<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) December 18, 1997
(October 3, 1997)
Commission File No. 0-11772
NU-TECH BIO-MED, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1411971
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation of organization)
476 Main Street, Wakefield, Rhode Island 02879
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (401)789-9995
55 Access Road, Warwick, Rhode Island, 02886
Former name or former address, if changed since last report.)
1
<PAGE> 2
Index to Current Report on Form 8-K
of Nu-Tech Bio-Med, Inc.
December 18, 1997
<TABLE>
<CAPTION>
Item Page
<S> <C>
Item 7. Financial Statements, Pro Forma Financial Information 3
and Exhibits
Signatures 4
</TABLE>
2
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
On October 20, 1997, Nu-Tech Bio-Med, Inc., the Registrant, filed a
current report on Form 8-K with respect to the acquisition by the Registrant of
a 52.6% interest in Physicians Clinical Laboratory, Inc. ("PCL"), located in the
State of California. As permitted by Item 7 of Form 8-K, such Form 8-K was filed
without the required financial statements and pro forma financial information as
it was impractical to do so at that time. This current report on Form 8-K/A
provides such required financial statements, pro forma financial information and
exhibits.
a. Financial Statements of Businesses Acquired.
The required Financial Statements for ("PCL") are
attached hereto as Exhibit 99.1 (Audited Financial Statements for
the year ended February 28, 1997, together with report of
independent accountants) and Exhibit 99.2 (Unaudited Financial
Statements for the six month period ended August 31, 1997).
b. Pro Forma Financial Information.
The required pro forma financial information for the
Registrant is attached hereto as Exhibit 99.3 (Unaudited Pro
Forma Combined Balance Sheet and Unaudited Pro Forma Combined
Statements of Operation for the nine-month period ended September
30, 1997, and year ended December 31, 1996).
3
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
December 18, 1997 NU-TECH BIO-MED, INC.
By: /s/ J. Marvin Feigenbaum
---------------------------------
J. Marvin Feigenbaum
Chairman of the Board,
President, Chief Executive and
Chief Financial Officer
4
<PAGE> 5
EXHIBIT INDEX
Exhibit No. Description
99.1 Audited Financial Statements for the year ended February
28, 1997, together with report of independent accountants
99.2 Unaudited Financial Statements for the six month period
ended August 31, 1997
99.3 Pro Forma Combined Balance Sheet and Statement of
Operations of Nu-Tech Bio-Med, Inc.
<PAGE> 1
EX-99.1
Audited Financial Statements for the year ended February 28, 1997, together with
report of independent accountants
<PAGE> 2
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index of financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
The schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements as a whole.
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
2
<PAGE> 3
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.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index of financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
The schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements as a whole.
Arthur Andersen LLP
Sacramento, California
June 28, 1996
3
<PAGE> 4
PHYSICIANS CLINICAL LABORATORY, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 29 (28), 1996 AND 1997
<TABLE>
<CAPTION>
February 29, February 28,
Assets 1996 1997
- ---------------------------------------------------------------- ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 391,815 $ 500,516
Trade accounts receivable --
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
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
PHYSICIANS CLINICAL LABORATORY, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 29 (28), 1996 AND 1997
<TABLE>
<CAPTION>
February 29, February 28,
Liabilities and Stockholders' Equity 1996 1997
- ---------------------------------------------------------------- ----------- -----------
<S> <C> <C>
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.
5
<PAGE> 6
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.
6
<PAGE> 7
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.
7
<PAGE> 8
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.
8
<PAGE> 9
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.
9
<PAGE> 10
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 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).
- 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.
10
<PAGE> 11
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
11
<PAGE> 12
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
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.
12
<PAGE> 13
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
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.
13
<PAGE> 14
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
14
<PAGE> 15
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
15
<PAGE> 16
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
16
<PAGE> 17
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
17
<PAGE> 18
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
18
<PAGE> 19
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECLASSIFICATIONS--
Certain reclassifications to prior years' financial statements have been made
to conform to the 1997 presentation.
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.
19
<PAGE> 20
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
20
<PAGE> 21
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
21
<PAGE> 22
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
</TABLE>
22
<PAGE> 23
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
February 28 (29),
----------------------------
1996 1997
------------ ----------
<S> <C> <C>
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>
23
<PAGE> 24
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
24
<PAGE> 25
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
25
<PAGE> 26
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
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 (6.1%) (6.1%) (6.1%)
federal income tax benefit
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>
26
<PAGE> 27
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
27
<PAGE> 28
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
28
<PAGE> 29
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
29
<PAGE> 30
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
30
<PAGE> 31
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 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.
31
<PAGE> 32
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
32
<PAGE> 33
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
33
<PAGE> 34
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
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
34
<PAGE> 35
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$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.
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.
35
<PAGE> 36
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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>
36
<PAGE> 1
EX-99.2
Unaudited Financial Statements for the six month period ended August 31, 1997
<PAGE> 2
PHYSICIANS CLINICAL LABORATORY, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF AUGUST 31, 1997 AND FEBRUARY 28, 1997
<TABLE>
<CAPTION>
August 31, February 28,
1997 1997
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 769,076 $ 500,516
Accounts receivable, net 11,755,327 9,591,204
Notes receivable 359,400 361,650
Supplies inventory 1,689,805 1,534,592
Other current assets 829,513 1,501,298
------------- -------------
Total current assets 15,403,121 13,489,260
EQUIPMENT AND IMPROVEMENTS, net 9,243,660 11,595,900
INTANGIBLE ASSETS, net 0 0
OTHER ASSETS 672,947 686,855
------------- -------------
Total assets $ 25,319,728 $ 25,772,015
============= =============
LIABILITIES & STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Debtor-in-Possession Borrowings $ 8,243,183 $ 5,243,182
Current Portion of Long Term Debt 270,025 283,687
Note payable to Related Party 5,000,000 5,000,000
Accounts Payable 2,456,124 1,237,338
Accrued Payroll & Other 18,379,580 8,857,225
------------- -------------
Total current liabilities 34,348,912 20,621,432
LONG-TERM DEBT 464,042 631,309
LIABILITIES SUBJECT TO COMPROMISE 167,454,300 167,776,289
------------- -------------
Total liabilities 202,267,254 189,029,030
STOCKHOLDERS' DEFICIT
Common Stock 60,713 60,714
Paid-in Capital 15,570,802 15,570,802
Retained Earnings (deficit) (192,579,041) (178,888,531)
------------- -------------
Total Stockholders' Deficit (176,947,526) (163,257,015)
Total Liabilities and Stockholders' Deficit $ 25,319,728 $ 25,772,015
============= =============
</TABLE>
2
<PAGE> 3
PHYSICIANS CLINICAL LABORATORY, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED AUGUST 31, 1997 AND 1996
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 31,
------------------------------- -------------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
NET REVENUE $ 16,745,854 $ 14,658,397 $ 34,460,695 $ 34,393,935
DIRECT LABORATORY COST 6,685,435 5,673,112 13,545,589 12,074,822
------------ ------------ ------------ ------------
Gross profit 10,060,419 8,985,285 20,915,106 22,319,113
LABORATORY SUPPORT COST 4,838,130 4,929,713 9,676,333 10,139,022
------------ ------------ ------------ ------------
Laboratory profit 5,222,289 4,055,572 11,238,773 12,180,091
OVERHEAD EXPENSE 6,805,001 8,850,350 13,915,461 18,161,908
CREDIT RESTRUCTURING EXPENSE 801,219 179,845 1,807,727 238,304
------------ ------------ ------------ ------------
Operating income (Loss) (2,383,931) (4,974,623) (4,484,415) (6,220,121)
INTEREST EXPENSE AND OTHER, net 4,616,976 5,764,186 9,205,087 9,516,502
INCOME TAXES 0 0 0 0
------------ ------------ ------------ ------------
Net Income (Loss) $ (7,000,907) $(10,738,809) $(13,689,502) $(15,736,623)
============ ============ ============ ============
EARNINGS PER SHARE
Primary $ (1.15) $ (1.77) $ (2.25) $ (2.60)
Fully Diluted N/A N/A N/A N/A
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
Primary 6,071,000 6,058,000 6,071,000 6,050,000
Fully Diluted N/A N/A N/A N/A
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements
3
<PAGE> 4
PHYSICIANS CLINICAL LABORATORY, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED AUGUST 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(13,689,502) $(15,736,623)
Adjustments to reconcile net (loss) to net cash provided
by operating activities
Depreciation and amortization 2,507,368 4,902,617
Provision for doubtful accounts 2,332,655 2,374,388
Write-down of tenant improvements related to abandoned
southern California laboratory -- 1,804,082
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable (4,496,777) (2,219,906)
Net decrease (increase) in inventories, prepaid
costs and other assets 532,730 (30,060)
(Decrease) increase in accounts payable and
accrued expenses 10,418,144 8,096,029
------------ ------------
Net cash provided by (used in) operating activities (2,395,382) (809,473)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase of intangible assets in connection with acquisitions -- --
Acquisition of equipment and leasehold improvements (155,128) (119,346)
------------ ------------
Net cash provided by (used in) investing activities (155,128) (119,346)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under long term debt 3,000,000 1,138,423
Payments of principle on long term debt (180,930) (568,558)
Proceeds from sale of capital stock -- 34,163
------------ ------------
Net cash provided by financing activities 2,819,070 604,028
------------ ------------
Net increase (decrease) in cash and cash equivalents 268,560 (324,791)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 500,516 391,815
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 769,076 $ 67,024
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest $ 0 $ 0
============ ============
Cash paid for income taxes $ 0 $ 0
============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE> 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) REORGANIZATION AND BASIS OF REPORTING
On November 8, 1996 (the "Petition Date"), Physicians Clinical
Laboratory, Inc., a debtor in possession ("PCL"), and its subsidiaries, Quantum
Clinical Laboratories, Inc., Regional Reference Laboratory Governing
Corporation, Diagnostic Laboratories, Inc. and California Regional Reference
Laboratory (collectively, the "Debtors"), commenced reorganization cases (the
"Bankruptcy Cases") by filing voluntary petitions for relief under chapter 11,
Title 11 of the United States Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the Central District of California, San Fernando Valley
Division (the "Bankruptcy Court"). For purposes of this Report, unless otherwise
referenced, the defined term "Company" shall apply to PCL and its consolidated
group of subsidiaries.
As previously disclosed, the Company had been in default since September
1995 with respect to principal and interest payments with respect to
approximately $80.9 million of secured indebtedness. The Company had also been
in default since September 1995 with respect to interest payments related to its
$40 million 7.5% Convertible Subordinated Debentures due 2000 (the "Debentures")
and the Notes issued by the Company in connection with the acquisition of
Medical Group Pathology Laboratory and Pathologists' Clinical Laboratories of
Glendale, Inc.
From September 1995 through the Petition Date, the Company experienced
severe cash flow problems, a reduction in third-party payor reimbursement rates,
billing and collection problems and effects of significant changes in the health
care industry. As a result of their inability to pay their obligations when they
became due, as well as the poor industry conditions referred to above, the
Company began taking steps to seek an infusion of new capital or a strategic
transaction (e.g., a merger or sale of the business). The Company concluded that
absent the provision of new capital or consummation of a strategic transaction,
the Company would not be likely to be able to continue to exist.
Accordingly, in June 1995, the Company retained the investment banking
firm of Donaldson, Lufkin & Jenrette ("DLJ") to seek either a strategic
transaction or a capital infusion for the Company. From June 1995 through the
Petition Date, DLJ and the Company's Board of Directors engaged in discussions
with numerous industry parties as well as financial institutions, with respect
to a potential transaction or transactions that could provide the Company with
sufficient liquidity to survive as a going concern.
As a result of the efforts of the Company and DLJ, only one offer to
make an investment in the Company surfaced that the Company believed was
favorable to its creditors and shareholders. This offer was made by Nu-Tech
Bio-Med, Inc. ("Nu-Tech") in conjunction with the Company's senior lenders,
Oaktree Capital Management, LLC ("Oaktree"), The Copernicus Fund, L.P.
("Copernicus"), DDJ Overseas Corp. ("DDJ"), Belmont Fund, L.P. ("Belmont I"),
Belmont Capital Partners, II, L.P. ("Belmont II) and Cerberus Partners, L.P.
("Cerberus") (collectively, the "Senior Lenders"). After months of negotiations,
on November 7, 1996, the Company, Nu-Tech and the Senior Lenders entered into an
agreement providing for a new investment of approximately $15 million into the
Company and an overall restructuring of the Company's balance sheet (the
"Prepetition Termsheet").
