UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 2 to
Form 8-K(A)
Current Report
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report: (Date of earliest event reported): November 5, 1998
Unilab Corporation ("Unilab")
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
33-77286 95-4415490
(Commission File Number) (I.R.S. Employer Identification Number)
18448 Oxnard Street, Tarzana, California 91356
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 996-7300
- ------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Introductory Note:
This Amendment No. 2 on Form 8-K(A) amends and restates the Current
Report on Form 8-K filed by Unilab on November 5, 1998, the Current Report on
Form 8-K/A filed on January 19, 1999,and the Current Report on Form 8-K/A,
Amendment No. 1, filed by Unilab on October 25, 1999 with respect to Unilab's
acquisition of substantially all of the assets of Meris Laboratories, Inc.
("Meris"). This Amendment is being filed for the purposes of providing
(i) additional information pursuant to Item 2, (ii) the consolidated
historical financial statements of the Meris business acquired (the "Meris
Financial Information") and (iii) the Unaudited Pro Forma Financial Information
of Unilab and the notes thereto (collectively, the "Pro Forma Financial
Information")
Item 2. Acquisition or Disposition of Assets
(a) Acquisition
Pursuant to an Asset Purchase Agreement, dated as of September
16, 1998 (the "Asset Purchase Agreement"), by and between Meris Laboratories,
Inc., a California corporation ("Meris") and Unilab Corporation, a Delaware
corporation ("Unilab" or the "Company"), effective as of November 5, 1998 the
Company acquired substantially all of the assets of Meris (the "Meris
Acquisition"). The purchase price for the Meris Acquisition consisted of a $14
million convertible subordinated note ("the Note") and the incurrence of $2.5
million of liabilities payable to Meris in equal installments over 72 months.
The Note has an 8-year term with a $3.00 per share conversion price, and bears a
7.5% interest rate. In addition to the customer list, Unilab acquired
approximately $6.5 million of assets, the majority of which were trade accounts
receivable.
The shares of Unilab common stock into which the Note are
convertible is subject to a Registration Rights Agreement, dated November 5,
1998.
The Asset Purchase Agreement is attached as Exhibit 2.1, the
Note is attached as Exhibit 2.2 and the Registration Rights Agreement is
attached as Exhibit 2.3. Each such agreement is incorporated by reference in its
entirety herein and the description of each such Agreement contained herein is
qualified in its entirety by reference to such agreement.
(a) Source of Funds
The consideration for the Meris Acquisition consisted of the
Note, plus the incurrence of certain payments over a 72-month period. Unilab
intends to make these monthly payments from cash on hand. Unilab believes its
cash flows will be sufficient to make such payments on a timely basis.
(b) Equipment or Other Physical Property
Certain of the assets of Meris acquired by the Company
pursuant to the Asset Purchase Agreement constitute equipment or other physical
property. Such assets were used by Meris in conjunction with its clinical
laboratory testing business. The Company intends to continue substantially the
same use for such acquired assets.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Information of Business Acquired
Attached hereto as Exhibit 99.1 is the revised Meris
Financial Information.
(b) Pro Forma Financial Information.
Attached hereto as Exhibit 99.2 is the Pro Forma Financial Information.
(c) Exhibits.
2.1 Asset Purchase Agreement *
2.2 Note *
2.3 Registration Rights Agreement *
99.1 Meris Financial Information
99.2 Pro Forma Financial Information *
* Previously filed
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act 1934,
Unilab Corporation has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: October 25, 1999 UNILAB CORPORATION
By: /s/ Brian D. Urban
Name: Brian D. Urban
Title: Executive Vice President,
Chief Financial Officer and Treasurer
MERIS LABORATORIES, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
* * * * *
DECEMBER 31, 1997
<PAGE>
November 12, 1998
To the Board of Directors
and Shareholders of
Meris Laboratories, Inc.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, shareholders' deficit and cash
flows present fairly, in all material respects, the financial position of Meris
Laboratories, Inc. (Debtor-in-possession) and its subsidiary, Meris, Inc. at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles. These consolidated financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Notes 1, 2, 10 and 11 to the consolidated financial
statements, on November 18, 1997, the Company filed a voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court. On November 5, 1998, the Company sold substantially all
of its assets and ceased operations. A loss of $1.9 million has been provided in
the consolidated financial statements for the year ended December 31, 1997 to
write-down such assets to their net realizable value. The Company intends to
file a plan of reorganization under which it will liquidate and distribute the
net proceeds of the sale and any remaining assets to its creditors, subject only
to the satisfaction of certain administrative and other priority liabilities.
