<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 June 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 August 13, 1997, there were issued and outstanding 10,558,704
shares of common stock of the registrant.
Traditional small business disclousre format.
Yes No X
--- ---
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Part I
Item 1 Financial Statements
Nu-Tech Bio-Med, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
---------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 825,279 $ 1,690,538
Accounts receivable - (net of allowance for doubtful
accounts of approximately $6,295 and $2,823,400 at
June 30, 1997, and at December 31, 1996, respectively) 107,250 1,751,230
Other receivables 137,261 -
Inventory 12,784 219,428
Prepaid expenses and other current assets 44,539 82,801
---------------------------------
Total current assets 1,127,113 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 342,723 1,766,842
Goodwill (net of accumulated amortization of approximately
$52,472 and $833,200 at June 30, 1997, and
December 31, 1996, respectively) 702,119 6,352,860
Deferred acquisition costs 1,085,477 1,028,524
Deposits 18,964 89,104
---------------------------------
Total Assets $ 16,663,560 $ 22,405,766
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 399,828 $ 1,580,797
Accrued expenses 226,947 1,286,035
Contract payable 55,571 65,571
Current portion of long term debt 178,850 2,263,990
Current portion of capitalized lease obligations 16,761 214,270
---------------------------------
Total current liabilities 877,957 5,410,663
Long-term debt 37,988 338,672
Capitalized lease obligations 9,475 471,984
Liabilities to be paid with common stock - 3,422,500
---------------------------------
Total liabilities 925,420 9,643,819
Stockholders' equity:
Series A convertible preferred stock, $.01 par value; 1,000,000 shares
authorized; 9,956 and 14,000 issued and outstanding at June 30, 1997,
and December 31, 1996, respectively
(liquidation preference of $9,956,000 at June 30, 1997) 100 140
Common stock, $.01 par value; 12,000,000 shares
authorized; 5,649,757 and 2,089,652 shares issued and
outstanding at June 30, 1997, and December 31, 1996
respectively 56,497 20,897
Capital in excess of par value 39,270,278 34,501,337
Deferred consulting expense (68,754) (96,250)
Accumulated deficit (23,519,981) (21,664,177)
---------------------------------
Total stockholders' equity 15,738,140 12,761,947
---------------------------------
Total liabilities and stockholders' equity $ 16,663,560 $ 22,405,766
=================================
</TABLE>
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Nu-Tech Bio-Med, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30 June 30 June 30 June 30
1997 1996 1997 1996
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Assay sales, net $ 42,399 $ 24,322 $ 72,249 $ 48,052
Laboratory revenues, net -- -- 1,798,361 --
Medical billing services revenues 135,460 -- 244,541 --
Contract revenue -- -- 5,540 --
-----------------------------------------------------------------
Total revenues, net 177,859 24,322 2,120,691 48,052
Operating costs:
Laboratory expenses 46,372 65,217 1,464,665 120,515
Medical billing services expenses 114,471 -- 238,400 --
Sales, general and administrative 536,039 791,954 1,726,273 1,509,808
Research and development 16,287 25,937 32,897 46,704
-----------------------------------------------------------------
Total operating costs 713,169 883,108 3,462,235 1,677,027
-----------------------------------------------------------------
Operating loss (535,310) (858,786) (1,341,544) (1,628,975)
Other income (expense):
Investment and interest income 8,715 49,526 18,980 79,573
Interest expense (4,229) (7,441) (533,240) (15,480)
-----------------------------------------------------------------
Total other income (expense) 4,486 42,085 (514,260) 64,093
-----------------------------------------------------------------
Net loss $ (530,824) $ (816,701) $(1,855,804) $(1,564,882)
=================================================================
Net loss per common share $ (0.13) $ (0.45) $ (0.60) $ (0.80)
=================================================================
Weighted average common shares outstanding 4,032,849 1,827,349 3,114,550 1,949,635
</TABLE>
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Nu-Tech Bio-Med, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30 JUNE 30
1997 1996
-----------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,855,804) $(1,564,882)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 277,881 613,923
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 (342,625) 74,879
Accounts payable and accrued expenses (610,007) (31,910)
Accrued compensation -- 216,374
-----------------------------
Net cash used in operating activities (1,944,972) (691,616)
INVESTING ACTIVITIES
Proceeds received from disposition of
Medical Science Institute, net 2,512,154 --
Acquisition costs (56,953) (192,264)
Capital expenditures (20,644) (14,890)
-----------------------------
Net cash provided by (used in) investing activities 2,434,557 (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 (2,089,018) (97,296)
Repayment of capitalized lease obligations (41,827) (6,253)
Other assets -- (44,766)
Notes receivable (100,000) --
-----------------------------
Net cash provided by (used in)
financing activities (1,351,844) 2,422,850
-----------------------------
Net increase (decrease) in cash and
cash equivalents (865,259) 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 $ (825,279) $ 4,062,082
=============================
</TABLE>
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Nu-Tech Bio-Med, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 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 June 30, 1997, and the results of operations and cash flows
for the three and six months ended June 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 ("MSI") through February 26, 1997, (see Note B). All
material intercompany transactions and balances have been eliminated.
Where appropriate, prior year amounts have been reclassified to permit
comparison.