The Prepetition Termsheet formed the basis for the Company's plan of
reorganization (see Note 3 - "Prepetition Termsheet and Plan of Reorganization,"
herein), and paved the way for the Company's chapter 11 filing, the
restructuring of the Company's debt and the acquisition of a majority of the
Company by Nu-Tech. Representatives of each of the respective Debtors determined
that filing the chapter 11 petitions would best give the Debtors the needed time
and flexibility to consummate the restructuring of the Company contemplated in
the Prepetition Termsheet. The Company's Plan
5
<PAGE> 6
of Reorganization was confirmed by the Bankruptcy Court on April 23, 1997. (See
Note 3 -"Prepetition Termsheet and Plan of Reorganization" herein) and became
effective on October 3, 1997. (See Note 10 - "Effectiveness of the Plan of
Reorganization" herein).
Since the Petition Date, the Debtors have continued in possession of
their properties and, as debtors in possession, are authorized to operate and
manage each of their respective businesses and enter into all transactions,
including obtaining services, supplies and inventories, that each could have
entered into in the ordinary course of business had there been no bankruptcy
filings. As debtors in possession, the Debtors may not engage in transactions
outside of the ordinary course of business without approval of the Bankruptcy
Court, after notice and hearing.
On November 18, 1996, the United States Trustee appointed an official
committee (the "Committee") of unsecured creditors pursuant to section 1102 of
the Bankruptcy Code. The Committee has the right to review and object to certain
business transactions and participated in the negotiation of the Company's plan
of reorganization (see Note 3 - "Prepetition Termsheet and Plan of
Reorganization," herein). Under the Bankruptcy Code, the Company will be
required to pay legal and other advisory fees of the Committee associated with
the Bankruptcy Cases until the effective date of the Company's plan of
reorganization.
Liabilities subject to compromise in the accompanying condensed
consolidated balance sheets represent the Company's estimate of liabilities as
of August 31, 1997, subject to adjustment in the reorganization process. 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. Other liabilities may arise or be subject to compromise as a
result of rejection of executory contracts and unexpired leases, or the
Bankruptcy Court's resolution of claims for contingencies and other disputed
amounts. As a general matter, the treatment of these liabilities will be
determined as a part of the formulation and confirmation of a plan of
reorganization. (See Note 4 - "Liabilities Subject to Compromise," herein).
The accompanying condensed consolidated financial statements have been
presented on the basis that the Company is a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. As a result of the chapter 11 filing and circumstances
relating to this event, realization of assets and satisfaction of liabilities is
subject to uncertainty. The accompanying condensed consolidated financial
statements have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities and commitments in the
ordinary course of business. The condensed consolidated financial statements do
not include any of the adjustments to the assets or liabilities that may result
from the outcome of the bankruptcy proceedings. The ability of the Company to
continue as a going concern is dependent on, among other things, future
profitable operations, compliance, until the effective date of the plan of
reorganization, with the debtor in possession financing agreement (see Note 2 -
"Cash Collateral, Debtor in Possession Financing and Exit Financing," herein),
and the ability to generate sufficient cash from operations and obtain financing
sources to meet future obligations.
The principal business of the Company is to provide clinical laboratory
services in the State of California. As of November 3, 1997, the Company
operated one full service clinical laboratory in Sacramento, 14 "STAT"
laboratories and approximately 189 patient service centers located in close
proximity to referral sources throughout the Company's service areas. The
Company is a "hybrid" among clinical laboratory companies in that it serves both
as a traditional reference laboratory for approximately 7300 office-based
physicians/clients and as an independent clinical laboratory to acute hospital
customers.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include
6
<PAGE> 7
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. The condensed consolidated financial
statements include the accounts of PCL and its consolidated group of Debtor
subsidiaries. All material intercompany balances and transactions have been
eliminated in consolidation. The operating results for the three month period
ended August 31, 1997 are not necessarily indicative of the results that may be
expected for the year ended February 28, 1998 ("Fiscal 1998"). For further
information, refer to the financial statements and related notes included in the
Company's annual report on Form 10-K for the year ended February 28, 1997
("Fiscal 1997").
(2) CASH COLLATERAL, DEBTOR IN POSSESSION FINANCING AND EXIT FINANCING
Critical to the Company's ability to restructure its businesses and to
emerge from chapter 11 was its ability to maintain liquidity to meet operating
needs during the Bankruptcy Cases. As a result of filing for chapter 11
protection, cash generated from services rendered prior to the Bankruptcy Cases
is "cash collateral" of the Senior Lenders, pursuant to their security interests
therein. Under the Bankruptcy Code, this cash collateral could not be used by
the Company without the Senior Lenders' consent or Bankruptcy Court approval.
Accordingly, and as contemplated by the Prepetition Termsheet, on November 12,
1996, the Bankruptcy Court entered an interim order and on December 3, 1996, the
Bankruptcy Court entered a final order authorizing the Company to use cash
collateral under specified conditions, as consented to by the Senior Lenders.
Use of cash collateral would not have provided the Company with
sufficient liquidity to sustain operations during the Bankruptcy Cases. Thus, to
provide additional necessary liquidity, as contemplated by the Prepetition
Termsheet, the Company entered into a Stipulation and Amended Stipulation: (1)
Regarding Terms and Conditions of Use of Cash Collateral Pursuant to 11 U.S.C.
Section 363; (2) Regarding Terms and Conditions of Post-Petition Secured
Financing from Senior Lenders Pursuant to 11 U.S.C. Section 364; (3) Validating
Pre-Bankruptcy Liens, Security Interests and Claims; (4) Providing Adequate
Protection; (5) Granting Post-Petition Liens and Security Interests; (6)
Granting Claims Pursuant to 11 U.S.C. Sections 503 and 507(b); and (7) Granting
Relief from The Automatic Stay (the "DIP Financing Facility") with the Senior
Lenders. The DIP Financing Facility provided the Company with up to $9.8 million
of borrowing capacity during the Bankruptcy Cases, for ordinary working capital
purposes and to fund the plan of reorganization as contemplated by the
Prepetition Termsheet. (See Note 3 -"Prepetition Termsheet and Plan of
Reorganization" herein). On November 12, 1996, the Bankruptcy Court entered an
interim order approving borrowings of up to $2.0 million under the DIP Financing
Facility. On December 3, 1996, the Bankruptcy Court entered a final order
approving all aspects of the DIP Financing Facility.
Under the DIP Financing Facility, the Senior Lenders agreed to make
loans to the Company in an aggregate principal amount not to exceed $9.8
million. The obligations of the Company under the DIP Financing Facility were
secured by a first priority lien on and security interest in all of the
Company's assets and are also allowed administrative expenses under the
Bankruptcy Code, with priority over most administrative expenses of the kind
specified in sections 503(b) and 507(b) of the Bankruptcy Code.
The DIP Financing Facility provides that interest on advances to the
Company accrues at the rate of 2% above the prime rate and is only payable upon
an event of default described below or at the end of the term of the DIP
Financing Facility if the Company's plan of reorganization is not confirmed.
Upon the effective date of the Company's plan of reorganization, accrued
interest under the DIP Financing Facility will be forgiven.
The DIP Financing Facility imposes an annual commitment fee of 1% on the
unused portion of the $9.8 million limit. This commitment fee is only payable
upon an event of default described
7
<PAGE> 8
below or at the end of the term of the DIP Financing Facility if the Company's
plan of reorganization is not confirmed. Upon the effective date of the
Company's plan of reorganization, accrued commitment fees will be forgiven.
In addition to other terms and conditions customary for debtor in
possession financings of this type, the DIP Financing Facility required the
Company to obtain Bankruptcy Court approval of the following: (a) provisions
acknowledging the amount and validity of certain senior secured claims and
security interests, the amount and validity of the Debentures, and that such
debt and security interests are not subject to challenge, dispute or avoidance
in the Bankruptcy Cases; (b) provisions waiving and releasing any known or
unknown claims of the chapter 11 estates arising out of (i) the Credit
Agreement, dated as of April 1, 1994, among PCL, Wells Fargo Bank, National
Association, as agent ("Wells Fargo Bank, N.A."), and other financial
institutions party thereto, and the first through fifth amendments to the Credit
Agreement (as amended, the "Credit Agreement"); (ii) the Term Notes by PCL in
favor of the banks party to the Credit Agreement, dated April 4, 1994; (iii) the
Overline Revolving Notes by PCL in favor of the Banks party to the Credit
Agreement, dated May 10, 1995; (iv) the Indenture Regarding $40 Million of 7.5%
Convertible Subordinated Documents Due In 2000, dated as of August 24, 1993, by
and among PCL, Donaldson, Lufkin & Jenrette Securities Corporation and Smith
Barney Shearson, Inc.; (v) the Collateral and Security Agreement, dated as of
April 1, 1994, among PCL, Wells Fargo Bank, N.A., as agent for the other
financial institutions party thereto; (vi) the Trademark and Service Mark
Security Agreement, dated as of April 1, 1994, between Wells Fargo Bank, N.A.,
and California Regional Reference Laboratory; (vii) the Guaranty and Security
Agreement, dated as of April 1, 1994, between Quantum Clinical Laboratories,
Inc. and Wells Fargo Bank, N.A., as agent for the financial institutions party
to the Credit Agreement; (viii) the Guaranty and Security Agreement, dated as of
April 1, 1994, between Regional Reference Laboratory Governing Corporation and
Wells Fargo, Bank, N.A., as agent for the financial institutions party to the
Credit Agreement; and (ix) the Guaranty and Security Agreement, dated as of
April 1, 1994, between California Regional Reference Laboratory and Wells Fargo
Bank, N.A., as agent for the financial institutions party to the Credit
Agreement (the "Existing Lender Agreements"); (c) provisions waiving any rights
of surcharge under section 506(c) of the Bankruptcy Code and rights of recovery
under section 502(d) of the Bankruptcy Code; and (d) provisions stating that
upon an event of default by the Company under the DIP Financing Facility, the
Senior Lenders will have the right to seek an order from the Bankruptcy Court,
on five days' notice, providing for the termination of all stays, including the
automatic stay of section 362 of the Bankruptcy Code, to permit the Senior
Lenders to exercise their rights and remedies under the DIP Financing Facility
as if no bankruptcy stay were in effect.
Moreover, the DIP Financing Facility contains the following events of
default, designed to ensure that the Company performs its obligations under the
Prepetition Termsheet: (i) failure of the breakup/overbid protections (see Note
5 - "Breakup/Overbid Protections," herein) to be approved by the Bankruptcy
Court; (ii) withdrawal of the Company's plan of reorganization by the Company or
proposal by the Company of a plan of reorganization inconsistent with the terms
of the Prepetition Termsheet; (iii) termination of the Company's exclusive right
to file and solicit acceptances with respect to the Company's plan of
reorganization for the benefit of any party other than the Proponents (as
hereinafter defined); (iv) removal or termination of J. Marvin Feigenbaum as
Chief Operating Officer of the Company other than in accordance with his
employment agreement or modification by the Company of his employment agreement
without the Proponents' written consent; and (v) termination by J. Marvin
Feigenbaum of his employment agreement in accordance with its terms. In
addition, the DIP Financing Facility contains events of default customary for
debtor in possession financings of this type.
The DIP Financing Facility terminates upon an event of default described
above or on the first anniversary of the Petition Date if the Company's plan of
reorganization is not confirmed. Provided no event of default occurs and is
continuing immediately prior to the effective date of the Company's plan of
reorganization, the unused principal availability under the DIP Financing
Facility will be fully
8
<PAGE> 9
drawn. Upon the effective date of the Company's plan of reorganization, the
principal balance of the DIP Financing Facility, all accrued interest and all
fees will be forgiven without any payment by the Company.
Section 5.2.4 of the Plan contemplates that the reorganized Company may
enter into an exit financing facility on or after the Effective Date (as herein
defined) in an aggregate amount up to $10 million to be secured by accounts
receivable of the reorganized Company and the proceeds thereof. Prior to the
confirmation of the Company's plan of reorganization, more fully discussed
below, the Company obtained a commitment for exit financing from Daiwa
Securities America, Inc. ("Daiwa") to provide a working capital credit facility
to the Company. On April 18, 1997, the Bankruptcy Court approved a commitment
letter with Daiwa and authorized the Company to pay a $250,000 advisory fee to
Daiwa.
