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 September 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2890 Zanker Road, San Jose, California 95134
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(Address of principal executive offices) (Zip Code)
408-434-9200
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(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 November 8, 1996.
1
<PAGE>
MERIS LABORATORIES, INC.
INDEX
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 September 30, 1996 and December 31, 1995................... 3
Condensed Consolidated Statements of Operations for the
Three and Nine Month Periods ended September 30, 1996 and 1995. 4
Condensed Consolidated Statements of Cash Flows for the Nine
Month Periods ended September 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..................................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 23
Item 3. Defaults Upon Senior Securities............................... 30
Item 5. Other Information............................................. 31
Item 6. Exhibits and Reports on Form 8-K.............................. 32
SIGNATURES .............................................................. 33
2
<PAGE>
Item 1.
<TABLE>
<CAPTION>
MERIS LABORATORIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
Sept.30, Dec.31,
1996 1995
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 26 $ 1,490
Restricted cash ......................................... 1,964 1,585
Accounts receivable, net ................................ 7,968 11,270
Income tax refund receivable ............................ - 384
Supplies inventory ...................................... 475 749
Prepaid expenses and other current assets ............... 634 548
-------- --------
Total current assets .................................. 11,067 16,026
Property and equipment, net ................................ 1,798 2,283
Intangible and other assets, net ........................... 23,308 25,165
-------- --------
Total assets ........................................ $ 36,173 $ 43,474
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings ......................................... $ - $ 7,657
Notes Payable ........................................... 8,300 -
Convertible subordinated debt ........................... 10,894 -
Current portion of long-term obligations ................ 615 544
Accounts payable ........................................ 6,064 3,767
Accrued expenses ........................................ 3,129 3,115
Note payable to Former Executive ........................ 1,526 1,526
Accrued litigation and investigation charges ............ 5,721 3,940
-------- --------
Total current liabilities ............................. 36,249 20,549
-------- --------
Convertible subordinated debt .............................. - 10,824
Long-term obligations, less current portion ................ 224 469
-------- --------
Commitments and contingencies (Notes 6 and 7) .............. -- --
-------- --------
Shareholders' equity:
Common stock ............................................ 37,157 37,136
Additional paid-in capital .............................. 826 826
Accumulated deficit ..................................... (38,283) (26,330)
-------- --------
Total shareholders' equity ............................ (300) 11,632
-------- --------
Total liabilities and shareholders' equity .......... $ 36,173 $ 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 Nine Months
Ended Ended
September 30, September 30,
--------------------- ---------------------
1996 1995 1996 1995
---------- --------- --------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Net revenues $ 8,344 $ 9,853 $27,728 $32,240
---------- --------- --------- ----------
Cost of services:
Salaries, wages and benefits 3,016 3,399 9,142 10,036
Supplies 1,172 1,314 3,938 3,797
Depreciation and amortization 785 1,057 2,537 3,412
Other cost of services 1,869 2,030 5,519 6,065
--------- --------- --------- ----------
Total cost of services 6,842 7,800 21,136 23,310
Selling, general and
administrative expenses 3,093 2,825 8,662 8,734
Provision for doubtful accounts 1,215 653 4,789 3,227
Litigation and investigation charges 2,500 - 2,750 700
Write-down of intangible assets 115 - 665 -
--------- --------- --------- ----------
Operating loss (5,421) (1,425) (10,274) (3,731)
Interest expense (655) (513) (1,815) (1,518)
Interest and other income, net 90 15 136 36
--------- --------- --------- ----------
Loss before income taxes (5,986) (1,923) (11,953) (5,213)
Provision for income taxes - - - 36
--------- --------- --------- ----------
Net loss $(5,986) $ (1,923) $(11,953) $ (5,249)
========= ========= ========= ==========
Net loss per share $ (0.75) $ (0.24) $ (1.49) $ (0.66)
========= ========= ========= ==========
Weighted average shares outstanding 8,011 7,961 7,998 7,944
========= ========= ========= ==========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
4
<PAGE>
<TABLE>
<CAPTION>
MERIS LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
September 30,
---------------------
1996 1995
---------- ---------
(Unaudited)
<S> <C> <C>
Net cash used in operating activities $(1,087) $ (289)
---------- ---------
Cash flows from investing activities:
Cash expenditure for customer lists
and other assets related to acquisitions (348) (2,258)
Purchase of property and equipment,net (199) (427)
---------- ---------
Net cash used in investing activities (547) (2,685)
---------- ---------
Cash flows from financing activities:
Issuance of common stock for option exercises 21 132
Proceeds from bank borrowings 2,429 5,000
Payments on bank borrowings (10,086) (3,131)
Proceeds from notes payable 8,200 -
Payments on long-term obligations (394) (530)
Payment of distribution payable to related parties - (267)
---------- ---------
Net cash provided by financing activities 170 1,204
---------- ---------
Net decrease in cash and cash equivalents (1,464) (1,770)
Cash and cash equivalents at beginning of period 1,490 3,115
---------- ---------
Cash and cash equivalents at end of period $ 26 $1,345
========== =========
</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 September 30, 1996 and the condensed
consolidated statements of operations and of cash flows for the three and nine
months ended September 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 September 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
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 - 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 5). Since the Company believes the Former Executive is indebted to the
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. Since both deposits are assets of the Company, they are also
subject to any applicable security interests of the Company's creditors.
NOTE 4 - BANK BORROWINGS/NOTES PAYABLE:
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
6
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MERIS LABORATORIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 were secured by
substantially all of the Company's assets. The interest rate increased or
decreased based upon the Company's quarterly operating results. The Line of
Credit expired on April 20, 1996 and 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 5), 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
stated that the bank would 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 included an extension of the forbearance period to
September 15, 1996.
As of September 20, 1996, the Company's borrowings under the Line of
Credit, including unpaid interest and costs, were $8.2 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.
Interest on borrowings under the Line of Credit was charged at the bank's prime
rate plus 3% (11.25% as of September 20, 1996). On September 20, 1996, pursuant
to a privately negotiated transaction, the bank assigned the Company's entire
debt outstanding as of such date of $8.2 million to a private lender (the
"Lender"). The Lender acquired from the bank any and all rights, claims and
causes of action under the Amended Agreement. In conjunction with discussions
with the Lender regarding a proposed financing and the assignment of the Bank
borrowings, the Company issued a promissory note to the lender for $100,000
representing a commitment fee relating to such financing.
SUBSEQUENT EVENTS: On October 4, 1996, the Lender advanced additional operating
funds to the Company, and the Company issued a promissory note (the "Note") to
the Lender in the amount of $575,000 payable on demand. The Note bears interest
at 24% per annum.
7
<PAGE>
MERIS LABORATORIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company and the Lender are in the process of negotiating amendments to
the terms of the Amended Agreement, however, under the terms of the existing
Amended Agreement, the Lender may, without notice to the Company, exercise any
of the remedies available to it under such agreement. There can be no assurance
that such negotiation will be concluded or, if concluded, will be on terms
acceptable to the Company.
NOTE 5 - 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 approximately 3,188,000 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 3,188,000 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.
8
<PAGE>
MERIS LABORATORIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
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 September
30, 1996, the Company was in default of the amended minimum consolidated net
worth criteria.
