundments except in compliance with
applicable law.
(v) No action, investigation, proceeding, permit revocation, permit
amendment, writ, injunction or claim is pending, nor has the Seller received any
notice of any of the foregoing, concerning or relating to (i) the use, storage,
sale or disposal of any Hazardous Substance related to or affecting the
Purchased Assets, (ii) the exposure of any person to any Hazardous Substance as
a consequence of any activity related to or affecting the Purchased Assets or
(iii) the presence of any Hazardous Substance in, on or under any of the
Seller's facilities or any property owned, leased or occupied by the Seller
which is related to or affecting the Purchased Assets.
(vi) For purposes of this Agreement, "Hazardous Substance" shall mean any
environmentally hazardous or toxic substance, material or waste which is
currently regulated as such by any local governmental authority, any state or
the United States Government.
o. Material Misstatements and Omissions. No representation or warranty by
either of the Sellers in this Agreement, any Related Agreement or in any
certificate furnished or to be furnished by either of the Sellers pursuant
hereto or in connection with the transactions contemplated hereby contains or
will contain any untrue statement of a material fact or omits or will omit to
state a material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
4. Representations and Warranties of the Purchaser. The Purchaser
represents and warrants to the Seller as follows:
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a. Organization. The Purchaser is a corporation duly organized and validly
existing under the laws of the State of California and has all requisite power
and authority to own, operate and carry on its business as it is now conducted.
b. Due Authority; Valid and Binding Agreements. The Purchaser has the power
and authority to enter into and be bound by the terms and conditions of this
Agreement and the Related Agreements to which it is a party and to carry out its
obligations pursuant hereto and thereto. Each of this Agreement and the Related
Agreements to which the Purchaser is a party is or, upon execution and delivery
thereof, will be, a legal, valid and binding obligation of the Purchaser, in
each case enforceable against the Purchaser in accordance with its terms. The
execution, delivery and performance by the Purchaser of this Agreement and the
Related Agreements has been authorized and approved by all necessary corporate
action.
c. No Conflicts or Violations. Neither the execution or delivery of this
Agreement and the Related Agreements nor the consummation of the transactions
contemplated hereby and thereby will (i) conflict with or result in any
violation of or constitute a default under any provision of the Purchaser's
Articles of Incorporation or Bylaws or any agreement, mortgage, bond, indenture,
franchise or other instrument or obligation to which the Purchaser is a party or
by which it is bound, (ii) violate any judgment, order, injunction, decree or
award of any court, administrative agency or governmental body against, or
binding upon, the Purchaser or upon the property or business regulation of any
jurisdiction as such law or regulation relates to the Purchaser or the property
or business or the Purchaser, (iii) constitute a violation by the Purchaser of
any law or regulation of any jurisdiction, or (iv) result in the breach of any
of the terms or conditions of, or constitute a default under, or otherwise cause
any impairment of, any permit, license or other governmental authorization held
by the Purchaser or required of the Purchaser to conduct its business.
d. Brokers, Finders and Consultants. The Purchaser shall indemnify and
defend the Sellers and hold each of them harmless against any claims for any
expenses, fees or commissions of any broker, finder or consultant retained by or
working in the Purchaser's behalf.
e. Materials Misstatements and Omissions. No representation or warranty by
the Purchaser in this Agreement or the Related Agreements or in any certificate
furnished or to be furnished by the Purchaser pursuant hereto or in connection
with the transactions contemplated hereby contains or will contain any untrue
statement of a material fact or, omits or will omit to state a material fact
necessary to make the statement therein, in light of the circumstances under
which they were made, not misleading.
5. Interim Agreements.
a. Access; Confidentiality. The Sellers agree to make available all books,
records, facilities, employees and information necessary for the Purchaser to
evaluate thePurchased Assets. Each party hereto shall keep confidential and
shall not make use of any information treated by the other party as confidential
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(including, without limitation, the existence of this Agreement), obtained from
the other party concerning the assets, properties, business or operations of the
other party other than to legal counsel, auditors, board members, consultants,
financial advisers, key employees, lenders and investment bankers where such
disclosure is related to the performance of obligations under this Agreement or
the consummation of the transactions contemplated under this Agreement (all of
whom shall be similarly bound by the provisions of this Section 5(a)), except as
may be required to be disclosed by applicable law. Notwithstanding the
foregoing, the foregoing confidentiality restrictions shall not apply to (i)
information that was in the receiving party's possession prior to receipt from
the disclosing party, (ii) information that becomes generally available to the
public other than as a result of the receiving party's fault or action, (iii)
information that becomes available to the receiving party from some source other
than the disclosing party, provided that such source is under no non-disclosure
obligation, or (iv) information that is developed independently by the receiving
party without reference to the disclosing party's information.
b. Public Announcements. The Purchaser and the Sellers agree to cooperate
in good faith and mutually consent to any press release or public statement with
respect to the existence of this Agreement or the transactions contemplated
hereby, and further agree not to issue any such press release or public
statement prior to consultation with the other, except as may be required by
law; provided, however, that the Purchaser shall be entitled to include
information in any filing with the Securities and Exchange Commission or such
press release or public statement which is reasonably necessary to comply with
the Purchaser's securities law reporting and disclosure requirements or
policies.
c. Interim Operations. The Seller agrees that, from the date of this
Agreement to the Closing Date, the Seller will carry on its activities with
respect to the Purchased Assets and the Business in the ordinary course and in
substantially the same manner as it has prior to this Agreement, and shall take
no action (i) that could diminish the value of the Purchased Assets, or (ii)
that would result in any representation or warranty of the Sellers being untrue
at the Closing Date. The Sellers agree to use their respective best efforts
prior to the Closing Date to cause the retention of all clients and payors on
the Customer List and to maintain the level of service provided to such clients
and payors.
d. Occurrence of Conditions. Each party hereto shall use its best efforts,
or where appropriate cooperate in the efforts of the other party, to cause the
occurrence of the conditions specified in Section 6 and Section 7 of this
Agreement.
e. Non-solicitation Agreement. From the date hereof and until the Closing
Date or the termination of this Agreement, whichever occurs earlier, neither of
the Sellers shall, whether directly or indirectly or through any shareholder,
officer, employee, affiliate, advisor or other consultant, initiate or
participate in any discussion or negotiation relating to, or provide any
information in connection with, any possible sale, directly or indirectly, of
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the Sellers, any of their assets or business (including, without limitation, the
Purchased Assets), to any party other than the Purchaser.
f. Certain Assignments. The Seller shall use their respective best efforts
to obtain assignments to Purchaser of each of the Assigned Contracts on the same
terms or terms more favorable to the Purchaser as currently exist with respect
to the Seller.
g. Employment Arrangements. The Purchaser shall pay the Shareholders a
commission for new accounts that are approved by the Purchaser and commence
service within 90 days after the Closing Date. The commission rate paid shall be
eight percent (8.0%) of Net Collections (as defined in Section 2.c.iii.)
received by Meris for the twelve (12) consecutive months following submission by
the Shareholders of such new account for payment. The Purchaser will have no
obligation to employ any employees of the Sellers after the Closing Date and the
Seller shall be solely responsible for all severance, termination and other
employment-related liabilities.
6. Conditions to Obligations of the Purchaser. Absent a waiver in writing,
all obligations of the Purchaser under this Agreement, except the obligations
set forth in Section 5 and Section 9 hereof, are subject to the satisfaction of
the following conditions, to the Purchaser's reasonable satisfaction, on or
before the completion of the Closing on the Closing Date:
a. Representations, Warranties and Performance. The representations and
warranties of the Sellers contained herein shall be deemed to have been made
again at and as of the Closing Date and shall then be true and correct with the
same force and effect as if such representations and warranties have been made
at and as of the Closing Date; the Sellers shall have performed and complied
with all agreements, conditions and covenants required by this Agreement to be
performed or complied with by the Sellers prior to or at the Closing Date; and
each of the Sellers shall have furnished to the Purchaser a certificate dated
the Closing Date, verifying, in such detail as the Purchaser may reasonably
request, to the fulfillment of the foregoing conditions.
b. Litigation. There shall not be pending any litigation before any court
or governmental agency (i) the outcome of which could reasonably be expected to
have a material adverse affect on the Purchased Assets or their value to the
Purchaser, or (ii) to restrain or prohibit or to obtain damages or other relief
in connection with, or which is related to or arises out of, this Agreement, the
Related Agreements or the transactions contemplated hereby or thereby.
c. Certain Assignments. The assignments of the Assigned Contracts as
described in Section 5(f) hereof shall have been received to the Purchaser's
satisfaction, or the Seller shall have provided the Purchaser with reasonable
assurances that such assignments will be obtained promptly following the Closing
Date.
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d. Absence of Material Changes. There shall not have been any adverse
change in or to the Purchased Assets or revenues obtained or anticipated to be
obtained therefrom. e. Related Agreements. The Sellers shall have executed and
delivered each of the Related Agreements to which they are a party.
f. Approvals. All consents, approvals and filings required under any
applicable law, rule or regulation to be completed or obtained prior to the
transactions contemplated by this Agreement and the Related Agreements shall
have been so completed or obtained, as the case may be.
g. FIRPTA Affidavit. The Seller shall have provided the Purchaser with an
affidavit stating, under penalty of perjury, that the Seller is not a foreign
person and providing such Seller's U.S. taxpayer identification number.
h. Cooperation in Transition. At least five (5) business days prior to the
Closing Date, the Seller shall have provided the Purchaser with an opportunity
to meet with an interview the Seller's employees and representatives of accounts
listed on the Customer List, in order for the Purchaser to familiarize itself
with the operation of the Seller's business and to facilitate the transition of
the Business to the Purchaser.