On September 30, 1997, the reorganized Company and its wholly owned
subsidiary, Bio-Cypher Funding Corp. (the "Funding Corp.") entered into a $10
million healthcare receivables financial facility (the "Exit Financing
Facility") with Daiwa. Under the Exit Financing Facility, the reorganized
Company sells and contributes all of its healthcare accounts receivables to the
Funding Corp., which in turn pledges such accounts receivable to Daiwa as
collateral for revolving loans. The proceeds of such revolving loans are used to
purchase the eligible accounts receivable from the reorganized Company. The
reorganized Company then uses such funds to fund future operating and capital
expenditures and to establish the future liquidity needed to operate its
businesses.
Under a Healthcare Receivables Purchase and Transfer Agreement, the
reorganized Company sells and contributes all of its healthcare accounts
receivables and related items to the Funding Corp. for a purchase price equal to
95% of the expected net value of those accounts receivable that meet certain
eligibility requirements. The reorganized Company will also act as the servicer
of such accounts receivable, continuing to conduct all billing and collection
responsibilities. The Funding Corp. may replace the reorganized Company with a
third-party servicer upon the occurrence of certain termination events.
Under a Loan and Security Agreement, the Funding Corp. pledges the
accounts receivable received from the reorganized Company to Daiwa as collateral
for revolving loans. Daiwa makes revolving loans available to the Funding Corp.
in an amount up to the lesser of (a) $10 million and (b) a borrowing base equal
to 85% of the value of eligible accounts receivables, subject to certain
adjustments. The Funding Corp. must pay interest on the outstanding balance of
these revolving loans at an interest rate per annum equal to two percent in
excess of the LIBOR Rate (as defined and calculated under the Loan and Security
Agreement), which interest rate will increase by three percent after an event of
default under the Loan and Security Agreement. The Funding Corp. must also pay
to Daiwa a monthly non-utilization fee equal to one-half of a percent on the
amount by which $10 million exceeds the outstanding balance of all revolving
loans during the prior month.
Both the Healthcare Receivables Purchase and Transfer Agreement and the
Loan and Security Agreement contain representations and warranties, affirmative
and negative covenants (including financial covenants), events of default and
events of termination that are typical in transactions of this nature. The Exit
Financing Facility expires on September 30, 1999. (See Note 10 - "Effectiveness
of the Plan of Reorganization - Daiwa Facility," herein).
(3) PREPETITION TERMSHEET AND PLAN OF REORGANIZATION
On November 7, 1996, the Company, the Senior Lenders and Nu-Tech entered
into the Prepetition Termsheet. The willingness of Nu-Tech to invest new capital
into the Company, and the
9
<PAGE> 10
willingness of the Senior Lenders to support a restructuring that provided value
for the Company's unsecured creditors and shareholders, was subject to numerous
conditions which, after lengthy negotiations, were agreed to by the Company in
the Prepetition Termsheet. These conditions included: (a) the filing of a
reorganization plan consistent with the Prepetition Termsheet by December 2,
1996, (b) the hiring of Nu-Tech's chief executive officer, J. Marvin Feigenbaum,
as Chief Operating Officer of PCL, effective immediately prior to the Petition
Date and (c) obtaining an order approving certain break-up fee and overbid
protections for Nu-Tech within 60 days of the Petition Date. (see Note 5 -
"Breakup/Overbid Protections," herein)
To provide the Company with sufficient liquidity to operate its
businesses during the Bankruptcy Cases, the Prepetition Termsheet required the
Senior Lenders to provide the DIP Financing Facility. Funds for the DIP
Financing Facility were obtained by the Senior Lenders from Nu-Tech, which
purchased approximately $13.33 million of the Senior Lenders' claims against the
Company for $10 million in cash, just prior to the Petition Date. Borrowings
under the DIP Financing Facility will be forgiven under the plan of
reorganization without any payment by the Company, provided that no event of
default occurs and continues under the DIP Financing Facility. In such case, $10
million of Nu-Tech's $15 million investment into the Debtors will have been made
at the outset of the Bankruptcy Cases. The Company's plan of reorganization, as
more fully discussed below, provides that on the effective date of the Company's
plan of reorganization, the $5.0 million promissory note issued by PCL to
Nu-Tech in connection with the MSI Stock Purchase will be forgiven, in exchange
for which Nu-Tech will receive an additional 17% of the New Common Stock.
As set forth in more detail above, the DIP Financing Facility contains
numerous provisions requiring the Company to perform its obligations under the
Prepetition Termsheet. If the Company fails to do so, it will be in default
under the DIP Financing Facility, which will give the Senior Lenders and Nu-Tech
the right to seek to foreclose on their security interests in the Company's
assets. The Company believes that if the Senior Lenders and Nu-Tech foreclose on
their security interests in the Company's assets, no other creditors or
shareholders will receive any recovery on their claims against or interests in
the Company. In addition, even if the Senior Lenders and Nu-Tech do not
foreclose on their security interests, absent the ability to borrow funds under
the DIP Financing Facility, the Company is unlikely to have sufficient working
capital to continue to operate its businesses.
Finally, the Prepetition Termsheet required that the Company's plan of
reorganization provide that holders of general unsecured claims and Debenture
claims and holders of common stock interests will only be entitled to a
distribution under the Plan if a certain voting condition (the "Voting
Condition") was satisfied. The Voting Condition, which has been satisfied (as
discussed below), required the holders of such general unsecured claims and
Debenture claims to accept the plan of reorganization.
On December 2, 1996, the Company, Nu-Tech and the Senior Lenders
(collectively, the "Proponents") filed a joint plan of reorganization with the
Bankruptcy Court. The December 2 plan embodied certain changes to the economic
terms contained in the Prepetition Termsheet, based upon negotiations with the
Committee and certain orders entered by the Bankruptcy Court during the
Bankruptcy Cases. On January 17, 1997, the Proponents filed an amended joint
reorganization plan with the Bankruptcy Court, which contained certain
amendments to the plan filed on December 2, 1996. On February 7, 1997, the
Proponents filed the Second Amended Joint Plan of Reorganization of Physicians
Clinical Laboratory, Inc. and Its Affiliated Debtors (the "Plan") with the
Bankruptcy Court, which contained certain amendments to the plan filed on
January 17, 1997. The Plan is jointly proposed by the Proponents.
By order of the Bankruptcy Court entered on February 14, 1997, a
Disclosure Statement (the "Disclosure Statement") describing, among other
things, the terms and conditions of the Plan was approved by the Bankruptcy
Court as containing "adequate information" within the meaning of section 1125 of
the Bankruptcy Code. On February 20, 1997, the Company began soliciting its
10
<PAGE> 11
shareholders and certain creditors to vote on the Plan by providing each with a
solicitation package (each, a "Solicitation Package") containing: (i) written
notice of (a) the Bankruptcy Court's approval of the Disclosure Statement, (b)
the commencement date of the confirmation hearing on the Plan, (c) the deadline
and procedures for filing objections to confirmation of the Plan, and (d) other
related issues; (ii) the Plan; (iii) the Disclosure Statement; (iv) a letter
from the Committee soliciting acceptances of the Plan; and (v) a ballot and a
ballot return envelope. February 11, 1997 was fixed by the Bankruptcy Court as
the voting record date for purposes of determining creditors and equity security
holders entitled to receive a Solicitation Package and to vote on the Plan,
subject to the disallowance of such creditors' claims and equity holders'
interests for voting purposes under certain circumstances.
The Plan was confirmed by the Bankruptcy Court at a hearing on April 18,
1997. Accordingly, on April 23, 1997 (the "Confirmation Date"), the Bankruptcy
Court entered the Findings of Fact, Conclusions of Law and Order Confirming
Second Amended Plan of Reorganization of Physicians Clinical Laboratory, Inc.
and Its Affiliated Debtors (the "Confirmation Order"). The Plan provides that
each of the conditions to the Effective Date as defined herein, must be
satisfied or waived as provided in the Plan by July 22, 1997, unless extended by
the Bankruptcy Court as more fully described below. The "Effective Date" shall
mean a business day, determined by the Company, after which all such conditions
have been satisfied or waived. Moreover, the Company's shareholders and
creditors voted to approve the Plan, and accordingly, the Voting Condition was
satisfied.
On the Effective Date, the Company will settle its obligations to its
impaired creditors as follows: (A) Nu-Tech will receive 35.6% of the New Common
Stock in exchange for its holdings of approximately $13.0 million in senior
secured debt (which debt it purchased from the Senior Lenders just prior to the
Petition Date), and 17% of the New Common Stock in exchange for Nu-Tech's
cancellation of a note executed by the Company in the principal amount of $5.0
million (the "Nu-Tech Stock Purchase") (which note comprised part of the
purchase price paid by the Company to Nu-Tech in connection with the MSI Stock
Purchase), (B) the Senior Lenders, which presently own an aggregate of
approximately $80.0 million of secured debt, will receive $55.0 million in new
senior secured debt and 38.1% of the New Common Stock, (C) the holders of the
Debentures will receive 9.3% of the New Common Stock, (D) the Company's
shareholders will receive warrants to purchase 5% of the New Common Stock for a
period of up to five years, at a purchase price of $13.30 per share, which price
is based upon an implied enterprise value for the Company of $90.0 million, and
(E) the Company's remaining general unsecured creditors will receive a pro rata
share of each of $2.45 million in cash and an unsecured note in the principal
amount of $400,000 due on the first anniversary of the Effective Date, without
interest. The Plan also provides that all of PCL's wholly-owned subsidiaries
will be merged with and into PCL immediately prior to the Effective Date.
Under the terms of the Plan, the Senior Lenders will receive, among
other things, $55 million in Senior Secured Notes (the "New Senior Notes") to be
issued by the reorganized Company. (See Note 10 - "Effectiveness of Plan of
Reorganization," herein).
The Company has also agreed that the reorganized Company will grant
registration rights with respect to the New Common Stock and the New Senior
Notes in substantially the forms hereinafter described. (See Note 10 -
"Effectiveness of Plan of Reorganization," herein).
In addition, certain of the shareholders of the reorganized Company will
enter into a shareholders agreement, pursuant to which the right of such
shareholders to dispose of their shares in the reorganized Company will be
subject to certain restrictions. (See Note 10 - "Effectiveness of Plan of
Reorganization," herein).
Under the terms of the Plan, Nu-Tech, the Senior Lenders and the holders
of the Debentures will receive 52.6%, 38.1% and 9.3%, respectively, of the New
Common Stock of the reorganized
11
<PAGE> 12
Company. Additionally, the holders of the Common Stock of the Company will
receive warrants to purchase 5% of the New Common Stock to be issued and
outstanding immediately after the Effective Date, on a fully diluted basis, at
the price of $13.30 per share. Because the Company currently has fewer than 300
shareholders, and because the reorganized Company will have fewer than 300
shareholders after the Effective Date, the Company filed an application with the
United States Securities and Exchange Commission to de-register its Common Stock
under the Securities Exchange Act of 1934. The de-registration became effective
on October 5, 1997.
On April 18, 1997, the Bankruptcy Court granted the Company's request to
substantively consolidate the Bankruptcy Cases into a single chapter 11 case for
purposes of the Plan and the distribution provisions thereunder. Pursuant to
such ruling, on the Confirmation Date, (1) all intercompany claims by and among
the Debtors were deemed eliminated, (2) all assets and liabilities of the
Debtors were merged or treated as though they were merged, (3) any obligations
of any Debtor and all guaranties thereof executed by one or more of the Debtors
were deemed to be one obligation of the reorganized Company, (4) any claims
filed or to be filed in connection with any such obligation and guaranties were
deemed one claim against the reorganized Company, (5) each claim filed in the
Bankruptcy Case of any Debtor were deemed filed against the reorganized Company
in the consolidated Bankruptcy Case on the Confirmation Date, in accordance with
the substantive consolidation of the assets and liabilities of the Debtors and
all claims based on guaranties of payment, collection or performance made by the
Debtors as to obligations of any other Debtor were discharged, released and of
no further force and effect, and (6) all transfers, disbursements and
distributions made by any Debtor were deemed to be made by all of the Debtors.
The Plan provides for the substantive consolidation of the estates, so
that the assets and liabilities of the Debtors are treated as if the assets were
held by, and the liabilities incurred by, a single entity.
The effectiveness of the Plan is subject to certain conditions set forth
in the Plan, including, but not limited to the execution of a shareholders
agreement between Nu-Tech and certain of the Senior Lenders and the consummation
of the Nu-Tech Stock Purchase by Nu-Tech and the reorganized Company. As
discussed more fully herein (see Part II - "Regulatory Investigation," herein),
consummation of the Plan and the occurrence of the Effective Date was delayed
for some months pending the settlement of a government investigation which the
Company became aware of subsequent to the Confirmation Date. As a result of this
uncertainty, the Company received two extensions (until September 19, 1997 and
September 30, 1997, respectively) of the date by which all conditions to the
Effective Date had to be satisfied or waived under the Plan. All conditions to
the Effective Date as required by the Plan were satisfied on September 30, 1997
and the Effective Date of the Plan occurred on October 3, 1997.