Additionally, as of September 30, 1996, the Company was in default of all
the financial covenants under the Line of Credit. Such Line of Credit
arrangement was assigned by the bank to a Lender on September 20, 1996 (see Note
4). The Lender acquired from the bank any and all rights, claims and causes of
action under the Line of Credit including the terms of the Amended Agreement
entered into by the Company and its bank on June 4, 1996 (see Note 4). 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 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 September 30, 1996, the Debentures are convertible into
3,188,000 shares of the Company's common stock. The Company is attempting to
obtain waivers of default from the Debenture holders. In the event that such
waivers are not received, the convertible subordinated debt becomes due and
payable and adjustments to the conversion price of the Debenture become
effective. The Company has recognized the Debenture as a current liability as of
September 30, 1996. Interest expense has been recorded and is included in
accrued expenses at September 30, 1996.
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
9
<PAGE>
MERIS LABORATORIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 September 30, 1996. See Note 3 and Part II. Other Information
- - Item 1. Legal Proceedings.
NOTE 6 - 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. Through the fourth quarter of 1995, as a
result of the initial and continuing correspondence and discussions with
government agencies relating to certain issues under investigation, the Company
recorded an aggregate charge of approximately $2,250,000. The Company has
produced the documents subpoenaed by the government agencies. The Company and
the government agencies have discussed a proposed settlement agreement. While
the actual agreement has not been finalized, the Company recorded a charge
during the third quarter of 1996 of $2,000,000 based on preliminary estimates.
Such amount, when aggregated with previously recorded accruals, bring the total
estimated accrual to $4,250,000. However, based on the ultimate outcome of the
proposed settlement agreement, additional charges may be recorded in the future.
Additionally, subsequent to the finalization of an agreement, noncompliance with
any terms of such an agreement could result in the acceleration of any unpaid
amounts or imposition of additional payments, fines and penalties.
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.
10
<PAGE>
MERIS LABORATORIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 - CONTINGENCIES:
The Company is involved in various other lawsuits which are described in
detail under Part II - Other Information - Item 1. Legal Proceedings.
NOTE 8 - CURRENT ACCOUNTING PRONOUNCEMENTS:
In June 1995, the American Institute of Certified Public Accountants
(the "AICPA") issued the AICPA Audit and Accounting Guide for Health Care
Organizations (the "Guide") to assist providers of health care services in
accounting and preparation of financial statements. The provisions of the Guide
are effective for financial statement periods beginning after June 15, 1996. The
Company expects to adopt the provisions of the Guide effective January 1, 1997.
The Company has not evaluated the financial statement impact of adopting the
Guide.
11
<PAGE>
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 nine 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 severely curtailed 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. Finally, the
Company may also, from time to time, record charges relating to the write-down
of intangible assets should the revenue stream related to acquisitions be below
the carrying value of such intangible assets. Unless revenues can be increased
and operating costs reduced, 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.
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
decrease. Throughout the first nine months of 1996, certain of the HMOs
previously contracted with the Company chose to utilize other laboratory service
providers. Conversely, the Company was successful in obtaining additional HMO
12
<PAGE>
contracts. The Company believes it will continue to 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/or decreasing costs, management believes the viability of the
Company would be adversely impacted. Additionally, as a result of the
requirement that effective January 1, 1997, the Company adopt the AICPA's Audit
and Accounting Guide for Health Care Organizations, (see Note 8 of Notes to
Condensed Consolidated Financial Statements), which precludes the grouping of
identifiable fee-for-service revenue with capitation premiums for purpose of
assessing the overall profitability under capitated arrangements, the Company
may, in the future, record loss acruals for existing and/or new contracts,
adversely impacting its results of operations.
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, internal sales
growth 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 severely curtailed. 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 Nine Months
Ended Ended
September 30, September 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 36.1 34.5 33.0 31.1
Supplies 14.0 13.3 14.2 11.8
Depreciation and amortization 9.4 10.7 9.1 10.6
Other cost of services 22.4 20.6 19.9 18.8
-------- --------- -------- --------
Total cost of services 81.9 79.1 76.2 72.3
Selling, general and administrative 37.1 28.7 31.2 27.1
Provision for doubtful accounts 14.6 6.6 17.3 10.0
Litigation and investigation charges 30.0 - 9.9 2.2
Write-down of intangible assets 1.4 - 2.4 -
-------- --------- -------- --------
Operating loss (65.0)% (14.4)% (37.0)% (11.6)%
======== ========= ======== ========
</TABLE>
Three Months Ended September 30, 1996 Compared to Three Months Ended
September 30, 1995
Net Revenues. Net revenues decreased 15.3% to $8.34 million for the three months
ended September 30, 1996 from $9.85 million for the same period in 1995. During
the three months ended September 30, 1995, the Company recorded a charge of
approximately $780,000 associated with certain overpayments received from
Medicare during 1994 and 1995. Excluding the effect of the 1995 Medicare
adjustment, net revenues decreased 21.5% from $10.63 million for the three
months ended September 30, 1995. The decrease in net revenues reflects a 15.8%
decrease in testing volume resulting partly from increased competition and
decreased utilization of the Company's laboratory services by patients and
clients. The general trend toward increased contractual discounts, including a
reduction in the composite Medicare reimbursement rate in 1996 of approximately
4% and an increase in discounts associated with a shift to more contract payors,
also contributed to the decrease in net revenues per accession.
Cost of Services. Cost of services decreased 12.3% to $6.84 million for the
three months ended September 30, 1996 from $7.80 million for the same period in
1995. The decrease in cost of services, including reference laboratory fees,
courier costs and operating expenses for PSCs and STAT laboratories, is
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attributable to the decrease in overall costs in relation to testing volume as
well as the cost containment programs put in place in the latter part of 1995
through September 30, 1996. Salaries, wages and benefits decreased as a result
of a 17.8% reduction in the number of employees. The decrease in supplies
expense, primarily for reagents and testing consumables, is the net effect of an
increase in supplies expense as a result of the Company bringing in-house
approximately 17 tests throughout 1995 and 1996 offset by a decrease directly
resulting from a decrease in testing volume. The decrease in depreciation and
amortization expense is a result of the full depreciation of certain fixed
assets and the write-down of certain intangible assets during the year ended
December 31, 1995 and through the period ended June 30, 1996. Excluding the
effect of the 1995 Medicare adjustment to net revenues, cost of services as a
percent of net revenues increased to 81.9% for the three months ended September
30, 1996 from 73.4% for the same period during 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 9.5% to $3.09 million for the three months
ended September 30, 1996 from $2.83 million for the same period in 1995. The
increase in selling, general and administrative expenses is the net result of a
reduction in commission expense as a direct result of the modification of the
Company's commission structure as well as decreased net revenues offset by an
increase in facility rent, utility and property costs. Excluding the effect of
the 1995 Medicare adjustment, selling, general and administrative expenses as a
percentage of net revenues increased to 37.1% for the three months ended
September 30, 1996 from 26.6% for the corresponding period in 1995.