7. Conditions to Obligations of the Sellers. Absent a waiver in writing,
all obligations of the Sellers under this Agreement, except the obligations set
forth in Sections 5 and 9 hereof, are subject to the satisfaction of the
following conditions, to the Seller's reasonable satisfaction, on or before the
completion of the Closing on the Closing Date:
a. Representations, Warranties and Performance. The representations and
warranties of the Purchaser shall be deemed to have been made again at and as of
the Closing Date and shall then be true and correct with the same force and
effect as if such representations and warranties had been made at and as of the
Closing Date; the Purchaser shall have performed and complied with all
agreements, conditions and covenants required by this Agreement to be performed
or complied with by it prior to or at the Closing Date.
b. Litigation. There shall not be pending any litigation before any court
or governmental agency to restrain or prohibit or to obtain damages or other
relief in connection with, or which is related to or arises out of, this
Agreement, the Related Agreements or the transactions contemplated hereby or
thereby.
c. Related Agreements. The Purchaser shall have executed and delivered the
Related Agreements to which it is a party.
d. Approvals. All consents, approvals and filings required under any
applicable law, rule or regulation to be completed or obtained prior to the
transactions contemplated by this Agreement and the Related Agreements shall
have been so completed or obtained, as the case may be.
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8. Termination; Survival and Effect of Termination.
a. Termination. Anything contained herein to the contrary notwithstanding,
this Agreement may be terminated and the transactions contemplated hereby
abandoned at any time prior to the Closing Date:
(i) By mutual consent of the Purchaser and the Seller;
(ii) By the Purchaser, if any of the conditions set forth in Section 6
shall have become incapable of fulfillment prior to May 30, 1996, through no
fault of the Purchaser and shall not have been waived by the Purchaser;
(iii) By the Seller, if any of the conditions set forth in Section 7 shall
have become incapable of fulfillment prior to May 30, 1996 through no fault of
the Sellers and shall not have been waived by the Sellers;
(iv) By either the Purchaser, on one hand, or the Sellers, on the other
hand, if (A) the other has breached this Agreement in any material respect, (B)
any of the representations and warranties made by the other in Section 3 or
Section 4 of this Agreement (as the case may be) is false or inaccurate in any
material respect, or (C) the Closing does not occur on or before May 30, 1996
(unless such date is extended by mutual agreement), but only if the failure to
consummate such transaction on or before such date did not result from the
failure by the party seeking such termination to fulfill any condition set forth
in Section 5(d), Section 6 or Section 7, as the case may be, which is a
condition precedent to the obligation of the other under this Agreement to
consummate the transactions contemplated hereby; or
(v) Without limiting the foregoing, by the Purchaser if there has been a
material adverse change in the Purchased Assets or the revenue and income
expected to be obtained therefrom.
b. Survival. If this Agreement is terminated prior to Closing and the
transactions contemplated hereby are not consummated at such time as described
above, this Agreement shall become void and of no further force and effect,
except for the provisions of Section 5(a) (relating to the obligations of
confidentiality); Section 5(b) (relating to disclosure); Section 8 (relating to
termination); Section 9(a) (relating to indemnification); Section 9(b) (relating
to arbitration); and Section 10 (relating to certain miscellaneous provisions);
provided, however, that such termination shall not limit any rights or
obligations of any party hereto for breach of this Agreement or any Related
Agreement.
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c. Effect of Termination. Notwithstanding Section 8(b) hereof, if
theSellers terminates this Agreement prior to the Closing pursuant to paragraph
8(a)(iii), 8(a)(iv)(A) or 8(a)(iv)(B) above or if the Purchaser terminates this
Agreement pursuant to paragraph 8(a)(ii), 8(a)(iv)(A), 8(a)(iv)(B) or 8(a)(v)
above, the terminating party shall be entitled to recover from the other party
all reasonable costs and expenses incurred by the terminating party with respect
to the transactions contemplated by this Agreement, including attorneys' and
consultants' fees, as well as any damages or other relief the terminating party
may be entitled to collect by law.
9. Covenants Following Closing.
a. Indemnification.
(i) Indemnification by Seller and the Shareholders. Each of the Seller and
the Shareholders, jointly and severally, agrees to indemnify, defend and hold
the Purchaser harmless from and against any and all losses, claims, demands,
damages, costs and expenses (including without limitation, reasonable attorneys'
fees and disbursements) of every kind, nature and description (collectively
"Claims") based upon, arising out of or otherwise in respect of (A) any
inaccuracy in or any breach of any representation, warranty, covenant or
agreement of the Sellers contained in this Agreement or in any certificate,
document or instrument delivered pursuant to this Agreement (including, without
limitation, any expenses incurred by the Purchaser in connection with any
governmental proceeding or investigation relating to the conduct of the Business
prior to the Closing Date); (B) any claim arising out of or made in connection
with the conduct of the Business prior to the Closing Date; (C) any claim
arising out of or related to the liabilities not expressly assumed by the
Purchaser pursuant to this Agreement (including, without limitation, those
described in Section 1(c) hereof; or (D) any claim arising out of or related to
performance of any Assigned Contract prior to the date of assignment thereof to
the Purchaser. Each of the Sellers agrees that any breach of this Agreement by
the other Seller shall be deemed to be a breach of this Agreement by each
Seller, and that all of the obligations of the Sellers under this Agreement
shall be, in all cases, joint and several. The Purchaser may, at its option (and
without limiting any other rights or remedies available to the Purchaser),
deduct the amount of any Claim described above from any amounts required to be
paid to the Sellers under Section 2(c) of this Agreement.
(ii) Indemnification by the Purchaser. The Purchaser agrees to indemnify,
defend and hold the Sellers harmless from and against any and all Claims based
upon, arising out of or otherwise in respect of (A) any inaccuracy in or any
breach of any representation, warranty, covenant or Agreement of the Purchaser
contained in this Agreement or in any certificate, document or instrument
delivered pursuant to this Agreement; (B) any claim arising out of or made in
connection with the Purchaser's conduct of its business after the Closing Date;
or (C) any claim arising out of or related to performance of any Assigned
Contract following the date of assignment thereof to the Purchaser.
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b. Arbitration. Any dispute arising between the parties with respect to
this Agreement (including, without limitation, in regard to any claim under
Section 9(a) hereof) orany Related Agreement, shall be settled by arbitration
conducted in San Jose, California. If either party wishes to commence an
arbitration hereunder, it shall serve written notice to such effect on the other
party and, within 45 days thereafter, the parties shall mutually select a single
arbitrator to conduct such arbitration from among a list of retired federal and
state trial court judges eligible to serve in such capacity furnished to the
parties by the American Arbitration Association. If the parties are unable to
select an arbitrator by mutual agreement within such period, the arbitrator
shall be selected by the American Arbitration Association in accordance with its
procedures. In conducting the arbitration, the arbitrator shall apply the
Commercial Arbitration Rules of the American Arbitration Association as modified
by any other instructions that the parties may agree upon at the time, except
that each party shall have the right to conduct discovery in any manner and to
any extent authorized by the Federal Rules of Civil Procedure as interpreted by
the federal courts. Costs and expenses, including reasonable attorneys' fees
incurred with respect to the arbitration, shall be borne by the losing party,
unless otherwise determined by the arbitrator based on a showing of good cause
to vary from the usual rule expressed in this sentence. The arbitrator's award
shall be final and unappealable. A judgment upon the award may be entered in any
court having jurisdiction of the parties.
c. Seller's Employees. The Seller agrees that it shall bear sole
responsibility for all amounts due and payable or otherwise arising with respect
to the Seller's employees at and prior to the Closing Date, including but not
limited to, all salaries, wages, commissions, profit and revenue sharing, and
holiday, vacation and severance pay, bonuses and past service credits and shall
have made and remitted, for all periods through and including the Closing Date,
all payroll deductions, remittances and contributions, including, but not
limited to, employees' salaries and wages, commissions, bonuses and
profit-sharing required under contract, any collective bargaining agreements or
applicable laws and regulations.
d. Use of Name. Following the Closing Date, neither of the Sellers shall
use the name "ROCEL" or any variations thereon, except in connection with
winding up of the Business.
f. Transition Support.
(i) The Sellers will use their respective best efforts to assist the
Purchaser in achieving the orderly transition of the Purchased Assets to the
Purchaser, and the Sellers shall cooperate in connection with such transition
(including, without limitation, in providing any introduction to customers,
clients and payors on the Customer List), in order that the Purchaser may
incorporate the Purchased Assets into its existing laboratory operations with no
interruption in service to clients or diminution in quality and no diminution in
the value of the Purchased Assets.
(ii) The Seller shall observe faithfully the terms of all Assigned
Contracts until assignments or transfers thereof have been obtained.
17
<PAGE>
(iii) For a period of four (4) years following the Closing Date, the
Purchaser shall make available such books and records included in the Purchased
Assets as are requested by the Secretary of Health and Human Services, the
Comptroller General of the United States, or their authorized representatives,
pursuant to Section 952 of the Omnibus Reconciliation Act of 1980 (or any
successor or other applicable statute or regulation), in compliance with the
time, place and manner of providing access set forth in such request.
