<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to_________________
Commission File No. 0-11772
NU-TECH BIO-MED, INC.
---------------------
(Exact name of registrant as specified in its charter)
Delaware 25-1411971
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation of organization)
55 Access Road, Warwick, Rhode Island 02886
- ------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (401) 732-6520
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes [X] No [ ]
As of November 18, 1997, there were issued and outstanding 33,065,663 shares
of common stock of the registrant.
Transitional small business disclosure format
Yes [ ] No [X]
Page 1 of 45
<PAGE> 2
Nu-Tech Bio-Med, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 346,923 $ 1,690,538
Accounts receivable - (net of allowance for doubtful
accounts of approximately $4,400 and $2,823,400 at
September 30, 1997, and at December 31, 1996, respectively) 88,044 1,751,230
Other receivables 198,649 --
Inventory 11,985 219,428
Prepaid expenses and other current assets 38,449 82,801
------------------------------
Total current assets 684,050 3,743,997
Investment in senior debt of Physicians Clinical Laboratory, Inc. 13,287,164 9,424,439
Note receivable 100,000 --
Equipment and leasehold improvements, net 316,898 1,766,842
Goodwill (net of accumulated amortization of approximately
$71,400 and $833,200 at September 30, 1997, and
December 31, 1996, respectively) 683,222 6,352,860
Deferred acquisition costs 1,085,477 1,028,524
Deposits 18,206 89,104
------------------------------
Total Assets $ 16,175,017 $ 22,405,766
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 533,556 $ 1,580,797
Accrued expenses 201,066 1,286,035
Contract payable 55,571 65,571
Current portion of long term debt 146,302 2,263,990
Current portion of capitalized lease obligations 17,719 214,270
------------------------------
Total current liabilities 954,214 5,410,663
Long-term debt 18,149 338,672
Capitalized lease obligations 3,237 471,984
Liabilities to be paid with common stock -- 3,422,500
------------------------------
Total liabilities 975,600 9,643,819
Stockholders' equity:
Series A convertible preferred stock, $.01 par value; 2,000,000 shares
authorized; 6,825 and 14,000 issued and outstanding at September
30, 1997, and December 31, 1996 (liquidation preference of
$6,825,000 at September 30, 1997) 68 140
Common stock, $.01 par value; 50,000,000 shares
authorized; 10,538,709 and 2,089,652 shares issued and
outstanding at September 30, 1997, and December 31, 1996
respectively 105,387 20,897
Capital in excess of par value 39,211,823 34,501,337
Deferred consulting expense (55,005) (96,250)
Accumulated deficit (24,062,856) (21,664,177)
------------------------------
Total stockholders' equity 15,199,417 12,761,947
------------------------------
Total liabilities and stockholders' equity $ 16,175,017 $ 22,405,766
==============================
</TABLE>
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<PAGE> 3
Nu-Tech Bio-Med, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30 September 30 September 30 September 30
1997 1996 1997 1996
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Assay sales, net $ (2,140) $ 26,455 $ 70,109 $ 74,508
Laboratory revenues, net -- -- 1,798,361 --
Medical billing services revenues 148,125 -- 392,666 --
Contract revenue -- -- 5,540 --
--------------------------------------------------------------
Total revenues, net 145,985 26,455 2,266,676 74,508
Operating costs:
Laboratory expenses 36,249 53,366 1,500,914 145,601
Medical billing services expenses 128,368 -- 366,768 --
Deferred acquisition costs charged off -- 218,914 218,914
Sales, general and administrative 511,997 769,913 2,238,267 2,308,001
Research and development 16,043 19,673 48,940 66,377
--------------------------------------------------------------
Total operating costs 692,657 1,061,866 4,154,889 2,738,893
--------------------------------------------------------------
Operating loss (546,672) (1,035,411) (1,888,213) (2,664,385)
Other income (expense):
Investment and interest income 6,337 49,774 25,317 129,347
Interest expense (2,543) (7,091) (535,783) (22,571)
--------------------------------------------------------------
Total other income (expense) 3,794 42,683 (510,466) 106,776
--------------------------------------------------------------
Net loss $ (542,878) $ (992,728) $(2,398,679) $(2,557,609)
--------------------------------------------------------------
Net loss per common share $ (0.06) $ (0.50) $ (0.47) $ (1.37)
==============================================================
Weighted average common shares outstanding 9,099,157 1,982,174 5,126,074 1,868,247
</TABLE>
Page 3 of 45
<PAGE> 4
Nu-Tech Bio-Med, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1997 1996
----------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,398,679) $(1,564,882)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 342,225 613,923
Provision for bad debt 91,643 --
Warrants issued in connection with debt 494,000 --
Changes in assets and liabilities:
Accounts receivable, prepaids,
inventory and other current assets (377,918) 74,879
Accounts payable and accrued expenses (502,160) (31,910)
Accrued compensation -- 216,374
----------------------------
Net cash used in operating activities (2,350,889) (691,616)
INVESTING ACTIVITIES
Proceeds received from disposition of
Medical Science Institute, net 2,512,154 --
Acquisition costs (56,953) (192,264)
Capital expenditures (39,174) (14,890)
----------------------------
Net cash provided by (used in) investing activities 2,416,027 (207,154)
FINANCING ACTIVITIES
Proceeds from exercise of warrants 889,001 --
Proceeds from the sale of common stock -- 2,611,165
Repayment of contract payable (10,000) (40,000)
Repayment of notes payable (2,141,405) (97,296)
Repayment of capitalized lease obligations (47,107) (6,253)
Other assets 758 (44,766)
Notes receivable (100,000) --
----------------------------
Net cash provided by (used in)
financing activities (1,408,753) 2,422,850
----------------------------
Net (decrease) in cash and
cash equivalents (1,343,615) 1,524,080
Cash and cash equivalents at beginning of period 1,690,538 2,538,002
----------------------------
Cash and cash equivalents at end of period $ 346,923 $ 4,062,082
============================
</TABLE>
Page 4 of 45
<PAGE> 5
Nu-Tech Bio-Med, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1997
(Unaudited)
A. Basis of Presentation
In the opinion of management of Nu-Tech Bio-Med, Inc. (the "Company"
or "Nu-Tech") the accompanying unaudited financial statements contain all
adjustments necessary to present fairly the financial position of the Company
at September 30, 1997, and the results of operations and cash flows for the
three and nine months ended September 30, 1997, and 1996.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Analytical Biosystems Corporation
("ABC"), NTBM Billing Services, Inc. ("NTBM") and Medical Science Institute,
Inc. ("MSI") through February 26, 1997, (see Note C). ABC has temporarily
suspended the marketing of its Fluorescent Cytoprint Assay ("FCA"). As of
November 3, 1997, ABC ceased processing specimens for assay and has suspended
its laboratory operations in Rhode Island (see Note I, Item 3). All material
intercompany transactions and balances have been eliminated. Where
appropriate, prior year amounts have been reclassified to permit comparison.
ABC was a clinical oncology laboratory service and research company
located in Rhode Island until November 3, 1997, (see Note I, Item 3); NTBM is a
medical billing service business located in Florida; MSI is a full service
medical laboratory facility which operates throughout the State of California.
The consolidated financial statements have been prepared on the basis
that the Company will continue as a going concern. The Company has expended
cash in excess of cash generated from operations and has not achieved
sufficient revenues to support future operations. The Company anticipates that
it will obtain additional debt or equity financing, generate additional
revenues and/or reduce costs, although no assurance may be given that it will
be able to do so. Obtaining additional financing or achieving adequate
revenues is dependent upon future events, the outcome of which is presently not
determinable. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of liabilities or any other adjustments that might be necessary should the
Company be unable to continue as a going concern.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and
Page 5 of 45
<PAGE> 6
with the instructions to Form 10-QSB and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month and nine month period ended September 30,
1997, are not necessarily indicative of the results that may be expected for
the year ended December 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-KSB for the year ended December 31, 1996.
B. Acquisition of Majority Interest in Physicians Clinical Laboratory,
Inc.
The Company had acquired certain debt securities of Physicians Clinical
Laboratory, Inc., a Delaware corporation ("PCL"), which is a full-service
clinical laboratory capable of providing a comprehensive battery of testing
services. PCL and its subsidiaries, Quantum Clinical Laboratories, Inc.,
Regional Reference Laboratory Governing Corporation, Diagnostic Laboratories,
Inc., and California Regional Reference Laboratory (collectively with PCL, the
"Debtors") had been operating as a debtor-in-possession under Chapter 11 of the
Bankruptcy Code from November 8, 1996 until October 3, 1997. PCL did file its
Form 10-K for its most recent fiscal year, which ended February 28, 1997, as
well as its quarterly reports on Form 10-Q for the quarters ended May 31, 1997,
and August 30, 1997.
Nu-Tech had reached an agreement (the "PCL Plan") with the holders of
the Senior Debt, Subordinated Debt and the management of PCL whereby Nu-Tech
would acquire a 52.6% interest in PCL. The terms of the agreement provided
that PCL would file a plan to effectuate the agreement. As required by the
aforementioned agreement, the Company purchased approximately $13,300,000 of
Senior Debt for $10,000,000 on November 7, 1996. In accordance with the PCL
Plan, certain holders of Senior Debt contributed $10,000,000 in
debtor-in-possession ("DIP") financing to PCL, which under the terms of the
reorganization, would be forgiven.
The PCL Plan also required that the Company purchase an additional 17%
of capital stock of PCL for $5,000,000 upon the approval of the PCL Plan.
Pursuant to the PCL Plan, the debt purchased by Nu-Tech would be converted into
35.6% of the common stock of PCL, which together with the 17% purchased for
$5,000,000, would result in Nu-Tech owning 52.6% of the outstanding common
stock of PCL. The PCL Plan was confirmed by the United States Bankruptcy
Court, Central District of California (Case No. SV96-23185-GM) on April 23,
1997. The PCL Plan as confirmed required that certain conditions be satisfied
or waived by July 22, 1997.
On February 26, 1997, the Company completed the sale of its ownership
interest in MSI (see Note C) and received, among other things, a $5,000,000
secured note receivable which was used to satisfy its remaining $5,000,000
commitment to PCL. The Company recognized a
Page 6 of 45
<PAGE> 7
deferred gain upon the sale of MSI to PCL, which was offset against the
$5,000,000 promissory note to reach the net amount of $3,862,725.
In April and June of 1997, PCL received separate subpoenas to furnish
certain documents to the United States Department of Defense ("DOD") and the
United States Department of Health and Human Services with respect to the
Company's Civilian Health and Medical Program of Uniformed Services billing
practices. PCL had been advised that its billing practices were the subject of
these investigations. Due to PCL's continued cooperation and negotiations with
these government agencies, on July 24, 1997, the Bankruptcy Court, on
stipulation of PCL, the Company and the creditors of PCL, extended the date
that certain conditions be satisfied or waived pursuant to the PCL Plan for 60
days to September 19, 1997, (from July 22, 1997), and stated that the terms and
conditions of the PCL Plan shall continue in full force and effect.
On or about July 18, 1997, PCL and the United States reached an
agreement in principle to settle such billing practices claims. The agreement
disposed of the claims on substantially the following terms:
1. PCL paid (i) $200,000 18 days after the Court issued its order
approving the Settlement Agreement (October 7, 1997) and (ii) will pay
$1,800,000 in principal plus interest calculated at the Treasury Bill
interest rate payable in equal monthly installments of $25,000 for six
years;
2. PCL entered into a five-year Corporate Integrity Agreement
with the Office of the Inspector General of the U.S. Department of
Health and Human Services ("HHS"), pursuant to which PCL will, among
other requirements, set up and follow an internal corporate compliance
plan with monitoring provided by an internal corporate compliance
officer, provide proper training for its billing and marketing
personnel, and fulfill various reporting requirements to HHS;
3. PCL and J. Marvin Feigenbaum were released from civil and
criminal liability under the False Claims Act and common law causes of
action in connection with their billing practices from January 1,
1992, to July 18, 1997;
4. The amounts owed to the United States will not be
dischargeable in any bankruptcy; and
5. If PCL defaults on any of its obligations under the Settlement
Agreement, all amounts owed will be immediately due, all releases will
be void and PCL may be excluded from participation in Medicare and
Medicaid.
Subsequent to reaching an agreement in principle with the United
States, PCL approached representatives of the State of California (the "State")
to discuss the compromise and settlement of any outstanding claims that the
State might have against PCL for its prior billing practices involving the
MediCal program for clinical laboratory services during the period from January
1, 1992, to July 18, 1997. On or about August 28, 1997, PCL and the State
reached a final
Page 7 of 45
<PAGE> 8
agreement to settle such claims (the "State Agreement"). The State Agreement
disposed of the claims on substantially the following terms:
1. PCL paid the State the sum of $100,000 22 days after the Court
issued its order approving the Settlement Agreement (October 11). All
of the terms of the Corporate Integrity Agreement executed by PCL and
the United States Government are incorporated by reference to the
Company's Current Report Form 8-K filed October 20, 1997 and all of
the terms therein are made applicable to the Settlement Agreement with
the state;
2. The State released PCL and J. Marvin Feigenbaum from any civil
or administrative monetary claim or cause of action that the
California Department of Health Services has or may have, and from any
action seeking exclusion from the MediCal program with regard to the
provision of and reimbursement for laboratory services under the
MediCal program;
3. The State released PCL and J. Marvin Feigenbaum from any
criminal liability for any conduct covered by the State Agreement;
4. PCL will cooperate in any further investigation of individuals
and entities not released by the State in the State Agreement.