Provision for Doubtful Accounts. The provision for doubtful accounts
increased 86.1% to $1.22 million for the three months ended September 30, 1996
from $653,000 for the same period in 1995. Excluding the effect of the 1995
Medicare adjustment, the provision for doubtful accounts, as a percentage of net
revenues, increased to 14.6% of net revenues for the three months ended
September 30, 1996 from 6.1% of net revenues for the three months ended
September 30, 1995. Of the increase in bad debt expense in the third quarter of
1996 over the same period in 1995, approximately $500,000 reflects an increase
in management's estimate, resulting from modification of the estimation basis,
in determining amounts which may not be ultimately collected. The increase is
also 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 or incomplete 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
continues to identify 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 Company recorded litigation and
investigation charges during the three months ended September 30, 1996
aggregating $2,500,000. Of the total amount, $500,000 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
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on actual costs incurred to date and management's best estimates as to amounts
to be incurred in the foreseeable future. The remaining $2,000,000, when
aggregated with an existing accrual of $2,250,000, represents the Company's
estimate of the total potential liability related to the Department of Health
and Human Services investigation. (See Note 6 of notes to Condensed Consolidated
Financial Statements).
Write-Down of Intangible Assets. During the three months ended September 30,
1996, the Company recorded a write-down for the impairment of certain customer
lists, covenants not-to-compete, and goodwill aggregating approximately
$115,000. 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. Relating
to acquired customers lists to the extent that assessing volume decreases, the
Company may , in future periods, record additional write-downs of intangible
assets.
Interest Expense. Interest expense increased 27.7% to $655,000 for the three
months ended September 30, 1996 from $513,000 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.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995
Net Revenues. Net revenues decreased 14.0% to $27.73 million for the nine months
ended September 30, 1996 from $32.24 million for the same period in 1995. The
decrease in net revenues reflects a 12.6% decrease in testing volume resulting
partly from increased competition and decreased utilization of the Company's
laboratory services by patients and clients. The general trend toward increased
contractual discounts, including a reduction in the composite Medicare
reimbursement rates in 1996 of approximately 4% and an increase in discounts
associated with a shift to more contract payors, also contributed to the
decrease in net revenues per accession.
Cost of Services. Cost of services decreased 9.3% to $21.14 million for the nine
months ended September 30, 1996 from $23.31 million for the same period in 1995.
The decrease in cost of services, including reference laboratory fees, courier
costs and operating expenses for PSCs and STAT laboratories, is attributable to
the decrease in overall costs in relation to testing volume as well as the cost
containment programs put in place in the latter part of 1995 through September
30, 1996. Salaries, wages and benefits decreased as a result of a 17.8%
reduction in the number of employees. The increase in supplies expense,
primarily for reagents and testing consumables, is the net effect of an increase
in supplies expense as a result of the Company bringing in-house approximately
17 tests throughout 1995 and 1996 offset by a decrease directly resulting from a
decrease in testing volume. The decrease in depreciation and amortization
expense is a result of the full depreciation of certain fixed assets and the
write-down of certain intangible assets during the year ended December 31, 1995
and through the period ended June 30, 1996.
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Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by 0.8% to $8.66 million for the nine months
ended September 30, 1996 from $8.73 million for the same period in 1995. The
decrease in selling, general and administrative expenses is the net result of a
reduction in labor costs as a result of a $200,000 severance charge in the nine
months ended September 30, 1995, 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 offset by an increase in facility rent, utility and
property costs.
Provision for Doubtful Accounts. The provision for doubtful accounts increased
48.4% to $4.79 million for the nine months ended September 30, 1996 from $3.28
million for the same period in 1995. Of the increase in bad debt expense in the
third quarter of 1996 over the same period in 1995, approximately $500,000
reflects an increase in management's estimate, resulting from modification of
the estimation basis, in determining amounts which may not be ultimately
collected. For the nine months ended September 30, 1996, approximately $2.83
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 administration problems due in part to
financial and personnel constraints.
Litigation and Investigation Charges. During the nine months ended September 30,
1996 and 1995, the Company recorded $750,000 and $700,000, respectively, 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. Also during the nine months ended
September 30, 1996, the Company recorded an additional $2,000,000 which, when
aggregated with an existing accrual of $2,250,000, represents the Company's
estimate of the total potential liability related to the Department of Health
and Human Services investigation. (See Note 6 of notes to Condensed Consolidated
Financial Statements).
Write-Down of Intangible Assets. During the nine months ended September 30,
1996, the Company recorded a write-down for the impairment of certain customer
lists, covenants not-to-compete, and goodwill aggregating approximately
$665,000. 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.
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Interest Expense. Interest expense increased 19.6% to $1.82 million for the nine
months ended September 30, 1996 from $1.52 million for the same period in 1995.
The increase is primarily the result of increased borrowings for working capital
purposes resulting from decreased cash collections coupled with higher interest
rates.
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 nine months ended September 30, 1995 was lower than the federal
statutory rate due primarily to 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.
Additionally, the Company may experience further fluctuations in quarterly
net revenues and results of operations, should charges relating to the
write-down of intangible assets and loss accruals for capitated contracts be
recognized.
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.
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Liquidity and Capital Resources
The Company's primary source of short-term financing for working capital
purposes has been operating cash flow and the liquidation of accounts
receivable. The Company, however, is currently negotiating financing
arrangements with an outside lender for additional funds which would help to
alleviate short-time cash constraints.
Net cash used in operating activities totaled $1,087,000 for the nine
months ended September 30, 1996.
As of September 30, 1996, the Company had $26,000 in cash and cash
equivalents, $1.96 million in restricted cash and $8.30 million of current
borrowings under the loan agreement. 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. The Company will require additional financing from outside
sources during 1996 to remain viable.
Capital expenditures during the nine months ended September 30, 1996
totaled $547,000. Of the total, the Company paid an aggregate of approximately
$348,000 with respect to payments made on customer lists acquired prior to
January 1, 1996. In addition, the Company purchased approximately $199,000 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. As of September 30, 1996,
the Company was in discussion with the government agencies regarding a proposed
settlement agreement. While an actual agreement has not been finalized, the
Company has accrued to date $4.25 million of estimated potential liability. 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
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operations and cash flow. 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
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 September 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
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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
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 also obtained a
waiver of such default from the bank as of December 31, 1995. See Notes 4 and 5
of Notes to Condensed Consolidated Financial Statements.
Prior to September 20, 1996, the Company's outstanding borrowings under its
line of credit arrangement (the "Line of Credit") with a bank, including unpaid
interest and costs were $8.2 million (see Note 4 of Notes to Condensed
Consolidated Financial Statements) 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 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 5 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 stated that the bank would 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 included an extension
of the forbearance period to September 15, 1996.
On September 20, 1996, the bank assigned the entire $8.2 million of the
Company's borrowings to a private lender (the "Lender") under a privately
negotiated transaction. The Lender acquired from the bank any and all rights,
claims and causes of action under the Amended Agreement. On October 4, 1996, the
Lender advanced additional operating funds to the Company and the Company issued
a promissory note to the Lender in the amount of $575,000 payable on demand. The
Company and the Lender are in the process of negotiating amendments to the terms
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of the Amended Agreement, however, under the terms of the existing Amended
Agreement, the Lender may, without notice to the Company, exercise any of the
remedies available to it under such agreement. There can be no assurance that
such negotiation will be concluded or, if concluded, will be on terms acceptable
to the Company.