(iv) The Sellers shall provide each other with such information and access
to books and records as may reasonably be requested by the other in connection
with any Claim or the preparation of any returns of Taxes and audits or other
proceedings relating to Taxes.
10. Miscellaneous.
a. Survival of Representations and Warranties. All representations and
warranties of the Purchaser and the Sellers made in this Agreement or in any
certificate, document or other instrument delivered pursuant hereto shall
survive the execution and delivery hereof and the Closing.
b. Fees and Expenses. Subject to the provisions of Sections 8(c) and 9(e)
hereof, each of the parties hereto shall bear its own fees and expenses,
including fees of counsel and accountants, incurred in connection with the
negotiation of this Agreement and the Related Agreements and the consummation of
the transactions contemplated hereby and thereby or otherwise arising out of, or
by reason of, this Agreement or any Related Agreement.
c. Entire Agreement; Third Party Beneficiaries. This Agreement and the
Related Agreements (including the exhibits and schedules hereto and thereto)
constitute the entire agreement between the parties hereto and thereto with
respect to the subject matter hereof and thereof and supersedes all prior and
contemporaneous agreements, understandings, negotiations and discussions,
whether oral or written, of the parties with respect thereto. The parties hereto
acknowledge and agree that no third party (including any employee of the
Sellers) is intended to be a third-party beneficiary of this Agreement or any
Related Agreement.
d. Amendments. No amendment, modification or rescission of this Agreement
or any Related Agreement shall be effective unless set forth in writing executed
by the party sought to be bound thereby.
e. Notices. Any notice given hereunder or under any Related Agreement
(except as otherwise provided therein) shall be in writing and shall be deemed
effective upon the earlier of personal delivery (including personal delivery by
telex or other means), the day after delivery by commercial courier to a
responsible individual or the third day after mailing by certified or registered
mail, postage prepaid, as follows:
18
<PAGE>
(1) If to the Purchaser:
Meris Laboratories, Inc.
2890 Zanker Road
San Jose, CA 95134
(408) 434-9200
Attention: William Neeley, MD, President
1) If to the Sellers:
c/o ROCEL Clinical Diagnostics, Inc.
Celia Blando or Romeo Torres
P.O. Box 7368
Oxnard, CA 93031
or to such other address as any party may have furnished in writing to the other
party in the manner provided above.
f. Assignment. No party may assign this Agreement or any Related Agreement,
nor may any of its rights hereunder be assignable or transferable, in any manner
by a party, without the prior written consent of the other party.
Notwithstanding the foregoing, however, the Purchaser (and its successors) may
assign this Agreement or any Related Agreement and any or all of the Purchaser's
rights and obligations hereunder or thereunder, to another entity (i) if such
entity has at least the same net worth immediately following such assignment as
the Purchaser immediately prior to such assignment, or (ii) in connection with
any sale of all or substantially all of the Purchaser's assets or the sale of at
least a majority of the Purchaser's capital stock, and so long as, in either
case, such entity acknowledges and accepts in writing the obligations assumed
pursuant to such assignment. Any proposed assignment in violation of this
Section 10(f) shall be void. Subject to the foregoing, this Agreement and the
Related Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective transferees, successors, assigns and legal
representatives.
g. Incorporation by Reference. All Exhibits referred to in this Agreement
are by this reference incorporated herein as an integral part hereof.
h. Governing Law. This Agreement and the Related Agreements and the
respective rights and obligations of the parties hereto and thereto shall be
construed under and by the laws of the State of California, without reference to
conflicts of laws principles.
i. Captions. The title to the Sections and subsections of this Agreement
and the Related Agreements are included herein solely for convenience, are not a
part of this Agreement or any Related Agreement and do not in any way limit or
amplify the terms of this Agreement or any Related Agreement.
19
<PAGE>
j. Attorneys' Fees. If any legal action or proceeding is brought to enforce
or interpret this Agreement or any Related Agreement, or because of an alleged
dispute, breach, default or misrepresentation in connection with this agreement,
the prevailing party shall be entitled to reasonable attorneys' fees and costs
in connection with such action or proceeding in addition to all other relief to
which such party may be entitled.
k. No Waiver. It is understood and agreed that no failure or delay by any
party in exercising any right, power, or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any right, power or
privilege be deemed to operate as a waiver of any other right, power or
privilege hereunder.
l. Counterparts. This Agreement and any Related Agreement may be executed
in any number of counterparts, each of which shall be considered to be an
original, but all of which together shall constitute one and the same
instrument.
[SIGNATURE PAGE FOLLOWS]
20
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first set forth above.
PURCHASER: MERIS LABORATORIES, INC.,
a California corporation
By: /S/ William Neeley, M.D.
---------------------------
William Neeley, M.D.
President
SELLER:
ROCEL Clinical Diagnostics, Inc.
a California corporation
By: /s/ Celia Blanda
----------------------------
Title: TECH. DIRECTOR
----------------------------
SHAREHOLDERS:
/s/ Celia Blanda
----------------------------------
Celia Blando, an individual
/s/ Romeo Torres
----------------------------------
Romeo Torres, an individual
21
<PAGE>
LIST OF EXHIBITS
Exhibit A Customer List
Exhibit B Equipment
Exhibit C Assigned Contracts
Exhibit D Non-competition Agreement
Exhibit E Bill of Sale
Exhibit F Purchase Price Allocation
Exhibit G Seller's Financial Statements
Exhibit H Special Panels and Pricing
22
<PAGE>
EXHIBIT A
CUSTOMER LIST
Group A GROUP B
- ------- -------
David Kerwin Chris Mele/Indian Health
E. Leslie Weeks David Shields
Hien-Van Nguyen Burt McDowell
Tung Phan Antoine Pham
Minh-Tam Nguyen Ngai-Xuan Nguyen
Nora Ancheta Thinh Nguyen
Renuka Patel Raphael Chu
Howard Thornton/Infinity Home Care Thuan Luu
John McClain Youbert Kavalian
Kenneth Rebong Chau Minh Nguyen
Marie-Anson Rebong Leticia Lutap
Rom Romero Cao Van Tran
Sam Khieu Rafia Parveen
A. Clients listed in Group A are considered Active for purposes of each
earnout period.
B. Any physician listed in Group B will be considered Active if during the two
(2) month period from June 1, 1996 to July 31, 1996 adjusted gross charges
for that account averages $1,000 per month. Any physician in Group B that
does not fit the above criteria will not be considered Active.
1
<PAGE>
EXHIBIT B
DESCRIPTION OF EQUIPMENT
Purchased Assets:
Tangible purchased assets shall include the following items located in the
remote draw stations:
1. Modesto
1 centrifuge $100
1 refrigerator 50
1 table 50
1 chair, for drawing 25
waiting room chairs 25
----
$250
2. Riverbank
1 centrifuge $100
1 refrigerator 50
1 table 50
1 chair, for drawing 25
waiting room chairs 25
----
$250
TOTAL $500
====
1
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EXHIBIT C
ASSIGNED CONTRACTS
1. Lease or sublease agreements for the Seller's offices or draw stations
at the following locations:
a. 110 Santa Barbara Ave.
Modesto, California
b. 3227 Stanislaus
Riverbank, California 95367
2
<PAGE>
EXHIBIT D
NON-COMPETITION AGREEMENT
Agreement is made and entered into as of May 16, 1996, by and between
Meris Laboratories, Inc., a California corporation, (the "Purchaser"), and ROCEL
Clinical Diagnostics, Inc., a California corporation (the "Seller"), and Celia
Blando and Romeo Torres, individuals (collectively, the "Shareholders") (the
Seller and the Shareholders are referred to herein collectively as the "Selling
Parties").
A. The Selling Parties are parties to that certain Asset Purchase Agreement
dated May 16, 1996 (the "Purchase Agreement"), pursuant to which the Purchaser
has purchased certain assets (including the customer list attached thereto as
Exhibit A (the "Customer List") relating to the Selling Parties' clinical
laboratory testing business; and
B. The Shareholders are the only shareholders of the Seller.
C. The business relationships that the Selling Parties have maintained with
the Seller's clients contribute substantially and materially to the value of the
Customer List, and the Selling Parties' knowledge and experience in the
laboratory business and their financial and investment ability could be used in
a manner which would prevent the Purchaser from realizing the benefits it
bargained for in purchasing such Customer List; and
D. The Selling Parties are willing to enter into this Agreement in further
consideration of the obligations undertaken by the Purchaser in the Purchase
Agreement.
NOW, THEREFORE, in consideration of the mutual agreements contained in this
Agreement and in the Purchase Agreement, the parties agree as follows:
1. Noncompetition Covenant of the Selling Parties. No Selling Party shall,
during the period specified in Section 2 below, do any of the following without
the prior written consent of the Purchaser:
a. Carry on in any county or other political subdivision of any state or
commonwealth of the United States of America in which a client or client account
listed on the Customer List is located, including (without limitation) Santa
Clara and Stanislaus County (collectively, the "Restricted Territory") any
business or activity in the field of commercial medical laboratory testing
services, (collectively, "Laboratory Services"), whether directly or indirectly,
as a partner, shareholder, principal, agent, medical director, affiliate or
consultant;
b. Solicit or influence or attempt to influence any customer, client, payor
or other person located within the Restricted Territory, including (without
limitation) those listed on the Customer List, either directly or indirectly, to
direct, his, her or its purchases of Laboratory Services to any person, firm,
corporation, institution or other entity in competition with the business of the
Purchaser; or
1
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c. Solicit or influence or attempt to influence any person employed by the
Purchaser, including any such employee who may previously have been employed by
any Selling Party, to terminate or otherwise cease his or her employment with
the Purchaser or become an employee of any Selling Party, any affiliate of any
Selling Party, or any competitor of the Purchaser.