The foregoing description of the principal terms of the Plan is
qualified in its entirety by the full text of such document, which is filed as
Exhibit 2.1, hereto and incorporated herein by this reference.
(4) LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise include substantially all of the
current and noncurrent liabilities of the Company as of the Petition Date.
Certain prepetition liabilities have been approved by the Bankruptcy Court for
payment. At August 31, 1997, such amounts to the extent not paid, were included
in accrued expenses and other payables for the period set forth below (amounts
in millions of dollars):
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<PAGE> 13
<TABLE>
<CAPTION>
<S> <C>
Long Term Debt $ 122.0
Accounts Payable 15.4
Accrued Payroll & Other 22.6
Capitalized PSC Leases 7.5
--------
Total Liabilities Subject to Compromise $ 167.5
========
</TABLE>
Prior to the Petition Date, the Company was party to the Existing Lender
Agreements. Under the Existing Lender Agreements, the Debtors were indebted to
the Senior Lenders and Nu-Tech in the approximate amount of $94.3 million. In
connection with the Third Amendment to the Credit Agreement, the lenders
required the Company's guarantors to provide a guarantee of the Debtors'
borrowings under the Credit Agreement in the amount of $3.5 million. On December
30, 1996, the Company's guarantors paid $3.5 million to Nu-Tech and the Senior
Lenders in respect of the senior secured claims which thus reduced the amount of
the senior secured claims to approximately $90.8 million. The Senior Lenders and
Nu-Tech assert a security interest in substantially all of the assets of the
Company and its subsidiaries. No payments of principal or interest were made by
the Company under the Existing Loan Agreements from September 1995 to the
Petition Date. Accordingly, the Company was in default under the Existing Lender
Agreements beginning in September 1995.
The amounts and terms of these prepetition liabilities will be
materially changed by the Plan on the Effective Date.
Additional bankruptcy claims and prepetition liabilities may arise from
the rejection of executory contracts and unexpired leases, the resolution of
contingent and unliquidated claims and the settlement of disputed claims.
Consequently, the amounts included in the condensed consolidated balance sheets
as liabilities subject to compromise may be subject to future adjustment.
In accordance with the American Institute of Certified Public
Accountants' Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" (SOP 90-7), the Company is not
required to record interest during chapter 11 proceedings on unsecured or
undersecured prepetition debt. Interest expense on certain secured debt will
continue to be accrued but is subject to settlement. No determination has been
made regarding the value of the property interests which secure certain debt
and, consequently, whether interest thereon will be paid.
(5) BREAKUP/OVERBID PROTECTIONS
The Prepetition Termsheet required the Company to seek entry of an order
from the Bankruptcy Court approving its agreement to transfer its assets or
stock to a third party other than as contemplated by the Plan or confirm any
other plan of reorganization only if: (a) the Bankruptcy Court finds that such a
transfer to a third party or alternative plan has an aggregate present value to
creditors and shareholders of the Company of at least $3.75 million higher than
the present value of the Plan to creditors and shareholders (the "Overbid
Protection") and (b) on the effective date of such third party transfer or
alternative plan of reorganization, Nu-Tech is paid $1.88 million in cash as
compensation for time and expenses incurred in pursuing the Plan and such
compensation is entitled to administrative expense priority (the "Breakup
Protection"). Failure to obtain an order of the Bankruptcy Court approving these
provisions would have been an event of default under the DIP Financing Facility.
On January 6, 1997, the Bankruptcy Court entered an order approving the
Breakup and Overbid Protections, modified in certain respects from the
provisions outlined in the Prepetition Termsheet. The Debtors received no offers
to purchase their stock or assets from any entity other than as set forth in the
Plan.
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<PAGE> 14
(6) MANAGEMENT CHANGES
During the pendency of the Bankruptcy Cases, as a condition to the
availability of funds under the DIP Financing Facility and until the Effective
Date of the Plan, J. Marvin Feigenbaum, Chief Executive Officer of Nu-Tech, was
appointed as Chief Operating Officer of the Company. On November 7, 1996, the
Company and Mr. Feigenbaum entered into an employment agreement, governing the
terms of Mr. Feigenbaum's employment with the Company as Chief Operating Officer
during this period. From and after the Petition Date, Mr. Feigenbaum has acted
as Chief Operating Officer, reporting directly to the Debtors' Board of
Directors.
From and after the Effective Date, Mr. Feigenbaum will serve as the
President and Chief Executive Officer of the reorganized Company. The
reorganized Company and Mr. Feigenbaum entered into a new employment agreement,
dated as of the Effective Date, governing the terms of Mr. Feigenbaum's
employment from and after the Effective Date (see Note 10 - "Effectiveness of
Plan of Reorganization," herein). Additionally, from and after the Effective
Date, Wayne E. Cottrell will serve as Vice President, Finance. Mr. Cottrell
currently holds this position.
(7) BAR DATE, DISPUTE RESOLUTION PROCEDURE AND OTHER CLAIM MATTERS
The Company filed schedules of assets and liabilities or statements of
financial affairs as required by Bankruptcy Rule 1007 on December 19, 1996.
On December 19, 1996, the Bankruptcy Court entered an order establishing
January 31, 1997 as the deadline for creditors to file proofs of claim against
the Debtors (the "Original Bar Date"). On April 3, 1997, the Bankruptcy Court
entered an order establishing April 30, 1997 (the "Supplemental Bar Date") as
the deadline for plaintiffs in certain lawsuits who did not receive notice of
the Original Bar Date to file proofs of claim. The Company is engaged in the
process of reviewing claims filed, comparing such claims to the Company's books
and records and objecting to, or seeking to consensually resolve, disputed
claims. Numerous claims that are disputed for various reasons have been or will
be objected to by the Company pursuant to omnibus claims objections.
(8) NEGOTIATIONS WITH THE COMMITTEE
Although Nu-Tech, the Senior Lenders, certain of the holders of the
Debentures and the Company had reached agreement on the terms of a restructuring
plan prior to the Petition Date (as embodied in the Prepetition Termsheet), no
agreement existed with the Committee, the representatives of the holders of
general unsecured claims. Accordingly, after the Bankruptcy Cases were
commenced, the Proponents began negotiations with the Committee. After lengthy
negotiations, the Proponents and the Committee reached agreement on terms and
conditions of a plan of reorganization. The terms of that agreement are embodied
in the Plan, and include changes to certain provisions of the Prepetition
Termsheet.
(9) RATIO OF EARNINGS TO FIXED CHARGES
For purposes of calculating the ratio of earnings to fixed charges,
"earnings" consists of income before income taxes, interest on indebtedness and
imputed interest on capital lease obligations; "fixed charges" consists of
interest on indebtedness and imputed interest on capital lease obligations. The
Company's losses during each of the periods presented provide no coverage of
fixed charges. The amount of the deficiency is $13,690,000 and $15,737,000 for
the three months ended August 31, 1997 and 1996, respectively.
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<PAGE> 15
(10) EFFECTIVENESS OF THE PLAN OF REORGANIZATION
As described more fully above, the Plan was confirmed by the Bankruptcy
Court pursuant to section 1129 of the Bankruptcy Code on the Confirmation Date.
By separate order, the Debtors' chapter 11 estates were substantively
consolidated. Pursuant to the Plan, all conditions to the Effective Date of the
Plan were to be satisfied or waived on or before July 22, 1997, unless such date
was extended by the Court.
In late May, 1997, PCL became aware of a subpoena it had received in
April of 1997 to furnish certain documents to the United States Department of
Defense with respect to PCL's Civilian Health and Medical Program of Uniformed
Services ("CHAMPUS") billing practices. In late May, 1997, PCL was also notified
that its Medicare and MediCal billing practices were undergoing review by the
Office of Inspector General of the United States Department of Health and Human
Services ("HHS/OIG"), and in early June of 1997, PCL received a subpoena to
furnish certain documents to HHS/OIG in connection with such review. Due to
PCL's cooperation and negotiations with these government agencies, on July 24,
1997, the Court, on stipulation of the Proponents and the Committee, extended
the date by which all conditions to the Effective Date had to be satisfied or
waived pursuant to the Plan for 60 days to September 19, 1997, and stated that
the terms and conditions of the Plan would continue in full force and effect.
The Court thereafter extended such date for an additional 11 days until
September 30, 1997.
Pursuant to the Plan, prior to the Effective Date, all of the Debtors
were merged with and into the Company. On September 30, 1997, all conditions to
the Effective Date in the Plan were satisfied. On October 3, 1997, the Effective
Date was declared by the Company and the following actions occurred:
The Old Common Stock of each Debtor, the Old Stock Options and the Old
Warrants (collectively, the "Capital Stock"), the Existing Lender Agreements,
that certain Indenture dated as of August 24, 1993 by and among PCL, Donaldson,
Lufkin & Jenrette Securities Corporation and Smith Barney Shearson, Inc., and
all related agreements (collectively, the "Old Indenture") and the Debentures
were deemed canceled and of no further force and effect. The Company amended and
restated its Certificate of Incorporation in the State of Delaware, which is
Exhibit 3.1 hereto, and which authorized the issuance of 50,000,000 shares of
common stock, par value $0.01 per share (the "New Common Stock"). The
reorganized Company issued, inter alia, (i) 2,500,000 shares of New Common
Stock, (ii) senior secured notes, in the principal amount of $55,000,000 and
(iii) warrants, exercisable within five years of the Effective Date, to purchase
approximately 131,579 shares of New Common Stock to be issued and outstanding on
the Effective Date, at an exercise price of $13.30 per share. In addition, the
reorganized Company adopted Amended and Restated Bylaws effective as of
September 30, 1997 (the "Bylaws"), which are Exhibit 3.2 hereto.
The Company satisfied its obligations to its impaired creditors as
follows: (A) Nu-Tech received 1,315,000 shares of New Common Stock, or
approximately 52.6% of the authorized shares of the New Common Stock issued and
outstanding on the Effective Date, constituting an estimated percentage recovery
of 79.58% of its allowed claims; of those shares, 890,000 shares were in
exchange for approximately $13.0 million in senior secured debt (which debt
Nu-Tech purchased from the Senior Lenders just prior to the Petition Date);
Nu-Tech also received an additional 425,000 shares in exchange for Nu-Tech's
cancellation of the MSI Acquisition Note; (B) the Senior Lenders, which held an
aggregate of approximately $80.0 million of secured debt, each received a pro
rata share of $55.0 million in new senior secured notes and 952,500 shares of
New Common Stock, which constitutes 38.1% of the amount of issued and
outstanding New Common Stock, constituting an estimated percentage recovery of
84.37% of their aggregate allowed claims; (C) the holders of the Debentures each
received a pro rata share of 232,500 shares of New Common Stock, which
constitutes 9.3% of the amount of issued and outstanding New Common Stock,
constituting an estimated percentage recovery of 5.9% of their aggregate allowed
claims; (D) the Company's former
15
<PAGE> 16
shareholders will receive warrants to purchase 131,579 shares of the New Common
Stock for a period of up to five years, at a purchase price of $13.30 per share,
which price is based upon an implied enterprise value for the Company of $90.0
million, and (E) each of the Company's general unsecured creditors received a
pro rata share of $2.45 million in cash and an unsecured note in the principal
amount of $400,000, constituting an estimated percentage recovery of 16.29% of
their aggregate allowed claims. The holders of Old Stock Options and Old
Warrants did not receive any distributions or property under the Plan.