ABC is a clinical oncology laboratory service and research company
located in Rhode Island; 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 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
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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 six month period
ended June 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. Disposition
On February 26, 1997, the Company completed the sale of its ownership
interest in MSI to Physicians Clinical Laboratory, Inc. ("PCL") (see
note C). The Company sold its interests in MSI to PCL for approximately
$7.6 million. The Company received approximately $2.6 million in cash
and a secured promissory note of PCL in the principal amount of
$5,000,000. The note is secured by all the assets of PCL but is
subordinate to certain other claims and administrative expenses. The
Company used approximately $2 million of the sale proceeds to repay in
full an outstanding secured loan which the Company had incurred to
acquire MSI. In the event the PCL Plan of Reorganization (see note C)
is consummated and such plan provides that the Company shall become the
owner of 52.6% of the outstanding capital stock of PCL, the note will
be forgiven. If the PCL Plan is not consummated by November 9, 1997,
the note shall be payable in full. There can be no assurance that the
note will be repaid in full if the PCL Plan is not consummated.
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.
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.
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<TABLE>
<CAPTION>
For the six months ended
June 30 June 30
1997 1996
--------------------------------
<S> <C> <C>
Revenues:
Assay sales, net $ 72,249 $ 48,052
Medical billing services revenues 244,541 -
Contract revenue 5,540 -
--------------------------------
Total revenues, net 322,330 48,052
Operating costs:
Laboratory expenses 90,242 120,515
Medical billing services expenses 238,400 -
Sales, general and administrative 1,008,248 1,509,808
Research and development 32,897 46,704
--------------------------------
Total operating costs 1,369,787 1,677,027
--------------------------------
Operating loss (1,047,457) (1,628,975)
Other income (expense):
Investment and interest income 10,265 79,573
Interest expense (532,273) (15,480)
--------------------------------
Total other income (expense) (522,008) 64,093
--------------------------------
Net loss $(1,569,466) $(1,564,882)
================================
</TABLE>
C. Investment in Physicians Clinical Laboratory, Inc.
The Company has 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 did file its Form 10-K for its most
recent fiscal year, which ended February 28, 1997. PCL's quarterly
report on Form 10-Q for the quarter ended May 31, 1997, was due to be
filed on July 15, 1997, but has not, as of the date hereof, been filed
by PCL. PCL has been operating as a debtor-in-possession under Chapter
11 of the Bankruptcy Code since November 8, 1996.
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Nu-Tech has reached an agreement (the "PCL Plan") with the holders of
the Senior Debt, Subordinated Debt and the management of PCL whereby
Nu-Tech will acquire a 52.6% interest in PCL. The terms of the
agreement provide 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, will be
forgiven. The PCL Plan also requires 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 will be converted into 35.6% of the common stock of PCL, which
together with the 17% purchased for $5,000,000, will 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. Upon the
completion of the transaction, the Company will consolidate the
accounts of PCL in its consolidated financial statements.
On February 26, 1997, the Company completed the sale of its ownership
interest in MSI and received, among other things, a $5,000,000 secured
note receivable which may be used to satisfy its remaining $5,000,000
commitment to PCL (see Note B). 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 has been advised that its
billing practices are 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 July 18, 1997, PCL entered into a letter agreement with the United
States Department of Justice in connection with such billing practices
claims. The letter agreement is intended, subject to final
documentation (as completed, the "Settlement Agreement"), to dispose of
the claims on substantially the following terms:
1. PCL will pay to the United States Government (i) $200,000 upon
execution of the Settlement Agreement and (ii) $1,800,000 in
principal plus interest calculated at the Treasury Bill rate,
payable in equal quarterly installments each year for six years;
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2. PCL will enter into a five-year corporate integrity agreement with
the Office of the Inspector General of the U.S. Department of Health
and Human Services, pursuant to which PCL will, among other
requirements, continually be monitored by internal corporate compliance
officers and provide proper training for its billing personnel;
3. PCL will be 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.
PCL has no reason to believe that the Settlement Agreement will not be
entered into as contemplated. The Settlement Agreement, however, may
contain additional or different terms from those set forth in the July
18, 1997 letter agreement.
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 B).
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
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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 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, 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 issuable upon conversion of
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 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
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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. The Company has
filed a motion to dismiss the allegations for failure to state a claim.
Such motion is pending as of the date hereof.
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
is 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 options/warrants.
H. Subsequent Events
Through August 13, 1997, an aggregate of 7,854,612 shares of Common
Stock were issued upon conversion of 7,175 shares of Series A
Convertible Preferred Stock (the "Preferred Stock"). The Company is
presently authorized to issue 12,000,000 shares of Common Stock. $.01
par value. The Company anticipates seeking shareholder approval to
amend its Certificate of Incorporation accordingly. As previously
noted, the Company has 10,558,704 shares of Common Stock issued and
outstanding, of which 7,854,612 or 74.39% of all issued and outstanding
shares of Common Stock are owned by present or former Preferred
Stockholders. The Amendment to the Certificate of Incorporation
requires, the affirmative vote of a majority of all issued and
outstanding shares entitled to vote. Present and former Preferred
Stockholders have the ability to cause the Amendment to the Certificate
of Incorporation, as proposed, to be adopted. However, there can be no
assurances that such amendment will be effected.
Safe Harbor Statement
Certain statements in this Form 10-QSB, including information set forth
under this 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
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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, potential
acquisitions (including Physicians Clinical Laboratory, Inc., ("PCL")
and indirectly Medical Science Institute ("MSI")), uncertainty of
market acceptance of Analytical Biosystems' FCA, 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, uncertainty of completion of the acquisition of PCL, 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.