As of September 30, 1996, the Company was in default of the minimum
consolidated net worth criteria under the Debenture Agreement. 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. The Company is attempting to obtain
waivers of default from the Debenture holders. In the event that such waivers
are not received, the convertible subordinated debt becomes due and payable and
adjustments to the conversion price of the Debenture become effective. The
Company has recognized the Debenture as a current liability as of September 30,
1996. Interest expense has been recorded and is included in accrued expenses at
September 30, 1996.
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 financing for other than working capital 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 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, that the Lender will demand payment of all outstanding borrowings
and interest related thereto 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 Settlement 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
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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).
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.
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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.
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
25
<PAGE>
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
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.
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
26
<PAGE>
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
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
27
<PAGE>
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.
In response to cross-motions to certify and decertify the class action, the
court orally stated recently that it would certify the suit as a class action
suit. No written opinion has been received from the court ordering the
certification.
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 both the Company and the government agencies have discussed a
proposed settlement. While the actual agreement has not been finalized, the
Company recorded a charge during the third quarter of 1996 of $2,000,000 based
on preliminary estimates. Such amounts, when aggregated with previously recorded
accruals, bring the total estimated accrual to $4,250,000. However, based on the
ultimate outcome of the proposed settlement agreement, additional charges may be
recorded in the future. Additionally, subsequent to the finalization of an
agreement, noncompliance with any terms of such an agreement could result in the
acceleration of any unpaid amounts or imposition of additional payments, fines
and penalties.
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.
28
<PAGE>
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.
29
<PAGE>
Item 3. Defaults Upon Senior Securities
Prior to September 20, 1996, the Company's outstanding borrowings under its
line of credit arrangement (the "Line of Credit") with a bank, including unpaid
interest and costs were $8.2 million (see Note 4 of Notes to Condensed
Consolidated Financial Statements) 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 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 5 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 stated that the bank would 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 included an extension
of the forbearance period to September 15, 1996.
On September 20, 1996, the bank assigned the entire $8.2 million of the
Company's borrowings to a private lender (the "Lender") under a privately
negotiated transaction. The Lender acquired from the bank any and all rights,
claims and causes of action under the Amended Agreement. On October 4, 1996, the
Lender advanced additional operating funds to the Company and the Company issued
a promissory note to the Lender in the amount of $575,000 payable on demand. The
Company and the Lender are in the process of negotiating amendments to the terms
of the Amended Agreement, however, under the terms of the existing Amended
Agreement, the Lender may, without notice to the Company, exercise any of the
remedies available to it under such agreement. There can be no assurance that
such negotiation will be concluded or, if concluded, will be on terms acceptable
to the Company.
As of September 30, 1996, the Company was in default of the minimum
consolidated net worth criteria under the Debenture Agreement. 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. The Company is attempting to obtain
waivers of default from the Debenture holders. In the event that such waivers
are not received, the convertible subordinated debt becomes due and payable and
adjustments to the conversion price of the Debenture become effective. The
Company has recognized the Debenture as a current liability as of September 30,
1996. Interest expense has been recorded and is included in accrued expenses at
September 30, 1996.
30
<PAGE>
Item 5. Other Information
On October 28, 1996, the Company announced the resignation of William E.
Neeley, M.D. from the position of President of Meris Laboratories, Inc. In
addition, effective November 1, 1996, Dr. Neeley also resigned as a member of
the Board of Directors. Henry E. Bose, most recently the Company's General
Counsel, has been appointed as the acting President and Chief Executive Officer
pending the hiring of a permanent replacement.
31
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 Consulting Agreement, dated as of August 9, 1996, entered
into between the Registrant and Stephen P. Monticelli
Exhibit 10.2 Consulting Agreement, dated as of August 9, 1996, entered
into between the Registrant and Henry W. Poett III
Exhibit 10.3 Consulting Agreement, dated as of October 1, 1996, entered
into between the Registrant and Henry E. Bose
Exhibit 10.4 Letter dated October 1, 1996 to confirm the further
understandings with respect to the Consulting Agreement between
the Registrant and Henry E. Bose dated October 1, 1996
Exhibit 10.5 Term Promissory Note, dated as of September 6, 1996, entered
into between the Registrant and Madeleine L.L.C.
Exhibit 11 Computation of earnings per common shares
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None.
32
<PAGE>
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: November 14, 1996
33
<PAGE>
EXHIBIT INDEX
Exhibit
Number Document
- ------- --------
10.1 Consulting Agreement, dated as of August 9, 1996, entered into
between the Registrant and Stephen P. Monticelli
10.2 Consulting Agreement, dated as of August 9, 1996, entered into
between the Registrant and Henry W. Poett III
10.3 Consulting Agreement, dated as of October 1, 1996, entered
into between the Registrant and Henry E. Bose
10.4 Letter dated October 1, 1996 to confirm the further
understandings with respect to the Consulting Agreement
between the Registrant and Henry E. Bose dated October 1, 1996
10.5 Term Promissory Note, dated as of September 6, 1996, entered
into between the Registrant and Madeleine L.L.C.
11 Computation of earnings per common shares
27 Financial Data Schedule
34
CONSULTING AGREEMENT
This Consulting Agreement (the "Agreement") is made this 9th day of August, 1996
by and between Stephen P. Monticelli ("Consultant") and Meris Laboratories, Inc.
("Client").
1. Consulting Services and Period.
1.1 Services. Client hereby retains Consultant and Consultant
agrees to render to Client from time to time and at Client's
written request consulting services relating to the Client's
business as specified in Exhibit A.
1.2 Consulting Period. Unless sooner terminated pursuant to
Section 3 below, this term of this Agreement shall be the
period set forth in Exhibit A.
2. Compensation; Expenses.
2.1 Compensation. In consideration of the services to be rendered
hereunder, Consultant shall be paid consulting fees at the
rate set forth in Exhibit A.
2.2 Expenses. Client shall reimburse Consultant for reasonable
travel and other business expenses incurred by Consultant in
the performance of Consultant's duties hereunder, provided
that Client is notified in advance of Consultant's need to
incur such expenses and such expenses are approved by Client.
2.3 Invoices. Client shall submit monthly invoices for services
provided by Consulant hereunder, and for costs and expenses to
be reimbursed hereunder. Payments shall be due within ten (10)
days of receipt of Client's invoice.
3. Termination of Consulting Period.
This Agreement may be terminated by either party (i) on 90 days prior
written notice to the other or (ii) if the other party shall breach any
material term or provision of this Agreement and shall fail or refuse,
within thirty (30) days after receipt of written notice from the
non-breaching party regarding such breach, to take such action as may
be necessary to cure or remedy such breach.
4. Proprietary Information.
4.1 Defined. "Proprietary Information" is all proprietary and
confidential information of Client which pertains to the
1
<PAGE>
business or products of Client, or its customers, consultants
or business associates, which was or is obtained by Consultant
from Client. Notwithstanding the foregoing, Proprietary
Information shall not include: (i) information which is or
becomes publicly known through lawful means; (ii) information
that was rightfully in Consultant's possession or part of
Consultant's general knowledge prior to the Consulting Period;
(iii) information which is disclosed to Consultant without
confidential or proprietary restrictions by a third party; or
(iv) information which is independently developed or
discovered by Consultant.
