<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 21, 1997
REGISTRATION NO. 333-30575
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NU-TECH BIO-MED, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 55 ACCESS ROAD 25-1411971
(STATE OF INCORPORATION) WARWICK, RHODE ISLAND 02886 (I.R.S. EMPLOYER
(401) 732-6520 IDENTIFICATION NO.)
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE
OFFICES)
</TABLE>
------------------------
J. MARVIN FEIGENBAUM
CHIEF EXECUTIVE OFFICER
NU-TECH BIO-MED, INC.
55 ACCESS ROAD
WARWICK, RHODE ISLAND 02886
TELEPHONE (401) 732-6520
FACSIMILE (401) 738-9160
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
WITH COPIES TO:
CHARLES P. AXELROD, ESQ.
WILLIE E. DENNIS, ESQ.
CAMHY KARLINSKY & STEIN LLP
1740 BROADWAY, 16TH FLOOR
NEW YORK, NEW YORK 10019-4315
TELEPHONE (212) 977-6600
FACSIMILE (212) 977-8389
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plan, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TITLE OF SHARES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value(2)(3)(4)................... 11,410,411 $1.46875 $16,759,041 $5,078
- ---------------------------------------------------------------------------------------------------------------------------
Total.................................................... 11,410,411 $1.46875 $16,759,041 $5,078
===========================================================================================================================
</TABLE>
(1) Estimated solely for purpose of determining the registration fee, and
computed based on the average of the closing bid and asked prices of a share
of Common Stock as quoted on the SmallCap Market of the Nasdaq Stock Market
on July 17, 1997 ($1.46875 per share).
(2) Includes (i) 3,734,713 shares of Common Stock issued upon the conversion of
5,077 shares of Series A Preferred Convertible Stock through July 18, 1997,
and (ii) 7,675,698 shares of Common Stock, subject to adjustment, issuable
upon conversion of 8,923 shares of Series A Preferred Stock and, for
purposes of this Registration Statement is computed based upon an assumed
conversion price of $1.1625 per share as of July 18, 1997 representing the
average closing bid price for the five days immediately preceding July 18,
1997 less 25% as provided in the formula for the conversion of the Series A
Preferred Convertible Stock.
(3) The Registrant is currently authorized under its Amended and Restated
Certificate of Incorporation to issue 12,000,000 shares of Common Stock. Of
the number of shares being registered, however, 2,209,508 shares of Common
Stock are being registered subject to the Registrant having effected an
amendment to its certificate of incorporation to increase the number of
shares of Common Stock which it is authorized to issue.
(4) Pursuant to Rule 416 promulgated under the Securities Act of 1933, as
amended, this Registration Statement is intended to include all of the
number of shares issuable upon conversion of the Series A Preferred
Convertible Stock which is subject to increase in accordance with the
conversion provisions and other adjustment provisions of the Series A
Preferred Convertible Stock, and accordingly such indeterminate number of
additional shares of Common Stock is registered hereunder.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION ACTING PURSUANT
TO SECTION 8(a) MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD, NOR
MAY OFFERS TO BUY BE ACCEPTED, PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JULY 21, 1997
PROSPECTUS
NU-TECH BIO-MED, INC.
THIS PROSPECTUS COVERS AN AGGREGATE OF 11,410,411 SHARES OF COMMON STOCK
------------------------
This Prospectus covers an aggregate of 11,410,411 shares of Common Stock,
$.01 par value (the "Shares") of Nu-Tech Bio-Med, Inc. (referred to as the
"Company" or "Nu-Tech"), offered by certain security holders ("Selling Security
Holders") consisting of 3,734,713 shares issued through July 18, 1997 upon
conversions of 5,077 shares of Series A Convertible Preferred Stock (the
"Preferred Stock") and 7,675,698 Shares (subject to adjustment) issuable upon
conversion of 8,923 issued, outstanding, and as yet unconverted shares of
Preferred Stock, and which may be offered and sold by the Selling Security
Holders thereof. The number of shares of Common Stock issuable upon conversion
of the remaining 8,923 shares of Preferred Stock has been estimated based upon a
conversion price of $1.1625 per share as of July 18, 1997, representing the
average closing bid price for the five days immediately preceding July 18, 1997,
less 25% as provided in the formula for the conversion of the Series A Preferred
Convertible Stock. The actual number of shares of Common Stock may be subject to
increase or decrease dependent upon the conversion price in effect at the date
of conversion of the Preferred Stock. See "Selling Security Holders". Of the
number of shares to which this Prospectus relates, 2,209,508 shares are subject
to the Company having effected an amendment to its Amended and Restated
Certificate of Incorporation to increase the number of shares of Common Stock
which it is authorized to issue.
The Shares may be sold from time to time by the Selling Security Holders,
or by the transferees of the holders of Series A Preferred Stock. No
underwriting arrangements have been entered into by the Selling Security
Holders. The distribution of the Shares of the Selling Security Holders and/or
their transferees may be effected in one or more transactions that may take
place on the over-the-counter market, including ordinary brokers transactions,
privately negotiated transactions or through sales to one or more dealers for
resale of the Shares as principals, at market prices prevailing at the time of
sale, at prices related to such prevailing market prices or at negotiated
prices. The Shares may be sold by the Selling Security Holders either (i) to a
broker or dealer as principal for resale by such broker or dealer for an amount
pursuant to this Prospectus (e.g., in a transaction with a "market maker"); (ii)
in brokerage transactions, including transactions in which the broker solicits
purchasers or (iii) in privately negotiated transactions pursuant to any
applicable exemption under the Securities act of 1933, as amended (the "Act").
Usual and customary or specifically negotiated brokerage fees or commissions may
be paid by the Selling Security Holders in connection with such sales. The
Selling Security Holders and intermediaries through whom such Shares are sold
may be deemed "underwriters" within the meaning of the Act, with respect to the
Shares offered.
The Common Stock is traded in the over-the-counter market and listed on the
SmallCap Market of the Nasdaq Stock Market ("Nasdaq") under the symbol "NTBM,"
and on the Boston Stock Exchange under the symbol "NTB." On July 17, 1997, the
closing bid and asked prices for the Common Stock as reported on Nasdaq were
$1.375 and $1.5625, respectively. See "Market Information" as set forth in the
Form 10-KSB for the fiscal year ended December 31, 1996.
------------------------
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND SHOULD BE PURCHASED ONLY BY
THOSE PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK
FACTORS" COMMENCING AT PAGE 16 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JULY , 1997.
<PAGE> 3
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and information
statements and other information filed by the Company with the Commission
pursuant to the informational requirements of the Exchange Act may be inspected
and copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional
offices of the Commission: 7 World Trade Center, 13th Floor, New York, New York
10048; and Chicago Regional Office, Everett McKinley Dirkson Building, 210 South
Dearborn Street, Room 1204, Chicago, Illinois 60604. Copies of such material may
be obtained from the public reference section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company with the Commission
pursuant to the Exchange Act, are hereby incorporated by reference except as
superseded or modified herein:
1. The Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996.
2. The Company's Form 8-K filed with the Commission on June 18, 1997.
3. The Company's Form 8-K filed with the Commission on June 9, 1997.
4. The Company's Form 8-K filed with the Commission on May 31, 1997.
5. The Company's Form 8-K filed with the Commission on May 1, 1997.
6. The Company's Quarterly Report on Form 10-QSB for the quarterly
period ended March 31, 1997 filed with the Commission on May 13, 1997.
7. The Company's Proxy Statement with respect to its Annual Meeting of
Shareholders held on June 20, 1997.
All documents filed by the Company subsequent to the date of this
Prospectus pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act and
prior to the filing of a post-effective amendment which indicates that all
Shares offered hereby have been sold or which deregisters all Shares then
remaining unsold, shall be deemed to be incorporated by reference in this
Registration Statement and Prospectus and to be a part hereof from the date of
filing such documents. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed modified or
superseded for purposes of this Registration Statement and Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of the Registration Statement of which this Prospectus forms a
part.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of any such
person, a copy of any document described (other than exhibits). Requests for
such copies should be directed to Nu-Tech Bio-Med, Inc., 55 Access Road,
Warwick, Rhode Island 02886. The Company's telephone numbers are (401) 732-6520
or (212) 391-2424.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is intended to set forth certain pertinent facts and
highlights from material contained in the body of this Prospectus and the
Company's Report on Form 10-KSB for the fiscal year ended December 31, 1996 (the
"Form 10-KSB"), the Form 10-QSB for the quarterly period ended March 31, 1997,
the Company's reports on Form 8-K filed by the Company since December 31, 1996
and up to the date hereof and the Company's Proxy Statement with respect to its
Annual Meeting of shareholders held on June 20, 1997, all of which are
incorporated herein by reference. The summary is qualified in its entirety by
reference to the more detailed information and consolidated financial statements
appearing elsewhere in this Prospectus and Form 10-KSB, 10-QSB, Forms 8-K, and
Proxy Statement. Each prospective investor is urged to read this Prospectus and
Form 10-KSB, 10-QSB, Forms 8-K and Proxy Statement in their entirety. This
Summary is further qualified in its entirety by reference to, and should be read
in conjunction with, the detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus.
THE COMPANY
Nu-Tech Bio-Med, Inc. (hereinafter sometimes referred to as "Nu-Tech" or
the "Company") was originally organized under the laws of the State of Delaware
in September 1981 under the name "Applied DNA Systems, Inc." On November 16,
1994, the Company changed its name to its present name. One of the Company's
wholly-owned operating subsidiaries, Analytical Biosystems Corp. ("ABC"), was
organized under the laws of the State of Delaware in August, 1985. On October
21, 1996, the Company, through a newly organized wholly-owned subsidiary, NTBM
Billing Services Inc. ("NTBM"), acquired substantially all of the medical
billing service assets of Prompt Medical Billing, Inc. ("Prompt Medical").
On November 8, 1996, Nu-Tech joined with Physicians Clinical Laboratory,
Inc., a Delaware corporation, ("PCL") in submitting a plan of reorganization for
PCL (the "PCL Plan") under Chapter 11 of the United States Bankruptcy Code
("Chapter 11") whereby Nu-Tech would acquire a 52.6% majority interest in PCL.
PCL is currently operating under Chapter 11 of the United States Bankruptcy
Code, and is incurring ongoing and significant losses. For the Fiscal Year ended
February 28, 1997, PCL incurred a net loss of approximately $98,679,000. See the
Consolidated Financial Statements of Physicians Clinical Laboratory, Inc. and
the notes thereto. At the time of the commencement of the Chapter 11, PCL was
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 secured debt in advance of submission of
the PCL Plan to the bankruptcy court. PCL is a full service clinical laboratory
which provides a comprehensive battery of testing services. PCL operates
throughout the State of California and its executive offices are located in
Sacramento, California. 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 judgement confirming the second amended plan of reorganization of PCL
and its affiliated debtors. Though confirmed, the PCL Plan is not effective as
of the date hereof.
On November 18, 1996, the Company completed the acquisition of Medical
Science Institute, a California corporation ("MSI") which had been operating
under Chapter 11 of the United States 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 $290,823 for the 57 day period
through February 26, 1997. MSI is a full service medical laboratory facility and
its primary executive offices are located in Burbank, California. MSI operates
throughout the State of California.
As a result of the acquisitions of the business of Prompt Medical and the
anticipated acquisition of a majority interest in PCL, together with an indirect
ownership interest in MSI, the business of Nu-Tech has recently significantly
changed and expanded. Prior to such acquisitions, the Company's sole business
activities
3
<PAGE> 5
were conducted through its subsidiary, ABC. Unless otherwise indicated, or
unless the context otherwise requires, the "Company" shall refer to Nu-Tech,
NTBM, ABC, PCL and MSI.
Analytical Biosystems Corp. is a clinical oncology laboratory service and
research company which currently performs and furnishes a patented in vitro
chemosensitivity assay known as the Fluorescent Cytoprint Assay ("FCA") which
aids oncologists in selecting those chemotherapeutic drugs most likely to be
effective in treating a cancer patient's solid mass tumor. The FCA, which was
developed by M. Boris Rotman, Ph.D., Professor of Medical Science at Brown
University, Providence, Rhode Island, is a patented laboratory procedure that
measures the effectiveness of specific chemotherapy drugs in destroying cancer
cells retrieved from solid mass tumors removed from individual patients. The FCA
tests cancer tissue taken from the individual's tumor against many of the
chemotherapeutic agents likely to be used for that tumor type. Information
provided by the test helps rule out ineffective drugs and assists the
oncologists in determining appropriate chemotherapy.
ABC also offers an ATPase cell viability assay ("ATP-CVA") which is a
bioluminescent assay utilized for the determination of inhibition of metabolic
activity in cancer cells. The Company uses the non-proprietary ATP-CVA in
conjunction with Analytical Biosystems' FCA for the purpose of expanding the
number of chemotherapeutic drugs which ABC can offer for in vitro drug response
testing. Such expanded drugs include taxol, which is utilized in the treatment
of breast and ovarian cancer. Analytical Biosystems intends that the FCA will be
principally used for the assay of those chemotherapeutic drugs such as
cisplatin, doxorubicin and mitomycin C which have the effect of bursting or
killing cancer cells. With respect to other chemotherapeutic drugs which work in
a different fashion such as taxol and taxotere, the ATP-CVA will detect the
inhibition of metabolic activity. These two latter drugs, which have been
approved by the Food and Drug Administration for the use in the treatment of
breast, lung and ovarian cancer, will be assayed by the Company utilizing the
ATPase assay. In addition, ABC has added navelbine to the chemotherapeutic drugs
which it is capable to assay, which is currently used in the treatment of
non-small cell lung cancer and whose effect is to burst or kill the cancer cells
immediately. This drug is being assayed by Analytical Biosystems Corp. utilizing
the FCA.
The existing and potential customers of Nu-Tech, ABC, MSI, and PCL and NTBM
Billing are medical offices, surgeons, oncologists, pathologists, patients,
hospitals, health maintenance organizations ("HMOs"), community health centers,
and third party insurance companies.
ABC maintains its administrative offices and clinical laboratory, research
facilities and its principal executive offices at 55 Access Road, Warwick, Rhode
Island 02886, and its telephone number is (401) 732-6520. Nu-Tech also maintains
executive offices at 500 Fifth Avenue, Suite 2424, New York, New York 10110, and
its telephone number (212) 391-2424. MSI maintains its executive offices at 811
South San Fernando Boulevard, Burbank, California 91502 and its telephone number
is (818) 846-4674. NTBM maintains a place of business at 9090 SW 87th Street,
Miami, Florida 33176 and its telephone number is (305) 273-1288. PCL maintains a
place of business at 3301 C Street, Suite 100E, Sacramento, California 95816 and
its telephone number is (916) 444-3500.
RECENT EVENTS
RECENT WARRANT EXERCISES AND SHARE ISSUANCES
On April 29, 1997, the Company reduced the exercise price of 15,856 options
(the "Options") and 1,076,979 warrants (the "Warrants") to $1.76 per share,
which resulted in a reduced exercise price equal to 75% of the average closing
price for the Company's common stock for the ten (10) days prior to such
reduction. The warrant holders/option holders were given the opportunity to
exercise the Options and Warrants at the reduced exercise price for the 45 day
period commencing April 30, 1997 through June 13, 1997. An aggregate of 351,728
Warrants were exercised for which the Company received an aggregate of $619,041.
Upon termination of the 45 day period, the Options and Warrants reverted to, and
are exercisable at, their original respective exercise prices which range from
$6.30 to $28.35 per share.
4
<PAGE> 6
DECEMBER 1996 PRIVATE PLACEMENT
On December 2, 1996, the Company completed a private placement of 14,000
shares of Series A Convertible Preferred Stock (the "Preferred Stock") for an
aggregate purchase price of $14 million. Each share of Preferred Stock, by its
terms, is convertible into such number of shares of Common Stock as shall equal
$1,000 divided by a Conversion Rate equal to the lesser of (i) 75% of the
average closing bid price of a share of Common Stock as reported by the SmallCap
Market of the Nasdaq Stock Market for the five trading days prior to the date of
the holders' notice of conversion or (ii) $17.50, subject to adjustment. By
reason of such conversion provisions, the holders of the Preferred Stock will
have the right, until all of their Preferred Shares are converted, to always
avail themselves of a conversion right at 25% below the prevailing market price.
Therefore, the lower the market price for the Company's Common Stock, the
greater the number of shares that the converting Preferred Shareholder will be
able to receive, and the greater consequent dilution to existing shareholders.
In addition, the issuance of shares of Common Stock by reason of conversions of
the Preferred Stock may have a depressive effect upon the market in that there
may not exist sufficient depth or breadth in the market for the Company's Common
Stock to absorb the sale of additional shares that may come to the marketplace
by reason of such conversions. Anything to the contrary notwithstanding, no
holder of Preferred Stock is permitted to convert any portion of the Preferred
Stock which would result in the holder being deemed the beneficial owner of
4.99% or more of the then issued and outstanding Common Stock of the Company.
The holders of the Preferred Stock are entitled to require the Company,
upon the demand of a majority of the holders of the registrable securities, to
file a registration statement with the Securities and Exchange Commission,
registering for sale the Common Stock which the holders of the Preferred Stock
may receive upon conversion. In the event the Company fails to have a
registration statement declared effective within 120 days of receipt of the
holders' Demand Registration Request, the conversion price is subject to
adjustment by increasing the percentage discount from 25% to 35% and increasing
by an additional 2% for each month for up to six months. In the case of
conversion, in the event that the shares of Preferred Stock are not converted
within 10 days following the receipt by the Company of a valid conversion
notice, the Company shall pay to the converting Preferred Shareholder an amount,
as liquidated damages, equal to 1% per day of the purchase price of the shares
converted.
The Company had heretofore filed, and in February 1997 withdrew, a
registration statement relating to the shares of its Common Stock issuable upon
conversion of the Preferred Stock. At the time of such filing, the Company had
not received a valid written demand by a majority of the holders of the
Preferred Stock to require it to proceed with such registration statement. At
the time such registration statement was withdrawn, and through and as of the
date hereof, the Company likewise did not receive a written demand by the
holders of a majority of Preferred Stock to file a registration statement. The
filing of a registration statement of which this Prospectus is a part has been
in effect by the Company without having a requisite demand made upon it.
Several holders of Preferred Stock have indicated that they intend to
commence an action against the Company arising out of the alleged 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 in the event 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 damages or losses, such circumstance would have a material
adverse effect upon the Company. The Company has had, and continues to have,
continuous discussions with representatives of the holders of Preferred Stock
concerning a resolution of the dispute arising out of the registration of the
shares of the Company's Common Stock issuable upon conversion of the Preferred
Stock.
As of July 18, 1997, an aggregate of 5,077 shares of Preferred Stock were
converted into an aggregate of 3,734,713 shares of Common Stock. This Prospectus
has been filed with respect to both the shares of Common Stock which have been
issued upon such conversions and shares of Common Stock underlying the Preferred
Stock which have yet to be converted. The filing of a registration statement by
the Company, may not, however, resolve the dispute to the satisfaction of the
holders of the Preferred Stock, and no assurance may be given that the holders
of Preferred Stock may not commence an action against the Company.
5
<PAGE> 7
As of July 18, 1997, the Company had 6,533,810 shares of Common Stock
issued and outstanding (including 3,734,713 shares of common stock issued
through July 18, 1997 upon conversion of 5,077 shares of Preferred Stock and
351,728 shares of common stock issued between April 30, 1997 and June 13, 1997
upon the exercise of certain Warrants). In the event that the remaining 8,923
shares of Preferred Stock are converted, the Company would be obligated to issue
approximately an additional 7,675,698 shares of Common Stock to the holders of
the Preferred Stock based upon a conversion price of $1.1625 per share as of
July 18, 1997. In such case the Company would have an aggregate of 14,209,508
shares of common stock issued and outstanding, of which an aggregate of
11,410,411 shares of common stock would be owned by 37 former holders of
Preferred Stock, who, as a group, would then be in a position to control the
business and affairs of the Company.
The number of shares of Common Stock issuable upon conversion of the
remaining 8,923 shares of the Preferred Stock has been estimated based upon a
conversion price of $1.1625 per share as of July 18, 1997. The actual number of
shares of Common Stock may be subject to increase dependent upon the conversion
price in effect at the date of conversion. The Company's Certificate of
Incorporation authorizes the issuance of 12,000,000 shares of Common Stock. In
the event that the remaining shares of Preferred Stock are converted at a
conversion price of $1.1625 per share, the Company would not have available a
sufficient number of authorized Common Stock. In such case the Company would be
required to amend its Certificate of Incorporation to increase the number of
shares of Common Stock which it is authorized to issue. No assurances may be
given that such an amendment would be approved of by the Company's shareholders.
Under various agreements related to the sale of the Preferred Stock, the
Company paid to several investment bankers approximately $1,420,000 from the
gross proceeds and issued up to 60,000 shares of common stock and five year
Common stock purchase warrants to purchase 85,714 shares of common stock
exercisable at $15.00 per share. The Company has engaged certain financial
public relations firms for which such firms have been paid an aggregate of
$1,355,000, which funds were paid from the offering proceeds.
APRIL 1996 PRIVATE PLACEMENT
On April 12, 1996, the Company completed a private offering (the "April
Offering"), under Section 4(2) of the Securities Act and/or Regulation D
promulgated thereunder, of 250,000 shares of its Common Stock to 36 investors
for an aggregate of $2,875,000. The Company paid to the placement agent
commissions of $143,750 (5% of the gross proceeds of the April Offering), an
expense allowance of $20,000, and Common Stock purchase warrants to purchase
75,000 shares of the Company's Common Stock at an exercise price of $14.50 per
share, subject to adjustment. The Company realized net proceeds of approximately
$2,596,000 after deduction of the placement agent commissions and expenses,
legal fees, blue sky filing fees and other miscellaneous expenses. The proceeds
were used for general working capital purposes as well as certain costs and
expenses related to the PCL, MSI and Prompt Medical acquisition activities.
An aggregate of 250,000 shares of Common Stock were issued to investors in
the April Offering. Investors in the April Offering were granted certain demand
and piggyback registration rights for the shares of Common stock sold in the
April Offering. In satisfaction of certain alleged claims by the investors in
the April Offering that the Company had failed to timely register the Shares
owned by such investors, the Company issued an additional one-half share to the
investors for each Share purchased in the April Offering for an aggregate of
125,000 additional shares. All of the shares issuable to the investors
participating in the April Offering have been registered for sale.
ACQUISITION OF MAJORITY INTEREST IN PHYSICIANS CLINICAL LABORATORY
The proceeds of the Preferred Stock offering discussed above were used in
furtherance of, among other things, the acquisition of certain debt securities
of Physicians Clinical Laboratory, Inc., a Delaware corporation ("PCL"). PCL is
a full service clinical laboratory capable of providing a comprehensive battery
of testing services. PCL is a publicly held corporation which the Company
believes had been delinquent in filing its reports with the Commission under the
Securities Exchange Act of 1934 until June 10, 1997. On June 6, 1997, PCL filed
with the Commission (i) its Quarterly Report on Form 10-Q for the quarter ended
6
<PAGE> 8
August 31, 1996; (ii) its Quarterly Report on Form 10-Q for the quarter ended
November 30, 1996; and (iii) a Current Report on Form 8-K. On June 10, 1997, PCL
filed with the Commission its Annual Report on Form 10-K for the Fiscal Year
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. At such time as PCL files its Quarterly Report
on Form 10-Q for the quarter ended May 31, 1997, Nu-Tech intends to suspend
sales by the Selling Shareholders pursuant to this Prospectus until such time
that this Prospectus is supplemented or amended to include such subsequently
filed financial information of PCL.
PCL has been, and currently is, operating as a debtor-in-possession under
Chapter 11 of the Bankruptcy Code since November 8, 1996. PCL's common stock is
traded in the over-the-counter market of the National Securities Dealers
Automated Quotation System under the symbol "PCLI". PCL reported net revenues of
approximately $111,111,000, $90,392,000 and $62,831,000 for the fiscal years
ended February 28 (29), 1995, 1996, and 1997, respectively. PCL incurred net
losses of approximately $5,596,000, $79,184,000 and $98,679,000 for the same
periods, respectively. PCL has operations throughout the State of California and
has been operating since 1992. PCL is continuing to incur significant ongoing
losses and is in default on approximately $80,000,000 in senior secured debt
(the "Senior Debt") and approximately $40,000,000 in subordinated debt (the
"Subordinated Debt").
Nu-Tech has reached an agreement 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
of reorganization under Chapter 11 of the United States Bankruptcy Code to
effectuate the agreement (the "PCL Plan"). On November 8, 1996, PCL and the
Company filed the PCL Plan with the U.S. Bankruptcy Court located in the Central
District of California (Case No. SV96-23185-GM). As required by the
aforementioned agreement, the Company, on November 7, 1996, purchased
approximately $13,300,000 of Senior Debt for $10,000,000. This purchase was in
advance of the filing of the PCL Plan with the bankruptcy court. In accordance
with the PCL Plan, certain holders of Senior Debt contributed $10,000,000 in
debtor-in-possession 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 the capital stock of PCL for $5,000,000. 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
$5,000,000 obligation of the Company has been satisfied through the satisfaction
of the $5,000,000 Note of PCL to the Company issued in connection with the sale
and transfer of MSI by the Company to PCL. On January 29, 1997, the Bankruptcy
Court having jurisdiction of PCL approved the acquisition by PCL of MSI from the
Company. 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. The PCL Plan as confirmed requires that certain conditions
be satisfied or waived by July 22, 1997 (90 days after the date of
confirmation), after which time any party in interest may move the bankruptcy
court to vacate the order of confirmation. If such confirmation order were to be
vacated, the PCL Plan would become null and void and Nu-Tech would be the holder
of $13,300,000 of Senior Debt. As of the date hereof, the PCL Plan is not
effective, but the confirmation order remains in full force and effect and no
application to vacate such confirmation order has been made.
Pursuant to the PCL Plan, J. Marvin Feigenbaum, President and Chief
Executive Officer of the Company, was appointed Chief Operating Officer of PCL.
It is contemplated that Mr. Feigenbaum will serve in such capacity pending the
bankruptcy court's determination of the PCL Plan. Mr. Feigenbaum receives a
salary of approximately $104,000 on an annualized basis from PCL for his
services. Upon the PCL Plan being consummated, Nu-Tech will have the right to
nominate three persons to the five member Board of Directors of PCL. In the
event the PCL Plan is not consummated, Nu-Tech shall not be entitled to nominate
any person to the PCL Board of Directors. Nu-Tech has no reason to believe that
the PCL Plan will not be consummated.
7
<PAGE> 9
Upon consummation of the PCL Plan, Mr. J. Marvin Feigenbaum, President and
Chairman of Nu-Tech, will enter into an employment agreement with PCL (the "PCL
Employment Agreement") which will provide for Mr. Feigenbaum's employment as
Chairman of the Board, President and Chief Executive Officer of PCL for a three
year term, during which he will continue in such capacity while simultaneously
continuing his employment with Nu-Tech. It is anticipated that the PCL
Employment Agreement will provide for an initial base salary at the rate of
$104,000 per annum for the first year of the term, and at a base salary of
$208,000 for each of the second and third years of the term. Additional
provision is expected to be made for Mr. Feigenbaum to receive health, life
insurance, disability benefits, expense reimbursement, as well as an automobile
allowance and lodging while in California. In addition to his compensation, Mr.
Feigenbaum will be granted options to purchase 100,000 shares of PCL's Common
Stock at an exercise price of $.25 per share and 100,000 shares of PCL's Common
Stock at an exercise price of $5 per share, subject to vesting upon PCL
achieving certain performance as to earnings before interest, taxes,
depreciation and amortization for each of the years ending December 31, 1997,
1998 and 1999, and further subject to the acceleration of vesting in the event
of a Change in Control of PCL, as defined in the PCL Employment Agreement. As
part of his employment, Mr. Feigenbaum will enter into a confidentiality
agreement and restrictive covenant with PCL in which he will agree not to
compete with PCL during the term of his employment and for one year thereafter
in certain territories. Nu-Tech intends to enter into a similar non-competition
agreement with PCL.
In connection with the implementation of the PCL Plan, it is anticipated
that PCL will enter into a series of additional agreements which will consist of
the following:
(i) an Indenture between PCL and First Trust National Association, as
Trustee (the "Trustee"), in connection with the issuance by PCL of $55
million of Senior Secured Notes due 2004 (the "Senior Notes") and secured
by:
(a) a Security Agreement granting a first lien on all existing and
future assets of PCL, including PCL's accounts, inventory, intellectual
property, real estate leases and laboratories of its subsidiaries,
including that of MSI; and
(b) a Pledge Agreement pledging all of the capital stock of PCL and
its subsidiaries, including that of MSI;
(ii) a Warrant Agreement between PCL and the Warrant Agent and a
Warrant Agreement relating to PCL's issuance of warrants for the purchase
of an aggregate of 131,579 shares of PCL Common Stock, which amount is
intended to constitute 5% of the shares of PCL Common Stock to be
outstanding upon consummation of the PCL Plan;
(iii) a Common Stock Registration Rights Agreement with respect to
shares of PCL's Common Stock held by senior lenders, granting both demand
and piggyback registration rights to the senior lenders; and
(iv) a Senior Note Registration Rights Agreement relating to the
registration of the $55 million of Senior Notes granting both demand and
piggyback registration rights to the holders of such Senior Notes.
In addition, it is anticipated that all of the stockholders of PCL,
including Nu-Tech, will enter into a Stockholders Agreement, under which Nu-Tech
will agree not to enter any business which directly or indirectly competes with
PCL, similar to the non-competition agreement entered into between Mr.