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Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRELIMINARY NOTE TO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS RELATING TO THE ACQUISITION AND DISPOSITION OF MEDICAL
SCIENCE INSTITUTE
On November 18, 1996, Nu-Tech Bio-Med, Inc. (the "Company") acquired
all of the capital stock of Medical Science Institute ("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. 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 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 Plan
are 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 Plan. These payments include:
(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 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,
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 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
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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 MSI to Physicians Clinical Laboratory, Inc., ("PCL"). PCL is
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 is
secured by all of the assets of PCL but is 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 of Reorganization is consummated and such
plan provides that the Company shall become the owner of 52.6% of the
outstanding capital stock of PCL, and, in turn, the owner of 52.6% of MSI (or
such other terms as the Company may agree), the note (including all principal
and interest) will be forgiven. If the PCL Reorganization Plan is not
consummated by November 9, 1997, the note shall be payable in full. There can be
no assurance that the note will be repaid in full if the PCL Reorganization Plan
is not consummated.
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 six months ended
June 30, 1997, and June 30, 1996, is presented on the basis of the Company's
temporary ownership of MSI.
Three months ended June 30, 1997, compared with three months ended June
30, 1996
Results of Operations
Total revenues for the three months ended June 30, 1997, were $177,859
compared to $24,322 for the three months ended June 30, 1996. The increase in
total revenues is primarily due to the medical billing services revenue
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 $42,399 and $24,322 for the three
months ended June 30, 1997 and 1996, respectively. The increase in assay sales
is primarily due to an increase in billable assays as well as an increase in
reimbursement from third party payers.
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There were no laboratory revenues reported for the three months ended
June 30, 1997 due to the sale of the Company's ownership interest in MSI to
Physicians Clinical Laboratory, Inc., ("PCL") on February 26, 1997.
Medical billing services revenues were $135,460 for the three months
ended June 30, 1997, generated by the acquisition of NTBM during the last
quarter of 1996.
Total operating costs for the three months ended June 30, 1997, were
$713,169 compared to $883,108 for the three months ended June 30, 1996. The
decrease is primarily due to a decrease in sales, general and administrative
expenses of approximately $256,000, offset by the inclusion of medical billing
services expenses of approximately $114,000 generated by the acquisition of NTBM
during the last quarter of 1996. The decrease in sales, general and
administrative expenses is primarily due to a decrease in compensation expense
of approximately $484,000, offset by an increase in professional fees and
franchise taxes. During the six months ended June 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.
Laboratory expenses for the three months ended June 30, 1997, were
$46,372 compared to $65,217 for the three months ended June 30, 1996. The
decrease of $18,845 is primarily due to a reduction in laboratory personnel
costs.
Medical billing services expenses were $114,471 for the three months
ended June 30, 1997, as a result of the acquisition of NTBM during the last
quarter of 1996.
Selling, general and administrative expenses for the three months ended
June 30, 1997, were $536,039 compared to $791,954 for the three months ended
June 30, 1996. The decrease of $255,915 is primarily due to a decrease in
compensation expense of approximately $484,000, offset by an increase in
professional fees and franchise taxes. During the three months ended June 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.
Research and development expenses for the three months ended June 30,
1997, were $16,287 compared to $25,937 for the three months ended June 30, 1996.
Operating loss for the three months ended June 30, 1997, was $535,310
compared to $858,786 for the three months ended June 30, 1996. The decrease is
primarily due to a decrease in sales, general and administrative expenses of
approximately $256,000, offset by the inclusion of medical billing services
expenses of approximately $114,000, as well as an increase in total
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revenues primarily due to the medical billing services revenue generated by the
acquisition of NTBM during the last quarter of 1996.
Investment and interest income for the three months ended June 30,
1997, was $8,715 compared to $49,526 for the three months ended June 30, 1996.
The decrease is primarily due to a decrease in cash and cash equivalents upon
which interest is earned.
Interest expense for the three months ended June 30, 1997, was $4,229
compared to $7,441 for the three months ended June 30, 1996. This decrease was
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 June 30, 1997, was $530,824 as
compared to $816,701 for the six months ended June 30, 1996. The decrease is
primarily due to a decrease in sales, general and administrative expenses of
approximately $256,000, offset by the inclusion of medical billing services
expenses of approximately $114,000, as well as an increase in total revenues
primarily due to the medical billing services revenue generated by the
acquisition of NTBM during the last quarter of 1996.
Net loss per share of Common Stock for the three months ended June 30,
1997, was $.13 compared to $.45 for the three months ended June 30, 1996.
Weighted average shares were 4,032,849 and 1,827,349 for the three months
ended June 30, 1997, and 1996, respectively.
Six months ended June 30, 1997, compared with six months ended June 30,
1996
Results of Operations
Total revenues for the six months ended June 30, 1997, were $2,120,691
compared to $48,052 for the six months ended June 30, 1996. The increase in
total revenues is primarily due to the inclusion of Medical Science Institute'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 six months ended June 30, 1997, would have been $322,330 as
compared to $48,052 for the six months ended June 30, 1996. The increase of
$274,278 is primarily due to revenues of $244,541 generated by the Company's
medical billing services subsidiary, NTBM Billing Services, Inc. ("NTBM") as
well as an increase in net assay sales primarily due to increased reimbursement
from third party payers.