4.2 Nondisclosure of Proprietary Information. Consultant agrees to
protect the confidentiality of the Proprietary Information and
not publish, disclose or otherwise make the same available to
any person without Client's prior written consent.
4.3 Reports. All reports and other written information furnished
by Consultant hereunder shall be the property of Client and
Client shall have the unrestricted right to use the same as
Client determines appropriate without obligation to a third
person.
5. Adverse Interests.
During the term of this Agreement, Consultant shall not enter to any
agreement, or perform any work for services for another or participate
in any activities, which may be adverse to the interests of Client. In
addition, during such period Consultant agrees not to undertake or
participate in any activity which is directly or indirectly in
competition with Client or its business.
6. Assignment; Successors and Assigns.
Neither Consultant nor Client shall assign this Agreement without the
prior written consent of the other party, which consent shall not be
unreasonably withheld. Subject to the foregoing, this Agreement shall
be binding upon and inure to the benefit of the parties hereto and
their respective heirs, legal representatives, successors and permitted
assigns, and shall not benefit any person or entity other than the
parties hereto.
7. Notices.
All notices or other communications required or permitted hereunder
shall be made in writing and shall be deemed to have been duly given if
delivered by hand or mailed, postage prepaid, by certified or
registered mail, return receipt requested, and addressed to Client at
2890 Zanker Road, San Jose, CA 95134 and Consultant at the address set
forth in Exhibit A. Notice of change of address shall be effective only
when done in accordance with this Section 7.
2
<PAGE>
8. Entire Agreement.
The terms of this Agreement are intended by the parties to be in the
final expression of their agreement with respect to the matters set
forth herein and may not be contradicted by evidence of any prior or
contemporaneous agreement. The parties further intend that this
Agreement shall constitute the complete and exclusive statement of its
terms and that no extrinsic evidence whatsoever may be introduced in
any judicial, administrative, or other legal proceeding involving this
Agreement.
9. Amendments; Waivers.
This Agreement may not be modified or amended except by an instrument
in writing, signed by Consultant and Client. By an instrument in
writing similarly executed, either party may waive compliance by the
other party with any provision of this Agreement that such other party
was or is obligated to comply with or perform, provided, however, that
such waiver shall not operate as a waiver of, or estoppel with respect
to, any other or subsequent failure. No failure to exercise and no
delay in exercising any right, remedy, or power hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any
right, remedy, or power hereunder preclude any other or further
exercise thereof or the exercise of any other right, remedy, or power
provided herein or by law or in equity.
10. Governing Law.
The validity, interpretation, enforceability, and performance of this
Agreement shall be governed by and construed in accordance with the
laws of the State of California as such laws are applied to contracts
entered into and to be performed therein by residents thereof.
11. Independent Contractor.
Consultant shall operate at all times as an independent contractor of
Client, and is in no way considered an employee of the Client.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date
first written above.
CONSULTANT MERIS LABORATORIES, INC.
By: /s/ Stephen P. Monticelli By: /s/ William Neeley, M.D.
- ------------------------------ --------------------------------------
Stephen P. Monticelli Medical Director & President
Title:--------------------------------
cons-sm
3
<PAGE>
EXHIBIT A
1. Consulting Services to be Provided.
Consultant shall provide consulting services with respect to
Client's business by assisting Client with respect to (i)
business and financial analysis and planning, and (ii) such
other tasks as Client and Consultant shall agree upon.
Consultant shall report to Client's President & CEO. Client's
President & CEO shall assign consulting tasks.
2. Term.
One year beginning August 9, 1996.
3. Consulting Fee Rate.
$150 per hour.
4. Address of Consultant.
Stephen P. Monticelli
Steuart Tower - Sixteenth Floor
One Market Street
San Francisco, CA 94105
cons-sm
4
CONSULTING AGREEMENT
This Consulting Agreement (the "Agreement") is made this 9th day of August, 1996
by and between Henry W. Poett III ("Consultant") and Meris Laboratories, Inc.
("Client").
1. Consulting Services and Period.
1.1 Services. Client hereby retains Consultant and Consultant
agrees to render to Client from time to time and at Client's
written request consulting services relating to the Client's
business as specified in Exhibit A.
1.2 Consulting Period. Unless sooner terminated pursuant to
Section 3 below, this term of this Agreement shall be the
period set forth in Exhibit A.
2. Compensation; Expenses.
2.1 Compensation. In consideration of the services to be rendered
hereunder, Consultant shall be paid consulting fees at the
rate set forth in Exhibit A.
2.2 Expenses. Client shall reimburse Consultant for reasonable
travel and other business expenses incurred by Consultant in
the performance of Consultant's duties hereunder, provided
that Client is notified in advance of Consultant's need to
incur such expenses and such expenses are approved by Client.
2.3 Invoices. Client shall submit monthly invoices for services
provided by Consultant hereunder, and for costs and expenses
to be reimbursed hereunder. Payments shall be due within ten
(10) days of receipt of Client's invoice.
3. Termination of Consulting Period.
This Agreement may be terminated by either party (i) on 90 days prior
written notice to the other or (ii) if the other party shall breach any
material term or provision of this Agreement and shall fail or refuse,
within thirty (30) days after receipt of written notice from the
non-breaching party regarding such breach, to take such action as may
be necessary to cure or remedy such breach.
4. Proprietary Information.
4.1 Defined. "Proprietary Information" is all proprietary and
confidential information of Client which pertains to the
1
<PAGE>
business or products of Client, or its customers, consultants
or business associates, which was or is obtained by Consultant
from Client. Notwithstanding the foregoing, Proprietary
Information shall not include: (i) information which is or
becomes publicly known through lawful means; (ii) information
that was rightfully in Consultant's possession or part of
Consultant's general knowledge prior to the Consulting Period;
(iii) information which is disclosed to Consultant without
confidential or proprietary restrictions by a third party; or
(iv) information which is independently developed or
discovered by Consultant.
4.2 Nondisclosure of Proprietary Information. Consultant agrees to
protect the confidentiality of the Proprietary Information and
not publish, disclose or otherwise make the same available to
any person without Client's prior written consent.
4.3 Reports. All reports and other written information furnished
by Consultant hereunder shall be the property of Client and
Client shall have the unrestricted right to use the same as
Client determines appropriate without obligation to a third
person.
5. Adverse Interests.
During the term of this Agreement, Consultant shall not enter to any
agreement, or perform any work for services for another or participate
in any activities, which may be adverse to the interests of Client. In
addition, during such period Consultant agrees not to undertake or
participate in any activity which is directly or indirectly in
competition with Client or its business.
6. Assignment; Successors and Assigns.
Neither Consultant nor Client shall assign this Agreement without the
prior written consent of the other party, which consent shall not be
unreasonably withheld. Subject to the foregoing, this Agreement shall
be binding upon and inure to the benefit of the parties hereto and
their respective heirs, legal representatives, successors and permitted
assigns, and shall not benefit any person or entity other than the
parties hereto.