Feigenbaum and PCL. Also under the Stockholders Agreement, the right of such
stockholders to dispose of their shares in PCL will be restricted to (i)
dispositions to successors in interest who agree to be bound by the Stockholders
Agreement, (ii) dispositions under a registered public offering, (iii)
dispositions to an Affiliate of the transferring stockholder ("Affiliate" is
defined in the Stockholders Agreement as a person with the power to direct the
management or a 10% beneficial owner of PCL) and (iv) dispositions by Nu-Tech
made solely in a pro rata distribution of securities to Nu-Tech's stockholders.
Further, the stockholders will agree not to transfer any of their PCL securities
to any entity which owns 5% or more of an entity which conducts clinical or
specialized laboratory services as its principal business. The aforesaid
documents are hereinafter collectively referred to as the "PCL Plan Documents".
8
<PAGE> 10
Under the terms of the PCL Plan, Nu-Tech, the holders of the Senior Debt
and the holders of the Subordinated Debt will receive 52.6%, 38.1% and 9.3%,
respectively, of the common stock of the reorganized PCL. Upon consummation of
the Plan, PCL will have less than 300 shareholders and as a result intends to
de-register the foregoing. The reorganized Company will continue to file on a
voluntary basis periodic reports with the United States Securities and Exchange
Commission as required by the terms of Indenture.
Proposed Secured Financing for PCL
In anticipation of the effectiveness of the PCL Plan, and to provide PCL
with working capital, PCL has been in negotiations with Diawa Healthco-2 LLC
("Diawa") with respect to obtaining a secured financing line (the "Diawa
Transaction"). The Diawa Transaction contemplates that PCL enter into two
agreements, both of which contain terms which have been substantially negotiated
to date but may be subject to additional or revised terms and revisions. It is
proposed that PCL enter into a Healthcare Receivables Purchase and Transfer
Agreement with PCL Funding Corp. ("Funding Corp."), a wholly-owned subsidiary of
PCL. Simultaneously, Funding Corp. is to enter into a Loan and Security
Agreement with Diawa. Under such agreements (referred to collectively herein as
the "Diawa Financing"), Funding Corp. will purchase certain "eligible
receivables" from PCL, which PCL will finance through Diawa, secured by the
receivables, under a $10,000,000 revolving commitment, at an interest rate per
annum equal to the LIBO Rate (a rate equal to the rate which appears in the
Telerate Service for the Bank of Tokyo of U.S. dollar deposits of amounts
comparable to the outstanding loan from time to time) plus 3.00%. In the event
that Diawa determines for any reason that it is not in its business interests to
enter into, compete or continue the Diawa Financing, the effectiveness of the
PCL Plan may be delayed as PCL will be required to obtain an alternate lender.
No assurance can be given that an alternate lender with acceptable commercial
terms will be available. The inability of PCL to obtain financing may delay it
from emerging from the Chapter 11, as it will have an impact on the final
effectiveness of the PCL Plan.
Certain Effects of PCL Plan Documents and Diawa Financing
The Indenture to be entered into by PCL contains numerous restrictive and
affirmative covenants, each of which may have an effect of the business
operations of PCL, and therefore, the value of Nu-Tech's investment in PCL. The
Indenture details certain restrictions on PCL and its subsidiaries including,
but not limited to, the following: (i) restrictions against engaging in any
activities other than those related to a clinical laboratory or medical
diagnostic service (except for Funding Corp.); (ii) restrictions against asset
sales unless certain criteria are met (such as 75% of such sale price is paid in
cash and the assumption of certain liabilities); (iii) restrictions against
transactions with affiliates of PCL; (iv) restrictions against allowing certain
liens against PCL's assets or income; (v) restrictions against PCL or its
subsidiaries acquiring additional debt (with exceptions for Funding Corp. and
certain leases or purchases of equipment); (vi) restrictions on forming new
subsidiaries; (vii) restrictions on capital expenditures; and (viii)
restrictions against issuing any preferred stock. In addition, for as long as
the Indenture is outstanding, PCL has agreed to: (i) maintain its corporate
existence and the existence of each of its subsidiaries (unless PCL's Board of
Directors determines that any of such subsidiaries are no longer necessary for
the conduct of PCL's business); (ii) maintain certain minimum levels of earnings
and net worth; (iii) maintain maximum levels of interest expenses; (iv) maintain
its properties in good business condition; (v) maintain certain levels of
insurance; and (vi) in the event of a public offering of any of PCL's capital
stock, to offer to apply 35% of the net proceeds thereby received by PCL to
purchase the principal amount at maturity of the Senior Notes.
A material breach or default by PCL in any of the PCL Plan Documents,
including breaches of the covenants under the Indenture, or the Diawa Financing
could adversely and materially affect the business, operations and affairs of
PCL, and therefore, the value of the investment of Nu-Tech in PCL could be
adversely affected or lost in its entirety. If PCL Funding defaults on the Diawa
Financing, Diawa could accelerate the repayment of any outstanding loan amounts,
avail itself of the receivables securing the loan and replace PCL or Funding
Corp. as the entity responsible for the administration and servicing obligations
with respect to the receivables being financed. In addition, a default in the
PCL Funding or either of the Registration Rights Agreements will cause a default
of the Indenture. A default of the Indenture could result
9
<PAGE> 11
in the Senior Note holders being able to avail themselves of their rights under
the Indenture and the collateral therefor, as well as an acceleration of the
payments of the Senior Notes. Further, defaults under either of the two
registration rights agreements could cause PCL to be subject to liquidated
damages for any period of time in which the default continues.
Additionally, if PCL is required to file a registration statement
registering either the debt or equity securities of PCL covered by the two
registration rights agreements, a trading market for PCL's securities may
develop, and therefore, Nu-Tech's investment interest in PCL could potentially
be affected by any fluctuation in the market for the common stock of PCL.
ACQUISITION AND DISPOSITION OF MEDICAL SCIENCE INSTITUTE
On November 18, 1996, the United States Bankruptcy Court of the Central
District of California (the "Court") (Case No. LA 95-37790 TD) approved the
first Amended Plan of Reorganization (the "MSI Plan") of Medical Science
Institute ("MSI") pursuant to which Nu-Tech acquired all of the capital stock of
MSI. Nu-Tech and MSI submitted the MSI Plan to the court on October 18, 1996.
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. The completion of the acquisition of MSI was with the intent of
reselling and passing through such ownership to PCL for consideration and value
substantially equal to that paid by the Company.
In connection with the initial acquisition of Medical Science Institute
("MSI"), by Order of the Bankruptcy Court, Central District of California,
confirming the First Amended Plan of Reorganization of MSI, Fausto Mendez, Jr.,
the sole shareholder of MSI, received shares of Nu-Tech stock having a then
value of $2 million. Based upon the formula provided, Mr. Mendez received
134,228 shares. Mr. Mendez entered into an employment agreement with MSI,
concurred in by Nu-Tech, pursuant to which Mr. Mendez received the sum of
$275,000 in cash and returned for cancellation 18,456 shares of the Nu-Tech
stock to be issued to him. In addition, 15,100 of Nu-Tech shares to be issued to
Mr. Mendez was permitted to be transferred by Mr. Mendez to a putative claimant
of an ownership interest in MSI in consideration of a settlement agreement
entered into with such individual and a general release in favor of MSI.
Pursuant to the MSI Plan, the holders of all of the MSI capital stock
(including any and all options, warrants and other convertible securities)
received 134,228 shares of Common Stock of Nu-Tech based upon the average
closing price of a share of Common Stock on the Nasdaq Small Cap Market for the
15 day period preceding November 18, 1996 ($14.90 per share). The recipients of
Nu-Tech's Common Stock are entitled to "piggyback" registration rights with
respect to such shares. Of the 134,228 shares of the Company's Stock issuable to
Mr. Mendez, 100,672 shares may not be sold prior to November, 1998 without the
consent of the Company. All of such shares have been registered for sale. In
addition, Mr. Mendez received a loan of $100,000 from the Company repayable in
two years and secured by the shares of the Company's Common Stock received by
him.
In addition, Nu-Tech agreed to make certain other payments to creditors of
MSI, and assumed certain obligations under the MSI Plan. These payments include:
(i) approximately $750,000 to pay administrative claims of professionals (ii) an
additional $425,000 to pay professional administrative claims payable over 12
months (iii) approximately $572,000 payable for federal and state payroll taxes
(iv) approximately $2,500,000 to Austin Financial Services, Inc., a secured
creditor of MSI (v) trade payables in the amount of approximately $738,000 (vi)
$75,000 payable to the federal government in satisfaction of certain claims and
(viii) $750,000 payable to general unsecured creditors. At the hearing
confirming the MSI Plan held on November 18, 1996, the Company tendered
$2,250,000 to the Court with respect to such payments. As reported in the
Company's Form 8-K/A filed on January 31, 1997, certain adjustments had been
made with respect to such payments.
Pursuant to Agreement dated February 26, 1997, the Company sold and
transferred to PCL all of its interest in MSI in consideration for PCL paying to
the Company $2,643,000 which represented amounts lent
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<PAGE> 12
or contributed by the Company to MSI, and issued a promissory note of PCL in the
principal amount of $5 million (the "Note"). This Note will be satisfied by the
issuance by PCL of 17% of the reorganized PCL common stock and will be in full
satisfaction of the Company's $5 million purchase obligation to PCL for such 17%
interest.
With respect to the sums payable under the MSI 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 and utilized the loan proceeds to pay off
Austin Financial. The loan bore interest at 15% per annum. All principal and
interest on the loan was payable on January 31, 1997. The loan was secured by
the Company's 16.4447% participation interest in a credit facility dated April
1, 1994 between the lender and Physicians Clinical Laboratory, which
participation represents the Company's purchase of the approximate $13,300,000
of debt securities of PCL. The loan was further secured by a personal guaranty
of the Company's President, J. Marvin Feigenbaum. The third party lender was a
significant creditor of PCL and has agreed to the terms of the PCL Plan. On
January 23, 1997, the Company obtained a new loan from a new third party lender
in the principal amount of $2,000,000. The proceeds of this new loan were used
to repay the remaining balance of the $2,500,000 loan. The new loan bore
interest at 7.5% per annum and was due and payable 60 days from the date of the
loan. The lender also received 5-year Common Stock Purchase Warrants to purchase
100,000 shares of Common Stock of the Company at $11.50 per share. On February
26, 1997, this new loan was repaid. The new loan was secured by a pledge of the
Company's stock ownership in MSI as well as the participation interest referred
to above in the PCL debt. The new third party lender is a significant
stockholder of the Company. The Company repaid the new loan on February 26,
1997. The 100,000 shares underlying the warrants issued to the new lender have
been registered pursuant to a Registration Statement filed with the Securities
and Exchange Commission.
Mr. Mendez, formerly President of MSI, has entered into an employment
agreement with MSI pursuant to which he will be employed at a salary of $182,000
per year. Mr. Mendez also has the right to serve on the Board of Directors of
MSI. Mr. Mendez will also receive options to purchase 10,000 shares of Nu-Tech
Common Stock for every $1,000,000 of annual collectible revenues obtained by MSI
through the acquisition of other businesses by MSI in which Mr. Mendez acted as
the procuring cause. The options to be granted, if any, will bear an exercise
price equal to the fair market value of Nu-Tech's Common Stock at the time of
grant.
ACQUISITION OF BUSINESS ASSETS OF PROMPT MEDICAL BILLING, INC.
On October 21, 1996, the Company, through a newly formed wholly-owned
subsidiary, NTBM Billing Services, Inc. ("NTBM") acquired substantially all of
the medical billing service assets of Prompt Medical Billing, Inc. ("Prompt
Medical"), a privately owned Florida corporation engaged in the medical billing
service business in Miami, Florida. The Company acquired the assets for a total
consideration of $675,000 consisting of $100,000 in cash and 37,504 shares of
restricted common stock. The number of shares may be subject to increase in the
event the fair market value of the shares at the termination of the two year
period is less than $500,000 or in the event that the holders thereof sell the
shares for less than $500,000. All of the consideration paid by the Company has
been placed into escrow for a period of up to two years, to be released upon
attainment of certain performance levels of NTBM. The Company has filed a
registration statement with the Securities and Exchange Commission registering
the 37,504 shares issued to the former shareholders of Prompt Medical for sale.
The escrowed cash consideration is being released from escrow in eight quarterly
installments of $12,500 together with interest. Additionally, NTBM has entered
into a two year $20,000 per annum employment agreement with a former principal
and executive officer of Prompt Medical. NTBM also entered into a consulting
agreement with Health Systems Development Corporation for a term of two years at
approximately $5,000 per month plus commissions on new business brought in by
them.
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<PAGE> 13
OTHER EVENTS
Termination of Clinical Trials Agreement
On August 14, 1995, ABC entered into an agreement (the "Clinical Trials
Agreement") with a research institution (the "Institution") and certain
individuals (the "Principal Investigators") related to the conduct and
performance of certain proprietary research and development activities to be
performed and/or coordinated on a work for hire basis on behalf of ABC by the
Institution. The Clinical Trials Agreement was terminated by the Company in
August 1996 as a result of the Institution's inability to obtain the requisite
number of accruals and the Company has commenced action against the institution
for return of $54,000 representing the balance of an advance made by the
Company. There can be no assurance that the Company will be successful in
reaching agreements with these research institutions or that the clinical trials
will be completed.
Rhode Island Laboratory License
Analytical Biosystems has received approval, effective May 21, 1996, from
the State of Rhode Island Department of Health that its clinical laboratory
license had been expanded to include laboratory testing for routine chemistry,
histopathology and cytology and that the expanded testing approvals had been
added to the CLIA database.
The expansion of the clinical license will allow ABC to provide additional
services to health care providers and to bill third party insurance carriers
under existing CPT codes which are included in these licenses. Management
believes that these changes to its clinical license, and the resultant ability
to utilize existing CPT codes, increases ABC's ability to obtain reimbursement
for its testing procedures.
August 1994 Placement
On August 9, 1994, the Company completed a private offering (the "August
Offering") of its securities to 15 investors for an aggregate of $620,000. The
private placement was intended to comply pursuant to Section 4(2) under the Act
and/or Regulation D promulgated thereunder. The securities sold by the Company
comprised (i) $400,000 principal amount of 7% Promissory Notes due the earlier
of August 1, 1995 or upon the completion of a public offering of Common Stock of
the Company in which the Company receives gross proceeds of not less than $5
million, (ii) 57,143 shares of Common Stock for an aggregate of $200,000, and
(iii) 114,286 Common Stock Purchase Warrants for an aggregate of $20,000; each
Warrant representing the right to purchase one share of Common Stock commencing
September 1, 1995 through July 31, 2001 at an exercise price of $7.00 per share.
The Promissory Notes were repaid in full when the Company completed its public
offering in December 1994.
The proceeds of the August 1994 offering were principally intended to fund
and sustain the Company's operations through December 31, 1994 and to fund
expenses to be incurred in connection with the completed public offering. The
Company has filed a registration statement with the Securities and Exchange
Commission covering the 57,143 shares of Common Stock and the shares of Common
Stock underlying the 114,286 warrants sold in the August 1994 offering.
April 1995 Placement
On April 27, 1995, the Company, in a private transaction effected with
eight investors, sold an aggregate of 120,000 shares of Common Stock and an
aggregate of 45,714 Common Stock Purchase Warrants (the "Warrants") for an
aggregate of $722,285.70. The private placement was intended to comply pursuant
to Section 4(2) under the Act and/or Regulation D promulgated thereunder. The
Warrants are exercisable at $7.00 per share through July 31, 2001, and the
Warrant holders were accorded certain piggyback registration rights with respect
to the shares of Common Stock underlying the Warrants. The Company has filed a
Registration Statement with the Securities and Exchange Commission covering the
120,000 shares of Common Stock issued in connection with the April 1995
placement. The proceeds received by the Company as a result of the aforesaid
transaction were used for additional working capital purposes.
12
<PAGE> 14
July 1995 Placement
On July 14, 1995, the Company, in a private transaction effected with seven
investors, sold an aggregate of 93,335 shares of Common Stock and an aggregate
of 35,408 Common Stock Purchase Warrants (the "Warrants") for an aggregate of
$561,780.40. The private placement was intended to comply pursuant to Section
4(2) under the Act and/or Regulation D promulgated thereunder. The Warrants are
exercisable at $7.00 per share through July 31, 2001, and the Warrant holders
were accorded certain piggyback registration rights with respect to the shares
of Common Stock underlying the Warrants. The proceeds received by the Company as
a result of the aforesaid transaction were to make available to the Company
additional working capital.
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<PAGE> 15
THE OFFERING
<TABLE>
<S> <C>
Common Stock Outstanding Prior to
Offering(1)...................... 6,533,810 shares
Common Stock Outstanding After the
Offering(2)(3)................... 14,209,508 shares
Risk Factors....................... This Offering involves a high degree of risk. See "Risk
Factors."
Use of Proceeds.................... All of the proceeds of this Offering will be paid to the
respective Selling Security Holders and none of the
proceeds will be received by the Company. See "Use of
Proceeds."
Nasdaq SmallCap Symbol............. NTBM
Boston Stock Exchange Symbol....... NTB
</TABLE>
- ---------------
(1) Includes (i) 3,734,713 shares of Common Stock issued through July 18, 1997
upon conversion of 5,077 shares of Preferred Stock and (ii) 351,728 shares
of Common Stock issued between April 30, 1997 and June 13, 1997 upon the
exercise of certain warrants. Does not include (i) 350,000 shares of Common
Stock reserved for issuance under the Company's 1994 Incentive Stock Option
Plan, of which 175,900 shares have been reserved for currently outstanding
options and 174,100 shares are available for future issuances, (ii) 200,000
shares of Common Stock reserved for issuance under the Company's Non-
Executive Director Stock Option Plan of which options to purchase 60,545
shares have been issued and 139,455 shares are reserved for future
issuances, (iii) 13,715 shares reserved for currently outstanding options
under the Company's 1992 Incentive Stock Option Plan which has been
terminated, (iv) any shares of Common Stock to be issued under the MSI Plan,
and (v) 1,159,681 shares reserved for issuance in connection with other
issued and outstanding warrants.
(2) Assumes the conversion of all of the remaining 8,923 shares of Series A
Preferred Stock at a prevailing conversion price of $1.1625 (the average
closing bid price of the Common Stock on the SmallCap Market of the Nasdaq
Stock Market of the 5 days preceding July 18, 1997 less 25%) into 7,675,698
shares of Common Stock. Does not include (1) 350,000 shares of Common Stock
reserved for issuance under the Company's 1994 Incentive Stock Option Plan,
of which 175,900 shares have been reserved for currently outstanding options
and 174,100 shares are available for future issuances, and (ii) 200,000
shares of Common Stock reserved for issuance under the Company's
Non-Executive Director Stock Option Plan of which options to purchase 60,545
shares have been issued and 139,455 shares are reserved for future
issuances, (iii) 13,715 shares reserved for currently outstanding options
under the Company's 1992 Incentive Stock Option Plan which has been
terminated; (iv) any shares of Common Stock to be issued under the MSI Plan
and (v) 1,159,681 shares reserved for issuance in connection with other
issued and outstanding options and warrants.
(3) The number of shares of Common Stock issuable upon conversion of the
remaining 8,923 shares of the Preferred Stock has been estimated based upon
a conversion price of $1.1625 per share as of July 18, 1997. The actual
number of shares of Common Stock may be subject to increase or decrease
dependent upon the conversion price in effect at the date of conversion. The
Company's Certificate of Incorporation authorizes the issuance of 12,000,000
shares of Common Stock. In the event that the remaining shares of Preferred
Stock are converted at a conversion price of $1.1625 per share, the Company
would not have available a sufficient number of authorized Common Stock. In
such case the Company would be required to amend its Certificate of
Incorporation to increase the number of shares of Common Stock which it is
authorized to issue. No assurances may be given that such an amendment would
be approved of by the Company's shareholders. See "Risk Factors -- Other
Risks -- Insufficient Number of Shares of Common Stock Available."
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<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected financial data are derived from the consolidated
financial statements of the Company which have been audited by Ernst & Young
LLP, independent auditors. Ernst & Young LLP's report on the consolidated
financial statements for the year ended December 31, 1996, which appears
elsewhere herein, includes a description of an uncertainty with respect to the
Company's ability to continue as a going concern described in Note 1 to the
consolidated financial statements. The financial data for the three months ended
March 31, 1997 and 1996 are derived from the unaudited financial statements. The
unaudited financial statements include all adjustments, consisting of normal
recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the three month period ended March 31, 1997 are
not necessarily indicative of the results that may be expected for the entire
year ended December 31, 1997. The data should be read in conjunction with the
consolidated financial statements, related notes and other financial information
included herein.
The pro forma consolidated statement of operations data for the three
months ended March 31, 1997 and the year ended December 31, 1996 give pro forma
effect to the Company's pending acquisition of a 52.6% majority interest in PCL
(including an indirect majority interest in MSI, which is a wholly-owned
subsidiary of PCL) as if such acquisition had occurred on January 1, 1997 and
1996, respectively, and the pro forma consolidated balance sheet data at March
31, 1997 gives effect to the Company's pending acquisition of a 52.6% majority
interest in PCL as if it had occurred on March 31, 1997. The Company has not
completed its evaluation of the carrying value of fixed assets or intangible
assets acquired or debt assumed. The actual allocation of the final purchase
price may be different from that reflected in the pro forma financial
information. Such evaluation is expected to be completed prior to the filing of
the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997.
See the Company's Pro Forma Consolidated Financial Information (Unaudited)
appearing elsewhere herein.
<TABLE>
<CAPTION>
PRO FORMA THREE MONTHS PRO FORMA
THREE MONTHS ENDED MARCH 31, YEAR ENDED YEAR ENDED DECEMBER 31,
ENDED MARCH 31, ---------------- DECEMBER 31, ---------------------------
1997(1)(2) 1997 1996 1996(1)(3) 1996 1995 1994
--------------- ------- ------ ------------ ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................... $ 16,375 $ 1,943 $ 24 $ 76,031 $ 1,065 $ 164 $ 214
Cost of revenues........................... 12,927 1,542 55 54,084 1,278 211 200
--------- ------- ------ -------- ------- ------- -------
Gross profit (deficiency).................. 3,448 401 (31) 21,947 (213) (47) 14
Total operating expenses................... 17,553 1,207 739 53,833 5,662 2,167 1,364
--------- ------- ------ -------- ------- ------- -------
Operating income (loss).................... (14,105) (806) (770) (31,886) (5,875) (2,214) (1,350)
Net interest income (expense).............. (2,573) (519) 22 (8,127) 102 125 (48)
Loss attributable to minority interest..... 8,541 -- -- 13,517 -- -- --
Other income (expense)..................... (1,342) -- -- (5,446) (2,015) -- 4
--------- ------- ------ -------- ------- ------- -------
Net loss................................... $ (9,479) $(1,325) $ (748) $(31,942) $(7,788) $(2,089) $(1,394)
========= ======= ====== ======== ======= ======= =======
Net loss per share......................... $ (5.08) $ (1.36) $ (.43) $ (17.98) $ (5.66) $ (1.33) $ (2.15)
========= ======= ====== ======== ======= ======= =======
Weighted average common shares
outstanding.............................. 2,193 2,193 1,728 1,961 1,961 1,570 648
========= ======= ====== ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA DECEMBER 31,
MARCH 31, MARCH 31, -------------------------
1997(4)(5) 1997 1996 1995 1994
----------- --------- ------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency)........................................ $ 8,727 $ 410 $(1,667) $1,871 $2,946
Total assets........................................................ 80,521 16,804 22,406 3,819 4,388
Long-term debt...................................................... 40,548 77 811 353 517
Minority interest................................................... 13,517 -- -- -- --
Stockholders' equity................................................ 15,902 15,902 12,762 2,588 2,951
</TABLE>
- ---------------
(1) Excludes the write down of PCL's intangibles of approximately $59.4 million
for the three month pro forma period ended March 31, 1997 and the pro forma
year ended December 31, 1996.
(2) Includes the historical quarter ended March 31, 1997 for Nu-Tech Bio-Med and
MSI and the historical quarter ended February 28, 1997 for PCL.
(3) Includes the historical year ended December 31, 1996 for Nu-Tech Bio-Med and
MSI and the historical year ended February 28, 1997 for PCL.
(4) Includes the historical balance sheet at March 31, 1997 for Nu-Tech Bio-Med
and the historical balance sheet at February 28, 1997 for PCL and MSI.
(5) The historical balance sheet of PCL has been adjusted to reflect the PCL
Plan becoming effective.
15
<PAGE> 17
RISK FACTORS
An investment in the Shares of Common Stock offered hereby involves a high
degree of risk. The following factors, in addition to those discussed elsewhere
in this Prospectus should be considered carefully in evaluating the Company and
its business. An investment in the Shares is suitable only for those investors
who can bear the risk of loss of their entire investment.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Certain statements in this Prospectus, including information set forth in
Nu-Tech's reports to the Commission filed under the Securities and Exchange Act
of 1934 which are incorporated by reference herein, 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 Prospectus 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 and indirectly Medical Science
Institute) 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, 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 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 March 31, 1997, the Company has incurred an
accumulated deficit of approximately $22,989,000. For the fiscal years ended
December 31, 1996, 1995 and 1994, and the three months ended March 31, 1997, the
Company incurred net losses of approximately $7,788,000, $2,089,000, $1,394,000
and $1,325,000, respectively. The amount of stockholders equity at March 31,
1997 was approximately $15,902,000. The amount of its working capital at March
31, 1997 was approximately $410,000. It is anticipated that the Company will
continue to incur losses until such
16
<PAGE> 18
time, if ever, that ABC and 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 contains an explanatory paragraph
that there are certain conditions that raise substantial doubt about the ability
to continue as a going concern. See Consolidated Financial Statements and Notes
thereto of Nu-Tech.
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. See Consolidated Financial Statements and Notes thereto of PCL.
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.
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. 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.
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
17
<PAGE> 19
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. See "General Business Developments Within Most Recent Fiscal Year --
Proposed Physicians Clinical Laboratory Acquisition" and "Acquisition and
Disposition of Medical Science Institute."
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
18
<PAGE> 20
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
19
<PAGE> 21
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.
20
<PAGE> 22
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.
21
<PAGE> 23
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.
22
<PAGE> 24
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
23
<PAGE> 25
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.
24
<PAGE> 26
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 currently has 6,533,810 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 8,923 shares of its Convertible
Preferred Stock issued and outstanding, convertible into approximately 7,675,698
shares of Common Stock as of July 18, 1997.
Additionally, the Company anticipates filing with the Securities and
Exchange Commission a registration statement to register for sale an additional
563,714 shares of Common Stock of the Company which shares may be issued in
connection with the exercise of options granted 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 July 18, 1997, an aggregate of 3,734,713 shares of Common Stock
were issued upon conversion of 5,077 shares of Preferred Stock. Based upon an
assumed prevailing conversion price of $1.1625 per share as of July 18, 1997,
the Company would be obligated to issue up to an additional 7,675,698 shares of
Common Stock. The Company is presently authorized to issue 12,000,000 shares of
Common Stock, $.01 par value. As of July 18, 1997, the Company had 6,533,810
shares of its Common Stock issued and outstanding (including 3,734,713 shares of
Common Stock previously issued upon conversion of 5,077 shares of Preferred
Stock). Assuming full conversion of the remaining 8,923 shares of Preferred
Stock at an assumed conversion price of $1.1625 per share, the Company would be
required to issue up to 7,675,698 additional shares of its Common Stock. In view
of the number of shares of Common Stock that are presently issued and
outstanding, the Company would only be able to legally issue up to a maximum of
5,466,190 additional shares and, therefore, under the provisions of its
Certificate of Incorporation, does not presently have a sufficient number of
authorized and unissued shares to issue upon anticipated future conversions of
the Preferred Stock. The Company anticipates seeking shareholder approval to
amend its certificate of incorporation accordingly. As previously noted, the
Company has 6,533,810 shares of Common Stock issued and outstanding, of which
3,734,713, or 57.2%, 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.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
shares of Common Stock offered hereby.
LEGAL PROCEEDINGS
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)). The complaint alleges that the Company and the other
defendants
25
<PAGE> 27
violated Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange
Act") and Section 349 of the General Business Law of the State of New York (the
"GBL"). The claims against the Company under the Exchange Act and the GBL are
purportedly based on allegations that the Company knew of and failed to
disclose, among other things, unlawful trading activity in the Company's
securities by the other defendants named in the action. The complaint seeks
compensatory damages in an unstated amount, seeks to enjoin the Company from
registering certain Series A Convertible Preferred Stock until the determination
of the action, and seeks reasonable attorneys' and expert fees as well as treble
and punitive damages.
The Company believes that the claims are without merit, and that it has
good defenses which it will assert at the appropriate time. The action is
currently in its preliminary stages. An answer has not as yet been interposed
and the Company intends to move to dismiss the complaint on alternate legal
grounds including the failure to state a cause of action.
VOTING SECURITIES AND SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is certain information as of July 18, 1997 with respect to
the ownership of Common Stock by (i) the persons (including any "group" as that
term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended), known by the Company to be the beneficial owner of more than five
percent of any class of the Company's voting securities, (ii) each director and
each officer, and (iii) directors and executive officers as a group. Except to
the extent indicated in the footnotes to the following table, each of the
individuals listed below possesses sole voting power with respect to the
securities listed opposite such individual's name.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT OF AND NATURE OF PERCENTAGE
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
- ---------------------------------------------------------- ----------------------- ----------
<S> <C> <C>
J. Marvin Feigenbaum...................................... 745,316(1) 10.4%
55 Access Road
Warwick, RI 02886
Edmond E. Charrette, M.D. ................................ 19,975(2) *
55 Access Road
Warwick, RI 02886
Leonard Green............................................. 13,309(3) *
55 Access Road
Warwick, RI 02886
David A. Sterling......................................... 14,809(3) *
55 Access Road
Warwick, RI 02886
Chriss W. Street.......................................... 10,309(4) *
Chriss Street & Company
1111 Bayside Drive Suite 100
Corona del Mar, CA 92625
Robert B. Fagenson........................................ 10,309(4) *
19 Rector Street
New York, NY 10006
Buchanan Fund Limited..................................... 336,488(5) 5.1%
3 St. James's Square
London SW1Y 4JU
England
Buchanan Partners Limited................................. 336,488(6) 5.1%
3 St. James's Square
London SW1Y 4JU
England
All Officers and Directors as
a Group (6 persons in number)........................... 814,027(1)(2)(3)(4) 11.3%
</TABLE>
26
<PAGE> 28
- ---------------
* Less than 1%.