Assay sales, net of billing adjustments, from the processing of
Analytical Biosystems Corporation's assay, the Fluorescent Cytoprint Assay, were
$72,249 and $48,052 for the six months ended June 30, 1997, and 1996,
respectively. The amount of billing adjustments relating to assay sales during
the six months ended June 30, 1997, and 1996, were approximately $8,200 and
$5,300, respectively. The increase in net assay sales is primarily due to an
increase in billable assays as well as an increase in reimbursement
from third party payers.
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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 $244,541 for the six months
ended June 30, 1997, generated by the acquisition of NTBM during the last
quarter of 1996.
Total operating costs for the six months ended June 30, 1997, were
$3,462,235 compared to $1,677,027 for the six months ended June 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 six months ended June 30, 1997, would have been $1,369,787 as compared
to $1,677,027 for the six months ended June 30, 1996. The decrease is primarily
due to decreases in selling, general and administrative expenses of $501,560 and
laboratory expenses of $30,273, offset by medical billing services expenses of
approximately $238,400.
Laboratory expenses for the six months ended June 30, 1997, were
$1,464,665 compared to $120,515 for the six months ended June 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 six months ended June 30, 1997, would have been $90,242 as
compared to $120,515 for the six months ended June 30, 1996. The decrease of
$30,273 is primarily due to a reduction in laboratory personnel costs.
Medical billing services expenses were $238,400 for the six months
ended June 30, 1997, as a result of the acquisition of NTBM during the last
quarter of 1996.
Selling, general and administrative expenses for the six months ended
June 30, 1997, were $1,726,273 compared to $1,509,808 for the six months ended
June 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
selling, general and administrative expenses. Without the inclusion of MSI's
transactions, selling, general and administrative expenses for the six months
ended June 30, 1997, would have been $1,008,248 as compared to $1,509,808 for
the six months ended June 30, 1996. The decrease of $501,560 is primarily due to
a decrease in compensation expense of approximately $849,000, offset by an
increase in professional fees and franchise taxes. During the six months ended
June 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.
Research and development expenses for the six months ended June 30,
1997, were $32,897 compared to $46,704 for the six months ended June 30, 1996.
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Operating loss for the six months ended June 30, 1997, was $1,341,544
compared to $1,628,975 for the six months ended June 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 $294,087. Without the
inclusion of MSI's transactions, operating loss for the six months ended June
30, 1997, and 1996, would have been $1,047,457 and $1,628,975, respectively. The
decrease is primarily due to a decrease in selling, general and administrative
expenses as discussed above.
Investment and interest income for the six months ended June 30, 1997,
was $18,980 compared to $79,573 for the six months ended June 30, 1996. The
decrease is primarily due to a decrease in cash and cash equivalents upon which
interest is earned.
Interest expense for the six months ended June 30, 1997, was $533,240
compared to $15,480 for the six months ended June 30, 1996. The increase 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 six months ended June 30, 1997, was $1,855,804 as
compared to $1,564,882 for the six months ended June 30, 1996. The increase 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 six months ended June 30, 1997 and 1996,
would have been $1,569,466 and $1,564,882, respectively. The increase is
primarily due to an increase in interest expense of approximately $521,000. 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. 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. This increase was offset by a decrease in selling,
general and administrative expenses of approximately $502,000. The decrease of
$502,000 is primarily due to a decrease in compensation expense of approximately
$849,000, offset by an increase in professional fees and franchise taxes. During
the six months ended June 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.
Net loss per share of Common Stock for the six months ended June 30,
1997, was $.60 compared to $.80 for the six months ended June 30, 1996. Weighted
average shares were 3,114,550 and 1,949,635 for the six months ended June
30, 1997, and 1996, respectively.
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Liquidity and Capital Resources
The Company had approximately $825,279 in cash and cash equivalents at
June 30, 1997.
Total current assets at June 30, 1997, and December 31, 1996, were
$1,127,113 and $3,743,997, respectively. This decrease of approximately
$2,616,884 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
$1,127,113 and $1,636,811 at June 30, 1997, and December 31, 1996, respectively.
This decrease of approximately $509,698 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 options/warrants during the
second quarter of 1997.
Accounts receivable, net of allowances for doubtful accounts, at June
30, 1997, and December 31, 1996, were $107,250 and $1,751,230, respectively.
This decrease of approximately $1,643,980 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 $107,250
and $76,846 at June 30, 1997, and December 31, 1996, respectively.
Inventory at June 30, 1997, and December 31, 1996, was $12,784 and
$219,428, respectively. This decrease of approximately $206,644 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 $12,784 and $10,255 at June 30, 1997, and
December 31, 1996, respectively.
Net investment in senior debt of Physicians Clinical Laboratory, Inc.,
("PCL") at June 30, 1997, and December 31, 1996, was $13,287,164 and $9,424,439,
respectively. This increase of approximately $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 will be
satisfied once the PCL Plan has been effected. 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 June 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.
Equipment and leasehold improvements, net of accumulated depreciation
and amortization, at June 30, 1997, and December 31, 1996, were $342,723 and
$1,766,842, respectively. This decrease of approximately $1,424,119 is primarily
due to the exclusion of
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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 $342,723 and $379,697 at June 30, 1997, and December 31, 1996,
respectively.
Goodwill, net of accumulated amortization, at June 30, 1997, and
December 31, 1996, was $702,119 and $6,352,860, respectively. This decrease of
approximately $5,650,741 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 $702,119 and $739,913 at June 30,
1997, and December 31, 1996, respectively.