On September 19, 1997, the Court granted the Debtors' motion to
approve the Federal and State Agreements. The Court's order became final on
September 30, 1997. Pursuant to the Plan, prior to the Effective Date, all of
the Debtors were merged with and into PCL. On October 3, 1997, all conditions
to the Effective Date set forth in the Plan were satisfied and the Effective
Date occurred.
C. Disposition
On February 26, 1997, the Company completed the sale of its ownership
interest in MSI to Physicians Clinical Laboratory, Inc. ("PCL") (see Note B).
The Company sold its interests in MSI to PCL for approximately $7,643,000. The
Company received approximately $2,643,000 in cash and a secured promissory note
of PCL in the principal amount of $5,000,000. The note was secured by all the
assets of PCL, but was subordinate to certain other claims and administrative
expenses. The Company used approximately $2,013,000 of the sale proceeds to
repay the principal and interest on the $2,000,000 loan which the Company had
incurred to acquire MSI. In the event the PCL Plan (see Note B) was
consummated, which plan provided that the Company was to become the owner of
52.6% of the outstanding capital stock of PCL, the note was to be forgiven. On
October 3, 1997, all conditions to the Effective Date set forth in the Plan
were satisfied and the Effective Date occurred.
PCL assumed all other obligations incurred by Nu-Tech in connection
with the MSI acquisition, including Nu-Tech's guarantee of certain remaining
obligations under the MSI Plan.
Page 8 of 45
<PAGE> 9
As a result of the above transactions, during the first quarter of
1997, the Company owned MSI for the 57 day period beginning January 1, 1997,
and ending February 26, 1997. The following table sets forth a Statement of
Operations on a pro forma basis to exclude the results of operations of MSI for
the 57 day period beginning January 1, 1997, and ending February 26, 1997.
<TABLE>
<CAPTION>
For the nine months ended
September 30 September 30
1997 1996
----------------------------
<S> <C> <C>
Revenues:
Assay sales, net $ 70,109 $ 74,508
Medical billing services revenues 392,666 --
Contract revenue 5,540 --
----------------------------
Total revenues, net 468,315 74,508
Operating costs:
Laboratory expenses 126,492 145,601
Medical billing services expenses 366,768 --
Deferred acquisition costs charged off -- 218,914
Sales, general and administrative 1,520,244 2,308,001
Research and development 48,940 66,377
----------------------------
Total operating costs 2,062,444 2,738,893
----------------------------
Operating loss (1,594,129) (2,664,385)
Other income (expense):
Investment and interest income 25,317 129,347
Interest expense (539,046) (22,571)
----------------------------
Total other income (expense) (513,729) 106,776
----------------------------
Net loss $(2,107,858) $(2,557,609)
============================
</TABLE>
D. Debt
On January 23, 1997, the Company obtained a new loan from a private
lender in the principal amount of $2,000,000, which funds were used to repay
the outstanding balance of a $2,500,000 loan obtained on December 2, 1996,
obtained to repay Austin Financial Services, Inc. under the MSI plan. The new
loan was secured by a pledge of the Company's stock ownership in MSI, as well
as the Company's investment in Senior Debt of PCL. In conjunction with the
issuance of this note payable, the lenders were issued warrants to purchase
100,000 shares of common stock at an exercise price of $11.50 per share. In
connection with this transaction, the Company recorded a $494,000 interest
charge representing the fair value of warrants issued in the quarter ended
March 31, 1997. On February 26, 1997, in connection with the sale of MSI to
PCL, the Company repaid the new loan (see Note C).
Page 9 of 45
<PAGE> 10
E. Adoption of New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share (FAS 128), which will be adopted on
December 31, 1997. FAS 128 requires companies to change the method currently
used to compute earnings per share and to restate all prior periods for
comparability. The adoption of FAS 128 is not expected to have any impact on
the Company's previously reported earnings per share because common stock
equivalents are excluded as their effect is antidilutive.
F. Legal Claims
The Company had heretofore filed, and withdrew, a registration
statement relating to the shares of its Common Stock to be issued upon
conversion of the Company's 14,000 shares of Series A Convertible Preferred
Stock ("Preferred Stock"). At the time of such filing, the Company believed
that it had not received valid written demand by a majority of the holders of
the Preferred Stock to require it to proceed with such registration statement.
The Company further believes that, at the time such registration statement was
withdrawn, it did not receive a written demand by the holders of a majority of
Preferred Stock to file a registration statement. Subsequently, the Company
did file a Registration Statement relating to the shares of its Common Stock to
be issued upon conversion of the Company's 14,000 shares of Preferred Stock
with the Securities and Exchange Commission on July 21, 1997.
Several Preferred Shareholders have indicated that they intend to
commence an action against the Company arising out of the failure of the
Company to cause the conversion shares to be registered prior to July 21, 1997,
seeking unspecified damages and/or seeking to rescind their purchase of the
Preferred Stock. The Company believes that, if any such action is commenced
against it, it has good and meritorious defenses. In the event any such action
is brought against the Company, and the Company does not prevail thereon, and
is found to be responsible for the damages or losses, such circumstances would
have a material adverse effect upon the Company's consolidated results of
operations and financial position. The Company filed a Registration Statement
relating to the shares of its Common Stock to be issued upon conversion the
Company's 14,000 shares of Preferred Stock with the Securities and Exchange
Commission on July 21, 1997, which was declared effective on July 23, 1997.
The filing of such registration statement may not, however, resolve the dispute
to the satisfaction of the Preferred Shareholders, and no assurance may be
given that the Preferred Shareholders may not thereafter commence an action
against the Company.
On May 23, 1997, a complaint was filed against Nu-Tech Bio-Med, Inc.
(the "Company") and others in an action in the United States District Court for
the Southern District of New York captioned Mordechai Gurary v. Isaac
Winehouse, Isaac Winehouse d/b/a Wall & Broad Equities and Nu-Tech Bio-Med,
Inc. (Docket No. 97 Civ. 3803 (LBS)). As of the date of this report, service
of the complaint has not been effected upon the Company. The complaint alleges
that the Company and the other defendants violated Section 10(b) of the
Securities Exchange Act of 1934 (the "Exchange Act") and Section 349 of the
General Business Law of the State of New York (the "GBL"). The claims against
the Company under the Exchange Act and the GBL are
Page 10 of 45
<PAGE> 11
purportedly based on allegations that the Company knew of and failed to
disclose, among other things, unlawful trading activity in the Company's
securities by the other defendants named in the action. The complaint seeks
compensatory damages in an unstated amount, seeks to enjoin the Company from
registering certain Series A Convertible Preferred Stock until the
determination of the action, and seeks reasonable attorneys' and expert fees as
well as treble and punitive damages.
The Company believes that the claims are without merit, and that it
has good defenses which it will assert at the appropriate time. The action is
currently in its preliminary stages.
G. Reduction in Exercise Price of Warrants
On April 29, 1997, Nu-Tech Bio-Med, Inc. (the "Company") reduced the
exercise price of 1,076,979 warrants (the "Warrants") and 15,856 options (the
"Options"), respectively, to $1.76 per share, which price was equal to 75% of
the average closing price for the Company's common stock for the ten (10) days
prior to such reduction. Such reduction was effected for a 45 day period
through June 13, 1997. As of June 13, 1997, the Company received an aggregate
of approximately $619,000 as a result of the exercise of 351,728 warrants.
H. Conversion of Series A Convertible Preferred Stock
Through August 1, 1997, an aggregate of 7,854,612 shares of Common
Stock had been issued upon conversion of 7,175 shares of Series A Convertible
Preferred Stock (the "Preferred Stock"). Based upon an assumed prevailing
conversion price of $.421875 per share as of August 1, 1997, the Company would
have been obligated to issue up to an additional 16,591,865 shares of Common
Stock. At August 1, 1997, the Company was authorized to issue 12,000,000
shares of Common Stock. $.01 par value. As of August 1, 1997, the Company had
10,653,709 shares of its Common Stock issued and outstanding (including
7,854,612 shares of Common Stock previously issued upon conversion of 7,175
shares of Preferred Stock). Consequently, the Company did not have a
sufficient number of unreserved shares of Common Stock to accommodate any
additional conversions of the Preferred Stock and suspended the acceptance of
future conversions while seeking stockholder approval for an Amendment to the
Company's Amended and Restated Certificate of Incorporation to effect an
increase in the Company's capital stock.
As of October 15, 1997, a majority of the stockholders of the Company
as of August 8, 1997, have approved an amendment to the Company's Amended and
Restated Certificate of Incorporation to increase the total number of shares of
all classes of capital stock which the Company may issue to 52,000,000 shares;
such increase has been effected by increasing the number of shares of Common
Stock from 12,000,000 shares to 50,000,000 shares and by increasing the number
of shares of Preferred Stock from 1,000,000 shares to 2,000,000 shares. This
proposal was made via a consent solicitation proxy statement on behalf of the
Company's Board of Directors. The amendment was declared effective by the
Secretary of the State of Delaware on October 21, 1997. By reason of such
amendment, the Company resumed accepting conversions of the Preferred Stock on
October 23, 1997. Through November 18, 1997, an aggregate of 30,381,566 shares
of Common Stock were issued upon conversion of 9,597 shares
Page 11 of 45
<PAGE> 12
of Preferred Stock. Based upon an assumed prevailing conversion price of
$.103125 per share as of November 18, 1997, the Company would be obligated to
issue up to an additional 42,695,758 shares of Common Stock.
I. Subsequent Events
1. Acquisition of Majority Interest of Physicians Clinical
Laboratory, Inc.
The Company had acquired certain debt securities of Physicians
Clinical Laboratory, Inc., a Delaware corporation ("PCL"), which is a
full-service clinical laboratory capable of providing a comprehensive battery
of testing services. PCL and its subsidiaries, Quantum Clinical Laboratories,
Inc., Regional Reference Laboratory Governing Corporation, Diagnostic
Laboratories, Inc., and California Regional Reference Laboratory (collectively
with PCL, the "Debtors") had been operating as a debtor-in-possession under
Chapter 11 of the Bankruptcy Code since November 8, 1996.
Nu-Tech had reached an agreement (the "PCL Plan") with the holders of
the Senior Debt, Subordinated Debt and the management of PCL whereby Nu-Tech
would acquire a 52.6% interest in PCL. The terms of the agreement provided
that PCL would file a plan to effectuate the agreement. As required by the
aforementioned agreement, the Company purchased approximately $13,300,000 of
Senior Debt for $10,000,000 on November 7, 1996. In accordance with the PCL
Plan, certain holders of Senior Debt contributed $10,000,000 in
debtor-in-possession ("DIP") financing to PCL, which under the terms of the
reorganization, would be forgiven.
The PCL Plan also required that the Company purchase an additional 17%
of capital stock of PCL for $5,000,000 upon the approval of the PCL Plan.
Pursuant to the PCL Plan, the debt purchased by Nu-Tech would be converted into
35.6% of the common stock of PCL, which together with the 17% purchased for
$5,000,000, would result in Nu-Tech owning 52.6% of the outstanding common
stock of PCL. The PCL Plan was confirmed by the United States Bankruptcy
Court, Central District of California (Case No. SV96-23185-GM) on April 23,
1997. The PCL Plan as confirmed required that certain conditions be satisfied
or waived by July 22, 1997. On February 26, 1997, the Company completed the
sale of its ownership interest in Medical Science Institute, Inc. ("MSI") and
received, among other things, a $5,000,000 secured note receivable which was
used to satisfy its remaining $5,000,000 commitment to PCL (see Note C). The
Company recognized a deferred gain upon the sale of MSI to PCL, which was
offset against the $5,000,000 promissory note to reach the net amount of
$3,862,725.
On September 19, 1997, the Court granted the Debtors' motion to
approve the Federal and State Agreements (see Note B). The Court's order
became final on September 30, 1997. Pursuant to the Plan, prior to the
Effective Date, all of the Debtors were merged with and into PCL. On October
3, 1997, all conditions to the Effective Date that were set forth in the Plan
were satisfied, the Effective Date occurred.
Page 12 of 45
<PAGE> 13
2. Amendment to the Company's Amended and Restated Certificate of
Incorporation
As of October 15, 1997, a majority of the stockholders of the Company
as of August 8, 1997, have approved an amendment to the Company's Amended and
Restated Certificate of Incorporation to increase the total number of shares of
all classes of capital stock which the Company may issue to 52,000,000 shares;
such increase has been effected by increasing the number of shares of Common
Stock from 12,000,000 shares to 50,000,000 shares and by increasing the number
of shares of Series A Convertible Preferred Stock ("Preferred Stock") from
1,000,000 shares to 2,000,000 shares. This proposal was made via a consent
solicitation proxy statement on behalf of the Company's Board of Directors.
The amendment was declared effective by the Secretary of the State of
Delaware on October 21, 1997. By reason of such amendment, the Company resumed
accepting conversions of the Preferred Stock (see Note H) on October 23, 1997.
Through November 18, 1997, an aggregate of 30,381,566 shares of Common Stock
were issued upon conversion of 9,597 shares of Preferred Stock. Based upon an
assumed prevailing conversion price of $.103125 per share as of November 13,
1997, the Company would be obligated to issue up to an additional 42,695,758
shares of Common Stock.