(1) Includes (i) 9,999 shares of Common Stock owned by Mr. Feigenbaum; (ii)
45,316 shares of Common Stock held in a trust for the benefit of a minor
child of Mr. Feigenbaum, as to which shares Mr. Feigenbaum disclaims
beneficial ownership; (iii) 54,500 options owned by the Feigenbaum
Foundation, as to which options Mr. Feigenbaum disclaims a beneficial
interest in; and (iv) options and warrants to purchase an aggregate of
595,500 shares of Common Stock.
(2) Includes (i) 3,809 shares of Common Stock; (ii) presently exercisable
options to purchase 2,857 shares of Common Stock; and (iii) options to
purchase 13,309 shares of Common Stock granted under the Company's
Non-Employee Director Plan.
(3) Includes options to purchase 13,309 shares of Common Stock under the
Company's Non-Employee Director Plan.
(4) Includes options to purchase 10,309 shares of Common Stock under the
Company's Non-Employee Director Plan.
(5) Includes 168,244 shares of the Company's Common Stock owned of record by
Buchanan Partners Limited according to a Schedule 13D received by the
Company on June 30, 1997.
(6) Includes 168,244 shares of the Company's Common Stock owned of record by
Buchanan Fund Limited according to a Schedule 13D received by the Company on
June 30, 1997.
27
<PAGE> 29
SELLING SECURITY HOLDERS
The following table sets forth the number of shares of Common Stock
beneficially owned by each of the Selling Shareholders on July 18, 1997 (the
"Shares"), the number of Shares covered by this Prospectus and the amount and
percentage ownership of each Selling Shareholder after the offering of the
Common Stock offered hereby assuming all the shares covered by this Prospectus
are sold by the Selling Shareholders. Except as otherwise indicated by footnote
below, none of the Selling Shareholders has had any position, office or other
material relationship with the Company within the past three years other than as
a result of the ownership of the Shares or other securities of the Company.
<TABLE>
<CAPTION>
SHARES OF
SHARES OF SHARES OF COMMON STOCK
COMMON SERIES A ISSUABLE
STOCK PREFERRED UPON PERCENTAGE
OWNED STOCK OWNED CONVERSION OF SHARES OF SHARES
BENEFICIALLY BENEFICIALLY SERIES A OWNED OWNED
AND OF AND OF PREFERRED SHARES AFTER AFTER
NAME OF SECURITY HOLDER RECORD(1) RECORD(2) STOCK(3) OFFERED(4) OFFERING OFFERING(5)
- ------------------------------ ------------ ----------- ------------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Buchanan Fund Ltd............. 168,244 0 0 168,244 0 0
Buchanan Partners, Ltd........ 168,244 0 0 168,244 0 0
Mifal Klita................... 141,750 800 688,172 829,922 0 0
Vermont Organization for
Jewish
Education-Lubavitch......... 141,750 300 258,065 399,815 0 0
Milton Partners............... 0 1,000 860,215 860,215 0 0
Citra Trading Corp............ 106,312 150 129,032 235,344 0 0
Yisroel Goldstein............. 35,437 50 43,011 78,448 0 0
Champion Partners............. 42,525 60 51,613 94,138 0 0
Israel Daniel Levy............ 77,962 110 94,624 172,586 0 0
Agudath Shalom Banaich........ 141,750 800 688,172 829,922 0 0
Avraham Cohen................. 56,700 80 68,817 125,517 0 0
Bishop Merchant Group Ltd..... 0 200 172,043 172,043 0 0
BMD Partners, a California
General Partnership......... 274,715 1,626 1,398,710 1,673,425 0 0
Albert Yanni.................. 106,312 100 86,022 192,334 0 0
Futures Brokerage Inc.(6)..... 141,750 100 86,022 227,772 0 0
Blumfield Investment
Inc.(7)..................... 53,156 75 64,516 117,672 0 0
Fanny Brach................... 141,750 100 86,022 227,772 0 0
Wayne Invest & Trade
Inc.(7)..................... 227,771 300 258,065 485,836 0 0
UFH Endowment Ltd............. 235,344 0 0 235,344 0 0
United International Insurance
Company(8).................. 0 75 64,516 64,516 0 0
Nachum Stein(8)............... 17,719 0 0 17,719 0 0
Kentucky National Insurance
Company(8).................. 0 75 64,516 64,516 0 0
Rutgers Casualty Insurance
Company(8).................. 53,156 0 0 53,156 0 0
F&N Associates(8)............. 35,437 0 0 35,437 0 0
Eli Itzinger.................. 0 200 172,043 172,043 0 0
Melvin Feigenbaum............. 35,437 50 43,011 78,448 0 0
Starr Securities, Inc.(9)..... 257,471 0 0 257,471 0 0
Stewart J. Kahn............... 0 100 86,022 86,022 0 0
Miklos Weinberger............. 0 100 86,022 86,022 0 0
Sholom Steinberg.............. 71,868 95 81,720 153,588 0 0
Refco Capital Markets,
Inc. ....................... 281,904 667 573,763 855,667 0 0
Red Rock Management
Corp.(6)...................... 129,032 150 129,032 258,064 0 0
</TABLE>
28
<PAGE> 30
<TABLE>
<CAPTION>
SHARES OF
SHARES OF SHARES OF COMMON STOCK
COMMON SERIES A ISSUABLE PERCENTAGE
STOCK PREFERRED UPON SHARES OF SHARES
OWNED STOCK OWNED CONVERSION OF OWNED OWNED
BENEFICIALLY BENEFICIALLY SERIES A AFTER AFTER
AND OF AND OF PREFERRED SHARES OFFERING OFFERING(5)
NAME OF SECURITY HOLDER RECORD(1) RECORD(2) STOCK(3) OFFERED(4) - -
- ------------------------------ ------- ----- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Granat........................ 260,171 250 215,054 475,225 0 0
Gorra Holding c/o Josef
Goldenberg.................... 70,875 400 344,086 414,961 0 0
Barras Inv.
c/o Shoschana Bornstein..... 0 500 430,108 430,108 0 0
J&B Associates Profit Sharing
Plan & Trust................ 0 300 258,065 258,065 0 0
Maslo Fund Ltd................ 260,171 110 94,624 354,795 0 0
</TABLE>
- ---------------
(1) Represents Shares of Common Stock of the Company acquired prior to July 18,
1997 as a result of conversion of shares of Preferred Stock pursuant to the
prevailing conversion price at the time of such conversion.
(2) Represents Shares of Preferred Stock not converted as of July 18, 1997.
(3) Represents shares of Common Stock issuable upon conversion of shares of
Preferred Stock at a conversion price of $1.1625, representing the average
closing bid price for the Common Stock of the Company on the SmallCap Market
of the Nasdaq Stock Market for the five days preceding July 18, 1997, less
25%. The actual number of shares of Common Stock may be subject to increase
or decrease dependent upon the conversion price if effect at the date of
conversion of the Preferred Stock.
(4) Additional shares of Common Stock may be issued from time to time as a
result of the conversion of any remaining unconverted shares of Series A
Preferred Stock. To the extent additional shares of Common Stock may be
issued to a selling shareholder as a result of additional conversions the
number of shares of Common Stock under the heading "Shares Offered" will be
increased to reflect the offer of such additional shares.
(5) Does not include (i) 350,000 shares of Common Stock reserved for issuance
under the Company's 1994 incentive Stock Option Plan, of which 175,900
shares have been reserved for currently outstanding options and 174,100
shares are available for future issuances, (ii) 200,000 shares of Common
Stock reserved for issuance under the Company's Non-Executive Director Stock
Option Plan of which options to purchase 60,545 shares have been issued and
139,455 shares are reserved for future issuances, (iii) 13,715 shares
reserved for currently outstanding options and under the Company's 1992
Incentive Stock Option Plan which has been terminated; (iv) any shares of
Common Stock to be issued under the MSI Plan and (v) 1,159,681 shares
reserved for issuance in connection with other options and warrants.
(6) Simcha Hecht is the Attorney-in-Fact for both Futures Brokerage, Inc. and
Red Rock Management Corp. Each entity has specifically disclaimed any
ownership or interest of shares owned by the other entity. The ownership of
Common Stock of each of these entities combined does not exceed 4.99% of the
Company's issued and outstanding Common Stock.
(7) Mosi Kraus is the Attorney-in-Fact for both Blumfield Investments, Inc. and
Wayne Invest & Trade, Inc. Each entity has specifically disclaimed any
ownership or interest of shares owned by the other entity. The ownership of
Common Stock of each of these entities combined does not exceed 4.99% of the
Company's issued and outstanding Common Stock.
(8) Nachum Stein is an individual investor as well as the General Partner of F&N
Associates and the Chairman of United International Ins. Co., Kentucky
National Ins. Co. and Rutgers Casualty Ins. Co. Each entity and Mr. Stein
individually has specifically disclaimed any ownership or interest in the
shares owned by any of the other entities and Mr. Stein. The ownership of
Common Stock of each of these entities combined does not exceed 4.99% of the
Company's issued and outstanding Common Stock.
(9) Starr Securities, Inc. is a registered broker-dealer which may, from time to
time, be a "market maker" in the Company's Common Stock.
Each of the above-named Selling Shareholders have represented to the
Company that they are not part of any "group" as defined in Rule 13d-5 under the
General Rules and Regulations under the Securities Exchange Act of 1934, as
amended, and each has represented that he or it is the sole beneficial owner of
Common Stock of the Company registered in his or its name or issuable upon
conversion of additional shares of Preferred Stock.
29
<PAGE> 31
DESCRIPTION OF SECURITIES
The Company's authorized capitalization consists of 12,000,000 shares of
Common Stock, par value $.01 per share and 1,000,000 shares of Preferred Stock,
par value $.01 per share, which may be issued in one or more series. As of the
date hereof, there were 6,533,810 shares of Common Stock outstanding and 8,923
shares of Series A Preferred Stock outstanding. No other shares or classes of
Preferred Stock have been authorized or issued. The following summary
description of the Common Stock and Preferred Stock are qualified in their
entirety by reference to the Company's Articles of Incorporation.
COMMON STOCK
Each share of Common Stock entitles its holder to one non-cumulative vote
per share and, the holders of more than fifty percent (50%) of the shares voting
for the election of directors can elect all the directors if they choose to do
so, and in such event the holders of the remaining shares will not be able to
elect a single director. Holders of shares of Common Stock are entitled to
receive such dividends as the Board of Directors may, from time to time, declare
out of Company funds legally available for the payment of dividends. Upon any
liquidation, dissolution or winding up the Company, holders of shares of Common
Stock are entitled to receive pro rata all of the assets of the Company
available for distribution to shareholders after the satisfaction of the
liquidation preference of the Preferred Stockholders.
Shareholders do not have any pre-emptive rights to subscribe for or
purchase any stock, warrants or other securities of the Company. The Common
Stock is not convertible or redeemable. Neither the Company's Certificate of
Incorporation nor its By-Laws provide for pre-emptive rights.
PREFERRED STOCK
General
The Preferred Stock may be issued in one or more series, to be determined
and to bear such title or designation as may be fixed by resolution of the Board
of Directors prior to the issuance of any shares thereof. Each series of the
Preferred Stock will have such voting powers (including, if determined by the
Board of Directors, no voting rights), preferences, and other rights as
determined by the Board of Directors, with such qualifications, limitations or
restrictions as may be stated in the resolutions of the Board of Directors
adopted prior to the issuance of any shares of such series of Preferred Stock.
Because the terms of each series of Preferred Stock may be fixed by the
Company's Board of Directors without shareholder action, the Preferred Stock
could be issued with terms calculated to defeat a proposed takeover of the
Company, or to make the removal of the Company's management more difficult.
Under certain circumstances, this could have the effect of decreasing the market
price of the Common Stock. Management of the Company is not aware of any such
threatened transaction to obtain control of the Company.
SERIES A CONVERTIBLE PREFERRED STOCK
The Company filed a Certificate of Designation (the "Certificate of
Designation") on October 23, 1996 which was subsequently amended on November 20,
1996 with the Secretary of State of Delaware designating 14,000 shares of
Preferred Stock as "Series A Convertible Preferred Stock." The following is a
summary of the rights, preferences and privileges of the Preferred Stock.
Dividends
Holders of shares of the Preferred Stock are not to be entitled to receive
dividends in cash or otherwise.
Liquidation Rights
In case of the voluntary or involuntary liquidation, dissolution or winding
up of the Company, holders of shares of Preferred Stock are entitled to receive
the liquidation price of $1,000 per share before any payment
30
<PAGE> 32
or distribution is made to the holders of the Common Stock or any other series
or class of the Company's stock hereafter issued which ranks junior as to
liquidation rights to the Preferred Stock. The holders of the shares of the
Preferred Stock will not be entitled to receive the liquidation price of such
shares until the liquidation price of any other series or class of the Company's
stock hereafter issued which ranks senior as to the liquidation rights to the
Preferred Stock ("senior liquidation stock") has been paid in full. There is no
prohibition upon the Company's creation of senior liquidation stock. See "Voting
Rights." The holders of Preferred Stock and all series or classes of the
Company's stock hereafter issued which rank on a parity as to liquidation rights
with the Preferred Stock ("parity liquidation stock") are entitled to share
ratably, in accordance with the respective preferential amounts payable on such
stock, in any distribution (after payment of the liquidation price of the senior
liquidation stock) which is not sufficient to pay in full the aggregate of the
amounts payable thereon. After payment in full of the liquidation price of the
shares of the Preferred Stock, the holders of such shares will not be entitled
to any further participation in any distribution of assets by the Company.
Neither a consolidation or merger of the Company with another corporation, nor a
sale or transfer of all or part of the Company's assets for cash, securities or
other property will be considered a liquidation, dissolution or winding up of
the Company.
Voting Rights
The holders of the Preferred Stock will not be entitled to voting rights
except as required by Delaware Corporate Law.
Redemption
The Preferred Stock is not redeemable by the Company at any time.
Conversion Rights
Commencing on the 45th day following the closing of the Offering Period,
and on the 75th and 105th days following the closing of the Offering Period, on
each such date one-third of the Shares sold in the Offering will be convertible
into Common Stock, at the option of the holder. Each share of Preferred Stock
will be convertible into such number of shares of Common Stock (the "Conversion
Shares") as shall equal $1,000 divided by a Conversion Rate equal to the lesser
of (i) 75% of the average closing bid of the Common Stock of the SmallCap Market
of the Nasdaq Stock Market for the 5 trading days immediately preceding the date
of the holder's notice of conversion or (ii) $17.50, subject to adjustment as
described below. No fractional shares will be issued and, in lieu of any
fractional share, cash in an amount based on the then current market price,
determined as provided in the Certificate of Designation, of the Common Stock
will be paid.
The conversion rate of the Preferred Stock is subject to adjustment in
certain circumstances, including the payment of a stock dividend on shares of
the Common Stock, combinations and subdivisions of the Common Stock, certain
reclassifications of the Common Stock, and certain cash dividends and
distributions of evidences of indebtedness or assets to holders of certain of
the Company's capital stock. No adjustment in the conversion rate is required
unless it would result in at least 1% increase or decrease in the conversion
rate; however, any adjustment not made is carried forward. No adjustment need be
made in the conversion rate in any of the foregoing cases if the holders of the
Preferred Stock participate in the distribution or transaction on a basis and
with notice that the Board of Directors determines to be fair to the holders of
the Preferred Stock.
In case of consolidation or merger of the Company with any other
corporation (other than a wholly-owned subsidiary), or in case of sale or
transfer of all or substantially all of the assets of the Company, or in the
case of any share exchange whereby the Common Stock is converted into other
securities or property, the Company will be required to make appropriate
provisions so that the holder of each share of Preferred Stock then outstanding
will have the right thereafter to convert such share of Preferred Stock into the
kind and amount of shares of stock and other securities and property receivable
upon such consolidation, merger, sale, transfer or share exchange by a holder of
the number of shares of Common Stock into which such share of Preferred Stock
might have been converted immediately prior to such consolidation, merger, sale,
transfer or share exchange.
31
<PAGE> 33
Through July 18, 1997, an aggregate of 3,734,713 shares of Common Stock
were issued upon conversion of 5,077 shares of Preferred Stock. Based upon an
assumed prevailing conversion price of $1.1625 per share as of July 18, 1997,
the Company would be obligated to issue up to an additional 7,675,698 shares of
Common Stock. The Company is presently authorized to issue 12,000,000 shares of
Common Stock, $.01 par value. As of July 18, 1997, the Company had 6,533,810
shares of its Common Stock issued and outstanding (including 3,734,713 shares of
Common Stock previously issued upon conversion of 5,077 shares of Preferred
Stock). Assuming full conversion of the remaining 8,923 shares of Preferred
Stock at an assumed conversion price of $1.1625 per share, the Company would be
required to issue up to 7,675,698 additional shares of its Common Stock. In view
of the number of shares of Common Stock that are presently issued and
outstanding, the Company would only be able to legally issue up to a maximum of
5,466,190 additional shares and, therefore, under the provisions of its
Certificate of Incorporation, does not presently have a sufficient number of
authorized and unissued shares to issue upon anticipated future conversions of
the Preferred Stock. The Company anticipates seeking shareholder approval to
amend its certificate of incorporation accordingly. As previously noted, the
Company has 6,533,810 shares of Common Stock issued and outstanding, of which
3,734,713, or 57.2%, 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.
Mandatory Conversion
In the event that less than all of the Shares of Preferred Stock are not
converted prior to the date which is 270 days from the closing of the Offering
Period, then the Company has the right, upon 30 days prior notice to cause all
remaining outstanding Shares of Preferred Stock to be mandatorily converted into
Common Stock at the then applicable conversion rate.
Registration Rights and Adjustment
Under the terms of the Preferred Stock, and a registration rights agreement
entered into among the Company and the holders of the Preferred Stock, the
Company agreed that it would use its best efforts to file with, and have
declared effective by, the Commission a registration statement with respect to
the shares of Common Stock underlying the Preferred Stock within 120 days of
receipt of a demand notice from the holders of the Preferred Stock. Under the
terms of the Preferred Stock, in the event the registration statement is not
declared effective within such 120 day period, the then applicable conversion
price would be reduced by 10%. In addition, for each 30 day period beyond the
120 period that the registration statement is not declared effective, the then
applicable conversion price is subject to further reduction of 2%, up to an
aggregate of 12%.
The Company had heretofore filed, and in February 1997 withdrew, a
registration statement relating to the shares of its Common Stock issuable upon
conversion of the Preferred Stock. At the time of such filing, the Company had
not received a valid written demand by a majority of the holders of the
Preferred Stock to require it to proceed with such registration statement. At
the time such registration statement was withdrawn, and through as of the date
hereof, the Company likewise did not receive a written demand by the holders of
a majority of Preferred Stock to file a registration statement. The filing of a
registration statement of which this Prospectus is a part has been in effect by
the Company without having a requisite demand made upon it.
No Sinking Fund
The Company is not required to provide for the retirement or redemption of
the Preferred Stock through the operation of a sinking fund.
Other Provisions
The shares of Preferred Stock, when issued, will be duly and validly
issued, fully paid and nonassessable. The holders of the shares of the Preferred
Stock have no pre-emptive rights with respect to any shares of
32
<PAGE> 34
capital stock of the Company or any other securities of the Company convertible
into or carrying rights or options to purchase any such shares.
Transfer Agent
The transfer agent for the Company's Common Stock is American Stock
Transfer and Trust Company, 40 Wall Street, New York, NY 10004. The Company acts
as its own transfer agent for the Preferred Stock.
PLAN OF DISTRIBUTION
The Shares of Common Stock underlying the Preferred Stock issuable to
Selling Security Holders upon exercise thereof, may be offered and sold from
time to time by the Selling Stockholders as market conditions permit in the
over-the-counter market, or otherwise, at prices and terms then prevailing or at
prices relating to the then-current market price, or in negotiated transactions.
The Shares offered hereby may be sold by one or more of the following methods,
without limitation: (a) a block trade in which a broker or dealer so engaged
will attempt to sell the shares as agent but may position and resell a portion
of the block as principal to facilitate the transaction; (b) purchases by a
broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this Prospectus; (c) ordinary brokerage transactions and
transactions in which the broker solicits purchasers; and (d) face-to-face
transactions between sellers and purchasers without a broker-dealer. In
effecting sales, brokers or dealers engaged by the Selling Stockholder may
arrange for other brokers or dealers to participate. Such brokers or dealers may
receive commissions or discounts from the Selling Stockholders in amounts to be
negotiated immediately prior to the sale. Such brokers and dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933, in connection with such sales.
Starr Securities, Inc. ("Starr") is a Selling Security Holder. Starr is a
registered broker-dealer, and is a market maker in the Common Stock of the
Company. Under certain circumstances, Rule 10b.6 promulgated under the
Securities Exchange Act of 1934 may preclude Starr from making a market in any
of the Company's securities for up to nine business days prior to the sale of
the Shares by Starr pursuant to this Prospectus and continuing until Starr has
completed the distribution of its Shares. The cessation of market making
activities by Starr during the distribution of the Shares hereby may have a
material adverse effect on the market, including price, for the Common Stock.
REPORTS TO SHAREHOLDERS
The Company distributes annual reports to its stockholders, including
consolidated financial statements examined and reported on by independent
auditors, and will provide such other reports as management may deem necessary
or appropriate to keep stockholders informed of the Company's operations.
LEGAL MATTERS
The legality of the offering of the Shares will be passed upon for the
Company by Camhy Karlinsky & Stein LLP, 1740 Broadway, New York, New York 10019.
EXPERTS
The consolidated financial statements of Nu-Tech Bio-Med, Inc. at December
31, 1996 and 1995, and for the years then ended, appearing in this Prospectus
and Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon (which contains an uncertainty
paragraph with respect to Nu-Tech's ability to continue as a going concern
mentioned in Note 1 to the consolidated financial statements) appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
33
<PAGE> 35
The consolidated financial statements of Physicians Clinical Laboratory,
Inc. at February 28, 1997, and for the year then ended, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon (which contains an
uncertainty paragraph with respect to PCL's ability to continue as a going
concern mentioned in Note 1 to the consolidated financial statements) appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Physicians Clinical Laboratory,
Inc. for the fiscal years ended February 28 (29), 1995 and 1996 appearing in
this Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as set forth in their report thereon (which contains an uncertainty
paragraph with respect to PCL's ability to continue as a going concern mentioned
in Notes 1 and 2 to the Consolidated Financial Statements of PCL) appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing in giving said
report.
ADDITIONAL INFORMATION
The Company filed a Registration Statement under the Act with the
Securities and Exchange Commission (the "Commission"), with respect to the
securities offered by this Prospectus. This Prospectus does not contain all of
the information set forth in the Registration Statement. For further information
with respect to the Company and such securities, reference is made to the
Registration Statement and to the exhibits and schedules filed therewith. Each
statement made in this Prospectus referring to a document filed as an exhibit to
the Registration Statement is qualified by reference to the exhibit for a
complete statement of its terms and conditions. The Registration Statement,
including exhibits thereto, may be inspected without charge to anyone at the
office of the Commission, and copies of all or any part thereof may be obtained
from the Commission's principal office in Washington, D.C. upon payment of the
Commission's charge for copying.
34
<PAGE> 36
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Nu-Tech Bio Med, Inc.
Report of Independent Auditors...................................................... F-2
Consolidated Balance Sheets, December 31, 1996 and 1995............................. F-3
Consolidated Statements of Operations, Years Ended December 31, 1996 and 1995....... F-4
Consolidated Statements of Cash Flows, Years Ended December 31, 1996 and 1995....... F-5
Consolidated Statements of Stockholders' Equity, Years Ended December 31, 1996 and
1995............................................................................. F-6
Notes to Consolidated Financial Statements.......................................... F-7
Condensed Consolidated Balance Sheets, December 31, 1996, March 31, 1997
(Unaudited)...................................................................... F-21
Condensed Consolidated Statements of Operations, Three Month Period Ended March 31,
1997 and 1996 (Unaudited)........................................................ F-22
Condensed Consolidated Statements of Cash Flows, Three Month Period Ended March 31,
1997 and 1996 (Unaudited)........................................................ F-23
Notes to the Condensed Consolidated Financial Statements............................ F-24
Physicians Clinical Laboratories, Inc.
Report of Independent Auditors...................................................... F-28
Report of Independent Public Accountants............................................ F-29
Consolidated Balance Sheets, February 28 (29), 1997, 1996 and 1995.................. F-30
Consolidated Statements of Operations, Fiscal Years Ended February 28 (29), 1997,
1996 and 1995.................................................................... F-31
Consolidated Statements of Cash Flows, Fiscal Years Ended February 28 (29), 1997,
1996 and 1995.................................................................... F-32
Consolidated Statements of Stockholders' Equity, Fiscal Years Ended February 28
(29), 1997, 1996 and 1995........................................................ F-33
Notes to Consolidated Financial Statements.......................................... F-34
Pro Forma Consolidated Financial Information
Unaudited Pro Forma Consolidated Statement of Operations, Three Months Ended March
31, 1997 and the Year Ended December 31, 1996.................................... F-55
Unaudited Pro Forma Consolidated Balance Sheet, March 31, 1997...................... F-56
</TABLE>
F-1
<PAGE> 37
REPORT OF INDEPENDENT AUDITORS
To the Stockholders
Nu-Tech Bio-Med, Inc.
We have audited the accompanying consolidated balance sheets of Nu-Tech
Bio-Med, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows, for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Nu-Tech Bio-Med, Inc. at December 31, 1996 and 1995, and the consolidated
results of their operations, stockholders' equity and cash flows for the years
then ended, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that Nu-Tech Bio-Med., Inc. will continue as a going concern. As more
fully described in Note 1, the Company has expended cash in excess of cash
generated from operations and has not achieved sufficient revenues to support
future operations and has a working capital deficiency. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are discussed in Note 1. 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 that may result from the outcome
of this uncertainty.