Total assets at June 30, 1997, and December 31, 1996, were $16,663,559
and $22,405,766, respectively. The decrease of approximately $5,742,207 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 $16,663,559 and $18,841,295 at
June 30, 1997, and December 31, 1996, respectively.
Current liabilities at June 30, 1997, and December 31, 1996, were
$877,957 and $5,410,663, respectively. The decrease of approximately $4,532,706
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 $877,957 and
$3,130,937 at June 30, 1997, and December 31, 1996, respectively. The decrease
of approximately $2,252,980 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 June 30, 1997, and December 31, 1996, were
$925,420 and $9,643,819, respectively. The decrease of approximately $8,718,399
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 $925,420 and $6,682,995
at June 30, 1997, and December 31, 1996, respectively. The decrease 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 June 30, 1997, the Company has expended cash in excess of cash
generated from operations and has not achieved 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
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Company is connection with the purchase of approximately $13,300,000 of senior
secured debt of PCL for $10,000,000 in connection with the proposed acquisition
by the Company of a majority interest in PCL; cash payments in connection with
its acquisition of MSI; acquisition costs of Prompt Medical Billing Inc.; and
general working capital purposes, including cash used from operations of the
Company and its principal subsidiaries Analytical Biosystems Corporation, 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 June 30, 1997, and December 31,
1996, were approximately $800,000 and $1,700,000, respectively. The Company
anticipates that it will need additional cash resources of approximately
$400,000 to sustain itself from June 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
Analytical Biosystems Corporation and NTBM Billing subsidiaries 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.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Certain statements in this Form 10-QSB, including information set forth in
this 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, potential acquisitions (including Physicians
Clinical Laboratory ("PCL") and indirectly Medical Science Institute) ("MSI")
uncertainty of market acceptance of Analytical Biosystems' FCA, 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, uncertainty of the
completion of the acquisition of PCL, 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, 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. 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:
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 has 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 June 30, 1997, the
Company has incurred an accumulated deficit of approximately $23,520,000. For
the fiscal years ended December 31, 1996, 1995 and 1994, and the six months
ended June 30, 1997, the Company incurred net losses of approximately
$7,788,000, $2,089,000, $1,394,000 and $1,856,000, respectively. The amount of
stockholders equity at June 30, 1997 was approximately $15,738,000. The amount
of its working capital at June 30, 1997 was approximately $249,000. It is
anticipated that the Company will continue to incur losses until such
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time, if ever, that Analytical Binsystems Corp., a wholly-owned subsidiary of
the Company ("ABC"), and 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 (assuming the PCL
acquisition is consummated) 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
of Independent Auditors Report
For the Fiscal Years ended February 28 (29), 1995, 1996 and 1997,
Physicians 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 retained deficit of PCL was $163,257,000. 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. Prior to emerging
from Chapter 11, PCL will require new financing, of which there can be no
assurance that such financing will be obtained. 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. To date, PCL has not filed its Quarterly Report for the
three-month period ended May 31, 1997.
Acquisition of Majority Interest in Physicians Clinical Laboratory, Inc.
Physicians Clinical Laboratory, Inc. ("PCL") is currently operating under
Chapter 11 of the United States Bankruptcy Code. The Company and PCL have
submitted a plan to the United States Bankruptcy Court to acquire a 52.6%
majority interest in PCL. Additionally, PCL is also 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 18,
1997, the United States Bankruptcy Court, Central District of California Case
No. SV96-23185-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 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).
At February 28, 1997, the last date for which PCL filed reports with the
Securities and Exchange Commission, PCL had 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. To date, PCL has not filed its Quarterly Report for the
three-month period ended May 31, 1997. There can be no assurance that upon
consummation of the PCL Plan that it will operate profitably even if
confirmation of the PCL Plan results in a decrease of liabilities.
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 is cooperating with DOD and HHS in such investigations and has
produced and will continue to produce documents in response to the subpoenas.
PCL has been advised that its billing practices are the subject of these
investigations and believes that these investigations may be similar to other
investigations being conducted by DOD and HHS with respect to the billing
practices of the clinical laboratory testing industry. PCL further believes that
these investigations as they relate to PCL would not subject PCL to significant
civil or criminal liability (which could include substantial fines, penalties or
forfeitures, and mandatory or discretionary exclusion from participation in
Medicare, Medi-Cal and other government funded health care programs), which
could have a material adverse effect on the financial condition of PCL. In such
case, the value of the investment of the Company in PCL could be adversely
affected or lost in its entirety.
On July 18, 1997, PCL entered into a letter agreement with the United
States Department of Justice in connection with such billing practices claims.
The letter agreement is intended, subject to final documentation (as completed,
the "Settlement Agreement"), to dispose of the claims on substantially the
following terms:
1. PCL will pay to the United States Government (i) $200,000 upon
execution of the Settlement Agreement and (ii) $1,800,000 in
principal plus interest calculated at the Treasury Bill rate,
payable in equal quarterly installments each year for six years;
2. PCL will enter into a five-year corporate integrity agreement with
the Office of the Inspector General of the U.S. Department of Health
and Human Services, pursuant to which PCL will, among other
requirements, continually be monitored by internal corporate compliance
officers and provide proper training for its billing personnel;
3. PCL will be 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.
PCL has no reason to believe that the Settlement Agreement will not be
entered into as contemplated. The Settlement Agreement, however, may
contain additional or different terms from those set forth in the July
18, 1997 letter agreement.