The consolidated financial statements do not reflect any adjustments that may be
required for the disposition of the remaining assets at amounts different from
those reflected in the financial statements or amounts which creditors may be
required to accept in settlement of obligations due them by the Company. The
Company and its directors and former officers are defendants in several
lawsuits. Plaintiffs in the lawsuits and their legal counsel have filed
bankruptcy claims in excess of $23 million. At December 31, 1997, the Company
has accrued $515,000 in costs associated with such lawsuits. The ultimate
resolution of the lawsuits cannot be determined at the present time;
accordingly, the consolidated financial statements do not include any
adjustments, beyond the accrual noted above, that might result from the outcome
of these uncertainties.
Odenburg, Ullakko, Muranishi & Co. LLP
San Francisco, California
<PAGE>
<TABLE>
MERIS LABORATORIES, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEET
(In thousands, except per share data)
<CAPTION>
September 30 December 31
---------------------------
1 9 9 8 1 9 9 7 1 9 9 6
------------------- ---------- -----------
(UNAUDITED)
A S S E T S
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 273 $ 601 $ 552
Restricted cash 2,036 1,979 1,964
Assets held for sale 16,928 16,928 -
Accounts receivable, net of allowance for doubtful
accounts of $2,122, $5,971 and $4,346 134 914 4,687
Supplies inventory - 66 511
Prepaid expenses and other current assets 926 1,397 1,018
----------- ----------- -----------
Total current assets 20,297 21,885 8,732
Property and equipment, net - - 1,559
Intangibles, net - - 15,343
Other assets, net - - 699
----------- ----------- -----------
$ 20,297 $ 21,885 $ 26,333
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Liabilities not subject to compromise:
Secured borrowings and accrued interest after filing for
bankruptcy $ 7,155 $ 601 $ -
Note payable to former executive 1,656 1,599 1,585
Accrued litigation charges 319 515 1,776
Accounts payable and accrued expenses 1,407 805 -
Liabilities subject to compromise:
Secured borrowings and accrued interest before filing
for bankruptcy 32,274 32,274 13,167
Accrued Medicare settlement 3,350 3,350 4,250
Accounts payable 4,142 4,142 2,783
Accrued expenses 5,513 5,513 6,019
Convertible subordinated debt 11,000 11,000 10,918
----------- --------- -----------
Total current liabilities 66,816 59,799 40,498
----------- --------- -----------
Commitments and contingencies (Notes 5, 6 and 10) - - -
Shareholders' deficit:
Preferred stock, no par value: 2,000,000 shares
authorized; none issued and outstanding - - -
Common stock, no par value: 20,000,000 shares authorized;
8,043,859 shares issued and outstanding
37,171 37,171 37,171
Additional paid-in capital 826 826 826
Accumulated deficit (84,516) (75,911) (52,162)
----------- ---------- -----------
(46,519) (37,914) (14,165)
----------- --------- -----------
$ 20,297 $ 21,885 $ 26,333
=========== ========= ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
MERIS LABORATORIES, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
<CAPTION>
Nine months
ended
September 30 Year ended December 31
-------------------------
1 9 9 8 1 9 9 7 1 9 9 6
------------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Net revenues $ 19,727 $ 29,903 $ 34,106
----------- ----------- -----------
Costs of services:
Salaries, wages and benefits 6,763 12,507 12,227
Supplies 3,267 4,946 5,144
Other cost of services 6,341 7,208 7,197
----------- ----------- -----------
16,371 24,661 24,568
Selling, general and administrative expenses 8,351 15,785 12,019
Depreciation and amortization - 2,240 3,302
Provision for doubtful accounts 2,266 1,577 5,798
Litigation and investigation charges 990 1,241 4,072
Write-down of intangible assets 1,720 7,552
Write-off of fixed assets - 1,982 -
----------- ----------- -----------
Operating loss (8,251) (19,303) (23,205)
Interest expense (354) (4,538) (2,786)
Interest and other income, net - 92 159
----------- ----------- -----------
Net loss $ (8,605) $ (23,749) $ (25,832)
=========== =========== ===========
Net loss per share $ (1.07) $ (2.95) $ (3.23)
========== ========== ===========
Weighted average shares outstanding 8,044 8,044 8,006
=========== =========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
MERIS LABORATORIES, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
(In thousands, except per share data)
<CAPTION>
Additional