7. Notices.
All notices or other communications required or permitted hereunder
shall be made in writing and shall be deemed to have been duly given if
delivered by hand or mailed, postage prepaid, by certified or
registered mail, return receipt requested, and addressed to Client at
2890 Zanker Road, San Jose, CA 95134 and Consultant at the address set
forth in Exhibit A. Notice of change of address shall be effective only
when done in accordance with this Section 7.
2
<PAGE>
8. Entire Agreement.
The terms of this Agreement are intended by the parties to be in the
final expression of their agreement with respect to the matters set
forth herein and may not be contradicted by evidence of any prior or
contemporaneous agreement. The parties further intend that this
Agreement shall constitute the complete and exclusive statement of its
terms and that no extrinsic evidence whatsoever may be introduced in
any judicial, administrative, or other legal proceeding involving this
Agreement.
9. Amendments; Waivers.
This Agreement may not be modified or amended except by an instrument
in writing, signed by Consultant and Client. By an instrument in
writing similarly executed, either party may waive compliance by the
other party with any provision of this Agreement that such other party
was or is obligated to comply with or perform, provided, however, that
such waiver shall not operate as a waiver of, or estoppel with respect
to, any other or subsequent failure. No failure to exercise and no
delay in exercising any right, remedy, or power hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any
right, remedy, or power hereunder preclude any other or further
exercise thereof or the exercise of any other right, remedy, or power
provided herein or by law or in equity.
10. Governing Law.
The validity, interpretation, enforceability, and performance of this
Agreement shall be governed by and construed in accordance with the
laws of the State of California as such laws are applied to contracts
entered into and to be performed therein by residents thereof.
11. Independent Contractor.
Consultant shall operate at all times as an independent contractor of
Client, and is in no way considered an employee of the Client.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date
first written above.
CONSULTANT MERIS LABORATORIES, INC.
By: /s/ Henry W. Poett III By:/s/s William Neeley, M.D.
- --------------------------- -------------------------------------
Henry W. Poett III Medical Director & President
Title:-------------------------------
cons-hp
3
<PAGE>
EXHIBIT A
1. Consulting Services to be Provided.
Consultant shall provide consulting services with respect to
Client's business by assisting Client with respect to (i)
business and financial analysis and planning, and (ii) such
other tasks as Client and Consultant shall agree upon.
Consultant shall report to Client's President & CEO. Client's
President & CEO shall assign consulting tasks.
2 Term.
One year beginning August 9, 1996.
3. Consulting Fee Rate.
$150 per hour.
4. Address of Consultant.
Henry W. Poett III
401 Chapin Lane
Burlingame, CA 94010
cons-hp
4
CONSULTING AGREEMENT
This Consulting Agreement (the "Agreement") is made this 1st day of
October 1996 between Henry E. Bose ("Consultant") and Meris
Laboratories, Inc. ("Client").
1. Consulting Services and Period.
1.1 Services. Client hereby retains Consultant and Consultant
agrees to render to Client from time to time and at Client's
written request legal services relating to Client's business
as specified in Exhibit A. Subject to the Termination
Provision of Paragraph 3, consultant agrees to serve as the
Client's General Counsel.
1.2 Consulting Period. Unless sooner terminated pursuant to
Section 3 below, this term of this Agreement shall be the
period set forth in Exhibit A (the "Consulting Period").
2. Compensation; Expenses.
2.1 Compensation. In consideration of the services to be rendered
hereunder, Client shall pay Consultant at the rate set forth
in Exhibit A for each hour of consulting services provided
during the Consulting Period.
2.2 Expenses. Client shall reimburse Consultant for reasonable
travel and other business expenses incurred by Consultant in
the performance of his duties hereunder, provided that Client
is notified in advance of Consultant's need to incur such
expenses and such expenses are approved by Client.
2.3 Payments. Payments shall be made upon receipt of
invoice. Consultant shall submit semi-monthly invoices
to Client.
3. Termination of Consulting Period.
This Agreement may be terminated by either party if the other party
shall breach any material term or provision of this Agreement and shall
fail or refuse, within thirty (30) days after receipt of written notice
from the non-breaching party regarding such breach, to take such action
as may be necessary to cure or remedy such breach.
4. Proprietary Information.
4.1 Defined. "Proprietary Information" is all proprietary and
1
<PAGE>
confidential information of Client which pertains to the
business or products of Client, or its customers, consultants
or business associates, which was or is obtained by Consultant
from Client. Notwithstanding the foregoing, Proprietary
Information shall not include: (i) information which is or
becomes publicly known through lawful means; (ii) information
that was rightfully in Consultant's possession or part of his
general knowledge, in either case other than as an employee of
Meris or as the result of such employment, prior to the
Consulting Period; (iii) information which is disclosed to
Consultant without confidential or proprietary restrictions by
a third party; or (iv) information which is independently
developed or discovered by Consultant.
4.2 Nondisclosure of Proprietary Information. Consultant
agrees to protect the confidentiality of the Proprietary
Information and not publish, disclose or otherwise make
the same available to any person without Client's prior
written consent.
4.3 Reports. All reports and other written information furnished
by Consultant hereunder shall be the property of Client and
Client shall have the unrestricted right to use the same as
Client determines appropriate without obligation to a third
person.
5. Stock Options.
As of the date hereof, Consultant holds options to purchase 45,746
shares of Client's common stock. It is the intent of the parties that
as a consequence of this Agreement such options shall continue to vest
under the Option Plan as if Consultant were an employee of Client
through the Consulting Period.
6. Adverse Interests.
During the term of this Agreement, Consultant shall not enter to any
agreement, or perform any work or services for another or participate
in any activities which may be adverse to the interests of Client. In
addition, during such period, Consultant agrees not to undertake or
participate in any activity which is directly or indirectly in
competition with Client or its business.
7. Assignment; Successors and Assigns.
Consultant shall not assign any of his obligations under this
Agreement, or subcontract any work to be performed hereunder, without
the prior written consent of Client. Subject to the foregoing, this
Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, legal representatives, successors
and permitted assigns, and shall not benefit any person or entity other
than the parties hereto.
2
<PAGE>
8. Notices.
All notices or other communications required or permitted hereunder
shall be made in writing and shall be deemed to have been duly given if
delivered by hand or mailed, postage prepaid, by certified or
registered mail, return receipt requested, and addressed to Client at
2890 Zanker Road, San Jose, CA 95134 and Consultant at the address set
forth in Exhibit A. Notice of change of address shall be effective only
when done in accordance with this Section 8.
9. Entire Agreement.
The terms of this Agreement are intended by the parties to be in the
final expression of their agreement with respect to the matters set
forth herein and may not be contradicted by evidence of any prior or
contemporaneous agreement. The parties further intend that this
Agreement shall constitute the complete and exclusive statement of its
terms and that no extrinsic evidence whatsoever may be introduced in
any judicial, administrative, or other legal proceeding involving this
Agreement.
10. Amendments; Waivers.
This Agreement may not be modified or amended except by an instrument
in writing, signed by Consultant and Client. By an instrument in
writing similarly executed, either party may waive compliance by the
other party with any provision of this Agreement that such other party
was or is obligated to comply with or perform, provided, however, that
such waiver shall not operate as a waiver of, or estoppel with respect
to, any other or subsequent failure. No failure to exercise and no
delay in exercising any right, remedy, or power hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any
right, remedy, or power hereunder preclude any other or further
exercise thereof or the exercise of any other right, remedy, or power
provided herein or by law or in equity.