2. Duration. The covenants set forth in Section 1 shall be effective
commencing as of the date hereof and shall continue with respect to a Selling
Party until the fifth (5th) anniversary of the date of this Agreement.
3. Certain Inquiries. Each Selling Party agrees that to the extent any of
them receive during the term hereof any inquiries or requests for Laboratory
Services of the type provided by the Sellers prior to the date hereof in the
Restricted Territory from any person, whether or not such person is listed on
the Customer List, such Selling Party shall state only that the Customer List
has been acquired by the Purchaser.
4. Limitations on Non-Competition Covenant. Section 1 of this Agreement
shall not be deemed to apply to any investments any Selling Party may make in
any publicly traded company so long as such Selling Party's aggregate holdings
do not exceed one percent (1%) of the outstanding voting securities of such
company.
5. Confidentiality. During the term hereof, each Selling Party agrees not
to disclose, communicate, use to the detriment of the Purchaser (or its
business) or for the benefit of any other person, or misuse in any way, any
proprietary or confidential information of the Purchaser such as information
relating to the Seller's business, trade secrets, personnel, processes,
techniques, know-how, customer lists, formulas and other information and
technical data.
6. Severability. The scope and effect of the covenants contained in this
Agreement shall be as broad in time (but not beyond the duration specified in
Section 2 hereof), geography, and in all other respects as is permitted pursuant
to the provisions of Sections 16600 through 16602 of the Business and
Professions Code of the State of California, or other applicable law. Should a
court or other body of competent jurisdiction determine that any term or
provision of this Agreement restricts competition to a greater degree than is
permitted by law, such term or provisions shall be adjusted rather than voided,
if possible, in accordance with the preceding sentence and with applicable law,
and all other terms and provisions of this Agreement shall be deemed valid and
enforceable to the maximum extent possible.
7. Remedies. The parties hereto acknowledge and agree that the extent of
damages to the Purchaser in the event of a breach of the covenants contained in
this Agreement by any of the Selling Parties would be difficult or impossible to
2
<PAGE>
ascertain and that there is and will be available to the Purchaser no adequate
remedy at law in the event of any such breach. Consequently, each of the Selling
Parties hereby agrees that in the event of such breach, the Purchaser shall be
entitled to enforce any or all of the covenants contained in this Agreement by
injunctive or other equitable relief.
8. Publicity. During the period specified in Section 2 hereof, the Selling
Parties will not make any public statement concerning the Purchaser or the
existence or terms of this Agreement, except as required by applicable
securities laws.
9. Miscellaneous. The provisions of Section 10(b), (c), (d), (e), (f), (h),
(i), (j), (k) and (l) of the Purchase Agreement are incorporated herein by
reference and made a part hereof (with all references to the "Agreement" therein
being construed to be references to this Agreement).
[SIGNATURE PAGE FOLLOWS]
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
MERIS LABORATORIES, INC.,
a California corporation
By: /s/ William Neeley. M.D.
------------------------
William Neeley. M.D.
President
SELLING PARTIES:
ROCEL Clinical Diagnostics, Inc.
a California corporation
By: /s/ Celia Blando
-------------------------------
Title: TECH. DIRECTOR
----------------------------
/s/ Celia Blando
-----------------------------------
Celia Blando, an individual
/s/ Romeo Torres
------------------------------------
Romeo Torres, an individual
1
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EXHIBIT E
BILL OF SALE
KNOW ALL MEN BY THESE PRESENTS, that ROCEL Clinical Diagnostics, Inc., a
California corporation (the "Transferor"), in exchange for consideration set
forth in the Asset Purchase Agreement (the "Agreement") dated as of May 16,
1996, by and among the Transferor and MERIS LABORATORIES, INC., a California
corporation (the "Transferee"), hereby sells, transfers, assigns and conveys
unto Transferee, its successors and assigns, free and clear of all liens and
encumbrances, all of the right, title and interest of Transferor in and to the
Purchased Assets (as described in the Agreement), including (without limitation)
the customer list attached hereto as Exhibit A and the equipment and other
personal property described in Exhibit B attached hereto.
TO HAVE AND TO HOLD the same unto the Transferee, its successors or
assigns, forever, and the Transferor hereby agrees that the Transferor will from
time to time, if requested by the Transferee, its successors and assigns,
execute, acknowledge and deliver, or will cause to be done, executed and
delivered to the Transferee, or its successors or assigns, all further acts,
transfers, assignments, deeds, powers and assurances of title, and additional
papers and instruments, and do or cause to be done all acts or things as often
as may be proper or necessary for better assuring, conveying, transferring and
assigning all of the property hereby conveyed, transferred or assigned, and
effectively to carry out the intent hereof, and to vest in the Transferee the
entire right, title and interest of the Transferor in and to all of the said
property, and the Transferors will warrant and defend the same to the
Transferee, its successors and assigns, forever against all claims or demands
whatsoever.
IN WITNESS WHEREOF, the Transferor has executed this instrument as of May 16,
1996.
ROCEL Clinical Diagnostics, Inc.,
a California corporation
By: /s/ Celia Blando
----------------------
Title: TECH. DIRECTOR
-------------------
1
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EXHIBIT F
PURCHASE PRICE ALLOCATION
Customer List and and Goodwill $249,500
Equipment (See Exhibit B) 500
Noncompete Agreement (See Exhibit D) 50,000
--------
$300,000
========
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EXHIBIT G
SELLER'S FINANCIAL STATEMENTS
[TO BE PROVIDED BY SELLER BY SEPTEMBER 30, 1996]
Note:The Company anticipates to file Exhibit G to Exhibit 10.1 (filed to the
June 30, 1996 Quarterly Report on Form 10-Q) along with the Quarterly
Report on Form 10-Q for the period ended September 30, 1996.
1
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EXHIBIT H
SPECIAL PANELS AND PRICING
UNIT CODE INFORMATION - COMPLETE
PAGE 1
ACTIVE AND INACTIVE
USER: HT 5/17/96
11:17:18
1)Unit Code 350345
2)Ordering Mnemonics CH20R
3)Reporting Title CHEM 20
5)Specimen Type S
6)Worklist CHEM
7)Test Code 35000 - SODIUM
35020 - POTASSIUM
35040 - CHLORIDE
35060 - CO2
35100 - GLUCOSE
35940 - BUN
36040 - CREATININE
36220 - TOTAL PROTEIN
36260 - ALBUMIN
36280 - GLOBULIN
36300 - A/G RATIO
36860 - URIC ACID
36900 - CALCIUM
36940 - PHOSPHORUS
37020 - TOTAL BILIRUBIN
37140 - ALKALINE PHOSPHATASE
37280 - AST (SGOT)
37300 - ALT (SGPT)
37320 - LD
37460 - CK TOTAL
37740 - CHOLESTEROL
37760 - TRIGLYCERIDES
11)Pathologist Review N
13)Container Type SST
15)Transport Temperature REFRIGERATE
17)Laboratory Area RTA
19)Day (s) Test Set-up DAILY
30)Special Instructions for Draw List
1 ML SERUM
40)Report Sequence 350345
10056260(PROFILE) Unit Code: 350550 Unit Code Name: CHEM 23
ROCEL 24 PROFILE 39140 T4
Mnemonic: ROC24
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10056250 (PROFILE) Unit Code: 350550 Unit Code Name: CHEM 23
ROCEL 28 PROFILE 39140 T4
100000 CBC, 4 INDICES,5 PART DIFF
Mnemonic: ROC28
10056060 (PROFILE) Unit Code: 350550 Unit Code Name: CHEM 23
ROCEL 30 COMPREHENSIVE 377860 HDL,LDL,C/H,L/H
37820 VLDL
391400 THYROID SCREEN
39340 TSH - HIGHLY SENSITIVE
11040 SED RATE, WESTERGREN
61220 RPR
150000 URINALYSIS
150020 UA MICROSCOPIC
Mnemonic: ROC30
2
<PAGE>
UNIT CODE INFORMATION - COMPLETE
PAGE 2 ACTIVE AND INACTIVE
USER: HT 5/17/96
11:17:18
10056080 (PROFILE) Unit Code: 37640 Unit Code Name: IRON
ANEMIA PANEL 376600 TIBC,UIBC,%SAT
37720 FERRITIN
41520 FOLATE, SERUM
100000 CBC, 4 INDICES,5 PART DIFF
10640 RETICULOCYTE COUNT
Mnemonic: ROCANEM