ERNST & YOUNG LLP
Providence, Rhode Island
March 12, 1997
F-2
<PAGE> 38
NU-TECH BIO-MED, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................ $ 1,690,538 $ 2,538,002
Accounts receivable (net of allowance for doubtful accounts of
approximately $2,823,400 and $16,700 at December 31, 1996 and 1995,
respectively).......................................................... 1,751,230 67,480
Inventory................................................................ 219,428 12,219
Prepaid expenses and other current assets................................ 82,801 130,135
----------- ------------
Total current assets.............................................. 3,743,997 2,747,836
Investment in senior debt of Physicians Clinical Laboratory, Inc. ......... 10,000,000 --
Less distribution received................................................. (575,561) --
----------- ------------
Net investment in Physicians Clinical Laboratory, Inc. .................. 9,424,439 --
Equipment and Leasehold Improvements, net.................................. 1,766,842 471,517
Goodwill (net of accumulated amortization of approximately $833,200 and
$441,200 at December 31, 1996 and 1995, respectively).................... 6,352,860 308,816
Patents (net of accumulated amortization of approximately $73,700 at
December 31, 1995)....................................................... -- 141,596
Deferred acquisition costs................................................. 1,028,524 129,846
Deposits................................................................... 89,104 18,964
----------- ------------
Total assets...................................................... $ 22,405,766 $ 3,818,575
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable......................................................... $ 1,580,797 $ 109,815
Accrued expenses......................................................... 1,286,035 451,490
Contract payable......................................................... 65,571 105,571
Current portion of long-term debt........................................ 2,263,990 197,246
Current portion of capitalized lease obligations......................... 214,270 13,050
----------- ------------
Total current liabilities......................................... 5,410,663 877,172
Long-Term Debt............................................................. 338,672 319,521
Capitalized Lease Obligations.............................................. 471,984 33,624
Liabilities to be Paid with Common Stock................................... 3,422,500 --
----------- ------------
Total liabilities................................................. 9,643,819 1,230,317
Commitments and Contingencies
Stockholders' Equity:
Series A convertible preferred stock, $.01 par value; 1,000,000 shares
authorized, 14,000 issued and outstanding at December 31, 1996
(liquidation preference of $14,000,000 at December 31, 1996)............. 140
Common stock, $.01 par value; 12,000,000 shares authorized, 2,089,652 and
1,742,148 shares issued and outstanding at December 31, 1996 and 1995,
respectively............................................................. 20,897 17,422
Capital in excess of par value............................................. 34,501,337 17,544,715
Unvested common stock grant................................................ -- (946,107)
Deferred consulting expense................................................ (96,250) (151,250)
Accumulated deficit........................................................ (21,664,177) (13,876,522)
----------- ------------
Total stockholders' equity........................................ 12,761,947 2,588,258
----------- ------------
Total liabilities and stockholders' equity........................ $ 22,405,766 $ 3,818,575
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 39
NU-TECH BIO-MED, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Assay sales, net.............................................. $ 115,397 $ 161,701
Laboratory revenues, net...................................... 836,143 --
Medical billing services revenues............................. 113,932 --
Other......................................................... -- 2,100
----------- -----------
Total revenues, net................................... 1,065,472 163,801
Operating Costs:
Laboratory expenses........................................... 1,188,564 211,377
Medical billing services expenses............................. 89,314 --
Selling, general and administrative expenses.................. 3,689,588 2,089,778
Public relations expenses..................................... 1,882,000 --
Research and development expenses............................. 90,903 77,066
----------- -----------
Total operating costs................................. 6,940,369 2,378,221
----------- -----------
Operating Loss.................................................. (5,874,897) (2,214,420)
Other Income (Expense):
Finance expense............................................... (1,422,500) --
Write-off of goodwill and patents............................. (372,864) --
Deferred acquisition assets charged off....................... (218,914) --
Investment and interest income................................ 161,871 158,977
Interest expense.............................................. (60,351) (33,514)
----------- -----------
Total other income (expense).......................... (1,912,758) 125,463
----------- -----------
Net Loss........................................................ $(7,787,655) $(2,088,957)
=========== ===========
Net Loss Per Common Share....................................... $ (5.66) $ (1.33)
=========== ===========
Weighted Average Common Shares Outstanding...................... 1,961,078 1,570,498
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 40
NU-TECH BIO-MED, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995
------------ -----------
<S> <C> <C>
Operating Activities:
Net loss......................................................... $ (7,787,655) $(2,088,957)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................. 403,199 124,331
Provision for bad debts........................................ 56,799 --
Finance expense relating to issuance of common stock........... 1,422,500 --
Common stock and warrants charged to compensation.............. 1,265,124 535,093
Warrants issued to consultants as compensation, net............ 700,800 --
Write-off of goodwill and patents.............................. 372,864 --
Deferred acquisition costs charged off......................... 218,914 --
Changes in assets and liabilities:
Accounts receivable......................................... 337,565 (37,630)
Prepaids and other current assets........................... 141,861 (89,034)
Inventory................................................... (56,292) --
Accounts payable and accrued expenses....................... 765,228 (61,213)
----------- -----------
Net cash used in operating activities............................ (2,159,093) (1,617,410)
Investing Activities:
Capital expenditures............................................. (19,403) (503,278)
Acquisition of Medical Science Institute......................... (4,951,948) --
Acquisition of assets of Prompt Medical.......................... (179,891) --
Investment in senior debt of Physicians Clinical Laboratory,
Inc. .......................................................... (10,000,000) --
Cash distribution received on investment in senior debt of
Physicians Clinical Laboratory, Inc. .......................... 575,561 --
Deferred acquisition costs....................................... (519,842) (129,846)
----------- -----------
Net cash used in investing activities............................ (15,095,523) (633,124)
Financing Activities:
Proceeds from issuance of notes payable.......................... 2,500,000 --
Repayment of notes payable....................................... (755,239) (192,149)
Repayment of contract payable.................................... (40,000) --
Repayment of capitalized lease obligations....................... (28,775) --
Proceeds from sale of common stock............................... 2,596,166 1,177,496
Proceeds from sale of Series A Convertible preferred stock....... 12,135,000 --
----------- -----------
Net Cash Provided by Financing Activities........................ 16,407,152 985,347
----------- -----------
Net Decrease in Cash and Cash Equivalents........................ (847,464) (1,265,187)
Cash and Cash Equivalents at Beginning of Year................... 2,538,002 3,803,189
----------- -----------
Cash and Cash Equivalents at End of Year......................... $ 1,690,538 $ 2,538,002
=========== ===========
Supplemental Disclosure of Cash Flow Information: Interest
Paid........................................................... $ 59,537 $ 33,514
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 41
NU-TECH BIO-MED, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF SERIES A
SHARES OF CONVERTIBLE COMMON
SERIES A PREFERRED NUMBER OF STOCK UNVESTED
CONVERTIBLE STOCK AT SHARES OF AT $.01 CAPITAL IN COMMON DEFERRED
PREFERRED $.01 PAR COMMON PAR EXCESS OF STOCK CONSULTING
STOCK VALUE STOCK VALUE PAR VALUE GRANT EXPENSE
----------- ----------- --------- ------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1994....... -- $ -- 1,429,128 $14,291 $14,724,150 $ -- $ --
Issuance of unregistered common
stock to investors at $6.00
per share and 45,714 common
stock purchase warrants (net
of issuance costs of
$53,700)...................... -- -- 120,000 1,200 668,586 -- --
Grant of unregistered common
stock to officer at $14.81 per
share......................... -- -- 100,000 1,000 1,480,200 (1,481,200) --
Grants of warrants to consultant
at $7.00 per share............ -- -- -- -- 165,000 -- (165,000)
Issuance of unregistered common
stock to investors at $6.00
per share and 35,408 common
stock purchase warrants (net
of issuance costs of
$54,090)...................... -- -- 93,335 934 506,776 -- --
Other........................... -- -- (315) (3) 3 -- --
Amortization of unvested common
stock grant................... -- -- -- -- -- 535,093 --
Amortization of deferred
consulting expense............ -- -- -- -- -- -- 13,750
Net loss........................ -- -- -- -- -- -- --
------ --- --------- ------- ----------- ----------- --------
Balances, December 31, 1995....... -- -- 1,742,148 17,422 17,544,715 (946,107) (151,250)
Issuance of unregistered common
stock to investors at $11.50
per share (net of cash
issuance costs of $278,834)... -- -- 250,000 2,500 2,593,666 -- --
Grant of warrants to
consultants................... -- -- -- -- 1,243,550 -- --
Amortization and adjustment to
unvested common stock grant... -- -- -- -- (112,765) 876,849 --
Exchange of unvested common
stock grant for warrants...... -- -- -- -- 523,286 69,258 --
Amortization of deferred
consulting expense............ -- -- -- -- -- -- 55,000
Issuance of unregistered Series
A Convertible preferred stock
to investors at $1,000 per
share (net of cash issuance
costs of $1,865,000).......... 14,000 140 -- -- 12,134,860 -- --
Issuance of common stock to
placement agent............... -- -- 60,000 600 (600) -- --
Issuance of common stock for
purchase of Prompt Medical.... -- -- 37,504 375 574,625 -- --
Net loss........................ -- -- -- -- -- -- --
------ --- --------- ------- ----------- ----------- --------
Balances at December 31, 1996..... 14,000 $ 140 2,089,652 $20,897 $34,501,337 $ -- $ (96,250)
------ --- --------- ------- ----------- ----------- --------
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ -------------
<S> <<C> <C>
Balances, December 31, 1994....... $(11,787,565) $ 2,950,876
Issuance of unregistered common
stock to investors at $6.00
per share and 45,714 common
stock purchase warrants (net
of issuance costs of
$53,700)...................... -- 669,786
Grant of unregistered common
stock to officer at $14.81 per
share......................... -- --
Grants of warrants to consultant
at $7.00 per share............ -- --
Issuance of unregistered common
stock to investors at $6.00
per share and 35,408 common
stock purchase warrants (net
of issuance costs of
$54,090)...................... -- 507,710
Other........................... -- --
Amortization of unvested common
stock grant................... -- 535,093
Amortization of deferred
consulting expense............ -- 13,750
Net loss........................ (2,088,957) (2,088,957)
------------ -----------
Balances, December 31, 1995....... (13,876,522) 2,588,258
Issuance of unregistered common
stock to investors at $11.50
per share (net of cash
issuance costs of $278,834)... -- 2,596,166
Grant of warrants to
consultants................... -- 1,243,550
Amortization and adjustment to
unvested common stock grant... -- 764,084
Exchange of unvested common
stock grant for warrants...... -- 592,544
Amortization of deferred
consulting expense............ -- 55,000
Issuance of unregistered Series
A Convertible preferred stock
to investors at $1,000 per
share (net of cash issuance
costs of $1,865,000).......... -- 12,135,000
Issuance of common stock to
placement agent............... -- --
Issuance of common stock for
purchase of Prompt Medical.... -- 575,000
Net loss........................ (7,787,655) (7,787,655)
------------ -----------
Balances at December 31, 1996..... $(21,664,177) $12,761,947
------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 42
NU-TECH BIO-MED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. BASIS OF PRESENTATION
Nu-Tech Bio-Med, Inc. (Nu-Tech or the Company), was originally organized
under the laws of Delaware in September 1981 under the name of "Applied DNA
Systems, Inc." On November 16, 1994, the Company changed its name to its present
name.
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) (see Note 3).
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 and has a working capital deficiency. 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.
Due to the acquisition of MSI and NTBM and their resulting revenues, the
Company ceased reporting as a development stage enterprise in 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original
maturity of three months or less to be cash equivalents.
Accounts Receivable
The Company provides services to patients even though they may participate
in programs that do not pay full charges. As a result, the Company is exposed to
certain credit risks. The Company manages such risk by
F-7
<PAGE> 43
NU-TECH BIO-MED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
regularly reviewing its accounts and contracts, and by providing appropriate
allowances. Actual results could differ from those estimates. Significant
concentrations of gross accounts receivable were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------ ------
<S> <C> <C>
Medicare.................................................. 22.7% 8.1%
Medi-Cal.................................................. 15.5% --
Other negotiated contracts................................ 20.9%
Self-pay and commercial................................... 40.9% 91.9%
----- -----
100.0% 100.0%
----- -----
</TABLE>
Inventory
Inventory, primarily laboratory supplies, is stated at cost, which
approximates market value, on a first-in, first-out (FIFO) basis.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost. Depreciation has
been provided using the straight-line method over the estimated useful lives of
the assets ranging from 3-10 years for financial reporting purposes, except for
leasehold improvements which are being amortized over the life of the lease.
Certain equipment has been acquired under capitalized lease obligations.
These assets total $396,700 and $46,700 with related accumulated amortization of
$26,700 and $3,200 at December 31, 1996 and 1995, respectively.
Investment in Physicians Clinical Laboratory, Inc.
The Company has recorded its investment in senior debt of Physicians
Clinical Laboratory, Inc. at cost reduced by distributions received. In view of
the anticipated exchange of senior debt (see Note 4) interest accrued on the
debt has not been recorded.
Fair Values of Financial Instruments
For cash, accounts receivable and accounts payable the carrying amounts
approximate fair value. It was not practicable to estimate the fair value of the
Company's investment in senior debt in Physicians Clinical Laboratory, Inc. (see
Note 3).
Other Assets
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted Statement 121 in
the first quarter of 1996. The adoption of this statement had no impact on the
financial position or results of operations of the Company.
The Company accounts for goodwill at the lower of amortized cost or fair
value. On an ongoing basis, management reviews to determine if "impairment
indicators" are present. If impairment indicators are present, the Company
performs a periodic assessment of assets for impairment. This review consists of
the Company reevaluating significant assumptions used in determining the
original cost of the acquired business
F-8
<PAGE> 44
NU-TECH BIO-MED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and related goodwill. These assumptions include operating results, cash flows
and other indicators of value. Based upon this periodic assessment, management
determines whether there has been a permanent impairment of the value of
goodwill and adjusts the carrying value accordingly. The Company determines fair
value based upon independent appraisals or cash flows discounted at a risk
adjusted rate, as appropriate in the circumstances. As a result of this process,
during the fourth quarter of 1996, the Company charged off the balance of the
remaining goodwill and capitalized patents relating to ABC totaling $372,900.
Amortization of goodwill is provided using the straight-line method over
the estimated useful lives of the assets (10 years).
Stock Based Compensation
The Company grants qualified stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares at the
date of grant. The Company accounts for stock option grants in accordance with
APB Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly,
recognizes no compensation expense for qualified stock option grants.
For certain non-qualified stock options, restricted stock and warrants
granted to employees, the Company recognizes as compensation expense the excess
of the market value of the common stock issuable upon exercise of such options
over the aggregate exercise price of such options. For warrants granted to non-
employees, the Company recognizes as a charge the deemed fair value of the
warrants or the value of the services provided, whichever is more reliably
measurable. Such charges are amortized over the vesting period of each option or
warrant or the recipient's service period, if shorter.
Income Taxes
The liability method is used to account for income taxes. Deferred tax
assets and liabilities are determined based on differences between financial
reporting and income tax bases of assets and liabilities as well as net
operating loss carryforwards and are measured using the enacted tax rates and
laws that will be in effect when the differences reverse. Deferred tax assets
are reduced by a valuation allowance to reflect the uncertainty associated with
their ultimate realization.
Net Loss Per Common Share
Net loss per common share is computed using the weighted average number of
common shares outstanding during the year. Such loss gives effect to the deemed
dividend associated with the conversion feature of the Series A convertible
preferred stock. Fully-diluted earnings per share, assuming conversion of
outstanding warrants, options and preferred stock are not presented since the
effect would be antidilutive.
Revenues
The Company recognizes revenue as earned on an accrual basis, when services
are performed.
3. ACQUISITIONS AND DISPOSITION
Acquisition and Sale of Medical Science Institute
On November 18, 1996, the United States Bankruptcy Court of the Central
District of California approved the First Amended Plan of Reorganization (the
"MSI Plan") of Medical Science Institute ("MSI") pursuant to which the Company
acquired all of the capital stock of MSI for a total purchase price of
approximately $6,952,000. The acquisition was in the form of a purchase. 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.
F-9
<PAGE> 45
NU-TECH BIO-MED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Bankruptcy Code since October 26, 1995. MSI is a California corporation with its
principal executive offices located in Burbank, California.
Pursuant to the MSI Plan, the holders of all of the MSI capital stock
(including any and all options, warrants, and other convertible securities) will
receive 134,228 shares of common stock of Nu-Tech with an aggregate value of $2
million recorded as a liability in the accompanying consolidated financial
statements. The number of shares of common stock to be issued under the MSI Plan
are based on the average closing price of a share of common stock on the NASDAQ
SmallCap Market for the 15 day period preceding November 18, 1996. The
recipients of Nu-Tech common stock will be entitled to "piggyback" registration
rights with respect to such shares. The sole holder of all capital stock of MSI
was granted the right to receive up to $275,000 in cash from Nu-Tech with a
concurrent reduction in the number of shares of Nu-Tech's common stock. In
addition, $225,000 value of Nu-Tech's common shares is permitted to be
transferred by the former shareholder in consideration of a settlement agreement
entered into with such creditor and a general release in favor of MSI.
In addition, Nu-Tech agreed to make certain other payments to creditors and
assume certain liabilities under the MSI Plan. These payments include: (a)
approximately $750,000 to pay administrative claims of professionals, (b) an
additional $425,000 for professional administrative claims payable over 12
months, (c) approximately $572,000 payable for federal and state payroll taxes,
(d) approximately $2,500,000 to Austin Financial Services, Inc. ("Austin
Financial"), a secured creditor of MSI, (e) trade payables in the amount of
approximately $738,000, (f) $75,000 payable to the federal government in
satisfaction of certain claims and (g) $750,000 payable to general unsecured
creditors. At the hearing confirming the MSI Plan held on November 18, 1996, the
Company tendered $2,250,000 to the Court with respect to such payments.
With respect to sums payable under the MSI Plan to Austin Financial,
Nu-Tech obtained a loan in the principal amount of $2,500,000 from a third-party
lender on December 2, 1996, and utilized the loan proceeds to pay off Austin
Financial (see Note 7).
In connection with this acquisition, the Company recorded $5,681,437 of
excess cost over the fair market value of net assets acquired ("goodwill")
related to this transaction and the remainder was allocated to the net assets of
MSI acquired based on their estimated fair value. The Statement of Operations
includes the operations of MSI for the period from November 18, 1996 (the date
of acquisition) through December 31, 1996.
The former sole stockholder and president of MSI has entered into an
employment agreement with MSI. As part of the employment agreement, the employee
has the right to borrow up to $100,000 from the Company, to be secured by the
shares of common stock to be issued to him under the MSI Plan. He will also
receive options to purchase 10,000 shares of Nu-Tech common stock for every
$1,000,000 of annual collectible revenues obtained by MSI through the
acquisition of other businesses by MSI in which he acted as the procuring cause.
The options to be granted, if any, will bear an exercise price equal to the fair
market value of Nu-Tech's common stock at the time of the grant. At December 31,
1996, no options have been granted.
On February 26, 1997, the Company completed the sale of its ownership
interest in MSI to Physicians Clinical Laboratory, Inc. ("PCL") (see Note 4).
The Company sold its interests in MSI to PCL for its costs aggregating
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 (see Note 7). In the event the PCL Plan of
Reorganization (see Note 4) 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,
F-10
<PAGE> 46
NU-TECH BIO-MED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
ACQUISITION OF BUSINESS ASSETS OF PROMPT MEDICAL BILLING COMPANY, INC.
On October 21, 1996, the Company, through a newly formed wholly owned
subsidiary, NTBM Billing Services, Inc. ("NTBM"), acquired all of the medical
billing service assets of Prompt Medical Billing Services, Inc., a privately
owned Florida corporation engaged in the medical billing service business. The
acquisition was in the form of a purchase. The Company acquired the assets for a
total consideration of $675,000 consisting of $100,000 in cash and 37,504 shares
of restricted common stock of the Company. The number of shares may be subject
to increase in the event the fair market value of the shares at the termination
of the two year period is less than $500,000 or in the event the holders are
unable to sell the shares. All consideration paid by the Company has been placed
into escrow for a period of up to two years, to be released upon the attainment
of certain performance levels. The cash consideration will be released from
escrow in eight quarterly installments of $12,500 together with interest.
In connection with this acquisition, the Company recorded $754,591 of
excess cost over the fair market value of net assets acquired ("goodwill")
related to this transaction. The Statement of Operations includes the operations
of NTBM for the period from October 21, 1996 (the date of acquisition) through
December 31, 1996.
Pro Forma Disclosures
Pro forma selected financial data, assuming the assets of Prompt Medical
and the stock of Medical Science Institute had been acquired at the beginning of
1995 and 1996, respectively, follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------ -----------
(UNAUDITED)
<S> <C> <C>
Revenues......................................... $ 13,139,000 $19,419,000
------------ -----------
Net loss......................................... $(10,366,000) $(4,704,000)
============ ===========
Net loss per common share........................ $ (6.49) $ (2.70)
============ ===========
Weighted average common shares outstanding(1).... 2,109,702 1,742,230
------------ -----------
</TABLE>
- ---------------
(1) Adjusted for the issuance of 171,732 shares of the Company included in the
purchase price.
The above pro forma information does not purport to represent what the
Company's results of operations would actually have been had the acquisition of
the assets of Prompt and the stock of MSI in fact occurred at the beginning of
the periods indicated or to project the Company's results for any future
periods.
4. 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 is a publicly held corporation which, until recently, filed
reports with the Commission under the Securities Exchange Act of 1934, as
amended. PCL is delinquent in its filings with the Commission and has not filed
any reports since the quarter ended May 31, 1996. 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
F-11
<PAGE> 47
NU-TECH BIO-MED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 with
PCL (see Note 3).
There can be no assurance that the PCL Plan will be consummated, or if
consummated, will be upon the terms as originally submitted to the bankruptcy
court. Should the PCL plan not be consummated, Nu-Tech will become a creditor of
PCL. Under the terms of the PCL Plan, however, no competing offer for PCL may be
accepted by the bankruptcy court unless (i) such competing offer is at least
$2.5 million higher than the bid by Nu-Tech and (ii) on the effective date of
the competing plan Nu-Tech receives $1.88 million in cash as compensation for
its time and expense in pursuing the PCL Plan.
In December 1996, the Company received a distribution totaling $575,561
which was applied against the Company's investment in senior debt of PCL.
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consists of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Laboratory equipment................................ $ 953,830 $ 454,131
Computer equipment.................................. 397,551 51,451
Office equipment.................................... 271,459 101,764
Leasehold improvements.............................. 499,414 79,114
---------- ---------
2,122,254 686,460
Less accumulated depreciation....................... (355,412) (214,943)
---------- ---------
$1,766,842 $ 471,517
========== =========
</TABLE>
Depreciation expense was approximately $140,500 and $24,500 for the years
ended December 31, 1996 and 1995, respectively.
6. ACCRUED EXPENSES
Accrued expenses are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- --------
<S> <C> <C>
Accrued acquisition fees............................. $ 117,000 $ --
Employee compensation................................ 418,192 280,210
Consulting and professional fees..................... 275,000 137,139
Other................................................ 475,843 34,141
---------- ---------
$1,286,035 $451,490
========== =========
</TABLE>
F-12
<PAGE> 48
NU-TECH BIO-MED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- --------
<S> <C> <C>
Notes payable due to a third party, interest at 15%,
all principal and interest due on January 31, 1997;
secured by the Company's investment in Senior Debt
of PCL. The loan was further secured by a personal
guaranty of Nu-Tech's president (see below)........ $1,953,605 $ --
Notes payable to State of Rhode Island's Small
Business Loan Fund Corporation (SBLFC), interest at
5.4%, due in monthly principal and interest
payments of $18,360 through February 1998 and
declining thereafter through February 1999; secured
by virtually all of the assets of the Company...... 319,519 516,767
Other long-term liabilities related to MSI
acquisition (see Note 3)........................... 329,538 --
---------- ---------
2,602,662 516,767
Current maturities of long-term debt................. 2,263,990 197,246
---------- ---------
Long-term debt, less current maturities.............. $ 338,672 $319,521
========== =========
</TABLE>
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 the notes payable due to a third party (see above). All
principal and interest on the new loan is due on March 22, 1997. The new loan is
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. The new third party
lender is a significant stockholder of the Company. On February 26, 1997, in
connection with the sale of MSI to PCL, the Company repaid the new loan (see
Note 3).
Future principal payments on long-term debt due in each of the next five
years are as follows:
<TABLE>
<S> <C>
1997..................................................... $2,263,990
1998..................................................... 150,452
1999..................................................... 54,864
2000..................................................... 53,735
2001..................................................... 58,807
Thereafter............................................... 20,814
----------
$2,602,662
==========
</TABLE>
The carrying amount of debt, using the discounted cash flow method,
approximates its fair value.
8. LEASE COMMITMENTS
The Company leases various office and research facilities and certain
equipment under noncancelable operating and capitalized leases. The leases
expire at various times through August 2000, at which time the Company will have
the option to renew leases from one to three years.
F-13
<PAGE> 49
NU-TECH BIO-MED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's future minimum lease payments under capital and operating
leases are as follows as of December 31, 1996:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1997................................................... $326,322 $ 114,200
1998................................................... 326,322 106,400
1999................................................... 291,734 58,700
2000................................................... 10,863 37,000
-------- --------
Total minimum lease payments................. 955,241 $ 316,300
========
Less interest.......................................... 268,987
--------
Present value of minimum lease payments................ 686,254
Less capital lease obligations due within one year..... 214,270
--------
Capital lease obligations -- long-term portion......... $471,984
========
</TABLE>
Rental expense was $168,500 and $25,000 for the years ended December 31,
1996 and 1995, respectively.
9. STOCKHOLDERS' EQUITY
Series A Convertible Preferred Stock
On December 2, 1996, the Company completed a private placement offering
under the Securities Act of 1933 and/or Regulation D promulgated thereunder,
pursuant to which the Company issued a total of 14,000 shares of Series A
Convertible Preferred Stock for a total aggregate purchase price of $14,000,000.
The Company realized net proceeds of approximately $12,135,000 after deducting
expenses totaling $1,865,000. In connection with this offering, the Company
issued 60,000 shares of common stock and warrants to purchase 85,714 shares of
common stock exercisable at $15.00 per share.
The Series A Convertible Preferred Stock is convertible, by its terms, into
shares of common stock at the option of the holder commencing on the 45th day
after the issue date. Up to one third of the shares of the Series A Convertible
Preferred Stock may be converted into common stock on each of the 45th day, 75th
day and 105th day after the issue date. Commencing upon the 270th day following
completion of the private placement, the Company has the right, upon 30 days'
prior notice, to cause the Series A Convertible Preferred Stock to be converted
into common stock at the then applicable conversion price. The shares will be
convertible into such number of shares of common stock as shall equal $1,000
divided by a conversion rate equal to the lesser of (i) 75% of the average
closing price of the common stock for the 5 days immediately preceding the date
of the holder's notice of conversion or (ii) $17.50, subject to certain
adjustments.
The holders of a majority of the Series A Convertible Preferred Stock were
granted one "demand" registration right with respect to the common stock
underlying the Series A Convertible Preferred Stock. In the event that the
Company does not file with, and have declared effective by, the Commission, a
registration statement under the Act within 120 days of receipt of the demand
notice of the investors holding the shares of the Series A Convertible Preferred
Stock, the then applicable conversion price of the Series A Convertible
Preferred Stock will be reduced by 10%. Further, for each 30 day period after
the 120 day period that the registration statement has not been declared
effective, the conversion price will be reduced by an additional 2%, up to an
aggregate of 12%.
The Company had heretofore filed and withdrew a registration statement
relating to the shares of its Common Stock issuable upon conversion of the
Preferred Stock. At the time of such filing, the Company believed that it had
not received a 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
F-14
<PAGE> 50
NU-TECH BIO-MED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
registration statement was withdrawn, and through and as of the date hereof, it
likewise did not receive a written demand by the holders of a majority of
Preferred Stock to file a registration statement.
Several Preferred Shareholders have indicated that they intend to commence
an action against the Company arising out of the failure of the Company for its
failure 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 damages or losses, such circumstance would have a material
adverse effect upon the Company's consolidated results of operations and
financial position. The Company has had, and continues to have continuous
discussions with representatives of the Preferred Shareholders concerning a
resolution of the dispute arising out of the registration of the shares of the
Company's Common Stock issuable upon conversion of the Preferred Shares. While
no assurance may be given that such dispute will be satisfactorily resolved, the
Company intends, however, to prepare and file such registration statement as
soon as practicable to do so. 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, even if such registration statement is filed
by the Company, that the Preferred Shareholders may not thereafter commence an
action against the Company.
Holders of shares of the Series A Convertible Preferred Stock are not
entitled to receive dividends in cash or otherwise. The holders of shares of the
Series A Convertible Preferred Stock are not entitled to voting rights.
Common Stock
In April 1996, the Company completed a private offering of 250,000 shares
of its common stock for an aggregate of $2,875,000. The Company realized net
proceeds of approximately $2,596,000 from the private placement. In connection
with this offering, the Company incurred expenses totaling $278,800 and issued
warrants to purchase 75,000 shares of common stock exercisable at $14.50 per
share.
Investors in the April offering were granted certain "demand and piggyback"
registration rights for the shares sold in the April offering. In settlement of
certain alleged claims by the investors in the April offering that the Company
had failed to timely register the shares owned by such investors, the Company
agreed to issue one-half share to the investors for each share purchased in the
April offering. The Company has expensed the fair value of the shares of common
stock issued in February 1997 to settle the matter resulting in a non-cash
charge of $1,422,500 in 1996 and has recognized a liability in the accompanying
consolidated financial statements.
Grant of Restricted Stock
In June 1995, the Company granted 100,000 restricted shares to the
Company's chairman that will vest periodically at a rate of 5,000 shares per
year subject to certain conditions and certain accelerated provisions. The grant
has been accounted for as an increase in common stock and capital in excess of
par value at the fair value of the shares at the date of the grant (and modified
periodically to reflect current valuations) offset by an equal charge to equity
recorded as an Unvested Common Stock Grant. At December 31, 1995, conditions for
acceleration were achieved, subject to one year continued employment. The
Unvested Common Stock Grant was to be amortized over an eighteen-month vesting
period and has been included in selling, general and administrative expenses. In
addition, the Company has agreed to reimburse the officer for income taxes
associated with the grant. Such reimbursements were accrued in accordance with
the vesting schedule.
On December 2, 1996, the Company agreed to exchange 95,000 unvested shares
under the 1995 grant for 300,000 warrants with an exercise price of $7.00 per
share. In connection with the exchange, the Company
F-15
<PAGE> 51
NU-TECH BIO-MED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognized the excess of the value ($26,200) of the old grant at the exchange
rate (valued at $2,013,700) over the value of the new grant (valued at
$1,987,500) as a reversal of an expense in 1996.
Stock Option Plans
At December 31, 1995, the Company has three stock option plans as follows:
1994 Plans
The Company has reserved 350,000 shares of common stock under the 1994
Employee Stock Option Plan (the 1994 Plan). Options granted under the 1994 Plan
may be incentive options or nonqualified stock options, and shall be designated
as such at the time of grant. The 1994 Plan permits the granting of incentive
options only to officers and full-time employees of the Company, at no less than
100% of the fair market value of the Company's common stock at the date of the
grant. Nonqualified stock options may be granted to officers, employees,
consultants, and advisors of the Company, as well as to members of the Board of
Directors, at a price determined by the Plan administrator but in no case less
than 85% of the fair market value of the Company's common stock at the date of
the grant. To the extent that any option intended to be an incentive option
shall fail to qualify as such under Section 422 of the Internal Revenue Code of
1986, such options shall be deemed to be nonqualified options. The 1994 Plan is
administered by the Option Committee of the Board of Directors, which has full
power to determine the specific terms of each option granted, subject to the
provisions of the 1994 Plan. As of December 31, 1996, the Company has granted
options for a total of 175,900 shares under this Plan.
The Company has reserved 200,000 shares of common stock under the
Non-Employee Director Stock Option Plan (the Director Plan). Each non-employee
director, upon election of the Company's Board of Directors, shall be granted
options for 5,000 shares of common stock, and each shall be granted on
subsequent annual anniversary dates of the initial grant, additional options for
8,000 shares of common stock. Under the terms of the agreement, the sum of the
number of shares to be received upon any grant multiplied by the fair market
value of each share at the time of the grant may not exceed $75,000. As of
December 31, 1996, the Company has granted options for a total of 60,545 shares
under this Plan.
The exercise price of each option shall be 100% of the fair market value of
the Company's common stock at the date of the grant. The Director Plan is
administered by the Director Plan Committee, which is comprised of not less than
two directors of the Company who are not entitled to participate in the Director
Plan.
1992 Plan
The Company has reserved 13,714 shares of common stock under a 1992 Stock
Option Plan (1992 Plan). In August 1994, the 1992 Incentive Plan was terminated
except for then outstanding options and replaced by the 1994 Employee Plan.