11. Governing Law.
The validity, interpretation, enforceability, and performance of this
Agreement shall be governed by and construed in accordance with the
laws of the State of California as such laws are applied to contracts
entered into and to be performed therein by residents thereof.
12. Independent Contractor.
Consultant shall operate at all times as an independent contractor of
Client, and is in no way considered an employee of the Client.
3
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date
first written above.
CONSULTANT MERIS LABORATORIES, INC.
/S/ Henry E. Bose By: /s/ William Neeley, M.D.
........................... ..............................
Henry E. Bose
4
<PAGE>
EXHIBIT A
1. Consulting Services to be Provided.
Consultant shall provide legal consulting services with respect to
Client's business, including legal services with respect to ongoing
litigation matters.
2. Term.
October 1, 1996 through September 30, 1997
3. Consulting Fee Rate.
$150 per hour.
4. Address of Consultant.
152 North Third Street, Suite 503, San Jose, CA 95112
5
HENRY E. BOSE
ATTORNEY AT LAW
152 NORTH THIRD STREET, SUITE 5O3
SAN JOSE, CA 95112
TELEPHONE: (408) 999-7400
FAX: (408) 999-7402
October 1, 1996
Meris Laboratories, Inc.
2890 Zanker Road
San Jose, CA 95134
Attn: William E. Neeley, MD
Re: Legal Services
Gentlemen:
This letter is written to confirm that you have retained me to provide
legal services to you and to set out certain of the agreements we have reached
with respect to such representation. Additional terms of our engagement are set
forth in the consulting agreement executed concurrently herewith. This letter is
intended to fulfill the requirements of Section 6148 of the California Business
and Professions Code which requires that a contract for legal services be in
writing in any case where it is reasonably foreseeable that the total expense to
a client, including attorneys fees, will exceed one thousand dollars. Our
agreements are as follows:
1. Legal Services to be Provided. I will provide you such legal services of
a business law nature as you shall request or require from time to time with
respect to the conduct of your clinical laboratory business. Legal services that
are not to be provided by me include consultation beyond that set forth in the
previous sentence and any litigation. If you wish me to provide any legal
services not to be provided under this agreement, the provisions of this
agreement shall apply to such additional services I shall provide, unless you
request a separate agreement with respect thereto. Subject to the Termination
provision of paragraph 3, I agree to serve as the Company's General Counsel.
2. Responsibilities. I will perform the legal services provided for under
this agreement and the consulting agreement and respond promptly to your
inquiries and communications. You will be truthful and cooperative with me and
timely make any payments required by this agreement.
1
<PAGE>
3. Termination. You have the right to discharge me at any time, and I may
withdraw from representation of you at any time. My withdrawal may be based on
your failure to meet your obligation of timely payment under this agreement. The
work product produced in the course of my representation will remain my
property, however, you will be entitled to reasonable access to it.
4. Fees for Services. I charge for my services based primarily on the
number of hours devoted to the matters undertaken in your behalf multiplied by
my hourly rate which in this case I have reduced to $150 per hour. The minimum
time billed is 0.1 hour. My hourly rate is subject to adjustment from time to
time; such adjustments will be reflected on your monthly bill. Any estimates I
provide of anticipated fees, whether for budgeting purposes or otherwise, are
necessarily only estimates, due to uncertainties involved, and are not a maximum
quotation or any other limit. Actual fees will be determined as described above.
I will notify you when I become aware fees in any given month will exceed
$15,000.
5. Out of Pocket Costs and Disbursements. In the course of my
representation, I will incur expenses such as filing fees, long distance
telephone charges, facsimile charges, copying charges, overnight delivery and
other communication costs, computer research fees, postage and non-attorney
staff and retained overtime (when required by you or the timing of the matters
being worked upon). I will reflect such charges on your regular monthly
statement. Such charges shall be your responsibility in addition to my charges
for legal fees. When my representation involves the incurring of any
expenditures of an amount in excess of $100 or of an extraordinary nature such
as travel and related expense, I will generally require that you provide those
sums to me in advance.
6. Monthly Statements. My practice is to send periodic statements for
services and disbursements. Such statements will be provided on a semi-monthly
or monthly basis. My hourly rate is based on the premise that statements are due
and payable upon receipt. If your payment is not received within 30 days of
receipt, I will charge you interest at the rate of 1.5% per month from the due
date until paid. If you have any question regarding a statement, please feel
free to ask the question as soon as possible. If you object to only a portion of
a statement, I ask that you pay the remainder, which will not constitute a
waiver of any question or objection you may have.
7. Nature of Relationship. The attorney-client relationship is one of
mutual trust and confidence. If at any time you have any questions about the
provisions of this agreement or my representation, please feel free to contact
me.
8. Effective Date of Agreement. This effective date of this agreement will
be the date a copy hereof is executed by you and returned to me.
If you agree with the foregoing, please sign the duplicate copy of this letter
in the space provided and return it to me.
2
<PAGE>
Very truly yours,
/s/ Henry E. Bose
....................
Henry E. Bose
ACCEPTED AND AGREED TO
THIS 1st DAY OF October, 1996
MERIS LABORATORIES, INC
By:/s/ William E. Neeley, M.D.
.............................
William E. Neeley, MD, President
3
TERM PROMISSORY NOTE
$100,000 New York, New York
September 6, 1996
FOR VALUE RECEIVED, the undersigned, MERIS LABORATORIES, INC., a California
corporation (the "Maker"), hereby promises to pay to the order of Madeleine LLC
("Madeleine") the principal sum of One Hundred Thousand Dollars ($100,000) on
September 6, 2001.
Principal is payable in lawful money of the United States and in
immediately available funds at the offices of Madeleine at 950 Third Avenue, New
York, New York 10022, or at such other place as Madeleine shall designate in
writing to the Maker. If any amount payable hereunder shall be due on a day on
which banks are required or authorized to close in New York City (any other day
being a "Business Day"), such payment may be made on the next succeeding
Business Day, and such extension of time shall in such case be included in the
computation of interest payable hereon.
This Note shall be immediately due and payable without presentment, demand,
protest or further notice of any kind, all of which are hereby expressly waived,
if (a) the Maker shall be generally not paying its debts as such debts become
due, or shall admit in writing its inability to pay its debts generally, or
shall make a general assignment for the benefit of creditors; or any proceeding
shall be instituted by or against the Maker seeking to adjudicate it a bankrupt
or insolvent, or seeking dissolution, liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief or composition of it or its debts
under any law relating to bankruptcy, insolvency or reorganization or relief of
debtors, or seeking the entry of an order for relief or the appointment of a
receiver, trustee, custodian or other similar official for the Maker or for any
substantial part of its property; or the Maker shall take any action to
authorize or effect any of the actions set forth above in this clause (a), (b)
the Maker shall refinance its existing senior indebtedness or (c) any person or
"group" (within the meaning of Section 13(d)(3) of the Securities Exchange Act
of 1934, as amended) shall have acquired, directly or indirectly, the Maker, all
or substantially all of its properties or assets or more than 50% of the shares
of the Maker's common stock then outstanding.