Common Stock Paid-in Accumulated
-------------------------
Shares Amount Capital Deficit Total
---------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 7,982 37,136 826 (26,330) 11,632
Issuance of common stock for option exercises
and employee stock purchase plan
62 35 - - 35
Net loss - - - (25,832) (25,832)
--------- ----------- ------ ----------- ----------
Balance at December 31, 1996 8,044 37,171 826 (52,162) (14,165)
Net loss - - - (23,749) (23,749)
--------- ----------- ------ ----------- ----------
Balance at December 31, 1997 8,044 37,171 826 (75,911) (37,914)
Net loss (unaudited) - - - (8,605) (8,605)
--------- ----------- ------ ----------- ----------
Balance at September 30, 1998 (unaudited) 8,044 $ 37,171 $ 826 $ (84,516) $ (46,519)
========= =========== ====== =========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
MERIS LABORATORIES, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<CAPTION>
Nine months ended
September 30 Year ended December 31
---------------------------
1 9 9 8 1 9 9 7 1 9 9 6
----------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Operations:
Net loss $ (8,605) $ (23,749) $ (25,832)
Items not requiring the current use of cash:
Depreciation and amortization - 2,240 3,302
Amortization of debt discount and issue costs - 446 531
Provision for doubtful accounts - - -
Provision for litigation and investigation charges - - 3,282
Write-down of intangible assets - 1,720 7,552
Write-down of property and equipment - 1,982 -
Gain on sale of property and equipment - (13) (71)
Compensation expense related to loan forgiveness,
charge for unrealizable note receivable, and
discounted stock options - - -
Changes in items affecting operations:
Restricted cash (57) (14) (380)
Accounts receivable 780 521 6,584
Income tax refund receivable - - 384
Supplies inventory 66 (28) 238
Prepaid expenses and other current assets 471 (404) (447)
Other assets - 175 (97)
Accounts payable - 1,359 963
Accrued expenses 870 384 (159)
Accrued litigation and investigation charges (196) (2,161) (779)
---------- ----------- -----------
Cash provided by (used in) operating activities (6,671) (17,542) (4,929)
---------- ----------- -----------
Investments:
Cash expenditures for customer lists and other assets
related to acquisitions - - (920)
Proceeds from notes receivable - 160 104
Purchase of property and equipment (21) (1,999) (334)
Proceeds from sale of property and equipment - 13 99
---------- ----------- -----------
Cash used for investing activities (21) (1,826) (1,051)
---------- ----------- -----------
Financing:
Issuance of common stock, net - - 35
Proceeds from bank borrowings 6,554 19,707 5,510
Payments on bank borrowings - - -
Principal payments on capital leases (190) (290) (503)
Reduction in distribution payable to related parties - - -
---------- ----------- -----------
Cash provided by financing activities 6,364 19,417 5,042
---------- ----------- -----------
Increase (decrease) in cash and cash equivalents (328) 49 (938)
Cash and cash equivalents at beginning of period 601 552 1,490
---------- ----------- -----------
Cash and cash equivalents at end of period $ 273 $ 601 $ 552
========== -=========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
MERIS LABORATORIES, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<CAPTION>
Nine months ended
September 30 Year ended December 31
---------------------------
1 9 9 8 1 9 9 7 1 9 9 6
----------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Interest paid - capital leases $ 12 $ 28 $ 35
========== =========== ===========
Interest paid - borrowing $ - $ - $ 451
========== =========== ===========
Income taxes paid $ - $ - $ -
========== =========== ===========
Supplemental disclosure of non-cash investing and financing activities:
Capital lease obligations incurred for acquisition of
property and equipment $ - $ 219 $ 247 $ 198
========== =========== =========== ===========
Reduction in consulting agreements related to
acquisition $ - $ - $ - $ 273
========== =========== =========== ===========
Accrued transaction costs related to acquisitions $ - $ - $ - $ 290
========== =========== =========== ===========
<FN>
See accompanying notes to consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
MERIS LABORATORIES, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Organization:
Meris Laboratories, Inc. (the "Company") was incorporated in California
on November 14, 1990 to effect the reorganization of Meris Laboratories, Ltd.