In addition, the reorganized Company entered into the following
agreements: (A) the New Indenture, dated as of September 30, 1997 between the
reorganized Company and First Trust National Association ("FTNA"), which is
Exhibit 4.1 hereto (the "Indenture"); (B) the Security Agreement, dated as of
September 30, 1997, between the reorganized Company and FTNA, which is Exhibit
4.2 hereto; (C) the Pledge Agreement, dated as of September 30, 1997, between
the reorganized Company and FTNA, which is Exhibit 4.3 hereto; (D) the
Stockholders Agreement, dated as of September 30, 1997, by and among the
reorganized Company, Nu-Tech, and Oaktree, which is Exhibit 4.6 hereto; (E) the
Employment Agreement, made as of September 30, 1997, by and between the
reorganized Company and J. Marvin Feigenbaum, which is Exhibit 10.1 hereto; (F)
the Noncompetition Agreement, made as of September 30, 1997, by and among the
reorganized Company and Nu-Tech, which is Exhibit 10.2 hereto; (G) the Warrant
Agreement, dated as of September 30, 1997, between the reorganized Company and
U.S. Trust Company of California, N.A., as warrant agent, which is Exhibit 4.7
hereto; (H) the Healthcare Receivables Purchase and Transfer Agreement, dated as
of September 30, 1997, which is Exhibit 4.8 hereto; (I) the Assignment of
Healthcare Receivables Purchase and Transfer Agreement as Collateral Security,
dated September 30, 1997 and which is Exhibit 4.9 hereto; (J) the Loan and
Security Agreement, dated as of September 30, 1997, between the Funding Corp.,
and Daiwa, which is Exhibit 4.10 hereto; and (K) the Depositary Agreement, dated
as of September 30, 1997, among the reorganized Company, the Funding Corp.,
Daiwa, and Union Bank of California, N.A., which is Exhibit 4.11 hereto.
The Indenture
The Indenture was entered into between the reorganized Company and FTNA
in connection with the issuance of the reorganized Company's $55,000,000 Senior
Secured Notes Due 2004. The original principal amount is $55,000,000 and the
Notes will bear interest at the rate of either 10% per annum in cash or 12% per
annum in kind, at the option of the reorganized Company, for the first two years
after issuance. The reorganized Company may not make any interest payments in
kind once a cash interest payment has been made pursuant to the Indenture. After
two years, the Notes will bear interest at the rate of 11% per annum in cash,
which rate will be increased by 1% per annum through maturity. Interest will be
payable semi-annually. To the extent lawful, the reorganized Company will pay
interest on overdue principal and overdue installments of interest at the rate
of 1% per annum in excess of the then applicable interest rate on the Notes. The
Notes will mature seven years after issuance.
The Notes may be redeemed, at the reorganized Company's option, in whole
or in part, upon not less than 30 or more than 60 days' notice, at a redemption
price equal to 100% of the principal amount thereon, plus accrued and unpaid
interest thereon through the applicable redemption date. Except with respect to
certain repurchase obligations, the reorganized Company will not be obligated to
make mandatory redemption or sinking fund payments with respect to the Notes.
Upon the occurrence of a Change of Control (as defined in the Indenture), each
noteholder shall have the right to require the reorganized Company to repurchase
such holder's Notes at an offer price in cash equal to 101% of the aggregate
principal amount of such Note, plus accrued and unpaid interest through the date
of repurchase. When the aggregate amount of excess proceeds from any asset sale
exceeds $5.0 million, the reorganized Company will be obligated to make an offer
to repurchase the maximum principal amount of Notes that may be purchased with
such Excess Proceeds at an offer price in cash equal to 100% of the principal
amount of such Notes at maturity, plus accrued and unpaid interest.
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<PAGE> 17
"Excess Proceeds" means the net proceeds from any asset sale that have not been
applied, at the reorganized Company's option, (a) to permanently reduce amounts
outstanding under the Exit Financing Facility, or (b) to make an investment in a
permitted business or certain permissible capital expenditures with respect to
the acquisition of certain long term tangible assets. Upon consummation by the
reorganized Company of an underwritten public offering of its capital stock, the
reorganized Company shall be obligated to offer to purchase the maximum
principal amount of Notes possible from the Equity Net Proceeds at an offer
price in cash equal to 100% of the principal amount of such Notes at maturity,
plus accrued and unpaid interest. "Equity Net Proceeds" means 35% of the net
proceeds received by the reorganized Company from any such public offering of
its capital stock.
Payment of the Notes is secured by a first priority security interest in
all existing and future assets of the reorganized Company including, without
limitation, accounts, equipment, inventory, intellectual property (including
patents, copyrights and trademarks), documents, instruments and any and all
proceeds of the foregoing. Finally, as additional collateral for payment of the
Notes, the reorganized Company pledged all of the capital stock of its now
owned, or hereafter acquired, subsidiaries, for the benefit of the noteholders.
Each of the Security Agreement and Pledge Agreement contains customary
provisions regarding the preservation of collateral, defaults and remedies, as
well as customary covenants, representations and warranties. Pursuant to an
intercreditor agreement between the Trustee (on behalf of the noteholders) and
Daiwa, the security interests granted to the Trustee in the reorganized
Company's receivables will be subordinated to Daiwa, as the lender providing the
Exit Financing Facility.
Until the first two cash interest payments are made by the reorganized
Company, the Indenture will contain covenants regarding minimum EBITDA (earnings
before interest, taxes, depreciation and amortization), minimum tangible net
worth, minimal EBITDA/interest expense coverage and certain restrictions on
capital expenditures. The Indenture contains customary covenants,
representations and warranties, as well as customary provisions regarding
defaults, remedies and modifications. The Indenture is Exhibit 4.1 hereto.
The Warrant Agreement
The reorganized Company has agreed to issue warrants (subject to
adjustment as set forth below) for the purchase by warrant holders of an
aggregate of 131,579 shares of New Common Stock in the reorganized Company, $.01
par value, which amount constitutes approximately 5% of the shares of the New
Common Stock to be issued and outstanding immediately after the Effective Date
of the Plan. Each warrant will entitle the holder thereof to acquire one share
of New Common Stock at a price of $13.30 per share. The exercise price was
derived based upon an assumed total enterprise value for the reorganized Company
of $90 million. The warrants will be exercisable at any time from 9:00 a.m., New
York City time, on the date of their issuance to 5:00 p.m., New York City time,
on the fifth anniversary of the Effective Date of the Plan (the "Exercise
Period"). Each warrant not exercised prior to the expiration of the Exercise
Period will become void.
The number and kind of securities purchasable upon the exercise of
warrants and the exercise price therefor will be subject to adjustment upon the
occurrence of certain events, including the issuance of New Common Stock or
other shares of capital stock as a dividend or distribution on the New Common
Stock; subdivisions, reclassifications and combinations of the New Common Stock;
the issuance to all holders of New Common Stock of certain rights, options or
warrants entitling them to subscribe for or purchase New Common Stock; the
distribution to holders of New Common Stock of evidences of indebtedness or
assets of the reorganized Company or any entity controlled by the reorganized
Company (excluding cash dividends or cash distributions from consolidated
earnings or surplus legally available for such dividends or distributions); the
distribution to holders of New Common Stock of shares of capital stock of any
entity controlled by the reorganized Company; the issuance of shares of New
Common Stock for less consideration than the then-current market price of the
New Common Stock; and the issuance of securities convertible into or
exchangeable or
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<PAGE> 18
exercisable for shares of New Common Stock or rights to subscribe for such
securities, for a consolidation per share of New Common Stock deliverable on
such conversion, exchange or exercise that is less than the then-current market
price thereof (although that no adjustment in such shares or exercise price will
be required in connection with the issuance of the New Common Stock, options,
rights, warrants or other securities pursuant to the Plan, any plan adopted by
the reorganized Company or any entity controlled by the reorganized Company for
the benefit of employees or directors, or any share purchase rights plan adopted
by the reorganized Company; the issuance of shares of New Common Stock or
securities convertible into or exchangeable for shares of New Common Stock
pursuant to an underwritten public offering satisfying specified criteria; sales
of New Common Stock pursuant to a plan adopted by the reorganized Company for
the reinvestment of dividends or interest; the issuance of shares of New Common
Stock to shareholders of any corporation which is acquired by, merged into or
made a part or subsidiary of the reorganized Company in an arm's-length
transaction; or a change in the par value of the New Common Stock).
Additionally, no adjustment will be required if in connection with any of the
events otherwise giving rise to an adjustment the holders of the warrants
receive such rights, securities or assets as such holders would have been
entitled had the warrants been exercised immediately prior to such event, and no
adjustment will be required unless such adjustment would require a change in the
aggregate number of shares of New Common Stock issuable upon the hypothetical
exercise of a warrant of at least 1% (but any adjustment requiring a change of
less than 1% will be carried forward and taken into account in any subsequent
adjustment).
The reorganized Company and the warrant agent may from time to time
supplement or amend the Warrant Agreement without the approval of any holder to
cure, among other things, any ambiguity or to correct or supplement any
provision or to comply with the requirements of any national securities
exchange. Any other supplement or amendment to the Warrant Agreement may be made
with the approval of the holders of a majority of the then outstanding warrants;
provided, however, that any such amendment or supplement that (i) increases the
exercise price; (ii) decreases the number of shares of New Common Stock issuable
upon exercise of warrants; or (iii) shortens the Exercise Period requires the
consent of each holder of a warrant affected thereby. The Warrant Agreement is
Exhibit 4.7 hereto.
The New Common Stock Registration Rights Agreement.
After the earlier of: (a) thirty months from the date of the New
Common Stock Registration Rights Agreement, or (b) six months after the date
that the first registration statement filed by the reorganized Company with
respect to shares of the New Common Stock in connection with an underwritten
public offering is declared effective by the Commission, and continuing
throughout the term of the New Common Stock Registration Rights Agreement, those
shareholders (including Nu-Tech) holding at least a majority of the Registrable
Securities (as defined therein) issued to the Senior Lenders and the Registrant
under the Plan shall have the right to request the registration of such
Registrable Securities (a "Demand"). The reorganized Company will then be
required to file with the Commission, within 120 days after receiving notice of
such Demand (such time period to be extended by the number of days that a
Suspension Period may be in effect), a registration statement (a "Stock
Registration Statement") on Form S-1 or Form S-3, if use of such a form is then
available to cover resales of Registrable Securities. Such holders thereof must
satisfy certain conditions relating to the provision of information in
connection with any Stock Registration Statement. The reorganized Company will
use commercially reasonable efforts to cause any Stock Registration Statement to
be declared effective by the Commission within 180 days of such Demand.
In the event that the reorganized Company defaults under its
obligations with respect to the registration of the New Common Stock, under
certain circumstances, the reorganized Company will be liable for liquidated
damages for the period that such default continues. No liquidated damages will
be payable with respect to any week commencing two years or more after the
reorganized Company consummates a registered public offering of its equity
securities.
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<PAGE> 19
Under the New Common Stock Registration Rights Agreement,
"Registrable Securities" means the New Common Stock acquired by persons pursuant
to the Plan or acquired by their successors and permitted assigns in accordance
with such agreement. The holders of the New Common Stock who are a party to the
New Common Stock Registration Rights Agreement will have the right to make one
Demand for the filing of a Stock Registration Statement.
The New Common Stock Registration Rights Agreement contains a
variety of other provisions applicable to a demand registration and will include
certain limited provisions pertaining to a shelf registration. However, the
provisions of the New Common Stock Registration Rights Agreement are for the
exclusive benefit of the parties thereto. The reorganized Company is required to
pay specified expenses in connection with such registration and is required to
indemnify the selling stockholders against certain liabilities, including
liabilities under the Securities Act. The registration rights provided for in
the New Common Stock Registration Rights Agreement are transferable to permitted
transferees of New Common Stock that comply with specified procedures. The New
Common Stock Registration Rights Agreement is Exhibit 4.5 hereto.
The New Senior Notes Registration Rights Agreement.
After a period of 15 months from the date of the New Senior Notes
Registration Rights Agreement, and continuing throughout the term of the New
Senior Notes Registration Rights Agreement, those Senior Lenders holding at
least a majority of the Registrable Securities (as defined therein) issued to
the Senior Lenders under the Plan shall have the right to make a Demand. The
reorganized Company will then be required to file with the Commission within 120
days after receiving notice of such Demand (such time period to be extended by
the number of days that a Suspension Period may be in effect), a registration
statement (a "Note Registration Statement") on Form S-1 or Form S-3, if use of
such a form is then available to cover resales of Registrable Securities. Such
holders thereof must satisfy certain conditions relating to the provision of
information in connection with any Note Registration Statement. The reorganized
Company will use commercially reasonable efforts to cause any Note Registration
Statement to be declared effective by the Commission within 180 days of such
Demand.
In the event that the reorganized Company defaults under its
obligations with respect to the registration of the New Senior Notes, under
certain circumstances, the reorganized Company will be liable for liquidated
damages for the period that such default continues. No liquidated damages will
be payable with respect to any week commencing two years or more after the
reorganized Company consummates a registered public offering of its equity
securities.
Under the New Senior Notes Registration Rights Agreement,
"Registrable Securities" means the New Senior Notes acquired by persons pursuant
to the Plan or acquired by their successors and permitted assigns in accordance
with such agreement. The holders of the New Senior Notes who are a party to the
New Senior Notes Registration Rights Agreement will have the right to make one
Demand for the filing of a Note Registration Statement.