The Maker may, at its option, prepay this Note, in whole at any time or in
part from time to time, without penalty or premium, provided that each partial
prepayment shall be in a principal amount equal to $10,000 or an integral
multiple thereof.
The Maker represents and warrants as follows: (a) the Maker is a
corporation duly organized, validly existing and in good standing under the laws
1
<PAGE>
of California; (b) the execution, delivery and performance by the Maker of this
Note are within the Maker's corporate powers, have been duly authorized by all
necessary corporate action, and do not contravene (i) the Maker's charter or
by-laws or (ii) any law or any contractual restriction binding on or affecting
the Maker, (c) no authorization or approval or other action by, and no notice
to or filing with, any governmental authority or regulatory body is required for
the due execution, delivery and performance by the Maker of this Note; and (d)
this Note constitutes the legal, valid and binding obligation of the Maker,
enforceable against the Maker in accordance with its terms.
All payments made by the Maker hereunder will be made without setoff,
counterclaim or other defense. All such payments shall be made free and clear of
and without deduction for any present or future income, stamp or other taxes,
levies, imposts, deductions, charges, fees, withholding, restrictions or
conditions of any nature now or hereafter imposed, levied, collected, withheld
or assessed by any jurisdiction or by any political subdivision or taxing
authority thereof or therein, and all interest, penalties or similar
liabilities, excluding taxes on the overall net income of Madeleine (such
non-excluded taxes are hereinafter collectively referred to as the "Taxes"). If
the Maker shall be required, by law to deduct or to withhold any Taxes from or
in respect of any amount payable hereunder, {i) the amount so payable shall be
increased to the extent necessary so that after making all required deductions
and withholdings (including Taxes on amounts payable to Madeleine pursuant to
this sentence) Madeleine receives an amount equal to the sum it would have
received had no such deductions or withholdings been made, (ii) the Maker shall
make such deductions or withholdings and (iii) the Maker shall pay the full
amount deducted or withheld to the relevant taxation authority in accordance
with applicable law. Whenever any Tax is payable by the Maker, as promptly as
possible thereafter the Maker shall send Madeleine an official receipt showing
payment. In addition, the Maker agrees to pay any present or future taxes,
charges or similar levies which arise from any payment made hereunder or from
the execution, delivery, performance, recordation or filing of, or otherwise
with respect to, this Note (hereinafter referred to as "Other Taxes"). The Maker
will indemnify Madeleine for the full amount of Taxes or Other Taxes (including,
any Taxes or Other Taxes on amounts payable to Madeleine under this paragraph)
paid by Madeleine and any liability (including penalties, interest and expenses)
arising therefrom or with respect thereto, upon written demand by Madeleine
therefor.
No failure on the part of Madeleine to exercise, and no delay in
exercising, any right, power, privilege or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise thereof by Madeleine
preclude any other or further exercise thereof or the exercise of any other
right, power, privilege or remedy of Madeleine. No amendment or waiver of any
provision of this Note, nor consent to any departure by Madeleine therefrom,
shall in any event be effective unless the same shall be in writing and signed
by Madeleine, and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given.
Any provision hereof which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective only to the extent
2
<PAGE>
of such prohibition or unenforceability without invalidating the remaining
provisions hereof or affecting the validity or enforceability of such provision
in any other jurisdiction.
The Maker hereby agrees to pay on demand all costs and expenses (including,
without limitation, all fees and expenses of counsel to Madeleine) incurred by
Madeleine in connection with (i) the preparation, execution, delivery,
administration and amendment of this Note, and (ii) the enforcement of
Madeleine's rights, and the collection of all amounts due, hereunder.
The Maker hereby acknowledges that it is obligated to pay Madeleine
pursuant to the terms of this Note regardless of whether or not the transactions
contemplated by the commitment letter dated September 5,1996 (together with all
attachments thereto, the "Commitment Letter") from Madeleine to the Maker are
consummated. The Maker further acknowledges that the obligations of the Maker
under this Note shall survive the termination of the Commitment Letter, as
provided therein.
The Maker hereby (i) irrevocably submits to the jurisdiction of any New
York State or Federal court sitting in New York City in any action or proceeding
arising out of or relating to this Note, (ii) waives any defense based on
doctrines of venue or forum non conveniens, or similar rules or doctrines, and
(iii) irrevocably agrees that all claims in respect of such an action or
proceeding may be heard and determined in such New York State or Federal court.
The Maker (by its acceptance hereof) waives any right to trial by jury in any
action, proceeding or counterclaim arising out of or relating to this Note.
This Note shall be governed by, and construed in accordance with, the laws
of the State of New York.
MERIS LABORATORIES, INC
By:/s/ Stephen Brent Kass
...........................
Name: Stephen Brent Kass
Title: Chairman Of Board
Address:
2890 Zanker road
...........................
San Jose, CA 95134
...........................
Attention: Henry Bose, ESQ.
...........................
Telephone: 1-800-219-9200 Ext 3700
.........................
Telecopier: Call First
.........................
3
<TABLE>
<CAPTION>
EXHIBIT 11
MERIS LABORATORIES, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
Q3-96 YTD 9/96
------------ --------------
<S> <C> <C>
Primary
Earnings
Income (loss) applicable to common shares ($5,986) ($11,953)
Shares
Weighted average number of common
shares outstanding 8,011 7,998
Primary earnings per common share
Net income (Loss) ($0.75) ($1.49)
Assuming full dilution
Earnings
Income (Loss) before extraordinary items ($5,986) ($11,953)
Add after tax interest expense applicable
to 10% Convertible Senior Subordinated Debt 283 834
Net income (Loss) adjusted ($5,703) ($11,119)
Shares
Weighted average number of common
shares outstanding 8,011 7,998
Assuming conversion of 10% convertible 3,188 3,188
Assuming conversion of options reduced
by the number of shares which could
have been purchased with the proceeds
from exercise of such options 0 0
Weighted average number of common
shares outstanding (adjusted) 11,199 11,186
Earnings per common share assuming full dilution
Net income (Loss) ($0.51) ($0.99)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 26,000
<SECURITIES> 0
<RECEIVABLES> 7,968,000
<ALLOWANCES> 0
<INVENTORY> 475,000
<CURRENT-ASSETS> 11,067,000
<PP&E> 1,798,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 36,173,000
<CURRENT-LIABILITIES> 36,249,000
<BONDS> 0
0
0
<COMMON> 37,157,000
<OTHER-SE> (37,457,000)
<TOTAL-LIABILITY-AND-EQUITY> 36,173,000
<SALES> 27,728,000
<TOTAL-REVENUES> 27,728,000
<CGS> 21,136,000
<TOTAL-COSTS> 21,136,000
<OTHER-EXPENSES> 12,077,000
<LOSS-PROVISION> 4,789,000
<INTEREST-EXPENSE> 1,679,000
<INCOME-PRETAX> (11,953,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,953,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,953,000)
<EPS-PRIMARY> (1.49)
<EPS-DILUTED> 0
</TABLE>