3. Suspension of Analytical Biosystems Corporation's Laboratory
Operations
ABC has temporarily suspended the marketing of its Fluorescent
Cytoprint Assay ("FCA"), which is a specialized clinical laboratory assay used
in assisting in the selection of chemotherapeutic drugs most likely to be
effective in treating a cancer patient's solid mass tumor. With the suspension
of current direct marketing efforts of the FCA, the Company and ABC intend to
investigate the feasibility of resuming such marketing efforts through an
alliance or joint venture whereby the FCA would be marketed and sold through an
entity having national sales capability, and the assay performed by either ABC
or an entity to whom technology has been licensed by ABC. At the present time,
the Company has not entered into any discussions with any entity relating to
the marketing and sale of the FCA or the licensing of ABC's FCA technology, and
no assurance may be given that the Company will be able to market and sell its
FCA through alternate means. ABC has ceased processing specimens for assay and
has suspended its laboratory operations in Rhode Island.
4. Resignations of Directors
Effective November 20, 1997, Leonard Green and Edmond Charrette
separately submitted resignations to the Company as a Director of the Company.
Such resignations of Mr. Green and Dr. Charrette as directors of the Company
were not occasioned by reason of any disagreement with the Company relating to
the Company's operations, policies or practices. As of the date hereof, the
Board of Directors of the Company has not determined to fill such vacancies.
Safe Harbor Statement
Certain statements in this Form 10-QSB, including information set
forth under Item 2 "Management's Discussion and Analysis of Financial Condition
and Results of Operations"
Page 13 of 45
<PAGE> 14
constitute or may constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Act"). Nu-Tech
Bio-Med, Inc. (the "Company") desires to avail itself of certain "safe harbor"
provisions of the Act and is therefore including this special note to enable
the Company to do so. Forward-looking statements included in this Form 10-QSB
or hereafter included in other publicly available documents filed with the
Securities and Exchange Commission, reports to the Company's stockholders and
other publicly available statements issued or released by the Company involve
known and unknown risks, uncertainties, and other factors which could cause the
Company's actual results, performance (financial or operating) or achievements
to differ from the future results, performance (financial or operating)
achievements expressed or implied by such forward-looking statement. Such
future results are based upon management's best estimates based upon current
conditions and the most recent results of operations. These risks include, but
are not limited to risks associated with recently consummated acquisitions
(including Physicians Clinical Laboratory, Inc., ("PCL") and indirectly Medical
Science Institute, Inc. ("MSI"), dependence on reimbursement by third party
payers, uncertainty of eligibility for Medicare/Medicaid reimbursement, need
for additional capital, certain patent and technology considerations, health
care reform, competition and technological changes, limited facilities,
governmental regulations, dependence upon key personnel, professional and
product liability, the ability of the Company and/or PCL to obtain additional
debt or equity financing to fund ongoing operations of PCL and indirectly MSI
and other risks detailed in the Company's Securities and Exchange Commission
filings, including its Annual Report on Form 10-KSB for the year ended December
31, 1996, each of which could adversely affect the Company's business and the
accuracy of the forward-looking statements contained herein. In addition the
report of the Company's independent auditors on the consolidated financial
statements of the Company for the year ended December 31, 1996, contains an
explanatory paragraph that there are certain conditions that raise substantial
doubt about the ability to continue as a going concern. The Company to date
has been materially dependent upon the efforts of its President and Chief
Executive Officer, Mr. J. Marvin Feigenbaum. The loss of Mr. Feigenbaum's
services may have a materially adverse effect upon the business or operations
of the Company.
This space intentionally left blank.
Page 14 of 45
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRELIMINARY NOTES TO MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1. ACQUISITION AND DISPOSITION OF MEDICAL SCIENCE INSTITUTE, INC.
On November 18, 1996, Nu-Tech Bio-Med, Inc. (the "Company") acquired
all of the capital stock of Medical Science Institute, Inc. ("MSI") with the
intent to ultimately sell MSI to Physicians Clinical Laboratory, Inc. ("PCL").
The Company had acquired MSI upon approval by the United States Bankruptcy
Court of the Central District of California (the "Court") (Case No. LA 95-37790
TD) of the First Amended Plan of Reorganization (the "MSI Plan") of Medical
Science Institute, Inc. MSI is engaged in the medical laboratory business
primarily in the State of California and had been operating under Chapter 11 of
the U.S. Bankruptcy Code since October 26, 1995. MSI provides clinical
laboratory testing services, including testing of human tissue and fluid
specimens to physicians, managed-care organizations, hospitals and other health
care providers. MSI is a California corporation with its principal executive
offices located in Burbank, California.
Pursuant to the MSI Plan, the holders of all of the MSI capital stock
(including any and all options, warrants and other convertible securities)
received 134,228 shares of Common Stock of the Company with an aggregate value
of $2,000,000. The number of shares of Common Stock to be issued under the MSI
Plan was based upon the average closing price of a share of Common Stock for
the 15 day period preceding November 18, 1996. The recipient of the Company's
Common Stock is entitled to "piggyback" registration rights with respect to
such shares. The sole holder of all capital stock of MSI was Fausto Mendez,
Jr., the former President of MSI. Mr. Mendez had the option to receive
$275,000 in cash with a concurrent reduction in the number of shares of the
Company's Common Stock, which he chose to exercise on April 30, 1997.
In addition, the Company agreed to make certain other payments to
creditors and assume certain obligations under the MSI Plan. These payments
included: (i) approximately $750,000 to pay administrative claims of
professionals, (ii) an additional $425,000 for professional administrative
claims payable over 12 months, (iii) approximately $572,000 payable for federal
and state payroll taxes, (iv) approximately $2,500,000 to Austin Financial
Services, Inc., a secured creditor of MSI, (v) trade payables in the amount of
approximately $738,000, (vi) $75,000 payable to the federal government in
satisfaction of certain claims, and (viii) $750,000 payable to general
unsecured creditors. At the hearing confirming the MSI Plan held on November
18, 1996, the Company tendered $2,250,000 to the Court with respect to such
payments.
With respect to the sums payable under the Plan to Austin Financial
Services, Inc., the Company obtained a loan in the principal amount of
$2,500,000 from a third party lender on December 2, 1996. The loan bore
interest at 15% per annum. All principal and interest on the loan was payable
on January 31, 1997. On January 23, 1997, the Company obtained a new loan
Page 15 of 45
<PAGE> 16
in the principal amount of $2,000,000 from a private lender, the proceeds of
which were used to repay the $2,500,000 loan. The new loan bore interest at
7.5% per annum and was due and payable 60 days from the date of the loan. The
lender also received five year common stock purchase warrants to purchase
100,000 shares of common stock at $11.50 per share. On February 24, 1997, the
new loan for $2,000,000 was repaid. In connection with this transaction, the
Company recorded a $494,000 interest charge representing the fair value of
warrants issued in the quarter ended March 31, 1997.
On February 26, 1997, the Company completed the sale of its ownership
interest in Medical Science Institute, Inc. ("MSI") to Physicians Clinical
Laboratory, Inc., ("PCL"). PCL was operating as a debtor-in-possession under
Chapter 11 of the United States Bankruptcy Code (United States Bankruptcy
Court, Central District of California, Case No. SV96-23185-GM). The Company
sold its interests in MSI to PCL for its costs and certain expenses of the
acquisition aggregating approximately $7,643,000. The Company received
approximately $2,643,000 in cash and a secured promissory note of PCL in the
principal amount of $5,000,000. The note was secured by all of the assets of
PCL, but was subordinate to certain other claims and administrative expenses.
The Company used approximately $2,013,000 of the sale proceeds to repay the
principal and interest on the $2,000,000 loan which the Company had incurred to
acquire MSI. In the event the PCL Plan (see Note B) was consummated, which
plan provided that the Company was to become the owner of 52.6% of the
outstanding capital stock of PCL, the note (including all principal and
interest) was to be forgiven. On October 3, 1997, all conditions to the
Effective Date set forth in the Plan were satisfied and the Effective Date
occurred.
As a result of the above transactions, during the first quarter of
1997, the Company owned MSI for the 57 day period beginning January 1, 1997 and
ending February 26, 1997. Therefore, Management's Discussion and Analysis of
Financial Condition and Results of Operations relating to the three and nine
months ended September 30, 1997, and September 30, 1996, is presented on the
basis of the Company's temporary ownership of MSI.
2. ACQUISITION OF MAJORITY INTEREST IN PHYSICIANS CLINICAL LABORATORY
The Company had acquired certain debt securities of Physicians Clinical
Laboratory, Inc., a Delaware corporation ("PCL"), which is a full-service
clinical laboratory capable of providing a comprehensive battery of testing
services. PCL and its subsidiaries, Quantum Clinical Laboratories, Inc.,
Regional Reference Laboratory Governing Corporation, Diagnostic Laboratories,
Inc., and California Regional Reference Laboratory (collectively with PCL, the
"Debtors") had been operating as a debtor-in-possession under Chapter 11 of the
Bankruptcy Code from November 8, 1996 until October 3, 1997. PCL did file its
Form 10-K for its most recent fiscal year, which ended February 28, 1997, as
well as its quarterly reports on Form 10-Q for the quarters ended May 31, 1997,
and August 30, 1997.
Nu-Tech had reached an agreement (the "PCL Plan") with the holders of
the Senior Debt, Subordinated Debt and the management of PCL whereby Nu-Tech
would acquire a 52.6% interest in PCL. The terms of the agreement provided
that PCL would file a plan to effectuate the
Page 16 of 45
<PAGE> 17
agreement. As required by the aforementioned agreement, the Company purchased
approximately $13,300,000 of Senior Debt for $10,000,000 on November 7, 1996.
In accordance with the PCL Plan, certain holders of Senior Debt contributed
$10,000,000 in debtor-in-possession ("DIP") financing to PCL, which under the
terms of the reorganization, would be forgiven.
The PCL Plan also required that the Company purchase an additional 17%
of capital stock of PCL for $5,000,000 upon the approval of the PCL Plan.
Pursuant to the PCL Plan, the debt purchased by Nu-Tech would be converted into
35.6% of the common stock of PCL, which together with the 17% purchased for
$5,000,000, would result in Nu-Tech owning 52.6% of the outstanding common
stock of PCL. The PCL Plan was confirmed by the United States Bankruptcy
Court, Central District of California (Case No. SV96-23185-GM) on April 23,
1997. The PCL Plan as confirmed required that certain conditions be satisfied
or waived by July 22, 1997.
On February 26, 1997, the Company completed the sale of its ownership
interest in MSI (see Note C) and received, among other things, a $5,000,000
secured note receivable which was used to satisfy its remaining $5,000,000
commitment to PCL. The Company recognized a deferred gain upon the sale of MSI
to PCL, which was offset against the $5,000,000 promissory note to reach the
net amount of $3,862,725.
In April and June of 1997, PCL received separate subpoenas to furnish
certain documents to the United States Department of Defense ("DOD") and the
United States Department of Health and Human Services with respect to the
Company's Civilian Health and Medical Program of Uniformed Services billing
practices. PCL had been advised that its billing practices were the subject of
these investigations. Due to PCL's continued cooperation and negotiations with
these government agencies, on July 24, 1997, the Bankruptcy Court, on
stipulation of PCL, the Company and the creditors of PCL, extended the date
that certain conditions be satisfied or waived pursuant to the PCL Plan for 60
days to September 19, 1997, (from July 22, 1997), and stated that the terms and
conditions of the PCL Plan shall continue in full force and effect.
On or about July 18, 1997, PCL and the United States reached an
agreement in principle to settle such billing practices claims (see Note B).
Subsequent to reaching an agreement in principle with the United States, PCL
approached representatives of the State of California (the "State") to discuss
the compromise and settlement of any outstanding claims that the State might
have against PCL for its prior billing practices involving the MediCal program
for clinical laboratory services during the period from January 1, 1992, to
July 18, 1997. On or about August 28, 1997, PCL and the State reached a final
agreement to settle such claims (the "State Agreement") (see Note B).
On September 19, 1997, the Court granted the Debtors' motion to
approve the Federal and State Agreements. The Court's order became final on
September 30, 1997. Pursuant to the Plan, prior to the Effective Date, all of
the Debtors were merged with and into PCL. On October 3, 1997, all conditions
to the Effective Date set forth in the Plan were satisfied and the Effective
Date occurred after the third quarter ended. Therefore, the Management's
Discussion and
Page 17 of 45
<PAGE> 18
Analysis of Financial Condition and Results of Operations relating to the three
and nine months ended September 30, 1997, and September 30, 1996, do not
include the Company's 52.6% majority ownership of Physicians Clinical
Laboratory, Inc.
3. SUSPENSION OF ANALYTICAL BIOSYSTEMS CORPORATION'S LABORATORY OPERATIONS
As of November 3, 1997, ABC has temporarily suspended the marketing of
its Fluorescent Cytoprint Assay ("FCA"), which is a specialized clinical
laboratory assay used in assisting in the selection of chemotherapeutic drugs
most likely to be effective in treating a cancer patient's solid mass tumor.
With the suspension of current direct marketing efforts of the FCA, the Company
and ABC intend to investigate the feasibility of resuming such marketing efforts
through an alliance or joint venture whereby the FCA would be marketed and sold
through an entity having national sales capability, and the assay performed by
either ABC or an entity to whom technology has been licensed by ABC. At the
present time, the Company has not entered into any discussions with any entity
relating to the marketing and sale of the FCA or the licensing of ABC's FCA
technology, and no assurance may be given that the Company will be able to
market and sell its FCA through alternate means. ABC has ceased processing
specimens for assay and has suspended its laboratory operations in Rhode Island.