Bay Area, a California limited partnership (the "Partnership"). This
reorganization of entities under common control has been accounted for on the
historical cost basis. The consolidated financial statements of the Company and
its subsidiary, Meris, Inc., include the financial position, results of
operations and cash flows for the Company. The Company provides complete
out-patient laboratory services and operates in only one industry segment within
the State of California.
Petition for relief under Chapter 11
On November 18, 1997 the Company ("Debtor") filed a voluntary petition
for relief under Chapter 11 of Title 11 of the United States Code in the United
States Bankruptcy Court for the Central District of California. Under Chapter
11, certain claims against the Debtor in existence prior to the filing of the
petition for relief under the federal bankruptcy laws are stayed while the
Debtor continues business operations as Debtor-in-possession. Such claims are
reflected in the December 31, 1997 and September 30, 1998 balance sheets as
"liabilities subject to compromise."
On September 16, 1998 the Company signed a definitive agreement with
Unilab Corporation ("Unilab") whereby the Company would sell substantially all
of its assets to Unilab. The agreement was approved on October 28, 1998 by the
United States Bankruptcy Court in Los Angeles, California (see Note 11). The
Company consummated the sale on November 5, 1998 and ceased operations. A loss
of $1,982,000 has been provided in the consolidated financial statements for the
year ended December 31, 1997, to write-down such assets to their net realizable
values. The Company plans to file a plan of reorganization under which it will
distribute all of the net proceeds of the sale and any remaining assets to its
creditors, subject only to the satisfaction of certain administrative and other
priority liabilities.
NOTE 2 - Summary of significant accounting policies:
Principles of consolidation
The consolidated financial statements include the accounts of the
Company and Meris, Inc. All significant intercompany accounts and transactions
have been eliminated.
Basis of presentation
The consolidated financial statements have been prepared on a going
concern basis except that, for the period from November 18, 1997 to December 31,
1997, interest totaling approximately $800,000 has not been accrued on
indebtedness outstanding as of November 18, 1997, the date on which the Company
filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy
Code. As discussed in the second and third paragraphs of Note 1, the Company has
sold substantially all of its assets and ceased operations, and intends to file
a plan of reorganization under which it will liquidate and distribute the net
proceeds of the sale and any remaining assets. The consolidated financial
statements do not reflect any adjustments that may be required for the
disposition of the remaining assets in amounts different from those reflected in
the consolidated financial statements or in amounts which creditors may be
required to accept in settlement of obligations due them by the Company.
Use of estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue recognition
Revenues are recognized upon performance of laboratory services.
Revenues are based on amounts billed or billable for services rendered, net of
price adjustments made with third-party payors by contract or otherwise. Certain
laboratory services are provided pursuant to managed care contracts which
provide for the payment of capitated fees rather than individual fees for tests
actually performed. The Company periodically evaluates such contracts to
ascertain their overall profitability. Such evaluations include both expected
capitated fees and identifiable referral revenues. Contract losses, if any, are
recognized as soon as they are identified. No such accruals were provided at
December 31, 1997 and 1996.
Laboratory services billed to Medicare comprised approximately 22.5%
and 22.9% of net revenues for the years ended December 31, 1997 and 1996,
respectively, and approximately 29.3% and 20.8% of outstanding net
accounts receivable at December 31, 1997 and 1996, respectively.
Expense recognition
All costs are expensed as incurred.
Financial instruments
Financial instruments which subject the Company to concentration of
credit risk consist primarily of accounts receivable. The primary payors are
individual patients, government agencies, insurance companies and, to a lesser
extent, physician clients. The Company provides an allowance for doubtful
accounts based on historical experience and current factors. The carrying value
of all other financial instruments is not presently determinable, since they may
be subject to compromise upon liquidation of the company.
Cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Concentration of credit risk
The Company places its cash and temporary cash investments with high
credit quality institutions. At December 31, 1997 and throughout the year, such
investments were in excess of FDIC insurance limits.
Restricted cash
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 pursuant to and in connection with a promissory note
dated October 28, 1992. The Company is holding the balance in a separate account
pending the outcome of the litigation. The interest on the certificate of
deposit is also being held in a restricted account.
The Company deposited $379,000 to perfect its appeal in a legal action,
in which the courts awarded judgments totaling $253,000 against the Company and
in favor of the former employee.