Other Stock Options
The Company also has 15,857 stock options outstanding that were not issued
under any specific plan.
FAS 123 Disclosures
The Company has adopted the disclosure provisions only of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("FAS 123") and will continue to account for its stock option plans in
accordance with the provisions of APB 25, Accounting for Stock Issued to
Employees.
F-16
<PAGE> 52
NU-TECH BIO-MED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the combined activity of its stock option
plans for the years ended December 31, as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding at January 1..................... 239,671 $ 7.41 230,014 $ 7.27
Granted.................................... 26,545 14.13 20,500 11.06
Canceled................................... (200) 7.00 (10,843) 12.78
------- ------ ------- ------
Outstanding at December 31................... 266,016 $ 8.08 239,671 $ 7.41
======= ====== ======= ======
Options exercisable at December 31........... 239,471 $ 7.42 220,671 $ 7.07
======= ====== ======= ======
</TABLE>
The Company grants warrants in connection with financing activities, merger
and acquisitions activity, and as a form of compensation to both employees and
consultants. Expiration dates vary on outstanding warrants ranging from April
1998 through December 2001.
The following table presents the combined activity for all warrants issued
for the years ended December 31, as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
WARRANTS EXERCISE PRICE WARRANTS EXERCISE PRICE
--------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding at January 1.................... 411,265 $ 9.65 227,143 $11.12
Granted................................... 1,065,714 11.43 184,122 7.83
------- ------ ------- ------
Outstanding at December 31.................. 1,476,979 $10.94 411,265 $ 9.65
======= ====== ======= ======
Warrants exercisable at December 31......... 1,476,979 $10.94 411,265 $ 9.65
======= ====== ======= ======
</TABLE>
The following table presents weighted average price and life information
about significant option groups outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YRS.) PRICE EXERCISABLE PRICE
- ------------------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Less than $7.50..................... 214,328 5.39 $ 6.91 214,328 $ 6.91
$7.51 - $15.00...................... 51,545 3.80 12.89 25,000 11.59
Greater than $15.00................. 143 .04 20.30 143 20.30
------- -------
266,016 239,471
======= =======
</TABLE>
F-17
<PAGE> 53
NU-TECH BIO-MED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents weighted average price and life information
about significant warrant groups outstanding at December 31, 1996:
<TABLE>
<CAPTION>
WARRANTS OUTSTANDING
---------------------------------------- WARRANTS EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YRS.) PRICE EXERCISABLE PRICE
- ------------------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Less than $7.50..................... 592,551 4.56 $ 6.99 592,551 $ 6.99
$7.51 - $15.00...................... 738,714 3.52 12.28 738,714 12.28
Greater than $15.00................. 145,714 1.64 20.18 145,714 20.18
--------- ---------
1,476,979 1,476,979
========= =========
</TABLE>
The following are the pro forma net loss and net loss per share for 1996
and 1995, as if the compensation cost for options and warrants granted had been
determined based on the fair value at the grant date for grants in 1996 and
1995, consistent with the provisions of FAS 123:
<TABLE>
<CAPTION>
1996 1995
--------------------------- ---------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss.............................. $(7,787,655) $(9,199,485) $(2,088,957) $(2,169,368)
Net loss per share.................... $ (5.66) $ (6.38) $ (1.33) $ (1.38)
</TABLE>
The weighted average fair value per share and exercise price of options and
warrants granted during 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------- -----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
----------------------------- -----------------------------
FAIR VALUE EXERCISE PRICE FAIR VALUE EXERCISE PRICE
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Share price = Exercise price............... $ 2.93 $12.53 $ 3.98 $ 11.38
Share price > Exercise price............... $ 8.05 $ 7.80 $ 6.64 $ 7.00
Share price < Exercise price............... $ 1.65 $16.80 -- --
</TABLE>
The fair value of options and warrants at the date of grant were estimated
using the Black-Scholes model with the following weighted average assumptions:
<TABLE>
<CAPTION>
OPTIONS WARRANTS
--------------- ---------------
1996 1995 1996 1995
----- ----- ----- -----
<S> <C> <C> <C> <C>
Expected life (years)............................... 5 5 1 - 5 3
Interest rate....................................... 6.09% 6.09% 6.09% 6.09%
Volatility.......................................... 25.7% 25.7% 25.7% 25.7%
</TABLE>
Common Stock Reserved
The Company has reserved 2,056,550 shares of common stock for the exercise
of options and warrants. In addition, the Company has reserved a sufficient
number of common shares to provide for the conversion of the Series A
Convertible Preferred Stock (1,500,838 shares at December 31, 1996). The Company
has also reserved 134,228 shares of common stock to be issued to the former
owner of MSI (see Note 3) and 125,000 shares of common stock to be issued to
certain investors.
F-18
<PAGE> 54
NU-TECH BIO-MED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. CONTRACT RESEARCH
Research Funding Agreement
On December 14, 1990, the Company entered into an agreement with the Rhode
Island Partnership for Science and Technology (RIPSAT) to fund research,
development, testing and validation of an in vitro assay to predict the outcome
of x-ray mediated chemotherapy enhancement anticancer therapy (the project) or
radiation mediated chemotherapy enhancement (RMCE; the product).
The project consists of two phases as follows:
Applied research -- RIPSAT will fund operating and capital costs
incurred in the performance of the Applied Research Phase up to a maximum
of $320,338. RIPSAT will not fund more than 60% of the total project cost.
Such research is paid for by the Company and reimbursed by RIPSAT. Through
December 31, 1993, approximately $531,500 of total operating costs have
been expended on this project. These operating costs included $362,255 in
reimbursable costs expended by Brown University of which $320,338 of these
reimbursable costs (the total grant) were reimbursed by RIPSAT. RIPSAT has
been informed and has acknowledged that the Applied Research Phase will not
be completed for an indeterminate period of time.
Commercialization -- During the Commercialization Phase, the Company
will pay amounts to RIPSAT equal to the funds received during the Applied
Research Phase. Payment will begin at the end of the first calendar quarter
in which sales of the product are recorded. Payments will be calculated as
follows (i) 3% of quarterly net sales of the FCA, but not exceeding an
aggregate of $107,000, and (ii) 5% of quarterly net sales of the RMCE. The
3% and 5%, under certain circumstances, may be increased to 6% and 10%,
respectively. At December 31, 1996, the Commercialization Phase has not
commenced.
Research and License Agreement
In May 1991, the Company entered into a Research Agreement with Brown
University (Brown). Under the agreement, the Company will fund Brown for all
direct and indirect costs incurred in the performance of the research which
shall not exceed $375,604 without written authorization from the Company. The
total reimbursable costs expended by Brown University under this agreement
through December 31, 1993, were $362,255, of which $320,338 was reimbursed to
the Company by RIPSAT. Of the $362,255, the Company has paid $296,684 to Brown
leaving a balance of $65,571 at December 31, 1996.
Under the provisions of the agreement, the Company has an option to license
intellectual property developed in the performance of the agreement. The Company
will pay royalties to Brown at a rate of 2% of sales which shall commence two
years from issuance of a patent and extend for the life of the license.
Clinical Trial Agreement
On August 14, 1995, the Company entered into an Agreement with a research
institution to conduct a clinical trial. The cost of this clinical trial was not
to exceed $568,000. In 1996, the Agreement was terminated by the Company as a
result of the institution's inability to obtain the requisite number of
accruals. For the year ended December 31, 1996, the Company recorded expenses
totaling $56,800 under the Agreement. No expenses were incurred under the
agreement in 1995.
11. INCOME TAXES
At December 31, 1996, the Company has net operating loss carryforwards of
approximately $24.5 million for income tax purposes that expire at various times
from 2001 to 2011. Approximately $3,100,000 of these losses relate to a
subsidiary of the Company that are limited in usage. In addition, utilization of
the net operating loss carryforwards may be subject to limitations pursuant to
Section 382. No income tax benefit has been recorded during the years ended
December 31, 1996 and 1995.
F-19
<PAGE> 55
NU-TECH BIO-MED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The principal components of the Company's deferred tax assets were as
follows:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............. $ 9,829,000 $ 5,732,000
Federal general business tax credits......... 150,000 150,000
Other........................................ 175,000 25,000
------------ -----------
10,154,000 5,907,000
Valuation allowance............................ (10,154,000) (5,907,000)
------------ -----------
Net deferred tax assets........................ $ -- $ --
============ ===========
</TABLE>
Net deferred tax assets are reduced by a valuation allowance to reflect the
uncertainty associated with their ultimate realization. The valuation allowance
increased $4,247,000 in 1996, due primarily to the increases in net operating
loss carryforwards and tax credits.
12. ACQUISITION COSTS
On December 14, 1995, the Company signed a letter of intent to acquire a
majority interest in American Cytogenetics, Inc. (ACI). In the 3rd quarter of
1996, the Company expensed $218,914 of deferred acquisition costs for expenses
incurred as a result of management's due diligence review of the business and
operations of ACI which management has determined not to pursue and has
terminated further negotiations.
At December 31, 1996, the Company has $1,028,524 of deferred acquisition
costs. The costs primarily relate to expenses incurred in conjunction with the
Company's proposed acquisition of PCL (see Note 4). Included in the deferred
costs, is investment banking expenses totaling $597,750 relating to the issuance
of 75,000 warrants with an exercise price of $9.50 per share to an investment
banker for work performed relating to the acquisition of PCL. The Company
anticipates payments of an additional $231,350 in cash commissions and an
additional 57,838 warrants upon the consummation of the PCL transaction (see
Note 13).
13. OTHER AGREEMENTS
In 1995, the Company entered into an agreement with an investment banker
whereby the investment banker can earn cash commissions and up to 200,000
warrants with an exercise price of $9.50 if certain events, as defined, occur.
The agreement expires in June 2000. In 1996, the investment banker earned a cash
transaction fee totaling $300,000 and was granted 75,000 warrants (see Note 12).
In May 1996, the Company entered into agreements with a consultant whereby
the consultant would assist the Company in identifying potential investors and
negotiating and structuring a transaction to provide equity financing, and,
following such financing, providing financial public relations for a period of
two years. No financing was arranged by the consultant and the agreements were
terminated in the 3rd quarter of 1996 resulting in a $40,000 charge to operation
results.
In September 1996, the Company entered into an agreement with certain
financial public relations firms for which firms have been paid an aggregate of
$1,355,000 in cash and 300,000 warrants with exercise prices ranging from $14.00
to $16.80 per share. In connection with the warrants issued, the Company
recorded an expense totaling $527,000. All such consideration has been expensed
in the year ended December 31, 1996.
On March 6, 1997, the Company adopted an Indemnification Trust (the
"Trust") for the benefit of the current officers and directors of the Company.
The Trust is in furtherance of the Company's indemnification obligations to its
officers and directors and is intended to establish a mechanism to assure a
source of funding for any payments the Company may be required to make under
such Indemnification Agreements. Accordingly, the Company plans to fund the
Trust in the amount of $250,000 in 1997.
F-20
<PAGE> 56
NU-TECH BIO-MED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................ $ 1,052,975 $ 1,690,538
Accounts receivable (net of allowance for doubtful accounts of
approximately $6,355 and $2,823,400 at March 31, 1997, and at December
31, 1996, respectively)................................................ 73,922 1,751,230
Other receivables........................................................ 52,609 --
Inventory................................................................ 10,714 219,428
Prepaid expenses and other current assets................................ 44,939 82,801
----------- -----------
Total current assets.............................................. 1,235,159 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....................................... 364,652 1,766,842
Goodwill (net of accumulated amortization of approximately $33,575 and
$833,200 at March 31, 1997, and December 31, 1996, respectively)......... 721,016 6,352,860
Deferred acquisition costs................................................. 1,077,040 1,028,524
Deposits................................................................... 18,964 89,104
----------- -----------
Total Assets...................................................... $ 16,803,995 $ 22,405,766
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable......................................................... $ 363,101 $ 1,580,797
Accrued expenses......................................................... 184,031 1,286,035
Contract payable......................................................... 55,571 65,571
Current portion of long term debt........................................ 205,185 2,263,990
Current portion of capitalized lease obligations......................... 17,265 214,270
----------- -----------
Total current liabilities......................................... 825,153 5,410,663
Long-Term Debt............................................................. 63,339 338,672
Capitalized Lease Obligations.............................................. 13,931 471,984
Liabilities to be Paid with Common Stock................................... -- 3,422,500
----------- -----------
Total liabilities................................................. 902,423 9,643,819
Stockholders' Equity:
Series A convertible preferred stock, $.01 par value; 1,000,000 shares
authorized; 14,000 issued and outstanding at March 31, 1997 (liquidation
preference of $14,000,000 at March 31, 1997)............................. 140 140
Common stock, $.01 par value; 12,000,000 shares authorized; 2,427,374 and
2,089,652 shares issued and outstanding at March 31, 1997, and December
31, 1996, respectively................................................... 24,273 20,897
Capital in excess of par value............................................. 38,948,820 34,501,337
Deferred consulting expense................................................ (82,503) (96,250)
Accumulated deficit........................................................ (22,989,158) (21,664,177)
----------- -----------
Total stockholders' equity........................................ 15,901,572 12,761,947
----------- -----------
Total liabilities and stockholders' equity........................ $ 16,803,995 $ 22,405,766
=========== ===========
</TABLE>
F-21
<PAGE> 57
NU-TECH BIO-MED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
----------------------------
MARCH 31, MARCH 31,
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Assay sales, net............................................... $ 29,850 $ 23,730
Laboratory revenues, net....................................... 1,798,361 --
Medical billing services revenues.............................. 109,081 --
Contract revenue............................................... 5,540 --
----------- -----------
Total revenues, net.................................... 1,942,832 23,730
Operating Costs:
Laboratory expenses............................................ 1,418,293 55,298
Medical billing services expenses.............................. 123,930 --
Selling, general and administrative............................ 1,190,235 717,855
Research and development....................................... 16,610 20,768
----------- -----------
Total operating costs.................................. 2,749,068 793,921
----------- -----------
Operating loss................................................... (806,236) (770,191)
Other Income (Expense):
Investment and interest income................................. 10,265 30,047
Interest expense............................................... (529,010) (8,038)
----------- -----------
Total other income (expense)........................... (518,745) 22,009
----------- -----------
Net Loss......................................................... $(1,324,981) $ (748,182)
=========== ===========
Net Loss Per Common Share........................................ $ (1.36) $ (0.43)
=========== ===========
Weighted Average Common Shares Outstanding....................... 2,192,690 1,728,069
=========== ===========
</TABLE>
F-22
<PAGE> 58
NU-TECH BIO-MED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------
MARCH 31, MARCH 31,
1997 1996
----------- ----------
<S> <C> <C>
Operating Activities:
Net loss........................................................... $(1,324,981) $ (748,182)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................... 215,997 264,969
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....................................................... (222,975) 43,935
Accounts payable and accrued expenses......................... (689,650) 20,900
Accrued compensation.......................................... -- 155,974
----------- ----------
Net cash used in operating activities.............................. (1,435,966) (262,404)
Investing Activities:
Proceeds received from disposition of Medical Science Institute,
net.............................................................. 2,512,154 --
Acquisition costs.................................................. (48,517) (106,812)
Capital expenditures............................................... (15,394) (11,523)
----------- ----------
Net cash provided by (used in) investing activities................ 2,448,243 (118,335)
Financing Activities:
Proceeds from exercise of warrants................................. 534,359 --
Repayment of contract payable...................................... (10,000) (24,999)
Repayment of notes payable......................................... (2,037,332) (48,321)
Repayment of capitalized lease obligations......................... (36,867) (2,041)
Notes receivable................................................... (100,000) --
----------- ----------
Net Cash Used in Financing Activities.............................. (1,649,840) (75,361)
----------- ----------
Net Decrease in Cash and Cash Equivalents.......................... (637,563) (456,100)
Cash and Cash Equivalents at Beginning of Period................... 1,690,538 2,538,002
----------- ----------
Cash and Cash Equivalents at End of Period......................... $ 1,052,975 $2,081,902
=========== ==========
</TABLE>
F-23
<PAGE> 59
NU-TECH BIO-MED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 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
March 31, 1997, and the results of operations and cash flows for the three
months ended March 31, 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 and has a working capital deficiency. 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 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 period ended March 31,
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
F-24
<PAGE> 60
NU-TECH BIO-MED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
-----------------------
MARCH 31, MARCH 31,
1997 1996
--------- ---------
<S> <C> <C>
REVENUES:
Assay sales, net................................................... $ 29,850 $ 23,730
Medical billing services revenues.................................. 109,081 --
Contract revenue................................................... 5,540 --
--------- ---------
Total revenues, net........................................ 144,471 23,730
OPERATING COSTS:
Laboratory expenses................................................ 43,871 55,298
Medical billing services expenses.................................. 123,930 --
Selling, general and administrative................................ 365,211 717,855
Research and development........................................... 16,610 20,768
--------- ---------
Total operating costs...................................... 549,622 793,921
--------- ---------
Operating loss....................................................... (405,151) (770,191)
OTHER INCOME (EXPENSE):
Investment and interest income..................................... 10,265 30,047
Interest expense................................................... (532,273) (8,038)
--------- ---------
Total other income (expense)............................... (522,008) 22,009
--------- ---------
NET LOSS............................................................. $(927,159) $(748,182)
========= =========
</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 is a publicly held corporation which, until recently, filed
reports with the Commission under the Securities Exchange Ace of 1934, as
amended. PCL is delinquent in its filings with the Commission and has not filed
any reports since the quarter ended May 31, 1996. 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 (see Note G). 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
F-25
<PAGE> 61
NU-TECH BIO-MED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 (see Note G).
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.
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. 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
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,
and through and as of the date hereof, it likewise did not receive a written
demand by the holders of a majority of Preferred Stock to file a registration
statement.
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
has had, and continues to have continuous discussions with representatives of
the Preferred Shareholders concerning a resolution of the dispute arising out of
the registration of the shares of the Company's Common Stock issuable upon
conversion of the Preferred Shares. While no assurance may be given that such
dispute will be satisfactorily resolved, the Company intends, however, to
prepare and file such registration statement as soon as practicable to do so.
The filing of such registration statement may not, however, resolve the dispute
to the satisfaction of the Preferred
F-26
<PAGE> 62
NU-TECH BIO-MED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Shareholders, and no assurance may be given that, even if such registration
statement is filed by the Company, that the Preferred Shareholders may not
thereafter commence an action against the Company.
G. SUBSEQUENT EVENTS
On April 18, 1997, the Plan of Reorganization under Chapter 11 of the
United States Bankruptcy Code filed by Physicians Clinical Laboratory, Inc.
("PCL") was approved by the United States Bankruptcy Court for the Central
District of California. Currently, the Company is awaiting final documentation
relating to the issuance of $55 million of secured notes by PCL to the former
holders of its senior debt and subordinated debt. Upon the completion of the
transaction, the Company will consolidate the accounts of PCL in its
consolidated financial statements.
On April 29, 1997, the Company reduced the exercise price of previously
issued 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. Upon the expiration of the 45 day period following such exercise
price reduction, the option and/or warrant exercise price of the Stock Options
and the Warrants will revert to and be exercisable at their original respective
exercise prices which range from $4.35 per share to $28.35 per share. None of
the Stock Options and the Warrants are directly or indirectly owned by any
officer or director of the Company.
F-27
<PAGE> 63
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of Physicians Clinical Laboratory, Inc.:
We have audited the accompanying balance sheet of Physicians Clinical
Laboratory, Inc. (a Delaware corporation) as of February 28, 1997, and the
related statements of operations, changes in stockholders' deficit and cash
flows for the year ended February 28, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Physicians Clinical
Laboratory, Inc. as of February 28, 1997, and the results of its operations and
its cash flows for the year ended February 28, 1997 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As discussed in Note 3 to the combined financial statements, effective
March 1, 1996, Physicians Clinical Laboratory, Inc. adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Ernst & Young LLP
Sacramento, California
May 9, 1997
F-28
<PAGE> 64
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Physicians Clinical Laboratory, Inc.:
We have audited the accompanying balance sheet of Physicians Clinical
Laboratory, Inc. (a Delaware corporation) as of February 29, 1996, and the
related statements of operations, changes in stockholders' equity (deficit) and
cash flows for each of the two years in the period ended February 29, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Physicians Clinical
Laboratory, Inc. as of February 29, 1996, and the results of its operations and
its cash flows for each of the two years in the period ended February 29, 1996
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has experienced a
significant decline in operating income margins, a substantial net loss on
operations, a negative operating cash flow, a negative working capital position
and is in default under the terms of substantially all of its loan agreements.
As a result, the lenders have the right to demand immediate payment of
approximately $123.2 million of indebtedness and to foreclose on the Company's
assets. The Company does not have sufficient resources to repay the indebtedness
and has engaged an adviser to seek a proposed restructuring of the Company's
indebtedness. All of these factors and others discussed in Notes 1 and 2 raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
Arthur Andersen LLP
Sacramento, California
June 28, 1996
F-29
<PAGE> 65
PHYSICIANS CLINICAL LABORATORY, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 29 (28), 1996 AND 1997
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1997
------------ -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash
Trade accounts receivable --........................................... $ 391,815 $ 500,516
Third parties........................................................ 17,948,681 18,998,025
Related parties...................................................... 476,923 322,964
------------ -------------
Total accounts receivable....................................... 18,425,604 19,320,989
Less -- Allowance for doubtful accounts................................ 4,632,000 9,729,785
------------ -------------
Net accounts receivable.............................................. 13,793,604 9,591,204
Notes receivable -- current............................................ 350,000 361,650
Supplies inventory..................................................... 1,370,742 1,534,592
Prepaid costs and other assets......................................... 618,287 1,501,298
------------ -------------
Total current assets............................................ 16,524,448 13,489,260
Equipment and Leasehold Improvements, less accumulated depreciation and
amortization of $19,196,157 and $23,238,541, respectively.............. 16,929,581 11,595,900
Intangible Assets:
Leasehold interest, less accumulated amortization of $1,452,045.......... 1,525,704 --
Customer lists, less accumulated amortization of $5,104,303.............. 22,278,986 --
Covenants not to compete, less accumulated amortization of $3,482,760.... 2,140,231 --
Goodwill, less accumulated amortization of $6,692,555.................... 31,525,140 --
------------ -------------
Total net intangible assets..................................... 57,470,061 --
Other Long-Term Assets................................................... 488,289 686,855
------------ -------------
Total assets.................................................... $ 91,412,379 $ 25,772,015
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current installments of long-term debt................................. $123,880,031 $ 283,687
Note payable to related party.......................................... -- 5,000,000
Line of credit ($4,556,818 available to be drawn)...................... -- 5,243,182
Accounts payable....................................................... 12,185,439 1,237,338
Accrued payroll........................................................ 1,954,271 1,857,352
Accrued paid time-off.................................................. 1,255,634 170,201
Accrued interest....................................................... 8,544,639 5,121,598
Other accrued expenses................................................. 4,635,019 1,708,074
------------ -------------
Total current liabilities....................................... 152,455,033 20,621,432
Long-Term Debt, less current installments................................ 955,393 631,309
Other Long-Term Liabilities.............................................. 2,614,537 --
Liabilities Subject to Compromise (Note 3)............................... -- 167,776,289
------------ -------------
Total liabilities............................................... 156,024,963 189,029,030
Commitments and Contingencies (Notes 2, 5, 8 and 14) Stockholders'
Deficit
Preferred stock, par value $0.01 per share -- 20,000,000 shares
authorized;
none issued or outstanding............................................. -- --
Common stock, par value $0.01 per share -- 30,000,000 shares authorized;
6,033,087 and 6,071,419 shares issued and outstanding as of February 29
(28), 1996 and 1997, respectively...................................... 60,331 60,714
Additional paid-in capital............................................... 15,536,906 15,570,802
Retained deficit......................................................... (80,209,821) (178,888,531)
------------ -------------
Total stockholders' deficit..................................... (64,612,584) (163,257,015)
------------ -------------
Total liabilities and stockholders' deficit..................... $ 91,412,379 $ 25,772,015
============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<PAGE> 66
PHYSICIANS CLINICAL LABORATORY, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED FEBRUARY 28 (29), 1995, 1996 AND 1997
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 (29),
-------------------------------------------
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Net Revenue
Net revenue from third parties.................... $107,565,433 $ 86,828,901 $ 60,422,858
Net revenue from related parties.................. 3,546,012 3,562,950 2,407,989
------------ ------------ -------------
Total net revenue......................... 111,111,445 90,391,851 62,830,847
Direct Laboratory Costs............................. 35,335,270 31,881,339 23,117,090
------------ ------------ -------------
Gross profit.............................. 75,776,175 58,510,512 39,713,757
Laboratory Support Costs............................ 24,741,263 26,509,055 20,013,962
------------ ------------ -------------
Laboratory profit......................... 51,034,912 32,001,457 19,699,795
Selling, General and Administrative................. 26,626,847 27,739,434 24,880,448
Provision for Doubtful Accounts (Note 3)............ 4,318,516 30,538,625 8,843,252
Depreciation, Amortization and Write Down of
Intangibles (Note 3).............................. 9,881,687 36,326,689 69,070,097
Credit Restructuring Costs.......................... -- 4,903,436 --
Reorganization Charges.............................. -- -- 1,558,820
Nonrecurring Acquisition Integration Expense........ 9,250,188 -- --
------------ ------------ -------------
Operating income (loss)................... 957,674 (67,506,727) (84,652,822)
Interest Expense.................................... (9,012,583) (12,898,919) (15,838,895)
Interest Income..................................... 88,269 61,285 21,855
Nonoperating Income (Expense), net.................. 181,291 (383,375) (1,708,848)
------------ ------------ -------------
Loss before benefit for income taxes...... (7,785,349) (80,727,736) (102,178,710)
Benefit for Income Taxes............................ 2,189,112 1,543,250 --
------------ ------------ -------------
Loss before extraordinary gain............ (5,596,237) (79,184,486) (102,178,710)
------------ ------------ -------------
Extraordinary Gain on Extinguishment of Debt, net of
taxes of $0....................................... -- -- 3,500,000
------------ ------------ -------------
Net Loss............................................ $ (5,596,237) $(79,184,486) $ (98,678,710)
============ ============ =============
Loss Before Extraordinary Gain Per Common Share..... $ (0.93) $ (13.13) $ (16.85)
============ ============ =============
Net Loss Per Common Share........................... $ (0.93) $ (13.13) $ (16.28)
============ ============ =============
Weighted Average Common Shares Outstanding.......... 6,013,000 6,030,000 6,063,000
============ ============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-31
<PAGE> 67
PHYSICIANS CLINICAL LABORATORY, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28 (29), 1995, 1996 AND 1997
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 (29),
-----------------------------------------
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss............................................ $(5,596,237) $(79,184,486) $(98,678,710)
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation, amortization and write down of
intangible assets................................ 9,881,687 36,326,689 69,070,097
Provision for doubtful accounts..................... 4,318,516 30,538,625 8,843,252
Credit Restructuring Costs.......................... -- 3,118,592 --
Net change in income tax refund receivable.......... (5,181,785) 5,181,785 --
Net changes in operating assets and liabilities..... (4,322,761) 1,487,822 19,626,940
----------- ------------ ------------
Net cash used in operating activities....... (900,580) (2,530,973) (1,138,421)
----------- ------------ ------------
Cash Flows from Investing Activities:
Increase of intangible assets in connection with
acquisitions..................................... (2,739,413) -- (1,632,968)
Purchase of Damon net of cash acquired.............. (58,111,866) -- --
Net acquisitions and disposals of equipment and
leasehold improvements........................... (8,989,249) (1,963,463) 366,613
----------- ------------ ------------
Net cash used in investing activities....... (69,840,528) (1,963,463) (1,266,355)
----------- ------------ ------------
Cash Flows from Financing Activities:
Borrowings of long-term debt........................ 83,438,587 6,266,763 5,443,182
Payments of principal on long-term debt --
Third parties....................................... (13,934,416) (1,586,407) 536,016
Gain on extinguishment of debt...................... -- -- (3,500,000)
Proceeds from exercise of stock options............. 41,250 -- --
Proceeds from sale of capital stock................. 111,224 23,999 34,279
----------- ------------ ------------
Net cash provided by financing activities... 69,656,645 4,704,355 2,513,477
----------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents............................... (1,084,463) 209,919 108,701
Cash and Cash Equivalents, beginning of year.......... 1,266,359 181,896 391,815
----------- ------------ ------------
Cash and Cash Equivalents, end of year................ $ 181,896 $ 391,815 $ 500,516
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-32
<PAGE> 68
PHYSICIANS CLINICAL LABORATORY, INC.
(DEBTOR-IN-POSSESSION)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED FEBRUARY 28 (29), 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON COMMON ADDITIONAL RETAINED
STOCK SHARES STOCK AMOUNT PAID-IN CAPITAL EARNINGS (DEFICIT)
------------ ------------- --------------- ------------------
<S> <C> <C> <C> <C>
Balance at March 1, 1994................. 6,006,606 $60,066 $15,360,704 $ 4,570,902
Net loss............................... -- -- -- (5,596,237)
Proceeds from exercise of stock
options............................. 7,500 75 41,175 --
Proceeds from sale of capital stock.... 13,603 136 111,082 --
--------- ------- ----------- --------------
Balance at February 28, 1995............. 6,027,709 $60,277 $15,512,961 $ (1,025,335)
Net loss............................... -- -- -- (79,184,486)
Proceeds from sale of capital stock.... 5,378 54 23,945 --
--------- ------- ----------- --------------
Balance at February 29, 1996............. 6,033,087 $60,331 $15,536,906 $ (80,209,821)
Net loss............................... -- -- -- (98,678,710)
Proceeds from sale of capital stock.... 38,332 383 33,896 --
--------- ------- ----------- --------------
Balance at February 28, 1997............. 6,071,419 $60,714 $15,570,802 $ (178,888,531)
========= ======= =========== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-33
<PAGE> 69
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND OPERATIONS
Physicians Clinical Laboratory, Inc. ("PCL" or the "Company") provides
clinical laboratory services in the State of California. The Company is a
"hybrid" among clinical laboratory companies in that it serves both as a
traditional reference laboratory for office based physician-clients and as an
independent clinical laboratory for regional acute care hospitals. PCL operates
within the health care industry which is undergoing significant changes such as
managed care (including capitated payment arrangements), proposed federal and
state health care reform measures, third party payor reimbursement decreases
(including Medicare, MediCal and private insurance), industry consolidation and
increasing regulation of laboratory operations.