However, given the closing occurred after the third quarter ended, Management's
Discussion and Analysis of Financial Condition and Results of Operations
relating to the three and nine months ended September 30, 1997, and September
30, 1996, do include the operations of ABC through September 30, 1997.
Three months ended September 30, 1997, compared with three months ended
September 30, 1996
Results of Operations
Total revenues for the three months ended September 30, 1997, were
$145,985 compared to $26,455 for the three months ended September 30, 1996.
The increase in total revenues is primarily due to medical billing services
revenue of approximately $148,000 generated by the acquisition of NTBM during
the last quarter of 1996.
Assay sales, net of billing adjustments, from the processing of ABC's
assay, the Fluorescent Cytoprint Assay, were $(2,140) and $26,455 for the three
months ended September 30, 1997 and 1996, respectively. The decrease is due to
an excess of billing adjustments over gross revenues. The amount of billing
adjustments relating to assay sales during the three months ended September 30,
1997 and 1996, were approximately $44,000 and $13,000, respectively.
There were no laboratory revenues reported for the three months ended
September 30, 1997 due to the sale of the Company's ownership interest in MSI
to Physicians Clinical Laboratory, Inc., ("PCL") on February 26, 1997.
Page 18 of 45
<PAGE> 19
Medical billing services revenues were $148,125 for the three months
ended September 30, 1997, generated by the acquisition of NTBM during the last
quarter of 1996.
Total operating costs for the three months ended September 30, 1997,
were $692,657 compared to $1,061,866 for the three months ended September 30,
1996. The decrease of $369,209 is primarily due to decreases in sales, general
and administrative expenses of approximately $258,000 and deferred acquisition
costs charged off of approximately $219,000, offset by the inclusion of medical
billing services expenses of approximately $128,000 generated by the
acquisition of NTBM during the last quarter of 1996. The decrease in sales,
general and administrative expenses is primarily due to decreases in
compensation expense of approximately $402,000 and consultants expense of
approximately $79,000, offset by increases in professional fees of
approximately $155,000 and corporate filing expenses of approximately $57,000.
During the three months ended September 30, 1996, the Company incurred a
one-time non-recurring charge associated with the severance package of a former
officer of the Company and compensation expenses related to the 1995 grant of
100,000 restricted common stock shares granted to an executive officer. In
1996, the Company exchanged 95,000 unrestricted common stock shares which were
remaining under the 1995 grant of restricted common shares for 300,000
warrants. The deferred acquisition costs charged off for the three months
ended September 30, 1996, were expenses incurred as a result of management's
due diligence review of the business and operations of potential acquisitions
which management has determined not to pursue and has terminated further
negotiations. No deferred acquisition costs were charged off for the three
months ended September 30, 1997.
Laboratory expenses for the three months ended September 30, 1997,
were $36,249 compared to $53,366 for the three months ended September 30, 1996.
The decrease of $17,117 is primarily due to reductions in laboratory personnel
costs.
Medical billing services expenses were $128,368 for the three months
ended September 30, 1997, as a result of the acquisition of NTBM during the
last quarter of 1996.
The Company reported $218,914 of deferred acquisition costs charged
off for the three months ended September 30, 1996, for expenses incurred as a
result of management's due diligence review of the business and operations of
potential acquisitions which management has determined not to pursue and has
terminated further negotiations. No deferred acquisition costs were charged
off for the three months ended September 30, 1997.
Selling, general and administrative expenses for the three months
ended September 30, 1997, were $511,997 compared to $769,913 for the three
months ended September 30, 1996. The decrease of $257,916 is primarily due to
decreases in compensation expense of approximately $402,000 and consultants
expense of approximately $79,000, offset by increases in professional fees of
approximately $155,000 and corporate filing expenses of approximately $57,000.
During the three months ended September 30, 1996, the Company incurred a
one-time non-recurring charge associated with the severance package of a former
officer of the Company and compensation expenses related to the 1995 grant of
100,000 restricted common stock shares granted to an executive officer. In
1996, the Company exchanged 95,000 unrestricted common
Page 19 of 45
<PAGE> 20
stock shares which were remaining under the 1995 grant of restricted common
shares for 300,000 warrants.
Research and development expenses for the three months ended September
30, 1997, were $16,043 compared to $19,673 for the three months ended September
30, 1996.
Operating loss for the three months ended September 30, 1997, was
$546,672 compared to $1,035,411 for the three months ended September 30, 1996.
The decrease of $488,739 is primarily due to decreases in sales, general and
administrative expenses of approximately $258,000 and deferred acquisition
costs charged off of approximately $219,000, as well as the inclusion of
medical billing services operating income of approximately $20,000 generated by
the acquisition of NTBM during the last quarter of 1996.
Investment and interest income for the three months ended September
30, 1997, was $6,337 compared to $49,774 for the three months ended September
30, 1996. The decrease of $43,437 is primarily due to a decrease in cash and
cash equivalents upon which interest is earned.
Interest expense for the three months ended September 30, 1997, was
$2,543 compared to $7,091 for the three months ended September 30, 1996. This
decrease of $4,548 is due to the reduction of principal outstanding for loans
from the State of Rhode Island's Small Business Loan Fund Corporation.
Net loss for the three months ended September 30, 1997, was $542,878
as compared to $992,728 for the nine months ended September 30, 1996. The
decrease of $449,850 is primarily due to a decrease in operating loss of
approximately $489,000, offset by a decrease in investment and interest income
of approximately $43,000.
Net loss per share of Common Stock for the three months ended
September 30, 1997, was $.06 compared to $.50 for the three months ended
September 30, 1996. The decrease of $.44 is primarily due to an increase in
weighted average common shares outstanding as well as a decrease in net loss of
approximately $450,000. Weighted average common shares outstanding were
9,099,157 and 1,982,174 for the three months ended September 30, 1997, and
1996, respectively.
Nine months ended September 30, 1997, compared with nine months ended September
30, 1996
Results of Operations
Total revenues for the nine months ended September 30, 1997, were
$2,266,676 compared to $74,508 for the nine months ended September 30, 1996.
The increase in total revenues is primarily due to the inclusion of Medical
Science Institute, Inc.'s ("MSI") total revenues for the 57 day period
beginning January 1, 1997 and ending February 26, 1997. Without the inclusion
of MSI's transactions, total revenues for the nine months ended September 30,
1997, would have been $468,315 as compared to $74,508 for the nine months ended
September 30, 1996. The increase of $393,807 is primarily due to revenues of
$392,666 generated by the acquisition of NTBM Billing Services, Inc. ("NTBM")
during the last quarter of 1996.
Page 20 of 45
<PAGE> 21
Assay sales, net of billing adjustments, from the processing of
Analytical Biosystems Corporation's assay, the Fluorescent Cytoprint Assay,
were $70,109 and $74,508 for the nine months ended September 30, 1997, and
1996, respectively. The amount of billing adjustments relating to assay sales
during the nine months ended September 30, 1997, and 1996, were approximately
$52,000 and $16,000, respectively.
Laboratory revenues, net of billing adjustments, were $1,798,361 for
the 57 day period beginning January 1, 1997, and ending February 26, 1997,
generated by the temporary ownership of MSI.
Medical billing services revenues were $392,666 for the nine months
ended September 30, 1997, generated by the acquisition of NTBM during the last
quarter of 1996.
Total operating costs for the nine months ended September 30, 1997,
were $4,154,889 compared to $2,738,893 for the nine months ended September 30,
1996. The increase in total operating costs includes MSI's total operating
costs for the 57 day period beginning January 1, 1997, and ending February 26,
1997, of $2,092,447. Without the inclusion of MSI's transactions, total
operating costs for the nine months ended September 30, 1997, would have been
$2,062,444 as compared to $2,738,893 for the nine months ended September 30,
1996. The decrease of $676,449 is primarily due to decreases in selling,
general and administrative expenses of approximately $788,000 and deferred
acquisition costs charged off of approximately $219,000, offset by medical
billing services expenses of approximately $367,000.
Laboratory expenses for the nine months ended September 30, 1997, were
$1,500,914 compared to $145,601 for the nine months ended September 30, 1996.
The increase in laboratory expenses is primarily due to the inclusion of MSI's
laboratory expenses for the 57 day period beginning January 1, 1997, and ending
February 26, 1997. Without the inclusion of MSI's transactions, laboratory
expenses for the nine months ended September 30, 1997, would have been $126,492
as compared to $145,601 for the nine months ended September 30, 1996. The
decrease of $19,109 is primarily due to reductions in laboratory personnel
costs.
Medical billing services expenses were $366,768 for the nine months
ended September 30, 1997, as a result of the acquisition of NTBM during the
last quarter of 1996.
Selling, general and administrative expenses for the nine months ended
September 30, 1997, were $2,238,263 compared to $2,308,001 for the nine months
ended September 30, 1996. The increase is primarily due to the inclusion of
MSI's selling, general and administrative expenses of $718,025 for the 57 day
period beginning January 1, 1997, and ending February 26, 1997, offset by a
decrease in non-MSI's selling, general and administrative expenses. Without
the inclusion of MSI transactions, selling, general and administrative expenses
for the nine months ended September 30, 1997, would have been $1,520,244 as
compared to $2,308,001 for the nine months ended September 30, 1996. The
decrease of $787,757 is primarily due decreases in compensation expense of
approximately $1,260,000 and consultants expense of $149,000, offset
Page 21 of 45
<PAGE> 22
by an increase in professional fees of approximately $386,000, franchise taxes
of approximately $33,000 and corporate filing expenses of approximately
$115,000. During the nine months ended September 30, 1996, the Company
incurred a one-time non-recurring charge associated with the severance package
of a form officer of the Company and compensation expenses related to the 1995
grant of 100,000 restricted common stock shares granted to an executive
officer. In 1996, the Company exchanged 95,000 unrestricted common stock
shares which were remaining under the 1995 grant of restricted common shares
for 300,000 warrants.
Research and development expenses for the nine months ended September
30, 1997, were $48,940 compared to $66,377 for the nine months ended September
30, 1996.
Operating loss for the nine months ended September 30, 1997, was
$1,888,213 compared to $2,664,385 for the nine months ended September 30, 1996.
The decrease in operating loss includes MSI's operating loss for the 57 day
period beginning January 1, 1997, and ending February 26, 1997, of $294,084.
Without the inclusion of MSI's transactions, operating loss for the nine months
ended September 30, 1997, and 1996, would have been $1,594,129 and $2,664,385,
respectively. The decrease of $1,070,256 is primarily due to decreases in
selling, general and administrative expenses of approximately $788,000 and
deferred acquisition costs charged off of approximately $219,000, as well as
the inclusion of medical billing services operating income of approximately
$26,000.
Investment and interest income for the nine months ended September 30,
1997, was $25,317 compared to $129,347 for the nine months ended September 30,
1996. The decrease of $104,030 is primarily due to a decrease in cash and cash
equivalents upon which interest is earned.
Interest expense for the nine months ended September 30, 1997, was
$535,783 compared to $22,571 for the nine months ended September 30, 1996. The
increase of $513,212 is primarily due to the interest recorded for the fair
value of warrants issued in connection with debt and interest related to a loan
in the principal amount of $2,000,000 obtained by the Company to repay the
outstanding balance on a loan in the principal amount of $2,500,000. In
conjunction with the issuance of the $2,000,000 note payable, the lenders were
issued warrants to purchase 100,000 shares of common stock at an exercise price
of $11.50 per share.
Net loss for the nine months ended September 30, 1997, was $2,398,679
as compared to $2,557,609 for the nine months ended September 30, 1996. The
decrease in net loss includes MSI's operating loss for the 57 day period
beginning January 1, 1997, and ending February 26, 1997, of $290,823. Without
the inclusion of MSI's transactions, net loss for the nine months ended
September 30, 1997 and 1996, would have been $2,107,858 and $2,557,609,
respectively. The decrease of $449,751 is primarily due to a decrease in
operating loss of approximately $1,070,000, offset by an increase in interest
expense of approximately $516,000 and a decrease in investment and interest
income of approximately $104,000.
Net loss per share of Common Stock for the nine months ended September
30, 1997, was $.47 compared to $1.37 for the nine months ended September 30,
1996. This decrease is
Page 22 of 45
<PAGE> 23
primarily due to an increase in weighted average common shares outstanding.
Weighted average shares were 5,126,074 and 1,868,247 for the nine months ended
September 30, 1997, and 1996, respectively.
Liquidity and Capital Resources
The Company had approximately $346,923 in cash and cash equivalents at
September 30, 1997.
Total current assets at September 30, 1997, and December 31, 1996,
were $684,050 and $3,743,997, respectively. This decrease of $3,059,947 is
primarily due to the exclusion of MSI's balance sheet as a result of the sale
of MSI to PCL on February 26, 1997. Without the inclusion of MSI's balance
sheet at December 31, 1996, total current assets would have been $684,050 and
$1,636,811 at September 30, 1997, and December 31, 1996, respectively. This
decrease of $952,761 is primarily due to the utilization of cash during the
period to support operating activities and the payment and reduction of current
liabilities, offset by an increase in cash of approximately $619,000 as a
result of the exercise of 351,728 warrants during the second quarter of 1997.