10056070 (PROFILE) Unit Code: 36860 Unit Code Name: URIC ACID
ARTHRITIS PANEL 36900 CALCIUM
36940 PHOSPHORUS
37140 ALKALINE PHOSPHATASE
61440 RHEUMATOID FACTOR
11040 SED RATE, WESTERGREN
Mnemonic: ROCARTH
1) Unit Code 351070
2) Ordering Mnemonics CH10R
3) Reporting Title CHEM 10
5) Specimen Type S
6) Worklist CHEM
7) Test Code 35100 - GLUCOSE
35940 - BUN
36040 - CREATININE
36220 - TOTAL PROTEIN
36260 - ALBUMIN
36280 - GLOBULIN
36300 - A/G RATIO
36860 - URIC ACID
36900 - CALCIUM
36940 - PHOSPHORUS
37020 - TOTAL BILIRUBIN
37740 - CHOLESTEROL
11) Pathologist Review N
13) Container Type SST
15) Transport Temperature REFRIGERATE
17) Laboratory Area CHEMISTRY
19) Day (s) Test Set-up DAILY
30) Special Instructions for Draw List
1 ML SERUM
40) Report Sequence 351070
1) Unit Code 350125
2) Ordering Mnemonics CH10G
3) Reporting Title CHEM 10
5) Specimen Type S
6) Worklist CHEM
7) Test Code 35000 - SODIUM
35020 - POTASSIUM
35100 - GLUCOSE
35940 - BUN
36040 - CREATININE
3
<PAGE>
UNIT CODE INFORMATION - COMPLETE
PAGE 3 ACTIVE AND INACTIVE
USER: HT 5/17/96
11:17:18
7) Test Code cont'd 36900 - CALCIUM
37020 - TOTAL BILIRUBIN
37280 - AST(SGOT)
37740 - CHOLESTEROL
37760 - TRIGLYCERIDES
11) Pathologist Review N
13) Container Type SST
15) Transport Temperature REFRIGERATE
17) Laboratory Area CHEMISTRY
19) Day(s) Test Set-up DAILY
30) Special Instructions for Draw List
1 ML SERUM
40) Report Sequence 350125
10056090 (PROFILE) Unit Code: 35000 Unit Code Name: SODIUM
HYPERTENSION PROFILE 35020 POTASSIUM
35100 GLUCOSE, RANDOM
35940 BUN
Mnemonic: ROCHYP
1) Unit Code 360030
2) Ordering Mnemonics LIVRR
3) Reporting Title LIVER PROFILE
5) Specimen Type S
6) Worklist CHEM
7) Test Code 36220 - TOTAL PROTEIN
36260 - ALBUMIN
36280 - GLOBULIN
36300 - A/G RATIO
37020 - TOTAL BILIRUBIN
37040 - DIRECT BILIRUBIN
37060 - IND BILIRUBIN
37100 - GGT
37280 - AST(SGOT)
37300 - ALT(SGPT)
37320 - LD
11) Pathologist Review N
17) Laboratory Area CHEMISTRY
40) Report Sequence 360030
10056270 (PROFILE) Unit Code: 37560 Unit Code Name: AMYLASE, TOTAL
PANCREATIC PROFILE 37620 LIPASE
37760 TRIGLYCERIDES
36900 CALCIUM
37100 GGT
Mnemonic: ROCPAN
4
<PAGE>
UNIT CODE INFORMATION - COMPLETE
PAGE 4 ACTIVE AND INACTIVE
USER: HT 5/17/96
11:17:18
1) Unit Code 351060
2) Ordering Mnemonics CH7R
3) Reporting Title CHEM 7
5) Specimen Type S
6) Worklist CHEM
7) Test Code 35000 - SODIUM
35020 - POTASSIUM
35100 - GLUCOSE
35940 - BUN
36040 - CREATININE
36220 - TOTAL PROTEIN
36260 - ALBUMIN
36280 - GLOBULIN
36300 - A/G RATIO
11) Pathologist Review N
13) Container Type SST
17) Laboratory Area CHEMISTRY
19) Day(s)Test Set-up DAILY
30) Special Instructions for Draw List
0.5 ML
40) Report Sequence 351060
10056310 (PROFILE) Unit Code: 350550 Unit Code Name:CHEM 23
CH23,HDL/LDL,THYSCN,TSH,ESR,RPR 377860 HDL,LDL,C/H,L/H
37820 VLDL
391400 THYROID SCREEN
39340 TSH - HIGHLY SENSITIVE
11040 SED RATE, WESTERGREN
61220 RPR
Mnemonic: HSP3
5
<PAGE>
UNIT CODE INFORMATION - COMPLETE
PAGE 5 CROSS REFERENCE
USER: HT 5/17/96
11:17:18
NAME CODE NAME CODE NAME
CODE
- -------------------------------------- ------------- -------- ----------
- ------------------- ----
ANEMIA PANEL 10056080 CHEM 20 350345 PANCREATIC
PROFILE 10056270
ARTHRITIS PANEL 10056070 CHEM 7 351060 ROCEL 24 P
ROFILE 10056260
CH23,HDL/LDL,THYSCN,TSH,ESR,RPR10056310 HYPERTENSION PROFILE 10056090 ROCEL 28 P
ROFILE 10056250
CHEM 10 350125 LIVER PROFILE 360030 ROCEL 30 C
OMPREHENSIVE 10056060
CHEM 10 351070
6
May 9, 1996
Meris Laboratories, Inc.
2890 Zanker Road
San Jose, CA 95134
Attn: William Neeley
RE: Silicon Valley Bank Loan
Dear Dr. Neeley:
This letter is written in connection with that certain Amended and
Restated Loan and Security Agreement between Silicon Valley Bank ("Bank") and
Meris Laboratories, Inc. ("Borrower") dated April 21, 1995, and related loan
documents (as amended from time to time, collectively, the "Loan Agreement").
Section 6.8 of the Loan Agreement as amended requires Borrower to
maintain on a monthly basis a minimum Quick Ratio of 0.75:1.00. Section 6.10 of
the Loan Agreement as amended requires Borrower to maintain on a monthly basis a
minimum Tangible Net Worth plus Subordinated Debt of $2,000,000. Section 6.11 of
the Loan Agreement as amended requires that Borrower achieve quarterly
profitability beginning with the quarter ended March 31, 1996. Section 6.13 of
the Loan Agreement as amended requires Borrower to maintain on a monthly basis a
ratio of total senior liabilities to annualized Earnings before Interest Taxes
Depreciation and Amortization of 3.50:1.00. As of March 31, 1996, Borrower was
in default of the Loan Agreement for non-compliance of all of the required
financial covenants, and that default continues as of this date.
Section 2.1 of the Loan Agreement limits funds to be advanced under the
above referenced loan obligation ("Line of Credit") to the lesser of (i)
$10,000,000.00, or (ii) 85% of eligible accounts receivable minus (iii) the face
amount of all outstanding letters of credit (including drawn but unreimbursed
letters of credit). Pursuant to that certain Borrowing Base Certificate
submitted by Borrower and dated as of March 31, 1996, the total funds available
under this formula totaled $6,804,020.00, as compared to the principal balance
outstanding under the Line of Credit of $7,750,000.00, which sum exceeds the
total available funds by $945,980.00 ("Overadvance"). Section 2.2 of the Loan
Agreement requires Borrower to immediately repay in cash the amount of any
Overadvance. To date, Borrower has failed to pay the amount of Overadvance to
Bank.
In addition, the Line of Credit matured on April 20, 1996 at which date
all indebtedness owing under the Line of Credit became immediately due and
payable. To date, amounts advanced under the Line of Credit have not been paid.
In light of the above described Events of Default (as set forth above
and as defined in the Loan Agreement), and with regard to those certain
1
<PAGE>
unsecured converable senior subordinated debentures dated November 14, 1994 and
December 5, 1994 (collectively, the "Subordinated Debt"), Borrower is hereby
prohibited from making any further payments of accrued interest or principal on
account of the Subordinated Debt in accordance with the terms of section 7 of
the agreements evidencing the Subordinated Debt.
Subject to the immediate cessation of Subordinated Debt payments as
outlined above and Borrower's continued compliance with all other terms and
conditions of the Loan Agreement, Bank agrees to forbear from exercising its
remedies under the Loan Agreement as amended until August 15, 1996,
notwithstanding Borrower's existing Events of Default under the Loan Agreement
as a result of Borrower's failure to comply with the covenants outlined above.
By signing below, Borrower acknowledges that the Loan is currently in default
and, as a result of such default, that Bank is entitled to exercise its remedies
as provided in the Loan Agreement and applicable law. Nothing in this agreement
in any way shall constitute Bank's waiver of Borrower's existing Events of
Default under the Loan Agreement. Upon termination of the forbearance period
described above, without any notice to Borrower, Bank may exercise any remedies
available to Bank under the Loan Agreement and under applicable law.
Borrower further understands and agrees that in modifying the Loan
Agreement, Bank is relying upon Borrower's representations, warranties, and
agreements, as set forth in the Loan Agreement. Except as expressly modified
pursuant to this letter, the terms of the Loan Agreement remain unchanged and in
full force and effect. Bank's agreement to modify the Loan Agreement in
accordance with the provisions set forth in this letter shall in no way obligate
Bank to make any future modifications to the Loan Agreement. Nothing in this
letter shall constitute a satisfaction of the Borrower's indebtedness to Bank.
The terms of this paragraph apply not only to this letter, but also to all
subsequent loan modifications agreements.
Very Truly Yours,
SILICON VALLEY BANK
/s/Mitzi R. Lazich
- -----------------------
Mitzi R. Lazich
Vice President
By executing below, the undersigned acknowledges and confirms the effectiveness
of this letter to amend the Loan Agreement.
MERIS LABORATORIES, INC.