On November 8, 1996, the Company filed a petition for relief under Chapter
11 of the Federal Bankruptcy Laws in the United States Bankruptcy Court. Under
Chapter 11, certain claims against the Company in existence prior to the filing
of the petition for relief under the Federal Bankruptcy Laws are stayed while
the Company continues business operations as debtor-in-possession. These claims
are reflected in the balance sheets as "liabilities subject to compromise" (Note
3). Additional claims ("liabilities subject to compromise") may arise subsequent
to the filing date resulting from rejection of executory contracts, including
leases, and from the determination by the court (or agreed to by parties in
interest) of allowed claims for contingencies and other disputed amounts. Claims
secured against the Company's assets ("secured claims") also are stayed,
although the holders of such claims have the right to move the court for relief
from the stay. Secured claims are secured primarily by liens on the Company's
assets. Liabilities not subject to compromise reported in the accompanying
balance sheets will be continuing obligations of the Company subsequent to the
Company's emergence from bankruptcy.
The Company received approval from the Bankruptcy Court to pay or otherwise
honor certain of its prepetition obligations, including employee wages. Credit
arrangements entered into subsequent to the Chapter 11 filings are described in
Note 2.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Recurring losses, an accumulated
deficit and lack of liquidity caused the Company to seek protection under the
Federal Bankruptcy Laws in 1996. Management's Plan of Reorganization has been
effectuated, as described in Note 2. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
(2) PLAN OF REORGANIZATION
On April 18, 1997 the Bankruptcy Court confirmed the Company's Plan of
Reorganization (Plan). Before the Company can emerge from bankruptcy (Effective
Date) certain conditions of the Plan must be met. The Plan is the result of
extensive negotiations, both prior to and during the pendency of the Company's
Chapter 11 cases among the Company, the Senior Lenders, certain of the Company's
Subordinated Debenture holders, the Creditors' Committee and other
parties-in-interest. The Plan reflects the results of negotiations with Nu-Tech
Bio-Med, Inc. ("Nu-Tech"), which resulted in Nu-Tech's commitment to invest
$14.8 million into the Company in return for the majority of the reorganized
Company's common stock.
The confirmed Plan provides for the following:
- Nu-Tech to receive 35.6% of the reorganized Company's common stock in
exchange for its holdings of senior secured debt.
- Nu-Tech to receive 17% of the reorganized Company's common stock as a
result of the purchase of Medical Science Institute (MSI) by the Company
from Nu-Tech (see Note 15).
F-34
<PAGE> 70
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- Senior Lenders to receive $55 million in new senior secured promissory
notes and 38.1% of the reorganized Company's common stock.
- The holders of the Company's Subordinated Debentures to receive 9.3% of
the reorganized Company's common stock.
- The Company's general unsecured claims to receive a pro rata share of (i)
$2.45 million in cash and (ii) a $400,000 noninterest-bearing note due
one year after the Effective Date.
- The Company's existing shareholders to receive warrants to purchase up to
5% of the shares of the reorganized Company's common stock at a price of
$13.30 per share.
ADMINISTRATIVE CLAIMS
On the Effective Date, each holder of an Allowed Administrative Claim shall
receive Cash equal to the amount of such Allowed Administrative Claim, unless
the holder and Company agree to other terms or a Final Order of the Bankruptcy
Court provides for other terms. However, Allowed Administrative Claims
representing obligations incurred in the ordinary course of business or
otherwise assumed by the Company pursuant to the Plan (including Administrative
Claims of governmental units for taxes) shall be assumed on the Effective Date
and paid, performed or settled by the reorganized Company when due in accordance
with the terms and conditions of the particular agreements governing the
obligations.
Priority Tax Claims
Pursuant to section 1129(a)(9)(C) of the Bankruptcy Code, unless otherwise
agreed by the holder of a Priority Tax Claim and the Company or the reorganized
Company, each holder of a Priority Tax Claim will receive in full satisfaction
of such Claim, deferred cash payments over a period not exceeding six years from
the date of assessment of such Claim. Payments will be made in equal quarterly
installments of principal, plus simple interest accruing from the Effective Date
at 8% per annum on the unpaid portion of each Priority Tax Claim.
Unless otherwise agreed by the holder of a Priority Tax Claim and the
Company or the reorganized Company, the first payment will be payable one year
after the Effective Date or, if the Priority Tax Claim is not allowed within one
year after the Effective Date, the first day of the quarter following the date
on which (a) an order allowing such Claim becomes a Final Order or (b) a
Stipulation regarding the Amount and Nature of Claim is executed by the
reorganized Company and the Claim holder.
Debtor-in-Possession (DIP) Financing Facility Claims
Immediately prior to the Effective Date, provided that no unwaived events
of default exist under the DIP Financing Facility, any amount available under
the DIP Financing Facility shall be borrowed by the Company so that the total
outstanding principal balance thereunder is $9,800,000. On the Effective Date,
all amounts owing under the DIP Financing Facility shall be forgiven without any
payment by the Company or further action by any party.
Quarterly Fees to U.S. Trustee
The reorganized Company shall pay all quarterly fees payable to the U.S.
Trustee's Office for the Company after Confirmation, consistent with applicable
provisions of the Bankruptcy Code and Bankruptcy Rules.
F-35
<PAGE> 71
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CLASSIFIED CLAIMS AND INTERESTS
All Claims and Interest, except Administrative Claims and Priority Tax
Claims, are placed in the Classes described below.
Each Claim or Interest is classified in a particular Class only to the
extent that the Claim or Interest qualifies within the description of that Class
and is classified in other Classes to the extent that any remainder of the Claim
or Interest qualifies within the description of other Classes. A Claim or
Interest is also classified in a particular Class only to the extent that such
Claim or Interest is an Allowed Claim or Allowed Interest in that Class and has
not been paid, released or otherwise satisfied prior to the Effective Date.
CLASS 1 -- PRIORITY CLAIMS
Classification: Class 1 consists of all Priority Claims against the Company.
Treatment: On the Effective Date, each holder of an Allowed Class 1 claim
shall receive Cash equal to the amount of the Claim, unless the holder and the
reorganized Company agree to a different treatment. Any Allowed Class 1 Claim
not due and owing on the Effective Date will be paid in full in Cash by the
reorganized Company when such Claim becomes due.
CLASS 2 -- SENIOR DEBT CLAIMS
Classification: Class 2 consists of all Senior Debt Claims against the
Company.
Treatment: On the Effective Date, the existing lender agreements shall
automatically be terminated without further action by any party and shall no
longer be of any force or effect. Each holder of an allowed Senior Debt claim
shall receive, on or as soon as practicable after the Effective Date, its Pro
Rata Share of 952,000 shares of New Common Stock, which constitutes 38.1% of the
amount of New Common Stock to be issued and outstanding on the Effective Date
and the $55 million of New Senior Notes.
CLASS 3 -- NU-TECH SENIOR DEBT CLAIMS
Classification: Class 3 consists of all Nu-Tech Senior Debt Claims.
Treatment: On the Effective Date, the existing lender agreements shall
automatically be terminated without further action by any party and shall no
longer be of any force or effect. Nu-Tech shall receive, on or as soon as
practicable after the Effective Date, 890,000 shares of New Common Stock, which
constitutes 35.6% of the amount of New Common Stock to be issued and outstanding
on the Effective Date.
CLASS 4 -- OTHER SECURED CLAIMS
Classification: Class 4 consists of all Other Secured Claims against the
Company.
Treatment: On the Effective Date, at the option of the reorganized
Company, each Allowed Class 4 Claim shall be treated pursuant to either (i) or
(ii) below:
(i) the reorganized Company may transfer the property securing the
Claim to the holder of the Claim, in full satisfaction of the Claim; or
(ii) the Claim may be Reinstated as follows: (A) any default, other
than a default of a kind specified in section 365(b)(2) of Bankruptcy Code,
shall be cured; (B) the maturity of the Claim shall be reinstated as the
maturity existed before any default; (C) the holder of the Claim shall be
compensated for any damages incurred as a result of any reasonable reliance
by the holder on any contractual provision that entitled the holder to
demand or receive accelerated payment of the Claim; and (D) the other
legal, equitable or contractual rights to which the claim entitles the
holder shall not otherwise be altered.
F-36
<PAGE> 72
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CLASS 5 -- UNSECURED CLAIMS
Classification: Class 5 consists of all Unsecured Claims against the Company,
including the CEO Claims.
Treatment: On the Effective Date, the Company will deliver to the
Third-Party Disbursing Agent, to be held in the Class 5 Disbursement Account for
the benefit of holders of Allowed Class 5 Claims, $2.45 million in Cash and a
New Unsecured Note in the amount of $400,000. Each holder of an Allowed Class 5
Claim, in full and final satisfaction of such Allowed Claim, shall receive its
Pro Rata share of the assets held in the Class 5 Disbursement Account in
accordance with the provisions of the Plan.
CLASS 6 -- OLD SUBORDINATED DEBENTURE CLAIMS
Classification: Class 6 consists of all Old Subordinated Debenture Claims
against the Company.
Treatment: On the Effective Date, the Old Indenture and the Old
Subordinated Debentures shall be automatically terminated without further action
by any party and shall no longer be of any force and effect. Each holder of an
Allowed Old Subordinated Debenture Claim, in full and final satisfaction of such
Allowed Claim, shall receive, on or as soon as practicable after the Effective
Date, its Pro Rata Share of 232,500 shares of New Common Stock, which
constitutes 9.3% of the amount of New Common Stock to be issued and outstanding
on the Effective Date.
CLASS 7 -- INTERESTS OF HOLDERS OF OLD COMMON STOCK IN PCL
Classification: Class 7 consists of the interests of holders of Old Common
Stock in PCL.
Treatment: Each holder of an Allowed Class 7 interest shall receive, in
full and final satisfaction of such Interest, its Pro Rata Share of the New
Warrants issued pursuant to the New Warrant Agreement. The New Warrants will
allow existing shareholders to purchase up to 5% of the shares of the
Reorganized Company's common stock at a price of $13.30 per share.
CLASS 8 -- INTERESTS OF HOLDERS OF INTERESTS IN SUBSIDIARIES
Classification: Class 8 consists of the Interests of the Subsidiary Debtors.
Treatment: In full and final satisfaction of the Allowed Class 8
Interests, the Company shall retain its Interests in each of the Subsidiary
Debtors. Each Subsidiary Debtor shall be merged into the Reorganized Company on
the Effective Date.
CLASS 9 -- INTERESTS OF HOLDERS OF OLD STOCK OPTIONS AND OLD WARRANTS
Classification: Class 9 consists of the Interests of the holders of Old Stock
Options and Old Warrants.
Treatment: The holders of Class 9 Interests shall not receive or retain
any property under the Plan on account of such Interests.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Physicians Clinical Laboratory, Inc. and its subsidiaries (Physicians Clinical
Laboratory, Inc. and its subsidiaries are collectively referred to hereinafter
as the "Company"). All significant intercompany accounts and transactions have
been eliminated in consolidation.
F-37
<PAGE> 73
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH EQUIVALENTS
Cash and cash equivalents include cash in bank and on hand and liquid
investments with original maturities of three months or less.
SUPPLIES INVENTORY
Supplies inventory is stated at cost, which approximates market value, on a
first-in, first-out (FIFO) basis. Supplies inventory consists primarily of
laboratory supplies.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are carried at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, except for leasehold improvements which are being amortized over the
life of the lease. When assets are retired or otherwise disposed of, the cost
and related accumulated depreciation or amortization are removed from the
accounts and any resulting gain or loss is recognized in operations for the
period. The cost of maintenance and repairs is charged to income as incurred,
significant renewals and betterments are capitalized.
The estimated useful lives of the equipment and leasehold improvements are
as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
------------
<S> <C>
Leasehold improvements........................................... 5-12 years
Laboratory equipment............................................. 5-20 years
Computer equipment............................................... 5-12 years
Furniture and fixtures........................................... 5-12 years
Automobiles...................................................... 1-5 years
</TABLE>
INTANGIBLE ASSETS
All amortization is calculated using the straight-line method over the
following lives:
<TABLE>
<CAPTION>
LIFE
------------------
<S> <C>
Customer list............................................. 19 years
Covenant not to compete................................... Life of Agreement
Goodwill.................................................. 19 years
Leasehold interest........................................ Life of Lease
</TABLE>
Prior to fiscal 1995, the Company used a 36 year amortization life for
goodwill. Effective March 1, 1994, the Company adopted a goodwill life of 19
years due to the rapid changes occurring in the healthcare industry. The 19
years has also been applied on a remaining life basis for goodwill relating to
acquisitions made prior to March 1, 1994. The effect of reducing the life to 19
years was to increase amortization expense for fiscal 1995 by approximately
$1,300,000.
Subsequent to its acquisitions, the Company continually evaluates whether
later events and circumstances have occurred that indicate the remaining
estimated useful life of goodwill may warrant revision or that the remaining
balance of goodwill may not be recoverable. When factors indicate that goodwill
should be evaluated for possible impairment, the Company uses an estimate of the
related business segment's enterprise value and deducts the fair value of all
tangible and intangible assets to arrive at the recoverable value of goodwill.
Using this approach, the Company recorded a write-down of $25,000,000 to
intangible assets which
F-38
<PAGE> 74
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
was allocated to Goodwill as of February 29, 1996. The amount of the write-down
was based upon a Board-approved restructuring plan prepared by investment
bankers engaged to assist and advise the Company on a proposed restructuring of
the Company's indebtedness.
During 1997, the Company continued to experience customer losses,
significant reduction in third party reimbursements and other changes in the
health care industry having adverse effects on the Company's operations. These
factors have resulted in significant cash flow deficits and continued operating
losses. As a result, management has reevaluated the recoverability of goodwill
and other intangible assets and concluded they have no continuing value.
Accordingly, the Company has recorded a $59.4 million write-off of those assets.
Amortization expense less the write-down of intangibles, for leasehold
interest was $277,189, $257,983 and $250,813, covenants not to compete,
$1,114,835, $1,070,242 and $1,027,598, goodwill, $2,765,197, $3,367,445 and
$2,011,458, and customer lists $1,410,399, $1,431,449 and $1,441,226 in fiscal
1995, 1996 and 1997, respectively.
DEBT ISSUANCE COSTS
Costs incurred in connection with the issuance of the convertible
subordinated debentures, notes payable to banks and lines of credit are deferred
and amortized over the life of the related debt using an effective interest rate
method. During fiscal year 1996, the debt issuance costs related to the bank
debt and the Convertible Subordinated Debentures was expensed due to defaults
with covenants in the lending agreement and the Indenture. The amounts were
$1,450,140 and $1,668,466, respectively and are included in credit restructuring
costs in the Statement of Operations.
EARNINGS PER SHARE
Weighted average shares outstanding include common stock equivalents
computed using the treasury stock method except for periods in which their
inclusion would be anti-dilutive. It is probable that the Plan of Reorganization
will require the issuance of common stock or common stock equivalents, thereby
diluting current equity interests.
LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, 1997
-----------------
<S> <C>
Long-term debt............................................... $ 121,984,291
Accounts payable............................................. 15,737,121
Accrued paid time-off........................................ 1,123,185
Accrued interest............................................. 18,993,764
Other accrued expenses....................................... 9,937,928
-------------
Total liabilities subject to compromise...................... $ 167,776,289
=============
</TABLE>
REORGANIZATION CHARGES
Reorganization charges consist primarily of professional fees incurred as
part of the Chapter 11 bankruptcy.
F-39
<PAGE> 75
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DIRECT LABORATORY AND LABORATORY SUPPORT COSTS
Direct laboratory costs consist of labor costs, supplies expense, reference
and pathology fees, utilities and other expenses. Included in reference and
pathology fees are charges from related parties of $362,851, $391,926 and
$326,920 for the years ended February 28 (29), 1995, 1996 and 1997,
respectively.
Laboratory support costs consist of patient service center costs, courier
costs, laboratory administration expenses, customer service costs, materials
management costs and management service charges from related parties. Management
service charges from related parties were $876,004, $868,338 and $405,419 for
the years ended February 28 (29), 1995, 1996 and 1997, respectively.
REPAIRS AND MAINTENANCE EXPENSE
Repairs and maintenance expense was $1,140,424, $1,174,077 and $908,795 in
fiscal 1995, 1996 and 1997, respectively.
INCOME TAXES
The provision for income taxes and related tax assets and liabilities have
been computed in accordance with SFAS No. 109, "Accounting for Income Taxes."
STATEMENTS OF CASH FLOWS
Net changes in operating assets and liabilities consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 (29),
--------------------------------------------
1995 1996 1997
------------ ----------- -----------
<S> <C> <C> <C>
Increase in accounts receivable............ $(12,402,033) $(9,917,080) $(4,640,852)
Net (increase) decrease in supplies
inventory, prepaid costs, deposits and
other assets............................. (952,735) 2,017,177 (1,257,077)
Increase in accounts payable and accrued
expenses................................. 9,032,007 9,387,725 25,524,869
------------ ----------- -----------
Net change in operating assets and
liabilities.............................. $ (4,322,761) $ 1,487,822 $19,626,940
============ =========== ===========
</TABLE>
Supplemental disclosure of cash flow information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 (29),
-------------------------------------
1995 1996 1997
---------- ---------- -------
<S> <C> <C> <C>
Cash paid for interest --
Third parties.................................. $8,199,578 $4,400,969 $26,277
</TABLE>
Non-cash transactions consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 (29),
----------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Gain on extinguishment of debt paid by a
related party................................ $ -- $ -- $3,500,000
Note payable to related party resulting from
MSI acquisition.............................. $ -- $ -- $5,000,000
</TABLE>
RECLASSIFICATIONS
Certain reclassifications to prior years' financial statements have been
made to conform to the 1997 presentation.
F-40
<PAGE> 76
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
Revenues are recognized when services are performed. Revenues under
capitated agreements are recognized monthly as earned. Expenses are accrued on a
monthly basis as services are provided.
Services under government programs represent approximately 29%, 30% and 33%
of net revenue for the year ended February 28 (29), 1995, 1996 and 1997,
respectively. The Company's primary concentration of credit risk is accounts
receivable, which consist of amounts owed by various governmental agencies,
insurance companies and private patients. Significant concentrations of gross
accounts receivable at February 29 (28), 1996 and 1997, reside in receivables
from governmental agencies of 48% and 52%, respectively.
Due to the significant changes occurring in the health care industry
related to managed care, billing system/process challenges and accounts
receivable collection problems, it is reasonably possible that the Company's
estimate of the net realizable value of accounts receivable will change in the
near term. No estimate can be made of a range of amounts of loss that are
reasonably possible.
Services under government programs represent approximately 29%, 30% and 33%
of net revenue for the year ended February 28 (29), 1995, 1996 and 1997,
respectively. The Company's primary concentration of credit risk is accounts
receivable, which consist of amounts owed by various governmental agencies,
insurance companies and private patients. Significant concentrations of gross
accounts receivable at February 28 (29), 1996 and 1997, reside in receivables
from governmental agencies of 48% and 52%, respectively.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
the value:
NOTES RECEIVABLE
The carrying amount approximates fair value.
It was not practicable to estimate the fair value of the Company's debt due
to the debt being in default. See Note 1 and 5.
USE OF ESTIMATE IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Company adopted Statements of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." The pronouncement requires that assets to
be held and used, and assets held for sale be reviewed for impairment. Any loss
resulting from the impairment of such assets held and used is included as a
component of continuing operations.
Also in 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." In accordance with the provisions of the pronouncement, the
Company elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its employee stock option plans.
F-41
<PAGE> 77
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share," which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The Company has not yet determined what the
impact of Statement 128 will be on the calculation of fully diluted earnings per
share.
(4) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 29, 1996
-----------------
COST
-----------------
<S> <C>
Equipment.................................................... $27,417,178
Furniture and fixtures....................................... 2,614,725
Leasehold improvements....................................... 6,093,835
-----------
Total........................................................ 36,125,738
Less -- Accumulated depreciation and amortization............ 19,196,157
-----------
Net book value............................................... $16,929,581
===========
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28,
1997
----------------
COST
----------------
<S> <C>
Equipment..................................................... $ 28,259,918
Furniture and fixtures........................................ 2,194,510
Leasehold improvements........................................ 4,380,013
------------
Total......................................................... 34,834,441
Less -- Accumulated depreciation and amortization............. 23,238,541
------------
Net book value................................................ $ 11,595,900
============
</TABLE>
Depreciation expense relating to equipment and leasehold improvements
charged to operations was $9,881,687, $11,326,689 and $4,967,068 for fiscal
years ended 1995, 1996 and 1997, respectively. As of February (29) 28, 1996 and
1997, respectively, the Company recorded a write down of $25,000,000 and
$59,371,935 to intangible assets.
F-42
<PAGE> 78
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 29 (28),
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
Convertible subordinated debentures, currently in default, par
value $1,000 per debenture, bearing interest at 7.5% due 2000.
The debentures are convertible into shares of common stock at
any time before maturity at a conversion price of $12.20 per
share........................................................... $ 40,000,000 $ 40,000,000
Variable interest rate notes payable to banks, currently in
default, bearing interest at prime plus 3% plus 2% for penalties
and interest; unpaid principal payments are bearing interest and
penalties of prime plus 3% plus 2%, principal due in aggregate
monthly and quarterly installments, with final payments due
March 2000, secured by all assets of the Company................ 47,359,476 43,859,476
Various lines of credit, currently in default, which allow
aggregate borrowings up to $33,700,000 bearing interest at prime
plus 3% plus 2% for penalties and interest; unpaid principal
payments are bearing interest and penalties of prime plus 3%
plus 2%, interest due monthly and quarterly with principal due
through March 1997, secured by all assets of the Company........ 33,500,000 33,700,000
Notes payable to former owners of acquired laboratories, currently
in default, with interest rates ranging from 6.0% to 6.7%, with
additional late charges of 3% and 6%, respectively, due monthly
with principal due through July 1996; secured by assets acquired
from the related laboratories................................... 2,383,493 2,376,113
Notes payable for Accounts Payable vendors converted to notes,
currently in default, with interest rates ranging from 8% to
12%, principal due in monthly and quarterly installments due
through April 1988.............................................. -- 1,047,767
Note payable to the City of Burbank, non-interest bearing, due
annually through September 2005 (annual payments forgiven if
building is still occupied)..................................... 150,000 150,000
Capital lease obligations (Note 8)................................ 1,442,455 850,935
------------ ------------
Liabilities subject to compromise in 1997......................... -- 121,984,291
Note payable to related party, bearing interest at 10%, principal
to be satisfied by issuance of 17% of issued and outstanding
stock of reorganized company; secured by property, assets, and
rights
of any kind..................................................... -- 5,000,000
Note payable to the Internal Revenue Service, bearing interest at
9%, principal due in monthly installments of $5,301 through May
2002............................................................ -- 261,732
Note payable bearing interest at 10%, principal due in monthly
installments of $11,886 through May 1997........................ -- 35,075
Capital lease obligations (Note 8)................................ -- 618,189
------------ ------------
124,835,424 5,914,996
Less -- Current installments...................................... 123,880,031 5,283,687
------------ ------------
Long-term debt, less current installments......................... $ 955,393 $ 631,309
============ ============
</TABLE>
As of February 28, 1997, the prime rate was 8.25%. All assets of the
Company are pledged as collateral to secure its borrowings. The loan agreements
with the Bank are conditional upon the Company's ongoing ability to comply with
certain covenants. The covenants include the maintenance of specified working
capital and debt-to-worth ratios.
F-43
<PAGE> 79
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has been in default since September of 1995 with respect to
principal and interest payments and certain covenants under its credit agreement
with respect to approximately $80.9 million of secured indebtedness. The secured
indebtedness under the Credit Agreement is classified as a Class 2 claim under
the Plan. The Company has also been in default since September of 1995 with
respect to interest payments on its $40 million 7.5% Convertible Subordinated
Debentures due 2000 and the Note issued by the Company in connection with the
acquisition of Medical Group Pathology Laboratory. The Debentures are classified
as a Class 3 claim under the Plan. The Company does not have available cash or
other cash resources available to cure the defaults under the Credit Agreement
or the Indenture covering the Debentures, or otherwise to make interest or
principal payments with respect to its debt obligations.
During the second quarter of fiscal 1996, the Company entered into
negotiations for the restructuring of its bank debt. The negotiations resulted
in the third and fourth amendment to its Credit Agreement with a group of banks
led by Wells Fargo Bank National Association (the holders of the Company's debt
obligations pursuant to the Credit Agreement hereinafter are referred to as the
"Bank Group"). As a result of insufficient cash flows caused by, among other
things, reductions in third party payor reimbursement rates, billing and
collection problems and effects and changes in the health care industry, the
Company was unable to make interest payments under its Credit Agreement due
monthly since September 1995, each in the amount of approximately $660,000
(excluding penalties on unpaid amounts), principal amortization payments due on
September 13, 1995 and October 6, 1995, each in the amount of $600,000,
principal amortization payments due on November 3, 1995, December 29, 1995 and
March 31, 1996, each in the amount of $1,200,000, principal amortization
payments due on February 7, 1996, June 30, 1996, September 30, 1996, December
31, 1996 and March 31, 1997, each in the amount of $3.6 million. In addition,
the Company failed to make four interest payments each in the amount of $1.5
million in respect of its Debentures due on August 15, 1995, February 15, 1996,
August 15, 1996 and February 17, 1997, respectively. Failure to pay the interest
with respect to the Debentures, as well as failure to timely pay principal and
interest with respect to the loans under the Credit Agreement, constitute
defaults under the Credit Agreement and the Indenture governing the Debentures.
The deferred financing costs related to the Credit Agreement and the Debentures
of $1,450,140 and $1,668,466 were written off as of August 31, 1995 and February
29, 1996, respectively. The costs associated with the Credit Agreement
restructuring and write off of the deferred financing costs has been reflected
in the statement of operations as Credit Restructuring costs.
As a result of the Company's failure to make principal and interest
payments under its existing Lender Agreements, the Company and its Senior
Lenders entered into the Third Amendment to the Credit Agreement in May 1995. In
connection with the Third Amendment to the Credit Agreement, the lenders
required the Company's guarantor, one of the Company's largest shareholders, to
provide a guaranty of the Company's borrowings in the amount of $3.5 million. In
December 1996, the Company's guarantor paid the full amount of the guaranty to
the Senior Lenders. This extraordinary item resulted in a net gain per common
share of $.57.
On October 13, 1995, the Company was notified by the Nasdaq Stock Market
Listing Qualification Committee (the "Listing Committee") that the Company's
common stock would be removed from listing on the Nasdaq National Market but
would be listed on the Nasdaq SmallCap Market due to the Company's inability to
satisfy the Nasdaq National Market's net tangible assets requirement. The
Company had been granted a temporary exception to the Nasdaq National Market's
net tangible asset requirement, which exception expired on October 12, 1995. The
Company's common stock began to trade on the Nasdaq SmallCap Market on Monday
October 16, 1995. On October 25, 1995, the Listing Committee determined not to
extend certain exceptions to the applicable listing requirements, and the
Company's common stock was removed from trading on the Nasdaq SmallCap Market.
The Company's common stock currently trades in the over-the-counter market.
F-44
<PAGE> 80
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The removal of the Company's common stock from listing on the Nasdaq
National Market System constituted a Redemption Event under the Company's
Indenture governing its Debentures. Such Redemption Event required the Company
to offer to repurchase the Debentures from the holders thereof at a redemption
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest, if any. Written notice of the occurrence of such Redemption Event was
given to the registered holders of the Debentures on November 2, 1995, and no
such holder perfected its right to redeem such Debentures within the period
provided under the Indenture. In addition, under the terms of the Registration
Rights Agreement between the Company and holders of the Debentures, the Company
is obligated to maintain an effective registration statement covering the
Debentures and the Company's common stock with respect to which the Debentures
are convertible.
Maturities of long-term debt, excluding capital lease obligations, in each
of the next five fiscal years are as follows:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 (29),
-----------------------------------------------------
<S> <C>
1998............................................... $126,210,043
1999............................................... 45,542
2000............................................... 49,843
2001............................................... 54,549
2002............................................... 59,701
Thereafter........................................... 10,485
------------
$126,430,163
============
</TABLE>
The above table reflects maturities of long-term debt before the effects of
changes under the Plan that will occur on the Effective Date. On the Effective
Date, substantially all of the existing long-term debt will be replaced with $55
million of New Senior Notes and common stock of the New Company, as described in
Note 2.
On November 4, 1993, the Company entered into an interest rate swap with an
investment bank. The swap is for $10,000,000 notional amount with a fixed rate
of 4.5625% received by the Company and a floating rate paid by the Company at
the six-month London Interbank Offered Rate (LIBOR). The rate adjustment dates
are November 8 and May 8 each year and the payment dates are six months after
the rate adjustment date. The swap contract expired November 8, 1996.
As of February 29, 1996 six month LIBOR was 5.297%. The Company did not
make its May 8, 1995, November 8, 1995 and May 8, 1996 semi-annual payments of
$76,684, $93,750 and $59,375 based upon six month LIBOR of 6.094% as of November
8, 1994, 6.061% as of May 8, 1995 and 5.75% as of November 8, 1995. As of
February 28, 1997 the fair value of this contract was a liability of the Company
of approximately $150,000.