Accounts receivable, net of allowances for doubtful accounts, at
September 30, 1997, and December 31, 1996, were $88,044 and $1,751,230,
respectively. This decrease of $1,663,186 is primarily due to the exclusion of
MSI's balance sheet as a result of the sale of MSI to PCL on February 26, 1997.
Without the inclusion of MSI's balance sheet at December 31, 1996, accounts
receivable, net of allowances for doubtful accounts, would have been $88,044
and $76,846 at September 30, 1997, and December 31, 1996, respectively.
Inventory at September 30, 1997, and December 31, 1996, was $11,985
and $219,428, respectively. This decrease of $207,443 is primarily due to the
exclusion of MSI's balance sheet as a result of the sale of MSI to PCL on
February 26, 1997. Without the inclusion of MSI's balance sheet at December
31, 1996, inventory would have been $11,985 and $10,255 at September 30, 1997,
and December 31, 1996, respectively.
Net investment in senior debt of Physicians Clinical Laboratory, Inc.,
("PCL") at September 30, 1997, and December 31, 1996, was $13,287,164 and
$9,424,439, respectively. This increase of $3,862,725 is the net amount
resulting from the sale of MSI to PCL. Upon the sale of MSI to PCL, a
$5,000,000 promissory note was issued by PCL to the Company, which obligation
was satisfied upon the effective date of the PCL Plan (see Note B).
Additionally, the Company recognized a deferred gain upon the sale of MSI to
PCL, which was offset against the $5,000,000 promissory note to reach the net
amount of $3,862,725.
A note receivable of $100,000 was outstanding at September 30, 1997.
On February 10, 1997, a $100,000 loan was issued to the former sole stockholder
and president of MSI, as part of the employment agreement between the Company
and the stockholder. The loan is secured by the shares of Common Stock issued
to the stockholder under the MSI Plan.
Page 23 of 45
<PAGE> 24
Equipment and leasehold improvements, net of accumulated depreciation
and amortization, at September 30, 1997, and December 31, 1996, were $316,898
and $1,766,842, respectively. This decrease of $1,449,944 is primarily due to
the exclusion of MSI's balance sheet as a result of the sale of MSI to PCL on
February 26, 1997. Without the inclusion of MSI's balance sheet at December
31, 1996, equipment and leasehold improvements, net of accumulated depreciation
and amortization, would have been $316,898 and $379,697 at September 30, 1997,
and December 31, 1996, respectively.
Goodwill, net of accumulated amortization, at September 30, 1997, and
December 31, 1996, was $683,222 and $6,352,860, respectively. This decrease of
$5,669,638 is primarily due to the exclusion of MSI's balance sheet as a result
of the sale of MSI to PCL on February 26, 1997. Without the inclusion of MSI's
balance sheet at December 31, 1996, goodwill, net of accumulated amortization,
would have been $683,222 and $739,913 at September 30, 1997, and December 31,
1996, respectively.
Total assets at September 30, 1997, and December 31, 1996, were
$16,175,017 and $22,405,766, respectively. The decrease of $6,230,749 is, in
part, due to the exclusion of MSI's balance sheet as a result of the sale of
MSI to PCL on February 26, 1997. Without the inclusion of MSI's balance sheet
at December 31, 1996, total assets would have been $16,175,017 and $18,841,295
at September 30, 1997, and December 31, 1996, respectively.
Current liabilities at September 30, 1997, and December 31, 1996, were
$954,214 and $5,410,663, respectively. The decrease of $4,456,449 is, in part,
due to the exclusion of MSI's balance sheet as a result of the sale of MSI to
PCL on February 26, 1997. Without the inclusion of MSI's balance sheets at
December 31, 1996, current liabilities would have been $954,214 and $3,130,937
at September 30, 1997, and December 31, 1996, respectively. The decrease of
$2,176,723 is primarily due to the repayment of the $2,000,000 loan obtained by
the Company to repay the outstanding balance on a loan in the principal amount
of $2,500,000.
Total liabilities at September 30, 1997, and December 31, 1996, were
$975,600 and $9,643,819, respectively. The decrease of $8,668,219 is, in part,
due to the exclusion of MSI's balance sheet as a result of the sale of MSI to
PCL on February 26, 1997. Without the inclusion of MSI's balance sheet at
December 31, 1996, total liabilities would have been $975,600 and $6,682,995 at
September 30, 1997, and December 31, 1996, respectively. The decrease of
$5,707,395 is primarily due to the issuance of common stock shares which value
of $3,422,500 had been recorded in 1996, and the issuance of the shares
occurred in the first quarter of 1997, as well as, the repayment of the
$2,000,000 loan obtained by the Company to repay the outstanding balance on a
loan in the principal amount of $2,500,000.
Plan of Operations
The consolidated financial statements of the Company have been
prepared on the basis that the Company will continue as a going concern. These
conditions have raised substantial doubt about the Company's ability to
continue as a going concern. Through September 30, 1997, the Company has
expended cash in excess of cash generated from operations and has not achieved
Page 24 of 45
<PAGE> 25
sufficient revenues to support future operations. During 1996, the Company
generated net cash from financing activities of approximately $16,407,000, which
was principally utilized by the Company is connection with the purchase of
approximately $13,300,000 of senior secured debt of Physicians Clinical
Laboratory, Inc. ("PCL") for $10,000,000 in connection with the acquisition by
the Company of a majority interest in PCL; cash payments in connection with its
acquisition of Medical Science Institute, Inc. ("MSI"); acquisition costs of
Prompt Medical Billing Inc.; and general working capital purposes, including
cash used from operations of the Company and its then principal subsidiaries
Analytical Biosystems Corporation ("ABC"), NTBM Billing Services, Inc. ("NTBM")
and cash used by MSI for a 44 day period of approximately $2,159,000. The
Company's remaining cash and cash equivalents at September 30, 1997, and
December 31, 1996, were approximately $347,000 and $1,700,000, respectively.
The Company anticipates that it will need cash resources of approximately
$200,000 to sustain itself from September 30, 1997, through December 31, 1997.
The ability of the Company to obtain additional financing or to achieve an
adequate level of sales is dependent upon future events, the outcome of which is
presently not determinable. No assurance may be given that the Company's NTBM
subsidiary will be able to generate adequate and sufficient revenues from
operations to supplement the Company's cash requirements. While the Company
will seek to raise additional funds through debt or equity financing, no
assurance may be given that the Company will be able to do so or, if that such
financing is available, that same will be on terms acceptable to the Company.
The Company will seek, during the balance of the calendar year 1997, to decrease
its costs of operations and thereby decrease the amount of additional cash
resources that it may require. However no assurance may be given that such
decreases in costs can be implemented at sufficient levels.
Effects of Inflation
The Company does not view the effects of inflation to have a material
effect upon its business.
Page 25 of 45
<PAGE> 26
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Certain statements in this Form 10-QSB, including information set
forth under Item 2 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" constitute or may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Act"). Nu-Tech Bio-Med, Inc. (the "Company") desires to avail
itself of certain "safe harbor" provisions of the Act and is therefore
including this special note to enable the Company to do so. Forward-looking
statements included in this Form 10-QSB or hereafter included in other publicly
available documents filed with the Securities and Exchange Commission, reports
to the Company's stockholders and other publicly available statements issued or
released by the Company involve known and unknown risks, uncertainties, and
other factors which could cause the Company's actual results, performance
(financial or operating) or achievements to differ from the future results,
performance (financial or operating) achievements expressed or implied by such
forward-looking statements. Such future results are based upon Management's
best estimates based upon current conditions and the most recent results of
operations. These risks include, but are not limited to risks associated with
recently consummated acquisitions (including Physicians Clinical Laboratory,
Inc. ("PCL") and indirectly Medical Science Institute, Inc. ("MSI"),
dependence on reimbursement by third party payers, uncertainty of eligibility
for Medicare/Medicaid reimbursement, need for additional capital, certain
patent and technology considerations, health care reform, competition and
technological changes, limited facilities, governmental regulations, dependence
upon key personnel, professional and product liability, the ability of the
Company and/or PCL to obtain additional debt or equity financing to fund
ongoing operations of PCL and MSI and other risks detailed in the Company's
Securities and Exchange Commission filings, each of which could adversely
affect the Company's business and the accuracy of the forward-looking
statements contained herein. In addition, the report of the Company's
independent auditors on the consolidated financial statements of the Company
for the year ended December 31, 1996, in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996, contains an explanatory paragraph
that there are certain conditions that raise substantial doubt about the
ability to continue as a going concern. The Company to date has been
materially dependent upon the efforts of its President and Chief Executive
Officer, J. Marvin Feigenbaum. The loss of Mr. Feigenbaum's services may have
a materially adverse effect upon the business or operations of the Company.
Risk factors and investment considerations which may materially affect the
Company, impact upon any forward looking statements, and which otherwise should
carefully be considered, include the following:
Suspension of Analytical Biosystems Corporation's Laboratory Operations
As of November 3, 1997, ABC has temporarily suspended the marketing of
its Fluorescent Cytoprint Assay ("FCA"), which is a specialized clinical
laboratory assay used in assisting in the selection of chemotherapeutic drugs
most likely to be effective in treating a cancer patient's solid mass tumor.
With the suspension of current direct marketing efforts of the FCA, the Company
and ABC intend to investigate the feasibility of resuming such marketing
efforts through an alliance or joint venture whereby the FCA would be marketed
and sold through an entity having national sales capability, and the assay
performed by either ABC or an entity to whom technology has been licensed by
ABC. At the present time, the Company has not entered
Page 26 of 45
<PAGE> 27
into any discussions with any entity relating to the marketing and sale of the
FCA or the licensing of ABC's FCA technology, and no assurance may be given
that the Company will be able to market and sell its FCA through alternate
means. ABC has ceased processing specimens for assay and has suspended its
laboratory operations in Rhode Island.
Historical Losses and Accumulated Deficit of Nu-Tech; Going
concern Qualification of Independent Auditors Report
Through the third quarter ended September 30, 1996, the Company was
classified as a development-stage company for financial accounting purposes by
reason of the fact that it had not generated significant revenues from
operations prior to such date. As a result of the acquisition of Prompt
Medical, and the ownership, at that time, of MSI, the Company ceased to be
classified as a development-stage company as of December 31, 1996. Since 1990,
the Company's principal business has been conducted through its wholly-owned
subsidiary, ABC. Prior to 1990, the Company, through other subsidiary
corporations, had engaged in other unrelated businesses which have been
discontinued. Since inception (February 1, 1982) through September 30, 1997,
the Company has incurred an accumulated deficit of approximately $24,063,000.
For the fiscal years ended December 31, 1996, 1995 and 1994, and the nine months
ended September 30, 1997, the Company incurred net losses of approximately
$7,788,000, $2,089,000, $1,394,000 and $2,399,000, respectively. The amount of
stockholders equity at September 30, 1997 was approximately $15,199,000. The
amount of its working capital at September 30, 1997 was approximately
($270,000). It is anticipated that the Company will continue to incur losses
until such time, if ever, that NTBM Billing Services, Inc., a wholly-owned
subsidiary of the Company ("NTBM"), attain revenues in amounts sufficient to
support their respective operations and/or the operations of MSI and PCL can be
stabilized and returned to profitability. There can be no assurance that the
Company will be able to successfully implement its marketing strategy, generate
significant revenues or achieve profitable operations in the future. In
addition, the report of the Company's independent auditors on the consolidated
financial statements of the Company for the year ended December 31, 1996, in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1996,
contains an explanatory paragraph that there are certain conditions that raise
substantial doubt about the ability to continue as a going concern.
Historical Losses and Accumulated Deficit of PCL; Going Concern
Qualification to Independent Auditors Report
For the Fiscal Years ended February 28 (29), 1995, 1996 and 1997,
Physician Clinical Laboratory, Inc. ("PCL") incurred net losses of
approximately $5,596,000, $79,184,000 and $98,679,000, respectively. At
February 28, 1997, the last date for which PCL filed reports with the
Securities and Exchange Commission, PCL had a retained deficit of
approximately $163,257,000, total current liabilities of approximately
$152,455,000 and net losses for the year ended February 28, 1997, of
approximately $98,679,000. PCL has continued to operate at a loss since
February 28, 1997. There can be no assurance that upon consummation of the PCL
Plan that it will operate profitably, even though the confirmation of the PCL
Plan would result in a decrease of liabilities.
Page 27 of 45
<PAGE> 28
While in Chapter 11, PCL had available to it $9,800,000 in
Debtor-in-Possession financing, and any unused portion of such financing was
contributed to working capital. In addition, the report of PCL's independent
auditors on the consolidated financial statements of PCL for the year ended
February 28, 1997, contains an explanatory paragraph that there are certain
conditions that raise substantial doubt about the ability to continue as a
going concern.
Acquisition of Majority Interest in Physicians Clinical Laboratory,
Inc.