Supplies inventory
Supplies inventory is stated at the lower of cost, determined on a
first-in, first-out basis, or market.
Assets held for sale
On October 28, 1998, the Company sold substantially all of its assets,
including accounts receivable, property and equipment, and intangible assets
(see Note 1). As a result, the Company has reported such assets at their net
realizable values under the caption, "Assets held for sale" at December 31, 1997
and September 30, 1998. The loss on the sale of such assets has been reflected
in the results of operations for the year ended December 31, 1997.
A summary of assets held for sale is as follows:
December 31
1 9 9 7
------------------
(in thousands)
Accounts receivable, net $ 3,252
Supplies inventory 473
Prepaid expenses and other current assets 25
Property and equipment, net:
Laboratory equipment 689
Furniture, fixtures and equipment 12
Vehicles 219
Leasehold improvements 1,883
Intangibles, net:
Covenant not-to-compete 283
Customer lists 11,612
Goodwill 462
-----------
18,910
Less - valuation reserve (1,982)
Net realizable value of assets held for sale $ 16,928
===========
Property and equipment
Property and equipment is recorded at cost. Property and equipment,
other than leasehold improvements, is depreciated using the straight-line method
over the estimated useful lives of the assets, generally three to five years.
Amortization of leasehold improvements is computed using the straight-line
method over the shorter of the remaining lease term or the estimated useful
lives of the improvements. The costs of assets sold or retired and the related
accumulated depreciation and amortization are eliminated from the accounts and a
gain or loss is included in operations.
<PAGE>
Intangible assets
Intangible assets are stated at cost and include acquisition-related
assets such as customer lists, covenants not-to-compete and goodwill.
Amortization of acquisition-related assets is computed using the straight-line
method over the estimated useful lives of the assets. Customer lists are
amortized over ten to sixteen years. Goodwill is amortized over twenty years.
Impairment of goodwill and intangible assets is measured on the basis
of anticipated undiscounted cash flows for each asset. Based upon the Company's
analysis, an impairment loss of $1,720,000 and $7,552,000 was
charged to operations for the years ended December 31, 1997 and 1996,
respectively.
Debt issuance costs
Debt issuance costs are amortized using the interest method over the
estimated term of the related debt.
Income taxes
A deferred income tax liability or asset, net of valuation allowance,
is established for the expected future consequences resulting from the
differences between the financial reporting and income tax basis of assets and
liabilities and from net operating loss and tax credit carryforwards. Deferred
income tax expense or benefit represents the net change during the year in the
deferred income tax liability or asset.
Loss per share
In 1997, the Company adopted Statement of Financial Accounting Standard
No. 128, "Earnings Per Share." This standard requires that both basic earnings
or loss per share and diluted earnings or loss per share be presented. All prior
period per share amounts have been restated, following the new standard
requirements. Diluted loss per share excludes the effect of convertible debt,
stock options, and warrants (See Notes 4 and 9), because their effect would have
been antidilutive.
<PAGE>
NOTE 3 - Balance sheet detail:
December 31
1996
------------------
(in thousands)
Property and equipment consisted of:
Laboratory and computer equipment $ 9,798
Furniture, fixtures and office equipment 2,154
Vehicles 1,249
Leasehold improvements 907
----------
14,108
Less - accumulated depreciation and amortization (12,549)
----------
$ 1,559
Amount relating to capitalized leases, which are
included in property
equipment above $ 982
Less - accumulated amortization (778)
----------
$ 204
Intangibles consisted of:
Customer lists $ 1,720
Covenants not-to-compete 21,997
Goodwill 1,485
Consulting agreements 50
----------
25,252
Less - accumulated amortization (9,909)
----------
$ 15,343
Other assets consisted of:
Note receivable $ 182
Deferred debt issuance costs, net 363
Other 154
----------
$ 699
NOTE 4 - Unsecured senior subordinated debt:
On November 14 and December 5, 1994, the Company completed a private
placement consisting of the sale of $11,000,000 of unsecured convertible senior
subordinated debentures (the "Debentures"). The Debentures carry a 10% interest
rate and require interest to be paid monthly. In addition, the Debentures mature
three years from the date of issue and are convertible sixty days from the date
of issuance, at the option of the holders, into 3,055,555 shares of the
Company's common stock at a conversion price based on certain antidilution
provisions of the Debenture agreement. The Board of Directors has resolved to
reserve an aggregate of 3,055,555 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.