In addition to the risks associated with the businesses of the Company and
of PCL and MSI on an individual basis, the combined entity will present
additional risks solely by virtue of the combination of the
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companies through affiliation. Assuming the acquisition of PCL is completed, the
Company's size will increase substantially and its operations will expand from
one geographical area to three states located on opposite ends of the country.
There can be no assurance that the PCL acquisition (and the indirect acquisition
of MSI) will be consummated in accordance with the PCL Plan, if at all.
The Company anticipates that PCL and MSI will each require further funds to
stabilize their respective operations following the proposed 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 ("MSI") which had been operating under Chapter 11 of the
Bankruptcy Code since 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 would include MSI as a
subsidiary of PCL, will result in additional profits to the Company.
Need for Additional Funds
The Company anticipates it may need additional capital for the operations
of its ABC and Prompt Medical subsidiaries and for the operations of PCL and
MSI, if not otherwise obtainable elsewhere, assuming they are acquired pursuant
to the PCL Plan. 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
subsidiaries 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 proposed acquisition of a majority ownership in PCL (which
will include indirect majority ownership of MSI), the Company is presently, and
will continue to be after the consummation of the PCL acquisition, subject to
numerous risks associated with the medical laboratory business.
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 ABC, 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
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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 Nu-Tech, 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 fully to comply with these
reporting obligations. Proposed regulations implementing the Stark Bill also
would prohibit 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.
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 of 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's 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 to 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
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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 contains severe penalties for violating testing
services reimbursed by the Medicare or Medicaid (referred to in California as
"MediCal") programs. Nu-Tech, 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
Nu-Tech, 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 reimbursements 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 schedules 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 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.
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Litigation and Liability Insurance Coverage
Although no significant liability has been imposed to date, each of MSI,
PCL, ABC and Nu-Tech 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 Nu-Tech, ABC, MSI or PCL 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
Nu-Tech, ABC, MSI and PCL currently maintains liability insurance, there can be
no assurance that such coverage is sufficient, that each of Nu-Tech, ABC, MSI
and PCL will be able to maintain such coverage with appropriate policy limits at
an acceptable cost or that each of Nu-Tech, ABC, MSI and PCL will have other
resources sufficient to satisfy any liability or litigation expense that may
result from any insured or underinsured claims.
OTHER RISKS
Uncertainty of Market Acceptance of Analytical Biosystems' FCA
Since 1986, ABC has performed over 4,300 assays on solid mass tumors
collected from over 260 different institutions and physicians. To date, however,
ABC has attempted only limited marketing of the FCA. Demand for and market
acceptance of the FCA is subject to a high degree of uncertainty, and there can
be no assurance that the FCA will ever achieve a sufficient level of market
acceptance to enable ABC to become profitable. The commercial success of ABC is
materially dependent upon its ability to educate the medical community
generally, and oncologists, surgeons, hospitals and HMOs in particular, of the
benefits and applications of ABC's assay, and to distinguish ABC's technology
from existing technology in the field and assays marketed by others. The process
of educating the physician regarding the use and benefits of a new technology
such as the FCA is, in the Company's opinion, difficult. No assurance can be
given that ABC will be able to successfully recruit experienced sales personnel
or successfully implement its proposed sales and marketing programs. In
addition, as part of ABC's research and development and to enhance the ability
of ABC to proceed with its intended sales and marketing of the FCA, ABC is
seeking to develop new protocols to conduct new randomized prospective clinical
trials. While the clinical trials which the Company anticipates conducting are
not required as a condition to use or market the FCA, the Company believes that
the results will have a material effect upon the acceptance of the Company's
assay and the ultimate success of the Company's business, in that such results
would, if they demonstrate the efficacy of the FCA, be an added sales and
marketing tool. There is no assurance as to the results of such anticipated
non-mandatory clinical trials or the time over which such trials will be
completed.
Dependence on Reimbursement by Third Party Payors
The success of ABC in being able to market its FCA, in addition to
educating potential users, will be dependent upon its ability to obtain routine
reimbursement approval from third party payors. Additionally, 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 payor,
how the charges 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 payor. Third party payors 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. ABC has recently received an expanded license
from the State of Rhode Island which allows ABC to utilize existing CPT codes
for portions of its laboratory services and which will enable ABC to obtain
reimbursement for certain of its services. There can be no assurance that the
Company will be able to maintain reimbursement approval on a routine basis from
enough additional third party payors so as to have a significant impact on the
marketing of the FCA. In the absence of third party reimbursement, the Company
will be dependent upon direct patient payment. Such dependence may affect the
amount and collectability of receivables of ABC.
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Certain Patent and Technology Considerations
Prior to the acquisition of Prompt Medical and MSI, the Company's primary
business was the FCA being marketed through ABC. ABC is the owner of three
patents granted by the United States Patent Office relating to the FCA and its
integral technology, as well as foreign patents which are founded upon its
United States patents. The Company views ABC's patents as being material to
ABC's business, its future success, and its ability to compete. The three United
States patents were originally issued in 1985, 1988 and 1990, and the protection
afforded the Company by virtue of such patents will expire in the years 2002,
2005 and 2007, respectively. On and after the respective dates of the expiration
of the Company's patents, the Company's patented technology may become generally
available to the marketplace.
ABC's success will depend in part on its ability to defend its patents,
maintain trade secrets and operate without infringing upon the proprietary
rights of others, both in the United States and in foreign countries. In
addition, there can be no assurance that any patents issued to ABC will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will afford ABC protection from competitive products or processes. Furthermore,
there can be no assurance that ABC or the Company will have the financial or
other resources necessary to enforce or to defend a patent infringement or
proprietary rights violation action. Neither ABC nor Nu-Tech is aware of any
objection or challenge to its patents or of any asserted claim of patent
infringement.