/s/William Neeley
- ------------------------
By: William Neeley
Its: President
Dated: 6-4-96
2
FORBEARANCE AGREEMENT
This Forbearance Agreement (this "Agreement") is entered into as of July
22, 1996, by and between Silicon Valley Bank ("Bank") and Meris Laboratories,
Inc. (the "Borrower"), with reference to the following facts:
A. Borrower and Bank (sometimes hereinafter referred to as the "Parties")
are parties to that certain Amended and Restated Loan and Security Agreement
dated as of April 21, 1995, as amended through the date hereof (as amended, the
"Loan Agreement"). The Loan Agreement and all related and supporting documents
are referred to in this Agreement as the "Loan Documents."
B. As of the date hereof, there is owing under the Loan Documents the
principal amount of Seven Million Five Hundred Fifty Thousand Dollars
($7,550,000), together with accrued but unpaid interest in the sum of
$49,671.88, plus costs, expenses and attorneys' fees. Such amount, plus accruing
interest and ongoing attorneys' fees and costs are hereinafter sometimes
referred to herein as the "Existing Debt."
C. One or more Events of Default have occurred under the Loan Documents by
virtue of Borrower's failures to comply with Sections 8.1, 8.2, 8.6 of the Loan
Agreement, including but not limited to failing to comply with Sections 6.8,
6.10, 6.11 and 6.13 of the Loan Agreement and to pay certain amounts (including
overadvances) under Sections 2.1 and 2.2 of the Loan Agreement. The Existing
Debt has fully matured by its own terms and is currently past due and payable in
full. Such Events of Default entitle Bank immediately to enforce all the
remedies set forth in the Loan Documents, or as otherwise may exist at law or in
equity. Borrower has asked Bank to forbear from exercising certain of those
remedies as a result of such currently existing Events of Default actually known
to Bank as of the date of this Agreement (the "Existing Defaults") and Bank has
agreed, provided Borrower timely performs each and all of the covenants and
agreements on its part to be performed under this Agreement.
NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby
acknowledged, the Parties agree as follows:
1. Defined Terms. Capitalized Terms not otherwise defined herein shall have
the same meanings as set forth in the Loan Documents.
2. Acknowledgement of Liability. As of the date of this Agreement, Borrower
acknowledges and agrees that it owes Bank an amount equal to the Existing Debt.
Borrower reaffirms each and all of its obligations under the Loan Documents and
hereby forever waives and relinquishes any and all claims, off sets or defenses
that Borrower may now have with respect to the payment of any sums due and the
performance of any other obligations under the Loan Documents. The security
interests granted to Bank under the Loan Documents in the Collateral are hereby
remade and reaffirmed and Borrower hereby represents and warrants that Bank
holds a valid and perfected first priority security interest in the Collateral.
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Borrower further hereby remakes and reaffirms each and all of the waivers,
covenants, representations and warranties contained in each of the Loan
Documents except as provided for in Schedule 1.
3. Forbearance. Borrower acknowledges that there are existing and uncured
Events of Default under the Loan Documents. Borrower further acknowledges and
agrees that Bank is not in any way agreeing to waive the Existing Defaults as a
result of this Agreement or the performance by the parties of their respective
obligations hereunder. Subject to the conditions contained herein and
performance by Borrower of each and all of the terms of this Agreement and of
the Loan Documents as modified herein, and provided there are no further Events
or Defaults, after the date hereof, Bank shall, until September 15, 1996, or
such earlier date that there shall occur any further Event of Default, forbear
from accelerating the Existing Debt as a result of the Existing Defaults
described in Recital C of this Agreement. Such forbearance does not apply to any
other Event of Default or other failure by Borrower to perform in accordance
with the Loan Documents or this Agreement (hereinafter a "New Event of
Default"). This forbearance shall not be deemed to be a continuing waiver or
forbearance with respect to any Event of Default of the same or a similar nature
that may occur after the date of this Agreement. Notwithstanding anything to the
contrary contained in this Agreement, Borrower shall continue to be obligated to
make the monthly interest payments required pursuant to Section 2.3(c) of the
Loan Agreement.
4. Further Advances. Borrower may not request any Advances under the Loan
Documents from and after the date hereof, and Bank shall not be obligated to
extend any further loans or financial accommodations to Borrower except as
expressly provided herein.
5. INTENTIONALLY OMITTED.
6. Receipt and Application of Payments. All payments hereunder and under
the Loan Documents may, at Bank's option, first be applied against Bank Expenses
and accrued and unpaid interest, and the balance against the principal portion
of the Obligations, all in Bank's sole and absolute discretion. Acceptance by
Bank of any payment in an amount less than the amount then due shall be deemed
an acceptance on account only, and the failure to pay the entire amount then due
shall be and continue to be a New Event of Default pursuant to this Agreement,
and at any time thereafter and until the entire amount then due has been paid,
Bank shall be entitled to exercise all rights conferred upon it herein or in the
Loan Documents upon the occurrence of a New Event of Default. To the extent that
Bank receives any payment or benefit and such payment or benefit, or any part
thereof, is required to be repaid to a trustee, receiver, or any other party
under any bankruptcy act, state or federal law, common law or equitable cause,
then to the extent of such payment or benefit, the Obligations, or any part
thereof intended to be satisfied shall be revived and continued in full force
and effect as if such payment or benefit had not been made, shall accrue
interest at the highest rate applicable to any portion thereof, shall be secured
by the Collateral and payable on demand.
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<PAGE>
7. Bank Expenses. Borrower shall reimburse Bank, on demand, for all
expenses incurred by Bank, at any time on, before or after the date hereof in
connection with (i) preparing and negotiating this Agreement; (ii) protecting
Bank's security interests and liens in the Collateral; and (iii) any matters
contemplated by or arising out of this Agreement or the Loan Documents
including, by way of illustration only, (a) to commence, prosecute, defend or
intervene in any litigation (adversary proceeding or otherwise) or to file a
petition, complaint, answer, motion or other pleadings, (b) to take any other
action in or with respect to any suit, case, motion, appeal or proceeding
(bankruptcy or otherwise), (c) to draft documents in connection with any of the
foregoing or in connection with any proposed modification or amendment of this
Agreement or the Loan Documents, or any proposed waiver, extension or refinance
of the Obligations, including, but not limited to, all inside and outside
counsel fees incurred by Bank in connection with the preparation and negotiation
of this Agreement and the Loan Documents, (d) to protect, collect, lease, sell,
take possession of or liquidate any of the Collateral or assets of Borrower, (e)
to attempt to enforce any rights of Bank to collect any Obligations, or (f) any
matter relating to the ongoing administration of this Agreement or the Loan
Documents. Bank Expenses shall include all expenditures by Bank, including
payment made by Bank for taxes, insurance, assessments, costs or expenses which
Borrower is required to pay under this Agreement or the Loan Documents, but
fails to pay; inside and outside counsel fees and any expenses, costs and
charges relating to such expenditures (including, without limitation, all fees
of legal assistants and other staff employed by such attorneys); and all other
expenses of any kind whatsoever incurred by Bank in connection with
administration of this Agreement and the Loan Documents, whether such
expenditures, fees and expenses are incurred before, after or in connection with
the commencement of an Insolvency Proceeding, including any actions taken in
connection with cash collateral orders, motions for relief from any stays,
preparation for any objections to plans of reorganization and any other
negotiations, actions or appeals entered into, taken or made in connection with
the reorganization, bankruptcy or liquidation of Borrower or the Collateral.
8. Cash Secured Obligations. Borrower acknowledges that (i) certificate of
deposit number 8800012914 in the principal amount of $379,500 has been pledged
to secure its reimbursement obligations in connection with a letter of credit
issued for the account of Borrower and the Obligations owing to Bank, and (ii)
certificate of deposit number 0351267325 in the principal amount of $1,584,670
which has been pledged to secure the Obligations owing to Bank, and is subject
to the subordinate claim pertaining to certain obligations which Borrower
allegedly may owe in connection with one or more promissory notes made to, or
certain litigation involving, Chris Reidel. Borrower shall not request the use
of such certificates of deposit, or the proceeds thereof, in any application or
motion for the use of cash collateral with respect to the Obligations, including
the determination of adequate protection, and may not use or otherwise attempt
to use such certificates of deposit for any purpose other than the payment to
Bank of the Obligations absent Bank's express written consent.
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<PAGE>
9. Functional Equivalent of Chapter 11 Case. Borrower acknowledges that
this Agreement is of considerable benefit to Borrower. The forbearances and
financial accommodations offered by Bank pursuant to this Agreement and
previously granted by Bank to Borrower result in a significantly delayed
repayment to Bank, provide Borrower with an opportunity to work out of its
financial difficulties, and allow Borrower to avoid bankruptcy, thus benefiting
all other creditors. Borrower acknowledges that this Agreement represents the
functional equivalent of the restructuring of its financial affairs under the
provisions of Chapter 11 of the United States Bankruptcy Code.