The Company defaulted on the November 14, 1997 principal payoff of $11
million and is still in default. The Company has not paid interest relating to
the subordinated debt of approximately $1,705,000 and $735,000 at December 31,
1997 and 1996, respectively. The unpaid interest is reflected on the balance
sheets as accrued expenses under "liabilities subject to compromise."
Through December 31, 1997, the Company incurred $1,021,000 related to
the issuance and registration of the Debentures which is being amortized over
the three-year term of the Debentures. At December 31, 1997, debt issue cost was
fully amortized.
NOTE 5 - Secured borrowings:
On September 20, 1996 a bank with whom the Company had a line of credit
agreement sold its rights and claims under the agreement to an unrelated party,
who in turn assigned all such rights to an affiliate of the unrelated party
("Lender").
On November 18, 1996, the Company entered into an agreement with the
Lender (the "Second Amended Agreement") which provided, among other things, that
the Company would repay the Lender $12,770,874, on demand, at an interest rate
of 15% per annum. Interest is capitalized and added to the outstanding principal
evidenced by issuance of Payment-In-Kind ("PIK") notes, payable on demand of the
Lender. The Company granted a security interest in substantially all of the
assets of the Company. The proceeds from the loan were used to repay the
outstanding balance under the bank line of credit in the amount of $8,202,461
and certain other obligations, including a facility fee to the Lender in the
amount of $1,242,332. The remaining proceeds were used for working capital
purposes. The Second Amended Agreement calls for an anniversary fee equal to 2%
of the average balance of the loans outstanding during the first year, a fee
equal to 3% of the average balance of the loans outstanding during the second
year, and a fee equal to 4% of the average balance of the loans outstanding
during the third year. In conjunction with the Second Amended Agreement, the
Company issued to the Lender a warrant to purchase an aggregate of 800,000
shares of common stock of the Company at $0.01 per share. The warrant was
exercisable immediately and expires on November 18, 2006.
The Second Amended Agreement allowed the Company to borrow, at the
Lender's sole discretion, and not more frequently than once every 28 days,
additional borrowings of not less than $250,000 per borrowing. The Lender
extended twenty one additional demand notes ("Interim Funding Agreements") to
the Company during the period February 3, 1997 through November 12, 1997,
totaling $13,750,000, with interest accrued thereon at an interest rate of 24.9%
per annum.
On November 18, 1997, the Company filed a voluntary petition for relief
under Chapter 11 of Title 11 of the United States Bankruptcy Code. The Company
owed the Lender pre-petition obligations in the aggregate amount of $32,273,665,
consisting of $31,891,132 of principal and interest (including capitalized
interest) related to the Second Amended Agreement, and $382,534 for unreimbursed
costs, expenses, fees and other charges the Company owed to the Lender pursuant
to the Second Amended Agreement dated November 18, 1996 and the twenty one
Interim Funding Agreements.
On November 18, 1997, the Company and the Lender signed a Loan and
Security Agreement ("DIP Loan Agreement") whereby the Lender provided the
Company with a $5,000,000 credit facility to provide operating capital while the
Company continued as Debtor-in-possession. The DIP Loan Agreement allowed the
Company to borrow minimum increments of $250,000, not more frequently than once
every 14 days, at an interest rate of 12% per annum. The DIP Loan Agreement
required a nonrefundable commitment fee of $100,000, payable from the proceeds
of the loans, and expired June 3, 1998, which was subsequently extended until
December 31, 1998 (see Note 11).
As the debt owed to the Lender by the Company is impaired
(undersecured) under the plan of liquidation (see Note 11), the debt is
reflected on the balance sheets at December 31, 1997 and September 30, 1998 as
"liabilities subject to compromise."
<PAGE>
NOTE 6 - Lease commitments:
The Company leases various laboratories, Patient Service Centers and
office facilities under non-cancelable operating lease agreements which expire
at various times through the year 2002. The leases generally require the Company
to pay property taxes, maintenance expense and certain insurance. Certain of the
lease agreements require escalation of the minimum rental based upon factors
defined in the leases. Total rent expense under operating leases amounted to
approximately $3,090,000, $2,655,000 and $2,686,000 in 1997, 1996 and 1995,
respectively.