The Company entered into the swap to convert a portion of its fixed rate
subordinated debentures to a variable rate. As such, the Company had been
accruing the net payments to be made on the contract as an adjustment to
interest expense.
(6) LINE OF CREDIT
The company has a line of credit with a financial institution which
provides for maximum borrowings of $9,800,000 under the DIP Financing Facility
bearing interest at prime plus 2%. As of February 28, 1997, $5,243,182 had been
withdrawn on the line, and $4,556,818 was available to be withdrawn. Immediately
prior to the Effective Date, provided that no unwaived event of default exists
under the DIP Financing Facility, any amounts available under the DIP Financing
Facility will be borrowed by the Company so that the total
F-45
<PAGE> 81
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding principal balance thereunder is $9,800,000. On the Effective Date,
all amounts owing under DIP Financing Facility will be forgiven without any
payment by the Debtors or further action by any party. The line is secured by a
first priority lien and security interest in all assets of the company.
(7) INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 (29),
-------------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current
Federal................................... $(2,947,750) $ (141,820) $ --
State..................................... -- (42,842) --
----------- ----------- -----------
(2,947,750) (184,662) --
Deferred
Federal................................... 531,783 (1,043,396) --
State..................................... 226,855 (315,192) --
----------- ----------- -----------
758,638 (1,358,588) --
----------- ----------- -----------
$(2,189,112) $(1,543,250) $ --
=========== =========== ===========
</TABLE>
The effective tax rate and statutory federal income tax rate are reconciled
as follows:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28
(29),
-------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Federal statutory income tax rate........................... (34.0)% (34.0)% (34.0)%
State franchise taxes, net of federal income tax benefit.... (6.1) (6.1) (6.1)
Change in valuation allowance............................... 5.8 38.3 40.1
Additional provision for intangible assets.................. 4.5 -- --
Other....................................................... 1.7 (0.2) --
----- ----- -----
(28.1)% (2.0)% --%
===== ===== =====
</TABLE>
F-46
<PAGE> 82
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At February 28, 1997, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $76,670,000 and
$38,370,000 respectively. The loss carryforwards expire between the years 1997
and 2012 for federal and state income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 29 (28),
-----------------------------
1996 1997
------------ ------------
<S> <C> <C>
DEFERRED TAX (ASSETS)/LIABILITIES
Current
Accrued Expenses..................................... $ (1,114,146) $ (1,039,480)
Bad Debt............................................. (4,765,504) (8,842,877)
Prepaid Expenses..................................... 65,021 (282,184)
Other................................................ 499,304 214,915
------------ ------------
Total Current Deferred (Assets)/Liabilities............ (5,315,325) (9,949,626)
Valuation Allowance.................................. 5,315,325 9,949,626
------------ ------------
Net Current Deferred (Assets)/Liabilities.............. -- --
Non-Current
Amortization......................................... (9,598,474) (30,247,568)
Depreciation......................................... (448,365) (843,566)
Net Operating Loss................................... (15,037,165) (29,190,589)
Sec. 481(a) Cash to Accrual.......................... 44,032 --
------------ ------------
Total Non-Current Deferred (Assets)/Liabilities........ (25,039,972) (60,281,723)
Valuation Allowance.................................... 25,039,972 60,281,723
------------ ------------
Net Non-Current Deferred (Assets)/Liabilities.......... -- --
TOTAL NET DEFERRED (ASSETS)/LIABILITIES................ $ -- $ --
============ ============
</TABLE>
As discussed in Note 2, the Company has filed petition for relief under
Chapter 11 of the Federal Bankruptcy Laws. To the extent that the Company is
insolvent, cancellation of indebtedness income arising from the Plan of
Reorganization will be offset against the federal net operating losses.
Additionally, as a result of the "change in ownership" provisions of the Tax
Reform Act of 1986, a portion of any remaining federal net operating loss
carryover may be subject to an annual limitation regarding their utilization
against taxable income in future periods.
(8) LEASES
The Company is obligated under capital leases for certain computer and
laboratory equipment that expire at various dates during the next five years.
Equipment under capital leases was $3,928,355 and $4,002,622, and related
accumulated amortization was $2,218,837 and $2,913,010 as of February 29, 1996
and February 28, 1997.
The Company also leases its laboratories and patient service centers under
operating leases expiring over various terms. Many of the monthly lease payments
are subject to increases based on the Consumer Price Index from the base year.
Beginning March 1, 1989, the Company began subletting one of its unoccupied
facilities. The sublease term coincides with that of the remaining primary lease
of eight years with rent for the year ended
F-47
<PAGE> 83
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
February 28, 1997 equal to $217,795 and subject to annual increases based on the
Consumer Price Index not to exceed 10% per year.
The Company also leases remote draw station space, several automobiles and
other equipment, which have been classified as operating leases and expire over
the next 9 years. Many of the draw station leases have renewal options and
monthly lease payment subject to annual increases.
Future minimum lease payments under noncancelable operating leases and the
present value of future minimum capital lease payments as of February 28, 1997
are:
<TABLE>
<CAPTION>
YEAR ENDED CAPITAL OPERATING
FEBRUARY 28 (29), LEASES LEASES
---------------------------------------------------------- ---------- ----------
<S> <C> <C>
1998................................................. $ 772,117 $2,778,390
1999................................................. 569,517 1,790,159
2000................................................. 309,002 1,057,639
2001................................................. -- 223,408
2002................................................. -- 81,849
Thereafter.............................................. -- 42,050
---------- ----------
Total minimum lease payments.............................. 1,650,636 $5,973,495
==========
Less -- Amount representing Interest (at rates ranging
from 7.2% to 20.7%)..................................... 181,512
----------
Present value of net minimum capital lease payments....... $1,469,124
==========
</TABLE>
Total rental expense under operating leases was $7,178,089, $10,199,909 and
$6,113,445 for fiscal years 1995, 1996 and 1997, respectively.
(9) RELATED PARTY TRANSACTIONS
The Company provides laboratory and computer services to certain of its
stockholders (and their affiliated entities). Laboratory and computer service
charges are billed to and paid by the stockholders at negotiated rates. The
following laboratory and computer service revenue was billed by the Company to
stockholders (and their affiliated entities).
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 (29),
----------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Laboratory and computer service revenue from
stockholders............................... $3,546,012 $3,562,950 $2,407,989
========== ========== ==========
</TABLE>
Amounts due from stockholders and included in accounts receivable were as
follows:
<TABLE>
<CAPTION>
FEBRUARY 29 (28),
---------------------
1996 1997
-------- --------
<S> <C> <C>
Amounts due from stockholders................................ $476,923 $322,964
======== ========
</TABLE>
The Company received management services from Diagnostic Pathology Medical
Group, Inc. (DPMG), a stockholder of the Company. The services of certain
management personnel were provided to the Company for management fees at a cost
of $326,000, $256,253 and $104,010 for fiscal years 1995, 1996 and 1997,
respectively.
In addition, the Company received professional services from the former
owners of certain of its acquisitions. Professional service fees paid in
connection with the related professional service agreements were $550,000,
$188,000 and $9,333 in fiscal years 1995, 1996 and 1997, respectively.
F-48
<PAGE> 84
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company occasionally uses the specialized laboratory services of one of
its owners and several of its owners' stockholders. Most of these services are
billed to the Company at negotiated discounts from the billing entities'
customary charges. Amounts billed to the Company were as follows:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 (29),
-----------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Billings from stockholders......................... $ 362,851 $ 391,926 $ 326,920
========= ========= =========
</TABLE>
The Company has loaned the President and CEO funds at various times as
follows:
<TABLE>
<CAPTION>
DATE INTEREST RATE AMOUNT
------------------------------------------------------------- ------------- ---------
<S> <C> <C>
October 1990................................................. 10% $ 50,000
October 1993................................................. 7% 150,000
August 1994.................................................. 7% 150,000
--- --------
Total outstanding as of February 28, 1997.................... $ 350,000
========
</TABLE>
As of February 28, 1997, no payments have been received.
The Company also leases draw station space and purchases other services and
various supplies from several of its stockholders. The total amount paid by the
Company for these items was $123,944, $97,137 and $26,691 for fiscal years 1995,
1996 and 1997, respectively.
(10) EMPLOYEE BENEFIT PLAN
As of January 1, 1989, the Company adopted a 401(k) profit sharing plan
under which employees may contribute between 1% and 20% of their annual
compensation to the Plan. A minimum of 90 days of service is required prior to
participation in the Plan by an employee. On April 30, 1990, the plan was
amended to provide that the Company would contribute 50% of employee
contributions up to 6% of their annual gross compensation for those employee who
have at least one full year of service. The Company contribution to the 401(k)
plan was discontinued effective December 31, 1995. The Company contributed
$398,906 and $288,219 in fiscal years 1995 and 1996, respectively.
(11) STOCK OPTION PLAN AND WARRANTS
STOCK OPTION PLAN
In March 1992 and February 1994, the Board of Directors adopted and the
stockholders of the Company subsequently approved two separate stock option
plans (the "1992 Plan" and the "1994 Plan," respectively and together, the
"Stock Option Plans"). These Stock Option Plans provide for the granting to
employees and directors of nonqualified stock options to purchase authorized but
unissued common stock. The maximum number of shares that may be sold under the
1992 Plan and the 1994 Plan is 590,649 and 300,000, respectively, subject to
anti-dilution adjustments. The Board of Directors has designated the
Compensation Committee to administer the Stock Option Plans. The Committee is
empowered to designate the employees who will receive options and to determine
the number of shares, vesting schedule, option price (which may not be less than
85% of the fair market value of the optioned shares), and option term (which may
not exceed ten years except in limited circumstances). Options may provide for
payment of the option price in cash, by application of vested deferred
compensation credits, or by the surrender of shares owned by the optionee for
more than one year. Options are not transferable except upon death and may be
exercised during the lifetime only by the optionee or his legal representative.
Options will terminate 180 days or 270 days after termination of the optionee's
employment under the 1992 Plan and the 1994 Plan, respectively, or two years
after permanent disability or death. The Board of Directors may amend the Stock
Option Plan in any respect. The Committee may modify outstanding options or may
accept the cancellation of existing options in return for the
F-49
<PAGE> 85
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
grant of new options (which may be for the same or a different number of shares
and specify the same or a different option price). No option may be granted
under the 1992 Plan or the 1994 Plan after July 28, 2002, or January 12, 2004,
respectively.
In connection with the acquisition of MGPL, PCLG and San Joaquin Diagnostic
Laboratories (SJDL), options were granted under a plan (the "Acquisition Stock
Option Plan") separate from the 1992 Plan and the 1994 Plan. The Stock Option
Plans are classified as class 9 claims under the Plan.
STOCK OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
1992 1994 ACQUISITION TOTAL OPTION
PLAN PLAN PLAN OPTIONS PRICE
-------- ------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Outstanding at February 28, 1994....... 564,645 36,667 50,842 652,154 $5.50 - $14.25
Granted................................ 188,000 30,000 -- 218,000 $8.88 - $11.50
Exercised.............................. (7,500) -- -- (7,500) $5.50
Forfeited.............................. (15,000) -- -- (15,000) $10.25 - $11.50
Expired................................ -- -- (26,035) (26,035) $14.25
-------- ------ -------- -------- --------------
Outstanding at February 28, 1995....... 730,145 66,667 24,807 821,619 $5.50 - $14.25
Granted................................ 10,000 -- -- 10,000 $4.25
Forfeited.............................. (94,845) -- -- (94,845) $5.50 - $11.50
-------- ------ -------- -------- --------------
Outstanding at February 29, 1996 and
February 28, 1997.................... 645,300 66,667 24,807 736,774 $5.50 - $11.50
</TABLE>
ADDITIONAL INFORMATION REGARDING STOCK OPTIONS
<TABLE>
<CAPTION>
2/28/95 2/29/96 2/28/97
-------- -------- --------
<S> <C> <C> <C>
Authorized shares..................................... 941,491 941,491 941,491
Shares available for granting......................... 119,872 204,717 204,717
Exercisable shares.................................... 293,683 372,787 451,891
</TABLE>
In addition to the shares reflected above, 5,000 options each were granted
to each member of the Board of Directors, subject to shareholder approval. The
exercise price of these options will be 85% of the greater of the market price
of the Company's common stock on November 14, 1994 and the price on the date of
shareholder approval.
WARRANTS
In connection with a revision to the Company's Credit Agreement with the
Bank Group (the Third Amendment), two warrants were issued to Sutter Health in
exchange for a guaranty of $3,500,000 of borrowings from the Bank Group. In
December 1996, Sutter Health paid the $3,500,000 guaranty as the Company was in
default of the Credit Agreement.
In exchange for the guaranty, Sutter Health received a warrant to purchase
up to 1,200,000 shares of the Company's common stock (Warrant A) and a second
warrant to purchase up to 300,000 shares of the Company's common stock (Warrant
B). The exercise prices of Warrant A are as follows:
<TABLE>
<S> <C>
Tranche 1:............................... 125,000 shares at $4.2219 per share
Tranche 2:............................... 687,500 shares at $5.1266 per share
Tranche 3:............................... 387,500 shares at $5.1266 per share
</TABLE>
Tranches 1 and 2 became exercisable May 10, 1995. Tranche 3 became
exercisable June 10, 1995.
F-50
<PAGE> 86
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Warrant B became exercisable as of June 10, 1995. Rights to purchase shares
under Warrant B may be exercised under the same terms as Tranche 3. Both
warrants expired 90 days from the expiration date of the guaranty.
(12) EMPLOYEE STOCK PURCHASE PLAN
In March 1993, the Board of Directors adopted, and the shareholders
approved, an employee stock purchase plan ("ESPP") which provide employees of
the Company with an opportunity to purchase common stock of the Company at 85%
of fair market value through payroll deductions. The maximum number of shares
that may be sold under the ESPP is 225,000 subject to adjustments upon changes
in capitalization of the Company. During fiscal 1995, 1996 and 1997, 13,603,
5,378 and 38,332 shares respectively of Common Stock were purchased through this
plan for $111,623, $24,090 and $34,279, respectively. The Board of Directors has
designated the Compensation Committee to administer the ESPP. On February 29,
1996 198,883 shares were available to be granted under the plan. The ESPP was
discontinued effective June 30, 1996.
(13) EMPLOYMENT AGREEMENT
The Company's CEO entered into an employment agreement with the Company
with a term expiring on February 28, 1999, which provides for his employment as
Chief Executive Officer. This agreement provides for a base salary of $375,000
annually and for quarterly bonuses of up to 3% of pre-tax net profits dependent
on the achievement of pre-tax net profit and other performance objectives. The
Company may terminate the agreement before the end of its term if certain
performance objectives have not been achieved. The Company may also terminate
the agreement without any cause by providing severance pay equal to two times
current base salary plus bonus for the four preceding quarterly periods.
The CEO also entered into two compensation agreements with the Company.
Under one of these agreements, the CEO received the sum of $155,000 in cash on
March 1, 1992, representing payment of accrued deferred compensation, and an
additional deferred compensation credit of $100,000 that may be applied only to
offset the purchase price of stock options awarded to the CEO which are
described in Note 9.
Under the other agreement, a deferred compensation account in the amount of
$1,855,000 was established for the CEO which vests at the rate of one seventh on
March 1 in each of the years 1993 through 1999. The vested portion, in general,
may be applied only to offset the purchase price of stock options granted to the
CEO. If, on any March 1 vesting date, the fair market value of the Company is
determined to be less than $40 million, the vesting schedule is delayed by one
year.
Under the Plan, all employment contracts or agreements between the CEO and
the Company will be treated as a single Class 5 claim, in an allowed amount not
exceeding $390,000.
(14) LEGAL PROCEEDINGS
As discussed previously, on November 8, 1996 (Petition Date), the Company
and its subsidiaries commenced reorganization cases by filing voluntary
petitions for relief under chapter 11 of the Bankruptcy Code in the Bankruptcy
Court. Under chapter 11, actions to enforce certain claims against the Company
are stayed if the claims arose, or are based on, events that occurred on or
before the Petition Date. The ultimate terms of settlement of these claims will
be determined in accordance with the terms of the Plan confirmed by the
Bankruptcy Court on April 18, 1997.
Prepetition claims that were contingent, unliquidated, or disputed as of
the Petition Date, including, without limitation, those that arise in connection
with rejection of executory contracts or unexpired leases, may be allowed or
disallowed depending on the nature of the claim. Such claims may be fixed by the
Bankruptcy Court or otherwise settled or agreed upon by the parties and approved
by the Bankruptcy Court.
F-51
<PAGE> 87
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Described below are certain legal proceedings involving the Company that
were in existence as of the Petition Date. All such proceedings have been stayed
pursuant to section 362 of the Bankruptcy Code, and can only proceed with the
approval of the Bankruptcy Court. As a general matter, the treatment of claims
arising prior to the Petition Date, including claims on account of litigation,
will be determined and paid pursuant to the terms of the Plan. The Plan provides
that following the Effective Date, such prepetition litigation, as well as
postpetition litigation involving claims based upon prepetition events, will
become subject to a permanent injunction. The Plan further provides that the
Company, the reorganized Company or the Committee may resolve or adjudicate the
amount of a prepetition litigation claim in the manner in which such claim would
have been resolved if the Company had not instituted the Bankruptcy Cases.
Additionally, the Bankruptcy Court may enter orders modifying the automatic stay
and/or permanent injunction to permit certain matters to continue to be
prosecuted in the courts or before arbitrators where or before whom such matters
are pending, generally for the purpose of pursuing payment of such claims as are
insured from third-party insurers. Because of the bankruptcy proceedings, the
Company's financial exposure with respect to the prepetition litigation claims
set forth in actions currently pending against the Company is limited by the
Plan and should not have a material financial impact on the Company.
A dispute has arisen between the Company and Medical Group Pathology
Laboratory, Inc. ("MGPL"), the seller of the Santa Barbara facility which the
Company acquired in 1992 (Acquisition), relating to the payment obligations
under the Agreement of Purchase and Sale of Assets between the Company and MGPL.
The Company and MGPL have been unable to reach successful negotiations with
respect to this matter. On November 8, 1995, MGPL commenced an action
(Litigation) against the Company in the Superior Court of the State of
California, Santa Barbara County, captioned Medical Group Pathology Laboratory,
Inc. v. Physicians Clinical Laboratory, Inc. (Case No. 210318). The complaint
alleges breach of the promissory note executed by the Company in connection with
the Acquisition and failure to pay amounts due thereunder equalling $1,169,505
plus interest and late fees, and seeks compensatory damages in the amount of
sums allegedly due, in addition to unspecified general damages and attorney's
fees. In December, 1995, a default was entered against the Company in the
Litigation. The Company has no substantive defenses to the Litigation. The
Company was able to have the default set aside before a judgment was entered in
connection therewith. As of the Petition Date (at which time the Litigation was
stayed), a standstill agreement with MGPL was in effect, pursuant to which the
parties agreed to attempt in good faith to determine the precise amount owed to
MGPL by the Company under the MGPL Agreement. As of February 28, 1997, the
outstanding principal amount of the Note issued by the Company to MGPL in
connection with the MGPL Agreement was $890,107.
On June 20, 1996, suit was filed against the Company in the Superior Court
of Sacramento under the caption Maintenance Management Corporation v. Physicians
Clinical Laboratory, Inc., Case No. 96AS03171. This lawsuit relates to a
management contract entered into among the Company and the plaintiff therein,
and alleges breach of contract and fraudulent and negligent misrepresentation.
The complaint seeks compensatory damages in excess of $3.0 million, interest and
expenses, as well as exemplary damages. However, based upon the facts presently
known to the Company, it does not believe that the merits of these claims, if
any, justify the amount of damages sought, and the Company does not believe that
this lawsuit, if adversely determined, would have a material adverse effect on
the financial condition of the Company.
In the ordinary course of business, several lawsuits have been filed
against the Company by former employees alleging, among other things, employment
discrimination and harassment, fraud, wrongful (including retaliatory) discharge
in violation of public policy, and related claims, including intentional and
negligent infliction of emotional distress, loss of consortium, breach of
contract and breach of the covenant of good faith and fair dealing. A number of
such suits include claims against current employees of the Company. Any existing
indemnification arrangements between any such employees and the Company with
respect to such claims are subject to the terms of the Plan as prepetition
claims, as described above.
F-52
<PAGE> 88
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, several lawsuits have been filed against the Company by
former patients alleging medical malpractice and requesting punitive damages.
Notwithstanding the limitations on the Company's liability exposure resulting
from the bankruptcy proceedings, as described above, the Company does not expect
these matters, either individually or in the aggregate, to have a material
adverse effect on the financial condition of the Company. Moreover, the Company
believes that its insurance policies may cover some or all judgments against the
Company, if any, in these matters.
To date, the Company has not experienced any significant liability with
respect to such claims.
Postpetition Litigation
On or about January 22, 1997, Taylor R. McKeeman, the Company's former Vice
President for Laboratory Operations, filed a Request for Payment of
Administrative Expense with respect to a prepetition Separation Agreement
between the Company and Mr. McKeeman. Under the Separation Agreement, Mr.
McKeeman is entitled to receive a severance payment in the event he is
terminated after a "Change in Control" occurs, as such term is defined in the
Separation Agreement. This request was denied by order of the Bankruptcy Court,
entered on March 19, 1997, because (i) no Change in Control occurred prior to
the termination of Mr. McKeeman's employment and (ii) any claim of Mr. McKeeman
against the Company's bankruptcy estates arising out of the Separation Agreement
constitutes a prepetition claim. Mr. McKeeman filed a notice of appeal on or
about March 5, 1997. If Mr. McKeeman were to prevail on appeal, the Company
would incur an administrative claim against their estates in the approximate
amount of $300,000.
Regulatory Investigation
In April of 1997, the Company received a subpoena to furnish certain
documents to the United States Department of Defense ("DOD") with respect to the
Company's Civilian Health and Medical Program of Uniformed Services ("CHAMPUS")
billing practices. The Company has produced and will continue to produce
documents in response to the DOD's subpoena. In late May 1997, the Company was
notified that its Medicare and Medi-Cal billing practices also were undergoing
review by the United States Department of Health and Human Services ("HHS"), and
in early June of 1997, the Company received a subpoena to furnish certain
documents to HHS in connection with such review. The Company is cooperating with
DOD and HHS in such investigations. The Company believes that these
investigations may be similar to investigations being conducted by DOD and HHS
with respect to the billing practices of the clinical laboratory testing
industry. The Company further believes that these investigations are in their
early stages. There can be no assurance that the result of such investigations
as they relate to the Company would not subject the Company 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 healthcare programs), which could
have a material adverse effect on the financial condition of the Company.
(15) ACQUISITIONS AND INTANGIBLE ASSETS
In February 1997, the Company purchased 100% of the common stock of MSI
from Nu-Tech for $7,643,183.
The Company accounted for the transaction using the purchase method of
accounting and has included MSI in the accompanying financial statements. There
is no operating activity of MSI included in the
F-53
<PAGE> 89
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
statement of operations of the Company for the year ended February 28, 1997. Pro
forma results of operations are as follows for the year ended February 28 (29):
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 (29),
------------------------------
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Net revenue............................................ $105,093,420 $ 75,125,077
Net loss............................................... $(81,920,908) $(102,004,130)
Net loss per common share.............................. $ (13.58) $ (16.82)
</TABLE>
As reported on the Company's Current Report on Form 8-K for January 24,
1997, on January 2, 1997, the Company's Board of Directors voted to accept the
proposal of the independent certified public accounting firm of Ernst & Young
LLP to audit the consolidated financial statements of the Company for the fiscal
year ending February 28, 1997. Accordingly, the engagement of Arthur Andersen
LLP as the Company's independent auditors was discontinued effective January 17,
1997. For further information, see the Company's Current Report on Form 8-K for
January 24, 1997.
F-54
<PAGE> 90
NU-TECH BIO-MED, INC.
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following unaudited pro forma consolidated statement of operations data
for the three months ended March 31, 1997 and the year ended December 31, 1996
give pro forma effect to the Company's pending acquisition of a majority 52.6%
interest in PCL (including an indirect majority interest in MSI, which is a
wholly-owned subsidiary of PCL) as if such acquisition had occurred on January
1, 1997 and 1996, respectively, and the following unaudited pro forma
consolidated balance sheet data at March 31, 1997 gives effect to the Company's
pending acquisition of a majority 52.6% interest in as if it had occurred on
March 31, 1997. The Company has not completed its evaluation of the carrying
value of fixed assets or intangible assets acquired or debt assumed. The actual
allocation of the final purchase price may be different from that reflected in
the pro forma financial information. Such evaluation is expected to be completed
prior to the filing of the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997. The unaudited pro forma consolidated financial data are
not necessarily indicative of what the Company's financial condition or results
of operations would have been had the acquisition been consummated at the
assumed dates.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
---------------------------------------------------------------------
ADJUSTMENTS
TO INCLUDE
OTHER
NU-TECH PCL ACQUIRED PRO FORMA PRO FORMA
HISTORICAL(1) HISTORICAL(2) COMPANIES(3) ADJUSTMENTS(4) COMBINED
------------- ------------- ------------ -------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues...................................... $ 1,943 $ 13,175 $1,257 $ -- $ 16,375
Cost of revenues.................................. 1,542 10,443 942 -- 12,927
------- --------- ------ -------- --------
Gross profit (deficiency)......................... 401 2,732 315 -- 3,448
Operating expenses................................ 1,207 16,100 240 (1,188)(a) 17,553
------- --------- ------ --------
1,194(b)
--------
Operating income (loss)........................... (806) (13,368) 75 (6) (14,105)
Net interest income (expense)..................... (519) (4,359) (31) 4,399(c) (2,573)
(2,063)(d)
Loss attributable to minority interest............ -- -- -- 8,541(e) 8,541
Other income (loss)............................... -- (60,738) (4) 59,400(f) (1,342)
------- --------- ------ -------- --------
Net income (loss)................................. $(1,325) $ (78,465) $ 40 $ 70,271 $ (9,479)
Net income (loss) per share....................... $ (1.36) $ (35.78) $ .02 $ 32.04 $ (5.08)
Weighted average common shares outstanding........ 2,193 2,193 2,193 2,193 2,193
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------------------
ADJUSTMENTS
TO INCLUDE
OTHER
NU-TECH PCL ACQUIRED PRO FORMA PRO FORMA
HISTORICAL(1) HISTORICAL(2) COMPANIES(3) ADJUSTMENTS(4) COMBINED
------------- ------------- ------------ -------------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues...................................... $ 1,065 $ 62,831 $ 12,135 $ -- $ 76,031
Cost of revenues.................................. 1,278 43,131 9,675 -- 54,084
------- --------- -------- -------- --------
Gross profit (deficiency)......................... (213) 19,700 2,460 -- 21,947
Operating expenses................................ 5,662 43,394 4,672 (4,670)(a) 53,833
------- --------- -------- --------
4,775(b)
--------
Operating income (loss)........................... (5,875) (23,694) (2,212) (105) (31,886)
Net interest income (expense)..................... 102 (15,817) (428) 16,266(c) (8,127)
(8,250)(d)
Loss attributable to minority interest............ -- -- -- 13,517(e) 13,517
Other income (loss)............................... (2,015) (62,668) (163) 59,400(f) (5,446)
------- --------- -------- -------- --------
Net income (loss)................................. $(7,788) $(102,179) $ (2,803) $ 80,828 $(31,942)
Net income (loss) per share....................... $ (5.66) $ (52.10) $ (1.43) $ 41.21 $ (17.98)
Weighted average common shares outstanding........ 1,961 1,961 1,961 1,961 1,961
</TABLE>
F-55
<PAGE> 91
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------------------------------------------------
NU-TECH PCL PRO FORMA PRO FORMA
HISTORICAL(1) HISTORICAL(2) ADJUSTMENTS(4) COMBINED
------------- ------------- -------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets
Cash and cash equivalents.................... $ 1,053 $ 501 $ 4,556(g) $ 6,110
Accounts receivable, net..................... 74 9,941 -- 10,015
Inventory.................................... 11 1,534 -- 1,545
Other current assets......................... 98 1,513 -- 1,611
------- --------- ---------- -------
Total current assets....................... 1,236 13,489 4,556 19,281
Property and equipment, net.................... 365 11,596 11,961
Investment in senior debt of PCL............... 13,287 -- (13,287)(h) --
Deferred acquisition costs..................... 1,077 -- (1,077)(h) --
Notes receivable............................... 100 -- -- 100
Intangible assets, net......................... 721 -- 47,752(h) 48,473
Other assets................................... 18 688 -- 706
------- --------- ---------- -------
Total assets................................... $16,804 $ 25,773 $ 37,944 $80,521
======= ========= ========== =======
Current liabilities
Accounts payable and accrued liabilities..... $ 547 $ 10,095 $ (1,350)(i) $ 9,792
500(h)
Notes payable................................ -- 5,000 (5,000)(i) --
Line of credit............................... -- 5,243 (5,243)(i) --
Other current liabilities.................... 56 -- -- 56
Current portion of long-term debt and
capitalized leases......................... 222 284 200(i) 706
------- --------- ---------- -------
Total current liabilities.................. 825 20,622 (10,893) 10,554
Long-term debt, net of interest to be accreted
totaling $15,913............................. -- -- 39,087(h)(i) 39,087
Other long-term debt and capitalized lease
obligations.................................. 77 632 752(i) 1,461
Liabilities subject to compromise.............. -- 167,776 (167,776)(i) --
Minority interest.............................. -- -- 13,517(h) 13,517
Total stockholders' equity (deficit)........... 15,902 (163,257) 127,973(i) 15,902
------- --------- -------
35,284(h)
----------
Total liabilities and stockholders' equity..... $16,804 $ 25,773 $ 37,944 $80,521
======= ========= ========== =======
</TABLE>
- ---------------
(1) Nu-Tech's historical statement of operations data includes the three-month
period ending March 31, 1997 and the year ended December 31, 1996,
respectively, and March 31, 1997 for the balance sheet data.