Borrower hereby acknowledges that:
(a) it has had a full and fair opportunity to reorganize its financial
affairs pursuant to this Agreement;
(b) the Agreement constitutes the functional equivalent of a confirmed
Chapter 11 plan;
(c) this Agreement represents a reasonable and sensible restructuring of
its indebtedness due and owing to Bank; and
(d) it would be manifestly unfair to Bank if Borrower was ever to seek
further restructuring of its indebtedness to Bank. If for any reason Borrower
defaults under the terms of this Agreement, it is agreed that it would be unfair
for the automatic stay of a bankruptcy case to impede Bank's ability to exercise
its legal rights and remedies. Consequently, Borrower hereby stipulates and
agrees that if any bankruptcy case shall be filed by or against Borrower, the
automatic stay arising in such bankruptcy case shall, after notice and a
hearing, be terminated upon the request of Bank and Bank shall then be allowed
to proceed with enforcement of its legal rights and remedies. Borrower further
agrees that it would be manifestly unfair to seek to use Bank's cash collateral
in a bankruptcy proceeding or to make any claim under sections 506(c) or 507(b)
of the Bankruptcy Code (including but not limited to any claim for attorneys'
fees) in commencing or prosecuting such bankruptcy case or proceeding without
Bank's express consent. Borrower hereby expressly waives any and all surcharge
rights on behalf of itself and its successors in interest which may exist
pursuant to Bankruptcy Code section 506(c), or otherwise.
10. Overadvance. Borrower acknowledges that the outstanding Advances exceed
the Borrowing Base as of the date hereof by approximately $1,700,000. Such
excess constitutes an "Overadvance" and is payable to Bank immediately under
Section 2.2 of the Loan Agreement. Subject to the terms of this Agreement, Bank
will forbear from accelerating the Existing Debt under the Loan Agreement to
collect the Overadvance until September 15, 1996 or upon the occurrence of a New
Event of Default, whichever occurs first; provided that, if and to the extent
the Overadvance at any time exceeds the lesser of $1,700,000 or $1,700,000 less
the permanent reductions provided for hereinbelow (the "Maximum Overadvance"),
Borrower shall be in default under this Agreement. Borrower shall immediately
pay Bank the amount of such excess, and the failure to do so shall, without any
4
<PAGE>
notice to Borrower or any action by Bank, constitute a New Event of Default. For
the purpose of this Agreement, the term "Maximum Overadvance" shall mean
$1,700,000 less payments to be made by Borrower to Bank from any of the
following: (i) the amounts due and payable to Bank upon receipt of any tax
refund described in paragraph 5 above; (ii) the proceeds from the sale,
transfer, conveyance, or other disposition of any of the Bank's collateral which
results in a reduction in the Bank's collateral base; and (iii) the amount equal
to each payment Borrower is obligated to make to Bank in lieu of making such
payments to the subordinated debt, including, but not limited to, the
approximate $100,000 payments due from Borrower to the Bank on the last day of
each month.
11. Financial Reporting; Audits.
(a) Bank shall have a right at any time after the date of this Agreement to
audit Borrower's Accounts at Borrower's expense, which audits shall occur at
Bank's option not less than once per fiscal quarter.
(b) In addition to complying with the provisions of Section 6.3 of the Loan
Agreement, Borrower shall deliver a Borrowing Base Certificate to Bank, signed
by a Responsible Officer, reflecting Borrower's condition as of close of
business on Friday of each week. Such Certificate shall be delivered to Bank not
later than 12:00 p.m. on Tuesday of the immediately following week.
12. Subordinated Debt. Borrower acknowledges that there has occurred a
default in payment referred to in Section 7B(1)(a) of the Purchase Agreement
dated as of November 14, 1994 among Borrower and the Investors named therein and
that, until Borrower receives from Bank an express waiver of such default,
Borrower shall not make any payment with respect to the principal of or interest
or other amounts due with respect to the Subordinated Debt as defined in the
Purchase Agreement.
13. Sole Depository. Borrower represents and warrants that Borrower
maintains its deposit and investment accounts only at Bank, and no Investments
or deposits are held by any other Person. Borrower covenants that Borrower will
continue to maintain all of such accounts, deposits and Investments with Bank.
14. Eligible Accounts. In addition to the Eligible Accounts defined in
section 1.1 of the Loan Agreement, Borrower shall be entitled to include work in
progress and unbilled order edit accounts which but for the fact that Borrower
has not issued an invoice would otherwise constitute Eligible Accounts
(hereinafter the "Eligible Unbilled Accounts") provided, however, that only 50%
of the fully diluted value of such Eligible Unbilled Accounts shall be included
in the Borrowing Base. PIPRE accounts for which an invoice has been issued and
which are aged less than 31 days old will be included as Eligible Accounts. Such
accounts shall be included in the Borrowing Base at 85% of the fully diluted
value. No other PIPRE and/or PICOLLECT Accounts shall constitute or be included
as Eligible Accounts.
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15. Representations and Warranties.
(a) Borrower hereby represents and warrants that no Event of Default or
failure of condition has occurred or exists, or would exist with notice or lapse
of time or both under any of the Loan Documents, other than the Events of
Default referred to in Recital C.
(b) The forbearance period granted pursuant to the terms of this Agreement
is reasonable and is based upon the projections of Borrower.
(c) All representations and warranties of Borrower in this Agreement and
the other Loan Documents are true and correct as of the date hereof, and shall
survive the execution of this Agreement.
16. Default. In addition to all other Events of Default under the Loan
Documents, the following shall constitute Events of Default:
(a) Borrower's failure to perform any covenant or other agreement contained
in this Agreement or any other document entered into pursuant hereto; and
(b) Bank's determination, in its sole and absolute discretion, that
Borrower may not be able to pay all or any part of the Obligations, or to
satisfy any condition, or to perform any obligation under any of the Loan
Documents.
17. Rights and Remedies.
(a) Upon the occurrence of a default which is other than one of the
Existing Defaults identified in Recital C above and during the continuation of
the New Event of Default, Bank may, at its election, without notice of its
election and without demand, do any one or more of the following, all of which
are authorized by Borrower:
(i) Without notice to Borrower. set off and apply to the amounts due and
owing under the Loan Documents and this Agreement:
(1) any and all certificates of deposit held by Bank for whatever purpose;
(2) any and all balances and deposits of Borrower held by Bank; and/or
(3) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
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(ii) Take action against Borrower for payment under the Loan Documents and
this Agreement; and/or
(iii) Exercise any right and remedy authorized by the Loan Documents and/or
this Agreement and/or applicable law or at equity.
(b) Bank's rights and remedies under this Agreement, the Loan Documents and
all other agreements shall be cumulative. Bank shall have all other rights and
remedies not inconsistent herewith as provided under the Code, by law, or in
equity. No exercise by Bank of one right or remedy shall be deemed an election,
and no waiver by Bank of any Event of Default on the part of Borrower shall be
deemed a continuing waiver. No delay by Bank shall constitute a waiver,
election, or acquiescence by it. Bank shall have the right to take any action it
deems necessary against Borrower in order to enforce or perfect, or to realize
on its security interest in the Collateral.
18. Turnover of Intellectual Property.
(a) Borrower shall, concurrent with the execution of the Agreement, turn
over to Bank one copy of all software and related materials (the "Software")
held for use, license and/or sale by Borrower. For the purpose of this
Agreement, the term "Software" shall consist of all existing or future annotated
source code listings, flow charts, decision tables, schematics, drawings,
specifications, documentation, design details, and other related documents and
all technology in which Bank has a security interest. The Software also will
include any update, modification, enhancement, or change to the materials.
Borrower agrees to deliver to Bank on January 15, April 15, July 15, and October
15 of each year, a package certified by an officer of Borrower to contain all
updates, modifications, enhancements, and changes to the Software made during
the period three (3) month period (the "Updates").
(b) Borrower hereby agrees that Bank shall be entitled to retain and use
the Software as provided for in this Agreement until it has been timely paid in
full by Borrower; provided, however, in the event Borrower defaults under this
Agreement or any agreements executed in connection herewith or referred to
herein, Bank shall be entitled to sell, transfer, license and/or otherwise
convey or utilize the Software as Bank, in its sole discretion, determines.
(c) Borrower and Bank acknowledge that this Agreement constitutes a license
of a right to intellectual property, and this Agreement is an "agreement
supplementary to" such license as provided in Section 365(n) of Title 11, United
States Code (the "Bankruptcy Code"). Borrower acknowledges that if Borrower, as
a debtor in possession, or a trustee in bankruptcy in a case under the
Bankruptcy Code, rejects this Agreement, Bank may elect to retain its rights
under this Agreement as provided in Section 365(n) of the Bankruptcy Code. Upon
written request of Bank to Borrower or the bankruptcy trustee, Borrower or such
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<PAGE>
bankruptcy trustee shall not interfere with the rights of Bank as provided in
this Agreement, including the right to obtain, use, license and/or otherwise
dispose of the Software.
(d) Subject to the rights granted Bank hereunder Bank shall hold the
software in confidence and not disclose, transfer or distribute the same to any
third party, except if there is a New Event of Default.
(e) License Grant for Use of Software; Security Interest.
(i) Borrower hereby grants Bank, its agents and assignees the right to use
and/or sell or otherwise transfer the Software for the purpose of exercising the
rights of Bank under the Loan Agreement and this Agreement. Bank shall not take
any actions in exercise of such right unless a New Event of Default occurs and
shall be continuing.
(ii) To secure the performance of Borrower under the Loan Agreement and
this Agreement, Borrower hereby affirms, remakes, regrants and grants Bank a
first priority security interest in the Escrowed Materials. Borrower will
execute such documents and take such steps as Bank reasonably requests to
perfect such security interest.