Minimum future lease payments under non-cancelable operating leases
subject to compromise are as follows:
Fiscal year
1998 $ 699,600
1999 699,600
2000 699,600
2001 699,600
2002 233,200
---------------
$ 3,031,600
NOTE 7 - Transactions with related parties:
One member of the Board of Directors of the Company received
approximately $86,000 and $154,000 for consulting and legal services rendered to
the Company during 1997 and 1996, respectively.
NOTE 8 - Income taxes:
The provision for income taxes is as follows:
Year ended December 31
--------------------------
1 9 9 7 1 9 9 6
------------ ----------
Current tax expense $ - $ -
Deferred tax expense - -
------------ -----------
Total $ - $ -
============ ===========
<PAGE>
The net deferred income tax asset comprises:
December 31
------------------------------
1 9 9 7 1 9 9 6
------------ ----------
Net operating loss carryforwards $ 20,141 $ 13,026
Alternative minimum tax credit carryforwards 122 122
Temporarily nondeductible reserves and allowances 1,293 1,963
Bad debt reserves 4,412 3,443
Loss on sale of assets 813 -
Depreciation and amortization 2,234 2,355
----------- -----------
29,015 20,909
Valuation allowance (29,015) (20,909)
----------- -----------
$ - $ -
=========== ===========
Changes in the valuation allowance for the years ended December 31, 1997 and
1996 are due to uncertainty regarding the ultimate realization of the gross
deferred tax assets based on the Company's recent operating results. Differences
between the Company's benefit for income taxes and that computed by applying the
federal statutory rate applied to the Company's loss before income taxes are as
follows:
December 31
-----------------
1997 1996
------- -------
Federal statutory rate (35.0)% (35.0)%
State income taxes, net of federal tax benefit (6.5)% (6.5)%
Deferred tax assets not recognized 41.5% 41.5%
----- -----
0.0% 0.0%
====== ======
At December 31, 1997 and 1996, the Company had federal and state net
operating loss carryforwards of approximately $82 million and $54 million,
respectively. The federal and state net operating losses will begin to expire in
the years ending December 31, 2003 and 1999, respectively.
NOTE 9 - Employee benefit plans:
1991 Employee Stock Purchase Plan:
In May 1991, the Company adopted the 1991 Employee Stock Purchase Plan
(the "Purchase Plan") under which 225,000 shares of common stock have been
reserved for issuance. The Purchase Plan provides for sequential offering
periods, generally of six months. At the end of each offering period, shares may
be purchased by participants at 85% of the market value at the beginning or end
of the offering period. Shares are to be purchased from payroll deductions which
are limited to 10% of base compensation. A total of 49,841 shares of common
stock were issued under the Purchase Plan during the year ended December 31,
1996 and no shares of common stock were issued in 1997.
Amended and restated 1991 Stock Option Plan:
In February 1991, the Company adopted the 1991 Stock Option Plan (the
"Option Plan"), which was amended and restated. The Option Plan, which expires
in February 2001, provides for incentive as well as nonstatutory stock options
to be granted to employees and consultants of the Company. The Board of
Directors may terminate the Option Plan at any time at its discretion.
A Committee of the Board determines the terms of options granted under
the Option Plan. Options granted generally vest over four years and will be
adjusted for certain changes in capitalization of the Company. In addition, the
outstanding options issued under the Option Plan will terminate within a period
set by the Board after termination of employment.
The Option Plan also provides for automatic grants of non-qualified
stock options to directors who are not employees of the Company (the "Outside
Directors"). Under these provisions, as amended by the Board in November 1992,
each Outside Director on August 20, 1991 received an option to purchase 10,000
shares of common stock. Additionally, each Outside Director on November 23, 1992
(other than Outside Directors receiving options on August 20, 1991) received on
such date an option to purchase 10,000 shares of common stock, and each new
Outside Director receives an option to purchase 10,000 share upon his or her
election or appointment to the Board. In addition, beginning with the fifth
annual meeting of shareholders following the initial 10,000 share option grant,
each Outside Director will receive an option to purchase 2,500 shares on the
date of each annual meeting at which he or she is elected the Board. All options
granted to Outside Directors will have an exercise price equal to 100% of the
fair market value at the date of grant and will vest ratably over four years
commencing on the first anniversary of the date of grant.
Options under the Option Plan are generally granted at prices ranging
from 85% to 110% of the fair market value of the stock at the date of grant.