(2) PCL's historical statement of operations data includes the three-month
period ending February 28, 1997 and the year ended February 28, 1997,
respectively, and February 28, 1997 for the balance sheet data.
(3) Includes adjustments to recognize an entire three month period to reflect
the acquisition of MSI for the three month period ended March 31, 1997;
includes adjustments to recognize an entire year to reflect the acquisition
of MSI and Prompt Medical for the year ended December 31, 1996.
(4) A summary of the pro forma adjustments is set forth as follows:
(a) To eliminate amortization of historical goodwill of PCL.
(b) To record amortization of newly created goodwill as a result of
Nu-Tech's acquisition of PCL.
(c) To eliminate interest expense incurred by PCL and MSI on debt to be
forgiven.
(d) To record interest expense on the $55 million debt using a 12% rate,
payable in additional debt. Also includes accretion of debt discount.
(e) To record the minority interest share of losses up to the extent of
the minority interest ($4.7 million suspended for the year ended
December 31, 1996).
(f) To eliminate write down of historical intangibles of PCL.
(g) To reflect the borrowing of the remainder of the $9.8 million
debtor-in-possession financing.
(h) To reclassify Nu-Tech's net investment in Senior Debt of PCL
($13,287) and deferred acquisition costs ($1,077) as a 52.6%
investment in PCL's equity and to record minority interest (47.4%) in
the net assets of PCL at their fair value.
(i) To account for PCL liabilities to be converted to equity or modified
by the bankruptcy court in accordance with the PCL Plan.
F-56
<PAGE> 92
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses in connection with the issuance and distribution of the securities
being registered herein are estimated.
<TABLE>
<CAPTION>
ITEM AMOUNT
------------------------------------------------------------------ --------
<S> <C>
Securities and Exchange Commission Registration Fee............... $ 5,078
Nasdaq Stock Market listing fee................................... $ 7,500
Boston Stock Exchange listing fee................................. $ 5,000
Printing and Engraving Expenses................................... $ 15,000
Accounting Fees and Expenses...................................... $ 35,000
Legal Fees and Expenses........................................... $ 50,000
Blue Sky Fees and Expenses........................................ $ 5,000
Miscellaneous Fees and Expenses................................... $ 6,422
---------
Total................................................... $129,000
=========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The General Corporation Law of Delaware provide generally that a
corporation may indemnify any person who was or is a party to or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative in nature,
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys' fees)
and, in a proceeding not by or in the right of the corporation, judgments, fines
and amounts paid in settlement, actually and reasonably incurred by him in
connection with such suit or proceeding, if he acted in good faith and in a
manner believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reason to believe his conduct was unlawful. Delaware law further provides that a
corporation will not indemnify any person against expenses incurred in
connection with an action by or in the right of the corporation if such person
shall have been adjudged to be liable for negligence or misconduct in the
performance of his duty to the corporation unless and only to the extent that
the court in which such action or suit was brought shall determine that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for the expenses with
such court shall deem proper.
The By-Laws of the Company provide for indemnification of officers and
directors of the Company to the greatest extent permitted by Delaware law for
any and all fees, costs and expenses incurred in connection with any action or
proceeding, civil or criminal, commenced or threatened, arising out of services
by or on behalf of the Company, providing such officer's or director's acts were
not committed in bad faith. The By-Laws also provide for advancing funds to pay
for anticipated costs and authorized the Board to enter into an indemnification
agreement with each officer or director.
In accordance with Delaware law, the Company's Certificate of Incorporation
contains provisions eliminating the personal liability of directors, except for
(i) breaches of a director's fiduciary duty of loyalty to the Company or to its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law, and (iii) any
transaction in which a director receives an improper personal benefit. These
provisions only pertain to breaches of duty by directors as such, and not in any
other corporate capacity, e.g., as an officer. As a result of the inclusion of
such provisions, neither the Company nor its stockholders may be able to recover
monetary damages against directors for actions taken by them which are
ultimately found to have constituted negligence or gross negligence, or which
are ultimately
II-1
<PAGE> 93
found to have been in violation of their fiduciary duties, although it may be
possible to obtain injunctive or equitable relief with respect to such actions.
If equitable remedies are found not to be available to stockholders in any
particular case, stockholders may not have an effective remedy against the
challenged conduct.
The Company has entered into Indemnification Agreements with each of its
directors and officers (the "Indemnitees") pursuant to which it has agreed to
provide for indemnification, to the fullest extent permitted by law and the
Company's By-Laws, against any and all expenses, judgments, fines, penalties,
and amounts paid in settlement arising out of any claim in connection with any
event, occurrence or circumstance related to such individual serving as a
director or officer of the Company. Such indemnification includes the advance of
expenses to the Indemnitees (including the payment of funds in trust therefor
under certain circumstances) and is subject to there not having been determined
that the Indemnitee would not be permitted to be indemnified under applicable
law. The rights of indemnification are in addition to any other rights which the
Indemnitees may have under the Company's Certificate of Incorporation, By-Laws,
the Delaware General Corporation Law or otherwise.
ITEM 16. EXHIBITS
The following exhibits, designated by an asterisk (*), have been previously
filed with the Commission and, pursuant to 17 C.F.R. Section 230.411, are
incorporated by reference to the document referenced in brackets following the
descriptions of such exhibits. All other exhibits are filed herewith.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- ------------------------------------------------------------------------------------
<S> <C>
2.1* Asset Purchase Agreement dated September 13, 1996, among Nu-Tech Bio-Med, Inc., NTBM
Billing Services, Inc., Prompt Medical Services, Inc., Judith Prussin and Jeffrey
Prussin (filed without exhibits or schedules) [filed as Exhibit 2.1 to Report on
Form 8-K filed dated September 30, 1996].
2.2* Order Confirming Medical Science Institute's First Amended Plan of Reorganization
dated November 18, 1996 (US Central District of California Case No. LA 95-37790 ID)
together with First Amended Disclosure Statement and Plan of Reorganization for
Medical Science Institute [filed and Exhibit 2.2 to Report on Form 8-K filed with
the Commission on December 3, 1996].
2.3* Disclosure Statement of Physicians Clinical Laboratory as filed with the U.S.
Bankruptcy Court (Central District of California Case No. SV96-23185-GM) [filed as
Exhibit 2.3 to Form S-3, File No. 333-17859
2.4* Joint Plan of Reorganization of Physicians Clinical Laboratory as filed with the
U.S. Bankruptcy Court (Central District of California Case No. SV96-23185-GM) [filed
as Exhibit 2.4 to Form S-3, File No. 333-17859].
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 Registration
Statement on Form SB-2, File No. 33-84622].
3.2* Amendment and Restated By-Laws effective November 16, 1994 [Exhibit 3.2.2 to
Registration Statement on Form SB-2, File No. 33-84622].
3.3* Amended Certificate of Designation, Preferences and Rights and Number of Shares of
Series A Preferred Stock as filed with the Secretary of State of Delaware on October
23, 1996 [filed as Exhibit 3.3 to Report on Form 10-QSB for the fiscal quarter ended
September 30, 1996].
3.4* Certificate of Amendment of Amended Certificate of Designations, Preferences and
Rights and Number of Shares of Series A Convertible Preferred Stock as filed with
the Secretary of State of Delaware on November 20, 1996.
4.1* Form of Common Stock Certificate [Exhibit 4.1 to Registration Statement on Form
SB-2, File No. 33-84622].
</TABLE>
II-2
<PAGE> 94
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- ------------------------------------------------------------------------------------
<S> <C>
4.2* Form of Warrant and Warrant Agreement relating to Warrants to purchase an aggregate
of 114,286 shares of Common Stock issued to certain individuals on August 9, 1994 in
connection with a Bridge Financing [Exhibit 4.2 to Registration Statement on Form
SB-2, File No. 33-84622].
4.3* Form of Warrant Agreement issued to Starr Securities, Inc. and Stein, Shore
Securities, Inc. [Exhibit 4.4 to Registration Statement on Form SB-2, File No.
33-84622].
4.4* Form of Registration Rights Agreement dated August 9, 1994 between the Registrant
and certain individuals in connection with completed Bridge Financing [Exhibit 4.5
to Registration Statement on Form SB-2, File No. 33-84622].
5.1 Opinion of Camhy Karlinsky & Stein LLP.
10.1* Amended and Restated Employment Agreement with J. Marvin Feigenbaum [Exhibit 10.2 to
Registration Statement on Form SB-2, File No. 33-84622].
10.2* Employment Agreement with Dr. Kenneth E. Blackman as of July 1, 1994 [Exhibit 10.3
to Registration Statement on Form SB-2, File No. 33-84622].
10.3* Patent No. 4,559.299 dated December 17, 1985 [Exhibit 10.4 to Registration Statement
on Form SB-2, File No. 33-84622].
10.4* Patent No. 4,734,372 dated March 29, 1988 [Exhibit 10.5 to Registration Statement on
Form SB-2, File No. 33-84622].
10.5* Patent No. 4,937,298 dated June 26, 1990 [Exhibit 10.6 to Registration Statement on
Form SB-2, File No. 33-84622].
10.6* Assignment of Patent No. 4,559.299 recorded on March 29, 1993, by Brown University
Research Foundation, in favor of Analytical Biosystems Corporation [Exhibit 10.7 to
Registration Statement on Form SB-2, File No. 33-84622].
10.7* Assignment of Patent No. 4,734.372 recorded on March 29, 1993, by Brown University
Research Foundation, in favor of Analytical Biosystems Corporation [Exhibit 10.8 to
Registration Statement on Form SB-2, File No. 33-84622].
10.8* Assignment of Patent No. 4,937.187 recorded on March 29, 1993, by Brown University
Research Foundation, in favor of Analytical Biosystems Corporation [Exhibit 10.9 to
Registration Statement on Form SB-2, File No. 33-84622].
10.9* Consulting Agreement with Starr Securities, Inc. [Exhibit 10.10 to Amendment No. 1
to Registration Statement on Form SB-2, File No. 33-84622].
10.10* Funding Agreement dated December 14, 1990 between Rhode Island Partnership for
Science and Technology and Analytical Biosystems Corporation [Exhibit 10.11 to
Registration Statement on Form SB-2, File No. 33-84622].
10.11* Loan Agreement dated February 11, 1993 between State of Rhode Island Economic
Development Small Business Loan Fund Corporation ("SBLFC") and Analytical Biosystems
Corporation in the amount of $150,000 [Exhibit 10.(iii) to Report on Form 10-KSB for
the fiscal year ended December 31, 1992].
10.12* Loan Agreement dated February 25, 1993 between SBLFC and Analytical Biosystems
Corporation in the amount of $100,000 [Exhibit 10.(iii) to Report on Form 10-KSB for
the fiscal year ended December 31, 1992].
10.13* Loan Agreement dated April 19, 1993 between SBLFC and Analytical Biosystems
Corporation in the amount of $250,000 [Exhibit 10(i)(a) to Report on Form 8-K dated
April 30, 1993].
10.14* Loan Agreement dated October 22, 1993 between SBLFC and Analytical Biosystems
Corporation in the amount of $166,666 [Exhibit 10.(iii)(d) to Report on Form 10-KSB
for the fiscal year ended December 31, 1993].
</TABLE>
II-3
<PAGE> 95
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- ------------------------------------------------------------------------------------
<S> <C>
10.15* Loan Agreement dated February 17, 1994 between SBLFC and Analytical Biosystems
Corporation in the amount of $125,000 [Exhibit 10.(iii)(e) to Report on Form 10-KSB
for the fiscal year ended December 31, 1993].
10.16* Security Agreement dated October 22, 1993 between SBLFC and Analytical Biosystems
Corporation [Exhibit 10.17 to Registration Statement on Form SB-2, File No.
33-84622].
10.17* Patent Security Agreement dated April 19, 1993 between SBLFC and Analytical
Biosystems Corporation [Exhibit 10.18 to Registration Statement on Form SB-2, File
No. 33-84622].
10.18* Patent Security Agreement dated October 22, 1993 between SBLFC and Analytical
Biosystems Corporation [Exhibit 10.19 to Registration Statement on Form SB-2, File
No. 33-84622].
10.19* Form of Indemnification Agreements between Registrant and Registrant's Directors and
Officers [Exhibit 10.20 to Registration Statement on Form SB-2, File No. 33-84622].
10.20* Lease Agreement as of November 1, 1994 for facility located at 55 Access Road,
Warwick, Rhode Island 02886 [Exhibit 10.21 to Amendment No. 1 to Registration
Statement on Form SB-2, File No. 33-84622].
10.21* Consulting Agreement and Warrant with Dr. Elliot Fishkin [Exhibit 10.22 to Amendment
No. 1 to Registration Statement on Form SB-2, File No. 33-84622].
10.22* Redacted copy of Clinical Trials Agreement dated August 14, 1995 between Analytical
Biosystems Corporation and research institution and certain individuals [Exhibit
10.1 to Report on Form 8-K dated August 11, 1995].
10.23* Agreement dated April 10, 1995 between Analytical Biosystems Corporation and Loats
Associates [Exhibit 10.1 to Report on Form 8-K dated August 20, 1995].
10.24* Form of Registration Rights Agreement entered into among the Company and the holders
of the Company's Series A Preferred Stock entered into on December 2, 1996. [Filed
as Exhibit 10.24 to Registration Statement on Form S-3 File 333-17857].
10.25* Form of Registration Rights Agreement entered into among the Company and certain
holders of the Company's Common Stock entered into on April 12, 1996 in connection
with private placement offering completed on April 12, 1996. [Filed as Exhibit 10.25
to Registration Statement on Form S-3 File 333-17857].
23.1 Consent of Ernst & Young LLP, independent auditors of Nu-Tech Bio-Med, Inc. and
Physicians Clinical Laboratory, Inc. for the year ended February 28, 1997.
23.2 Consent of Arthur Andersen LLP, independent public accountants of Physicians
Clinical Laboratory, Inc. for the Fiscal Year Ended February 29, 1996.
23.3 Consent of Camhy Karlinsky & Stein LLP (included as part of Exhibit 5.1).
99.1* 1992 Stock Option Plan [Exhibit 28 to Report on Form 10-Q for the quarter ended
March 31, 1992].
99.2* 1994 Incentive Stock Option [Exhibit 99.2 to Registration Statement on Form SB-2,
File No. 33-84622].
99.3* Non Employer Director Stock Option Plan [Exhibit 99.3 to Registration Statement on
Form SB-2, File No. 33-84622].
99.4* Amended and Restated Non-Employee Director Stock Option Plan [filed as Exhibit to
the Company's Proxy Statement for the Annual Meeting held August 27, 1996].
</TABLE>
II-4
<PAGE> 96
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
A. (1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or most recent
post-effective amendment thereto) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) (i) For the purpose of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(5) For purposes of determining any liability under the Securities Act of
1933, each filing of the Company's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
B. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-5
<PAGE> 97
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of New York, State of New York, on the 21st day of July,
1997.
Nu-Tech Bio-Med, Inc., Inc.
By: /s/ J. MARVIN FEIGENBAUM
------------------------------------
J. Marvin Feigenbaum
Chairman of the Board of Directors,
President, Chief Executive
Officer, Chief Financial Officer
and Principal Accounting Officer
July 21, 1997
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below substitutes and appoints J. Marvin Feigenbaum, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto each said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------------------ --------------------------------- --------------
<C> <S> <C>
/s/ J. MARVIN FEIGENBAUM Chairman of the Board of July 21, 1997
- ------------------------------------------ Directors, President, Chief
J. Marvin Feigenbaum Executive Officer, Chief
Financial Officer and Principal
Accounting Officer
/s/ EDMOND E. CHARRETTE Director July 21, 1997
- ------------------------------------------
Edmond E. Charrette
Director
- ------------------------------------------
Robert B. Fagenson
/s/ CHRISS W. STREET Director July 21, 1997
- ------------------------------------------
Chriss W. Street
/s/ LEONARD GREEN Director July 21, 1997
- ------------------------------------------
Leonard Green
/s/ DAVID A. STERLING Secretary, Director July 21, 1997
- ------------------------------------------
David A. Sterling
</TABLE>
II-6
<PAGE> 98
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------- ------------------------------------------------------------------------------ ----
<S> <C> <C>
2.1* Asset Purchase Agreement dated September 13, 1996, among Nu-Tech Bio-Med,
Inc., NTBM Billing Services, Inc., Prompt Medical Services, Inc., Judith
Prussin and Jeffrey Prussin (filed without exhibits or schedules) [filed as
Exhibit 2.1 to Report on Form 8-K filed dated September 31, 1996]. ...........
2.2* Order Confirming Medical Science Institute's First Amended Plan of
Reorganization dated November 18, 1996 (US Central District of California Case
No. LA 95-37790 ID) together with First Amended Disclosure Statement and Plan
of Reorganization for Medical Science Institute [filed and Exhibit 2.2 to
Report on Form 8-K filed with the Commission on December 3, 1996]. ...........
2.3* Disclosure Statement of Physicians Clinical Laboratory as filed with the U.S.
Bankruptcy Court (Central District of California Case No. SV96-23185-GM)
[filed as Exhibit 2.3 to Form S-3, File No. 333-17859.........................
2.4* Joint Plan of Reorganization of Physicians Clinical Laboratory as filed with
the U.S. Bankruptcy Court (Central District of California Case No.
SV96-23185-GM) [filed as Exhibit 2.4 to Form S-3, File No. 333-17859]. .......
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
Registration Statement on Form SB-2, File No. 33-84622]. .....................
3.2* Amendment and Restated By-Laws effective November 16, 1994 [Exhibit 3.2.2 to
Registration Statement on Form SB-2, File No. 33-84622]. .....................
3.3* Amended Certificate of Designation, Preferences and Rights and Number of
Shares of Series A Preferred Stock as filed with the Secretary of State of
Delaware on October 23, 1996 [filed as Exhibit 3.3 to Report on Form 10-QSB
for the fiscal quarter ended September 30, 1996]. ............................
3.4* Certificate of Amendment of Amended Certificate of Designations, Preferences
and Rights and Number of Shares of Series A Convertible Preferred Stock as
filed with the Secretary of State of Delaware on November 20, 1996. ..........
4.1* Form of Common Stock Certificate [Exhibit 4.1 to Registration Statement on
Form SB-2, File No. 33-84622]. ...............................................
4.2* Form of Warrant and Warrant Agreement relating to Warrants to purchase an
aggregate of 114,286 shares of Common Stock issued to certain individuals on
August 9, 1994 in connection with a Bridge Financing [Exhibit 4.2 to
Registration Statement on Form SB-2, File No. 33-84622]. .....................
4.3* Form of Warrant Agreement issued to Starr Securities, Inc. and Stein, Shore
Securities, Inc. [Exhibit 4.4 to Registration Statement on Form SB-2, File No.
33-84622]. ...................................................................
4.4* Form of Registration Rights Agreement dated August 9, 1994 between the
Registrant and certain individuals in connection with completed Bridge
Financing [Exhibit 4.5 to Registration Statement on Form SB-2, File No.
33-84622]. ...................................................................
5.1 Opinion of Camhy Karlinsky & Stein LLP. ......................................
10.1* Amended and Restated Employment Agreement with J. Marvin Feigenbaum [Exhibit
10.2 to Registration Statement on Form SB-2, File No. 33-84622]. .............
10.2* Employment Agreement with Dr. Kenneth E. Blackman as of July 1, 1994 [Exhibit
10.3 to Registration Statement on Form SB-2, File No. 33-84622]. .............
10.3* Patent No. 4,559.299 dated December 17, 1985 [Exhibit 10.4 to Registration
Statement on Form SB-2, File No. 33-84622]. ..................................
</TABLE>
<PAGE> 99
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------- ------------------------------------------------------------------------------ ----
<S> <C> <C>
10.4* Patent No. 4,734,372 dated March 29, 1988 [Exhibit 10.5 to Registration
Statement on Form SB-2, File No. 33-84622]. ..................................
10.5* Patent No. 4,937,298 dated June 26, 1990 [Exhibit 10.6 to Registration
Statement on Form SB-2, File No. 33-84622]. ..................................
10.6* Assignment of Patent No. 4,559.299 recorded on March 29, 1993, by Brown
University Research Foundation, in favor of Analytical Biosystems Corporation
[Exhibit 10.7 to Registration Statement on Form SB-2, File No. 33-84622]. ....
10.7* Assignment of Patent No. 4,734.372 recorded on March 29, 1993, by Brown
University Research Foundation, in favor of Analytical Biosystems Corporation
[Exhibit 10.8 to Registration Statement on Form SB-2, File No. 33-84622]. ....
10.8* Assignment of Patent No. 4,937.187 recorded on March 29, 1993, by Brown
University Research Foundation, in favor of Analytical Biosystems Corporation
[Exhibit 10.9 to Registration Statement on Form SB-2, File No. 33-84622]. ....
10.9* Consulting Agreement with Starr Securities, Inc. [Exhibit 10.10 to Amendment
No. 1 to Registration Statement on Form SB-2, File No. 33-84622]. ............
10.10* Funding Agreement dated December 14, 1990 between Rhode Island Partnership for
Science and Technology and Analytical Biosystems Corporation [Exhibit 10.11 to
Registration Statement on Form SB-2, File No. 33-84622]. .....................
10.11* Loan Agreement dated February 11, 1993 between State of Rhode Island Economic
Development Small Business Loan Fund Corporation ("SBLFC") and Analytical
Biosystems Corporation in the amount of $150,000 [Exhibit 10.(iii) to Report
on Form 10-KSB for the fiscal year ended December 31, 1992]. .................
10.12* Loan Agreement dated February 25, 1993 between SBLFC and Analytical Biosystems
Corporation in the amount of $100,000 [Exhibit 10.(iii) to Report on Form
10-KSB for the fiscal year ended December 31, 1992]. .........................
10.13* Loan Agreement dated April 19, 1993 between SBLFC and Analytical Biosystems
Corporation in the amount of $250,000 [Exhibit 10(i)(a) to Report on Form 8-K
dated April 30, 1993]. .......................................................
10.14* Loan Agreement dated October 22, 1993 between SBLFC and Analytical Biosystems
Corporation in the amount of $166,666 [Exhibit 10.(iii)(d) to Report on Form
10-KSB for the fiscal year ended December 31, 1993]. .........................
10.15* Loan Agreement dated February 17, 1994 between SBLFC and Analytical Biosystems
Corporation in the amount of $125,000 [Exhibit 10.(iii)(e) to Report on Form
10-KSB for the fiscal year ended December 31, 1993]. .........................
10.16* Security Agreement dated October 22, 1993 between SBLFC and Analytical
Biosystems Corporation [Exhibit 10.17 to Registration Statement on Form SB-2,
File No. 33-84622]. ..........................................................
10.17* Patent Security Agreement dated April 19, 1993 between SBLFC and Analytical
Biosystems Corporation [Exhibit 10.18 to Registration Statement on Form SB-2,
File No. 33-84622]. ..........................................................
10.18* Patent Security Agreement dated October 22, 1993 between SBLFC and Analytical
Biosystems Corporation [Exhibit 10.19 to Registration Statement on Form SB-2,
File No. 33-84622]. ..........................................................
10.19* Form of Indemnification Agreements between Registrant and Registrant's
Directors and Officers [Exhibit 10.20 to Registration Statement on Form SB-2,
File No. 33-84622].
10.20* Lease Agreement as of November 1, 1994 for facility located at 55 Access Road,
Warwick, Rhode Island 02886 [Exhibit 10.21 to Amendment No. 1 to Registration
Statement on Form SB-2, File No. 33-84622]. ..................................
</TABLE>
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10.21* Consulting Agreement and Warrant with Dr. Elliot Fishkin [Exhibit 10.22 to
Amendment No. 1 to Registration Statement on Form SB-2, File No.
33-84622]. ...................................................................
10.22* Redacted copy of Clinical Trials Agreement dated August 14, 1995 between
Analytical Biosystems Corporation and research institution and certain
individuals [Exhibit 10.1 to Report on Form 8-K dated August 11, 1995]. ......
10.23* Agreement dated April 10, 1995 between Analytical Biosystems Corporation and
Loats Associates [Exhibit 10.1 to Report on Form 8-K dated August 20,
1995]. .......................................................................
10.24* Form of Registration Rights Agreement entered into among the Company and the
holders of the Company's Series A Preferred Stock entered into on December 2,
1996. [Filed as Exhibit 10.24 to Registration Statement on Form S-3 File
333-17857]. ..................................................................
10.25* Form of Registration Rights Agreement entered into among the Company and
certain holders of the Company's Common Stock entered into on April 12, 1996
in connection with private placement offering completed on April 12, 1996.
[Filed as Exhibit 10.25 to Registration Statement on Form S-3 File
333-17857]. ..................................................................
23.1 Consent of Ernst & Young LLP, independent auditors of Nu-Tech Bio-Med, Inc.
and Physicians Clinical Laboratory, Inc. for the year ended February 28,
1997. ........................................................................
23.2 Consent of Arthur Andersen LLP, independent public accountants of Physicians
Clinical Laboratory, Inc. for the Fiscal Year Ended February 29, 1996. .......
23.3 Consent of Camhy Karlinsky & Stein LLP (included as part of Exhibit 5.1).
99.1* 1992 Stock Option Plan [Exhibit 28 to Report on Form 10-Q for the quarter
ended March 31, 1992]. .......................................................
99.2* 1994 Incentive Stock Option [Exhibit 99.2 to Registration Statement on Form
SB-2, File No. 33-84622]. ....................................................
99.3* Non Employer Director Stock Option Plan [Exhibit 99.3 to Registration
Statement on Form SB-2, File No. 33-84622]. ..................................
99.4* Amended and Restated Non-Employee Director Stock Option Plan [filed as Exhibit
to the Company's Proxy Statement for the Annual Meeting held August 27,
1996]. .......................................................................
</TABLE>
The following exhibits, designated by an asterisk (*), have been previously
filed with the Commission and, pursuant to 17 C.F.R. Section 230.411, are
incorporated by reference to the document referenced in brackets following the
descriptions of such exhibits. All other exhibits are filed herewith.
<PAGE> 1
EXHIBIT 5.1
July 21, 1997
Nu-Tech Bio-Med, Inc.
55 Access Road
Warwick, Rhode Island 02886
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
You have requested our opinion in connection with the above-captioned
Registration Statement on Form S-3 to be filed by Nu-Tech Bio-Med, Inc., a
Delaware corporation (the "Company"), with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended (the "Act"), and
the rules and regulations promulgated thereunder (the "Rules") by certain
securities holders of 11,410,411 shares of common stock, $.01 par value of the
Company, (the "Common Stock"), consisting of 3,734,713 shares of Common Stock
issued through July 18, 1997 (the "Converted Shares") upon conversion of 5,077
shares of the Company's Series A Convertible Preferred Stock (the "Preferred
Stock") and 7,675,698 shares of Common Stock (subject to adjustment) (the
"Convertible Shares") issuable upon conversion of 8,923 issued, outstanding and
as yet unconverted shares of Preferred Stock.
We have examined such records and documents and have made such examination
of law as we considered necessary to form a basis for the opinions set forth
herein. In our examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, and the
conformity with the originals of all documents submitted to us as copies
thereof.
Based upon such examination, it is our opinion that the Converted Shares,
have been validly issued, and are fully paid and non-assessable. Furthermore, it
is our opinion subject to the following, the Convertible Shares issuable upon
the conversion of the issued outstanding and yet unconverted shares of Preferred
Stock, when issued, delivered and paid for in accordance with the provisions of
the Preferred Stock, will be validly issued, fully paid and non-assessable;
provided, however, that the Company is presently authorized to issue 12,000,000
shares of Common Stock, $.01 par value. The ability of the Company to validly
issue, at any time, any Convertible Shares which, when taken together with the
Company's issued and outstanding shares of Common Stock, exceeds the number of
shares of Common Stock which it is authorized to issue is dependent upon and
subject to the Company effecting an amendment to its certificate of
incorporation to increase the number of shares of Common Stock which it is
authorized to issue in the manner provided in the Delaware Corporation Law.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Registration Statement. In so doing, we do not admit that we are
in the category of persons whose consent is required under Section 7 of the Act
or under the Rules.
Very truly yours,
CAMHY KARLINSKY & STEIN LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our report dated March 12, 1997, in
Amendment No. 1 to the Registration Statement (Form S-3) and related Prospectus
of Nu-Tech Bio-Med, Inc. for the registration of 11,410,411 shares of its common
stock and to the incorporation by reference therein of our report dated March
12, 1997, with respect to the consolidated financial statements of Nu-Tech
Bio-Med, Inc. included in its Annual Report (Form 10-KSB) for the year ended
December 31, 1996, filed with the Securities and Exchange Commission.
We also consent to the use of our report dated May 9, 1997, in Amendment
No. 1 to the Registration Statement (Form S-3) and related Prospectus of Nu-Tech
Bio-Med, Inc. for the registration of 11,410,411 shares of its common stock,
with respect to the consolidated financial statements of Physicians Clinical
Laboratory, Inc. included in its Annual Report (Form 10-K) for the year ended
February 28, 1997, filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Providence, Rhode Island
July 17, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As Independent Public Accountants, we hereby consent to the use of our
Report (and to all references to our Firm) relating to our audits of the
financial statements of Physicians Clinical Laboratory, Inc. for the fiscal
years ended February 29(28), 1996 and 1995 included in or made a part of this
Registration Statement on Amendment No. 1 to Form S-3 of Nu-Tech Bio-Med, Inc.
ARTHUR ANDERSEN LLP
Sacramento, California
July 17, 1997