19. Conditions Precedent to Bank's Obligation to Forbear.
The Bank's obligation to forbear under this Agreement in relation to the
Existing Defaults described in recital C above is subject to the following
conditions precedent:
(a) Receipt by Bank of this Agreement and such other agreements and
instruments reasonably requested by Bank pursuant hereto (including such
documents as are necessary to create and perfect Bank's interest in the
Collateral), each duly executed by Borrower;
(b) A certificate of the secretary of Borrower with respect to incumbency
and resolutions authorizing the execution and delivery of this Agreement, in
form acceptable to Bank;
(c) Receipt of the source codes and other materials pertaining to the
Software in a form acceptable to Bank;
(d) Payment by Borrower of all Bank Expenses incurred in the preparation of
this Agreement; and
(e) Such other documents and completion of such other matters as Bank may
reasonably deem necessary or appropriate.
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20. Waiver of Notice and Cure. Borrower acknowledges that an Event of
Default occurred under the Loan Documents that, but for this Agreement, would
have entitled Bank to exercise all the remedies available to Bank under the Loan
Documents and applicable law. Borrower waives, after default, all notices of
default and rights to cure that are otherwise provided in the Loan Documents or
applicable law, including rights to notice and redemption under California
Uniform Commercial Code sections 9504, 9505 and 9506.
21. Release.
(a) Borrower acknowledges that Bank would not enter into this Agreement
without Borrower's assurance that Borrower has no claims against Bank or any of
Bank's officers, directors, employees or agents. Except for the obligations
arising hereafter under this Agreement, Borrower releases Bank and each of
Bank's officers, directors and employees from any known or unknown claims which
Borrower now has against Bank of any nature, including any claims that Borrower,
its successors, counsel, and advisors may in the future discover they would have
now had if they had known facts not now known to them, whether founded in
contract, in tort or pursuant to any other theory of liability, including but
not limited to any claims arising out of or related to the Loan Documents or the
transactions contemplated thereby. Borrower waives the provisions of California
Civil Code section 1542, which states:
A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor.
(b) The provisions, waivers and releases set forth in this section are
binding upon Borrower and Borrower's shareholders, agents, employees, assigns
and successors in interest. The provisions, waivers and releases of this section
shall inure to the benefit of Bank and its agents, employees, officers,
directors, assigns and successors in interest.
(c) The provisions of this section shall survive payment in full of the
Obligations, full performance of all the terms of this Agreement and the Loan
Documents, and/or Bank's actions to exercise any remedy available under the Loan
Documents or otherwise.
(d) Borrower warrants and represents that Borrower is the sole and lawful
owner of all right, title and interest in and to all of the claims released
hereby and Borrower has not heretofore voluntarily, by operation of law or
otherwise, assigned or transferred or purported to assign or transfer to any
person any such claim or any portion thereof. Borrower shall indemnify and hold
harmless Bank from and against any claim, demand, damage, debt, liability
9
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(including payment of attorneys' fees and costs actually incurred whether or not
litigation is commenced) based on or arising out of any assignment or transfer.
22. Further Assurances. Borrower will take such other actions as Bank may
reasonably request from time to time to perfect or continue Bank's security
interests in Borrower's property, and to accomplish the objectives of this
Agreement.
23. Consultation of Counsel. Borrower acknowledges that Borrower has had
the opportunity to be represented by legal counsel of its own choice throughout
all of the negotiations that preceded the execution of this Agreement. Borrower
has executed this Agreement after reviewing and understanding each provision of
this Agreement and without reliance upon any promise or representation of any
person or persons acting for or on behalf of Bank. Borrower further acknowledges
that Borrower and its counsel have had adequate opportunity to make whatever
investigation or inquiry they may deem necessary or desirable in connection with
the subject matter of this Agreement prior to the execution hereof and the
delivery and acceptance of the consideration described herein.
24. Miscellaneous.
(a) Successors and Assigns. This Agreement shall be binding upon and shall
inure to the benefit of Borrower and Bank and their respective successors and
assigns; provided, however, that the foregoing shall not authorize any
assignment by Borrower of its rights or duties hereunder.
(b) Entire Agreement. This Agreement and the Loan Documents contain the
entire agreement of the parties hereto and supersede any other oral or written
agreements or understandings with respect to the subject matter hereof and
thereof.
(c) Course of Dealing; Waivers. No course of dealing on the part of Bank or
its officers, nor any failure or delay in the exercise of any right by Bank,
shall operate as a waiver thereof, and any single or partial exercise of any
such right shall not preclude any later exercise of any such right. Bank's
failure at any time to require strict performance by Borrower of any provision
shall not affect any right of Bank thereafter to demand strict compliance and
performance. Any suspension or waiver of a right must be in writing signed by an
officer of Bank.
(d) Time is of the Essence. Time is of the essence as to each and every
term and provision of this Agreement and the other Loan Documents.
(e) Counterparts. This Agreement may be signed in counterparts and all of
such counterparts when properly executed by the appropriate parties thereto
together shall serve as a fully executed document, binding upon the parties.
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(f) Appointment of Bank as Borrower's Attorney-in-Fact. Borrower hereby
irrevocably designates, makes, constitutes and appoints Bank, acting through any
and all individuals, persons and entities lawfully representing Bank, as
Borrower's true and lawful agent and attorney-in-fact (which appointment shall
for all purposes be deemed to be coupled with an interest and shall be
irrevocable) and authorizes Bank, in Bank's and/or Borrower's name, to take any
and all actions set forth in Section 9.2 of the Loan Agreement and as Bank
otherwise deems appropriate in connection with Bank's administration of this
Agreement or any other Loan Documents.
(g) Legal Effect. The Loan Documents remain in full force and effect. If
any provision of this Agreement conflicts with applicable law, such provision
shall be deemed severed from this Agreement, and the balance of this Agreement
shall remain in full force and effect.
(h) WAIVER OF JURY. BANK AND BORROWER ACKNOWLEDGE AND AGREE THAT THE TIME
AND EXPENSE REQUIRED FOR TRIAL BY JURY EXCEED THE TIME AND EXPENSE REQUIRED FOR
A BENCH TRIAL AND HEREBY WAIVE, TO THE EXTENT PERMITTED BY LAW, TRIAL BY JURY OF
ANY CLAIM OR CAUSE OF ACTION BASED UPON, RELATED TO OR ARISING OUT OF THE
TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS, INCLUDING CONTRACT CLAIMS, TORT
CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS.
EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A
MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS
AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.
(i) Assignment and Indemnity. Borrower consents to Bank's assignment of all
or any part of Bank's rights under this Agreement and the Loan Documents.
Borrower shall indemnify and defend and hold Bank and any assignee of Bank's
interests harmless from any actions, costs, losses or expenses (including
attorneys' fees) arising out of such assignment, this Agreement and the Loan
Documents.
(j) Severability. In the event that any provision of this Agreement shall
be unenforceable or invalid under any applicable law or be so held by applicable
court or arbitration decision, such unenforceability or invalidity shall not
render this Agreement unenforceable or invalid as a whole, and, in such event,
such provision shall be changed and interpreted so as to bestaccomplish the
objectives of such unenforceable or invalid provision within the limits of
applicable law or applicable court decisions.
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IN WITNESS WHEREOF the undersigned have executed this Agreement as of
the first date above written.
MERIS LABORATORIES, INC.
Date: August 14, 1996
------------------ By: /s/ Thurman Jordan
----------------------------
Title: Sr. V.P. - CFO
----------------------------
MERIS LABORATORIES, INC.
By: /s/ William E. Neeley, M.D.
----------------------------
Title: President & CEO
----------------------------
SILICON VALLEY BANK
By: /s/ Judy Sanchez
----------------------------
Title: Sr. Vice President
----------------------------
12
<PAGE>
SCHEDULE 1
EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES
Set forth below are the exceptions, as of July 22, 1996, to the
representations and warranties set forth in the Loan Agreement.
1. Section 5.2. Agreement Defaults. Borrower is in default under (a)
agreements with the holders of its 10% senior convertible subordinated
debentures, (b) the Loan Agreement, and (c) its agreements with Chris Reidel.
2. Section 5.3. Liens. Existing liens, other than those held by Bank, are
(a) such liens as would be shown by a search of federal, state and county
records, (b) the liens held by Chris Riedel, and (c) the judgment in favor of
Kenneth Hadler.
3. Section 5.7. Litigation. See Exhibit 1 attached.
4. Section 5.9. Solvency. Borrower admits that it is not paying its debts
as they become due.
5. Section 5.12. Taxes. Borrower has not filed its federal or state tax
returns for 1995.
6. Section 5.13. Subsidiaries. Meris, Inc. is a subsidiary of Borrower.
7. Section 5.15. Full Disclosure. This representation is subject to the
disclosures in Borrower's financial statements furnished to Bank and the
disclosures in its Quarterly report on Form 10-Q for the period ended March 31,
1996, its Annual Report on Form 10-K for the period ended December 31, 1995 and
the Proxy Statement for the Annual Meeting of Borrower's shareholders on May 21,
1996.
13
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 33,000
<SECURITIES> 0
<RECEIVABLES> 8,576,000
<ALLOWANCES> 0
<INVENTORY> 641,000
<CURRENT-ASSETS> 12,255,000
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0
0
<COMMON> 37,157,000
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<TOTAL-LIABILITY-AND-EQUITY> 38,019,000
<SALES> 19,384,000
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<CGS> 14,294,000
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