The New Senior Notes Registration Rights Agreement contains a
variety of other provisions applicable to a demand registration and will include
certain limited provisions pertaining to a shelf registration. However, the
provisions of the New Senior Notes Registration Rights Agreement are for the
exclusive benefit of the parties thereto. The reorganized Company is required to
pay specified expenses in connection with such registration and is required to
indemnify the selling stockholders against certain liabilities, including
liabilities under the Securities Act. The registration rights provided for the
New Senior Notes Registration Rights Agreement are transferable to permitted
transferees of New Senior Notes that comply with specified procedures. The New
Senior Notes Registration Rights Agreement is Exhibit 4.4 hereto.
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<PAGE> 20
The Stockholders Agreement
On the Effective Date, Nu-Tech and Oaktree (collectively, the
"Stockholders") and the reorganized Company entered into the Stockholders
Agreement as of September 30, 1997. Following is a brief description of the
substantive provisions of such agreement:
(i) Transfer Restrictions. None of the shares of the New Common
Stock or any securities exercisable for or convertible into the New Common Stock
(the "Securities") held by the Stockholders may be transferred unless (A) the
transferee shall deliver to the reorganized Company a written acknowledgment
that the Securities are subject to the Stockholders Agreement; (B) such transfer
shall be made pursuant to a public offering registered under the Securities Act
and in accordance with applicable state law; (C) such transfer is made to an
Affiliate of the transferring Stockholder; or (D) such transfer is made by
Nu-Tech in a pro rata distribution of Securities to its stockholders. In
addition, the Stockholders agree that they will not, without the prior written
consent of the reorganized Company, transfer any shares of Common Stock to
Cerberus or any entity which owns, directly or indirectly, 5% or more of the
issued and outstanding equity securities of any entity that conducts clinical or
specialized laboratory services as its principal business.
(ii) Stockholder Share Purchase Rights. If the reorganized
Company desires in good faith to issue or transfer the Securities, the
reorganized Company shall deliver a written notice of the proposed transfer to
each of Nu-Tech and Oaktree (the "Transfer Notice"), which notice shall contain
a description of the proposed transaction and the terms thereof, and shall be
accompanied by a copy of the bona fide third party written offer. If the
reorganized Company receives authority from its Board of Directors, it may issue
the Securities on the terms set forth in the Transfer Notice; subsequently
(except in certain circumstances set forth in the Shareholders Agreement), the
reorganized Company shall make the offer to sell to each Stockholder a pro rata
portion of the Securities based upon such Stockholder's holdings of New Common
Stock. Any Stockholder may, by written notice, accept such offer, in whole or in
part, within thirty days after receipt of the offer.
The reorganized Company's Certificate of Incorporation also
provides certain shareholders with rights to acquire additional shares pro rata
to their holdings if additional shares are issued or transferred by the
reorganized Company. The terms of the Certificate of Incorporation are identical
to those set forth in the Stockholders' Agreement, except that in addition to
Nu-Tech and Oaktree, Belmont I, Belmont II, Copernicus, Gallileo Fund, L.P.
("Gallileo") and Cerberus, and all of their respective permitted transferees,
are the beneficiaries of such purchase rights.
(iii) Initial Board of Directors. The Initial Board of Directors,
as specified in the Shareholders Agreement, is comprised of:
Dr. Nathan Rubin
Mr. J. Marvin Feigenbaum
Mr. Matthew S. Barrett
Mr. David Sterling
Mr. William J. Begley
(iv) Voting Agreement. On or after September 30, 1998, at the
next annual or special meeting called for the purpose of electing directors,
each Stockholder shall elect five members of the Board of Directors, of which
two individuals shall be designated by OCM Administrative Services, L.L.C. or
its designee ("OCM") (an affiliate of Oaktree) and three individuals shall be
designated by Nu-Tech. If a director designated by OCM or Nu-Tech vacates such
position for any reason prior to the expiration of his or her term, then OCM or
Nu-Tech shall have the right to nominate a replacement so long as it continues
to beneficially own the percentage of outstanding Securities specified in the
Stockholders Agreement.
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(v) Corporate Governance. During such time as OCM has the right
to designate Directors under the Stockholders Agreement, an affirmative vote of
at least one Director who is appointed by OCM shall be required to: (A)
authorize or propose to authorize any agreement of the reorganized Company other
than issuances of securities pursuant to the Warrants, employee benefit plans,
management incentive plans or employment agreements with officers of the
reorganized Company; (B) issue, or propose to issue any capital stock; (C)
modify or propose to modify the Certificate of Incorporation or the By-Laws of
the reorganized Company; (D) directly or indirectly acquire or propose to
acquire any of its capital stock, or any security exercisable or exchangeable
for or convertible into any of its capital stock; (E) effect or propose to
effect a recapitalization or reorganization of the reorganized Company in any
form; (F) consolidate or merge, or propose to consolidate or merge, or transfer
all or substantially all of the properties and assets of the reorganized
Company; (G) incur, or cause any subsidiary of the reorganized Company to incur
any indebtedness or other payment obligation out of the ordinary course of
business (other than amounts borrowed pursuant to the Loan and Security
Agreement), that exceeds $1,000,000 when aggregated with all other outstanding
indebtedness of the reorganized Company and its subsidiaries; (H) make any
Capital Expenditure that exceeds $1,000,000 when aggregated with all other
Capital Expenditures in the immediately preceding twelve month period; or (I)
modify the Employment Agreement (as defined below) or otherwise approve any
compensation arrangement or other transaction for the benefit of Mr. Feigenbaum
other than as provided in the Employment Agreement. The Stockholders Agreement
is Exhibit 4.6 hereto.
The Certificate of Incorporation and the Bylaws
The Certificate of Incorporation provides that the number of Directors
shall be five, the Directors may be elected only at an annual meeting of
Stockholders, and said election need not be by written ballot unless requested
by the Chairman or by the majority stockholders. Vacancies on the Board will be
filled solely by the majority of the remaining Directors then in office and
Board Members elected in this manner will hold office until the next annual
meeting and until his or her successor is elected and qualified. Any Director
may be removed from office only at an annual or special meeting of the
stockholders, the notice of which meeting states that the removal of a Director
is among the purposes of the meeting, and with an affirmative vote of the
holders of at least 66 2/3% of the voting stock. The Certificate of
Incorporation provides that each Director, officer, employee or agent of the
reorganized Company shall be indemnified by the reorganized Company to the full
extent permitted by law, and will be entitled to advancement of expenses in
connection therewith.
The Bylaws of the reorganized Company provide, in general, that (i)
subject to the Certificate of Incorporation, the number of Directors will be
fixed within a specified range by a majority of the total number of the
reorganized Company Directors then in office; (ii) the Directors in office from
time to time will fill any newly created directorship or vacancy on the Board;
(iii) Directors may be removed only by the holders of at least 66 2/3% of the
reorganized Company's voting stock; (iv) special meetings of stockholders may be
called only by the Chairman of the Board or the Secretary of the reorganized
Company within ten days of receipt of the written request of a majority of the
total number of Directors of the reorganized Company that the reorganized
Company would have if there were no vacancies, or the holders of record of at
least 10% of the voting stock, and any such request must state the purpose or
purposes of the proposed meeting; and subject to certain exceptions, the
21
<PAGE> 22
number of Directors of the reorganized Company that the reorganized Company
would have if there were no vacancies, or the holders of record of at least 10%
of the voting stock, and any such request must state the purpose or purposes of
the proposed meeting; and subject to certain exceptions, the Board may postpone
and reschedule any previously scheduled annual or special meeting of
stockholders.
The Bylaws also require that stockholders desiring to bring any
business before an annual meeting of stockholders deliver written notice thereof
to the Secretary of the reorganized Company not less than 50 days in advance of
the meeting of stockholders; provided, however, that in the event that the date
of the meeting is not publicly announced by the reorganized Company more than 60
days prior to the meeting, notice by the stockholder to be timely must be
delivered to the Secretary of the reorganized Company not later than the close
of business on the tenth day following the day on which such announcement of the
date of the meeting was so communicated. The Bylaws further require that the
notice by the stockholder set forth a description of the business to be brought
before the meeting and the reasons for conducting such business at the meeting
and certain information concerning the stockholder proposing such business at
the meeting and the beneficial owner, if any, on whose behalf the proposal is
made, including their names and addresses, the class and number of shares of the
reorganized Company that are owned beneficially and of record by each of them
and any material interest of either in the business proposed to be brought
before the meeting.
The Bylaws also provide that the terms of any Director who is also an
officer of the reorganized Company will terminate automatically, without any
further action on the part of the Board or such Director, upon the termination
for any reason of such Director in his or her capacity as an officer of the
reorganized Company.
Under applicable provisions of the Delaware General Corporation Law, the
approval of a Delaware company's board of directors, in addition to stockholder
approval, is required to adopt any amendment to a company's certificate of
incorporation, but a company's bylaws may be amended either by action of its
stockholders or, if the company's certificate of incorporation so provides, its
board of directors. However, the reorganized Company's Certificate and Bylaws
provide that the provisions summarized above and certain other provisions,
including those relating to the classification of the Board and nominating
procedures, may not be amended by the stockholders nor may any provisions
inconsistent therewith be adopted by the stockholders, without the affirmative
vote of the holders of at least 75% of the company's voting stock, voting
together as a single class. The Company's Certificate authorizes the Board to
approve amendments to the Bylaws. Any amendment to the Bylaws relating to the
automatic termination of any Director who is an officer upon termination of such
officer would require the affirmative vote of the holders of at least 66 2/3% of
the Directors then in office.
DAIWA FACILITY
On September 30, 1997, the reorganized Company and its wholly owned
subsidiary, the Funding Corp., entered into the Exit Financing Facility with
Daiwa. Under the Exit Financing Facility, the reorganized Company sells and
contributes all of its healthcare accounts receivables to the Funding Corp.,
which in turn pledges such accounts receivable to the Daiwa as collateral for
revolving loans. The proceeds of such revolving loans are used to purchase the
eligible accounts receivable from the reorganized Company. The reorganized
Company then uses such funds to fund future operating and capital expenditures
and to establish the future liquidity needed to operate its businesses.
Under a Healthcare Receivables Purchase and Transfer Agreement, the
reorganized Company sells and contributes all of its healthcare accounts
receivables and related items to the Funding Corp. for a purchase price equal to
95% of the expected net value of those accounts receivable that meet certain
eligibility requirements. The reorganized Company will also act as the servicer
of such accounts receivable, continuing to conduct all billing and collection
responsibilities. The Funding Corp. may replace the reorganized Company with a
third-party servicer upon the occurrence of certain termination events.
22
<PAGE> 23
Under a Loan and Security Agreement, the Funding Corp. pledges the
accounts receivable received from the reorganized Company to Daiwa as collateral
for revolving loans. Daiwa makes revolving loans available to the Funding Corp.
in an amount up to the lessor of (a) $10 million and (b) a borrowing base equal
to 85% of the value of eligible accounts receivable, subject to certain
adjustments. The Funding Corp. must pay interest on the outstanding balance of
these revolving loans at an interest rate per annum equal to two percent in
excess of the LIBOR Rate (as defined and calculated under the Loan and Security
Agreement), which interest rate will increase by three percent after an event of
default under the Loan and Security Agreement. The Funding Corp. must also pay
to Daiwa a monthly non-utilization fee equal to one-half of a percent on the
amount by which $10 million exceeds the outstanding balance of all revolving
loans during the prior month.
Both the Healthcare Receivables Purchase and Transfer Agreement and the
Loan and Security Agreement contain representations and warranties, affirmative
and negative covenants (including financial covenants), events of default and
events of termination that are typical in transactions of this nature. The Exit
Financing Facility expires on September 30, 1999.
Employment Agreement
On September 30, 1997, J. Marvin Feigenbaum, President and Chief
Executive Officer of Registrant, entered into an Employment Agreement with the
reorganized Company pursuant to which he is also to be employed as President and
Chief Executive Officer and Chairman of the Board of the reorganized Company.
The employment of Mr. Feigenbaum is for a term of three years at a base salary
of $104,000 per annum through October 31, 1997, and $208,000 per annum
thereafter. The reorganized Company is to provide Mr. Feigenbaum with health
insurance to the extent not provided for under other employment arrangements,
long term disability insurance, reimbursement for reasonable and necessary
expenses incurred, and an automobile allowance of $500 per month relating to the
use of an automobile while in the state of California, and certain travel and
living expenses. Mr. Feigenbaum is also to be provided with a policy of term
life insurance in the amount of $500,000. As part of his Employment Agreement
with the reorganized Company, Mr. Feigenbaum is subject to certain
non-disclosure provisions and a restrictive covenant which provide for the
non-disclosure of trade secrets and confidential information of the reorganized
Company and which information is not generally known. While employed by PCL, Mr.