Physician Clinical Laboratory, Inc. ("PCL") had been operating as a
debtor-in-possession under Chapter 11 of the United States Bankruptcy Code from
November 8, 1996 through October 3, 1997. The Company and PCL had submitted a
plan (the "PCL Plan") to the United States Bankruptcy Court to acquire 52.6%
majority interest in PCL on November 8, 1996. Additionally, PCL was in default
on approximately $80,000,000 in senior secured debt and approximately
$40,000,000 in subordinated debt. The Company purchased approximately
$13,300,000 of PCL Senior Debt in advance of submission of the PCL Plan to the
bankruptcy court. On April 23, 1997, the United States Bankruptcy Court,
Central District of California Case No. 5V96-23185-GM, following the approval
and entry of findings of fact, conclusions of law and order confirming the
second amended plan of reorganization of PCL and its affiliated debtors,
entered a final judgment confirming the second amended plan of reorganization
of PCL and its affiliated debtors. On or about July 18, 1997, the Bankruptcy
Court, on stipulation of PCL, extended the date that certain conditions be
satisfied or waived pursuant to the PCL Plan for 60 days, to September 19,
1997.
In April and June of 1997, PCL received separate subpoenas to furnish
certain documents to the United States Department of Defense ("DOD") and the
United States Department of Health and Human Services with respect to the
Company's Civilian Health and Medical Program of Uniformed Services billing
practices. PCL had been advised that its billing practices were the subject of
these investigations. Due to PCL's continued cooperation and negotiations with
these government agencies, on July 24, 1997, the Bankruptcy Court, on
stipulation of PCL, the Company and the creditors of PCL, extended the date
that certain conditions be satisfied or waived pursuant to the PCL Plan for 60
days to September 19, 1997 (from July 22, 1997), and stated that the terms and
conditions of the PCL Plan shall continue in full force and effect.
On or about July 18, 1997, PCL and the United States reached an
agreement in principle to settle such billing practices claims. The agreement
disposed of the claims on substantially the following terms:
1. PCL paid (i) $200,000 18 days after the Court issued its order
approving the Settlement Agreement (October 7, 1997) and (ii) will pay
$1,800,000 in principal plus interest calculated at the Treasury Bill
interest rate payable in equal monthly installments of $25,000 for six
years;
Page 28 of 45
<PAGE> 29
2. PCL entered into a five-year Corporate Integrity Agreement
with the Office of the Inspector General of the U.S. Department of
Health and Human Services ("HHS"), pursuant to which PCL will, among
other requirements, set up and follow an internal corporate compliance
plan with monitoring provided by an internal corporate compliance
officer, provide proper training for its billing and marketing
personnel, and fulfill various reporting requirements to HHS;
3. PCL and J. Marvin Feigenbaum were released from civil and
criminal liability under the False Claims Act and common law causes of
action in connection with their billing practices from January 1,
1992, to July 18, 1997;
4. The amounts owed to the United States will not be dischargeable
in any bankruptcy; and
5. If PCL defaults on any of its obligations under the Settlement
Agreement, all amounts owed will be immediately due, all releases will
be void and PCL may be excluded from participation in Medicare and
Medicaid.
Subsequent to reaching an agreement in principle with the United
States, PCL approached representatives of the State of California (the "State")
to discuss the compromise and settlement of any outstanding claims that the
State might have against PCL for its prior billing practices involving the
MediCal program for clinical laboratory services during the period from January
1, 1992, to July 18, 1997. On or about August 28, 1997, PCL and the State
reached a final agreement to settle such claims (the "State Agreement"). The
State Agreement disposed of the claims on substantially the following terms:
1. PCL paid the State the sum of $100,000 22 days after the Court
issued its order approving the Settlement Agreement (October 11). All
of the terms of the Corporate Integrity Agreement executed by PCL and
the United States Government are incorporated by reference to the
Company's Current Report Form 8-K filed October 20, 1997 and all of
the terms therein are made applicable to the Settlement Agreement with
the state;
2. The State released PCL and J. Marvin Feigenbaum from any civil
or administrative monetary claim or cause of action that the
California Department of Health Services has or may have, and from any
action seeking exclusion from the MediCal program with regard to the
provision of and reimbursement for laboratory services under the
MediCal program;
3. The State released PCL and J. Marvin Feigenbaum from any
criminal liability for any conduct covered by the State Agreement;
4. PCL will cooperate in any further investigation of individuals
and entities not released by the State in the State Agreement.
Page 29 of 45
<PAGE> 30
On September 19, 1997, the Court granted the Debtors' motion to
approve the Federal and State Agreements. The Court's order became final on
September 30, 1997. Pursuant to the Plan, prior to the Effective Date, all of
the Debtors were merged with and into PCL. On October 3, 1997, all conditions
to the Effective Date that were set forth in the Plan were satisfied, the
Effective Date occurred.
The Company anticipates that PCL and MSI will each require further
funds to stabilize their respective operations following the acquisition.
There can be no assurance that these funds will be available to either the
Company, PCL or MSI.
Acquisition of Medical Science Institute
The Company, on November 18, 1996, completed the acquisition of
Medical Science Institute, Inc. ("MSI") which had been operating under Chapter
11 of the Bankruptcy Code since October 26, 1995. The completion of the
acquisition of MSI was effected with the intent to resell and transfer such
ownership to PCL on a pass through basis, which occurred on February 26, 1997.
MSI incurred losses of approximately $617,000 during the 44 day period ending
December 31, 1996, and approximately $291,000 for the 57 day period through
February 26, 1997. There can be no assurance that the PCL acquisition, which
includes MSI as a subsidiary of PCL, will result in additional profits to the
Company.
Need for Additional Funds
As of November 3, 1997, ABC has temporarily suspended the marketing of
its Fluorescent Cytoprint Assay ("FCA"). ABC has ceased processing specimens
for assay and has suspended its laboratory operations in Rhode Island.
Additionally, the Company has begun preparations to close its executive offices
in New York. These closures will result in a reduction of expenses on a going
forward basis.
The Company anticipates it may need additional capital for the
operations of its NTBM subsidiary and for the operations of PCL and MSI. The
Company has no ongoing funding obligations with respect to either PCL or MSI.
The Company, in the future, will also need additional funds from loans and/or
the sale of equity securities. No assurance can be given that such funds will
be available or, if available, will be on commercially reasonable terms
satisfactory to the Company. In the event such funds are not available for the
operations of the Company, the Company and its wholly-owned subsidiary may be
forced to curtail operations, or, in an extreme situation, cease operations.
If such funds are not available to either PCL or MSI, such entities may be
required to curtail their respective operations.
Risk Factors Associated with Medical Laboratory Business
In light of its acquisition of a majority ownership in PCL (which
includes indirect majority ownership of MSI), the Company is subject to
numerous risks associated with the medical laboratory business.
Page 30 of 45
<PAGE> 31
Competition
Competition in the clinical laboratory industry is intense. Each of
MSI and PCL competes with other independent clinical laboratories as well as
laboratories located in physicians' offices and in hospitals. Several regional
and national independent clinical laboratories are larger and have greater
financial resources than either MSI or PCL. Each of MSI or PCL may encounter
more intense and varying levels of competition from other independent clinical
laboratory companies in the future. In addition, changes in the regulatory
environment in which each of MSI and PCL operates could affect the basis for
competition in the industry, and could thereby have a material adverse effect
on each of MSI and PCL's results of operations. There is also competition in
the industry for acquisition candidates, and there can be no assurance that
such candidates will be available to the Company, MSI or PCL on favorable
terms, or at all.
The Stark Bill and Other Restrictions Referral
Each of MSI and PCL are subject to certain self-referral prohibitions
of Federal law, commonly known as the "Stark Bill." The Stark Bill, which
became effective January 1, 1992, generally prohibits MSI and PCL from billing
the Medicare program if the physician ordering the test (or an immediate family
member of such physician, as defined by the Stark Bill) has an ownership or
investment interest in the Company, MSI or PCL or a compensation arrangement
with the Company. Ownership interests would include ownership of shares of
Common Stock purchased in the open market or otherwise. In the event that a
significant number of either MSI or PCL's referring physicians who, in the
aggregate refer to either MSI or PCL a significant portion of their respective
Medicare-billed testing, were to acquire and maintain ownership or investment
interests in either MSI or PCL or enter into compensation agreements with
either MSI or PCL, and in such case either the Company, MSI or PCL were to
continue to perform testing services for such physicians comprising a
significant portion of either the Company, MSI or PCL's Medicare-billed
testing, then either MSI or PCL's inability to bill the Medicare program for
tests ordered by such physicians would have a material adverse effect on their
respective revenues. There can be no assurance that physicians have complied
or in the future will comply with these requests or accurately represent
ownership of any Common Stock. The Stark Bill also requires MSI and PCL to
comply with certain reporting requirements relating to physicians who have an
ownership interest in the Company and physicians who order tests from, and have
a compensation arrangement with, the Company. There can be no assurance that
either the Company, MSI or PCL will be able to obtain adequate information
concerning its physician stockholders to enable it to fully comply with these
reporting obligations. Proposed regulations implementing the Stark Bill also
would profit the Company, MSI and PCL from offering physician price discounts
for laboratory services as an inducement for obtaining Medicare referrals.
Those regulations also would prohibit the purchase by the Company of a
physician-owned laboratory unless, for a period of one year before the
transaction and one year after the transaction, the physician had not had any
other financial relationship with the Company, MSI or PCL. Violations of the
Stark Bill could subject the Company to significant civil penalties or
exclusion from the Medicare program.
Page 31 of 45
<PAGE> 32
In August, 1993, Congress passed and the President signed the Omnibus
Budget Reconciliation Act of 1993 ("OBRA '93"), which amended certain important
provisions of the Stark Bill. OBRA '93 extended the prohibition on physician
self-referrals to all Medicare- and Medicaid-billable clinical laboratory
services, prohibiting the billing of such services to Medicare, Medicaid or any
other State plan. Under the amendments, physician ownership or shares in a
publicly-traded corporation in which the average stockholder equity either at
the end of the corporations' most recent fiscal year or an average over the
prior three fiscal years exceeds $75 million will not be considered ownership
or an investment interest subject to the prohibition. While this exception is
not relevant to the ownership of shares in the Company at present, it may apply
in the future.
In July, 1993, the California Legislature passed, and the Governor of
California signed, a comprehensive workers' compensation reform package. One
of the statutes prohibits the referral by a physician of workers' compensation
medical services to a clinical laboratory in which the physician or his or her
family has a financial interest. The term "financial interest" is defined
very broadly, covering many forms of direct or indirect payments, and includes
interests which are created or transferred to avoid the prohibition. The
legislation exempts referrals under the following circumstances: (1) when the
physician practices in a rural area and there is no alternative site within a
reasonable distance, (2) when the financial interest is a loan made on
commercially reasonable terms and the terms are not affected by referrals or
volume of services, (3) when the financial interest is a lease made on
commercially reasonable terms and the terms are not affected by referrals or
volume of services, (4) when the interest is ownership of securities in a
public company for which distribution or transfers for value are not based on
referrals and which has gross assets over $100 million (a condition which
presently is not met by the Company), (5) when the physician is not
compensated for the referral or a university-employed physician refers to a
university-owned laboratory and (6) when the laboratory is owned by the
physician's group practice in a multi-specialty clinic. The law also requires
disclosure to the patient of any financial interest of the physician in the
facility to which the referral is made. Violation of law, which is a
misdemeanor, could subject MSI or PCL to fines and disciplinary action,
including license revocation.
Prohibitions Relating to the Mark-up of Laboratory Services
Clinical laboratories, physicians, hospitals and other health care
providers in California are subject to Section 655.5 of the California Business
and Professions Code. This statute prohibits those subject to the statute,
including MSI and PCL in billing patients or third-party payers, from marking
up charges for any clinical laboratory services actually not rendered by the
provider. Each of PCL and MSI derive a significant portion of their revenues
which are subject to these regulations. In the event that either PCL or MSI
are found in violation of these regulations, they may be subject to fines
and/or sanctions.
Anti-kickback Laws
The Medicare/Medicaid anti-kickback statute prohibits laboratories
from paying remuneration as inducement for referrals of patients or specimens
to third parties for testing and
Page 32 of 45
<PAGE> 33
contains severe penalties for violating testing services reimbursed by the
Medicare or Medicaid (referred to in California as "MediCal") programs. The
Company, PCL and MSI believe that their existing business relationships do not
violate this statute. Court decisions and an administrative decision suggest
that any direct or indirect payment conferred upon one who refers Medicare or
Medicaid patients by or on behalf of the referral recipient may violate the
statute if any part of the purpose of such benefits is to provide an incentive
for such referrals. In addition, a provider convicted of violating such laws
would be excluded from participation in the Medicare and MediCal programs.
The Office of Inspector General of the United States Department of Health and
Human Services has issued "safe harbor" regulations, which identify certain
payment practices which do not violate the anti-kickback statute. Although
these regulations protect certain types of investment interests, they do not
protect investments by physicians or hospitals in the Company, PCL or MSI or
the purchase of clinical laboratories from persons in a position to refer
business to the laboratory after the purchase occurs.
California law also prohibits the receipt or acceptance by licensed
physicians of various forms of consideration, including rebates, refunds,
discounts or preferences as compensation or inducement for referring patients,
clients or customers to any other person (including a clinical laboratory),
irrespective of any ownership which the physician may have in the entity to
which the referral is made or the source of payment of other services.
Laboratories that violate the California anti-kickback laws may be subject to
loss of licensure and substantial fines. In addition, a provider convicted of
violating such laws would be excluded from participation in the Medicare and
MediCal programs. Each of PCL and MSI believe that it satisfies the
requirements of California law with respect to its relationship with its
physician-owners.