The Company also relies on certain proprietary trade secrets and know-how,
which are not patentable, and on certain ancillary technologies which are not
patentable or proprietary and are therefore available to the Company's
competitors. Although the Company has taken steps to protect its unpatented
trade secrets and know-how, there can be no assurance that the Company's trade
secrets will not otherwise become known or be independently developed or
discovered by competitors.
The ability of ABC to obtain patents and similar rights and the nature,
extent and enforceability of the intellectual property rights that may be
obtained as a result of ABC's research efforts involve complex legal and factual
concerns. Discoveries made or developed by the Company may not qualify for
patents or if qualified, may be subject to challenge or to protracted
proceedings. In addition, other public or private concerns, including
universities, may hold or have filed patent applications and have been issued
patents on inventions or otherwise possess proprietary rights to technology
which may be necessary to commercially implement the Company's inventions. The
extent to which the Company may be required to license other patents or
proprietary rights, and the cost and availability of such licenses, are
presently unknown. There can be no assurances that others may not independently
develop similar technology or otherwise obtain access to the Company's know-how.
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 Nu-Tech, MSI, NTBM and
ABC, as well as PCL. Although ABC believes its FCA to be cost-effective in
overall chemotherapy treatment, changes in the level of support by federal and
state governments of health care services, the methods by which such services
may be delivered and the prices for such services may all have a materially
adverse impact on the Company's ability to achieve and sustain a profit. Health
care reform could also reduce the profitability of certain medical institutions
and, in turn, adversely impact the fees Nu-Tech, MSI, PCL, NTBM and ABC 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.
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Competition and Technological Changes
At the present time, there are several companies which commercially market
chemoresistant assays in addition to general oncology related laboratory
services. The Company believes that it is the only company currently marketing,
though on a limited basis, a patented chemosensitivity assay in the United
States. ABC believes that it competes based upon its patented technology, the
high evaluability rate (i.e. the ability to successfully test the tumor) for
most types of human solid tumors, and the positive and negative predictive
accuracy of ABC's FCA assay. There can be no assurance that ABC's competitors
will not succeed in developing technologies and services that are more accurate
and effective than ABC's FCA or any other assay which may be developed by ABC or
that would render the Company's technology and services obsolete or
noncompetitive. In addition, in the event of the future development and approval
of chemotherapeutic drugs which are not capable of being assayed by the FCA and
such drugs become commonly used, such event may materially affect the ability of
ABC to market the FCA.
In addition, there are many public and private companies, including several
well-known pharmaceutical companies and specialized biotechnology companies,
universities and research centers, engaged in developing therapeutic and
diagnostic products for the treatment of cancer. Many of ABC's competitors have
substantially greater financial and technological resources than the Company or
ABC, and have significantly greater experience in sales and marketing and
research and development. Such companies may be more successful in developing
alternate methods to predict the effectiveness or non-effectiveness of
chemotherapeutic drugs on an individual cancer patient.
Limited Facilities for FCA Services
ABC currently has limited laboratory facilities at which to perform its FCA
services. Since 1986, the Company has performed over 4,300 assays and currently
is performing approximately 10 assays per month. The Company believes that ABC's
present facilities are adequate to allow ABC to perform up to approximately 900
assays per month. No assurance may be given that the Company will have adequate
or sufficient cash resources to fund necessary expansion of facilities and
equipment to fully accommodate its future needs, or that additional capital for
such purposes will be available to it. Such circumstances would have an adverse
effect upon ABC's ability to maximize its business potential.
Pledge of Principal Assets to Secure Existing Loans from the State of Rhode
Island
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 March 31, 1997, was approximately $269,000).
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 is 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"). Theses 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
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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. At the present
time, the United States Food and Drug Administration ("FDA") does not regulate
the FCA. 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 on the life of Mr. Feigenbaum 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 and MSI,
as well as the pending acquisition of 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 or 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 assay, 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,
MSI or PCL against future claims or that insurance will be available to the
Company, 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, 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 the 1997, 1998 and 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.
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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 August 13 1997, has 10,558,704 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 1933, 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 became eligible for immediate resale, and has
additionally registered 1,159,681 shares issuable upon exercise of various
options and warrants. In addition, there are 6,825 shares of its Convertible
Preferred Stock issued and outstanding, convertible into approximately 8,950,819
shares of Common Stock as of August 13, 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 or to be 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.
Insufficient Number of Shares of Common Stock Available
Through August 13, 1997, an aggregate of 7,854,612 shares of Common Stock
were issued upon conversion of 7,175 shares of Series A Convertible Preferred
Stock (the "Preferred Stock"). Based upon an assumed prevailing conversion price
of $.7625 per share as of August 13, 1997, the Company would be obligated to
issue up to an additional 8,950,819 shares of Common Stock. The Company is
presently authorized to issue 12,000,000 shares of Common Stock, $.01 par value.