Feigenbaum may not become associated with another business which is directly
involved in the provision of clinical laboratory services anywhere in the United
States and, in the event of his termination of employment under certain
circumstances, Mr. Feigenbaum is not to engage in any competitive act in the
United States prior to September 30, 2001. In connection with his employment by
the reorganized Company, The reorganized Company granted to Mr. Feigenbaum
options to purchase 100,000 shares of the reorganized Company's common stock at
an exercise price of $.25 per share and granted options to purchase an
additional 100,000 shares of the reorganized Company's common stock at an
exercise price of $5 per share, which latter 100,000 options vest and become
exercisable based on the reorganized Company's performance for each of the years
ended December 31, 1997, 1998 and 1999. Such Employment Agreement is Exhibit
10.1 hereto. On October 23, 1997, the Company's Board of Directors authorized an
amendment to the Employment Agreement providing that all 200,000 options granted
to Mr. Feigenbaum would be exercisable at $.25 per share without regard to the
previously imposed performance conditions.
Non-Competition Agreement
On September 30, 1997, Nu-Tech entered into a Non-Competition Agreement
with the reorganized Company. The entry into this agreement was in connection
with the purchase by reorganized Company of all of the shares of capital stock
of Medical Science Institute, Inc., which were formerly owned by Nu-Tech. The
Non-Competition Agreement provides that Nu-Tech will not, directly indirectly,
engage in a business which is involved in the provision of clinical laboratory
services in the United States during such time as Nu-Tech is the beneficial
owner of 25% of the issued
23
<PAGE> 24
and outstanding shares of the reorganized Company; provided, however, that the
specialized cancer or genetic diagnostic laboratory services shall not be deemed
to be clinical laboratory services for the purposes of the Non-Competition
Agreement. The Non-Competition Agreement is Exhibit 10.2 hereto.
(11) REGULATORY INVESTIGATION
In late May, 1997, PCL became aware of a subpoena it had received in
April of 1997 to furnish certain documents to the United States Department of
Defense with respect to PCL's Civilian Health and Medical Program of Uniformed
Services ("CHAMPUS") billing practices. In late May, 1997, PCL was also notified
that its Medicare and MediCal billing practices were undergoing review by the
Office of Inspector General of the United States Department of Health and Human
Services ("HHS/OIG"), and in early June of 1997, PCL received a subpoena to
furnish certain documents to HHS/OIG in connection with such review.
The United States alleged that PCL submitted or caused to be submitted
false and fraudulent claims for payment to the Medicare program ("Medicare"),
Title XVIII of the Social Security Act, 42 U.S.C. ss.Section 1395-1395ddd, the
MediCal Program, Title XIX of the Social Security Act and other federally funded
health programs, for clinical laboratory services during the period from January
1, 1992 to July 18, 1997. During the course of its investigation, the Government
revealed that its investigation was prompted by the filing of a qui tam action
- -- a whistleblower complaint -- by Taylor McKeeman (the "Relator"), a former
officer of the Debtors, alleging that PCL violated the False Claims Act for
certain actions detailed in the Complaint filed in the District Court for the
Eastern District of California, in United States ex rel. Taylor McKeeman v.
Physicians Clinical Laboratory, et al., CIV-S97-I005GEBGGH (the "Qui Tam
Action").
The United States also alleged certain claims and causes of action
against PCL predicated upon the False Claims Act, 31 U.S.C. Sections 3729-3733,
as amended; the Civil Monetary Penalties Law, 42 U.S.C. Section 1320a-7a; the
Program Fraud Civil Remedies Act, 31 U.S.C. Sections 3801-12; and the provisions
for exclusion from the Medicare and State health care programs, 42 U.S.C. ss.
1320a-7(b), 42 U.S.C. Section 1320a-7a and 42 U.S.C. Section 1320a-7(d); as well
as under common law theories for damages and penalties arising out of claims for
reimbursement for clinical laboratory services (collectively, with the Qui Tam
Action, the "Government Claims").
PCL denied the respective allegations of the United States and the
Relator. Nevertheless, PCL immediately recognized that the Government Claims
were significant and would adversely affect the Debtors' ability, among other
things, to satisfy all conditions to the Effective Date and to consummate the
Plan.
On or about July 18, 1997, PCL and the United States reached an
agreement in principle to settle the Government Claims. The final agreement (the
"Federal Agreement") resolved the Government Claims on substantially the
following terms. The following description of the terms and provisions of the
Federal Agreement is a summary only, and is qualified in its entirety by the
actual terms and conditions of the Federal Agreement, which is Exhibit 99.2
hereto.
(1) PCL paid to the United States Government $200,000 18 days
after the Court issued its order approving the Settlement
Agreement (October 7, 1997); and will pay $1,800,000 in
principal plus interest calculated at the Treasury Bill
interest rate payable in equal monthly installments of
$25,000 for six years;
(2) PCL entered into a five-year corporate integrity agreement
(the "Corporate Integrity Agreement") with the HHS/OIG,
pursuant to which PCL will, among other requirements, set
up and follow an internal corporate compliance plan with
monitoring provided by an internal corporate compliance
officer,
24
<PAGE> 25
provide proper training for its billing and marketing
personnel, and fulfill various reporting requirements to
HHS. The Corporate Integrity Agreement is Exhibit 99.3
hereto;
(3) PCL and J. Marvin Feigenbaum were released from civil and
criminal liability under the False Claims Act and common
law causes of action in connection with their billing
practices from January 1, 1992, to July 18, 1997;
(4) The amounts owed to the United States will not be
dischargeable in any bankruptcy; and
(5) If PCL defaults on any of its obligations under the
Settlement Agreement, all amounts owed will be immediately
due, all releases will be void and PCL may be excluded
from participation in Medicare and Medicaid.
Subsequent to reaching an agreement in principle with the United States,
PCL approached representatives of the State of California (the "State") to
discuss the compromise and settlement of any outstanding claims that the State
might have against PCL for its prior billing practices involving the MediCal
program for clinical laboratory services during the period from January 1, 1992
to July 18, 1997. On or about August 28, 1997, PCL and the State reached a final
agreement to settle such claims (the "State Agreement"). The State Agreement
resolved the claims on substantially the following terms. The following
description of the terms and provisions of the State Agreement is a summary
only, and is qualified in its entirety by the actual terms and conditions of the
State Agreement, which is Exhibit 99.1 hereto.
(1) PCL paid the State the sum of $100,000 22 days after the
Court issued its order approving the Settlement Agreement
(October 11). All of the terms of the Corporate Integrity
Agreement executed by the Company and the United States
Government are incorporated by reference and all of the
terms therein are made applicable to the Settlement
Agreement with the State;
(2) The State released PCL and J. Marvin Feigenbaum from any
civil or administrative monetary claim or cause of action
that the California Department of Health Services had or
may have had, and from any action seeking exclusion from
the MediCal program with regard to the provision of an
reimbursement for laboratory services under the MediCal
program;
(3) The State released PCL and Mr. Feigenbaum from any
criminal liability for any conduct covered by the State
Agreement; and
(4) PCL will cooperate in any further investigation of
individuals and entities not released by the State in the
State Agreement.
On September 19, 1997, the Bankruptcy Court granted the Debtors' motion to
approve the Federal Agreement and the State Agreement. The Bankruptcy Court's
order became final on September 30, 1997.
25
<PAGE> 1
EX-99.3
Pro Forma Combined Balance Sheet & Statement of Operations
<PAGE> 2
NU-TECH BIO-MED, INC.
PRO FORMA COMBINED BALANCE SHEET AND STATEMENT OF OPERATIONS
(UNAUDITED)
BACKGROUND INFORMATION
Acquisition of Physicians Clinical Laboratory, Inc.
On November 8, 1996, (the "Petition Date"), Physicians Clinical
Laboratory, Inc., a Delaware corporation ("PCL"), and its subsidiaries, Quantum
Clinical Laboratories, Inc., Regional Reference Laboratory Governing
Corporation, Diagnostic Laboratories, Inc., and California Regional Reference
Laboratory (collectively with PCL, the "Debtors") commenced their respective
reorganization cases by filing voluntary petitions for relief under Chapter 11
of the Bankruptcy Code, 11 U.S.C. Sections 101-1330 (the "Bankruptcy Code").
The Debtors provide clinical laboratory testing services in the State of
California. Clinical testing focuses on testing bodily fluids for the diagnosis
and treatment of illnesses. The Debtors provide these services in a high-quality
and cost-efficient manner to a diversified group of customers and payor sources,
including office-based physicians, managed health care associations and
acute-care hospitals.
On December 12, 1996, the Debtors, Registrant and the Debtors' senior
lenders (collectively, the "Proponents") filed a joint plan of reorganization
which embodied the terms of the Prepetition Termsheet agreed to among the
Proponents. On January 17, 1997, the Proponents filed a modified joint plan of
reorganization, which contained certain amendments to the joint plan of
reorganization filed on December 2, 1996. On February 11, 1997, the Proponents
filed the Second Amended Plan of Reorganization of Physicians Clinical
Laboratories, Inc., and Its Affiliated Debtors (the "Plan") with the United
States Bankruptcy Court for the Central District of California (the "Court"),
which contained certain amendments to the plan of reorganization filed on
January 17, 1997.
On February 26, 1997, the Registrant completed the sale of its ownership
interest in another clinical laboratory company, Medical Science Institute, Inc.
("MSI") to PCL. The Registrant sold its interest in MSI to PCL for approximately
$7.6 million. The Registrant received approximately $2.6 million in cash and a
secured promissory note of PCL in the principal amount of $5,000,000 that was
secured by all the assets of PCL, but was subordinate to certain other claims
and other administrative expenses (the "MSI Acquisition Note"). In the event the
Plan was consummated and the Plan provided that the Registrant was to become the
owner of 52.6% of the outstanding capital stock of PCL, the MSI Acquisition Note
was to be forgiven.
By order dated April 23, 1997, (the "Confirmation Order'), the Court
confirmed the Plan pursuant to section 1129 of the Bankruptcy Code. By separate
order dated April 23, 1997, the Debtors' Chapter 11 estates were substantively
consolidated. Pursuant to the Plan, all conditions
2
<PAGE> 3
to the effective date of the plan (the "Effective Date") were to be satisfied or
waived on or before July 22, 1997, unless such date was extended by the Court.
In late May 1997, PCL became aware of a subpoena it had received in
April of 1997 to furnish certain documents to the United States Department of
Defense with respect to PCL's Civilian Health and Medical Program of Uniformed
Services ("CHAMPUS") billing practices. In late May 1997, PCL was also notified
that its Medicare and MediCal billing practices were undergoing review by the
Office of Inspector General of the United States Department of Health and Human
Services ("HHS/OIG"), and in early June of 1997, PCL received a subpoena to
furnish certain documents to HHS/OIG in connection with such review. Due to
PCL's cooperation and negotiations with these government agencies, on July 24,
1997, the Court, on stipulation of PCL, the Registrant, and the creditors of
PCL, extended the date that certain conditions be satisfied or waived pursuant
to the Plan for 60 days to September 19, 1997, and stated that the terms and
conditions of the Plan would continue in full force and effect.
Pursuant to the Plan, prior to the Effective Date, all of the Debtors
were merged with and into PCL. On October 3, 1997, all conditions to the
Effective Date that were set forth in the Plan were satisfied and the Effective
Date occurred.
BASIS OF ACCOMPANYING UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The Accompanying Unaudited Pro Forma Combined Financial Statements
presents the historical financial statements of Nu-Tech Bio-Med., Inc.
(Nu-Tech), the historical financial statements of PCL, the pro forma adjustments
relating to the PCL acquisition (inclusive of the adjustments to account for PCL
liabilities to be converted to equity or modified by the bankruptcy court in
accordance with the PCL Plan) and Pro Forma Combined (which includes Nu-Tech and
the acquisition of PCL taking into consideration pro forma adjustments).
The results of the acquired operations will be included in the Company's
operating results as of the closing date of the acquisition. The Unaudited Pro
Forma Combined Balance Sheet assumes that the acquisitions occurred on September
30, 1997. The Unaudited Pro Forma Combined Statements of Operations combines the
historical results of operations of the acquired company for the year ended
December 31, 1996 and the nine months ended September 30, 1997 assuming the
acquisitions occurred on January 1, 1996 and January 1, 1997, respectively. The
unaudited pro forma combined statement of operations do not reflect cost savings
and synergies that might result from the acquisition. In addition, the unaudited
pro forma combined statement of operations do not consider non-recurring
charges, if any, that may result from the transaction and the proposed
integration of the acquired company into the Company.