Medicare/MediCal Reimbursement
Laboratories are required to bill Medicare or MediCal directly for
services and supplies provided to patients under these programs and to accept
Medicare or MediCal reimbursement as payment in full. In 1984, Congress
established a reimbursement fee schedule for clinical laboratory testing
performed for Medicare beneficiaries (excluding hospital in-patients). State
Medicaid programs, including MediCal, are prohibited from paying more than the
Medicare fee schedule stipulates for testing for Medicaid beneficiaries. When
initially established, the Medicare fee schedules were set at 60% of prevailing
local charges. Medicare reimbursement rates for clinical laboratory testing
subsequently have been reduced several times pursuant to Congressional mandate.
The reductions in Medicare reimbursement rates have been offset to some extent
by increases in both the national cap and the local fee schedule tied to the
Consumer Price Index ("CPI"). Further decreases in such fee schedules,
however, could have a material adverse effect on businesses and operations of
PCL and MSI. Proposals that would reduce the amounts reimbursable to and other
independent testing laboratories under the Medicare program are continuously
under consideration by Congress and the Executive Branch.
Management Information Systems
MSI's and PCL's testing operations and the level of service provided
by each of PCL and MSI to its clients are dependent upon the accurate and
effective operation of their respective
Page 33 of 45
<PAGE> 34
management information systems. Any difficulty associated with or failure of
such systems even for a short period of time, or any inability to expand
processing capacity or develop and maintain networking capability when needed,
could have a material adverse effect upon MSI's and PCL's results of
operations.
Litigation and Liability Insurance Coverage
Although no significant liability has been imposed to date, each of
MSI, PCL, and the Company could be subject to legal actions arising out of the
performance of its testing services, which could entail significant costs and
liabilities. There can be no assurance that each of MSI, PCL or the Company
will not at some time in the future incur significant liability arising out of
such actions or any other actions relating to past or future testing services.
While each of MSI, PCL and the Company currently maintains liability insurance,
there can be no assurance that such coverage is sufficient, that each of MSI,
PCL and the Company will be able to maintain such coverage with appropriate
policy limits at an acceptable cost or that each of MSI, PCL and the Company
will have other resources sufficient to satisfy any liability or litigation
expense that may result from any insured or underinsured claims.
Dependence on Reimbursement by Third Party Payers
The businesses of both MSI and PCL are dependent upon reimbursement
for services. Reimbursement for diagnostic tests is typically determined by
reference to whether such tests are generally accepted as standard medical
practice by each third party payer, how the charge for such tests compare to
charges for established tests for similar indications, and whether the charges
are within the range of usual and customary services. Such determinations are
independently made by each third party payer. Third party payers also consider
whether a test will further the general objective of health care cost
containment and enhance the potential for the reduction of treatment costs.
Health Care Reform
The Clinton Administration and various Congressional and private
parties have proposed various plans to continue the reform of health care.
Numerous alternatives are under consideration, including mandated basic health
care benefits, controls on health care spending, price controls, the creation
of large insurance purchasing groups and fundamental changes in the health care
delivery system. In addition, several states have passed and implemented, or
are considering, various health care reform proposals. The various proposals
and plans may affect the businesses and operations of each of NTBM, PCL, MSI
and the Company. Health care reform could also reduce the profitability of
certain medical institutions and, in turn, adversely impact the fees MSI, PCL,
and NTBM are able to charge for their services. The Company cannot predict
which, if any, health care reform plan might be adopted or, if adopted, the
effect on these businesses.
Page 34 of 45
<PAGE> 35
OTHER RISKS
Pledge of Principal Assets to Secure Existing Loans from the State of
Rhode
In connection with a series of loans obtained during 1993 and 1994 by
the Company from the State of Rhode Island Economic Development Small Business
Loan Fund Corporation ("SBLFC") in the principal aggregate amount of $791,000,
the Company executed two patent security agreements granting the SBLFC a
security interest in ABC's patents to secure $541,000 of the $791,000 of SBLFC
loans (the principal balance of which, as of September 30, 1997, was
approximately $164,000). All of the SBLFC loans, including those which are
subject to the patent security interest, are further secured by a security
interest in the Company's accounts receivable, inventory and equipment. Each
of these loans are for a term of five years from its respective loan date, bear
interest at the rate of 5.4% and, as to each loan, after the first year is
amortized monthly as to principal and interest. The aggregate amount of
monthly loan repayments is approximately $18,000 per month for the remainder of
the loan terms. In the event that the Company, for whatever reason, is unable
to continue to meet its loan repayment obligations, the assets which are
pledged will be subject to the rights of the SBLFC as a secured party.
Further, until the SBLFC loans are repaid, it is unlikely that the Company or
ABC will be able to obtain additional secured financing utilizing this
collateral.
Governmental Regulation
The Company is subject to regulation by the Health Care Financing
Administration ("HCFA"), a division of the United States Department of Health
and Human Services, under the Clinical Laboratories Improvement Act of 1988
("CLIA"). These regulations mandate that all clinical laboratories be
certified to perform testing on human specimens and provide specific conditions
for certification. These regulations also contain guidelines for the
qualification, responsibilities, training, working conditions and oversight of
clinical laboratory employees. In addition, specific standards are imposed for
each type of test which is performed in a laboratory. CLIA and the regulations
promulgated thereunder are enforced through continuous quality inspections of
test methods, equipment, instrumentation, materials and supplies on a biennial
and "spot" basis. Any change in CLIA or these regulations or in the
interpretation thereof could have a materially adverse effect on the Company's
business, prospects, financial condition or results of operations. To its
knowledge, the Company is in compliance with the currently applicable
regulations of HCFA. In addition, the extent of potentially adverse government
regulations which might arise from future legislation or administrative action
cannot be predicted.
Dependence Upon Key Personnel
The Company is dependent upon the executive abilities of its Chairman,
J. Marvin Feigenbaum, to implement its present and anticipated future plans and
programs. Mr. Feigenbaum has no background or training as a scientist, nor is
Mr. Feigenbaum a physician. The Company has entered into an employment
agreement with Mr. Feigenbaum for a term ending May 11, 2000, and has obtained,
for its benefit, a policy of key man life insurance of Mr. Feigenbaum
Page 35 of 45
<PAGE> 36
in the amount of $1,000,000. The loss of Mr. Feigenbaum's services may have a
materially adverse effect on the business or prospects of the Company.
Additionally, as a result of the recent acquisitions of Prompt Medical, MSI,
and PCL, current management, especially Mr. Feigenbaum, has been unable to
devote full-time to operating ABC and the marketing of the FCA. The Company
will be required to hire additional management or retain existing management at
MSI and PCL in order to operate such businesses. In light of the financial
difficulties of both MSI and PCL, culminating in their bankruptcy filings, it
may be difficult for the Company, MSI and PCL to attract qualified personnel to
these businesses. There can be no assurance that the Company will succeed in
retaining current management or hiring qualified persons to operate these
businesses.
Professional and Product Liability
As a clinical laboratory performing assay services and other medical
laboratory services, the Company may be subject to professional and/or product
claims. While no claims have been asserted against or instituted to date
arising out of the performance by the Company of any test, any such actions in
the future may subject the Company to liability for damages and significant
costs associated with the defense of such action or claim. ABC presently
maintains professional liability insurance in the amount of $1,000,000 per
claim and $3,000,000 aggregate as well as product liability insurance in the
amount of $2,000,000 per occurrence and $4,000,000 aggregate. In addition,
both MSI and PCL maintain professional liability insurance in the amount of
$10,000,000 per claim and $10,000,000 aggregate, and product liability
insurance in the amount of $1,000,000 per occurrence and $2,000,000 aggregate.
There can be no assurance, however, that this coverage will be adequate to
protect the Company, ABC, MSI or PCL against future claims or that insurance
will be available to the Company, ABC, MSI or PCL in the future on acceptable
terms, if at all, or that a liability or other claim would not materially and
adversely affect the business, prospects, financial condition or results of
operations of the Company, ABC, MSI or PCL. The Company intends, however, if
feasible, to increase the amounts of such insurance coverage to such greater
amount as management, in its discretion, may determine having due regard to the
cost of such insurance coverage.
Classified Board of Directors
In November 14, 1994, at a Special Meeting of Stockholders in Lieu of
Annual Meeting, the Company's stockholders authorized and approved an amendment
to the Company's Certificate of Incorporation to provide for a classified Board
of Directors consisting of three classes of directors with terms which
currently expire at 1997, 1998, 1999 Annual Meeting of Stockholders. Any
further amendment to the Company's Certificate of Incorporation affecting the
classified Board may only be adopted upon the affirmative vote of not less than
75% of the issued and outstanding shares entitled to vote thereon.
Insufficient Number of Shares of Common Stock Available
Through November 18, 1997, an aggregate of 30,381,566 share of Common
Stock were issued upon conversion of 9,597 shares of Series A Convertible
Preferred Stock (the "Preferred Stock"). Based upon an assumed prevailing
conversion price of $.103125 per share as of
Page 36 of 45
<PAGE> 37
November 18, 1997, the Company would be obligated to issue up to an additional
42,695,758 shares of Common Stock. The Company is presently authorized to
issue 50,000,000 shares of Common Stock, $.01 par value. As of November 18,
1997, the Company has 33,065,663 shares of its Common Stock issued and
outstanding (including 30,381,566 shares of Common Stock previously issued upon
conversion of 9,597 shares of Preferred Stock). Assuming full conversion of
the remaining 4,403 shares of Preferred Stock at an assumed conversion price of
$.103125 per share, the Company would be required to issue up to 42,695,758
additional shares of its Common Stock. In view of the number of shares of
Common Stock that presently issued and outstanding, the Company would only be
able to legally issue up to a maximum of 16,934,337 and, therefore, under the
provisions of its Certificate of Incorporation, does not presently have a
sufficient number of authorized and unissued shares to issue upon anticipated
future conversions of the Preferred Stock. As previously noted, the Company
has 33,065,663 shares of Common Stock issued and outstanding, of which
23,652,885 or 71.53%, of all issued and outstanding shares of Common Stock are
owned by present or former Preferred Stockholders.
No Dividends and None Anticipated
Nu-Tech has never declared nor paid a dividend on any shares of its
capital stock and the Board of Directors intends to continue this policy for
the foreseeable future.
Shares Eligible for Resale
The Company, as of November 13, 1997 has 10,538,709 shares of Common
Stock issued and outstanding , of which 3,419,856 shares may be deemed
"restricted securities" as that term is defined under the Securities Act of
1993, as amended. Such restricted securities may be sold in the future only
pursuant to registration under the Act of an exemption therefrom, including
Rule 144 promulgated thereunder. Of such 3,419,856 shares, the Company has
registered for sale 3,359,856 shares, which become eligible for immediate
resale, and has additionally registered 1,264,696 shares issuable upon exercise
of various options and warrants. In addition, there are 4,403 shares of its
Series A Convertible Preferred Stock issued and outstanding, convertible into
approximately 42,695,758 shares of Common Stock as of November 18, 1997.
Additionally, the Company anticipates filing with the Securities and
Exchange Commission a registration statement to register for sale an additional
563,714 shares of Common Stock of the Company which shares may be issued in
connection with the exercise of options granted under the Company's stock
option plans. Sales of such additional shares may have an adverse effect upon
the price of the Company's Common Stock.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company had heretofore filed, and withdrew, a registration
statement relating to the shares of its Common Stock issuable upon conversion
of the Company's 14,000 shares of Series A Convertible Preferred Stock
("Preferred Stock"). At the time of such filing, the Company believed that it
had not received valid written demand by a majority of the holders of the
Preferred
Page 37 of 45
<PAGE> 38
Stock to require it to proceed with such registration statement. The Company
further believes that, at the time such registration statement was withdrawn,
it did not receive a written demand by the holders of a majority of Preferred
Stock to file a registration statement. Subsequently, the Company did file a
Registration Statement relating to the shares of its Common Stock issuable upon
conversion of the Company's 14,000 shares of Preferred Stock with the
Securities and Exchange Commission on July 21, 1997.
Several Preferred Shareholders have indicated that they intend to
commence an action against the Company arising out of the failure of the
Company to cause the conversion shares to be registered prior to July 21, 1997,
seeking unspecified damages and/or seeking to rescind their purchase of the
Preferred Stock. The Company believes that, if any such action is commenced
against it, it has good and meritorious defenses. In the event any such action
is brought against the Company, and the Company does not prevail thereon, and
is found to be responsible for the damages or losses, such circumstances would
have a material adverse effect upon the Company's consolidated results of
operations and financial position. The Company has had, and continues to have
continuous discussions with representatives of the Preferred Shareholders
concerning a resolution of the dispute arising out of the registration of the
shares of the Company's Common Stock issuable upon conversion of the Preferred
Shares. While no assurance may be given that such dispute will be
satisfactorily resolved, the Company did file a Registration Statement relating
to the shares of its Common Stock issuable upon conversion of the Company's
14,000 shares of Preferred Stock with the Securities and Exchange Commission on
July 21, 1997. The filing of such registration statement may not, however,
resolve the dispute to the satisfaction of the Preferred Shareholders, and no
assurance may be given that the Preferred Shareholders may not thereafter
commence an action against the Company.
On May 23, 1997, a complaint was filed against Nu-Tech Bio-Med, Inc.