Except as discussed below, no options have been granted at exercise prices less
than 100% of such fair market value at the date of grant. In December 1991, an
Executive was granted, in connection with his employment with the Company, an
option to purchase 150,000 shares of common stock at an exercise price of $8.00
per share. The last reported sale price of the Company's common stock on such
date was $14.00 per share. In October 1993, the Executive irrevocably terminated
the option to the extent of 100,000 unvested shares. Accordingly, the Company
ceased recognizing compensation associated with this option effective September
30, 1993. There is no commitment to grant the Executive any additional options.
The Company recorded $122,000 of compensation expense during the year ended
December 31, 1993 related to this stock option grant.
The Company applies the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") for its
stock option plan. Accordingly, no compensation cost has been recognized for the
plan for the years ended December 31, 1997, 1996, and 1995. Certain information
related to the Company's stock option plan was not available for the years ended
December 31, 1997 and 1996. Consequently, the effect of the Company's adoption
of Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), was not calculated. However, the
increase in net loss would not be material to the financial statements.
<PAGE>
A summary of the status of the Company's stock option plan as of
December 31, 1997 and 1996 and changes during the years then ended is
presented below:
<TABLE>
<CAPTION>
1997 1996
------------------------------------ ----------------------------------
Range of Range of
Number of Exercise Number of Exercise
Shares Prices Shares Prices
--------------- ---------------- ------------- -----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of
year 2,092,089 $.73-$4.38 1,450,579 $ .73-$4.38
Granted 1,211,709 $1.00-$1.50
Exercised (12,150)
Canceled or expired (389,176) - (558,049) -
----------- ------------- ----------- ------------
Outstanding at end of year 1,702,913 $.73-$4.38 2,092,089 $ .73-$4.38
=========== ========== =========== ============
</TABLE>
Employee savings and retirement plan
In January 1992, the Company adopted the 401(k) Retirement Plan of
Meris Laboratories, Inc. (the "Plan"), a savings and investment plan, as allowed
under Section 401(k) of the Internal Revenue Code (the "Code"). Under the terms
of the Plan, eligible participants may contribute up to 15% of their eligible
earnings to the Plan, not to exceed the amount allowed under the Code. Under the
Plan Agreement, the Company may make contributions at the discretion of the
Board of Directors. As of December 31, 1997, no contributions have been made to
the Plan by the Company.
NOTE 10 - Contingencies:
The Company and its directors and former officers are defendants in
several lawsuits. Plaintiffs in the lawsuits and their legal counsel have filed
bankruptcy claims in excess of $23 million. At December 31, 1997, the Company
has accrued $515,000 in costs associated with such lawsuits. The ultimate
resolution of the lawsuits cannot be determined at the present time;
accordingly, the consolidated financial statements do not include any
adjustments, beyond the accrual noted above, that might result from the outcome
of the lawsuits.
In February 1997, the Company entered into a settlement agreement with
the U.S. Department of Justice and Department of Health and Human Services
related to certain Medicare and other billing practices. Under the terms of the
settlement, the Company agreed to pay $4.25 million in monthly installments of
$100,000. This obligation is reflected in the consolidated balance sheet as
accrued Medicare settlement, under liabilities subject to compromise. The
Company has made no payments since it filed for bankruptcy.
NOTE 11 - Subsequent events:
Amendment to DIP Loan Agreement
On November 23, 1998, the Company and the Lender amended the terms of
the DIP Loan Agreement to extend the terms of the agreement from June 3, 1998 to
December 31, 1998 and to increase the amount of funds available to the Company
from $5 million to $9.5 million.
<PAGE>
Plan of liquidation
On September 16, 1998, the Company signed a definitive agreement with
Unilab whereby Unilab would acquire substantially all of the assets of the
Company. The purchase price of $16,928,000 consisted of the following: an
eight-year convertible subordinated note in the amount of $14 million, bearing
interest at a rate of 7.5% per annum, with a $3.00 per share conversion price
plus $2,520,000 in cash payable in seventy-two equal monthly installments; and
the assumption of certain liabilities totaling approximately $408,000. The
agreement was approved on October 28, 1998 by the U.S. Bankruptcy Court in Los
Angeles, California, and Unilab took possession of the acquired assets on
November 5, 1998.
The Company intends to file a plan of liquidation under which it will
distribute all of the net proceeds of the sale to its creditors, subject to the
satisfaction of certain administrative and other priority liabilities.