The Unaudited Pro Forma Combined Balance Sheet includes direct
transaction costs associated with the acquisition. The Company has not completed
its evaluation of the carrying value of fixed assets or debt assumed nor has the
Company completed its evaluation of the intangible asset acquired giving
consideration to impairment factors. The actual allocation of the final purchase
price may be different from that reflected in the pro forma financial combined
financial statements. Such
3
<PAGE> 4
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.
Management believes that the assumptions used in preparing these
Unaudited Pro Forma Combined Financial Statements provide a reasonable basis for
presenting all of the significant effects of the acquisition. These Unaudited
Pro Forma Combined Financial Statements do not purport to be indicative of the
results that actually would have been obtained had the acquisitions been
effected on the date indicated or of those results that may be achieved in the
future. The Pro Forma Combined Financial Statements should be read in
conjunction with the consolidated financial statements included in the Nu-Tech's
and PCL's Annual Reports on Form 10-KSB for the year ended December 31, 1996,
and February 28, 1997, respectively, and on Form 10-QSB for the nine month
period ended September 30, 1997 and August 31, 1997, respectively.
4
<PAGE> 5
Footnotes
(1) Nu-Tech's historical statement of operations data includes the
nine-month period ending September 30, 1997 and the year ended December
31, 1996, respectively, and September 30, 1997 for the balance sheet
data.
(2) PCL's historical statement of operations data includes the nine-month
period ending August 31, 1997 and the year ended February 28, 1997,
respectively, and August 31, 1997 for the balance sheet data.
(3) Includes adjustments to recognize an entire nine month period to reflect
the acquisition of MSI for the nine month period ended September 30,
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 ($5.5 million suspended for the year
ended December 31, 1996; $2.3 million suspended for the nine
month period ended September 30, 1997).
(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 provide for additional charges to PCL operations associated
with valuation adjustments reflected in September 1997, as if
they had occurred in August 1997.
(i) To reclassify Nu-Tech's net investment in Senior Debt of PCL and
deferred acquisition costs 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.
(j) To account for PCL liabilities to be converted to equity or
modified by the bankruptcy court in accordance with the PCL
Plan.
5
<PAGE> 6
Nu-Tech Bio-Med, Inc.
Unaudited Pro Forma Combined Balance Sheet
September 30, 1997
<TABLE>
<CAPTION>
Nu-Tech PCL Pro Forma Pro Forma
Historical (1) Historical (2) Adjustments (4) Combined
-------------- -------------- --------------- --------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 346,923 $ 769,076 $ 1,056,817 G $ 2,172,816
Accounts receivable, net 88,044 11,755,327 (2,876,000) H 8,967,371
Notes receivable -- current 198,649 359,400 (350,000) H 208,049
Inventory 11,985 1,689,805 -- 1,701,790
Prepaid expenses 38,449 829,513 (90,000) H 777,962
------------- ------------- ------------- -------------
Total current assets 684,050 15,403,121 (2,259,183) 13,827,988
Investment in senior debt of PCL 13,287,164 -- (13,287,164) I --
Note receivable 100,000 -- -- 100,000
Equipment and leasehold improvements, net 316,898 9,243,660 (6,434,631) H 3,125,927
Deferred acquisition costs 1,085,477 -- (1,085,477) I --
Goodwill, net 683,222 -- 64,015,157 I 64,698,379
Other assets 18,206 672,947 -- 691,153
------------- ------------- ------------- -------------
Total Assets $ 16,175,017 $ 25,319,728 $ 40,948,702 $ 82,443,447
============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 533,556 $ 2,456,124 $ 1,200,000 J $ 4,189,680
Accrued expenses 201,066 18,379,580 (14,391,630) J 4,189,016
Notes payable to Nu-Tech -- 5,000,000 (5,000,000) J --
Notes payable (DIP) -- 8,243,183 (8,243,183) J --
Other current liabilities 55,571 -- -- 55,571
Current portion of long term debt 146,302 270,025 -- 416,327
Current portion of capitalized lease
obligations 17,719 -- 129,975 J 147,694
------------- ------------- ------------- -------------
Total current liabilities 954,214 34,348,912 (26,304,838) 8,998,288
Long term debt - Oaktree -- -- 39,087,000 J 39,087,000
Due Medicare Settlement -- -- 1,800,000 H 1,800,000
Due IRS -- -- 496,314 H 496,314
Credit agreement -- -- 2,860,000 J 2,860,000
Debt 18,149 464,042 -- 482,191
Capitalized lease obligations 3,237 -- -- 3,237
Liabilities subject to compromise -- 167,454,300 (167,454,300) J --
------------- ------------- ------------- -------------
Total liabilities 975,600 202,267,254 (149,515,824) 53,727,030
Minority interest -- -- 13,517,000 I 13,517,000
Stockholders' equity:
Preferred stock 68 -- -- 68
Common stock 105,387 60,713 (60,713) I,J 105,387
Capital in excess of par 39,211,823 15,570,802 (15,570,802) I,J 39,211,823
Deferred consulting expense (55,005) -- -- (55,005)
Retained Earnings (Accumulated Deficit) (24,062,856) (192,579,041) 192,579,041 I,J (24,062,856)
------------- ------------- ------------- -------------
Total stockholders' equity 15,199,417 (176,947,526) 176,947,526 15,199,417
Total Liabilities and Stockholders' Equity $ 16,175,017 $ 25,319,728 $ 40,948,702 $ 82,443,447
============= ============= ============= =============
</TABLE>
6
<PAGE> 7
Nu-Tech Bio-Med, Inc.
Unaudited Pro Forma Combined Statement of Operations
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Adjustments to
include
Nu-Tech PCL Other Pro Forma
Historical (1) Historical (2) Acquired Companies (3) Adjustments (4)
-------------- -------------- --------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Assay sales, net $ 115,397 $ - $ - $ -
Laboratory revenues, net 836,143 62,830,847 11,941,084 -
Medical billing services revenues 113,932 - 193,801 -
--------- ------------ ----------- -----------
Total revenues 1,065,472 62,830,847 12,134,885 -
Laboratory costs 1,188,564 43,131,052 9,606,831 -
Medical billing services costs 89,314 - 68,126 -
--------- ------------ ----------- -----------
Total cost of revenues 1,277,878 43,131,052 9,674,957 -
Gross profit (deficiency) (212,406) 19,699,795 2,459,928 -
Expenses:
Selling, general and administrative 3,689,588 24,880,448 3,837,764 -
Provision for doubtful accounts - 8,843,252 519,363 -
Research and development expenses 90,903 - - -
Public relations expenses 1,882,000 - - -
Depreciation, amortization and - - - -
write-down of intangibles - 9,670,097 314,356 1,731,419 A,B
--------- ------------ ----------- -----------
Total expenses 5,662,491 43,393,797 4,671,483 1,731,419
Operating income (loss) $ (5,874,897) $ (23,694,002) $ (2,211,555) $ (1,731,419)
Other income (expense):
Share of loss attributable to minority
interest - - - 13,517,000 E
Investment and interest income 161,871 21,855 (69) -
Finance expense (1,422,500) - - -
Write-off of goodwill and patents (372,864) (59,400,000) - 59,400,000 F
Reoganization charges - (1,558,820) - -
Deferred acquisition assets charged off (218,914) - - -
Interest expense (60,351) (15,838,895) (426,902) 8,015,797 C,D
Nonoperating income (expense), net - (1,708,848) (164,631) -
--------- ------------ ----------- -----------
Total other income (expense) (1,912,758) (78,484,708) (591,602) 80,932,797
Income (loss) before extraordinary items $ (7,787,655) $ (102,178,710) $ (2,803,157) $ 79,201,378
============ ============== ============ ============
Net income (loss) per common share $ (5.66) $ (52.10) $ (1.43) $ 40.39
============ ============== ============ ============
Weighted average common shares outstanding 1,961,078 1,961,078 1,961,078 1,961,078
============ ============== ============ ============
<CAPTION>
Pro Forma
Combined
--------
<S> <C>
Revenues:
Assay sales, net $ 115,397
Laboratory revenues, net 75,608,074
Medical billing services revenues 307,733
---------
Total revenues 76,031,204
Laboratory costs 53,926,447
Medical billing services costs 157,440
---------
Total cost of revenues 54,083,887
Gross profit (deficiency) 21,947,317
Expenses:
Selling, general and administrative 32,407,800
Provision for doubtful accounts 9,362,615
Research and development expenses 90,903
Public relations expenses 1,882,000
Depreciation, amortization and -
write-down of intangibles 11,715,872
---------
Total expenses 55,459,190
Operating income (loss) $ (33,511,873)
Other income (expense):
Share of loss attributable to minority
interest 13,517,000
Investment and interest income 183,657
Finance expense (1,422,500)
Write-off of goodwill and patents (372,864)
Reoganization charges (1,558,820)
Deferred acquisition assets charged off (218,914)
Interest expense (8,310,351)
Nonoperating income (expense), net (1,873,479)
---------
Total other income (expense) (56,271)
Income (loss) before extraordinary items $ (33,568,144)
=============
Net income (loss) per common share $ (18.81)
=============
Weighted average common shares outstanding 1,961,078
=============
</TABLE>
7
<PAGE> 8
Nu-Tech Bio-Med, Inc.
Unaudited Pro Forma Combined Statement of Operations
Nine Month Period Ended September 30, 1997
<TABLE>
<CAPTION>
Adjustments to
include
Nu-Tech PCL Other Pro Forma Pro Forma
Historical (1) Historical (2) Acquired Companies (3) Adjustments (4) Combined
-------------- -------------- ---------------------- --------------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Assay sales, net $ 70,109 $ - $ - $ - $ 70,109
Laboratory revenues, net 1,798,361 47,635,331 1,257,995 - 50,691,687
Contract revenue 5,540 - - - 5,540
Medical billing services revenues 392,666 - - - 392,666
------------ ------------ -------- ----------- -------------
Total revenues 2,266,676 47,635,331 1,257,995 - 51,160,002
Cost of Revenues:
Laboratory costs 1,500,914 33,665,400 941,293 - 36,107,607
Medical billing services costs 366,768 - - - 366,768
------------ ------------ -------- ----------- -------------
Total cost of revenues 1,867,682 33,665,400 941,293 - 36,474,375
Gross Profit 398,994 13,969,931 316,702 - 14,685,627
Expenses:
Selling, general and administrative 2,238,267 17,530,596 (34,633) 3,226,000 H 22,960,230
Provision for doubtful accounts - 7,620,907 154,622 - 7,775,529
Research and development expenses 48,940 - - - 48,940
Public relations expenses - - - - -
- - - - -
Depreciation, amortization and - - - - -
write-down of intangibles - 4,863,466 119,534 1,107,671 A,B 6,090,671
------------ ------------ -------- ----------- -------------
Total expenses 2,287,207 30,014,969 239,523 4,333,671 36,875,370
Operating income (loss) $ (1,888,213) $ (16,045,038) $ 77,179 $ (4,333,671) $ (22,189,743)
Other income (expense):
Share of loss attributable to
minority interest - - - 13,517,000 E 13,517,000
Investment and interest income 25,317 11,855 (3,263) - 33,909
Medicare and Medicaid settlement - - - (2,100,000) H (2,100,000)
Write-off of goodwill and patents - (59,400,000) - 59,400,000 F -
Reorganization expense - (3,100,625) - (1,285,000) H (4,385,625)
Deferred acquisition assets
charged off - - - - -
Interest expense (535,783) (13,575,982) (27,789) 7,416,271 C,D (6,723,283)
Nonoperating income (expense),
net - (44,848) (4,322) - (49,170)
------------ ------------ -------- ----------- -------------
Total other income (expense) (510,466) (76,109,600) (35,374) 76,948,271 292,831
Income (loss) before extraordinary
items $ (2,398,679) $ (92,154,638) $ 41,805 $ 72,614,600 $ (21,896,912)
============ ============= ========= ============ =============
Net income (loss) per common share $ (0.47) $ (17.98) $ 0.01 $ 14.17 $ (4.59)
============ ============= ========= ============ =============
Weighted average common shares
outstanding 5,126,074 5,126,074 5,126,074 5,126,074 5,126,074
============ ============= ========= ============ =============
</TABLE>
8