(the "Company") and others in an action in the United States District Court for
the Southern District of New York captioned Mordechai Gurary v. Isaac
Winehouse, Isaac Winehouse d/b/a Wall & Broad Equities and Nu-Tech Bio-Med,
Inc. (Docket No. 97 Civ. 3803 (LBS)). As of the date of this report, service
of the complaint has not been effected upon the Company. The complaint alleges
that the Company and the other defendants violated Section 10(b) of the
Securities Exchange Act of 1934 (the "Exchange Act") and Section 349 of the
General Business Law of the State of New York (the "GBL"). The claims against
the Company under the Exchange Act and the GBL are purportedly based on
allegations that the Company knew of and failed to disclose, among other
things, unlawful trading activity in the Company's securities by the other
defendants named in the action. The complaint seeks compensatory damages in an
unstated amount, seeks to enjoin the Company from registering certain Series A
Convertible Preferred Stock until the determination of the action, and seeks
reasonable attorneys' and expert fees as well as treble and punitive damages.
The Company believes that the claims are without merit, and that it
has good defenses which it will assert at the appropriate time. The action is
currently in its preliminary stages.
Item 2. Changes in Securities
Page 38 of 45
<PAGE> 39
As of October 15, 1997, a majority of the stockholders of the Company
as of August 8, 1997, have approved an amendment to the Company's Amended and
Restated Certificate of Incorporation to increase the total number of shares of
all classes of capital stock which the Company may issue to 52,000,000 shares;
such increase has been effected by increasing the number of shares of Common
Stock from 12,000,000 shares to 50,000,000 shares and by increasing the number
of shares of Preferred Stock from 1,000,000 shares to 2,000,000 shares. This
proposal was made via a consent solicitation proxy statement on behalf of the
Company's Board of Directors.
Item 3. Defaults Upon Senior Securities
Not applicable for the third quarter ended September 30, 1997.
Item 4. Submission of Matters to a Vote of Security Holders
As of October 15, 1997, a majority of the stockholders of the Company
as of August 8, 1997 (via a proxy consent solicitation mailed to the
shareholders on August 22, 1997), have approved an amendment to the Company's
Amended and Restated Certificate of Incorporation to increase the total number
of shares of all classes of capital stock which the Company may issue to 52
million shares; such increase has been effected by increasing the number of
shares of common stock from 12 million shares to 50 million shares and by
increasing the number of shares of preferred stock from 1 million shares to 2
million shares. This proposal was made via a consent solicitation proxy
statement on behalf of the Company's Board of Directors. As of November 14,
1997, the tabulation of the votes was as follows:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
6,776,707 1,769,509 36,120
64.2% 16.8% 0.34%
</TABLE>
Item 5. Other Information
1. Acquisition of Majority Interest in Physicians Clinical
Laboratory, Inc.
The Company had acquired certain debt securities of Physicians Clinical
Laboratory, Inc., a Delaware corporation ("PCL"), which is a full-service
clinical laboratory capable of providing a comprehensive battery of testing
services. PCL and its subsidiaries, Quantum Clinical Laboratories, Inc.,
Regional Reference Laboratory Governing Corporation, Diagnostic Laboratories,
Inc., and California Regional Reference Laboratory (collectively with PCL, the
"Debtors") had been operating as a debtor-in-possession under Chapter 11 of the
Bankruptcy Code from November 8, 1996 through October 3, 1997. PCL did file its
Form 10-K for its most recent fiscal year, which ended February 28, 1997, as
well as its quarterly reports on Form 10-Q for the quarters ended May 31, 1997,
and August 30, 1997.
Page 39 of 45
<PAGE> 40
Nu-Tech had reached an agreement (the "PCL Plan") with the holders of
the Senior Debt, Subordinated Debt and the management of PCL whereby Nu-Tech
would acquire a 52.6% interest in PCL. The terms of the agreement provided
that PCL would file a plan to effectuate the agreement. As required by the
aforementioned agreement, the Company purchased approximately $13,300,000 of
Senior Debt for $10,000,000 on November 7, 1996. In accordance with the PCL
Plan, certain holders of Senior Debt contributed $10,000,000 in
debtor-in-possession ("DIP") financing to PCL, which under the terms of the
reorganization, would be forgiven.
The PCL Plan also required that the Company purchase an additional 17%
of capital stock of PCL for $5,000,000 upon the approval of the PCL Plan.
Pursuant to the PCL Plan, the debt purchased by Nu-Tech would be converted into
35.6% of the common stock of PCL, which together with the 17% purchased for
$5,000,000, would result in Nu-Tech owning 52.6% of the outstanding common
stock of PCL. The PCL Plan was confirmed by the United States Bankruptcy
Court, Central District of California (Case No. SV96-23185-GM) on April 23,
1997. The PCL Plan as confirmed required that certain conditions be satisfied
or waived by July 22, 1997.
On February 26, 1997, the Company completed the sale of its ownership
interest in MSI (see Note C) and received, among other things, a $5,000,000
secured note receivable which was used to satisfy its remaining $5,000,000
commitment to PCL. The Company recognized a deferred gain upon the sale of MSI
to PCL, which was offset against the $5,000,000 promissory note to reach the
net amount of $3,862,725.
In April and June of 1997, PCL received separate subpoenas to furnish
certain documents to the United States Department of Defense ("DOD") and the
United States Department of Health and Human Services with respect to the
Company's Civilian Health and Medical Program of Uniformed Services billing
practices. PCL had been advised that its billing practices were the subject of
these investigations. Due to PCL's continued cooperation and negotiations with
these government agencies, on July 24, 1997, the Bankruptcy Court, on
stipulation of PCL, the Company and the creditors of PCL, extended the date
that certain conditions be satisfied or waived pursuant to the PCL Plan for 60
days to September 19, 1997, (from July 22, 1997), and stated that the terms and
conditions of the PCL Plan shall continue in full force and effect.
On or about July 18, 1997, PCL and the United States reached an
agreement in principle to settle such billing practices claims. The agreement
disposed of the claims on substantially the following terms:
1. PCL paid (i) $200,000 18 days after the Court issued its order
approving the Settlement Agreement (October 7, 1997) and (ii) will pay
$1,800,000 in principal plus interest calculated at the Treasury Bill
interest rate payable in equal monthly installments of $25,000 for six
years;
2. PCL entered into a five-year Corporate Integrity Agreement
with the Office of the Inspector General of the U.S. Department of
Health and Human Services ("HHS"),
Page 40 of 45
<PAGE> 41
pursuant to which PCL will, among other requirements, set up and
follow an internal corporate compliance plan with monitoring provided
by an internal corporate compliance officer, provide proper training
for its billing and marketing personnel, and fulfill various reporting
requirements to HHS;
3. PCL and J. Marvin Feigenbaum were released from civil and
criminal liability under the False Claims Act and common law causes of
action in connection with their billing practices from January 1,
1992, to July 18, 1997;
4. The amounts owed to the United States will not be
dischargeable in any bankruptcy; and
5. If PCL defaults on any of its obligations under the Settlement
Agreement, all amounts owed will be immediately due, all releases will
be void and PCL may be excluded from participation in Medicare and
Medicaid.
Subsequent to reaching an agreement in principle with the United
States, PCL approached representatives of the State of California (the "State")
to discuss the compromise and settlement of any outstanding claims that the
State might have against PCL for its prior billing practices involving the
MediCal program for clinical laboratory services during the period from January
1, 1992, to July 18, 1997. On or about August 28, 1997, PCL and the State
reached a final agreement to settle such claims (the "State Agreement"). The
State Agreement disposed of the claims on substantially the following terms:
1. PCL paid the State the sum of $100,000 22 days after the Court
issued its order approving the Settlement Agreement (October 11). All
of the terms of the Corporate Integrity Agreement executed by PCL and
the United States Government are incorporated by reference to the
Company's Current Report Form 8-K filed October 20, 1997 and all of
the terms therein are made applicable to the Settlement Agreement with
the state;
2. The State released PCL and J. Marvin Feigenbaum from any civil
or administrative monetary claim or cause of action that the
California Department of Health Services has or may have, and from any
action seeking exclusion from the MediCal program with regard to the
provision of and reimbursement for laboratory services under the
MediCal program;
3. The State released PCL and J. Marvin Feigenbaum from any
criminal liability for any conduct covered by the State Agreement;
4. PCL will cooperate in any further investigation of individuals
and entities not released by the State in the State Agreement.
On September 19, 1997, the Court granted the Debtors' motion to
approve the Federal and State Agreements. The Court's order became final on
September 30, 1997. Pursuant to the Plan, prior to the Effective Date, all of
the Debtors were merged with and into PCL. On October
Page 41 of 45
<PAGE> 42
3, 1997, all conditions to the Effective Date set forth in the Plan were
satisfied and the Effective Date occurred.
2. Amendment to the Company's Amended and Restated Certificate of
Incorporation
As of October 15, 1997, a majority of the stockholders of the Company
as of August 8, 1997, have approved an amendment to the Company's Amended and
Restated Certificate of Incorporation to increase the total number of shares of
all classes of capital stock which the Company may issue to 52,000,000 shares;
such increase has been effected by increasing the number of shares of Common
Stock from 12,000,000 shares to 50,000,000 shares and by increasing the number
of shares of Series A Convertible Preferred Stock ("Preferred Stock") from
1,000,000 shares to 2,000,000 shares. This proposal was made via a consent
solicitation proxy statement on behalf of the Company's Board of Directors.
3. Suspension of Analytical Biosystems Corporation's Laboratory
Operations
As of November 3, 1997, ABC has temporarily suspended the marketing of
its Fluorescent Cytoprint Assay ("FCA"), which is a specialized clinical
laboratory assay used in assisting in the selection of chemotherapeutic drugs
most likely to be effective in treating a cancer patient's solid mass tumor.
With the suspension of current direct marketing efforts of the FCA, the Company
and ABC intend to investigate the feasibility of resuming such marketing
efforts through an alliance or joint venture whereby the FCA would be marketed
and sold through an entity having national sales capability, and the assay
performed by either ABC or an entity to whom technology has been licensed by
ABC. At the present time, the Company has not entered into any discussions
with any entity relating to the marketing and sale of the FCA or the licensing
of ABC's FCA technology, and no assurance may be given that the Company will be
able to market and sell its FCA through alternate means. ABC has ceased
processing specimens for assay and has suspended its laboratory operations in
Rhode Island.
4. Resignations of Directors
Effective November 20, 1997, Leonard Green and Edmond Charrette
separately submitted resignations to the Company as a Director of the Company.
Such resignations of Mr. Green and Dr. Charrette as directors of the Company
were not occasioned by reason of any disagreement with the Company relating to
the Company's operations, policies or practices. As of the date hereof, the
Board of Directors of the Company has not determined to fill such vacancies.
Page 42 of 45
<PAGE> 43
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
3.1* Amended and Restated Certificate of Incorporation
filed with the Secretary of State of Delaware on
November 16, 1996 (Exhibit 3.1.5 to Amendment No. 1 to
Registration Statement on Form SB-2, file No. 33-
84622)
3.2* Amended and Restated By-Laws effective November 16,
1996 (Exhibit 3.2.2 to Registration Statement on Form
SB-2, File No. 33-846221)
3.3* Amended and Restated Certificate of Incorporation
filed with the Secretary of State of Delaware on
October 21, 1997 (Exhibit 3 on Form 8-K, file No.
001-13900)
27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended September 30, 1997, the following
reports on Form 8-K were filed by the Registrant:
<TABLE>
<CAPTION>
Date of the Report Item Reported Description of Item
- ------------------ ------------- -------------------
<S> <C> <C>
July 25, 1997 Item 5. Other Events Physicians Clinical
Laboratory Settlement with
Government
August 1, 1997 Item 5. Other Events Suspension of Conversions
and Issuance of Shares
Subsequent to the quarter ended September 30, 1997, the
following reports on Form 8-K were filed by the Registrant:
October 6, 1997 Item 5. Other Events Acquisition Completion of
52.6% of Physicians
Clinical Laboratory
October 20, 1997 Item 2. Acquisition or Disposition Physicians Clinical
of Assets Laboratory Acquisition
Documents
</TABLE>
Page 43 of 45
<PAGE> 44
<TABLE>
<S> <C> <C>
October 23, 1997 Item 5. Other Events Increase Total Number of
Shares of All Capital Stock
November 4, 1997 Item 5. Other Events Suspension of Rhode Island
Laboratory Operations
</TABLE>
Page 44 of 45
<PAGE> 45
SIGNATURES
In accordance with requirements of the Securities Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NU-TECH BIO-MED, INC.
(Registrant)
Dated: November 21, 1997 By: /s/ J. Marvin Feigenbaum
-------------------------
J. Marvin Feigenbaum
President, Chief Executive
and Chief Financial Officer
Page 45 of 45
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 346,923
<SECURITIES> 0
<RECEIVABLES> 88,044
<ALLOWANCES> 4,389
<INVENTORY> 11,985
<CURRENT-ASSETS> 684,050
<PP&E> 316,898
<DEPRECIATION> 339,282
<TOTAL-ASSETS> 16,175,017
<CURRENT-LIABILITIES> 954,214
<BONDS> 18,149
68
0
<COMMON> 105,387
<OTHER-SE> 15,093,962
<TOTAL-LIABILITY-AND-EQUITY> 16,175,017
<SALES> 2,266,676
<TOTAL-REVENUES> 2,266,676
<CGS> 0
<TOTAL-COSTS> 4,154,889
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 143,738
<INTEREST-EXPENSE> 535,783
<INCOME-PRETAX> (2,398,679)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,398,679)
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<NET-INCOME> (2,398,679)
<EPS-PRIMARY> (0.47)
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