As of August 13, 1997, the Company had 10,558,704 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). Assuming full
conversion of the remaining 6,825 shares of Preferred Stock at an assumed
conversion price of $.7625 per share, the Company would be required to issue up
to 8,950,819 additional shares of its Common Stock. As of August 1, 1997, the
Company no longer had a sufficient number of unreserved Shares of Common Stock
to accomodate any additional conversions. The Company has advised the holders of
unconverted shares of Preferred Stock that future conversions have been
suspended. The Company is currently in the process of seeking shareholder
approval to amend its Certificate of Incorporation to increase the number of
Shares of its capital stock which it is authorized to issue. As previously
noted, the Company has 10,558,704 shares of Common Stock issued and outstanding,
of which 7,854,612, or 74.39%, of all issued and outstanding shares of Common
Stock are owned by present or former Preferred Stockholders. The Amendment to
the Certificate of Incorporation requires the affirmative vote of a majority of
all issued and outstanding shares entitled to vote. Present and former Preferred
Stockholders have the ability to cause the Amendment to the Certificate of
Incorporation, as proposed, to be adopted. However, there can be no assurances
that such amendment will be effected.
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<PAGE> 32
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 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, 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 issuable upon conversion of
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 Secion 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
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<PAGE> 33
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. The Company has filed a motion
to dismiss the allegations for failure to state a claim. Such motion
is pending as of the date hereof.
Item 2. Changes in Securities
Not applicable for the second quarter ended June 30, 1997.
Item 3. Defaults Upon Senior Securities
Not applicable for the second quarter ended June 30, 1997.
Item 4. Submission of Matters to a Vote of Security Holders
On June 20, 1997, the Company held its Annual Meeting of Shareholders.
At the Meeting, the sole item of business was the election of two (2)
Class 1 Directors to the Board of Directors of the Company. The two (2)
Directors elected as Class 1 Directors and the tabulation of the votes
(both in person and by proxy) was as follows:
Nominees for Directors For Withheld
---------------------- --- --------
J. Marvin Feigenbaum 1,960,697 236,570
Robert B. Fagenson 1,771,208 226,059
Item 5. Other Information
The Company has 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 did file its Form 10-K for its most
recent fiscal year, which ended February 28, 1997. PCL's quarterly
report on Form 10-Q for the quarter ended May 31, 1997, was due to be
filed on July 15, 1997, but has not, as of the date hereof, been filed
by PCL. PCL has been operating as a debtor-in-possession under Chapter
11 of the Bankruptcy Code since November 8, 1996.
Nu-Tech has reached an agreement (the "PCL Plan") with the holders of
the Senior Debt, Subordinated Debt and the management of PCL whereby
Nu-Tech will acquire a 52.6% interest in PCL. The terms of the
agreement provide 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, will be
forgiven. The PCL Plan also requires that the Company purchase an
additional 17% of capital stock of PCL for $5,000,000 upon the approval
of
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<PAGE> 34
the PCL Plan. Pursuant to the PCL Plan, the debt purchased by Nu-Tech
will be converted into 35.6% of the common stock of PCL, which together
with the 17% purchased for $5,000,000, will 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. Upon the
completion of the transaction, the Company will consolidate the
accounts of PCL in its consolidated financial statements.
On February 26, 1997, the Company completed the sale of its ownership
interest in MSI and received, among other things, a $5,000,000 secured
note receivable which may be 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 has been advised that its
billing practices are 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 July 18, 1997, PCL entered into a letter agreement with the United
States Department of Justice in connection with such billing practices
claims. The letter agreement is intended, subject to final
documentation (as completed, the "Settlement Agreement"), to dispose of
the claims on substantially the following terms:
1. PCL will pay the United States Government (i) $200,000 upon
execution of the Settlement Agreement and (ii) $1,800,000 in principal
plus interest calculated at the Treasury Bill rate, payable in equal
quarterly installments each year for six years;
2. PCL will enter into a five-year corporate integrity agreement with
the Office of the Inspector General of the U.S. Department of Health
and Human Services, pursuant to which PCL will, among other
requirements, continually be monitored by internal corporate compliance
officers and provide proper training for its billing personnel;
3. PCL will be 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;
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<PAGE> 35
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.
PCL has no reason to believe that the Settlement Agreement will not be
entered into as contemplated. The Settlement Agreement, however, may
contain additional or different terms from those set forth in the July
18, 1997 letter agreement.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits designated by an asterisk (*) have been
previously filed with the Securities and Exchange Commission and pursuant to
17 C.F.R. Section 230.411, are incorporated herein by reference to the document
referenced in brackets following the description of such exhibits. All other
exhibits are filed herewith.
Exhibit No. Description
3.1* Amended and Restated Certificate of Incorporation filed with
the Secretary of State of Delaware on November 16, 1994
[Exhibit 3.1.5 to Amendment No. 1 to Reigstration Statement on
Form SB-2, file No. 33-84622]
3.2* Amended and Restated By-Laws effective November 16, 1994
[Exhibit 3.2.2 to Registration Statement on Form SB-2, File
No. 33-84622]
27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended June 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>
April 29, 1997 Item 5. Other Events Reduction in Warrant Price
May 29, 1997 Item 5. Other Events Gurary v. Winehouse
Legal Complaint
June 9, 1997 Item 5. Other Events Employment Agreement
June 18, 1997 Item 5. Other Events Results of Reduction in
Warrant Price
</TABLE>
Page 35
<PAGE> 36
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: August 14, 1997 by: /s/ J. Marvin Feigenbaum
------------------------
J. Marvin Feigenbaum
President, Chief Executive Officer
and Chief Financial Officer
Page 36
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000716778
<NAME> NU-TECH BIO-MED, INC.
<MULTIPLIER> 1
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
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